Business Environment Audit for Starbucks (2009)

ACE1004 2009

ANALYSIS AND EVALUATION OF THE ENVIRONMENT INFLUENCING STARBUCKS’ OPERATIONAL ACTIVITIES

BY: ATIQAH ISMAILBSC MARKETING (N500)NEWCASTLE UNIVERSITY

EXECUTIVE SUMMARYBusiness Environment Audit

EXECUTIVE SUMMARY

This report will focus and evaluate Starbucks’ operational environment in the Coffee Retail Market.

After evaluation of the issues and factors influencing Starbuck’s operation, my recommendations for the company are:

1. Starbucks should avoid flooding the industry to eliminate small competitors2. It should take advantage of international expansion3. Starbucks should maintain consistency and commitment to quality4. It should diversify

Starbucks products are considered to be a luxury good, and have an elastic income elasticity of demand. With the very recent global economic downturn, the consumption of Starbucks products have slowed down, as people has less disposable income to spend.

In the United States, Starbucks aggressive expansion has put itself into trouble, adding thousands of stores often within eyesight of existing stores. Outlets are cannibalising sales between branches only a short distance from each other.

In 2008 the company decided to ease the pace of store openings and closing underperforming US branches to allow Starbucks to focus more on its customers and the market.

Market saturation has changed how Starbucks is viewed. Some consumers in the United States state that Starbucks is comparable to McDonald’s and Burger King with the insight that Starbucks stellar expansion worsens its customer service and quality, leading customers away to its growing rivals.

Starbucks’ chairman Howard Schultz admitted that the brand risked becoming a mere commodity.

Starbucks aggressive expansion of the past decade has tarnished the powerful and exclusive, upmarket image that made it so popular in the first place.

ACE1004 2009

STARBUCKSBusiness Environment Audit

TABLE OF CONTENTS

Company Overview 1

The Market

Market Growth and Production Concentration 2

Consumption Trends 2

Starbucks Value Growth 3

Competition 4

Porter’s Five Forces 6

Macro-Environment

Economic Influences 7

Political and Legal Influences 8

Environmental Influences 8

Conclusion 9

Recommendation 10

Reflection 11

References

ACE1004 2009


COMPANY OVERVIEW

Starbucks is based in Seattle, Washington, United States and it was founded in 1971 by three partners who named the company after Captain Ahab’s first mate in the novel Moby-Dick.

Starbucks involves in selling coffee, bakery products, and coffee beans, it also owns Starbucks Entertainment division and Hear Music brand through which it markets books, music and film.

Starbucks coffeehouses are recognised for its relaxing ambience and regarded as a third place between home and work. Its stores are typically located in high traffic, and high visibility locations. The company purchases green coffee beans from coffee-producing provinces around the world.

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THE MARKET

MARKET GROWTH AND PRODUCTION CONCENTRATION

In some Western markets especially in the United States and the United Kingdom, the number of coffeehouses in the specialty coffee retail market has reached its level of saturation after years of dynamic growth.

Starbucks operates both domestically and internationally. It’s domestic United States market is highly saturated, and its international market still growing. Nevertheless, with low barriers to entry and low capital and technological requirements, both markets face a very high level of competition.

Starbucks owns almost 37% of the coffee specialist industry value market share. The company is operating in a total of 49 countries with more than 40,000 stores worldwide.

CONSUMPTION TRENDS

A study made by the SCAA Group in the early 1990s noted that average-consumption of gourmet coffee drinkers in the Pacific, Middle Atlantic and New England:

Tended to be slightly more affluent than average and lived and worked in big cities. Gourmet coffee consumption increased with the drinker’s educational level.

The study proves right with majority of Starbucks consumers are from urban areas, consisting of:

College-age students and post-graduates Educated, working professionals

The consumption trends for Starbucks products are influenced by factors such as competitions from other beverages, health and wellness benefits, the economy, consumer’s income and education level.

“Coffee Culture” is the art of enjoying coffee in a relaxing atmosphere. The boost and popularity in coffee culture has increased the awareness of coffee consumption and influences consumption trend of Starbucks coffee.

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STARBUCKS VALUE GROWTH

Foodservice Value Growth: Starbucks versus the Market

Starbucks was one of the first global foodservice chains to feel the impact of the global recession, causing value growth to fall in 2008 as consumer spending habit began to change.

Starbucks Performance versus the Market 2003-2008

A Starbucks is the growth driver of specialist coffee shops through its own expansion and by creating coffee culture that did not exist in most markets

B Despite a slowdown in US store traffic in 2007, the addition of over 2,600 outlets worldwide helps the company achieve another year of over 20% growth

C Following a long trend of double-digit value growth driven by outlet expansion and strong comparable sales growth, global value growth for Starbucks dropped below zero, as sales in its largest market, the US, fell by 6% in 2007-2008

Source: Euromonitor International

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COMPETITION

Starbucks competes against a number of categories in the foodservice retail market, such as coffee beverages sales, quick-service restaurants and specialty coffee shops. The most direct competition is from specialist coffee houses.

Source: Euromonitor International

Starbucks leads the market by value showing its brand dominance in the market against its competitors. Starbucks is the sixth largest foodservice brand.

Large competitors selling high-quality specialty coffee beverages at a low cost has attracted some of Starbucks customers and if the numbers become large enough, it could adversely affect Starbucks’ sales.

In this industry, firms use product mix and store atmosphere differentiations to capture customers.

In 2008, McDonalds introduces the McCafe where customers can purchase espressos and cappuccinos with prices range from $2 to $4 representing McDonalds’ incursion into the high-margin caffeinated beverages market, dominated by Starbucks.

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Starbucks36%

Doutor Coffee Shop3%

McCafe2%

Costa Coffee3%

Barnes & Noble1%

Gloria Jean's1%

Caffe Nero1%

Other chains30%

Independents23%

Top Coffee Specialist Brands by Value 2008


April 15th 2009 the Deutsche Bank relegated Starbucks Corp to “sell” from “hold” stating that McDonald’s national rollout of the McCafe specialty coffee product line will hurt Starbucks, sending its share down as much as 6%.

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Current Competitive Force

Starbucks has few major competitors

SUPPLIERSBargaining power of suppliers

There is no substitute products for the coffee beans.In 2001, Starbucks announced coffee purchasing guidelines. Only suppliers who can meet Starbucks' coffee standards will be able to supply the company.Hence, the supply industry to Starbucks consists of few companies.Starbucks offsets this threat by paying premium to vendors based on how well their coffee meets Starbucks' standards.Starbucks has a degree of control over its suppliers. However, it is also possible for the suppliers to have an enermous amount of bargaining power.

POTENTIAL ENTRANTSThreat of new entrants

Starbucks has controlled access over the distribution channels and excellent relationship with suppliers.Starbucks has been constantly showing strong product differentiation.Statistics have shown that the slowing industry makes competition high and the threat to new entrants low.

SUBSTITUTESThreat of Substitute Products or Service

There are good substitutes for Starbucks products.This is why image is important to Starbucks, as well as its ability to innovate and differentiate.There is a threat in substitute products in food and drink industry.

BUYERSBargaining power of buyers

Starbucks has developed a plan called Starbucks Preferred Office Coffee Provider in which companies can purchase the ingredients and tools necessary to brew the "perfect cup of Starbucks coffee" in large quantities.Starbucks' typical customers buy in small quantities.Threats:Customers have no switching costs in switching from Starbucks' premium coffee to other coffee suppliers of lower quality.Customers have the ability to brew their own coffee at home.


PORTER’S FIVE FORCES

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MACRO-ENVIRONMENT

ECONOMIC INFLUENCES

Economic risks to the gourmet coffee market:

High gas prices, minimum credit card payments and a slower housing market could cause consumers to cut back on spending on food away from home

Increases in dairy or coffee prices could affect profitability Approximately 10% of Starbucks’ international revenues are from the UK, Canada and Japan.

Economic downturns or exchange rate fluctuations in these countries can cause a negative impact on Starbucks.

HEALTH OF THE ECONOMY: RECESSION

Starbucks is a well known global brand, which sells premium coffee. Its products are considered to be a luxury good.

The company’s reliance on consumer’s discretionary spending now facing a global economic recession, Starbucks’ customers have less money for discretionary spending resulting from job losses, foreclosures, and reduced access to credit. The global economic recession, also causes a shift in consumer spending which may decrease the coffeehouse market in general. It may also drive consumers to less costly competitors such as McDonald’s which began offering premium coffee in 2008.

Source: www.news.bbc.co.uk

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In July 2008, Los Angeles - Consumers are faced with mortgage meltdown, job losses and higher costs for food and fuel cutback on everyday luxuries like coffee drinks costing £3 to £5.

POLITICAL & LEGAL INFLUENCES

Starbucks imports its coffee beans from around the world, therefore emphasizes the importance of political stability of other countries to Starbucks.

Political stability of coffee-supplying countries, as well as the relationship between coffee producing countries and the United States is very important to the company. Labour dispute, war or terrorism can greatly affect the relationship between Starbucks and its coffee suppliers, and this will adversely complicate Starbucks operation.

Supply and price can be affected by political conditions of the producing countries. Establishments of agreements on export quotas and restrictions in coffee supplies in coffee-producing countries by certain organizations and associations have affected green coffee prices in the past.

Legal forces such as changes in import laws would greatly influence numerous areas of production for Starbucks. For example, if the cost to import increases or the process is made more complex, the result to these could ultimately be a change in price, and this would affect the consumption level of Starbucks coffee.

ENVIRONMENTAL INFLUENCES

In 2004, Starbucks started reducing the size of their paper napkins and garbage bags, and reducing its waste production by 816.5 metric tons.

RECYCLING

Starbucks’ coffee cups were the first ever to be approved by the US Food and Drug Administration to use recycled content. Starbucks was awarded the National Recycling Coalition Recycling Works Award in 2005. Starbucks also encourages its customers to bring their own reusable cup by giving them 10% discount.

FAIR TRADE

Starbucks have become the largest buyer of Certified Fair Trade Coffee in North America, making up 10% of the global market. Starbucks purchased 2,180 metric tons of Certified Fair Trade coffee in 2004 and 5,220 metric tons in 2005. Also, much of Starbucks’ price justification is linked to its business ethics. Starbucks prioritise fairness and equality amongst coffee growers over profitability. In accordance to Starbucks’ mission, it also reinvests some of its profits into healthcare for its employees and coffee growers abroad.

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HELPFULTO ACHIEVE OBJECTIVES

HARMFULTO ACHIEVE OBJECTIVES

INTE

RNAL

ORI

GIN

STRENGTHS Strong brand image Leader in the coffee retailing market High brand awareness Worldwide resources for coffee

beans Diverse distribution channels, such

as, grocery stores, convenience stores and department stores.

WEAKNESSES Aggressive growth which has lead to

cannibalization of sales Over-reliance on coffee and coffee-

related products Over-reliance on the US market Brand image becoming a mere

commodity with rapid expansion

EXTE

RNAL

ORI

GIN

OPPORTUNITIES Contact and contracts with foreign

exporters Excellent relationship with suppliers Worldwide resources for coffee

beans. Some degree of control over

suppliers Global expansion

THREATS Saturation in the specialty coffee

market Growing competition from national

brands and new entrants Current economic recession

CONCLUSIONS

SWOT ANALYSIS

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RECOMMENDATION

BRAND IMAGE AND REPUTATION: Preservation and Reinforcement

Reinforcement and awareness of Starbucks brand in the global market would provide competitive advantage and more ease to differentiate its products from competitors.

As Starbucks is expected to expand and double in locations, there is a tendency in the deterioration in focus on quality and brand image. Hence Starbucks should maintain consistent atmosphere and strengthen its commitment to consistency in excellent quality coffee and services to preserve their brand image and reputation, and avoid it being a mere commodity.

It should not flood new markets to eliminate threats of small competitors, as it could lead to more cannibalization of sales, which will ultimately lead to more store closures, this could adversely affect its reputation as closures will not only solely affect the company, but will also affect employees, as a result of redundancies.

COMPETITIVE STRATEGIES

The global market for coffee gourmet is still growing, and some countries are still not exposed to the coffee drinking culture. Starbucks should take the opportunity of international expansion to advantage, and establish strategies based on it and gain the advantage of the first mover. This would very much help Starbucks move away from its reliance on the US market and sales.

Becoming the first mover could benefit Starbucks into becoming an industry leader and in building customer loyalty.

Starbucks should continuously innovate to stay ahead of the increasingly fierce competition. Acquisition would also help Starbucks reduce the threat of competition and achieve a greater market share.

PRODUCT DIVERSIFICATION

Starbucks may carry out research and development to target new market segment or create a completely new line of high quality coffee-flavoured beverages. Starbucks has been focusing on the adult market for its products. With careful market analysis and creativity Starbucks may develop products for children, with careful observation on ingredients and decaffeinated drinks which are suitable for younger-aged consumers, such as milkshakes specifically targeted for children.

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REFLECTION

Upon completing the audit I have to admit that this was a very challenging task as it required an excellent writing skill, with high capability to captivate the reader and to keep their interest throughout the report.

Undergoing the researches necessary to prepare and complete this audit has also exposed me not only to the micro and macro-environment of Starbucks but also what is going on in the economy globally and locally, and how external influences can affect business operation and how too many of good things, such as over-expansion, can bring about problems to the business.

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Business Environment Audit for Starbucks (2009)

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