An Industry and Company Analysis

Jonathan Brydon Richard Gutierrez Jacob Henson Christopher Hutchins Josh Nelson Mitchell Rehak Katie Rustmann Krystal Wolf

Table of Contents
Brief History and Introduction.....................................................................................3 Industry Overview......................................................................................................5 Chief Business and Economic Characteristics.............................................................9 Driving Forces...........................................................................................................15 Competitive Forces...................................................................................................22 Competitive Positions...............................................................................................28 Predictions................................................................................................................33 Key Success Factors.................................................................................................39 Industry Attractiveness.............................................................................................44 Company Analysis....................................................................................................46 Current Performance................................................................................................46 SWOT Analysis..........................................................................................................55 Competitive Strengths..............................................................................................62 Relative Cost Position...............................................................................................64 Strategic Issues and Problems..................................................................................69 Choices/Options for Starbucks..................................................................................72 Build Substantial Competitive Advantages...............................................................73 Appendix..................................................................................................................77 Bibliography.............................................................................................................78

Industry Analysis
Fast Food Restaurants – 72221 NAICS Coffee and Snack Shops – 72221B NAICS Specialty Coffees – 2095 SIC
Introduction to Starbucks

In 1971, the Starbucks name was first introduced in Seattle by Gordon Bowker, Jerry Baldwin, and Ziy Siegl. The name and logo were named after the famous Moby Dick. In 1982, Howard Shultz joined the company to help with retail sales and marketing. At this point in time the Starbucks company only had five stores and were selling to espresso stands and restaurants. The very next year Shultz traveled to Italy where he saw just how popular coffee bars were. He then convinced the owners to open their own version of this coffee bar, and it was a huge success. The following year Shultz left the company to open his own coffee bar called the Il Giornale. The turnaround of the Starbucks name came in 1987 when the owners sold off the Starbucks name because of the inability to control quality. Shultz saw his opportunity and swooped in and bought the company’s retail operations for $4 million
(Starbucks.com and Proquest).

In the late 1980s Starbucks focused much of its energy on expansion and actually lost money during the expansion process. In a two year span from 1987 to 1989 the company went from around 15 stores to 55. In 1991,
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Starbucks became the nation’s first privately owned company to offer stock options to their employees. In 1992, the company went public and started selling its coffee in Nordstrom’s department stores. The following year Barnes and Nobles bookstores started selling the Starbucks brand in their cafes. By the end of 1993 the company had just under 300 stores under their belt. In 1994, the Sheraton hotel franchise was the next big name to carry Starbucks coffee. In 1995, the company partnered up with PepsiCo, and together they produced a bottled coffee drink. In addition, they agreed to terms with Dreyer's to produce a coffee flavored ice cream (Starbucks.com
and Proquest).

In 1996, Starbucks decided to start expanding to different countries. They started in Japan and Singapore. Just two years later Starbucks expanded to the United Kingdom. In 1999, they bought Tazo a tea company and Hear music. At the turn of the century Shultz handed over the CEO position to Orin Smith, but Shultz still remain the chairman of the company to focus on the company’s global strategy. In the early part of the decade Starbucks began to take expansion to a new level. By the end of 2001 the company had 1100 stores worldwide with new stores popping up in Austria, Switzerland, Spain, Greece, Germany, Mexico, and Latin America

(Starbucks.com and Proquest). In 2003, Starbucks added Seattle's Best Coffee

Brand to their list of conquests for $72 million and at the end of the year Starbucks had a total of 7,225 stores. This deal was huge for Starbucks because it added 150 more coffee shops.
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com and Proquest). and Specialty Coffees. Half of the 16. Starbucks also increased market presence by adding a coffee flavored ice cream that is produced by Dreyer’s. Therefore.Starbucks is the number one retailer in specialty coffee. how Starbucks is functioning in each one. In addition. We will cover Fast-Food Restaurants. competition. and teas. fastest growing companies in the world. In this analysis we will cover parts of each industry relevant to Starbucks. It is easy to see that Starbucks was destined to be a great company from the very start of the company (Starbucks. it is involved in several industries as defined by the NAICS. and economic characteristics of each of these industries also vary. Starbucks is a global giant which covers over 40 countries with more than 16.000 plus stores are ran by franchises. Starbucks position in each industry varies greatly as the size. the past and present of 5 . Starbucks started to market their coffee in grocery store chains. but Starbucks is not only known for their coffee but also for their roasted beans. Industry Overview Starbucks is one of the largest.000 stores. They also added their own flavor of liqueur. A huge part of their business is licensing the Starbucks brand. coffee accessories. Half of these stores are operated by Starbucks and the remaining stores are licensed and franchised to qualified recipients. Coffee and Snack Shops.

each industry. Fast Food Restaurant Industry Starbucks is involved largely in the fast food industry. where they stand compared to Starbucks. However. such as the growing consumer trend towards eating healthier foods and the growing percentage of disposable income. this industry has a major affect on decisions that Starbucks makes in order to stay competitive against these different types of restaurants. 6 . Starbucks’ market share is much smaller. and where the industry appears to be headed in the future. With industry giants like McDonald’s and Wendy’s/Arby’s Group. we will make predictions for the industries discussed and reveal any successful factors that have helped Starbucks maneuver successfully in each industry. To conclude this analysis.com). and how they affect Starbucks strategic decisions. only 6%. This is the most broad and saturated industry that Starbucks competes in. compared to the other industries we will discuss. The following table represents data from the last five years and predicts growth for the next five in the fast food industry (ibisworld. Starbucks still sees potential for growth in this market due to several social and economic phenomena. We will also discuss competitors of Starbucks.

6% 5.9% 5. cookies.The following pie chart shows the segments and products of the fast food industry. Fast Food Industry Market Shares (2010) McDonald's Corporation Yum! Brands Inc.1% 5.1% of this market. donuts. Wendy's/Arby's Group Inc.0% Coffee and Snack Shops Industry This industry is made up of businesses that prepare and serve specialty snacks and nonalcoholic beverages. Starbucks Corporation Burger King Corporation Doctor's Associates Inc. or sodas. 7 . juices. Starbucks falls in the Snack and non-alcoholic beverage bars category that holds 13. smoothies. www. including ice cream. frozen yogurt.com 12.7% 9.ibisworld. bagels. coffee.7% 6.

coffee was the world's second most traded commodity after oil. Evaluation of 8 . coffee originated in Ethiopia. Specialty coffee remains one of the fastest-growing food service markets globally. Specialty coffee has been defined as "a coffee that has no defects and has a distinctive flavor in the cup. namely Starbucks (Specialty Coffee. At the beginning of the twenty-first century.Customers can consume these products in the establishment or takeout/drive-through (ibisworld. This is a major market for Starbucks as they dominate 32% of this industry and continue to grow. due to the explosion of coffee shops. Specialty Coffee Industry Despite many beliefs. Galenet).com). This industry is quite a bit more narrowed than the former." Arabica coffee accounts for 70 percent of the world's coffee production.

com) The industries that Starbucks competes in have many of the same Medium business and economic characteristics.this industry is critical in the research of Starbucks due to their product expansion into pre-packaged coffee beans and grounds that are sold in supermarkets and other retail outlets. these industries experienced a major slowdown in 2009 due to economic woes and partially to changing 9 . which in 2010 accounted for 7 % of total revenue according to Hoover’s Company Information. After surging over the past decade. These industries fit within the largest segment of disposable income spending which is food and beverages. as seen above. Chief Business and Economic Characteristics Industry Structure Life Cycle Stage Mature Revenue Volatility Regulation Level Technology Change Barriers to Entry Industry Globalization Medium Medium Medium Capital Intensity Medium Industry Assistance Concentration Level Low None Low Competition High Level (ibisworld.

However. and when they did. industry revenue is expected to continue to climb with growth of 4. In 2011. In the past five years. consumers choose to buy coffee at supermarkets and corner stores rather than an expensive gourmet cup of coffee such as Starbucks. they purchased lower-priced items. IBISWorld estimates that revenue grew at an average annual rate of 2. Since this industry holds consistently high demand through periods of low disposable income. High-priced coffee retailers such as Starbucks and other non-essential foods lost the battle for shrinking budgets (ibisworld.0% (ibisworld.com).5% to $24. During 2009. consumers spent less on luxury items like gourmet coffee.com). After revenue declined by 6.2%.consumer tastes. The following graphs show how coffee consumption did not drop substantially when consumer spending did. it began its upward climb in 2010 with growth of 3.7 billion during the recession in 2009. 10 . statistics show a drop in total sales revenues for most coffee retailers as shown in the following graph.0%.

As mentioned earlier. While 11 . consumers have also become more aware of their eating habits due to rising health concerns over the last decade.

In an attempt to combat slumping sales.many retailers have responded by expanding the number of healthy options on their menus. such as donuts. new breakfast items and healthy snacks. in order to reverse the trend 12 . Industry revenue growth is expected to continue in 2011 and 2012. and French fries. hamburgers. Also. companies are looking for new ways to grow in current markets and expand into possible new markets. Revenues in these industries are slightly volatile. However. The industry recovered in 2010. it is usually consistent. In the last five years. As the economy recovers. or hit high numbers in good times. demand for coffee increases and the addition of healthy menu options.com).1% per year to 479. as consumer spending began to increase and consumers started using more disposable income on satisfying fixes such as coffee and other snacks. industries can fall off the map for a certain period of time. high calorie foods. Due to recessions.856 employees. employment in this industry has grown at 1. the number of new stores has increased only slightly at an average rate of 1. which creates the need for flexibility in competitors.857 in 2011 (ibisworld. Since this industry is in the mature stage of its life cycle. to account for growing social pressures. abates some of the concerns for the health risks associated with high fat. industry leaders have expanded their product lines to offer higher-margin items like iced coffee drinks. the general trend toward healthy eating has hurt the industry's unhealthier segments. due to weak market conditions.5% to reach 48.

IBISWorld calculates the ratio as 0. this industry is deemed to have a low to medium level of capital intensity (and higher level of labor intensity) (ibisworld. including Starbucks.com). This means this industry is affected more by economic factors such as unemployment as opposed to capital factors like the price of steel. are also investing in international growth as part of their long-term strategy. many major chains.16 is spent on the use and replacement of buildings and equipment for every dollar spent on wages. As such. face-to-face service and labor input in all areas from acceptance of deliveries.16:1. industry revenue is forecast to grow at an average rate of 4.5 billion (ibisworld. In the next five years to 2016. from cost structure. in particular. Starbucks. This is determined by the ratio of capital to labor costs. To calculate the ratio. Capital intensity for these industries is medium. The industry is labor intensive given the need for personal. wages and depreciation. views China as a market that has large potential for growth and lasting profitability. order- 13 . are used as proxies.1% per year to reach $32. This implies that about $0.com).and try to boost sales. After seeing success in other companies such as McDonald’s.

there is consistent pressure across all industries to compete on innovation. which suggests room for growth and more market domination. As a food service industry. There is also not much pressure to become extremely innovative in developing new technologies within this industry. However. as well as in the management of each store (ibisworld. and capitalized on the opportunity. and technology development are all in the medium range. regardless of economic conditions. 14 . However. Currently. This in turn. provides better customer service by speeding up the transaction process. such as Starbucks. Concentration level. serving and cleaning. Starbucks current CEO. Even though industry globalization is low. This can be attributed to the consistently high demand for coffee products. Howard Schultz. got many of his ideas while traveling through Italy and seeing popularity of gourmet coffee shops in other parts of the world. many companies are beginning to see the value in expanding to international markets. the automobile industry.taking. it does not compare to the high level of regulation governing such industry as aviation. therefore. regulation levels are considered medium. the USDA has strict regulations over these industries pertaining to the health and well being of the general public. Companies in these industries. say. have implemented technologies such as the Starbucks Card or the ability to pay for your coffee directly from your smart phone. The industry is not as concentrated as. and the industry can expect to see a growth in this segment. He brought these ideas to the U. regulation level.S. with today’s technology.com).

where they see great potential for sales and continued growth. Asia and the Middle East are regions where domestic fast-food brands have not saturated the market yet. make it easy for anyone to open a “Ma and Pop” coffee shop on any corner. International expansion is anticipated to be the largest source of revenue and profit growth for major players over the next five years. Major competitors will attempt to expand revenue and profit by providing a variety of meal options. or coffee products. Finally. most fast-food chains will continue to evolve and launch new healthy food substitutes and expand on their current product lines.many companies are trying to develop in countries such as China. They will also continue to diversify into new markets. Intense competition will likely continue over the next several years. pastries. one of the most noticeable characteristics is the high level of competition across these industries. including fresh salads. the high demand for this type of product and ease to access low amounts of capital needed to start a coffee shop. Barriers to entry are very low in this industry. such as cafes and full-service restaurants. “Many domestic operators will continue to expand internationally. Again. These operations 15 . competition has become fierce. Given the low barriers to entry and the high demand in this industry. This factor will include significant price-based competition and an increased emphasis on the constant introduction of new goods. As mentioned.com). and where operators are currently experiencing their strongest growth” (ibisworld. It is very easy to access the resources needed to join in the fast food or specialty beverage industry.

We gathered as much information as possible and used Porter’s five forces framework to help assess factors for change. etc. In monopolistic competition. product mix. barriers are low in monopolistic competition. Given these characteristics. The producers involved have a degree of control over the price of products. such as quality. Threat of Potential Entrants 16 . Competitors use location. making it somewhat of a difficult task to find forces that will drive their company to change. this industry demonstrates monopolistic competition as its market structure. Assessing Forces for Change Starbucks Corporation is largely the world leader in their industry. time spent being served. Consumers generally believe there are non-price differences in products. product variety.will mock what Yum! Brands is already doing (with several brands like KFC. Taco Bell and Pizza Hut under one roof) at existing and new locations. their company is not perfect and many studies found flaws that were apparent. there are many producers and consumers. and store atmosphere differentiation to establish a market niche. Again. With that said. There is very intense competition which leads to product differentiation being a major asset to companies. which keep any one business from obtaining total control. atmosphere.

This industry differentiation is an opportunity for Starbucks. Many distributors in the industry. like Starbucks. competitors are McDonald’s Corporation.. the industry is one of the fastest growing.S.com). and a threat to potential entrants. As mentioned. as previously mentioned. they have regularly controlled access to many channels of distribution. over waiting in stores. Rivalry Within the Industry Another force that Porter describes is rivalry among existing firms. Starbucks was ranked by Fortune in their “Top 20 Most Admired Companies” and ranked 1st overall in the food industry (CNN. something we will discuss in the buying power of suppliers. Starbucks has displayed their power over distribution channels by setting a strategy for their suppliers to follow. direct U. are becoming broader in product range. The competition. Dunkin Brands Incorporated. that many of Starbucks' customers do prefer convenience. and Einstein/Noah Bagel Corporation. The implications of this are. Since Starbucks is the world leader in its industry.One of the main driving forces for change at Starbucks is their threat of prospective entrants. Starbucks says it expects its own single-cup packaged coffee business to generate $1billion of annual sales in the future. Nestle Ltd. is not equally 17 . which makes competition for market space high and the threat of new entrants also high (with a low success rate). One of their key attributes to success is innovation. however. Starbucks is constantly revolutionizing the coffee industry while also firmly distinguishing themselves in the food and beverage industry. As stated.

as we will discuss later. Starbucks had over 15.000 locations in over 20 countries. Smaller competitors. among others. Other beverage industries can satisfy the customer's need for a drink. create potential threats to the company. the best way to evaluate this threat is to ask whether other industries/companies can satisfy the customer’s need (Coulter). While it is apparent that Starbucks Corporation has major competitors within the industry. Starbucks Corporation is the premier retailer. but what companies can do both? The answer: Starbucks.balanced when arguing company sizes.com). In the budding market. roaster and brand of specialty coffee in the world. while McDonald’s has over 13.000 international) (finance. in 2007. risks facing the company. competition is high and Starbucks’ main competitors are promoting comparable products. There are obviously good substitutes to Starbucks' products. An expansive growth in the coffee industry market and the threat of substitutions are.000 stores (7. Threat of Substitute Products Porter's next force principle takes into account the threat of substitute products. including fine brews as well as quality foods. There are many substitute products in the specialty foods and services industry and according to Mary Coulter. and other food industries can satisfy the customer's need to eat. the competition has little brand loyalty in comparison to that of Starbucks’ customers.000 stores nationally and Dunkin Donuts operates in over 36 states with over 5. Einstein/Noah Bagel Corporation operates about 500 cafes in the United States. however. Comparatively.yahoo. but 18 .

” was one in which companies and organizations could buy the coffee and tools necessary to brew "the perfect cup of Starbucks Coffee. 19 . satisfies their needs. a standard Starbucks customer orders relatively small amounts of their products (anything from a cup to a bag of coffee) and their main strengths. a customer can eat ice cream (or drink iced beverages). As you know by now.com). as well as the company's ability to innovate and differentiate. There is a large threat of substitute products in the food and drink industry. And that very thought. we know that there is an enormous selection of coffees at a Starbucks' coffee shop.this is why image is very important for Starbucks. At a Starbucks coffee shop. are the main reasons why customers prefer to purchase at Starbucks. to many customers. differentiation and exclusivity. but Starbucks has created an image. A plan that was devised by Starbucks management to reach larger quantities of customers. the “Preferred Office Coffee Provider. and drink a Pepsi." in large quantities for their offices (starbucks. and has separated their company from competition so that many of their substitute products are actually a part of their daily business. while his friend drinks tea while eating a pastry. Bargaining Power of Buyers (Customers) Porter's next industry force for change is the Bargaining Power of Buyers. Any of Starbucks' customers are considered the buyers. leaving little to no room for substitute products or companies to come in and pocket Starbucks’ loyal customers. And as seen through many studies and some individual familiarity.

This attempt has broken into some market segments. Bargaining Power of Suppliers The last force that Porter assesses for change is the bargaining power of suppliers.With that in mind. We saw threats to Starbucks in the fact that customers face no marginal costs in switching premium coffee suppliers from Starbucks to another forgone premium coffee supplier. the possibility of buying a large number of products that span across the coffee market.” as well as directions on how to make the perfect cup of Starbucks Coffee at home. to music (giving the customer little buying power with regards to other suppliers that offer this wide range of products). it was evident that Starbucks’ managers strategically made this the only prospect found on their website for a consumer to buy a mass amount of their products so they could keep the power over buyers. but it is evident that their customers do have some bargaining power in the industry. Coffee is one of the world's largest traded commodities in the United States. with South and Central America producing the majority of coffee traded in the world.com. Starbucks. from your basic coffee blend. Starbucks has vigorously tried to equalize this threat by offering the previously mentioned. This pie graph gives the breakdown of the world’s 20 . “Preferred Office Coffee Providers. With that said. we saw great supplying power for Starbucks on their website. Another threat that was exploited by potential Starbucks' customers is the ability to brew their own coffee.

According to the many experts in the industry. and because of this.00 per pound (starbucks. the chief competitors in the coffee business have seen profits plateau and even decline in some cases because of over-crowding in the market. nowhere mentioned are there alternate types of beans Starbucks must buy. they have conventionally paid first-rate prices for its environmentally friendly (or green) coffee. 21 . Starbucks often seeks to buy coffee that is superior to its competitors. but also the direct exporters for the supply of coffee. According to a Starbucks Case Profile. coming in at anywhere from $1. Starbucks not only relies on both outside brokers.50 to $2.production of coffee with South and Central America accounting for approximately 65% of all production. However. In the strategic plan for Starbucks. these are alarming threats. For the industry.com). the price of the coffee bean could rise in the future due to lower supply and heightened demand. The distribution of coffee is affected by weather conditions and the health of coffee trees that produce beans. which ultimately gives the coffee suppliers bargaining power.

This is a potential threat for the prosperity of Starbucks Corporation. because of Starbucks’ strict guidelines for their product. "With these guidelines. the 22 . Starbucks often equalizes this threat by paying a premium of up to ten cents per pound of coffee to vendors based on how well their coffee meets Starbucks' standards (starbucks. consequently. has few companies that can comply with the regulations." Starbucks has an unprecedented degree of control over its suppliers in an industry where it is possible for suppliers of premium coffees to have an enormous amount of bargaining power. Quality control checks. said.com). Glenn Prickett. Starbucks announced new guidelines for their purchases. Workforce Planning (Retirement of the Baby Boomers) Prior to the millennium. Former executive director of the Center for Environmental Leadership in Business. Today. the distribution industry. the most significant generational issue facing corporations was attracting and holding on to bright new talent. which were developed in partnership with The Center for Environmental Leadership in Business guidelines. environmental concern. social responsibility.Starbucks has demonstrated how little control its suppliers truly have by showing their commitment to superior products. Starbucks would only allow brokers and exporters who could meet their high standards to supply the industry leader. With that said. In turn. and economic issues were the basis for these guidelines. Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry. At the turn of the millennium.

public companies. The industry at that time was split up into two types of competitors. there were two main coffee industries: retail and specialty. solely existed in the small-scale specialty coffee industry. To succeed. those who sold flavored coffees and those who sold unflavored coffees. it is the most experienced employees who are causing concern with their plans of retirement. When Starbucks first opened in the 1980s.generational scales have changed. like Starbucks. Due to the fact that 23 . then. should have built their leadership pipelines by now and put their strategic plan into action. It is no longer the youngest employees who are causing concern. This factor is something they will need to take into account when assessing their company and as these managers leave the company. Competitive Forces The competitive forces of Starbucks have also continually evolved as the company has grown and entered different industries. many upper level administrators and managers are getting ready to retire. While many of Starbucks’ employees at cafes are young. The retail industry consisted of companies such as Folgers. proving that the predicament of retiring “baby boomers” will hit Starbucks' management significantly. future Starbucks leaders will need to retain and transfer their knowledge. Starbucks. Starbucks chose to compete in the unflavored category because they felt that the flavored syrups ruined the flavor of the coffee beans.

many Starbucks supporters say that they lack the atmosphere that Starbucks has. it did not take long for the industries to evolve and grow. Therefore. Even though they may have the lowest prices. Fast Food The largest competitors to Starbucks exist in the fast food industry. They have also expanded into other industries including those of fast food and coffee and snack shops. It is said that these companies focus mainly on selling premium coffees quick and at a low price. Inc. Even though all of these industries fall in the food and beverage spending category. we will look at how Starbucks compares to companies in each separate industry. Two main companies that Starbucks competes against in this industry are Dunkin’ Donuts and McDonalds. Starbucks now competes among many different sizes of companies rather than just small-scale specialty shops.there was really no competition (because of two separate industries and the separation between flavored and non-flavored specialty coffees) the consumption was very inelastic. Due to the low level of competition and change in demand. 24 . there was not very much competition between the prices of rivals. Dunkin’ Brands. They have price superiority and start a lot of price wars that lead to high competition within the industry. We will break them down in the next few paragraphs and look at how they perform as well as how they are a threat to Starbucks.

McDonalds was very determined to develop the idea and in 2003 it changed its plan. so they could move their image more towards a “breakfast bistro” and increase their competitive advantage against Starbucks and McDonalds.000 locations in 30 countries and is the world’s leading doughnut shop. Inc. Dunkin’ Donuts took advantage of the situation. and at a consistent quality. It is also the “largest coffee and baked goods chain. is a privately held company that runs both Dunkin’ Donuts and Baskin-Robbins brands. In 1993. however it introduced the idea of McCafe. fast. its own brand of espresso. They have continued to renovate 25 . has approximately 9. but in fact it creates a huge competitor to the coffee shop. McDonalds only sold regular brewed coffee. It started to renovate the atmosphere and replace the bright red. the one that we will be focusing on for the analysis. from 5:30. They have also started selling more breakfast foods. It does not seem that this type of strategy would be in competition to Starbucks. The idea took off very well. They wanted to create an atmosphere more like that of Starbucks. They opened their doors during that time. such as sandwiches.” When Starbucks shut down for a few hours in the evening in 2008. The new strategy did not go over very well and was not accepted in America. and was introduced to America in 2001.9:30 pm to serve one dollar cups of coffee.Dunkin’ Brands. Dunkin’ Donuts. McDonalds The strategy of McDonalds seems to be very clear: low prices. plastic booths with large brown leather couches. Originally.

donuts. they do compete indirectly as the purchasing power of buyers is only so large. it showed income of $979. some new companies are incorporated when including the players in the coffee and snack shop industry. in fact. While some say that this was a temporary competitive advantage due to price superiority during a recession. They did this in order to create a sense of theatrics and fun. Even though these companies do not always compete directly with Starbucks. Coffee and Snack Shops While some companies within these three different industries overlap. At the end of the same first quarter in 2009. bagels. smoothies. juices. During the recession of 2008-2009.5 million or 87% of the market share. this industry is comprised of businesses that prepare and serve specialty snacks and nonalcoholic beverages. frozen yogurt. some of the stores showed a sales increase totaling up to 4.7%. It will be interesting to see what the future holds.and have also incorporated large espresso machines on their counters. is a major one. As previously mentioned. the numbers show that it. including ice cream. this cannot be determined yet. McDonald’s market share grew at a pretty reasonable amount. coffee. In addition to this.1 million or 81% of the market share. Some of the key 26 . At the end of the first quarter in 2008 they showed income of $946. cookies. Even though some still believe that McDonalds is not really a competitor. or sodas.

Cinnabon is a service chain that has developed franchising opportunities to expand its business. Cinnabon. These 27 . A lot like Cinnabon. however. airports. one being coffee.400 shops in the United Kingdom who serve snacks and foods from pastries and other bakery items to sandwiches and healthy choices. Inc. It has grown over the years to approximately 750 shops around the world. The shops are mostly located in malls. it can fulfill that craving for the cup of coffee and something sweet to snack on. Even though Cinnabon is primarily famous for its cinnamon rolls.competitors that are most closely related to Starbucks and not already mentioned in other industry analysis are Cinnabon. The competitive advantage that they have against Starbucks is the fact that they do serve healthier choices and have a wider variety of products. It consists of over 1. and Greggs. the shops are commonly located in high traffic areas like malls and airports. it is not a direct competitor to Starbucks being that it does not offer a large amount of specialty coffees or the atmosphere. It also has the potential to collect the extra spending money of Starbucks' customers. indirectly affecting the profits of Starbucks. it does offer a wide variety of products. but it is a large competitive force in the United Kingdom. and other areas that have a lot of traffic on a daily basis. Inc. Like previously mentioned. Greggs Greggs is not a known competitor for Starbucks in America.

They are very different in each area depending on their geographical locations. It also sells its roasted coffee and other merchandise to retailers (such as grocery stores) and foodservice suppliers. Caribou Coffee operates the second largest coffee chain that is non-franchised. whole bean coffee. Next to Starbucks. Caribou Coffee Company. baked goods. The chain is a lot like Starbucks in that it offers fresh-brewed coffee. Inc. The shops are designed like lodges and have fireplaces to create a more “American. Starbucks has a harder time doing so because it is so large and generic. Two main competitors in this industry are Caribou Coffee and Peet’s Coffee and Tea. Some of their main advantage points are that they can easily appeal to the demographics of the area and change their product line and atmosphere accordingly. and brewing supplies. Unlike Starbucks. and comfortable atmosphere. 28 .” homey. specialty coffee drinks. Specialty This industry is mostly comprised of smaller coffee shops that are more directly competitive towards Starbucks. most of these are located in Minnesota. it is designed to please its location more.advantages appeal to customers who may want a light meal while they enjoy their coffee or have companions that may want something other than a coffee product. It has approximately 400 stores in 30 states. Another difference is that the shops also all have meeting rooms that may be rented out to customers.

It focuses on the same “high-class” group of people as its clientele. it offers coffee. Positions of Competitors Starbucks opened their first store in 1971 during the start of the specialty coffee boom. this has greatly affected the profitability of the whole company. pastries. Similar to Starbucks. However. During this period coffee sales moved from just a product purchased at the supermarket to a special treat that was purchased by. Even though it is growing at a slower rate.” Specialty Coffee Industry 29 . specialty drinks. and products sold to retail stores. Peet's does not partake in any licensing or franchising. mugs. many believe that it will be Starbucks' key competitor in the future. This also means that it grows a lot slower as it has trial and errors with a few stores. From the 70’s specialty coffee increased the number of retailers from around 70 to over 400 by 1989. in contrast to Starbucks. so it can have more control over its shops. mainly located in California.Peet’s Coffee and Tea Peet’s Coffee and Tea has approximately 190 coffee shops. herbal tea. biscotti. It also continuously advertises new items to let customers try new items and different blends. “an educated urban resident with the disposable income to spend on fine coffee. This is because it is so closely related and has the same marketing strategy. brewing equipment.

They provided fine coffee (they refused to sell flavored coffee) and coffee type drinks such as lattes.27 billion. espresso. In addition. These numbers are up three and four percent respectively since 2002 and show the rise in popularity of the specialty coffee industry. 30 . that appealed to this urban demographic.In 1987 when Starbucks started to expand. Starbucks’ sales in 2009 were $9. By 2009 the Specialty coffee had grown into a $13. By the end of 2006 the specialty coffee industry had reached sales of $12. Starbucks is still the clear winner in the competition for sales among the specialty coffee retailers. etc. they provided a setting that was more like a club or pub where their customers could go and visit with their friends and/or just relax. They are not only beating their competition.5 million in sales for Caribou. frappaccinos. This resulted in Starbucks developing a niche market that has catapulted them to the top of the specialty coffee retailers. An estimated sixteen percent of American adults say they consume specialty coffee daily with almost 63% saying that they had specialty coffee occasionally.65 billion industry with growth expecting to hit $18 billion by 2012. they are beating them by a very large margin.6 billion compared to around $500 million for Green Mountain and $262. their chief competition was still the specialty coffee retailers. Starbucks is the industry icon for specialty coffee and has stores all over the country selling their coffee.

In this market they have stronger competition.4% decline for the last five years to fiscal 2012. They boast that they have “the world’s largest coffee and baked goods chain. The first we have already discussed which is the small specialty coffee retailers. Dunkin’ Brands has 14. Their total company revenue is expected to show approximately a 3.5% 31 . they also sell baked goods and accessories. cappuccinos and espresso. Einstein Noah owns 2. They have the distinction of currently competing in three separate markets. The second competitive market is the ‘Coffee and Snack Shop. coffee and ice cream. In recent years Dunkin’ has put much more emphasis on their coffee market including lattes. but they do not have a very large piece of the market compared to Starbucks and Dunkin’ Donuts.848 locations across 44 countries with 9. Dunkin’ saw the value in this market and have entered into the competition with a very strong position. One of their competitors is Dunkin’ Brands Inc. There are other competitors in this group such as Krispy Kreme Doughnut Corporation and Einstein Noah Restaurant Group.” Dunkin sells donuts.’ Starbucks not only sells coffee.087 of those locations being on the United States. breakfast items and coffee paraphernalia.Coffee and Snack Shops Industry Starbucks has now moved beyond just competing with specialty coffee retailers. Krispy Kreme has 224 domestic locations and owns about 3% of the market. This includes pastries.

In 2001 McDonald’s entered into the coffee market in America after success in Australia. Starbucks was pulled into a new market category that they had previously not competed in at all. Fast Food Restaurant Industry Around 2001. Krispy Kreme estimated roughly $363 million with Einstein estimating $412 million in 2010. but with new competition coming into the market they are being challenged at a much higher level compared to previous competition. This improvement was 32 . Starbucks had $11. Starbucks is clearly a dominating force in this business segment as well as in the coffee specialty market. Previously McDonald’s and Starbucks would not have been seen as competitive with one another.7% increase in 2010 and are expected to show a 5. they can still take small chunks out of Starbucks' market share.6% increase by the end of fiscal 2011. McDonald’s tried to improve their basic coffee that was being sold with their breakfast items. Two things happened around the same time that drew Starbucks and McDonald’s closer together in the Fast Food market.26 billion in sales in 2010 while Dunkin’ Donuts had approximately $7 billion in sales for the same period. Based on the boom in coffee in the last 20 to 30 years. While neither one of these companies pose a serious threat to Starbucks. They are showing a steady growth with 0.of the Coffee and Snack Shop industry and has 683 locations across 37 states.

In 2010 McDonald’s had 12. Pizza Hut and Taco Bell) had 9. McDonald’s is also remodeling some of their stores. to have a more relaxed setting similar to the Starbucks stores and provide Espresso machines and ‘baristas. This combined with an article in Consumer’s Report in 2008 that rated McDonald’s drip coffee as better tasting than Starbucks has spurred McDonald’s forward. This is expected to increase sales for McDonald’s by around a billion dollars.7%. Starbucks started to build stores that had ‘drive thru’ windows like the fast food restaurants use. They also started to provide more breakfast type foods beyond just their normal pastry fair. Around the same time that McDonald’s was introducing their new coffee options Starbucks also took actions that would pull them more into the category of Fast Food.7% of the market. 33 . and a Frappe which is direct competition to Starbucks Frappuccino. Yum Brands (which consists of Kentucky Fried Chicken. mochas. referred to as McCafe.a success and led them to try and obtain some of the growing market for specialty coffees. McDonald’s has provided similar coffee type drinks that compete with Starbucks at a lower cost including lattes. This has resulted in Starbucks basically entering into the Fast Food competition.’ This shows that McDonald's is trying to copy the success of the Starbucks setting which in many ways is the cornerstone of their business.

This is an indication of how competitive the overall ‘coffee market’ is becoming. Why is this a concern? Starbucks isn’t really a fast food franchise. much less actively trying to compete and be at the top.Wendy’s had 6. They have moved from an environment where they only had to deal with ‘like’ companies into a competitive world where companies that were previously not even really interested in the coffee market. which was higher than Burger King that only had 5. Starbucks has to adapt and solidify their place in the overall market.1% of the overall market. Predictions 34 . So while Starbucks still dominates both the Specialty Coffee market and the Specialty Coffee and Snack market they do not dominate the Fast Food market.6% of the market. are entering into the market and targeting sales in order to increase their revenue.9% of the market. and Starbucks had 5.

specialty coffee sales adds up to $13. but according to sales figures. one-third of the nation’s $40 billion of sales in the coffee industry. • • 40% of the coffee consumed is now gourmet. with 56% of adults partaking. America was the country that drinks the most coffee. As the recession hit. “The sales growth rate for the specialty segment is four times that of traditional coffee with projections the category will top $18 billion by 2012” (Hensley). This was not the case. it was assumed that specialty coffee would be one of the first things cut down upon.The Specialty Coffee trade is a strong and emerging industry in the United States.65 billion. it was revealed that Americans are still willing to pay for good coffee. 35 . If we look ahead. Today. It was stated in an article about specialty coffee that. Coffee preparation at home is up 4 percentage points with 86% of past-day coffee drinkers reporting that they made coffee at home ("2010 National"). Historically. It is obvious that this shift will occur. • 84% of consumers have not changed their consumption habits despite the economic environment. much of the industry’s growth will remain in the specialty coffee segment. Here are a few coffee consumption trends from The National Coffee Drinking Trends study: • Daily consumption of coffee beverages among consumers remained unchanged as compared to 2009.

With all of the different choices. as the rest of the industry is scattered with tons upon tons of other specialty companies. Starbucks mostly calls the shots. one must differentiate from the rest. To anticipate what Starbucks’ competitors would do next. the customers have a wide array of stores trying to pull them in. From the business side of things. They are devoted to controlling the industry they have created. Starbucks is not in much danger. It is evident that the coffee industry has a huge pool of competitors. the question becomes. we move our attention to what they have done in the past. giving them an advantage. When the recession hit. all 36 . To stick out in this mass of companies. as the others follow. This industry is characterized by monopolistic competition. trying to get some sort of recognition as number two.In the strategic environment. Like in the realestate industry right now. Starbucks Corporation is the major leader in the Specialty Coffee Industry. being that they are the industry leader. flavors. who will likely make what moves? As previously stated. which inevitably leads to rivalries.. and price points for the coffee businesses. foods. which thrives on competitive differentiation. The closest competitor that Starbucks would need to worry about is Dunkin’ Brands Inc. it is very much a buyer’s market.

industries felt some sort of repercussion. Einstein Noah Restaurant Group, owner of Einstein’s Bagels (2.5% market share), launched several different choices for their customers to choose from. Some of these options included “a new 400 calorie breakfast menu, a premium Frozen Strawberry Lemonade, the $1.99 Chicken Bagel wrap and re-introduced the Bagel Poppers, and the Saladwich Sandwich. All of these efforts resulted in the company only experiencing a 1% revenue decline in 2009” (Major Companies Starbucks, 2010). Einstein’s responded to the recession by changing up their menu, adding different items to appeal to different people, as well as adding cost-friendly choices. Dunkin’ Brands Inc. is taking a similar approach. The company has just rolled out a new, delicious-looking, bacon, egg, and cheese biscuit. In doing this, Dunkin’ Donuts will attract a whole other crowd. Those who prefer McDonalds-esque breakfasts will now have the choice to go to Dunkin’ Donuts, and with convenience, get their coffee there as well. With this first move towards improving their breakfast menu, expanding to more than just donuts, it is easily assumed that these steps will continue—bringing new customers with it. If seen from an industry perspective, the Specialty Food Store Industry will be putting many competitive moves into action in the next few years. The future regions of growth will most likely start with the increase in demand for organic foods. “According to the US Department of Agriculture, organic food is by far the fastest-growing food industry in the world, with growth occurring in new farms, products and processors” ("Industry Outlook"
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2010). Companies in the Specialty Food Store Industry will more than likely notice a growing demand for organic food that will stay for the long haul. Organic food is expected to “account for more than 5.0% of the US food market by the end of 2015” ("Industry Outlook" 2010). Previously, sales from organic products remained small, but they are growing much faster than the food industry as a whole. Premium or high-end goods are forecasted to continue to shoot revenue growth upward. Given the similar food market, gourmet and specialty food marketed in stores, like in the coffee industry, provide a level of competition. Over the next five years, “IBISWorld forecasts that [The Coffee and Snack Shops] industry revenue will increase at an average annual rate of 4.1% to $32.5 billion” (www.ibisworld.com). It is predicted that the industry will resume its growth trend starting back up in 2012. As anticipated, as the economy turns around, unemployment drops, and customers feel more comfortable spending money on non-necessity items, the coffee and snack shops will benefit to the expected annual rate of 2.3%.

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The intense competition between companies will likely continue throughout the next few years, but now the focus of competition will be price-based, as well as an added emphasis in product development. IBISWorld is predicting that “most chains will introduce new healthy food alternatives and expand their current product lines” (www.ibisworld.com). They continue to explain how domestic operators will continue to expand internationally. This is expected to be the most popular option. Yes, it is costly, but is “anticipated to be the largest source of revenue and profit growth for major players over the next five years” (www.ibisworld.com). As stated many times before, the economy is finally turning around. With this, the Coffee and Snack Industry will continue to grow, the demand for coffee will increase, and people will loosen up about how their money is spent. If companies do as expected and expand their menus to include new, healthier alternatives to their older items, this should entice customers, even more, to spend their money. As noticed by observing at the projected Revenue Outlook, the future of this industry looks promising. The last industry to take a look at is the Fast Food Industry. Just like the others, this industry is growing at a predicted annual rate of 2.5%, and worth up to $208.16 billion over the next

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five years. It is an obvious observation that as the economy improves, fastfood restaurants will wreak the benefits. Luxury spending on things such as eating out will return to be a normal thing for most Americans. IBISWorld has also predicted that “over the five years leading to 2015, personal consumption expenditure is expected to increase at an average annual rate of 2.5%” (www.ibisworld.com). If the information from the previous industries studied is taken into account, it is easily expected to see competition at a very high level continue in the future. Similarly to the Coffee and Snack Shops Industry, the competition will include substantial “price-based competition and an increased emphasis on the regular introduction of new products” (www.ibisworld.com). Healthy alternatives will most likely be the first introduced, followed by an expansion of foods already produced. Major players in this industry will start to offer alternatives to the classic red-meat burger, trying to attract a more expansive pool of customers. They will also become more aware of areas of expansion, “such as cafes and full-service restaurants” (www.ibisworld.com). Again, like before, international expansion is foreseen. As consumer spending increases and people loosen their grip on their purses and pocketbooks, this will translate into fast fixes, like fast food. With the international growth intensifying into a popular option, the revenue of the major fast-food chains will continue to increase. As seen in the chart to

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and by offering natural and organic products (84%). but explained it exactly—focus on small aspects of the company. such as knowledge and performance. the company’s employees will find that their business life will be a lot more enjoyable. In looking at the Food Retailing Industry report. In an article titled. Success Factors First Mover Advantage 41 . “Fundamentals of Coffee Business Success”.com). and by developing store brands (88%).com). rather than only on profit and loss. If this advice is taken. it is recommended to use something close to the Hedgehog Concept. “as growth rates approach historical levels and operators are forced to contend with the market saturation issues they have grappled with over the past 10 years” (www. “by large percentages.the right.ineedcoffee. retailers have common strategies about what they’ll do next: Nearly all intend to address competitive concerns by emphasizing perishables (99%). and by improving the shopping experience (74%). the revenue growth for the Fast Food Industry will level off eventually around 2015.ibisworld. and by catering to health and wellness concerns (73%) and by lowering prices (72%)” (Merrefield). It was not clearly stated as the Hedgehog Concept. but also the company as a whole will be more likely to find financial success (www.

they wanted to test the different markets before going on an all out expansion of the company. topping the plan by 25. At this point in time. you always hear "a company that was made one cup at a time. Starbucks opened a total of 150 stores. The amount of stores only grew in the following years: in 1989 they opened 20. The original plans of Shultz was to open 125 stores in the first five years of expansion. in order to maintain high quality and customer service Starbucks decided not to explore franchising. but it was designed to prove that their business plan would stand the test of time and be able to prove the feasibility of the company. they opened 15 stores to more than double the original number of 11. Canada areas. 42 . Starbucks chose to expand in the Chicago. This expansion was very risky. Whenever you hear about Starbucks.Beginning from the moment Howard Shultz bought Starbucks in 1987. Starbucks mainly focused its stores in the Pacific Northwest region. bringing the total to 26. Illinois area and the Vancouver. in 1991 they opened 32 stores." This is because of the strategy they had in place. 1990 they opened 30 more. Furthermore. They decided to simultaneously expand to areas outside of their comfort zone. he envisioned a company with aggressive expansion ideas in the premium coffee industry. and a whopping 52 stores in 1992. In 1988. but instead chose to own and operate the stores at the company level (Larson). In addition. In the five year expansion. but this number was low compared to what was actually opened.

Two of the largest basic coffee companies were based here. These bags allowed them to transport 5lb bags without the risk of losing freshness.Expansion East The main reason Starbucks chose to expand into the Chicago area was because it faced numerous challenges not present in other cities in the Midwest and east coast cities. At first. 43 . Starbucks wanted to know if stores that were far from headquarters could operate efficiently and at the same time have a solid infrastructure. Both of these companies had the brand recognition and resources to impede the expansion attempt made by Starbucks. One of the main problems with building stores away from headquarters was that of quality. There were three reasons why these stores were originally unsuccessful. What upper management at Starbucks really wanted to know was if they thought Starbucks was worth throwing resources at to stop their expansion. and this forced Starbucks to reassess their situation in their location matrix and their pricing and hiring process. With the frigid cold temperatures and the wind playing factors. Folgers and Maxwell House. The first reason was because of the locations they chose to put their coffee stores. In addition. the Chicago stores were not successful. to solve this problem Starbucks put their perishable items in flavor lock bags. Would quality be maintained after being trucked in from several thousands of miles away? However. people would not leave their buildings to get coffee.

and raising prices. Their expansion into Vancouver was met with a lot less resistance because the city was similar to Seattle's demographics. California represents an immense market with an ideal demographic makeup and open attitude toward high quality and innovative foods. hiring more experienced managers. For Starbucks this was an immediate success. Los Angeles was chosen to be the main hub for Starbucks because of its status for being trendsetters and Hollywood's ties to the rest of the country. Starbucks learned many things from the openings in the Chicago area and made the necessary changes to include: closing the unattractive locations and reopening in lobbies of high traffic locations.They should have put stores in the lobbies of the busiest buildings. Lastly. Starbucks mainly focused the concerns in the Seattle and Chicago areas. California Expansion Until 1991. it was hard to convey the ideals and methodology of Starbucks to baristas hired there. The Los Angeles Times named Starbucks the best coffee in America before the first store was 44 . The second mistake was that they hired inexperienced managers to run their stores. and this helped ensure future investors of the company's viability (Larson). Because of the distance between Chicago and Seattle. Starbucks did not make pricing adjustments due to the higher cost of goods and rental prices.

In addition. Employee Satisfaction Howard Shultz once said about his employees.in place. This catalog served two purposes. A hidden advantage was the implicit celebrity endorsements made by paparazzi by showing photos with celebrities holding a cup of Starbucks coffee (Larson). The Catalog Starbucks used their catalog service to place stores where a significant number of people were ordering bags of coffee through their mail order catalog. When the company first opened it cost the company $3000 to train a barista. it helped Starbucks with location choices and it allowed them to sell to people who did not have a store near them. Starbucks reasoned that they would attract higher quality employees and at the same time reduce turnover and decrease overall expenses. With huge amounts of resources and time Starbucks can capture the highest quality employees.” Employees are Starbucks number one reason for success. One way that Starbucks can attract these great employees is by raising health care benefits to anyone who works 20 hours or more per week. and $1500 for full health care benefits. Every dollar earned passes through their hands. this catalog gave Starbucks the ability to further expand their loyal customer base before physically entering into that market. 45 . “These people are not only the heart and soul but also the public face of the company. Knowing that there were high costs associated with raising benefits.

In the long run there is no doubt that the increased health benefits did indeed save the company money (Starbucks. The idea behind “bean stock” was that every employee would be eligible to receive stock options and this is based in proportion to their pay level. Starbucks started an employee forum every quarter which gives employees an option to speak their minds by encouraging questions and suggestions. Starbucks entered into agreements with Coffee and Farmer Equity Practices (CAFÉ) to maintain a long term stream of high quality coffee and at the same time enhancing the coffee farmers' living standards. and they pursue different strategies to ensure that the quality stays high. 1) was that Starbucks would receive a sustainable amount of coffee beans from a stable source of farmers who 46 .” which is a stock ownership plan for their employees. Three major principles came out of this agreement. Arabica Coffee Beans It is important for Starbucks to maintain the quality of the Arabica beans. In addition. Stocks options were originally offered at 12 % of employee’s base pay but were later increased to 14%. After this forum was established the word employee was no longer used but instead the word ‘partner’ is used (Larson). Starbucks was only 60% at the barista level and 25% at the managerial level which are the lowest in the industry. The Starbucks corporate team started “bean stock.com and Larson).The average fast food industry turnover rate ranged from 150 to 400%.

their coffee and snack shop and specialty coffee segment basically consists of various similar characteristics. The farmers. who invest in this plan. To begin with each industry is somewhat narrower when compared to the fast food industry that they are also considered to belong to. CAFÉ allows Starbucks to lock in the highest quality suppliers of beans which ultimately gives our company a competitive advantage over our competitors.were not influenced by trading partners. Despite this fact. however. Starbucks currently operates within three industries as defined by the NAICS: • • • Fast-Food Restaurants Coffee and Snack Shops. This agreement helped lower the amount of lesser quality beans and therefore suppressed the price of coffee. 2) was to maintain the integrity of Lamb’s farm. and 3) to make sure that the farmers lived in societies that were safe and healthy. With the supply-chain in mind. and Specialty Coffees Each of these segments are somewhat related. will now have incentives to stay with Starbucks or risk switching cost (Larson). the coffee and snack shop aspect of their overall 47 . This agreement gave farmers who followed the guidelines a leg up when Starbucks makes buying decisions. Overall Industry Attractiveness As we have mentioned.

industry attractiveness is their bread and butter. for instance. Despite their relative insignificance as compared to giants such as McDonald’s. it is worthwhile for them to pay crucial attention to this segment. Though Starbucks should continue to focus on its most important 48 . It is also wise to mention the largest segment in which Starbucks operates. so the current socio-political environments of the nations mentioned in the sections below more than certainly have been taken into consideration. making them one of its largest players. because McDonald’s and Starbucks may differ in market share in this industry but Starbucks holds a larger market share of the segment that McDonald’s seeks to capitalize on: Coffee. This is the industry that they need and have focused the most on. Starbucks currently represents an astounding 32% of this industry and continue to grow. Fast Food Restaurant Industry. So to operate in parallel industries makes key success factors dependent on the level of information on competitors that also drives change. Key success factors in this segment are clearly related to their ambitious plans for global expansion because Starbucks has all but halted their domestic expansion (GlobalData) and focused almost exclusively on the former. Another fact that illustrates the need for concentration on this segment for the advancement of overall industry attractiveness is that their specialty coffees segment (consisting of retail store sales) only comprises 7% of their total revenue. They have entered into contracts with various suppliers in order to meet their desires for global expansion.

Company Analysis Current Performance When analyzing a company to develop a strategy the first and probably the most important factor to take into consideration is its performance. marketing criteria. the Coffee and Snack Shop. This allows you to closely identify the company’s goals as well as to track its progress towards them. It also helps you compare its performance to the standards set forth by the company internally as well as those set by the environment external to the company. In analyzing Starbucks' performance. This performance measurement also opens the eye to what is known as Total Quality Management and allows the analyst to identify areas that need improvement.segment. human resource management criteria. we will consider many variables including accounting criteria. Accounting Criteria 49 . it is crucial to pay careful attention to this segment as well in order to achieve their optimal industry attractiveness. and by style of management. financial criteria.

842 $3.343 $390 $550 $3. It has done pretty well on keeping its receivables at a small amount and not getting in over its head in money owed to the company.059 $2. Property & Equipm ent Total Assets Accounts Payable Long-Term Debt Total Liabilities Retained Earnings Liabilities + Equity 2009 $666 $271 $664 $2.343 2006 $453 $224 $636 $2. This is most likely due to the recession and Starbucks decision to close and sell a few of its shops.956 $5. irregular spikes.428 $340 $1.513 Even though the amount of Starbucks' total assets has gone up and down from year to year.287 $4.87 $1.576 $267 $549 $2.513 $220 $2.890 $5.181 $2. Its inventory has been at a pretty safe.48 50 .423 $1.402 $5.151 $4. and we have not seen any huge.79 0.200 $2.B la c S e t( m n ) a n e h e in illio s Cash Net Receivables Inventory Plant.531 $2.576 2008 $322 $329 $692 $2. steady level.793 $5.189 $5.672 2007 $438 $287 $691 $2.428 2005 $307 $190 $546 $1.672 $324 $549 $3.86 2008 0. Property. plant and equipment were at a steady growth until 2008.96 $2. Liquidity 2009 Current Ratio Quick Ratio 1.938 $3.536 $5.2 0. they have had a steady growth over the last five years. This can allude to the fact that they have a pretty steady cost and inventory control and can forecast pretty efficiently.

As one can see. The quick ration is also known as the “acid-test ratio. but it looks closer at the short term. however.It is very important for firms to maintain a good level of liquidity. Starbucks did not have a very good ratio. In 2008. it will probably most likely not be able to liquidate its inventory very quickly. they still have improvement to make before they meet the “good” benchmark. because if it is having a hard time and has to liquidate assets to pay off debt. This is probably a better measure for Starbucks.” It takes into consideration inventory when looking at liquidity. Financial Criteria 51 . researchers say that a good level of liquidity is equal to two. While they have done a fair job at paying off their short-term debt. but between 2008 and 2009. Starbucks increased its liquidity to greater than one from 2008 to 2009. It is very similar to liquidity. Current liquidity can be calculated by comparing the amount of current assets to the amount of current liabilities. so they can pay their bills in a timely manner. they made a huge improvement. Liquidity refers to how quickly and easily one can covert it’s assets into cash to pay short-term debt. The ratio takes current assets minus inventory and compares it to current liabilities. They are fairly close to one in 2009. The fact that they have beat the benchmark equal to one shows that they have a fair amount of liquidity. but there is still plenty of room for improvement. Researchers say that a good benchmark for the acid-test ratio is one.

The fact that there is such a dramatic 52 .196 $1.383 $7.786 $5.774 $10.390 $2.992 $562 $503 $390 $315 2007 $9. and finance without being forced to liquidate any assets. Their cost of revenue pretty fairly matches their amount of revenue across the board.215 $2. Gross margin takes revenue.024 $1.369 $4. It is most commonly due to a decrease in cost of goods sold.750 $8. This cash flow adequacy allows them to operate. Profitability Gross Profit Margin Net Profit Margin Return on Assets Return on Equity 2009 55% 4% 7% 12% 2008 19% 3% 5% 12% Starbucks also has a pretty decent gross profit margin for 2009 (it dramatically increased compared to 2008 again).920 $893 $564 2005 $6. They have also had a strong amount of cash flow adequacy shown by their operating income. their profits have gone back up in 2009.598 $780 $494 The net income of Starbucks is at a pretty strong level. less the cost of goods sold and compares it to the actual revenues. As you can see. they once again took their hit between 2007 and 2008 due to the recession starting.771 $1. invest.053 $672 2006 $7. In layman’s terms it measures the firm’s “financial health” and therefore how well it is operating taking out other factors.411 $7. However.Income Statement (in millions) Revenue Cost of Revenue Gross Profit Operating Income Net Income 2009 2008 $9.866 $1.

00 sold. An increase in profitability directly shows that there is improvement being made in the company. Therefore. Return on assets is also known as return on investments. The net profit margin for Starbucks increased from three percent to four percent from 2008 to 2009. they are in fact improving. It shows how much of the net income is directly related to the amount of assets or investments put into the company. The net profit margin is also more commonly known as the profitability of the firm. Better ways to understand this ratio is to read it like so: if the company has a 4% profit margin. An increase in profit margin is by far a better statistic to look at than just an increase in earnings. it has a net income of $0. it tells you how well management is doing at turning investments directly into profit. It has increased two percent from 2008 to 2009.increase between 2008 and 2009 shows that the management of Starbucks did a superior job of cutting the cost of goods sold over the time period. but also to 53 . showing that management has showed a great deal of improvement and that the increase in profitability was not only due to other environmental factors. Starbucks has a good net profit margin compared to Caribou who had a ratio of two percent in 2008 and three percent in 2009. It is simply calculated by taking the net income of the company and dividing it by the total amount of its assets.04 for every $1. In other words. It comes into play when comparing companies of different sizes. it measures the profitability of a company given its amount of assets.

The return on equity of Starbucks is at a high percent.9% in 2009.8 6. but there was no increase from 2008 to 2009. it uses the amount of stockholder’s equity.1 54 . Even though Caribou had a greater amount of improvement. the high percentage both years shows that Starbucks has a high amount of market strength. but instead of taking the amount of capital investments into consideration. Starbucks is still performing better. Even though there was not an increase. Starbucks is doing well for the industry.5 2008 1.8 12. Caribou had an ROI of -37% in 2008 and 11% in 2009. For example. taking into consideration the industry it is in.the management of the company. Management Criteria Asset Management 2009 Asset Turnover Inventory Turnover 1. In comparison to Caribou. Return on equity is similar to return on assets. who had an ROA of -18% in 2008 and 5.

8 9.8 for both years. It measures how effective the company is at turning assets into revenue.28 45.Asset turnover is the amount of sales directly related to the dollar amount of assets. However. It can be calculated by dividing sales by inventory. management could use significant improvement here. The numbers overall are pretty low. However. The inventory turnover for Starbucks has been cut in half from 2008 to 2009. it is lower than Caribou.83 1. Debt Management 2009 Debt to Equity Debt to Assets Times Earned Interest Ratio 2008 0. who has a ratio of 2. It is calculated by dividing revenue by assets. This is most likely due to the significant difference in the amount of assets between the two companies and the fact that Caribou is much more concentrated to a specific area.10% 14. due to the low market. It is better to have a low ratio because that means that the company is not taking on more debt in order to grow.4 The debt to equity ratio measures a company’s leverage and is calculated by dividing its total liabilities by the shareholder’s equity. The ratio has decreased from 2008 to 55 . The ratio has stayed the same over the time period indicating that it is very efficient in turning assets into revenue. Inventory turnover shows how much of a company’s inventory is sold to customers and replaced throughout the time period.30% 56.

but also compared to other companies within its industry. one can infer that Starbucks does an excellent job at managing its debt not only as a company in itself. However. As one can see. management decreased this amount by 11% from 2008 to 2009. After looking at all three of these ratios and taking all of them into consideration. they focus on their image and appealing to their customers in their everyday 56 . It also runs very close with Caribou. Marketing Criteria Starbucks does not focus on advertising for their marketing. This shows that Starbucks is very capable of paying off its debts. roughly about half of Starbucks’ assets are purchased on debt.2009. It tells how many times a company can cover its interest charges on a pre-tax basis. It calculates how much of its assets have been purchased on debt by dividing the total amount of debt by the total amount of assets. The times-earned-interest ratio illustrates how capable the company is to pay off its debts. The debt to assets ratio shows how much risk the company has under its belt. This is a significant improvement. one of its closest comparable competitors which has ratios of 1. Instead. if need be.03 (2008) and . which is a sign of improvement.85 (2009). Both ratios for 2008 and 2009 are very high and are increasing.

they also have the “Bean Stock. Compared to other companies in the industry. will increase their customer service and promote a positive image for Starbucks. They are able to purchase this stock at a discount of 85% of FMV. Starbucks puts far less money into marketing. and 7400 other global employees. 60. and expand their business through word-of-mouth.lives. in-turn. They are also then qualified to partake in all of the benefits. They follow the philosophy of “leave no one behind” in all of their employee benefits and fringe benefits. Upon being hired. they do not have to put a huge amount of money into advertising. This is outstanding.000 part-time. They have recently started promoting environmental-friendly operations. the “Bean Stock” is employee stock options that the employee can purchase with up to 14% of their gross pay. This is not only a benefit to the employees. every employee is given twenty-four hours of in-store training. but it 57 . As long as they continue to please their customers. As mentioned earlier. They also focus on human resource management to increase their employee satisfaction. Human Resource Criteria Starbucks human resource management is probably its larges intangible assets. it still strives to please all of them. Even though it employs a total of 1000 full-time. because most companies only provide benefits to full-time employees. Starbucks provides full health care benefits to anyone who works more than 240 hours in a quarter. This will.” As a reminder.

For example.also in turn benefits Starbucks. but it also affects the performance of Starbucks. In addition to these basic benefits.which is well-known for its benefits). they extended their military reserve policy to benefit their employees that are enrolled in the services. post-9/11.” which is a 401K plan for all employees.” but they also lead to high employee satisfaction rates. 58 . they care more about the profitability and growth of the company. the average satisfaction rate for Hewitt’s “Best Places to Work” is only 74%. given that employees also have the stock option benefits. Not only do all of these benefits make the employees feel like they have “value. The highest matching percentage that I have seen by a large company is 8% (USAA. The average job satisfaction for Starbucks is 82% compared to the average of 50%. The main difference in Starbucks and other companies is the fact that Starbucks makes these benefits available to all employees. and lower turnover rates. which is a pretty reasonable amount. greater customer service. Starbucks matches employee contributions up to 4%. In fact. Employee satisfaction leads to better performance. Once again. Starbucks also has other policies that satisfy its employees. Since the employees own part of the company through these stock options. and most other companies just do so for full-time employees. not only does this phenomenal human resource management satisfy the employees. They also incorporate the “Future Roast.

Its retail activities allow the company to expand at an exponential rate. We did one of our company (Starbucks) because we would like to know some of the external and internal factors that will make our decisions for the future favorable or unfavorable. Opportunities. The broad product/brand offering compliments the strategic innovation initiatives of the company through new products and appeals to a more extensive consumer market. business venture. or company. Market Potential Store Operation Product Recalls Wide Product and Brand Offering Opportunities Strategic Growth Initiatives Threats Government Regulations Third Place Experience Intense Competition Focus on Emerging Economies Supply of High Quality Arabica Coffee Beans (Source: GlobalData) A SWOT (Strengths. Weaknesses. The company operates in a highly59 . and Threats) is an evaluation of a project.SWOT Analysis – Overview Starbucks SWOT Analysis Strengths Sound Financial Performance Weaknesses Overdependence on the U.S.

Strengths Unparalleled Financial Performance As shown in “Current Performance” of this paper.e. they could be in a position that they have yet to experience (i. Starbucks also 60 . The company reported an operating profit of $ 1.competitive “red ocean. an increase of 9.4 million during the fiscal year 2010.56% over 2009.4 million (USD) during the year (ended October 2010). Potential Store Operations Starbucks’ expanded retail business has enabled it to increase its market share as well as dive into other markets and become one of the leading coffee retailers. the company sells its products through retail stores (both owned retail stores and licensed stores). As everyone knows.” If the company is unable to maintain the quality that they currently offer. as well as the loyalty of their customers. Its retail stores are featured at high-traffic and high visibility positions. This current performance is an absolute strength that is certainly a competitive advantage that most competitors envy. To recap. an increase of 152. The increase in operating profit resulted in the increased net profit levels (GlobalData).419.54% over 2009.707. lessened market position). the company reported revenues of $10. Starbucks’ strong financial position helps it in achieving stability and the necessary margins for funding to expand its operations as well as target new markets.

The company's diversified product and brand portfolio supports the innovation process. Starbucks also sells its products through licensed retail store operations. In 2010.locates stores in shopping malls. It focuses on locations that provide convenient access for both pedestrians and drivers. The portfolio of the company’s brand includes premium Tazo teas. as already discussed. It also sells beverages which include bottled Frappuccino beverages and Starbucks DoubleShot espresso drinks at various retail locations. Wide Product and Brand Offerings Starbucks has an unequivocally diversified product and brand offering in the target market segments. Starbucks has made efforts to expand development of Drive-thru retail stores (GlobalData). seasonal novelty items and Starbucks cards. Starbucks opened 13 company-owned stores in the US and 97 internationally. coffeemakers. Seattle’s Best Coffee and Torrefazione coffee. coffee grinders. the company had a total of 8. travel products. appeals to a broader customer base and enhances its revenue stream (GlobalData). In 2010. to provide more access and convenience for customers. Additionally.833 company-operated retail stores and 8. 61 . which. Starbucks opened 166 licensed stores in the US and 335 internationally to the public. At the end of fiscal year 2010. non-food items include mugs. In addition to food services.025 licensed stores. storage containers. in launching new products.

Starbucks obtained about 78% of its total sales from the US market.000 Starbucks Barista Blade Grinder and Seattle’s Best Coffee Blade Grinder. Product Recalls In 2009. announced the recall of about 550. the company lacks a global presence equal to its domestic one. the company’s operations are principally located in the US. posing 62 . A significant amount of the company’s sales are generated from the US region. The recall was made after they received reports of the blades failing to turn off or turning on unexpectedly. acting as an obstacle for the expansion of the company (GlobalData). Even though it has operations worldwide. however. Thus. If the company concentrates only on the US. with the company. Starbucks sells its products in the Asia Pacific. During 2010. manufactured by Tsann Kuen (Zhangzhou) Enterprise. the US Consumer Product Safety Commission. with respect to its revenue. Middle East and African regions. The geographical concentration increases the risk the company is exposed to. then it would lose out on the potential Blue Oceans arising in the international market. while its International segment accounted for 22%. the contribution of revenues from the international segment is significantly less than its domestic counterpart. Europe.Weaknesses Overdependence on the US Market In terms of geographic spread.

In 2010.200 glass water bottles due to laceration hazard. “Third Place” Leader Experience The company’s goal is to become the leading retailer and brand of coffee in each of its target markets by selling the highest quality coffee and 63 . which provides expansion potential for the company. the segment’s revenue increased due to the launch of Starbucks VIA Ready Brew by approximately $22 million. and impacts its performance positively. Hence. besides a negative impact on consumer confidence (GlobalData). Starbucks and China agreed with the Yunnan government for planting coffee in the region. Product recalls such as this will cause unexpected expenditures. The instant-coffee market is estimated at $17 billion. In 2009. recently in 2010. posing a hazard to consumers. Starbucks is also expanding the portfolio of its non-branded brands.the threat of lacerations. Opportunities Strategic Growth Focus The company is focused on strategic growth. Starbucks started selling “VIA Ready Brew” an instant coffee in its shops across the US during year 2010. The recall was made after the company received reports of the glass water bottle breaking when the consumer removed or inserted the stopper. Furthermore. In October 2009. the company can leverage its presence in European countries like the UK to tap the massive market segment potential (GlobalData). These grinders were sold by the company between 2002 and 2009. the company recalled 12.

China is expected to become the second largest market for the company. Wi-Fi internet access in all stores also makes it a place where customers can work. With the company expecting to open about 500 international stores during 2011. the company has increased in Japan through consumer packaged goods. their strategy of making its retail viable by selectively opening stores in existing markets and opening locations in new markets supports its long. India. and also opened about 30 stores in China. where the company has about 800 stores. and Brazil is a main goal for the company. the Indian economy is anticipated to increase around 9. in 2010. The company predicts potential for thousands of stores in the country. Hence. Events also take place at Starbucks. after the US. perfect for casual meetings and a calm experience away from the hassle of daily life. Furthermore. more stores are likely to be in China. In addition. India is one 64 . According to IMF forecasts.7% in 2010 and 8. the Chinese economy is expected to grow at 10. keeping with the company's strategy of making their locations a community center and to garner the loyalty of local customers.products by giving each customer an individual Starbucks Experience. Focus on Emerging Markets Concentration upon realizing the emerging market opportunities in regions such as China.term strategic goals (GlobalData). It owes its success to the up-and-coming trend of its coffeehouses as a convenient “third place” out of home and work.6% in 2011.4 % in 2011. Also. Russia. largely due to the increasing domestic demand.5% in 2010 and 9.

the Environmental Protection Agency and the Department of Commerce. and distribution. storage. one of the largest suppliers of premium coffee beans in India. including those issued under the Occupational Safety and Health Act (OSHA). labeling. Furthermore. including the Food and Drug Administration. regarding the production processes. In summation. Threats Government Regulations Starbucks. as well as state regulations. The company is restricted to certain health and safety regulations. particularly from China and India (GlobalData). The failure to comply with the various regulations may expose Starbucks to liabilities or harm existing operations. is subjected to numerous regulations by federal agencies. which could decline in its profitability (GlobalData). product quality. the company can expect to highly benefit from the strong economic growth provided by the emerging markets. Also in 2011. being a specialty coffee roaster and retailer. Intense Competition 65 .of the most rapidly changing countries globally. packaging. Starbucks Coffee Company contracted into a Memorandum of Understanding with Tata Coffee. they are subject to regulation by the Federal Trade Commission. the Department of Agriculture. the Federal Trade Commission.

specialty retailers and specialty coffee stores under the whole bean coffee segment. Supply of High Quality Arabica Coffee Beans The company’s business depends on the availability of high quality Arabica coffee beans. Barista. Starbucks competes with various manufacturers and distributors of coffee products that have significantly greater financial. If Arabica coffee beans from a market become unavailable or too expensive. Aroma Cafe. and thereby hinder its market position (GlobalData). could become unsound. The political and economic circumstances in those regions. Caffe Nero. Caribou Coffee and Costa Coffee. Cafe Republic. The company’s other competitors include coffees sold through supermarkets. the company's chief competitors include McDonald's Corporation. Furthermore. Diedrich Coffee. and Central and South America. Indonesia. marketing and distribution resources. with Africa. then the company may be forced to withdraw particular coffee types and blends or replace coffee beans from other regions in blends. the company’s whole bean coffees and its coffee beverages compete indirectly against all other coffees in the market. Common substitutions and changes in product lines could lead to cost 66 . which might affect the company’s ability to purchase coffee. this competition could lessen the sales of the company. Starbucks roasts coffee beans from various regions to produce different blends of coffee.Starbucks’ markets are highly competitive with the entrance of more new players. Green Mountain Coffee Roasters. As mentioned. Allied Domecq. If the company is not able to preserve their product quality and loyalty.

the company hires designers to come up with artwork for commuter mugs.increases. Once a user registers his/her card to the app. Starbucks’ forte is incorporating differentiated features such as their different flavored and seasonal coffees that no other company offers. For example. Testing done by Starbucks has shown that this is fastest way of payment. the political uncertainty in growing regions could decrease the availability of Arabica coffee beans necessary for the operation and growth of the business (GlobalData). new products. 67 . Competitive Strengths As you can see from the SWOT analysis above. all that is needed is to hold the phone to a scanner that will charge them for their purchase. Starbucks sustains a competitive advantage by constantly looking for new ideas. Starbucks launched a Smartphone app in January which allows users to pay for coffee or latte with a barcode. as well as new experiences for guests. Thus. and changes in the gross margins. Starbucks has key strengths in: • • • Innovation / Wide Product Offering Distinctive Brand Name Unparalleled Financial Strength Starbucks has a reputation for new product development and creativity. As stated earlier. The app has already experienced 3 million people who have bought their coffee from their phones.

With statistics showing their continual growth. Starbucks sells its branded packed coffees and teas in grocery and warehouse club stores throughout the US through its licensing relationship with Kraft Foods. This could make them slow to diversify into other sectors should the need arise. One customer on their website was quoted saying. Starbucks Corporation’s most valuable resources and assets. that is non-imitable. Starbucks. For instance. the largest food and beverage corporation in the U. It is evident that the Starbucks brand is one of their greatest assets and clearly. the retail coffee. with regards to a distinctive competency. has produced a world leader in the coffee industry and made their brand distinguishable wherever you go. undoubtedly. many companies would not be able to sustain the growth and prosperity that Starbucks has and will continue to have.com). in turn. This.S. which some people find euphoric” (starbucks. Almost everyone in the world knows that Starbucks serves premium coffee brew and holds high standards with concern to all their products. rather. has been able to sustain their advantage and become an industry leader.The organization is dependent on another main competitive advantage. Starbucks also has an established relationship with Kraft Foods. Although their resources may be imitable. a total coffee experience. or a mocha latte. “Starbucks is not just a pound of coffee beans. are unquestionably their premium product and their brand. 68 .

Strategic Questions: • • • • • In what areas do our competitors have the biggest cost advantage? What is driving competitor’s profitability? How much flexibility would our competitors have in a price war? What is the client’s position? What are the strategic implications of the full potential cost position? Tactical Questions: • Where should we focus our cost reduction efforts? (e. We will discuss where Starbucks strengths and weaknesses are.g. Value Chain The value chain examines an organization's functional activities and how they create customer value. wage rates and amounts of raw material inputs) • Which cost elements would decrease significantly with an increase in scale? • Which cost elements might benefit from different business practices? The first step in conducting a relative cost position is designing a value chain.Relative Cost Position The relative cost position (RCP) is a method for estimating the full cost of a company's product relative to its competitors. Porter believed that there are 5 primary activities and 69 The 5 primary activities .

this is turning the coffee beans into actual cups of coffee/espresso. service is support for our customers after they receive their product(s) (netmba). The third level of the value chain.4 support activities involved in the value chain and they are designed to increase customer value. but we must know how well our organization is performing these activities (netmba). the size of packaging. Lastly. Some of the cost drivers that can influence raw materials are quality of ingredients. outbound logistics. It is one thing to know what these activities are. What kind of packaging is used. advertising accounts for 15%.1 . mix and volume of ingredients. amount of waste. and the cost of the ingredients needed. Marketing and sales. indirect overhead is 8%. In our company. and 70 $1. direct labor is 17%. The second step in the cost position is to identify cost elements and drivers. Operations are turning our inputs into finished goods. and sales and marketing is 20%. Raw materials accounts for 25% of total costs. Inbound logistics covers the receiving and warehousing of raw materials and the distribution process. is the warehousing and distribution of our finished goods. is finding out what customers want and how much sales we produce. packaging is 7%. what material is being used.

and if there is overtime or benefits. number of coffee machines. Direct labor depends on the number of total employees employed and how many hours they work. Some of these items include: non-direct labor costs.S. and the wages and benefits paid to these sales people. Advertising is based on what is spent on advertising. financial analysis.S. how old are the machines. and product brochures. and what are the maintenance costs. Some of the different government agencies that offer information about different companies are: The U. labor unions. how much the coffee machines cost. U. utilities. consumer promotions. equal employment opportunities commission. and by examining patents and trademarks. Sales and marketing cost drivers are things like trade promotions. department of labor. 71 . There are multiple places to get information about your competitors including: current employees.what’s the cost per package are some of the forces that control the packaging aspect. the hourly wages that are paid. government fillings. number of sales people. Indirect overhead are things that are not directly related with the production of goods. The third step is to scour different information and sources for cost data on competitors. The next step in calculating our relative cost position is to calculate the full costs position and savings which allows us to focus on areas Cost Saving Levers with the greatest potential cost savings (netmba). environmental protection agency. wages and benefits. it is important to be persistent and creative but at the same time being ethical in retaining this information.

what kind of ingredients are used and the total amount of ingredients understanding your competitors' cost structures and at the same time Wage Rates. but this price difference can be explained by the level of customer service that is instilled at every Starbucks location.how many employees are needed to run each store. and pays them well above the industry average.are there unions involved that could understanding our company’s full potentialpossibly increase rates. 72 .Price. cost position. The key to evaluating a relative cost analysis is gathering and Staffing. There is no surprise that Starbucks has higher prices amongst their competitors.Negotiate with suppliers and quality of ingredients. Amount used. European Coffee Industry”—Allegra Strategies 2009 to 2010 • “100 Best Corporate Citizens”—Corporate Responsibility Officer/Business Ethics 2000 to 2010. Starbucks only hires the best people. Strategic Issues and Problems • One of the “World’s Most Ethical Companies”—Ethisphere 2007 to 2010 • “Most Ethical Company.

Some common questions that keep popping up include: • Will consumers continue to be okay with. if the company wishes to continue the same success. a blue ocean was created in the form of specialty premium coffee. and pay a steep price for specialty coffee in order to enjoy the atmosphere of a store or the exceptional customer service it offers? • Have McDonald's and Dunkin' Donuts’ entrance into the specialty coffee industry redefined the success factors by offering high 73 . the industry’s success factors must be revisited and reassessed. The specialty coffee industry has developed in direct response to a growing consumer demand for quality experiences.These are only a few of the many awards that the Starbucks Corporation has received for being an ethically sound company. The Starbucks Corporation’s original success came from its’ creators’ abilities to break away from the red ocean coffee industry. we bring the unique Starbucks Experience to life for every customer through every cup. it is hard to find a flaw in the company’s mission or strategy. there was a preconceived notion that coffee was just coffee. Before Starbucks came into the picture. and redefine the way that the specialty coffee industry functioned. “Through our unwavering commitment to excellence and our guiding principles. However. By ignoring this type of thinking. It is clearly stated on the Starbucks website. and that it could not be sold at a premium.” With that in mind. and Starbucks was able to thrive. This industry is in a period of rapid growth.

be distracted from Starbucks’ “brand” and ambiance? Questions such as these lead an industry leader. As an industry moves from the beginning stage of development where there are few competitors and limited barriers to entry. During this transition from a growing industry into a mature industry. and structural setup. it would be extremely advantageous to keep a close eye on the industry and market competitors. it then continues into the growth stage. This leads to an increase of competition. A company like Starbucks has the main concern of competitors surpassing them. specifically those that sell similar products. and in result. 74 . such as Starbucks. To avoid this.com/newsletter/422). into an analysis of their company—this would include their systems. This already has happened in the area of cost. then Starbucks is in big trouble. organization. and if product quality is surpassed as well. “most industries approach maturity. “Many firms in this stage of development will find it difficult to compete” (http://espresso101. it becomes very important that Starbucks realizes what changes need to be made in order to acclimate seamlessly. and then in time. Doing this successfully is very important. especially if Starbucks wants to continue to be the industry leader.quality coffee at substantially reduced prices? • Will customers be attracted to the other options competitors are introducing. All of this is reliant on achieving functioning efficiency while keeping up the ability to create new products and having great customer service.

2007). but at a competitively low cost. Starbucks needs to be focused on creating new innovations. can be surpassed by the growing competition. and Coco-Cola. and “game changers”. Compared to other top companies like Microsoft. meaning they get to call the shots. Google. but if not careful. marketing strategies. The economy is ever-changing as 75 . Starbucks is mainly a “word of mouth” and reputation company. Starbucks has spent significantly less amount of money on advertising.com. With the coffee industry still in its’ growing stage. In the side-by-side comparison. This corporation is the industry leader.whom we have discussed. which have made them successful and see if those will still work.marketingpilgrim. it is critical that the company as a whole find ways to provide high quality coffee. Starbucks should also reassess the factors. With many industry competitors having Starbucks as their main target of competition. They do not spend a lot of money on television commercials or advertisements. This proves the above statement of how they build “most of their business on their branding and by creating happy customers and making the brand part of a culture” (www. it is interesting to see how substantial the difference is between all of the companies and the amount of money Starbucks spent on advertising in previous years.

Third. Expanding internationally would also force the company to rely on 76 . We suggest continuing to seize international opportunities at a constant but steady pace. continue to expand into international markets. Second. expand on their already broad menu. They must find excellent people to foster the process of expanding to a new country. devise a new marketing strategy. Using its financial strength. this process must be steady. China is their primary target currently. Options/Choices for Starbucks From the gathered information. The expansion strategy must incorporate the core competencies and advantages of the company. First. There is much more room for expansion and growth. Starbucks has but only touched the available and potential global markets.well are the consumers in it—this causes companies to have to adapt to these said changes. The business ties they have created over the years must be used carefully and not put too much strain on any suppliers and put the entire company at stake. we have come up with three options that Starbucks could consider. As stated. Starbucks can blossom into an international business powerhouse. and long standing relationships. it is to be assumed that Starbuck will remain to be the industry leader in specialty coffee. However. international experience. If the proper tweaks and changes are made.

implementing deli items such as Paninis or wraps. Build Substantial Competitive Advantages In 2008 Starbucks was faced with the reality that. in competitive markets. they were heavily impacted by the recession. From spending very little. This would continue to further differentiate the Starbucks brand. Given this. inform loyal customers of new menu items. 77 . as least as a trial. as we have determined is key. especially with the new logo. As an industry leader. many companies are benchmarking Starbucks. perhaps. which we determined to be a weakness. Starbucks can implement a proactive strategy that includes new and innovative menu and convenience items. the company could boost spending to include things such as TV ads and other untested marketing outlets. and if our second suggestion is adopted. Starbucks also has the opportunity to change their marketing strategy. while they were dominating specialty coffee. relatively. Most major competitors involved in cutthroat competition include major forms of advertising a key for differentiation.other markets than the United States. This could possibly be an opportunity to expand their brand recognition. which.

even though they are being challenged by major ‘fast food’ restaurants such as McDonald’s.9%. During that year. they have to realize they cannot really compete as a fast food chain without stepping out of their niche market. 78 .9% or $390.8 million. This was offset by reduction in cost of around 6. reduction in stores (both in the US and international) and the reduction in personnel resulted in Starbucks still ending up with an increase in net earnings of 23.They took action and closed approximately 600 stores in the US and reduced staff by almost 1000 people. As Starbuck continues to recover from the recession they can protect their place in the market by doing a couple of things. Even after taking this action Starbucks still saw a decline in total net revenue in 2009. The restructuring. Starbucks expanded at a very rapid pace leading to oversaturation in some markets. A perhaps higher priority for Starbucks is the method with which they handle future expansion. Starbucks needs to continue to stick to the strong base that the company has using all the resources that they currently have in place.6%. During that time they managed to still increase net earnings despite a fall in net revenue as a result of reduction of stores. They were on every corner in some areas which appeared to lead to loss of profitability for some stores. total revenue fell 5. First. This is indicated by the results seen when Starbucks reduced the number of stores in 2008 and 2009.

they need to avoid making a similar mistake. and it is reflected in the customer service that every patron receives. At other stores. The customer sees this. Their method of making each employee feel like they are part of the store is a great business practice. Starbucks needs to have a controlled territory for each store which will help ensure the profitability of each store. having a large numbers of stores that do a good business or fewer stores that have a great business. do as little as possible. Training employees is very expensive and every time a trained employee is fired or quits.) or keeping with their original coffee shop/club type atmosphere or if they can maintain a balance of the two. customer service as a whole goes down. as the economy improves. and many other profitable chains. most employees seem content to show up. Like McDonalds. etc. in essence. They will need to decide what is more important.Therefore as they move to increase stores in the future. Each employee feels ownership of the store they work for and that trickles down to how and why they work. This helps protect not only profitability but also protects the integrity of the franchise and the brand image of the corporation and to some degree the exclusivity. 79 . This leads to higher turnover. and leave. such as McDonalds. They also need to determine if they are better served with being more accessible (in places like Target. supermarkets. Starbucks' most sustainable advantage is their employees.

and happy customers are the key. and the comfortable chairs and couches but. Sure. The happier they are. The happy employee at Starbucks is why there are happy customers in Starbucks. there is the music. the longer they stay and before you know it. the customer is why businesses operate. There are many things that separate the Starbucks' experience from everywhere else. 80 . It is the employees’ “making it their own” that leads them to learn more about their job and take pride in it.The attitude of a Starbucks is different. The employees create the atmosphere and sustain it from when the customer enters the store until when they leave. You could put all of those things in a McDonalds and for the most part it would not change the way people felt they were treated and served. you've got a veteran crew that knows not only their job but the jobs of everyone around them. After all. the free wireless internet. what most people don't realize is that it starts with the employees.

Appendix 81 .

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