TheFutureofStarbucks

AnAnalysisbyTeamMacchiato:
ZackHigbee
ChenYeeLiaw
CalvinTing
KevinTjho
MichelleTon
1
ExecutiveSummary
StarbucksCorporationhasarguablybeenthemostsuccessfulcoffeechaininthepastfewdecades,
usingtheiraggressiveexpansionstrategiestopushoutmuchofitscompetition.Throughits
expansion,StarbuckshasfocusedoncreatingadensenetworkofstoresallaroundAmerica,while
alsoopeningupnewlocationsallaroundtheworld.Byleadingtheretailcoffeemarket,Starbucks
isabletosellitscoffeeforapremiumpriceandincreasetheirprofitability.Itssuccesscanbeseen
inthegradualriseofitsstockpricesfrom19922007,reachingalmost6000%oftheirinitial
publicoffering 1 .

Yet,intherecentyear,themarkethasshownStarbuckstobeinconstantdecline,astheirstock
hasdroppedabout$15/share,avaluetheyhavebeenabovesince2004.Also,lookingat
StarbucksSECfilings,wecanseethatitscomparablestoresaleshavedecreasedsignificantlyinUS
marketssince2004.ThishaspromptedTeamMacchiatotoevaluateStarbuckscurrentstrategies
inadditiontotheretailcoffeemarketasawhole.Toevaluatetheproblem,oneofthebiggest
questionstoconsideristowhatextentisthedesignercoffeemarketjustafad.Inotherwords,
willtheallureofgourmetStarbuckscoffeebemaintainedorwillmoreappealingoptionsthreaten
thesuccessofStarbucksprimaryproduct?Ifthedesignercoffeemarketisindeedafadindustry,
weneedtoevaluateStarbuckspossibleoptionstoavoidfurtherdecline.

ProblemDefinition
TheoverarchingquestionthatweshouldanswerishowStarbuckscanstayprofitableinthefuture.
Agoodplacetostartinvolvesevaluatingthecurrentmarketforcoffee;fromthispoint,wecan
gatherinformationaboutmarketperformanceanddeterminetheextenttowhichdesignercoffee
appealstocurrentconsumers.Throughmarketanalysis,wecaninvestigatewhetherornotthe
demandforgourmetcoffeeiswavering.Wewillevaluatewhethercoffeecompaniesingeneral
arehavingtroublemaintainingprofitabilityorifitisjustStarbucksthathasdeclinedinrecent
times.Ifthemarketisindeedindecline,wemustanswerthefollowingquestions:

Ifdesignercoffeeisjustafad,isthetemporarypopularityapproachingtheendorhasthefad
alreadyended?

WhataretheoptionsavailabletocompanieslikeStarbucksthatspecializeinfadcoffee
products?

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

1
www.finance.yahoo.com,SBUX.

2
businessstrategies.Also,whatstrategiesshouldStarbuckspursueinthefutureinordertoavoid
furtherdeclineandhowcanStarbuckscounteracteffortsfromcompetitors?

TheCurrentSituation
Comparedtotherestofthemarket,duringthepastyearStarbucksstockhassteadilydeclinedin
value.Meanwhile,PeetsCoffee,oneofStarbucksmajorcompetitors,hashaditsstocksperform
aboutthesameastherestofthemarket,followingthegeneraltrendofrisesanddropsthatthe
marketexperienced.

SinceMayof2007,Peetsstockhasremainedsteady,peakinginDecember2007at30dollarsa
share,andreachingalowof20dollarashareinthemiddleofMarch2008.Meanwhile,Starbucks
hasbeenonasteadydecline,itsstocksdroppingby50%oftheirvaluesinceMayof2007,from
about30dollarsasharedownto16dollarsashare.ThelasttimeStarbucksstockwastraded
above20dollarsasharewasattheendofJanuary2008.Incomparison,inthepastyear,the
lowestPeetsstockhasbeenwas19.89ashare.

ConsideringotherminorcompetitorswhohavebeenencroachingonStarbucksscoffeebusiness,
bothMcDonaldsandBurgerKinghavebeenoutperformingthemarketinthepastyear.Lastyear,
ConsumerReportratedMcDonaldscoffeeaboveStarbuckscoffeeforthefirsttime.

AnotherimportantfinancialaspecttoevaluateisStarbuckscomparablestoresales,orthe
percentageofrevenuegrowthamongtheirexistingstores.SinceStarbucksprimarystrategyisto
expandatamuchhigherratethanitscompetitors,itismuchmoreusefultogetasenseofhow
Starbucksexistingcoffeestoresareperforming,ratherthanincludingtheirnewlyexpanded
locations.AglanceatStarbucksSECFilingforthefiscalyearof2007revealsthatStarbucks
annualcomparablestoresalesgrowthhassteadilydecreasedfrom11%in2004to4%in2007in
USmarkets 2 .InFebruaryof2008,Starbucksreportedthatitscomparablestoresalescontracted
1%,dueto2%increaseintheaveragevaluepertransactionoffsetbya3%decreaseinthenumber
oftransactions 3 .Thoughtheirinternationalcomparablestoresalesgrowthhasconsistently
remainedaround78%,theiroverallconsolidatedsamestoresalesgrowthhasdecreasedfrom
10%in2004to5%in2007.Thisdramaticdecreaseingrowthmaybefinancialevidencethat
Starbucksperformanceasaspecialtycoffeechainiswaning.

Whencomparingnetrevenuegrowthinstead,PeetsandStarbucksbothhaveshownarelatively
consistentpercentageforthepastthreeyears(1820%) 4 .Additionally,inStarbucksmostrecent

2
Starbucks10KFiled11/29/2007(SECWebsite)
3
Starbucks10QFiled2/8/2008(SECWebsite)
4
Starbucks10KFiled11/29/2007(SECWebsite)

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

ProblemAnalysis
Asoflate,Starbuckshasclearlybeendecliningcomparedtoitsmaincompetitorsandcomparedto
themarket.Onecauseofthismaybethecurrenteconomicdownturn.Theslowdowninthe
economyhaschangedpeoplesspendinghabits.AccordingtotheAssociatedPress,Researchby
WSLStrategicRetailfoundthatpremiumbrandsorfoodandspecialtycoffeesare[among]the
topareaswherepeoplearetrimmingtheirspending. 6

Starbucksconsidersitselfapremiumcoffeeprovider,asisevidentfromthestatementfromThe
EconomistHowardSchultzoncesaidthathefindsitpainfulwhenpeoplecomparehisfirm,
Starbucks,toMcDonald's.Thefounderoftheworld'sbiggestchainofcoffeeshopsthinksavisitto
Starbucksshouldinvolveromanceandtheatre,afarcryfromthepitstoplikeexperienceof
eatingamealattheworld'sbiggestfastfoodchain. 7

AccordingtoTheEconomist,NotallofStarbucks'poorperformanceisofitsownmaking.Prices
forfoodcommoditiesareatalltimehighs,promptingthefirmtoincreasepricestwiceinthepast
year.Thishasscaredoffcustomers,whohavebeendefectingtofastfoodchainssuchasDunkin'
DonutsorPaneraBread,whichsellreasonablecoffeeforaslittleasaquarterofthepriceofa
fancyStarbucksbrew.7

Meanwhile,ononefront,Starbuckshascontinuedtoembracethislegacyofuniqueexcellence
andhighqualitycoffee.AccordingtoUSAToday,Schultzsaysthecompanyishavingsuccessin
BostonandSeattletestingapremiumcoffeethatsellsfor$2.50percup,aboutabuckmorethana
similarcupoftheregulardripcoffee.We'regoingtogoupinexperiencenotdown,hesays. 8

FacingcompetitionfromMcDonaldsandDunkingDonuts,Starbucksexperimentedwith$1
bottomless8oz.cupsofcoffeeforashorttimeinSeattle.However,Schultzaxedatestofdollar
cupsofcoffeeinSeattle8.Inaddition,hesspecificallystated"We'renotinthefastfood
business."8

5
Starbucks10QFiled2/8/2008(SECWebsite)
6
http://money.cnn.com/2008/04/25/news/economy/doing_without.ap/index.htm
7
http://www.economist.com/business/displaystory.cfm?story_id=11021146
8
http://www.usatoday.com/money/industries/food/20080318starbuckschanges_N.htm

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

AnalysisofStarbucksUsingPortersFiveForces
1. TheThreatofSubstitution
Substitutes(Products)

OtherbeveragesapartfromStarbuckscoffeeandteaExamplesincludesoda,fruitjuice,
smoothies,water,beerandotheralcoholicdrinks

Otherquickgrabfoodsapartfrompastries,muffins,doughnuts,etcsoldatStarbucks.
Examplesincludeburgers,burritos,tacos,sushi,snackfood

Substitutes(Environment/Ambience)

Lowerendorlessluxuriouscoffeeplaces

Placesthatofferpeopleaplacetohangout,chat,relaxorevenwork.Examplesincludetea
houses,fastfoodplaces,icecreamparlors,sidewalkcafes,andbarsandpubs

2. TheThreatofNewEntry
Theentrybarrierforthecoffeeindustryisrelativelylow,evenforpremiumcoffeelikeStarbucks.
Anylargeandwellfundedcompanywherecapitalisnotaproblemcouldbepotentialentrants.

Someofthemorecurrentandongoingthreatsofnewentrantsincludefastfoodchainssuchas
McDonalds,BurgerKingandDunkinDonuts.

3. CompetitiveRivalry
Othercoffeechains.ExamplesincludeCoffeeBean&TeaLeaf,GloriaJeansCoffee,Peets,and
SanFranciscoCoffeeHouse

Smallerprivatelyownedcoffeehouses

Secondarycoffeeproviders.ExamplesincludeMcDonalds,BurgerKing,DunkinDonuts

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4. TheBargainingPowerofSuppliers
NotmuchbargainingpowerforcoffeebeansuppliersduetotheimportanceofStarbucks
businesstoanyindividualsupplier,andthefactthatStarbucksprobablyaccountsforalarge
percentageofanyindividualsupplierssales..ThisgivesStarbuckstheabilitytodictatethepriceof
coffeebeansales.

Similarly,suppliersofpaperandplasticproducts,suchascups,napkins,lids,etc,haveverylittle
bargainingpowerduetothelargeamountofalternativesourcesStarbuckscoulddrawfrom.In
addition,Starbuckshasformedcontractswithsuchsuppliers,givingthemeffectivelynobargaining
power.

Thereismorebargainingpowerforsuppliersoftechnologicalinnovationssuchasautomated
coffeemachines,latteandespressomachines,etcbecausetherearenotasmanysuppliersfor
suchequipmentasthereareforcoffeebeans.

5. TheBargainingPowerofBuyers
Inthepast,buyersdidnotreallyhavebargainingpowerwhenitcametopremiumcoffeesuchas
Starbucks.ThesheerscaleofStarbucksbusinessreducesthebargainingpowerofanysinglegroup
ofbuyers.

WithnewerentrantsandcompetitorssuchasMcDonaldswhoclaimtoofferpremiumroast
coffeeofreasonablequalityforlowerprice,buyersnowhaveslightlymorebargainingpowerthan
theyvehadinthepast.

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

Strengths:
Prettymucheveryone,atleastwithintheUS,knowsthenameStarbucksandassociatesitwith
highendcoffees.Inaddition,peopleseeStarbucksasthebiggestandbestinthebusiness.Thisisa
significantstrengthbecauseStarbuckshasanaturaledgeoveritslesserknowncompetitorsinthat
peoplealreadyassociateitwithahighqualityandpopularexperience.

TheenormousnumberofStarbuckslocationsallowsthemtoreachalmosteverydomesticmarket
aswellasagoodnumberofinternationalones.Thisallowsthemtoimplementnewproducts
quicklyacrossalargedemographicandensuresalargeexposureofclienteletopreventnew
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entrantsfromgainingmarketshare.Additionally,takingadvantageofexistingestablishmentssuch
asBarnesandNobleandopeningsmallercafsinotherbusinessesallowsthemtoexpandtheir
marketwhilekeepingcostslow.Thisalsoallowsthemexpandtheirmarketingpotentialto
differentdemographics.

WhiletheirbusinessisntaswellestablishedinternationallyasacompanylikeMcDonalds,thereis
anextremelylargebenefittohavingaglobalizedbusiness(seeAppendix).Asidefromtheobvious
scaleadvantages,beinginternationalalsohelpstopreventtheriseofinternationalcompetitors
thatmaybuildupenoughcapitaltojumpintotheAmericanmarket.

Starbuckshasawellknownpracticetomakeeffortstopreservetheenvironmentandbeethicalin
itsdealings.Thisgivesthecompanyagoodpublicimage,whichservestocountersomecriticism
thatitssheersizecreates.Itssizealsohelpsitspositioninthemarket.Beingaheadofallits
competitorsintheindustryintermsofsizeandvolumeallowsthemtosetthepricesandprevent
thegrowthofothercompanies.

Starbuckssuccessfullychangedthepublicopinionofcoffeeproductsfromacommoditytoaluxury
good,andinsodoing,enabledanincreaseinpriceforthesegoodstoamuchhigherlevelthan
wouldhavebeenpossiblebefore.

Starbucksmissiontomakeitsstoresathirdplaceforpeopletogobesidesworkandhome
comesbyofferingserviceslikefreeinternetandcomfortablechairs.ThisgoalgivesStarbucksthe
ambiancetogoalongwithitsproduct.WhileStarbuckshasanexceptionaledgeinthecoffee
industry,ithassomeweaknessesthatmayleaveitvulnerabletochangesinthemarket.

Weaknesses:
WhilemostpeopleconsiderStarbuckscoffeealuxurygoodandwouldpaywhateverpriceisset
forit,thereisanincreasingopinionthatStarbuckschargestoomuch.Theyarealsoveryinflexible
intermsoflocation.Forexample,Starbuckschargesthesamepricefortheirproductswhether
youreinLAorBeijing.

Basically,themainproblemforStarbucksisthatitsentirebusinessrestsonthecoffeeindustry.If
coffeedoesturnouttobeafad,theymustdiversifyorgooutofbusinesswhereasother
competitors,suchasDunkinDonuts,haveinvestmentsinavarietyofindustries.

Inadditiontofixingitspricesforinternationalcustomers,Starbucksalsohaslackedsometactin
thewayofinternationalrelations.InIsrael,Starbuckshashadahardtimetakingoffbecauseit
wontmaintainkosherstandards.Ingeneral,Starbuckskeepsitsbusinessplanformulaicand
centralizedanddoesnottailoritsbranchestothelocationstheyarebeingplacedin.

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

Opportunities:
BypurchasingcompaniessuchasSeattlesBest,XMCaf,andTazoTea,Starbucksusedadifferent
brandnametogetbusinessinadifferentmarketniche.Starbucksalsooffersarangeofproducts
thatitsellstoothercompaniessuchasitsbottledFrappuccinosandotherspecialtygoods,which
expanditsmarketatalowercostthanopeningfullbranches.

Theyusedtheirvastresourcestodevelopaninternationalbusiness.Thisgeneratedevenmore
revenueforStarbucksandreallyhelpedtodeveloptheirbrandimage.Oneoftheirbiggest
opportunitiescontinuestobeinexpandinganddiversifyingtheirbusinesswiththeirvastwealth.

Threats:
Recently,seriouscompetitionhaspresenteditself.Severalcompaniesaredevelopingcoffee
productsthatrivalthoseofStarbucks.CompaniessuchasPeetsandtheCoffeeBeanhavegrown
largeenoughtoseriouslycompetewithStarbucks.Othercompanies,suchasMcDonalds,Dunkin
Donuts,BurgerKing,etc,alreadyhavetheinfrastructureinplaceandareinsteadaddingquality
coffeetotheirmenustocompetewithStarbucks.

Anotherpotentialthreatisthatcoffeeisjustafadandeventuallypeoplewillgrowoutofit.Ifthis
isthecase,Starbucksonlyhopeistodiversifyitsbusinessintootherindustriestopotentiallygive
itsomesecurityfromfluctuationsinthecoffeemarket.Becauseofthespecializationoftheir
industry,Starbucksisverydependentonsupplyfactorssuchasthepriceofcoffeebeans,which
couldhurttheirbusiness.

AnalysisofStarbucksCompetitors
WhileStarbucksisstillconsideredthedominatingcoffeechaincorporation,inrecentyears,its
holdonthecoffeehasloosenedconsiderably.TherecentcompetitionfacingStarbuckshasnot
beenfromnewcomers,butratherfromoldercoffeechainsthathaveincreasingconsumerloyalty
andfromestablishedfastfoodcorporationsthathavealteredtheirfocustoincorporatetherising
trendofcoffee.Starbuckshasalsobeenunsuccessfulinunseatingmanyindependentmomand
popcoffeehouses,whichhavebothhometownfamiliarityandloyalty.

OneofStarbucksbiggestcompetitorsisconsideredtobeDunkinDonuts.WhileDunkinDonuts
hasalwaysbeenmoderatelysuccessfulinsellingcoffee,especiallybecauseofthecomplimentary
pairingofdonutsandcoffee,inthepastfewyearsthecorporationhasbeguntoaggressively
promoteitscoffee.DunkinDonutsrecentlyhiredcelebrityRachaelRaytobethefaceoftheirnew
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advertisingcampaign,whichhastheslogan,AmericaRunsonDunkin 9 .Moreover,Dunkin
DonutshasstartedtoemulateseveralStarbucksstrategies,includingholdingafreecoffeedaya
weekafterStarbuckshelditsfreecoffeegiveaway.WhileStarbucksisstillthelargestretailchain,a
2007surveyconductedbyresearchfirmBrandKeyshasfoundthatDunkinDonutsisNo.1interms
ofcustomerloyalty(StarbuckscameinatNo.2)9.

WhileDunkinDonutshasfounditsgreatestsuccessintheNortheast,StarbucksmainWestCoast
rivalhasalwaysbeenPeetsCoffee&Tea.Starbucksstockshavefallensignificantlybelowthe
marketinthepastyear,whileothercoffeechaincompetitorssuchasPeetsCoffee&Teahave
hadtheirstocksremainatmarketlevelorabove.PeetsCoffee&Tea,whichwasfoundedonly5
yearsbeforeStarbucks,hasstayedinthecoffeeindustryduetoitsfocusonqualitycoffee.Ithas
nottriedtobeatStarbucksmoneymakingstrategiesofsellingmusicandappearingedgy,but
insteadithasremainedtruetoitscoreasacoffeeshopthatsellsqualitycoffee.Peets
concentrationonqualitycoffeecomesacrosswithstancessuchasneverresteamingmilk,roasting
beansinsmallbatches,andmaintainingalargevarietyofcoffeesforcustomerstochoosefrom 10 .

PeetsstrategyofopeningacrossthestreetornearbytoStarbuckslocationshasallowedittotake
advantageofStarbuckspopularityforitsowngain,givingconsumersanalternativecoffeeshopto
goto.Additionally,Peetshasneverconcentratedonstoreexpansion,choosingtomaintainits
currentstrongholdinCalifornia.Becauseofthis,ontheWestCoast,Starbucksdoesnotcommand
thesamecustomerloyaltythatPeetsdoes.

TheCoffeeBean&TeaLeafhassimilarlydonewellbymakingsuretoappeardifferentthan
Starbuckswithitslargeteaselectionanditssuccessfullyinnovativenature.CoffeeBean&TeaLeaf
wasthefirstcorporationtopopularizeChaiLattesandIceBlendedCoffeeDrinks,bothofwhich
havebeenmassivelysuccessfulandemulatedbyStarbucks.TheCoffeeBean&TeaLeafwasalso
abletofindsuccessinIsrael,aplacewhereStarbuckswasunabletoconquer,becauseCoffeeBean
&TeaLeafboastskosherdrinksandallowssmoking.

Starbuckshasstrongcompetitionfromothercoffeeshops,butsurprisingly,theothermain
competitorsrisinginthecoffeemarketareprominentfastfoodchains.Corporationssuchas
McDonaldsandBurgerKinghavebeenaroundmuchlongerandhaveamuchbigger
establishmentthanStarbucksdoes.Theyalreadyhavetheinfrastructureinplacetosellcoffee,
andthesefastfoodchainshaverecentlybeenpromotingwhattheyassertiscoffeethatsof
similarqualitytoStarbucksforacheaperprice.Forthesamesizedcupofcoffee,McDonalds

9
http://articles.moneycentral.msn.com/Investing/Extra/DunkinAndMcDonaldsTakeOnStarbucks.aspx
10
http://superreviews.com/articles/new/peet'scoffee:40yearsandstillgoingstrong.html

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 charged$1.35,BurgerKingcharged$1.40,andStarbuckscharged$1.55 11 .McDonaldshas
recentlyconfirmedanincreaseinitsbreakfastbusiness,whichiscitedasduetotheirNewmans
OrganicCoffeeline.BurgerKingscoffeeisalsopraisedashighqualityfastfoodcoffee,especially
withitschoicesofdecaf,regular,andturbo.

WhileStarbuckshasstrategicallyopeneditsstoresnearbysmall,privatelyownedcoffeeshopsin
attemptstodrivethemoutofbusiness,inmanycasestheefforttodriveawaythesmallermom
andpopshopshasbackfired.Starbucksmarketingfortheirnewlyopenedstoresonlydrewmore
customersfortheindependentcoffeeplacesinthevicinity.Independentcoffeeshopshaveeven
gonesofarastoopenupmorecoffeeshopsnexttoStarbucks,similartoPeetsstrategyofchasing
Starbuckslocations.Andthesmallerindependentshopshavetheupperhandintermsof
customizingtheircoffeeshoptoappealtosmalltowns,suchasendorsinghometownfootball
teams.

Starbucksfacesstiffcompetitionfromallsides.Itsmassmarketingleavesitunabletogainthe
consumerloyaltythatsmallercoffeeshopshave,andfastfoodconglomeratesarefarmore
establishedthanStarbucksis.

Fragmentation:
ProbablyoneofthebiggestproblemsforStarbucksistheconstantlyincreasingfragmentationof
theretailcoffeeindustry.ThereisnoquestionthatStarbucksdominatesthecoffeeindustryand
thattheyarefarlargerthananyoftheircompetitors.Forthisreason,theyhavenothadmuch
troublewithmarketshareinthepast.However,therearenowsomanyplayersintheindustryand
incompetingindustriesthattheyareslowlytakingtheirtollonStarbuckssales.Asanexampleof
this,McDonaldssalesrose8.2%bytheendof2007aftertheybeganscalinguptheircoffee
service. 12

TherapidupriseofthesetypesofcompetitorshashurtStarbucksjustbecauseofthesheer
volumeofthecompetition.Bothcompetingcompaniesandsubstitutecompanieshavebeenon
therise,andbecauseofthis,themarketforStarbuckshasbeenshrinking.In2005,thesalesof
organiccoffeesrose40%accordingtoFoodandBeverageInternational. 13 Thisshowsthatsmaller
butstillpowerfulcoffeecompanies,suchasVermontsGreenMountainCoffeeRoasters,have
significanttractioninthecoffeemarket.Thisapparentshiftinthemarkethascausedittobecome

11
http://www.consumerreports.org/cro/food/beverages/coffeetea/coffeetastetest3
07/overview/0307_coffee_ov_1.htm
12
http://www.bloomberg.com/apps/news?pid=20601087&sid=a38bWZePUXLk&refer=home
13
http://www.fbworld.com/News%20Releases/2006/06.12.06/organic%20coffee.html

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morefragmentedaspeoplebegintryingotherbrandsofcoffeeinsteadofimmediatelychoosing
Starbucks.Similartrendscanbeseeninthechangeofconsumerpreferencetowardshealthier
drinks.TheseoveralltrendshavefragmentedthemarketbecauseStarbucksandsimilarcoffee
companiesdonothavetheedgeontheretailindustrythattheyoncedid.Thisproblemtiesinto
themuchlargerproblemofthecoffeefad.Whileitisnotentirelydeterminedthatcoffeeisa
transientfadandnotjustsufferingfromabriefdecline,itiscertainlyobviousthatStarbucksmust
takeactiontocontinueitsdominanceontheluxurydrinksindustry.

PartofStarbucksproblemdealswiththecommoditizationofcoffeeingeneral.Rightnowcoffee
isthe5thmostwidelytradedcommodityintheworld 14 .Franklyitsasurprisethattheyhave
madeitthisfarwithoutsignificantproblems.Someofthereasonforthissuccessisintheir
specialtydrinks.Starbucksdoesnotmakemuchmoneyonitsregularcoffeesales,butinstead,it
canmakelargeamountsofmoneyonitsspecialtycoffeedrinksthatothercompanieshavea
hardertimeduplicating.

ThisnewgrowthinthespecialtydrinkindustryhasmadeitnecessaryforStarbuckstokeepahead
ofthecompetitionbygettingseriousaboutitscoffee.Thebottomlineisthatoneoftheonly
thingsthatcontinuestoappealtoregularcoffeedrinkersistheStarbucksbrand.Withrapidly
growingcompetitionandsomanynewoptionsforconsumers,theyneedtoseriouslyreconsider
theircoffeepractices.

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

14
http://tutor2u.net/economics/revisionnotes/asmarketscoffee.html

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1. StrategiestoRenewtheStarbucksBrandName
AdvertisingandPromotion

Inanefforttorenewtheirbrandname,Starbucksfirstneedstoaddressanimportantissue,
namelytheneedtoconvincepeoplethatStarbuckscoffeeissuperiortoothercoffeesand
beverages.ThisisvitalbecauseifthegeneralperceptionisthatMcDonaldscoffeeiscomparable
toStarbuckscoffee,thentherewouldbenoincentiveforconsumerstopayapremiumfor
Starbuckscoffee.Toapproachthisproblem,Starbucksneedstobemoreaggressiveintheir
advertisingcampaignstoeducateandnotifythepublicthespecialtyanduniquenessofStarbucks
coffee.In2006,Starbucksallocatedonly$38milliononmarketing,comparedto$782million
allocatedbytheirclosestrival,McDonalds.EvenDunkinDonuts,whichisconsiderablysmaller
thanStarbucks,allocatedatotalof$116milliononadvertisinginthatyear. 15 Itisclearthatas
incumbents,Starbucksneedstoheightenitsadvertisingeffortsinordertomaintainleadershipin
thecoffeeindustry.

Previously,Starbucksadvertisingstrategyhasbeenfocusedoninthestorerelationships.They
retaincustomerloyaltybyprovidingpersonalizedinteractionstotheircustomers.Therefore,the
Starbuckscountersusuallyhouselargenumbersofbaristasandgeneralemployeeswhowould
proactivelycommunicateandattendtocustomerneeds.Althoughithasproventobearelatively
successfulstrategy,StarbucksneedstocounteragainstMcDonaldsmarketingapproachthatis
moreaggressive.Forinstance,McDonaldslaunchedawebsitethatmockstheapparentlyover
ratedStarbuckscoffee,athttp://www.unsnobbycoffee.com.AlthoughStarbuckspridesitselfin
providingaluxurygood(hencesnobby),theyshouldeducatethepublicmoreeffectivelythanit
currentlydoes,abouttheuniquecharacteristicsoftheStarbuckscoffeetoassureitscustomers
thattheyarepayingapremiumthatisworththemoney.

Inadditiontothat,Starbucksshouldfocusmainlyonadvertisingitscorebusiness,itscoffee.Of
late,theyveconcentratedtoomuchinmarketingtheirmusic,films,booksandotherbusinesses
thatsupplementthecoffeebusiness.Asaresult,theyvedeviatedandneglectedtheproductthat
reallydefinesStarbucks.Bydoingso,customersmightthinkthatthemusic/filmmarketing
strategywasimplementedtocompensateStarbucksmediocrecoffee.Intermsofmarketing
specificallyfortheircoffee,Starbucksshoulddiversifytheiradvertisingchannels.Insteadofrelying
mainlyonemployeecustomerrelationship,theyshouldalsoventuremoreassertivelyinto
advertisementsviatheinternet,printedandvisualmedia.

15
http://www.wikinvest.com/stock/Starbucks_(SBUX)

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ProductDifferentiation

InrenewingtheStarbucksbrand,apartfromconvincingconsumerswhyStarbuckscoffeeis
superiorthroughlargescalemarketingefforts,Starbucksshouldalsoworkonproduct
differentiation.AlthoughMcDonaldsclaimstoofferpremiumcoffeeatalowerprice,itwouldbe
inefficientforStarbuckstostartapricewar.SuchamoveisnotfavorablebecauseStarbucks
coffeeissupposedtoepitomizealuxurygood,wherepeoplearewillingtopayapremiumforit.
Besides,apricewarwouldleadtofurtherdecreaseinpricing,anditreachesapointwhereit
wouldnotbeprofitableforbothparties.Instead,Starbucksshouldworkondifferentiatingits
coffee.Theyshouldinvestinextensiveresearchanddevelopmenteffortstodevelopnewflavors,
blends,orevenroastfusions.Noveltybyitselfisagoodadvertisingtool.Inintroducingthenovel
andsupposedlyrevolutionaryproductdeveloped,theyshouldstartbyprovidingfreesamples
foralimitedperiodoftime.Iftheresponseisgood,theycanthenproceedtointroducethenew
producttoallstores.Starbuckshasimplementedthe$1samplingstrategy,however,thereneeds
tobeafollowuptothatstrategy.Becausethe$1coffeeischeap,peoplewouldtendtogetthat
coffeemorefrequentlyduringthesamplingperiod.Afteracertainduration,Starbucksoughtto
increasethepricefrom$1totheusualpriceforprofits,becausebythen,presumably,alarge
fractionofitsconsumershavegottenhookedtothecoffee.Fromabehavioraleconomics
perspective,thesepeoplewouldbemorewillingtopaytheusualpricebecausetheyfeelthatthey
havereapedthebenefitsthroughoutthesamplingperiod.

Productdifferentiationmayalsobeusedasastrategytoovercomethedownsideofthecurrent
economy.WiththeongoingrecessionintheUnitedStates,consumerswouldbeconservativein
theirspending,andarelesslikelytospend$4onacupofcoffee.Starbuckscouldcreateanew
productthatismorecostefficient,hence,soldatalowerprice.Insteadofdeviatingfromits
luxury,premiumstatus,Starbuckscancounterthisproblembypromotingitaspartoftheir
marketingstrategytohelpconsumerssaveduringthistransientrecession.Notonlywouldtheybe
abletocompetewithlowerpricedcoffeeofferedbyitscompetitors,theyalsowouldretaintheir
customersduringtheeconomicdownturn.Starbucksflexibilityinadaptingtotheeconomyto
servetheircustomersneedsmightevenheightentheirbrandname.

CoffeeVarietyandQualityControl

Incateringtodifferentconsumerpreferences,Starbucksneedstoincreaseitsvarietyofcoffee
offered.Currently,Starbucksonlyoffersonetypeofcoffeetoitsconsumers,whileitscompetitors,
suchasPeetsCoffee,offermultipletypesofcoffeetosuitawiderrangeofcustomers.Examples
wouldincludedifferentkindsofcoffeebrewsspecifictocoffeedrinkerswhoeitherdoordonot
addmilktotheircoffee.Aboveall,Starbucksneedstoensurethatthecoffeeofferedisofthe
highestquality.Otherwise,customerswouldnothaveanincentivetopaysuchapremiumprice
forStarbuckscoffee.

13
2. StrategiestoBuildandRetainCustomerLoyalty
PrivilegeCardandRewardsProgram

Todate,StarbuckshasimplementeditsStarbucksCardprogram,wherebyconsumerscanreload
creditonline,andessentiallyuseitasacashcardatanyStarbucksstore.Inaddition,cardholders
canalsoregisteronlinetoqualifyforrewardseachtimetheyusetheirStarbuckscard.Someofthe
benefitsincludecomplimentarybeveragesafteracertainnumberofpurchases,freerefills,and
freesyrupandmilkoptions 16 .Despitethissoundstrategy,itdoesnotdifferfromotherreward
programsofferedbyitscompetitors.Forinstance,CoffeeBean&TeaLeafalsoimplementsa
relativelysimilarrewardsprogram,wherebyconsumersgetcomplimentarydrinksandvarious
otherbenefits.

Havinganondistinctrewardsprogramprovidesnoincentiveforcoffeedrinkerstochoose
Starbucksoverotheritscompetitors.Forinstance,iftherewereapersondrivingalongastreet
lookingforacoffeeplace,hewouldprobablynottakethetroubletolookforaStarbucks,and
insteadwouldsettleforsomethingconvenientsuchasMcDonaldsorGloriaJeansCoffee.
However,thiswouldnotbethecaseifStarbuckshadasuperiorrewardsprogram.Onepossibility
wouldbetocooperatewithairlinecompaniesandotherlargeretailcompaniesandcombinetheir
rewardsprogramwiththatofStarbucks.Essentially,aUnitedAirlineprivilegecardholdercan
accumulatemileswhileaGAPcardholdercanobtainGAPrewardsevenwhentheyspendat
Starbucks.Ifsuchsynergiesexist,thenconsumerswouldhavemoreincentivetochooseStarbucks
overotherbrandssimplybecauseitwouldbewealthmaximizing.

StarbucksDriveThrough

AlthoughStarbucksstrategyhasbeentoopenasmanystoresaspossible,mostofitsstoresare
midsized.Therehavebeenreportsfromrecentsurveysonpeoplesopinionsaboutthelackof
tablesandseatsinStarbucksduringpeakperiods,namelyinthemidmornings.Itispossiblethatif
onefindsnoavailabletableinStarbucks,shewillchoosetogotosomeotherplacethatoffers
reasonablecoffeeandatabletoworkorread.Asaresult,Starbuckslosespotentialcustomers.
Furthermore,althoughStarbucksislocatedateverystreetcorner,itisusuallylocatedinsucha
waythatitisdifficulttofindaparkingspace.Peoplepreferconvenience,andthisusuallymeans
pullingoverandmakingaquickruntogetcoffeeorasnack.Asaresult,Starbuckslosesaportion
ofitscustomersduringpeakperiodsbecausemostpeoplewouldrathergoelsewhere,suchasa
placewithdrivethroughcounterslikeMcDonalds.

OnepossibilitywouldbeforStarbuckstoincreaseitsstorespacetoaccommodatecrowdsduring
peakperiods.However,thismightnotbecostefficientbecauseenlargingcurrentStarbucksstores

16
https://www.starbucks.com/customer/faq_qanda.asp?name=card

14
 requiresabiginvestment.Starbuckshasalreadystartedimplementingdrivethrusaroundthe
country,andthereispotentialforthemtoexpand.ItshouldbenotedthatdrivethruStarbucks
locationsshouldbeimplementedonlyasasupplementtoretailstores,targetingcustomerswho
areinahurry,andwhosemainpurposeismerelytosatisfytheirdailycaffeineintake.Because
Starbucksrelativelyrecentdrivethruinitiativehasnotbeenaggressivelymarketed,mostlyto
preventthisnewconceptfrominterferingwiththeStarbucksimage,anewbrandcouldbe
createdtoovercomethisproblem.Forinstance,thisnewsubsidiarycouldbecalledStarbucks
Expresstodifferentiateitsretailstores.Inthatsense,Starbucksstillretainsitsoriginalbrand
nameasaluxurygood,andthenewdistributionchannelprovidesanextrameansforconsumers
tobuyStarbuckscoffee.

3. StrategiestowardsCostEfficiency
FocusontheCoffee

Consideringtheweakeconomy,Starbucksshouldalsoconsiderstrategiesthatwouldreducecost,
aswellasstrategiesthatwouldpromotegrowthandprofit.Inrecentyears,Starbuckshasstarted
venturingintootherbusinessesapartfromcoffee.Examplesincludethemusic,film,andbook
marketingbusiness.Indoingso,notonlyaretheydilutingthevalueoftheircoffee,buttheyare
alsoincurringalargecost.Onewaytoreducecostwouldbetospecializeandfocusonmarketing
theircoffee.Bybeinginvolvedinfewerbusinesses,costisreduced,andalltheresourcescanthen
bechanneledtowardsimprovingtheircoreproduct.

EffectiveStoreExpansionDecisions

ConsideringtherecessionintheUSeconomy,itwouldbefavorableforStarbuckstoputahalton
itsstrategytoopenmorestoresintheUnitedStates.In2007alone,Starbucksopened1700new
stores,amountingtoatotalofover15000stores,andaimedtoreach40000storesinthefuture 17 .
ConsideringStarbucksfinancialperformanceaswellastheeconomicclimateintheUnitedStates,
itwouldbeefficientforStarbuckstostopaddingstoresintheUSandinsteadworkonrenewingits
brandandcustomerbase.

Furthermore,thebudgetallocatedforstoreexpansionintheUSwouldbeputtobetterusefor
expansioninothercountriesthathavegreatergrowthpotential,specificallyChina.Expandinginto
ChinawouldbeagoodopportunityforStarbucks,consideringChinasfastgrowingeconomy
wheremorepeoplearelikelytosplurgeonluxurygoods.Recentreportshaveshownthat
StarbuckslocationsinBeijinghavereportedatleast30%growthinannualsales 18 .Withsuch

17

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

18
http://www.atimes.com/atimes/China_Business/HF15Cb06.html
15
promisinggrowthrates,itwouldbefavorableforStarbuckstotakeabreakinthesaturatedUS
market,andventureintoyoungergrowingmarkets.Othercountrieswithpromisinggrowth
potentialincludeRussiaandBrazil,wherethecoffeemarketisstillinitsinfancystage 19 .

4. Strategiestowardsfurthergrowth
Expansionintothecorporatemarket

InFebruaryof2008,afteryearsofunbridledgrowth,Starbucksreportedforthefirsttimethatit
wouldslowthepaceofstoregrowthintheUnitedStates.Thiswasamarkeddeviationfromits
previouslyconsistentphilosophythattheprimarydriveroftheCompanysrevenuegrowth
continuestobetheopeningofnewretailstores,bothCompanyoperatedandlicensed,inpursuit
oftheCompanysobjectivetoestablishStarbucksasoneofthemostrecognizedandrespected
brandsintheworld 20,21 .Therunningjokeforseveralyearshasbeentoridiculethefactthat
frequently,onecanencounterStarbucksstoresacrossthestreetfromeachother,illustratinghow
ineffectiveStarbuckssexpansionstrategyis.Starbuckshassaturatednearlyeveryprofitable
marketwithitscompanyownedandlicensedretailstores,andsustaininggrowthbythesheer
numberofnewstoreopeningsisbecomingmoreandmoredifficult,especiallygiventheamount
ofcannibalizationofexistingstoresalesbynewstores.

Asstatedintheirannualreport,Starbucksiscommittedtosellingonlythefinestwholebean
coffeesandcoffeebeverages.Toensurecompliancewithitsrigorouscoffeestandards,Starbucks
controlsitscoffeepurchasing,roastingandpackaging,andthedistributionofcoffeeusedinits
operations.Currently,Starbucksonlysellsitsbrewedcoffeeinitsretailstores,wherebaristas
trainedbyStarbuckspreparecoffeeforcustomers.ItalsoprovidesFoodservicebysellingwhole
beanandgroundcoffeestocompaniesthatservicebusiness,industry,educationandhealthcare
accounts,officecoffeedistributors,hotels,restaurants,airlinesandotherretailers. 22 However,
theproductsaredelivered,percontractualagreements,throughSYSCOCorporationsandUS
Foodservicesdistributionnetworks.Asaresult,theseproductsarepartoftheStarbucksbrand
onlyinname.ThisrepresentsadistancingoftheproductfromtheStarbucksbrandname,and
posesarisktotheStarbucksbrandifthequalityofcoffeebrewedbythesecustomersisnotupto
parwiththestandardssetbyStarbucksforitsretailstores.

19
http://news.bbc.co.uk/2/hi/business/4712012.stm
20
Starbucks10Qfiled8/10/2007(SECWebsite)
21
Starbucks10QFiled2/8/2008(SECWebsite)
22
Starbucks10KFiled11/29/2007(SECWebsite)

16
OnestrategyStarbuckscanadoptthatwouldallowthemtocontinuetheirgrowthwouldbeto
enterthecorporatemarketandbegindirectlysellingbrewedcoffeetocorporateoffices,hotels,
andothersimilarprofessionalbusinesses.Thisisabeneficialbusinessarrangementforboth
Starbucksandthecustomer.Thebusinessesreceivereadytoservedeliveriesoffreshlybrewed
coffeeofthesamehighqualitythatStarbucksprovidesattheirretaillocations,alsoatadiscount.
Thisallowformoreconvenientdistributionofcoffeetoitsemployeesanditscustomers,a
beveragethatistypicallyinextremelyhighdemandatbusinessoffices.Starbuckscanexpandits
brandrecognitiontoalloftheemployeesandcustomersofthecompaniesitserves,andalsocan
bettermaintainthevalueoftheStarbucksbrandbypreservingthequalityofitsproducts.

OnebenefitofthisapproachisthatStarbucksalreadyhasadensenetworkofretailstoreswhich
canbeutilizedasanauxiliaryproductionanddistributionnetworkforthisstrategy.Thecoffeecan
bebrewedonlocationatvariousretailstores,possiblyduringnonpeakhourswhenfoottraffic
islow.ThisallowsStarbuckstooverseethequalitycontrolofthecoffeeandensuresahighquality
productthatwillnotdamagetheStarbucksbrand.Also,thereisahighdemandforcoffeeinmany
businesses,bothfromtheiremployees(e.g.lawfirms,ITbusinesses)andfromtheircustomers
(e.g.hotels,airlineexecutivelounges),somethingthatStarbucksshouldtakeadvantageofinorder
tobecomeaprominentplayerinthismarket.

17
Appendix:

Starbucks/McDonaldsGlobalDominionGraph

StarbucksvsMcDonaldsStockPrices(May07May08)
18


StarbucksMarginAnalysis

StarbucksCashFlowAnalysis

19
 StarbucksROEAnalysis

ComparisonofStarbuckstotheDow30andtheXLPpricesovera6monthperiod
20


NumberofretailstoresopenbyStarbucksbetweenyears20022006

TimeCourseGraphShowingStarbucksSameStoreSales

21