TheFutureofStarbucks

AnAnalysisbyTeamMacchiato:
ZackHigbee ChenYeeLiaw CalvinTing KevinTjho MichelleTon
1

ExecutiveSummary
StarbucksCorporationhasarguablybeenthemostsuccessfulcoffeechaininthepastfewdecades, usingtheiraggressiveexpansionstrategiestopushoutmuchofitscompetition.Throughits expansion,StarbuckshasfocusedoncreatingadensenetworkofstoresallaroundAmerica,while alsoopeningupnewlocationsallaroundtheworld.Byleadingtheretailcoffeemarket,Starbucks isabletosellitscoffeeforapremiumpriceandincreasetheirprofitability.Itssuccesscanbeseen inthegradualriseofitsstockpricesfrom19922007,reachingalmost6000%oftheirinitial publicoffering 1 . Yet,intherecentyear,themarkethasshownStarbuckstobeinconstantdecline,astheirstock hasdroppedabout$15/share,avaluetheyhavebeenabovesince2004.Also,lookingat StarbucksSECfilings,wecanseethatitscomparablestoresaleshavedecreasedsignificantlyinUS marketssince2004.ThishaspromptedTeamMacchiatotoevaluateStarbuckscurrentstrategies inadditiontotheretailcoffeemarketasawhole.Toevaluatetheproblem,oneofthebiggest questionstoconsideristowhatextentisthedesignercoffeemarketjustafad.Inotherwords, willtheallureofgourmetStarbuckscoffeebemaintainedorwillmoreappealingoptionsthreaten thesuccessofStarbucksprimaryproduct?Ifthedesignercoffeemarketisindeedafadindustry, weneedtoevaluateStarbuckspossibleoptionstoavoidfurtherdecline.

ProblemDefinition
TheoverarchingquestionthatweshouldanswerishowStarbuckscanstayprofitableinthefuture. Agoodplacetostartinvolvesevaluatingthecurrentmarketforcoffee;fromthispoint,wecan gatherinformationaboutmarketperformanceanddeterminetheextenttowhichdesignercoffee appealstocurrentconsumers.Throughmarketanalysis,wecaninvestigatewhetherornotthe demandforgourmetcoffeeiswavering.Wewillevaluatewhethercoffeecompaniesingeneral arehavingtroublemaintainingprofitabilityorifitisjustStarbucksthathasdeclinedinrecent times.Ifthemarketisindeedindecline,wemustanswerthefollowingquestions: Ifdesignercoffeeisjustafad,isthetemporarypopularityapproachingtheendorhasthefad alreadyended? WhataretheoptionsavailabletocompanieslikeStarbucksthatspecializeinfadcoffee products?

Afterwards,itisnecessarytoanalyzeStarbuckssstrengths,weaknesses,opportunities,and threats.Fromthisanalysis,wecandetermineStarbuckssmotivationsbehindtheircurrent

www.finance.yahoo.com,SBUX.

businessstrategies.Also,whatstrategiesshouldStarbuckspursueinthefutureinordertoavoid furtherdeclineandhowcanStarbuckscounteracteffortsfromcompetitors?

TheCurrentSituation
Comparedtotherestofthemarket,duringthepastyearStarbucksstockhassteadilydeclinedin value.Meanwhile,PeetsCoffee,oneofStarbucksmajorcompetitors,hashaditsstocksperform aboutthesameastherestofthemarket,followingthegeneraltrendofrisesanddropsthatthe marketexperienced. SinceMayof2007,Peetsstockhasremainedsteady,peakinginDecember2007at30dollarsa share,andreachingalowof20dollarashareinthemiddleofMarch2008.Meanwhile,Starbucks hasbeenonasteadydecline,itsstocksdroppingby50%oftheirvaluesinceMayof2007,from about30dollarsasharedownto16dollarsashare.ThelasttimeStarbucksstockwastraded above20dollarsasharewasattheendofJanuary2008.Incomparison,inthepastyear,the lowestPeetsstockhasbeenwas19.89ashare. ConsideringotherminorcompetitorswhohavebeenencroachingonStarbucksscoffeebusiness, bothMcDonaldsandBurgerKinghavebeenoutperformingthemarketinthepastyear.Lastyear, ConsumerReportratedMcDonaldscoffeeaboveStarbuckscoffeeforthefirsttime. AnotherimportantfinancialaspecttoevaluateisStarbuckscomparablestoresales,orthe percentageofrevenuegrowthamongtheirexistingstores.SinceStarbucksprimarystrategyisto expandatamuchhigherratethanitscompetitors,itismuchmoreusefultogetasenseofhow Starbucksexistingcoffeestoresareperforming,ratherthanincludingtheirnewlyexpanded locations.AglanceatStarbucksSECFilingforthefiscalyearof2007revealsthatStarbucks annualcomparablestoresalesgrowthhassteadilydecreasedfrom11%in2004to4%in2007in USmarkets 2 .InFebruaryof2008,Starbucksreportedthatitscomparablestoresalescontracted 1%,dueto2%increaseintheaveragevaluepertransactionoffsetbya3%decreaseinthenumber oftransactions 3 .Thoughtheirinternationalcomparablestoresalesgrowthhasconsistently remainedaround78%,theiroverallconsolidatedsamestoresalesgrowthhasdecreasedfrom 10%in2004to5%in2007.Thisdramaticdecreaseingrowthmaybefinancialevidencethat Starbucksperformanceasaspecialtycoffeechainiswaning. Whencomparingnetrevenuegrowthinstead,PeetsandStarbucksbothhaveshownarelatively consistentpercentageforthepastthreeyears(1820%) 4 .Additionally,inStarbucksmostrecent

Starbucks10KFiled11/29/2007(SECWebsite) Starbucks10QFiled2/8/2008(SECWebsite) Starbucks10KFiled11/29/2007(SECWebsite)

quarterlyperformancereport,theymentionedthattheywillnolongerbeannouncingtheirsame storesalesgrowth.Theirreasoningstemsfromneartermchangesthatwillsignificantlyimpact theCompany'sU.S.retailstores[andcomparablestoresalesmetrics]willnotbeaneffective indicatoroftheCompany'sperformance 5 .Removalofthisinformationfromthepubliceyeis indicativeofanunhealthydownturninStarbucksexpectedperformance.

ProblemAnalysis
Asoflate,Starbuckshasclearlybeendecliningcomparedtoitsmaincompetitorsandcomparedto themarket.Onecauseofthismaybethecurrenteconomicdownturn.Theslowdowninthe economyhaschangedpeoplesspendinghabits.AccordingtotheAssociatedPress,Researchby WSLStrategicRetailfoundthatpremiumbrandsorfoodandspecialtycoffeesare[among]the topareaswherepeoplearetrimmingtheirspending. 6 Starbucksconsidersitselfapremiumcoffeeprovider,asisevidentfromthestatementfromThe EconomistHowardSchultzoncesaidthathefindsitpainfulwhenpeoplecomparehisfirm, Starbucks,toMcDonald's.Thefounderoftheworld'sbiggestchainofcoffeeshopsthinksavisitto Starbucksshouldinvolveromanceandtheatre,afarcryfromthepitstoplikeexperienceof eatingamealattheworld'sbiggestfastfoodchain. 7 AccordingtoTheEconomist,NotallofStarbucks'poorperformanceisofitsownmaking.Prices forfoodcommoditiesareatalltimehighs,promptingthefirmtoincreasepricestwiceinthepast year.Thishasscaredoffcustomers,whohavebeendefectingtofastfoodchainssuchasDunkin' DonutsorPaneraBread,whichsellreasonablecoffeeforaslittleasaquarterofthepriceofa fancyStarbucksbrew.7 Meanwhile,ononefront,Starbuckshascontinuedtoembracethislegacyofuniqueexcellence andhighqualitycoffee.AccordingtoUSAToday,Schultzsaysthecompanyishavingsuccessin BostonandSeattletestingapremiumcoffeethatsellsfor$2.50percup,aboutabuckmorethana similarcupoftheregulardripcoffee.We'regoingtogoupinexperiencenotdown,hesays. 8 FacingcompetitionfromMcDonaldsandDunkingDonuts,Starbucksexperimentedwith$1 bottomless8oz.cupsofcoffeeforashorttimeinSeattle.However,Schultzaxedatestofdollar cupsofcoffeeinSeattle8.Inaddition,hesspecificallystated"We'renotinthefastfood business."8

Starbucks10QFiled2/8/2008(SECWebsite) http://money.cnn.com/2008/04/25/news/economy/doing_without.ap/index.htm http://www.economist.com/business/displaystory.cfm?story_id=11021146 http://www.usatoday.com/money/industries/food/20080318starbuckschanges_N.htm

Thus,aswecansee,Starbucksiscommittedtoremaininginthepremiumcoffeeandpremium serviceindustry.Thoughtheirslowdownispartiallycausedbythemarket,itisclearthatother competitorshavenotbeenaffectedasbadly,sointernalstrategymaybethecausefortheir decline.Theirstrategyofnotstoopingdowntothelevelofafastfoodprovider,forexample,may behurtingthemduringthiseconomicdownturn.

AnalysisofStarbucksUsingPortersFiveForces
1. TheThreatofSubstitution

Substitutes(Products) OtherbeveragesapartfromStarbuckscoffeeandteaExamplesincludesoda,fruitjuice, smoothies,water,beerandotheralcoholicdrinks Otherquickgrabfoodsapartfrompastries,muffins,doughnuts,etcsoldatStarbucks. Examplesincludeburgers,burritos,tacos,sushi,snackfood Substitutes(Environment/Ambience) Lowerendorlessluxuriouscoffeeplaces Placesthatofferpeopleaplacetohangout,chat,relaxorevenwork.Examplesincludetea houses,fastfoodplaces,icecreamparlors,sidewalkcafes,andbarsandpubs

2.

TheThreatofNewEntry

Theentrybarrierforthecoffeeindustryisrelativelylow,evenforpremiumcoffeelikeStarbucks. Anylargeandwellfundedcompanywherecapitalisnotaproblemcouldbepotentialentrants. Someofthemorecurrentandongoingthreatsofnewentrantsincludefastfoodchainssuchas McDonalds,BurgerKingandDunkinDonuts.

3.

CompetitiveRivalry

Othercoffeechains.ExamplesincludeCoffeeBean&TeaLeaf,GloriaJeansCoffee,Peets,and SanFranciscoCoffeeHouse Smallerprivatelyownedcoffeehouses Secondarycoffeeproviders.ExamplesincludeMcDonalds,BurgerKing,DunkinDonuts

4.

TheBargainingPowerofSuppliers

NotmuchbargainingpowerforcoffeebeansuppliersduetotheimportanceofStarbucks businesstoanyindividualsupplier,andthefactthatStarbucksprobablyaccountsforalarge percentageofanyindividualsupplierssales..ThisgivesStarbuckstheabilitytodictatethepriceof coffeebeansales. Similarly,suppliersofpaperandplasticproducts,suchascups,napkins,lids,etc,haveverylittle bargainingpowerduetothelargeamountofalternativesourcesStarbuckscoulddrawfrom.In addition,Starbuckshasformedcontractswithsuchsuppliers,givingthemeffectivelynobargaining power. Thereismorebargainingpowerforsuppliersoftechnologicalinnovationssuchasautomated coffeemachines,latteandespressomachines,etcbecausetherearenotasmanysuppliersfor suchequipmentasthereareforcoffeebeans.

5.

TheBargainingPowerofBuyers

Inthepast,buyersdidnotreallyhavebargainingpowerwhenitcametopremiumcoffeesuchas Starbucks.ThesheerscaleofStarbucksbusinessreducesthebargainingpowerofanysinglegroup ofbuyers. WithnewerentrantsandcompetitorssuchasMcDonaldswhoclaimtoofferpremiumroast coffeeofreasonablequalityforlowerprice,buyersnowhaveslightlymorebargainingpowerthan theyvehadinthepast.

SWOTAnalysis
LookingintoStarbucksspecifically,weneedtoanalyzehowitperformsasacompanyandwhether ornotitwillcontinuetoperform.Inordertogaugethisperformancewelookatboththe companyscharacteristicsandthoseofthesurroundingmarketandseewhatneedstobedonefor thefuture.AnexcellenttoolforgaugingthesequalitiesisStrengths,Weaknesses,Opportunities, andThreatsanalysis,alsoknownasSWOTanalysis.ConsideringthestrengthsofStarbucks:

Strengths:
Prettymucheveryone,atleastwithintheUS,knowsthenameStarbucksandassociatesitwith highendcoffees.Inaddition,peopleseeStarbucksasthebiggestandbestinthebusiness.Thisisa significantstrengthbecauseStarbuckshasanaturaledgeoveritslesserknowncompetitorsinthat peoplealreadyassociateitwithahighqualityandpopularexperience. TheenormousnumberofStarbuckslocationsallowsthemtoreachalmosteverydomesticmarket aswellasagoodnumberofinternationalones.Thisallowsthemtoimplementnewproducts quicklyacrossalargedemographicandensuresalargeexposureofclienteletopreventnew
6

entrantsfromgainingmarketshare.Additionally,takingadvantageofexistingestablishmentssuch asBarnesandNobleandopeningsmallercafsinotherbusinessesallowsthemtoexpandtheir marketwhilekeepingcostslow.Thisalsoallowsthemexpandtheirmarketingpotentialto differentdemographics. WhiletheirbusinessisntaswellestablishedinternationallyasacompanylikeMcDonalds,thereis anextremelylargebenefittohavingaglobalizedbusiness(seeAppendix).Asidefromtheobvious scaleadvantages,beinginternationalalsohelpstopreventtheriseofinternationalcompetitors thatmaybuildupenoughcapitaltojumpintotheAmericanmarket. Starbuckshasawellknownpracticetomakeeffortstopreservetheenvironmentandbeethicalin itsdealings.Thisgivesthecompanyagoodpublicimage,whichservestocountersomecriticism thatitssheersizecreates.Itssizealsohelpsitspositioninthemarket.Beingaheadofallits competitorsintheindustryintermsofsizeandvolumeallowsthemtosetthepricesandprevent thegrowthofothercompanies. Starbuckssuccessfullychangedthepublicopinionofcoffeeproductsfromacommoditytoaluxury good,andinsodoing,enabledanincreaseinpriceforthesegoodstoamuchhigherlevelthan wouldhavebeenpossiblebefore. Starbucksmissiontomakeitsstoresathirdplaceforpeopletogobesidesworkandhome comesbyofferingserviceslikefreeinternetandcomfortablechairs.ThisgoalgivesStarbucksthe ambiancetogoalongwithitsproduct.WhileStarbuckshasanexceptionaledgeinthecoffee industry,ithassomeweaknessesthatmayleaveitvulnerabletochangesinthemarket.

Weaknesses:
WhilemostpeopleconsiderStarbuckscoffeealuxurygoodandwouldpaywhateverpriceisset forit,thereisanincreasingopinionthatStarbuckschargestoomuch.Theyarealsoveryinflexible intermsoflocation.Forexample,Starbuckschargesthesamepricefortheirproductswhether youreinLAorBeijing. Basically,themainproblemforStarbucksisthatitsentirebusinessrestsonthecoffeeindustry.If coffeedoesturnouttobeafad,theymustdiversifyorgooutofbusinesswhereasother competitors,suchasDunkinDonuts,haveinvestmentsinavarietyofindustries. Inadditiontofixingitspricesforinternationalcustomers,Starbucksalsohaslackedsometactin thewayofinternationalrelations.InIsrael,Starbuckshashadahardtimetakingoffbecauseit wontmaintainkosherstandards.Ingeneral,Starbuckskeepsitsbusinessplanformulaicand centralizedanddoesnottailoritsbranchestothelocationstheyarebeingplacedin.

Moreover,Starbucksoffersonlyoneflavorofcoffee,asopposedtoitscompetitorssuchasPeets andCoffeeBean&TeaLeaf,whichofferalargevarietyofcoffeestochoosefrom.Thislackof selectionmakesStarbucksanunappealingchoiceformanycoffeedrinkers.

Opportunities:
BypurchasingcompaniessuchasSeattlesBest,XMCaf,andTazoTea,Starbucksusedadifferent brandnametogetbusinessinadifferentmarketniche.Starbucksalsooffersarangeofproducts thatitsellstoothercompaniessuchasitsbottledFrappuccinosandotherspecialtygoods,which expanditsmarketatalowercostthanopeningfullbranches. Theyusedtheirvastresourcestodevelopaninternationalbusiness.Thisgeneratedevenmore revenueforStarbucksandreallyhelpedtodeveloptheirbrandimage.Oneoftheirbiggest opportunitiescontinuestobeinexpandinganddiversifyingtheirbusinesswiththeirvastwealth.

Threats:
Recently,seriouscompetitionhaspresenteditself.Severalcompaniesaredevelopingcoffee productsthatrivalthoseofStarbucks.CompaniessuchasPeetsandtheCoffeeBeanhavegrown largeenoughtoseriouslycompetewithStarbucks.Othercompanies,suchasMcDonalds,Dunkin Donuts,BurgerKing,etc,alreadyhavetheinfrastructureinplaceandareinsteadaddingquality coffeetotheirmenustocompetewithStarbucks. Anotherpotentialthreatisthatcoffeeisjustafadandeventuallypeoplewillgrowoutofit.Ifthis isthecase,Starbucksonlyhopeistodiversifyitsbusinessintootherindustriestopotentiallygive itsomesecurityfromfluctuationsinthecoffeemarket.Becauseofthespecializationoftheir industry,Starbucksisverydependentonsupplyfactorssuchasthepriceofcoffeebeans,which couldhurttheirbusiness.

AnalysisofStarbucksCompetitors
WhileStarbucksisstillconsideredthedominatingcoffeechaincorporation,inrecentyears,its holdonthecoffeehasloosenedconsiderably.TherecentcompetitionfacingStarbuckshasnot beenfromnewcomers,butratherfromoldercoffeechainsthathaveincreasingconsumerloyalty andfromestablishedfastfoodcorporationsthathavealteredtheirfocustoincorporatetherising trendofcoffee.Starbuckshasalsobeenunsuccessfulinunseatingmanyindependentmomand popcoffeehouses,whichhavebothhometownfamiliarityandloyalty. OneofStarbucksbiggestcompetitorsisconsideredtobeDunkinDonuts.WhileDunkinDonuts hasalwaysbeenmoderatelysuccessfulinsellingcoffee,especiallybecauseofthecomplimentary pairingofdonutsandcoffee,inthepastfewyearsthecorporationhasbeguntoaggressively promoteitscoffee.DunkinDonutsrecentlyhiredcelebrityRachaelRaytobethefaceoftheirnew
8

advertisingcampaign,whichhastheslogan,AmericaRunsonDunkin 9 .Moreover,Dunkin DonutshasstartedtoemulateseveralStarbucksstrategies,includingholdingafreecoffeedaya weekafterStarbuckshelditsfreecoffeegiveaway.WhileStarbucksisstillthelargestretailchain,a 2007surveyconductedbyresearchfirmBrandKeyshasfoundthatDunkinDonutsisNo.1interms ofcustomerloyalty(StarbuckscameinatNo.2)9. WhileDunkinDonutshasfounditsgreatestsuccessintheNortheast,StarbucksmainWestCoast rivalhasalwaysbeenPeetsCoffee&Tea.Starbucksstockshavefallensignificantlybelowthe marketinthepastyear,whileothercoffeechaincompetitorssuchasPeetsCoffee&Teahave hadtheirstocksremainatmarketlevelorabove.PeetsCoffee&Tea,whichwasfoundedonly5 yearsbeforeStarbucks,hasstayedinthecoffeeindustryduetoitsfocusonqualitycoffee.Ithas nottriedtobeatStarbucksmoneymakingstrategiesofsellingmusicandappearingedgy,but insteadithasremainedtruetoitscoreasacoffeeshopthatsellsqualitycoffee.Peets concentrationonqualitycoffeecomesacrosswithstancessuchasneverresteamingmilk,roasting beansinsmallbatches,andmaintainingalargevarietyofcoffeesforcustomerstochoosefrom 10 . PeetsstrategyofopeningacrossthestreetornearbytoStarbuckslocationshasallowedittotake advantageofStarbuckspopularityforitsowngain,givingconsumersanalternativecoffeeshopto goto.Additionally,Peetshasneverconcentratedonstoreexpansion,choosingtomaintainits currentstrongholdinCalifornia.Becauseofthis,ontheWestCoast,Starbucksdoesnotcommand thesamecustomerloyaltythatPeetsdoes. TheCoffeeBean&TeaLeafhassimilarlydonewellbymakingsuretoappeardifferentthan Starbuckswithitslargeteaselectionanditssuccessfullyinnovativenature.CoffeeBean&TeaLeaf wasthefirstcorporationtopopularizeChaiLattesandIceBlendedCoffeeDrinks,bothofwhich havebeenmassivelysuccessfulandemulatedbyStarbucks.TheCoffeeBean&TeaLeafwasalso abletofindsuccessinIsrael,aplacewhereStarbuckswasunabletoconquer,becauseCoffeeBean &TeaLeafboastskosherdrinksandallowssmoking. Starbuckshasstrongcompetitionfromothercoffeeshops,butsurprisingly,theothermain competitorsrisinginthecoffeemarketareprominentfastfoodchains.Corporationssuchas McDonaldsandBurgerKinghavebeenaroundmuchlongerandhaveamuchbigger establishmentthanStarbucksdoes.Theyalreadyhavetheinfrastructureinplacetosellcoffee, andthesefastfoodchainshaverecentlybeenpromotingwhattheyassertiscoffeethatsof similarqualitytoStarbucksforacheaperprice.Forthesamesizedcupofcoffee,McDonalds

http://articles.moneycentral.msn.com/Investing/Extra/DunkinAndMcDonaldsTakeOnStarbucks.aspx http://superreviews.com/articles/new/peet'scoffee:40yearsandstillgoingstrong.html

10

charged$1.35,BurgerKingcharged$1.40,andStarbuckscharged$1.55 11 .McDonaldshas recentlyconfirmedanincreaseinitsbreakfastbusiness,whichiscitedasduetotheirNewmans OrganicCoffeeline.BurgerKingscoffeeisalsopraisedashighqualityfastfoodcoffee,especially withitschoicesofdecaf,regular,andturbo. WhileStarbuckshasstrategicallyopeneditsstoresnearbysmall,privatelyownedcoffeeshopsin attemptstodrivethemoutofbusiness,inmanycasestheefforttodriveawaythesmallermom andpopshopshasbackfired.Starbucksmarketingfortheirnewlyopenedstoresonlydrewmore customersfortheindependentcoffeeplacesinthevicinity.Independentcoffeeshopshaveeven gonesofarastoopenupmorecoffeeshopsnexttoStarbucks,similartoPeetsstrategyofchasing Starbuckslocations.Andthesmallerindependentshopshavetheupperhandintermsof customizingtheircoffeeshoptoappealtosmalltowns,suchasendorsinghometownfootball teams. Starbucksfacesstiffcompetitionfromallsides.Itsmassmarketingleavesitunabletogainthe consumerloyaltythatsmallercoffeeshopshave,andfastfoodconglomeratesarefarmore establishedthanStarbucksis.

Fragmentation:
ProbablyoneofthebiggestproblemsforStarbucksistheconstantlyincreasingfragmentationof theretailcoffeeindustry.ThereisnoquestionthatStarbucksdominatesthecoffeeindustryand thattheyarefarlargerthananyoftheircompetitors.Forthisreason,theyhavenothadmuch troublewithmarketshareinthepast.However,therearenowsomanyplayersintheindustryand incompetingindustriesthattheyareslowlytakingtheirtollonStarbuckssales.Asanexampleof this,McDonaldssalesrose8.2%bytheendof2007aftertheybeganscalinguptheircoffee service. 12 TherapidupriseofthesetypesofcompetitorshashurtStarbucksjustbecauseofthesheer volumeofthecompetition.Bothcompetingcompaniesandsubstitutecompanieshavebeenon therise,andbecauseofthis,themarketforStarbuckshasbeenshrinking.In2005,thesalesof organiccoffeesrose40%accordingtoFoodandBeverageInternational. 13 Thisshowsthatsmaller butstillpowerfulcoffeecompanies,suchasVermontsGreenMountainCoffeeRoasters,have significanttractioninthecoffeemarket.Thisapparentshiftinthemarkethascausedittobecome

http://www.consumerreports.org/cro/food/beverages/coffeetea/coffeetastetest3 07/overview/0307_coffee_ov_1.htm
12 11

http://www.bloomberg.com/apps/news?pid=20601087&sid=a38bWZePUXLk&refer=home http://www.fbworld.com/News%20Releases/2006/06.12.06/organic%20coffee.html

13

10

morefragmentedaspeoplebegintryingotherbrandsofcoffeeinsteadofimmediatelychoosing Starbucks.Similartrendscanbeseeninthechangeofconsumerpreferencetowardshealthier drinks.TheseoveralltrendshavefragmentedthemarketbecauseStarbucksandsimilarcoffee companiesdonothavetheedgeontheretailindustrythattheyoncedid.Thisproblemtiesinto themuchlargerproblemofthecoffeefad.Whileitisnotentirelydeterminedthatcoffeeisa transientfadandnotjustsufferingfromabriefdecline,itiscertainlyobviousthatStarbucksmust takeactiontocontinueitsdominanceontheluxurydrinksindustry. PartofStarbucksproblemdealswiththecommoditizationofcoffeeingeneral.Rightnowcoffee isthe5thmostwidelytradedcommodityintheworld 14 .Franklyitsasurprisethattheyhave madeitthisfarwithoutsignificantproblems.Someofthereasonforthissuccessisintheir specialtydrinks.Starbucksdoesnotmakemuchmoneyonitsregularcoffeesales,butinstead,it canmakelargeamountsofmoneyonitsspecialtycoffeedrinksthatothercompanieshavea hardertimeduplicating. ThisnewgrowthinthespecialtydrinkindustryhasmadeitnecessaryforStarbuckstokeepahead ofthecompetitionbygettingseriousaboutitscoffee.Thebottomlineisthatoneoftheonly thingsthatcontinuestoappealtoregularcoffeedrinkersistheStarbucksbrand.Withrapidly growingcompetitionandsomanynewoptionsforconsumers,theyneedtoseriouslyreconsider theircoffeepractices.

WhatShouldStarbucksDo?
Formanyyears,Starbucksfacedalmostnocompetitioninthecoffeebusiness.ItwasStarbucks, theluxurycoffee,orcoffeetakenasacommodity.However,withtheentryofthecompetition mentionedpreviously,Starbucksisnolongerthesoledominantplayer.Thesefirmsareathreatto StarbucksastheystrivetoprovidepremiumcoffeecomparabletoStarbucksbutatalower price.Despitethat,weshouldconsiderwhetherthePremiumRoastCoffeeinMcDonaldsorin DunkinDonutsisactuallycomparabletothatofStarbucksintermsofflavor,aromaandquality. Therehavebeenmixedreviewsfromrecentsurveysinthepublicmedia,suggestingthatthere mightbesomebehavioraleconomicsgoingon.WhetherornotStarbuckscoffeeisbetterthan othercoffeeseemstobethematterofperceptionratherthanactualquality.Belowaresome potentialstrategiesthatStarbucksshouldconsiderinovercomingtheirrecentdecline.

14

http://tutor2u.net/economics/revisionnotes/asmarketscoffee.html

11

1.

StrategiestoRenewtheStarbucksBrandName

AdvertisingandPromotion Inanefforttorenewtheirbrandname,Starbucksfirstneedstoaddressanimportantissue, namelytheneedtoconvincepeoplethatStarbuckscoffeeissuperiortoothercoffeesand beverages.ThisisvitalbecauseifthegeneralperceptionisthatMcDonaldscoffeeiscomparable toStarbuckscoffee,thentherewouldbenoincentiveforconsumerstopayapremiumfor Starbuckscoffee.Toapproachthisproblem,Starbucksneedstobemoreaggressiveintheir advertisingcampaignstoeducateandnotifythepublicthespecialtyanduniquenessofStarbucks coffee.In2006,Starbucksallocatedonly$38milliononmarketing,comparedto$782million allocatedbytheirclosestrival,McDonalds.EvenDunkinDonuts,whichisconsiderablysmaller thanStarbucks,allocatedatotalof$116milliononadvertisinginthatyear. 15 Itisclearthatas incumbents,Starbucksneedstoheightenitsadvertisingeffortsinordertomaintainleadershipin thecoffeeindustry. Previously,Starbucksadvertisingstrategyhasbeenfocusedoninthestorerelationships.They retaincustomerloyaltybyprovidingpersonalizedinteractionstotheircustomers.Therefore,the Starbuckscountersusuallyhouselargenumbersofbaristasandgeneralemployeeswhowould proactivelycommunicateandattendtocustomerneeds.Althoughithasproventobearelatively successfulstrategy,StarbucksneedstocounteragainstMcDonaldsmarketingapproachthatis moreaggressive.Forinstance,McDonaldslaunchedawebsitethatmockstheapparentlyover ratedStarbuckscoffee,athttp://www.unsnobbycoffee.com.AlthoughStarbuckspridesitselfin providingaluxurygood(hencesnobby),theyshouldeducatethepublicmoreeffectivelythanit currentlydoes,abouttheuniquecharacteristicsoftheStarbuckscoffeetoassureitscustomers thattheyarepayingapremiumthatisworththemoney. Inadditiontothat,Starbucksshouldfocusmainlyonadvertisingitscorebusiness,itscoffee.Of late,theyveconcentratedtoomuchinmarketingtheirmusic,films,booksandotherbusinesses thatsupplementthecoffeebusiness.Asaresult,theyvedeviatedandneglectedtheproductthat reallydefinesStarbucks.Bydoingso,customersmightthinkthatthemusic/filmmarketing strategywasimplementedtocompensateStarbucksmediocrecoffee.Intermsofmarketing specificallyfortheircoffee,Starbucksshoulddiversifytheiradvertisingchannels.Insteadofrelying mainlyonemployeecustomerrelationship,theyshouldalsoventuremoreassertivelyinto advertisementsviatheinternet,printedandvisualmedia.

15

http://www.wikinvest.com/stock/Starbucks_(SBUX)

12

ProductDifferentiation InrenewingtheStarbucksbrand,apartfromconvincingconsumerswhyStarbuckscoffeeis superiorthroughlargescalemarketingefforts,Starbucksshouldalsoworkonproduct differentiation.AlthoughMcDonaldsclaimstoofferpremiumcoffeeatalowerprice,itwouldbe inefficientforStarbuckstostartapricewar.SuchamoveisnotfavorablebecauseStarbucks coffeeissupposedtoepitomizealuxurygood,wherepeoplearewillingtopayapremiumforit. Besides,apricewarwouldleadtofurtherdecreaseinpricing,anditreachesapointwhereit wouldnotbeprofitableforbothparties.Instead,Starbucksshouldworkondifferentiatingits coffee.Theyshouldinvestinextensiveresearchanddevelopmenteffortstodevelopnewflavors, blends,orevenroastfusions.Noveltybyitselfisagoodadvertisingtool.Inintroducingthenovel andsupposedlyrevolutionaryproductdeveloped,theyshouldstartbyprovidingfreesamples foralimitedperiodoftime.Iftheresponseisgood,theycanthenproceedtointroducethenew producttoallstores.Starbuckshasimplementedthe$1samplingstrategy,however,thereneeds tobeafollowuptothatstrategy.Becausethe$1coffeeischeap,peoplewouldtendtogetthat coffeemorefrequentlyduringthesamplingperiod.Afteracertainduration,Starbucksoughtto increasethepricefrom$1totheusualpriceforprofits,becausebythen,presumably,alarge fractionofitsconsumershavegottenhookedtothecoffee.Fromabehavioraleconomics perspective,thesepeoplewouldbemorewillingtopaytheusualpricebecausetheyfeelthatthey havereapedthebenefitsthroughoutthesamplingperiod. Productdifferentiationmayalsobeusedasastrategytoovercomethedownsideofthecurrent economy.WiththeongoingrecessionintheUnitedStates,consumerswouldbeconservativein theirspending,andarelesslikelytospend$4onacupofcoffee.Starbuckscouldcreateanew productthatismorecostefficient,hence,soldatalowerprice.Insteadofdeviatingfromits luxury,premiumstatus,Starbuckscancounterthisproblembypromotingitaspartoftheir marketingstrategytohelpconsumerssaveduringthistransientrecession.Notonlywouldtheybe abletocompetewithlowerpricedcoffeeofferedbyitscompetitors,theyalsowouldretaintheir customersduringtheeconomicdownturn.Starbucksflexibilityinadaptingtotheeconomyto servetheircustomersneedsmightevenheightentheirbrandname. CoffeeVarietyandQualityControl Incateringtodifferentconsumerpreferences,Starbucksneedstoincreaseitsvarietyofcoffee offered.Currently,Starbucksonlyoffersonetypeofcoffeetoitsconsumers,whileitscompetitors, suchasPeetsCoffee,offermultipletypesofcoffeetosuitawiderrangeofcustomers.Examples wouldincludedifferentkindsofcoffeebrewsspecifictocoffeedrinkerswhoeitherdoordonot addmilktotheircoffee.Aboveall,Starbucksneedstoensurethatthecoffeeofferedisofthe highestquality.Otherwise,customerswouldnothaveanincentivetopaysuchapremiumprice forStarbuckscoffee.
13

2.

StrategiestoBuildandRetainCustomerLoyalty

PrivilegeCardandRewardsProgram Todate,StarbuckshasimplementeditsStarbucksCardprogram,wherebyconsumerscanreload creditonline,andessentiallyuseitasacashcardatanyStarbucksstore.Inaddition,cardholders canalsoregisteronlinetoqualifyforrewardseachtimetheyusetheirStarbuckscard.Someofthe benefitsincludecomplimentarybeveragesafteracertainnumberofpurchases,freerefills,and freesyrupandmilkoptions 16 .Despitethissoundstrategy,itdoesnotdifferfromotherreward programsofferedbyitscompetitors.Forinstance,CoffeeBean&TeaLeafalsoimplementsa relativelysimilarrewardsprogram,wherebyconsumersgetcomplimentarydrinksandvarious otherbenefits. Havinganondistinctrewardsprogramprovidesnoincentiveforcoffeedrinkerstochoose Starbucksoverotheritscompetitors.Forinstance,iftherewereapersondrivingalongastreet lookingforacoffeeplace,hewouldprobablynottakethetroubletolookforaStarbucks,and insteadwouldsettleforsomethingconvenientsuchasMcDonaldsorGloriaJeansCoffee. However,thiswouldnotbethecaseifStarbuckshadasuperiorrewardsprogram.Onepossibility wouldbetocooperatewithairlinecompaniesandotherlargeretailcompaniesandcombinetheir rewardsprogramwiththatofStarbucks.Essentially,aUnitedAirlineprivilegecardholdercan accumulatemileswhileaGAPcardholdercanobtainGAPrewardsevenwhentheyspendat Starbucks.Ifsuchsynergiesexist,thenconsumerswouldhavemoreincentivetochooseStarbucks overotherbrandssimplybecauseitwouldbewealthmaximizing. StarbucksDriveThrough AlthoughStarbucksstrategyhasbeentoopenasmanystoresaspossible,mostofitsstoresare midsized.Therehavebeenreportsfromrecentsurveysonpeoplesopinionsaboutthelackof tablesandseatsinStarbucksduringpeakperiods,namelyinthemidmornings.Itispossiblethatif onefindsnoavailabletableinStarbucks,shewillchoosetogotosomeotherplacethatoffers reasonablecoffeeandatabletoworkorread.Asaresult,Starbuckslosespotentialcustomers. Furthermore,althoughStarbucksislocatedateverystreetcorner,itisusuallylocatedinsucha waythatitisdifficulttofindaparkingspace.Peoplepreferconvenience,andthisusuallymeans pullingoverandmakingaquickruntogetcoffeeorasnack.Asaresult,Starbuckslosesaportion ofitscustomersduringpeakperiodsbecausemostpeoplewouldrathergoelsewhere,suchasa placewithdrivethroughcounterslikeMcDonalds. OnepossibilitywouldbeforStarbuckstoincreaseitsstorespacetoaccommodatecrowdsduring peakperiods.However,thismightnotbecostefficientbecauseenlargingcurrentStarbucksstores

16

https://www.starbucks.com/customer/faq_qanda.asp?name=card

14

requiresabiginvestment.Starbuckshasalreadystartedimplementingdrivethrusaroundthe country,andthereispotentialforthemtoexpand.ItshouldbenotedthatdrivethruStarbucks locationsshouldbeimplementedonlyasasupplementtoretailstores,targetingcustomerswho areinahurry,andwhosemainpurposeismerelytosatisfytheirdailycaffeineintake.Because Starbucksrelativelyrecentdrivethruinitiativehasnotbeenaggressivelymarketed,mostlyto preventthisnewconceptfrominterferingwiththeStarbucksimage,anewbrandcouldbe createdtoovercomethisproblem.Forinstance,thisnewsubsidiarycouldbecalledStarbucks Expresstodifferentiateitsretailstores.Inthatsense,Starbucksstillretainsitsoriginalbrand nameasaluxurygood,andthenewdistributionchannelprovidesanextrameansforconsumers tobuyStarbuckscoffee.

3.

StrategiestowardsCostEfficiency

FocusontheCoffee Consideringtheweakeconomy,Starbucksshouldalsoconsiderstrategiesthatwouldreducecost, aswellasstrategiesthatwouldpromotegrowthandprofit.Inrecentyears,Starbuckshasstarted venturingintootherbusinessesapartfromcoffee.Examplesincludethemusic,film,andbook marketingbusiness.Indoingso,notonlyaretheydilutingthevalueoftheircoffee,buttheyare alsoincurringalargecost.Onewaytoreducecostwouldbetospecializeandfocusonmarketing theircoffee.Bybeinginvolvedinfewerbusinesses,costisreduced,andalltheresourcescanthen bechanneledtowardsimprovingtheircoreproduct. EffectiveStoreExpansionDecisions ConsideringtherecessionintheUSeconomy,itwouldbefavorableforStarbuckstoputahalton itsstrategytoopenmorestoresintheUnitedStates.In2007alone,Starbucksopened1700new stores,amountingtoatotalofover15000stores,andaimedtoreach40000storesinthefuture 17 . ConsideringStarbucksfinancialperformanceaswellastheeconomicclimateintheUnitedStates, itwouldbeefficientforStarbuckstostopaddingstoresintheUSandinsteadworkonrenewingits brandandcustomerbase. Furthermore,thebudgetallocatedforstoreexpansionintheUSwouldbeputtobetterusefor expansioninothercountriesthathavegreatergrowthpotential,specificallyChina.Expandinginto ChinawouldbeagoodopportunityforStarbucks,consideringChinasfastgrowingeconomy wheremorepeoplearelikelytosplurgeonluxurygoods.Recentreportshaveshownthat StarbuckslocationsinBeijinghavereportedatleast30%growthinannualsales 18 .Withsuch

17

http://www.nytimes.com/2008/01/12/business/12nocera.html?_r=2&adxnnl=1&oref=slogin&adxnnlx=1210134311 AyKV9QhXOvjJwTQxUBwLlw&oref=slogin
18

http://www.atimes.com/atimes/China_Business/HF15Cb06.html

15

promisinggrowthrates,itwouldbefavorableforStarbuckstotakeabreakinthesaturatedUS market,andventureintoyoungergrowingmarkets.Othercountrieswithpromisinggrowth potentialincludeRussiaandBrazil,wherethecoffeemarketisstillinitsinfancystage 19 .

4.

Strategiestowardsfurthergrowth

Expansionintothecorporatemarket InFebruaryof2008,afteryearsofunbridledgrowth,Starbucksreportedforthefirsttimethatit wouldslowthepaceofstoregrowthintheUnitedStates.Thiswasamarkeddeviationfromits previouslyconsistentphilosophythattheprimarydriveroftheCompanysrevenuegrowth continuestobetheopeningofnewretailstores,bothCompanyoperatedandlicensed,inpursuit oftheCompanysobjectivetoestablishStarbucksasoneofthemostrecognizedandrespected brandsintheworld 20,21 .Therunningjokeforseveralyearshasbeentoridiculethefactthat frequently,onecanencounterStarbucksstoresacrossthestreetfromeachother,illustratinghow ineffectiveStarbuckssexpansionstrategyis.Starbuckshassaturatednearlyeveryprofitable marketwithitscompanyownedandlicensedretailstores,andsustaininggrowthbythesheer numberofnewstoreopeningsisbecomingmoreandmoredifficult,especiallygiventheamount ofcannibalizationofexistingstoresalesbynewstores. Asstatedintheirannualreport,Starbucksiscommittedtosellingonlythefinestwholebean coffeesandcoffeebeverages.Toensurecompliancewithitsrigorouscoffeestandards,Starbucks controlsitscoffeepurchasing,roastingandpackaging,andthedistributionofcoffeeusedinits operations.Currently,Starbucksonlysellsitsbrewedcoffeeinitsretailstores,wherebaristas trainedbyStarbuckspreparecoffeeforcustomers.ItalsoprovidesFoodservicebysellingwhole beanandgroundcoffeestocompaniesthatservicebusiness,industry,educationandhealthcare accounts,officecoffeedistributors,hotels,restaurants,airlinesandotherretailers. 22 However, theproductsaredelivered,percontractualagreements,throughSYSCOCorporationsandUS Foodservicesdistributionnetworks.Asaresult,theseproductsarepartoftheStarbucksbrand onlyinname.ThisrepresentsadistancingoftheproductfromtheStarbucksbrandname,and posesarisktotheStarbucksbrandifthequalityofcoffeebrewedbythesecustomersisnotupto parwiththestandardssetbyStarbucksforitsretailstores.

19

http://news.bbc.co.uk/2/hi/business/4712012.stm Starbucks10Qfiled8/10/2007(SECWebsite) Starbucks10QFiled2/8/2008(SECWebsite) Starbucks10KFiled11/29/2007(SECWebsite)

20

21

22

16

OnestrategyStarbuckscanadoptthatwouldallowthemtocontinuetheirgrowthwouldbeto enterthecorporatemarketandbegindirectlysellingbrewedcoffeetocorporateoffices,hotels, andothersimilarprofessionalbusinesses.Thisisabeneficialbusinessarrangementforboth Starbucksandthecustomer.Thebusinessesreceivereadytoservedeliveriesoffreshlybrewed coffeeofthesamehighqualitythatStarbucksprovidesattheirretaillocations,alsoatadiscount. Thisallowformoreconvenientdistributionofcoffeetoitsemployeesanditscustomers,a beveragethatistypicallyinextremelyhighdemandatbusinessoffices.Starbuckscanexpandits brandrecognitiontoalloftheemployeesandcustomersofthecompaniesitserves,andalsocan bettermaintainthevalueoftheStarbucksbrandbypreservingthequalityofitsproducts. OnebenefitofthisapproachisthatStarbucksalreadyhasadensenetworkofretailstoreswhich canbeutilizedasanauxiliaryproductionanddistributionnetworkforthisstrategy.Thecoffeecan bebrewedonlocationatvariousretailstores,possiblyduringnonpeakhourswhenfoottraffic islow.ThisallowsStarbuckstooverseethequalitycontrolofthecoffeeandensuresahighquality productthatwillnotdamagetheStarbucksbrand.Also,thereisahighdemandforcoffeeinmany businesses,bothfromtheiremployees(e.g.lawfirms,ITbusinesses)andfromtheircustomers (e.g.hotels,airlineexecutivelounges),somethingthatStarbucksshouldtakeadvantageofinorder tobecomeaprominentplayerinthismarket.

17

Appendix:

Starbucks/McDonaldsGlobalDominionGraph

StarbucksvsMcDonaldsStockPrices(May07May08)

18

StarbucksMarginAnalysis

StarbucksCashFlowAnalysis

19

StarbucksROEAnalysis

ComparisonofStarbuckstotheDow30andtheXLPpricesovera6monthperiod 20

NumberofretailstoresopenbyStarbucksbetweenyears20022006

TimeCourseGraphShowingStarbucksSameStoreSales

21