Strategic Analysis Report: Starbucks.

Minjie Wang

Executive Summary
The paper looks at the strategic decisions made by Starbucks, by examining it through
known Management tools such as SWOT, PESTEL, Porters five forces theory, VRIO
Framework Analysis, GAP Analysis, and also examines the Value chain system at
Starbucks. The paper further looks at the strategic decisions made by Starbucks and
where it could improve even further. It is concluded that Starbucks, a globally
renowned brand and international player has managed to be successful even during
adverse and recessionary economic times. Their strategies are definitely paying off.

Contents
1. Introduction:...........................................................................................3
2. Financial Analysis of Starbucks:............................................................3
3. SWOT Analysis.....................................................................................5
4. PESTLE Analysis:................................................................................10
5. Porters Five Forces:.............................................................................13
6. VRIO Framework:................................................................................16
7. GAP Analysis:......................................................................................17
8. Competitive Analysis:..........................................................................18
9. Value Chain:.........................................................................................18
10. Strategy at Starbucks:.........................................................................19
References:...............................................................................................20
APPENDICES:.........................................................................................25

1. Introduction:
Starbucks can be cited as a testament to a great success story anywhere in the world.
From being a local Seattle based company, it has expanded to four continents, with an
excess of 5000 stores worldwide (Gulati et al, 2008). The question that arises in
everyones mind is what is so special about this place? How did grow at the speed it
has? The answer, perhaps, lies in some of its core values: Relationships. According to

Anne McGonigle, vice-president for special projects at Starbucks:

Starbucks starts and ends with core values [and] the core values emanate from
and around relationships with people, (Gulati et al, 2008: 1)

2. Financial Analysis of Starbucks:

Starbucks Corporation's Financials for Fiscal Year ending
September of each year (All USD figures in millions)
Key
Ratio's/Accounts

FY
2008

FY
2009

FY
2010

FY
2011

FY
2012

FY
2013

Profitability Ratio's
Revenue

10,383 9,775 10,707 11,700 13,300 14,892

Gross Margin %

19.2

55.8

58.4

57.7

56.3

57.1

Operating
Income (USD
Millions)

504

562

1,419

1,729

1,997

-325

Operating
Income Margin
%

4.9

5.7

13.3

14.8

15

-2.2

Net Income
(USD Millions)

316

391

946

1,246

1,384

Net Margin %

8.8

10.7

10.4

0.06

Return on Equity
(ROE) %

13.2

14.1

28.14

30.9

29.2

0.17

Return on Assets
(ROA) %

5.73

16

18.1

17.8

0.08

Earnings Per

0.43

0.52

1.24

1.62

1.79

0.01

Share (EPS)
Efficiency Ratio's
Asset Turnover

1.89

1.74

1.79

1.7

1.71

1.51

Inventory
Turnover

12.1

6.4

7.4

6.6

5.3

5.4

Fixed Asset
Turnover

3.5

3.5

4.3

4.9

5.3

Days Sales
Outstanding

10.9

11.2

9.8

10.75

12

12.8

Days Inventory

30.11

57.3

49.4

55.6

69.3

67.3

Payable Period

15.6

25

22.5

30.3

29.4

25.4

Cash Conversion
Cycle

25.4

43.5

36.7

36.1

52

54.7

Liquidity & Financial Health Ratio's

Current Ratio

0.8

1.3

1.55

1.83

1.9

1.02

Quick Ratio

0.3

0.6

1.17

1.14

0.71

Debt/Equity

0.22

0.18

0.15

0.13

0.11

0.29

Financial
Leverage

2.28

1.83

1.74

1.68

1.61

2.57

13.7

12

Year on Year Growth %

Revenue Growth
%

10.3

-5.9

9.5

9.3

[Source: (Starbucks Corporation, 2014)]

The financial health of Starbucks is constantly increasing. From a Net Revenue of

$9.8 billion in 2009, it has added a year on year increase, and it now stands at a
whopping $14.8 billion in 2013 (Starbucks Corporation, 2014). With an operating
margin of 16.5%, its operating income stands at $2459 million in 2013, an increase of
$462 million since 2012 (Starbucks Corporation, 2014). These numbers surely add up,
with, more than 3 billion visits by customers in the 19000 plus stores operated by
Starbucks in over 60 countries worldwide (Starbucks Corporation, 2014).

3. SWOT Analysis
Strengths:

Excellent Brand Equity: Starbucks has become synonymous with coffee.

Starbucks is easily the most recognizable coffee brands worldwide, as well as a

globally renowned brand (Trigeorgis & Baldi, n.d). Its strong brand value is a huge
intangible asset to the company, and part of its success story. Its strong brand image
has helped it expand so rapidly and successfully.

Very Strong market position: Starbucks continues to expand on its market share,

despite saturation setting-in in the industry (Hennessey, 2012). Starbucks quickly

edges out the competition with its rapid opening of stores, hence giving it a
competitive edge when it comes to Market position.

Use of the best raw materials: Starbucks uses the best quality of ingredients, as its

philosophy is to serve the best coffee to its customers. Starbucks sources its coffee

from the best farmers through its responsible buying programs (Starbucks, 2014).
[Appendix 1]

Excellent Ambiance and A Place for Everyone: Starbucks has a very aesthetic

and pleasing ambiance. Customers know what to expect as soon as they enter one of
their stores (Hennessey, 2012). Apart from coffee, Starbucks caters to a wide variety
of options on its menu. Its reasonably priced products have a great market appeal,
thus, making it a place for everyone (Hennessey, 2012).

Customer Loyalty: Starbucks thrives on its customer loyalty and its marketing is

done mostly by word of mouth. Infact, Satrbucks spends a miniscule 1% on its

marketing expenses compared to other Coffee Stores globally (Wahba, 2014).
Weaknesses:

Over-reliance on American Stores: Starbucks has about 7049 stores in USA

alone, compared to its 10194 stores worldwide (Starbucks Corporation, 2014)

(including USA). Hence it has only 3145, less than half of USA, stores outside the
USA (Starbucks Corporation, 2014). It comes as no surprise that the majority of the
revenues come from within the USA. Hence, it puts an over reliance on the stores in
USA. With the USA coffee market reaching a saturation point, it could be a major
downside for Starbucks in the future.

Over dependence on Company operated store: A majority of stores are company

operated (Starbucks Corporation, 2014) despite the company having several licensed
stores. Company operated stores put extra burden on the resources of the company,
especially human resources. Starbucks could easily employ a strategy where more
stores can be licensed. Even existing company owned stores can give way to licensed
stores.
Opportunities:

Expansion outside the USA, particularly developing nations: With the saturation

of the markets in the developed world, particularly in USA and the EU, more and
more organizations are setting shop in the developing economies such as China India
Brazil Thailand etc. These countries boast of a huge middle class with a good amount
of money at their disposal. Economic and political power is definitely swinging the
way of these developing nations (Kharas, 2010). Starbucks should aim at exploiting
these markets to the fullest extent. While it recently opened it 1000 nd store in China
(Starbucks Corporation, 2014) it seems to slow into entering other economies which
may have huge potential, especially with the sales in the USA starting to fall off now.

Operating outside the stores: Starbucks have started retailing their products as

packaged goods to various grocery stores both domestically as well as internationally

(Grant, 2013). Starbucks must continue and expand on these packaged goods and
utilize its excellent brand equity to the fullest.
Threats:

Increasing Competition: The emergence of various other coffee stores such as

Dunkin Donuts, Costa Coffee, Petes Coffee, and existing fast food biggies such as
McDonalds and Burger King can have an adverse impact on the future sales of
Starbucks (Chang & Carroll, 2014).

Saturation of Existing markets: With USA and Europe being the two largest

markets of Starbucks, and with both saturating, Starbucks may soon face problems.
The key indicators of market saturation for Starbucks are evidenced by a slower
growth in sales as well as a trimmed profitability (UW Business School, 2003).

Changes in Consumer preferences: Various studies have pointed out the ill effects

of consuming coffee on a regular basis. Dr. Rob van Dam Assistant Professor in the
Department of Nutrition, Harvard School of Public Health says that coffee may not
offer any real health benefits. On the other hand, the caffeine present in coffee can
cause serious damages to the body (Dam, 2014). These studies have an impact on
consumer behaviour and some of them may switch to substitutes like Tea which has
lesser bad effects or completely healthy drinks such as Green Tea or Green Coffee.
Starbucks should look at expanding their menu and incorporating some healthy
options for the future.
Summary:
Starbucks is a financially sound organization with huge brand equity and customer
loyalty; it uses the best quality of materials in making its food/ beverages. Its stores

are aesthetic and easy to reach out to, in the manner that they are well located, easy to
access and provide a sense of familiarity to the customer. However, Starbucks
depends heavily on its American stores as well as stores that are run by the company
itself. Starbucks has been a successful innovator thus far, with its huge resources; it
should look to diversify into other segments such as retailing its products, especially
in large departmental stores such as Wal-Mart, Tesco or Carrefour. Starbucks should
also enter newer markets, as it has the experience of successfully doing so, especially
with its current markets reaching their peak. Starbucks current brand image will hold
the competition at sea, however they must continue to innovate, expand their menus
and incorporate changing customer needs and preferences if they are to remain at the
top.

4. PESTLE Analysis:
Political: Recently, Starbucks has fallen into the microscope of various countries,
particularly in Latin America and Africa on the way they source Coffee Beans. To
combat these problems, Starbucks has initiated Farmer Suport Centers in countries
like Rwanda and Costa Rica, which are their top sources of coffee beans (Grant,
2013). Furthermore, Starbucks itself controls the purchasing, roasting and packaging
of the coffee beans in order to ensure their standard of quality is maintained (Grant,
2013). Starbucks has adopted a Fair Trade policy in order to offer the best prices to
the farmers in these countries (Grant, 2013). Moreover, Starbucks should also be
concerned about the laws in the countries they have stores in. Starbucks is an

international entity, spanning over 60 countries, (Gulati et al, 2008) a strict adherence
to local country laws is a must. Moreover, Starbucks will have to keep an eye out for
political turmoil in the countries they operate it, particularly in the Middle east which
may be prone to wars or be politically unstable. In March 2003, Starbucks had to
move out of Israel due to political turmoil in the country (Wu, 2014).
Economical: Perhaps the key challenge for Starbucks, and any other multinational
corporation, continues to be the current downswing in world wide economies.
Starbucks has been very successful in avoiding the effects of recession on its
businesses (Wood, 2012), but it needs to keep doing so, as the effects of recession can
overpower the biggest of companies.
Social: America and USA have a strong coffee culture (Scheller, 2014). However, in
emerging markets such as China, India and Turkey, a wide population of people prefer
tea to coffee (Scheller, 2014). In order to exploit these markets, Starbucks will need to
either change the traditional habits of the people or innovate its menus, to incorporate
varities of tea as well as its signature coffee. Moreover, as disscussed earlier, recent
studies have shown that consumers are trying to switch to healthier bevarages like
green tea, and stop the consumption of bevarages with a lot of caffeine such as coffee.
Starbucks needs incorporate these changing customer needs in order to remain
successful.
Technological: It is the era for technological innovations. Smartphone, tablets and
even Smart Televisions are part of our day to day lives. Starbucks has tried to

incorporate technology in its efforts, by introducing mobile applications, available on

the iPphone1 as well as Android TM2 platform (Starbucks (a), 2014). Moreover,
Starbucks uses the Cloud Technology in order to plan its IT innovation strategies to
maintain a competitive edge says Robert Teagle, Starbucks Coffees EMEA IT
director (Venkatraman, 2014). In Europe, Starbucks uses Microsoft Office 365 for
email and SQL cloud services. It also uses Oracle Siebel customer relationship
management (CRM) service as its loyalty system, which is tied to the Oracle ERP
platform. (Venkatraman, 2014). These innovations and implementation of
technology will surely keep Starbucks ahead of the competition. However, in todays
times, technology gets obsolete quickly and newer technologies emerge. Hence,
Starbucks will have to keep in sync with changing technologies and invest in them.
Environmental: There have been several complaints made by Starbucks customers
who are environmentally conscious, regarding the use of paper cups to serve coffee in.
These cups are not recyclable (Allison, 2008). Moreover, Starbucks does not use
recycle bins (Allison, 2008). Hence, the use of recyclable materials would be
ineffective. However, this is changing fast at Starbucks, as they are offering a 10c
discount to customers who carry their own reusable cups (Allison, 2008). In an
industry, which is dependable on using products which cannot always be used again,
Starbucks has a trash profile [Appendix 2] which needs to be corrected sooner rather
than later.
Legal: Starbucks must be watchful regarding any local laws that may exist in the
1
2

iPhone is a trademark of Apple Inc

Android TM is a registered trademark of Google Inc.

country of operation. For example, Starbucks had been in the news on how little
Corporation Tax it paid (BBC, 2012). HM Revenue and Customs (UK) had said that
corporation tax is not voluntary in nature is a statutory obligation (BBC, 2012).
Starbucks needs to adhere more carefully to local laws, rules and regulations.
Summary:
In some areas such as economical progression and technological innovation,
Starbucks has managed to be quite successful and in some areas, especially
environmental; it has broken a few norms and invited criticsm, both by its customers
and the administration. Starbucks needs to put more emphasis in valuing the factors
that affect its business and take corrective action to set them straight or to take full
advantage of situations presented to them.

5. Porters Five Forces:

Threat of New Entrants: Moderate to Low.

Entry in the industry would require considerable investment to achieve proper market
penetration, and since the industry is already dominated by some large players such as
Starbucks, it makes it a relatively unattractive industry to enter.

Bargaining Power of Buyers: Low.

There are many buyers in the industry; hence no single buyer has the power to

demand any price concessions. Starbucks itself had more than 3 billion visits by
customers in 2013 (Starbucks Corporation, 2014).

Bargaining Power of Suppliers: Medium.

Starbucks sources its main ingredient: Coffee beans from select farmers in Latin
America and Africa. It would make it difficult for them to move to another location
and maintain the same quality as coffee beans from these places are known to be the
best. However, none of the suppliers are big enough to bargain with a giant like
Starbucks. Despite this, Starbucks maintains its Fair Trade policy [Appendix1] to
source coffee beans responsibly.

Competitive Rivalry in the industry: Moderate to High.

The industry is a pseudo oligopoly; the largest players control most of the market,
with Starbucks leading the way. However, the rivalry is heating up, with Dunkin and
Starbucks at the center of the battle and the likes of Costa Coffee waiting to pick up
the pieces.

Threat of Substitutes: High.

With changing customer preferences or traditional habits (in countries such as China
or India, where tea is a preferred beverage) the industry faces a big threat of substitute
products. Moreover, the industry is as much about coffee as it is about the ambience,
quality and option of food available and value added services such as Wi-Fi internet

services. Even if customers do not switch beverages, it would be easy for them to
change the caf they prefer to have coffee in. For example, some customers may
prefer a Dunkin Donut with their coffee rather than a sweet condiment being offered
by Starbuck.
Summary:
The industry has a low to medium threat of new entrants as the barriers are rather
high, with low bargaining power of both buyers and suppliers. However, the threat of
substitute products is quite high and the firms need to constantly differentiate their
products as well as services to retain their customers. The competitive rivalry within
the industry is moderately intense, with a few firms competing with each other. With
continued innovation and excellent customer loyalty, it should continue to dominate
the markets in the future.

6. VRIO Framework:
Resources for Starbucks

Value

Rare

Costly to
Imitate

Organization

Huge financial resources

YES

YES

YES

YES

Technological Innovation

YES

NO

YES

YES

Brand Equity

YES

YES

YES

YES

Global Presence

YES

YES

YES

YES

Customer Loyalty

YES

YES

YES

YES

The financial resources of Starbucks definitely give it a competitive advantage in

the industry.

Technological Innovation is superior at Starbucks (Higbee et al, n.d) but it is not

rare in the industry, hence, it does not give them an absolute competitive advantage.

Starbucks boasts of a huge cult following which has given it an unbeatable Brand

Equity. (Silverman, 2009) It definitely has a huge competitive advantage.

Starbucks strong global presence (Starbucks Corporation: Competing in a Global

Market, 2003) is the main reason for its success and almost impossible to duplicate.
Hence, it gives them a strong competitive advantage.

Starbucks boasts of great customer loyalty that stays loyal to Starbucks, giving

them another competitive edge.

7. GAP Analysis:
Desired

Actual

Consistency

Drinks taste different and can vary

from place to place, depending on
where it was purchased.

Accessibility to customers

No Delivery service yet. (Although it

is on the anvil)
Corporation (a), 2013)

(Starbucks

Affordability

Prices are generally higher than its

competitors (Starbucks (b) , 2013)

Flexibility in operations

Centrally managed and controlled

through a majority of stores operated
by the Company.

8. Competitive Analysis:
Some major competitors of Starbucks are mainly in the retail coffee industry such as
Costa Coffee. However, fast food brands like McDonalds and Dunkin Donuts are
venturing into the retail coffee industry as well, which adds to the competition in the
industry. In 2011, Starbucks controlled about 33% markets share, about double its
nearest competitor Dunkin Donuts. With an industry revenue of $26.5billion,
[Appendix 3] Starbucks managed to generate $11.7 billion (Starbucks Corporation,,
2014) itself, proving it is by far the biggest player in the market. A closer look at
Starbucks competition reveals that even though Starbucks does not spend on
marketing activities, it enjoys domination in customer retention and loyalty.
Moreover, Starbucks prices are comparatively higher than Dunkin. Still, people prefer
Starbucks due to some critical factors such as quality, brand equity and ambiance in
the store.
However, Starbucks will have to guard against complacency in the future with a rapid
growth of Dunkin and Costa Coffee and especially with McDonalds entering the

coffee retail segment on global basis through its caf chain McCafe. (McDonalds,
2014)

9. Value Chain:
Primary Activities:

Inbound Logistics: The main ingredients of Starbucks, Coffee beans and sugar are

directly sourced by them through Latin America and Africa (for coffee beans) and
different parts of the world for sugar.

Outbound Logistics: Starbucks operates through a chain of its retail stores. A

majority of them are company owned and some are licensed stores.

Marketing & Sales: Starbucks spends the least amount of money on marketing

operations. It relies heavily on customer retention and word of mouth. (Allison (a),
2006)

Service: The service staff at Starbucks are known to be courteous and helpful, an

attribute that Starbucks builds in its employees. (wpaadmin, 2014)

Support Activities:

Infrastructure: Starbucks concentrates on the infrastructure of its store. All the

stores have a sense of familiarity to them. The customer knows exactly where to go
for what he needs, even if he is visiting that store for the first time.

Human Resource Management: Starbucks places a great deal of importance in

proper managing its human resources. They believe it is one of the greatest assets they
have.

Technology: Starbucks uses various machines in preparing the coffee and food

items. In addition to this, it offers Wi-Fi internet at most of its locations as well as an
online ordering system available on smart phones that run on IoS or Android.

10. Strategy at Starbucks:

The strategy at Starbucks is uncomplicated. Offer the best products and services to the
consumers, along with several value added services and hope that they keep coming
back. Starbucks doesnt spend on marketing activities, yet it boasts of the highest
customer retentions. Starbucks innovates on a regular basis, whether it is its delivery
system, use of technology or reaching out to customers. (Loeb, 2013)
It should continue to follow its strategic decisions and look at expanding into further
emerging markets outside the USA, especially in Asia where there is a huge economic
boom.
11. Recommendations:
Starbucks has managed to recover and get back into profitability after a series of
misfit expansions across the world. Starbucks should carefully evaluate the market
before entering and pay special attention to the legal or cultural requirements of the
country they want to operate in. This would certainly help them avoid the debacle that

they were subject to in Israel, and had to withdraw from the country after protests.
Starbucks must aim to build on its menu and perhaps offer more vegan variety in their
food menu, especially in countries like India where people prefer not to eat meat and
go for vegetarian alternatives. Moreover, more and more people across the world,
including the West are now realizing the importance of avoiding meats, especially red
meat. It would be a good idea for Starbucks to introduce a vegan menu in the West as
well.
Starbucks has thrived on consumer loyalty and as discussed earlier, its marketing is
done solely on the basis of word of mouth. Starbucks can introduce a referral
program, where if a customer brings in a friend with him, he is eligible for a discount
on his order. Customer loyalty cards can be used to track consumer behavior in this
instance.
Starbucks should look to invest in technology and give their customers the luxury of
online ordering and payment. This way they will have knowledge of the particular
customers buying patterns and hence, will be able to analyze the collective data to
improve on its services.
Starbucks should also expand on its delivery. The service has just begun for
Starbucks, but big chains such as Pizza Hut, Dominos, McDonalds have been doing it
successfully for years now, and it is reflected in their bottom line.

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APPENDICES:
APPENDIX 1:

[Source: Starbucks (2014)]

APPENDIX 2:
Starbucks' trash profile
Cardboard:

By volume:
32 percent

Milk jugs:

15 percent

Paper cups:

9 percent

Pastry boxes:

8 percent

Other dairy cartons:

7 percent

Other waste:

29 percent
[Source: (Allison, 2008)]

APPENDIX 3:

[Source: (IBIS World, 2013)]