Final paper starbucks a strategic plan.edited

Running head: STARBUCKS: A STRATEGIC PLAN 1

Starbucks: A Strategic Plan

Terry L. Dashner

STR/581

February 5, 2014

Dr. Tammi A. Reilly

STARBUCKS: A STRATEGIC PLAN 2

Table of Contents

Executive Summary ............................................................................................................................3

Starbucks History ...............................................................................................................................4

Starbucks Mission, Vision, and Values.................................................................................................4

Environmental Scan ............................................................................................................................5

Porter Five Forces...............................................................................................................................5

PESTEL.............................................................................................................................................7

SWOT Analysis .................................................................................................................................8

General Strategies and Recommendations ...........................................................................................8

Starbucks China: Strategies and Recommendations ...............................................................................9

Implementation of the Strategic Plan.................................................................................................. 11

Contingency Plan ............................................................................................................................. 13

Outcome of the Analysis ................................................................................................................... 13

Conclusion ....................................................................................................................................... 14

Request for Plan Approval ................................................................................................................ 15

Appendix A...................................................................................................................................... 20

Appendix B ...................................................................................................................................... 21

Appendix C ...................................................................................................................................... 22

Appendix D...................................................................................................................................... 23


Executive Summary

Starbucks is a premier roaster and retailer of specialty coffee with over 21,366 stores in 68

countries. On January 22, 2015, Starbucks reported that consolidated net revenues had increased

13 percent to $4.8 billion in its fiscal first quarter. In the same report, shares gained 6.4 percent

with an EPS of 80 cents (Starbucks Newsroom, 2015). The strategic plan analyzed the question as

to why Starbucks China had not accelerated expansion plans to advance into third and fourth tier

cities in order to move ahead of its competitors and, thus, secure a dominant market share. The

analysis demonstrated that it is imperative for Starbucks China to expedite its expansion into third

and fourth tier cities because competitors such as Nestle, which controls 80 percent of the coffee

market in China, have achieved a strong presence already in the smaller cities. Kunal Sinha, the

Shanghai-based Regional Director of Cultural Insights for Ogilvy & Mather Asia Pacific (n.p.) has

spoken extensively on multinational companies who want to win in China. Multinationa l

corporations will have to market lower-tier cities. Although China is steeped in a tea culture, its

per capita annual coffee consumption has grown to 300 cups, well above the global average. Much

of the shift from tea to coffee is because of the influence of Western coffee companies (Barlow,

2013). The opportunity for Starbucks to capitalize on the Chinese middle class and their taste for

the Western experience is now. Starbucks China should expand quickly into the smaller city venue

with the addition of 40 stores a month between 2015 and 2019, in order to reach the overall

company goal of 3400 stores in China (Starbucks Newsroom, 2014). The cost for 40 stores at

$500,000 is $20,000,000, with a breakeven point of $65,083.33 per store. The profit margin is

36.75%.


Starbucks History

Starbucks was founded in Seattle, Washington, a haven for coffee zealots. Although the

city was noted for its fine coffees before the Second World War, the quality of its coffee declined

afterward. To remedy the poor quality of coffee, Seattle resident, Gordon Bowker, traveled to

Vancouver, British Columbia, to purchase high-quality coffee beans. Bowker preferred dark

coffee, similar to the coffee he had found in Italy. Eventually, Bowker wrote about his travel

experiences for Seattle magazine. When Seattle folded, two friends of Bowker, Jerry Baldwin, an

English teacher, and Zev Siegl, a history professor, built their first store, located in Pike Place

Market. They picked the name Starbucks, after the first mate who loved coffee in Moby Dick

(History of Starbucks, n.d.).

Starbucks Mission, Vision, and Values

The mission statement for Starbucks (Mission Statement Starbucks Coffee Company,

n.d.) states, “To inspire and nurture the human spirit – one person, one cup and one

neighborhood at a time.” (para. 1). Pearce (2013) noted that mission statements are “broadly

framed” but an “enduring statement” of the purpose for which a company exists. (p. 38).

Starbucks exists to provide a unique experience for the customer. In other words not only are

customers provided a quality product, but an atmosphere of community in a very pleasant

environment. In regard to a company vision, Starbucks has promoted its vision since its inception

to create a place to go to between work and home. The values of Starbucks have centered on

community, company employees, and customers. When every employee is clear on the company

mission, vision, and values, then there is less emphasis on policy and procedure compliance and

enforcement (History of Starbucks, n.d.).


Environmental Scan

Until the 20th century (Wheelen & Hunger, 2012), the global environment was

understood by business people to be a given. It was something to exploit and not to conserve. It

was the right of a company to take what it wanted. The side effects of such exploitatio n were

considered a tradeoff for jobs and a healthy economy. Eventually, the exploitations of the

environment were investigated by governments, which passed regulations to force corporations

to provide measures that dealt with the side effects of their activities (Wheelen and Hunger,

2012).

There are many external factors that impact the direction, action, and ultimately the

organizational structure of a company (Pearce, 2013). For example, Zachery (1996) wrote that

Starbucks was the first U.S. business to proclaim minimum standards for foreign farm workers

who produced its coffee (a result of pressure from protest groups). Under the standards,

impoverished farmers were given the authority to form or join unions without retribution. The

pay and benefits were to be sufficient enough to provide the basic needs of farmers and their

families. The intervention on behalf of the Guatemalan farmers was just one of the many socially

responsible programs that Starbucks would implement through the years.

Porter Five Forces

The remote environment (Pearce, 2013) comprises certain economic, social, political,

technological, and ecological factors that originate outside the purview of a company. The

primary factor in the remote environment is often the give and take relationship between a

business and the ecology. Industry factors have been defined by Harvard professor Michael E.

Porter (Porter, 1985). Porter cited five forces that impact industry competition. The first force is

competition or rivalry. Economists measure company competition by indicators of industry


concentration. The concentration ratio is one measure. The Bureau of Census in the U.S. will

periodically report the CR for major standard industrial classifications. The information is good

for analyzing market share. The second force is the supplier power. Essentially, the fewer

suppliers a company has, the more powerful are the suppliers to drive up prices. With Chinese

labor costs on the rise (Bradsher, 2014), Starbucks China has begun a search for suppliers

outside China. For example, American Mug out of Ohio has become the supplier of coffee mugs

for Starbucks. The Ohio Company can deliver product in four days while on the contrary China

may take three months (Strom, 2012).

Porter also identified the power of buyers to bargain. At Starbucks in Beijing, a Grande

Latte sells for roughly $4.80, a dollar more than what it would cost in the U. S. That is

remarkable because China is a country still in development and its taste for tea is still preferred

to coffee. Since the Chinese economy opened to imports in the late 1970s, Western products

have acquired an absolute superiority with brand conscious Chinese. High prices actually enticed

customers because the affluent customers wanted to show off their status. So, to purchase a

product like a cup of coffee at Starbucks was a good way to obtain status in a business or

personal relationships. An advantage for Starbucks is that it entered China at a time when the

Chinese middle class had emerged, with its desire to drink Western specialty coffees

(Schiavenza, 2013).

Porter identified the force of new entrants to the market. The barrier for new specialty

coffee shops in China is significant. The formable competition for Starbucks in China is coffee

companies that have well-established locations worldwide. For example, Nestle, a Swedish

company, has been in China for over twenty years and holds 80 percent of the coffee market


(Barlow, 2013). New entrants would have a difficult time in a market dominated by specialty

coffee companies that have years of proven success.

Porter identified the fifth force as the threat of substitutes. There are many substitute

beverages to coffee such as, tea, fruit juices, water, soda, and energy drinks. Other coffee

companies from the West, like Costa Coffee from Britain, which opened 73 shops in China in

2013 for a total of 326 stores in 30 cities, could eventually provide an experience that rivals

Starbucks. Once coffee makers become fashionable items in China, the typical Starbucks

customer could elect to drink coffee at home to save on costs (Giang, 2011).

PESTEL

PESTEL stands for political, economic, social, technological, environmental, and legal

factors that impact a business (Pearce, 2013). PESTLE is a very useful tool used to analyze the

effects of environmental factors on a company. Starbucks in China is concerned for the political

stability in China, such as the burdensome rules and regulations assessed against Western

companies and the differences in political philosophies. Starbucks must consider the economy

and whether or not it can sustain the future growth of Starbucks China. Starbucks has addressed

cultural issues in China with the enlargement of its stores so that families may gather and linger

as they desire. Technology has changed the way business is conducted in Starbucks stores, such

as the use of a cell phone app to pay for a purchase. An environmental factor that has affected

Starbucks is the drought in Brazil, the largest producer of Arabica coffee beans in the world

(Cooke, 2010). Starbucks has also complied with the strict laws in China on food safety

(Jourdan, 2014).


SWOT Analysis

A strength, weakness, opportunity, and threat analysis (SWOT) for Starbucks China

conveys factors that have challenged, strengthened, and propelled it to success (See Appendix

A). The SWOT analysis is used to assess and monitor domestic and international markets. An

analysis of the internal environment of Starbucks focuses on resources and core competencies to

determine strengths and weaknesses. Some of the internal forces of Starbucks include the

replacement of the automatic espresso machines, the purchase of the Coffee Equipment

Company, new products, and international expansion. Its primary weakness is that some foreign

stores have yet to reach their full potential. Its present opportunity is the development and

expansion of distribution channels and further expansion into third and fourth tier cities in China.

The primary threat to Starbucks China is the Western specialty coffee company that is well

established in China already (Geereddy, n.p.).

General Strategies and Recommendations

When strategic planners study their market possibilities, they labor to determine which

opportunities are most likely to achieve the strategic long-term objectives. At the same time, they

try to forecast whether an available grand strategy can take advantage of the preferred

opportunities. Many strategic planners believe that long-term strategies should evolve from a

competitive advantage. Michael Porter has written about three generic strategies (Pearce, 2013).

The first is to strive for an overall economic leadership in the industry. Starbucks China must

control costs throughout its value chain, but the costs of its products are determined currently by

demand. The Chinese will pay a dollar more for a Grande Latte than Americans. Secondly, a

policy should aim to develop and sell unique products. The process is called differentiation.

Starbucks China continues to differentiate itself by changes in the menu items. Many items on


the China menu are flavored for the Chinese palate. Last, a generic strategy should attempt to

have special appeal to more than one group of consumers. Starbucks has targeted the Chinese

middle class successfully and should expand its reach to include the family unit.

Management consultants Michael Treacy and Fred Wiersema have proposed an

alternative approach to the generic strategy of Porter that they call the value disciplines (Pearce,

2013). Strategies should center on customer value through one of the three value disciplines:

Operational excellence, customer intimacy, or product leadership (Pearce, 2013). Starbucks

China should continue to enhance the uniqueness of the Starbucks experience for its customers.

The Chinese culture is a family oriented culture. One reason Starbucks went to the larger store

model was to accommodate the families that come and linger in the stores (Starbucks

Newsroom, 2014).

Starbucks China: Strategies and Recommendations

Starbucks is committed to China (See Appendix B), which is the most populous country

in the world (Worldometers, n.d.). China in 2015 will become the second largest market for

Starbucks (Starbucks, 2014). Starbucks must pursue the Chinese market aggressively because if

it does not, its competitors will (Riley, 2014). For example, Costa Coffee, a British coffee chain,

is very similar to Starbucks and, as a result, it appeals to a comparable customer base. It has

plans to have 500 stores in China by 2016 and has the potential to rival Starbucks in China.

Profitability is the primary objective of an organization (Pearce, 2013). It does not matter

how profit is measured or defined, but a long-term plan for profitability is the best indicator that

a company can satisfy employees and stockholders (Pearce, 2013). A caveat for Starbucks

(Brizek, 2010) is that it plans for the short-term reach in China and not a long-term plan that

addresses its competitors.


A clear view (Pearce, 2013) of how a business will generate profits and strategic actions

to succeed over the long term is a good business model. Starbucks should expand its business

model in China (Zhuqioing, 2014). Starbucks is the primary leader in single serve packaged

roast, ground coffee, and Ready-to-Drink products served outside its retail stores in the U.S. It

must implement that model in China to compete against Nestle and its 80 percent control of the

instant coffee market. (Starbucks Newsroom, 2014). In September, 2014, Starbucks announced

(Starbucks, 2014) the expansion of it store formats and its company experience segmentation in

both domestic and foreign markets. Starbucks has launched an interactive Starbucks Reserve

Roastery and Tasting Room, which is dedicated to educate customers to its various coffees

(Starbucks, 2014). This is an opportunity for Starbucks to continue its versatile business models

and expedite its expansion in China tier three and tier four cities.

The fact that Starbucks has a long-term plan for growth internationally does not negate

the need for an alternative plan. If the Starbucks Reserve Roastery and Tasting Room fails in a

large foreign market like China, then Starbucks should have another, alternative plan to

implement. For example (Starbucks, n.d.) in 2014, Starbucks “averaged $1.2 million in year-one

sales with a return on investment of approximately 50% that exceeded the best-in-class

investment ratio of 2 to 1.” (para. 5). The problem with the optimistic numbers is that they do not

include international markets. Nevertheless, Starbucks plans to make China its second largest

market by the end of 2015 to counter its dependence on the U.S. market (Starbucks, 2014).

Helen Wang (2012), author and noted expert on the middle class in China, has written

about the Chinese culture. Wang said that China had drunk tea and developed a culture around it


for over a thousand years. She stated that everything pointed to a failure when Starbucks entered

China, but Starbucks had learned several valuable lessons, which helped it move forward:

Before Starbucks entered China in 1999, it conducted a careful market study and discovered that

the Chinese middle class had emerged.

Starbucks plans to have 1500 stores in China by the end of 2015 (Starbucks, 2014). The

president of Starbucks China, Belinda Wong, wrote that it is imperative for Starbucks to stay

value oriented to continue the success in China. Wong said (Starbucks 2014), "Growth has to be

built on the foundational values of Starbucks." (para. 9). Values that honor the Chinese customer

over profitability are vital to the success of expanded growth in China (Starbucks, 2014).

To expedite its growth in China and, thus, outpace its competition, Starbucks should:

Communicate expansion plans from the top down. John Culver, group president

of Starbucks China and Asia Pacific (CAP), should declare that China is the primary

Asian market for Starbucks

Establish More Partnerships

Honor the Chinese Culture

Change the Narrowness of the Brand (Matherson, 2013)

Reinvest in China (Starbucks, 2014)

Implementation of the Strategic Plan

In 2015, the challenge for Starbucks China is to stay ahead of the competition. Nestle and

Costa Coffee, a British chain, are two of the top competitors for Starbucks China (Fang, n.d.).

Starbucks China must implement a strategic management plan that expedites the expansion of

Starbucks China and advances its lead over the competition to secure its foothold in the market.


Currently, Nestle controls 80 percent of the coffee market in China. Starbucks China has 320

stores in Shanghai, a tier one city. A single strategy to saturate first and second tier cities only in

order to dominate the coffee market will not work. Kunal Sinha, the Shanghai-based Regional

Director of Cultural Insights for Ogilvy & Mather Asia Pacific (2013) said, "If multinational

companies want to win in China, they will have no option but to redouble their efforts in the

lower-tier markets." Starbucks China should move immediately into third and fourth tier cities.

Forty stores a month should be built between 2015 and 2019 to reach 3400 stores. The cost is

$20,000,000, but the breakeven point will show a profit margin of 36.75% (See Appendix B).

Starbucks China University (Starbucks Newsroom, 2014), established in November 2012, has

provided 625,000 school hours to nearly 14,000 partners. (para. 8). Starbucks China needs to

begin a campaign to recruit potential employees and utilize the University to train them

immediately.

Starbucks (2015) has announced plans to double its China store count to 3,400 by 2019.

To accomplish the objective, 40 new stores a month must be built for four years. China is one of

the strongest markets for the company, due to a rapid growth of a customer base and quick

expansions (Johnston, 2015). The company added a record 120 new stores in China in the fourth

quarter of fiscal 2014 (See Appendix C). Recently, the company reached a milestone for the

number of stores in one Chinese city. Shanghai now has 320 stores, the most Starbucks stores in

the world. In December of 2014, Starbucks opened the new Chengdu Taikoo Li store in China,

as a part of its plan for innovation and rapid expansion in China (Starbucks Newsroom, 2015).

The flagship store was designed to introduce and encourage Starbucks’ Reserve Coffee — a rare

and exquisite Arabica coffee.


Contingency Plan

When Starbucks entered China in 1999, many were skeptical that Starbucks had a chance

(Johnston, 2015). Given the fact that Chinese people have traditionally favored tea, it seemed

impossible that Starbucks would be able to break into the market. Starbucks did not let the

skepticism stop it. A market study conducted by Starbucks in the 1990s revealed that the Chinese

middle class was strong and formidable. Conditions were right for Starbucks to introduce its

products and its specialty coffee experience (Starbucks Newsroom, 2014).

Risks for success in China can be lessened, but never completely negated. For example,

coffee prices in 2015 could spike as a result of drought in Brazil, the biggest producer of Arabica

coffee in the world. If coffee prices spike because of drought in Brazil, the contingency plan for

Starbucks is to purchase Arabica Coffee from farms in China. If global supply chains are

interrupted because of world events, a contingency plan for Starbucks is to establish a

partnership with local suppliers. If a move into the tier three and four cities does not work out, it

behooves Starbucks to saturate coastal cities where the population is more affluent and likely to

purchase Starbucks products. As China (Worldometer, n.d.) attempts to become the largest

economy in the world and its ability to maintain a GDP of roughly 7% annually as estimated by

the World Bank, Starbucks should be able to build on its former success and dominate the

specialty coffee market.

Outcome of the Analysis

The fiscal last quarter for Starbucks (Starbucks Coffee Company, n.d.) ends the Sunday

after Sept 30. The first quarter of 2015 ended on December 28, 2014. Consolidated net revenues

increased 13 percent to 4.8 billion (See Appendix D). Global comparable store sales (stores that

have been open at least a year to distinguish growth from new sales) increased 5 percent with a 2


percent increase in traffic. Starbucks China, Asia and Pacific (CAP) comparable sales increased

8 percent, driven entirely by increased traffic. Consolidated operation income reached $915.5

million with a Non-GAAP operation margin of 19.5 percent an increase of 80 basis points over

Q1 FY14 (1 percent change=100 basis points and 0.01 percent=1 basis point). Non-GAAP is

also called “adjusted” or pro forma. For example, a company may write-down an asset or

restructure its organization. These actions usually come with significant one-time costs that

distort company profits. As such, a company will also provide an "adjusted" earnings number

that excludes these nonrecurring items. Q1 2014 for CAP operation margin was 21.8 percent. It

was 30.4 percent in 2013, a change of 860 bps. The cost for 40 stores is estimated to be

$20,000,000 with a breakeven point of $65,083.33 per store, which leaves a profit margin of

36.75 percent.

Conclusion

The strategic plan for Starbucks China has analyzed the question as to why Starbucks

China has not accelerated expansion plans and advanced into third and fourth tier cities.

Starbucks China should expand in order to move ahead of its competitors and, thus, secure a

dominant market share by 2019. The analysis has demonstrated that it is imperative for

Starbucks China to expedite its expansion into third and fourth tier cities ahead of its

competitors. Although China is steeped in a tea culture, its per capita annual coffee consumption

has grown to 300 cups, well above the global average. Much of the shift from tea to coffee is

because of the influence of Western coffee companies (Barlow, 2013). The opportunity for

Starbucks to capitalize on the Chinese middle class and their taste for the Western experience is

now. Starbucks China should expand quickly into the smaller city venue with the addition of 40


stores a month between 2015 and 2019 in order to reach the overall company goal of 3400 stores

in China by 2019 (Starbucks Newsroom, 2014).

Request for Plan Approval

I respectfully request to meet with you at your earliest convenience to discuss plans for

the implementation of the Starbucks China strategic management plan. It is my desire to begin

the implementation process immediately to reach certain milestones reserved for 2015. I can be

reached at 918-576-9532 or email at [email protected]. Thank you.


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Appendix A

S W O T

Strength 2014

Annual

Revenue has more than tripled in the

last ten years to 16.5

billion U.S. dollars in 2014

A Nielsen Scarborough

survey in 2014 found

that 32 million Americans

visited within last

30 days

Weakness

Expensive

Products

Overdependence

on the U.S. market

Self-

Cannibalization through

overcrowding

Opportunity

Expansion

into Emergent Markets

Expand

Product mix and offers

Brand Extension

Technological advances

Threats

Increased

Competition

Developed

Countries Economy

Changing

customer tastes and

lifestyle choices

Strength 2013

Starbucks loyalty and

rewards program

Best year in

Starbucks 42-year

history

Weakness

Coffee bean surplus drove

down profits

Negative

Publicity telling gun owners to leave their

weapons at home

Opportunity

Increased product

offerings

Expansion of

retail operations in various

venues

Threats

Trademark infringements

Supply disruptions

Increased competition

from local cafes


Appendix B

Starbucks China must build 1900 stores between 2015 and 2019 to reach its goal of 3400 stores

in China. Starbucks must build 40 stores a month across China at a cost of $20,000,000. Stores in

China average $886,000 annually. The average startup costs are $500,000.

Starbucks China Milestones Goals Vision

Double Store Count by 2019

2019 3400 Stores

475 New Stores

a Year until 2019

Between 2015

and 2019 must build 1900 stores

2015 1500 Stores

Across China

2014 120 Stores 320 Stores in Shanghai

Accomplished

Mission

Statement


Appendix C

Milestones between December 2013 and December 2014

$ in Millions December 28, 2013 December 29, 2014 Change

Net New Stores 234 209 25

Revenue $495.8 $266.9 86%

Operation Income $108.3 $81.1 34%

Operation Margin (Measure of

Profitability)

21.8% 30.4% 860 (bps)


Appendix D

Starbucks reported revenues of $4.8 billion from three sources:

company-operated stores – 79%

licensed stores – 10%

consumer packaged goods, food services, and other – 11%

The chart shows a breakdown of revenue by segment by geography.

Final paper starbucks a strategic plan.edited

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