Case Study: Starbucks Corporation - 2009

Course Name: Organization, Strategy and Control

Course Code: AIS 5105

Submitted to

Probir Kumar Bhowmik

Assistant Professor

Department of AIS

University of Barisal

Submitted by

S. N. Name Roll No.

01 Rayhan 12 AIS 003
02 Md. Rakib Hossain 12 AIS 010
03 Md. Atiqur Rahaman 12 AIS 019
04 Md. Tariqul Islam 12 AIS 021
05 S.M. Mahamood Reza 12 AIS 026
06 Nipa Akter 12 AIS 046

Date of submission

16 April, 2018
 Starbucks Corporation - 2009

Syarynn Tomlin

Angelo State University

1. Case Abstract
Starbucks was founded in 1971 by Gordon Bowker, Jerry Baldwin, and Zev Siegl, who joined
forces to open a coffee shop in Seattle, Washington. By 1972, with the success of the first store,
they opened a second store in University Village, Washington. Its wholesale business, which
sold coffee primarily to local restaurants, changed its name to Caravali out of concern that the
Starbucks‟ name would become tarnished by retailers who sold the coffee after its shelf life has
expired. In the next 10 years, the business expanded to five stores and hired Howard Schultz to
manage retail sales and marketing.

By 1993 the company ventured into the East Coast market in Washington, D.C., and entered into
a venture with Barnes & Noble to sell its coffee at the bookseller‟s stores. At this point, the
company had licensed 12 stores and were operating 260 company-owned facilities with revenues
reaching $176.5 million and net earnings at $8.3 million.

Starbucks opened 200 new stores outside of the United States during 2000, 150 of which were in
the Asia-Pacific region, and opened its first stores in Dubai and Hong Kong, and its 100th stores
in both Japan and the United Kingdom. The following year, Starbucks opened a store in Zurich,
Switzerland, marking its first venture into continental Europe.

Starbucks experienced its first setback in 2002 when its Japanese operation posted a $3.9 million
loss, despite a 15 percent increase in revenues and 108 new store openings, and the first low
performance locations were closed. But not discouraged by this, international expansion
continued as Starbucks opened its first store in Turkey and acquired 129 Seattle‟s Best Coffee
coffeehouses, as well as certain wholesale distribution rights. In the following two years, its
long-term U.S. expansion goal was set at 50 percent and Starbucks announced it will eventually
open 15,000 domestic outlets, and 30,000 worldwide. However, then the worldwide economic
recession hit in 2007 and simultaneously McDonald‟s entered the coffee business big time.
Starbucks closed 600 underperforming stores in the United States in 2008 and plans to open only
about 200 new stores in 2009.

Starbucks Corporation - 2009 2

 2. Mission Statement Evaluation
The following table evaluates the mission statement of Starbucks along with its major
competitors:

Starbucks Caribou Coffee McDonald

Vision “to establish Starbucks as the “Aspire to be The “Our overall vision is
Statement premier purveyor of the finest Community Place I for McDonald’s to
coffee in the world while Love” become a modern,
maintaining our uncompromising progressive burger
principles while we grow.” company delivering a
contemporary customer
experience.”
Mission “To inspire and nurture the human “An experience that “Our mission is to be
Statement spirit – one person, one cup and makes the day better.” our customers’ favorite
one neighborhood at a time.” place and way to eat &
drink.”

Core Values • With our partners, our • Our commitment • Making quality
coffee and our customers to our guests food
at our core, we live these • Our commitment • practicing
values: to our sustainable
• Creating a culture of community sourcing, and
warmth and belonging, • Our commitment • Committing to
where everyone is to our team a healthier
welcome. members planet.
• Acting with courage, • Delivered with
challenging the status quo our unique
and finding new ways to personality
grow our company and
each other.
• Being present, connecting
with transparency, dignity
and respect.
• Delivering our very best
in all we do, holding
ourselves accountable for
results.
• We are performance
driven, through the lens of
humanity.

Starbucks Corporation - 2009 3

 3. Financial Information: ($ In Million)

Particulars Starbucks Caribou Coffee McDonald

Year Year Year Year Year Year

2008 2007 2008 2007 2008 2007
Sales 10383 9411 253.9 256.8 23522 22787
Depreciation and 549 467 24.9 32.2 1208 1193
amortization
General and 456 489 29.1 32.3 2355 2367
admin exp
Operating income 504 1054 (15.5) (30.4) 6443 3879
EBIT 512 1056 11 3 6,158 3,572
Net income 316 673 (16.3) (30.7) 4313 2395
Company 9217 8536 414 432 6502 6906
operated outlets
Total outlets 16680 15011 511 484 31962 31377
Sales per com. .988 1.018 .553 .551 2.547 2.204
outlet
Current Assets 1748 1696 28 26 3,517.6 3,581.9
Other Current 169 148 .8 1.6 411.5 421.5
Assets
Inventory 692 691 10 10 111.5 125.3
Total assets 5673 5344 89.6 111.8 28462 29392

Deferred Income 303 271 .4 .4 944.9 960.9

Tax
Current Liability 2189 2155 32 36 2,537.9 4,498.5

Total debt 3181 3059 45 51 10218 9301

Shareholders’ 2491 2284 43.9 59.3 13382 15280

equity

Starbucks Corporation - 2009 4

3.1Financial Ratio Analysis

Name of Formula Year 2008 Year 2007

Ratios Starbuc Caribou McDonald Starbucks Caribou McDonald
ks Coffee Coffee
1.Total (Sales/ Total 1.830 2.833 .826 1.761 2.296 .775
asset assets)
turnover
2.Return (Net income/Total .055 (.182) .152 .126 (.275) .081
on assets assets)
(ROA)
3.Current (Current .798 .875 1.386 .787 .722 .796
ratio asset/Current
liabilities)
4.Quick (Current asset - .267 .525 .80 .272 .388 .461
ratio Inventory- deferred
tax -Other current
assets- prepaid
expenses)/Current
liabilities
5.Debt (Total debt/ 1.277 1.046 .763 1.339 .864 .608
Equity Shareholder's
Ratios Equity)

6.Operatin (EBIT/ Total Sales .049 .043 .262 .112 .012 .156
g Profit or Revenue)
Ratios
7.Return (Net profit after .126 (.37) .322 .29 (.517) .156
on tax/Net worth)
Equity(RO
E)
8.Earnings (Net profit after .43 -0.84 3.828 .90 -1.59 2.015
Per Share tax/ No. Ordinary
(EPS) Share)

Starbucks Corporation - 2009 5

Descriptions about them are given below:

Particulars Year 2008 (million) Year 2007 (million)

Starbucks Caribou McDonald’s Starbucks Caribou McDonald
Coffee Coffee
Sales 10383 253.9 23522 9411 256.8 22787
Total assets 5673 89.6 28462 5344 111.8 29392
1.Total asset 1.830 2.833 .826 1.761 2.296 .775
turnover=(Sales/
Total assets)
It measures the dollars of sales generated by each dollar invested in assets. Analysts make different
methodological choices in selecting the denominator for turnover measures: sales can be measured
against beginning assets, ending assets, or average assets. That is, asset turnover for fiscal 2008 can be
measured by dividing 2008 sales by 2007 assets (beginning), 2008 assets (ending), or an average of 2007
and 2008 assets (average). The argument in favor of using average assets is that average assets best
reflects the asset investment on which sales are generated during a reporting period. In the interest of
simplicity, the convention used throughout this note for all turnover measures is a denominator defined as
ending assets. Here, asset turnover of Starbucks is higher than McDonald‟s but lower than Caribou
Coffee.

Net income 316 (16.3) 4313 673 (30.7) 2395

Total assets 5673 89.6 28462 5344 111.8 29392
2.Return on assets .055 (.182) .152 .126 (.275) .081
(ROA)=(Net
income/Total
assets)
In its simplest form, ROA measures the net income generated for each dollar invested in assets. When
decomposed, however, one can see that ROA is the product of net profit margin and total asset turnover.
The decomposition reveals that an effective strategy must be both profitable and asset efficient.
It shows that Starbucks‟ asset turnover improved from 2007 to 2008, but its ROA deteriorated
substantially because of the decrease in net profit margin in 2008. On the other hand, Caribou Coffee has
negative ROA.

Total Current 1748 28 3,517.6 1696 26 3,581.9

asset
Total Current 2189 32 2,537.9 2155 36 4,498.5
liabilities
3.Current ratio .798 .875 1.386 .787 .722 .796
=(Current
asset/Current
liabilities)
The current ratio is the liquidity ratio that measures a company's ability to pay short-term and long term
obligations. To measure this ability, the current ratio considers the current total assets of a company
relative to that company‟s current total liabilities. Above figure the ability to pay short-term and long-
term obligations of Starbucks company‟s nearly same in 2007 and 2008 year but in comparison with other
company Starbucks Company has lowest capacity to pay its current debt. Among three, McDonald‟s has
higher capacity to pay its short-term and long-term obligations

Starbucks Corporation - 2009 6

Total Current 1748 28 3,517.6 1696 26 3,581.9
Assets
Deferred Income 303 .4 944.9 271 .4 960.9
Tax
Prepaid exp & 169 .8 411.5 148 1.6 421.5
Other current
Assets
Inventory 692 10 111.5 691 10 125.3
Total Current 2189 32 2,537.9 2155 36 4,498.5
Liabilities
4.Quick Ratio .267 .525 .80 .272 .388 .461
(Current asset-
Inventory-
deferred tax-
Other current
assets- prepaid
expenses)/Current
liabilities
The quick ratio is an indicator of a company‟s short-term liquidity, and measures a company‟s ability to
meet its short-term obligations with its most liquid assets. Because we're only concerned with the most
liquid assets, the ratio excludes inventories from current assets. Here in year 2007 & 2008 , Starbucks
ability to pay short-term debt is lower than comparative to Caribou Coffee & McDonald‟s

Total Debt 3181 45 10,218 3059 51 9,301

Total 2490 43 13,383 2284 59 15,280
Shareholder's
Equity
5.Debt Equity 1.277 1.046 .763 1.339 .864 .608
Ratios (Total
debt/
Shareholder's
Equity)
Debt/Equity (D/E) Ratio, calculated by dividing a company‟s total liabilities by its stockholders' equity, is
a debt ratio used to measure a company's financial leverage. The D/E ratio indicates how much debt a
company is using to finance its assets relative to the value of shareholders‟ equity. From the figure above,
It shows that Starbucks company uses more debt than the other company. McDonald‟s uses the lowest
amount of debt compare to its equity.

Starbucks Corporation - 2009 7

EBIT 512 11 6,158 1056 3 3,572
Total Revenue 10383 253.9 23522 9411 256.8 22787
6.Operating Profit .049 .043 .262 .112 .012 .156
Ratios=(EBIT/
Total Sales or
Revenue)
Operating margin/Profit gives analysts an idea of how much a company makes profit (before interest and
taxes) on each dollar of sales. A company‟s operating margin often determines how well the company can
satisfy creditors and create value for shareholders by generating operating cash flow. A healthy operating
margin is also required for a company to be able to pay for its fixed costs, such as interest on debt, so a
high margin means that a company has less financial risk than a company with a low margin. Above
calculation Operating profit ratios of Starbucks & Caribou Coffee company is near to same but
McDonald’s operating profit ratios is higher.

Net Profit After 316 (16.3) 4313 673 (30.7) 2395

Tax
Net Worth 2491 43.9 13382 2284 59.3 15280
7. Return on .126 (.37) .322 .29 (.517) .156
Equity(ROE)=(Net
profit after
tax/Net worth)
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity.
Return on equity measures a corporation's profitability by revealing how much profit a company
generates with the money shareholders have invested. Starbucks Company has lower ROE than
McDonald‟s but higher than Caribou Coffee company. Even, Caribou Coffee company has negative ROE
which indicate that company did not earn grater profit by investing shareholders money, for this reason it
can't back grater return to its shareholders.

Net Profit After 316 (16.3) 4313 673 (30.7) 2395

Tax
No. Of Ordinary 732 20 1,126.6 747 20 1,188.3
Share
8. Earnings Per .43 -0.84 3.828 .90 -1.59 2.015
Share (EPS)= (Net
profit after tax/
No. Ordinary
Share)
Earnings per share (EPS) are the portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serve as an indicator of a company's profitability. Above calculation
Starbucks Company has lower EPS than McDonald‟s. On the other hand, Caribou Coffee company has
negative EPS in 2007 (.1.59) & in 2008 (.84) which indicates the negative profitability to its shareholders.
In 2008, McDonald‟s has higher EPS and that is 3.828.

Starbucks Corporation - 2009 8

4. External Environment of The Retail Market For Coffee & Snacks:

4.1) Industry Overview and Analysis:

Starbucks primarily operates and competes in the retail coffee and snacks store industry. This
industry experienced a major slowdown in 2008 due to the operation cost is high, with the
industry net profit decline to 316 million from 673 million. Before this, the industry had a decade
of growth consistent. Due to the economic slump, consumers spent less on luxuries like eating
out, choosing to purchase low-price items instead of high-priced coffee drinks due to shrinking
budgets. The industry is now forecasted to grow at an annualized rate of 3.9% over the next five
years, with a potential to reach $35.1 billion revenues in the US. This growth would be mainly
driven by an improving economy, increase in consumer confidence and expanding menu
offerings within the industry. Starbucks dominates the industry with a market share of 36.7%,
other competitors like McDonalds, Caribou Coffee, Costa Coffee, Tim Horton‟s etc. taking the
rest.

4.2) Industry Life Cycle and Market Share Concentration:

The life cycle comprises four phases:

 Introduction Stage - the product is introduced to the market through a focused and
intense marketing effort designed to establish a clear identity and promote maximum
awareness.
 Growth Stage - this stage is distinguished by increasing sales and the emergence of
competitors. It is characterized by sustaining marketing activities on the vendor's side,
with customers engaged in repeat purchase behavior patterns.

Starbucks Corporation - 2009 9

  Maturity Stage - the competitors begin to leave the market, sales velocity is dramatically
reduced, and sales volume reaches a steady state. Mostly loyal customers purchase the
product.
 Decline Stage - the lingering effects of competition, unfavorable economic conditions,
new fashion trends, etc, often explain the decline in sales.

This industry is in a mature stage with a medium level concentration.

4.3) Porters Five Forces Model Analysis

Figure: Porter‟s Five Forces Model Analysis

Starbucks Corporation - 2009 10

1. Threat of New Entrants: Moderate
 There is a moderate threat of new entrants into the industry as the barriers to entry
are not high enough to discourage new competitors to enter the market.

 The industry‟s saturation is moderately high with a monopolistic competition

structure.
 For new entrants, the initial investment is not significant as they can lease stores,
equipment etc. at a moderate level of investment.
 At a localized level, small coffee shops can compete with the likes of Starbucks
and Dunkin Brands because there are no switching costs for the consumers. Even
though it‟s a competitive industry, the possibility of new entrants to be successful
in the industry is moderate.
 But this relatively easy entry into the market is usually countered by large
incumbent brands identities like Starbucks who have achieved economies of scale
by lowering cost, improved efficiency with a huge market share. There is a
moderately high barrier for the new entrants as they differentiate themselves from
Starbuck‟s product quality, its prime real estate locations, and its store ecosystem
„experience‟.
 The incumbent firms like Starbucks have a larger scale and scope, yielding them
a learning curve advantage and favorable access to raw material with the
relationship they build with their suppliers.
 The expected retaliation from well-established companies for brand equity,
resources, prime real estate locations and price competition are moderately high,
which creates a moderate barrier to entry.
2. Threat of Substitutes: High
 There are many reasonable substitute beverages to coffee, which are mainly tea,
fruit juices, water, soda‟s, energy drinks etc. Bars and Pubs with non/alcoholic
beverages could also substitute for the social experience of Starbucks
 Consumers could also make their own home produced coffee with household
premium coffee makers at a fraction of the cost for buying from premium coffee
retailers like Starbucks.

Starbucks Corporation - 2009 11

  There are no switching costs for the consumers for switching to substitutes, which
makes the threat high.
 But it‟s important to note that industry leaders like Starbucks are currently trying
to counter this threat by selling coffee makers, premium coffee packs in grocery
stores but this threat still puts pressure their the margins.
3. Bargaining Power of Buyers: Moderate to Low Pressure
 There are many different buyers in this industry and no single buyer can demand
price concession.
 It offers vertically differentiated products with a diverse consumer base, which
make relatively low volume purchases, which erodes the buyer‟s power.
 Even though there are no switching costs with high availability of substitute
products, industry leaders like Starbucks prices its product mix in relation to
rivals stores with prevailing market price elasticity and competitive premium
pricing.
 Consumers have a moderate sensitivity in premium coffee retailing as they pay a
premium for higher quality products but are watchful of excessive premium in
relation product quality.
4. Bargaining Power of Suppliers: Low to Moderate Pressure
 The main inputs into the value chain of Starbucks is coffee beans and premium
Arabica coffee grown in select regions which are standard inputs, which makes
the cost of switching between substitute suppliers, moderately low.
 Starbucks, with its size and scale, has the power to take advantage of its suppliers
but it maintains a Fair trade certified coffee under its coffee and farmer equity
(C.A.F.E) program, which gives its suppliers a fair partnership status, which
yields them some moderately, low power.
 The suppliers in the industry also pose a low threat of competing against
Starbucks by forward vertical integration, which lowers their power.
 Starbucks also forms a highly important part of the suppliers business, due its size
and scope, which make the power of the suppliers lower. Given these factors,
suppliers pose a moderately low bargaining power.
5. Rivalry among Existing Competitors: High to Moderate
 The industry has a monopolistic competition, with Starbucks having the largest
markets share and its closest competitors also having a significant market share,
creating significant pressure on Starbucks.
 Consumers do have any cost of switching to other competitors, which crates high
intensity in rivalry.
 But it‟s important to note that Starbucks maintain some competitive advantage as
it differentiates its products with premium products and services, which cause a
moderate level of intensity in competition.

Starbucks Corporation - 2009 12

  The industry is mature and growth rate has been moderately low which cause the
intensity of competition among the companies to be moderately high due to all of
them seeking to increase market shaper from established firms like Starbucks.
 This industry does not have over capacity currently and all these factors
contribute to the intensity among rivals to be moderately high.

Looking at the Porters five forces analysis, we can get an aggregate industry analysis that the
strength of forces and the profitability in the retail coffee and snacks industry are Moderate.

5. Major Competitors

• Caribou Coffee

• McDonald's

• 7-Eleven

• Dunkin Donuts

• Green Mountain Coffee Roasters

• Coffee Bean and Tea Leaf

• Costa Coffee

• Peet's Coffee and Tea

6. Internal Analysis of Starbucks Corporation:

6.1) Starbucks Core Competence:

The core competence of Starbucks has been its ability to effectively leverage their cornerstone
product differentiation strategies by offering a premium product mix of high quality beverages
and snacks. Starbuck‟s brand equity is built on selling the finest quality coffee and related
products, and by providing each customer a unique “Starbucks Experience”, which is derived
from supreme customer service, clean and well-maintained stores that reflect the culture of the
communities in which they operate, thereby building a high degree of customer loyalty with a
cult following. Its other core competence is its human resource management's values based
approach for building very strong internal and external relationships with suppliers, which drives
the successful deployment of its business strategy of organic expansion into international
markets, horizontal integration through smart acquisitions and alliances that maintains their long-
term strategic objective being the most recognized and respected brands in the world.

Starbucks Corporation - 2009 13

6.2) Starbucks SWOT Analysis:

Strengths:
 Strong Market Position and Global Brand Recognition: Starbucks has a significant
geographical presence across the globe and maintain a 36.7% market share in the United
States and has operations in over 60 countries. Starbucks is also the most recognized
brand in the coffeehouse segment and is ranked 91st in the best global brands of 2013.
Starbucks effectively leverages its rich brand equity by merchandizing products,
licensing its brand logo out. Such strong market position and brand recognition allows the
company to gain significant competitive advantage in further expanding into international
markets and also help register higher growth in both domestic and international markets.
Over the years, they have achieved significant economies of scale with superior
distribution channels and supplier relationships.

 Products of the Highest Quality: They give the highest importance to the quality of their
products and avoid standardization of their quality even for higher production output.

 Location and Aesthetic appeal of its Stores: Starbucks has stores in some of the most
prime and strategic location across the globe. They target premium, high-traffic, high-
visibility locations near a variety of settings, including downtown and suburban retail
centers, office buildings, university campuses, and in select rural and off-highway
locations across the world.This has earned them a significant competence and advantage
to be able to penetrate prime markets and tap into customers convince factor. Their stores
are visually appealing and have a „cool‟ factor attached to it with being designed to

Starbucks Corporation - 2009 14

 reflect the unique character of the neighborhood they serve in and environmentally
friendly. They provide free wifi, great music, great service, warm atmosphere and
provide an environment of community meeting spot, which forms a wider part of the
„Starbucks Experience‟. The main aim for the firm is to make their stores a „third place‟
besides home and work.

 Human Resource Management: Starbucks is know for its highly knowledge base
employees. They are the main assets of the company and they are provided with great
benefits like stock option, retirement accounts and a healthy culture. This effective
human capital management translates into great customer services. It was rated 91st in
the 100 best places to work for by Fortune Magazine.

 Goodwill among consumers due to Social Responsibly Initiatives: Their stores are
community friendly, focused on recycling and reducing waste. They build goodwill
among communities where they operate.

 Diverse Product Mix: Starbuck portfolio of products given in Appendix 8, that caters to
all age groups demographic factors.

 Use of Technology and Mobile Outlets: Starbucks efficiently leverages technology with
its mobile application “Starbucks App‟ in both apple and android software‟s. They make
significant investments in technology to support their growth every year.

 Customer base loyalty: Starbucks has cult following status among consumers and they
have also implemented loyalty-based programs to drive loyalty with the Starbucks
Rewards programs and Starbucks Card. The Starbucks Card is a value card programs that
provides convenience, support gifting, and increase the frequency of store visits by
cardholders and integrated with their mobile application.

Weaknesses:
 Expensive Products: While Starbucks does differentiate their products with being highly
quality couple with the whole „Starbucks Experience‟, in times of economic sluggishness,
consumers to have so switching costs to competitor‟s products with lower prices and
forgo paying a premium. These premium prices could also pose some weakness for it to
succeed in developing countries.
 Self-Cannibalization through overcrowding: By aggressive expansion and high
saturation due to overcrowding in the market leads to self-cannibalization and diminishes

Starbucks Corporation - 2009 15

 long term growth targets of Starbucks. This is happening especially in the United States
where Starbucks operates 8078 stores
 Overdependence in the United States market: In line with self-cannibalization of the US
market with 8078 stores, Starbucks generates a huge percentage of their total revenue
from the US and this makes it very sensitive to prospects of the US economy and growth.
 Negative large corporation image: Like any large corporation, Starbucks does come
under increased scrutiny and have to invest in corporate social responsibility activates
and maintain tight control over labor practices.
 American/European coffee culture clash with that of other countries: Starbucks coffee
culture may not widely accepted in some countries as part of their international expansion
strategy.

Opportunities:

 Expansion into Emerging Markets: The increase saturation and self-cannibalization of

the US market makes its international strategy even more important. Starbucks has made
good inroad into many countries, with India recently joining the list with a joint venture
entry. Starbucks has a great growth potential in further expanding into the emerging and
developing markets. They can leverage their size, experience, financial prowess and
efficiencies to make new market share.
 Expanding Product mix and offerings: Starbucks recently started to expand their
product mix by venturing into the Tea and fresh juice product offerings with a smart
acquisition strategy. This provides significant opportunities for Starbucks.
 Expansion of retail operations: Starbucks currently sell its packed coffee products, iced
beverages and merchandizes through large box retailers. This market‟s potential is yet to
be fully realized and this provides Starbucks great opportunities for the future to future
monetizes their brand.
 Technological advances: Starbucks has leveraged the use of mobile applications and has
an investment partnership with Square, a mobile payments app that is integrated with its
Starbucks app. This creates an ease of use process for customers, aligns customer loyalty
through reward programs. Starbucks has already set the bar in the industry with this
advancement and about 10% of its transactions in the US have been made using mobile
applications. This is a growing field and would drive more business to their stores as
technology advances.
 New distribution channels: Starbucks introduced a beta version of a delivery system
called Mobile Pour. This presents a great opportunity for the future by expanding their
end product distribution systems and could drive more revenue if the implementation is
successful.

Starbucks Corporation - 2009 16

  Brand extension: Starbucks carries a powerful brand image and it can leverage it to
extend into horizontal lines of its business and also venture into product diversification
with keeping brand dilution risk in check.

Threats:

 Increased Competition: This is by far the biggest threat that Starbucks faces with the
market being at a mature stage, there is increased pressure on Starbucks from its
competitors like McDonalds, Caribou Coffee, Costa Coffee, Pete‟s Coffee, mom and pop
specialty coffee stores
 Price Volatility in the Global Coffee Market: There has been a significant fluctuation in
the market prices of high quality coffee beans, which Starbucks can‟t control.
 Developed Countries Market Saturation: Starbucks derives a significant amount of its
revenue from the development markets and there is increased market saturation currently.
 Developed Countries Economy: In an increasingly economically integrated world, an
economic crisis like the one in 2008 could have a trickledown effect from the developed
markets to the developing markets. This threat would hurt revenues for Starbucks as
consumers shift away from premium product mix to stay in limited budgets during
economic hardships.
 Changing Consumer tastes and lifestyle choices: The shift of consumers toward more
healthy products and the risk of coffee culture being just a fad represent a threat for
Starbucks going into the future.

7. Product Diversification

Starbucks Corporation - 2009 17

7.1 Starbucks: Finding Value in Product Diversification

Sometimes it‟s good to be known for doing one thing well. But it‟s also a dangerous proposition,
putting your bottom line at the mercy of consumer trends. But when you‟re a billion dollar global
brand, with your livelihood – not to mention the livelihoods of tens of thousands of employees
and suppliers – riding on your bottom line, you don‟t want to leave yourself susceptible to
consumers suddenly deciding en masse that the product you‟re selling is “over.”

As a breakfast staple since time immemorial, it isn‟t likely that coffee will ever go out of style;
meanwhile, with an outpost on practically every block in every major city in the world,
Starbucks has seemingly defied any and all conventions about oversaturation killing consumer
interest. But while there will always be a stream of consumers ordering a cup of black coffee for
their morning commute, one thing Starbucks CEO Howard Schultz is predicting is an inevitable
downturn of consumers maintaining their excitement for frothy premium coffee drinks like
Frappuccino‟s and Pumpkin Spice Lattes – in other words, Starbucks‟ bread and butter. If
Starbucks is going to continue to thrive at its current capacity, it‟s going to have to offer up some
new flavor profiles and keep audiences interested.

But how do you diversify when you‟re a massive brand known for selling one thing? That‟s what
Starbucks is trying to find out, utilizing partnerships and acquisitions along the way to see what
sticks.

7.1.1Acquiring the Tea Market and Moving it Forward

Starbucks made a major move toward diversification by finalizing its acquisition of the Atlanta-
based retail chain Teavana for $620 million. Starbucks has taken this acquisition to heart,
throwing itself into the expansion of the specialty tea brand – in October of 2013, Starbucks
brought Teavana from a strictly retail space into the foodservice world with the launch of the
first Teavana tea bar in New York City. Betting on the success of this test location, Schultz
expressed to the media that he hoped to build out the brand‟s existing retail locations and open a
thousand new full service Teavana tea bars within the next five years.

7.1.2 A New Approach to Soft Drinks

Starbucks has always sold Italian sodas, lightly flavored with a shot of any syrup they have on
tap, but they were never specifically branded or capitalized on before. But as Starbucks continues
its plans to diversify its offerings, the brand has turned to soft drinks by launching its new
Fizzio™ Handcraftted Sodas line alongside its Teavana iced teas as the centerpiece of its
Summer 2014 season.

Starbucks isn‟t serving its Fizzio™ drinks out of regular soda fountain taps – to underscore the
line‟s “handcrafted” nature, the brand has launched a special Fizzio™ machine at its stores,
offering what the brand calls “a breakthrough in carbonation technology with the ability to
deliver an unmatched soda experience.” It seems reasonable to expect that a Verismo-like home
version will be released once consumer interest in the soda line has been sufficiently piqued,

Starbucks Corporation - 2009 18

putting Fizzio™ in competition instead with increasingly lucrative brands like SodaStream and
providing multiple potential revenue streams in both the foodservice and the retail markets.

7.1.3Partnering with Groupe Danone for Smoothie Success

Acquiring a smaller brand like Teavana makes plenty of financial and strategic sense for
Starbucks, but acquiring a giant like Groupe Danone would be another story – and even if
Starbucks could acquire Groupe Danone, chances are slim that it would have much use for most
of the European dairy titan‟s operations. But what would make sense is a partnership for
compatible products, and that‟s exactly what has happened.

It‟s also smart because it‟s a launch that is targeting a totally different demographic compared to
its soda line, hoping to capture health-conscious consumers looking for a light and protein-
packed option for lunch. These are still in test mode, only currently available at a few select
locations – but if they test well and take off, they hold the potential to bring in a new consumer
base that might not have been interested in the sugary coffee drinks at Starbucks‟ core.

7.1.4 Going Adult with Beer and Wine Offerings

Starbucks has been testing beer and wine at various locations for a while now, but the concept
started really ramping up in March as the chain announced the rollout of its “Starbucks
Evenings” campaign at thousands of locations nationwide.

While the concept feels like the last frontier in beverage diversification and the least likely to
stick permanently, it‟s perhaps the best way to court customers during the evening day part. Still,
it seems at odds with the important younger demographic of students getting together at
Starbucks for a relatively quiet and relaxed atmosphere to study. It also brings in further
complications like licenses and distribution that aren‟t present with the brand‟s new non-
alcoholic offers. It‟s hard to imagine beer and wine rolling out at all Starbucks locations
worldwide any time soon – but if they are able to figure out a way to pull it off, their
diversification plan will be about as complete as it can get.

8. Starbucks Generic Value Chain:

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8.1 Primary activities

1. Inbound logistics – Sourcing coffee from diverse coffee beans producers with whom they
have great relationships and built up efficient supply chain management system.
2. Operations – They have operation in 60 countries with their stores being modeled on
company operated stores and licensed stores.
3. Outbound logistics – Most of its product mix are sold in-store and some through large
box retailers. Payment around source through point of sale, prepaid Starbucks Cards and
mobile payments.
4. Marketing and Sales – Traditionally, investment in marketing activities have not be
significant and relied mainly on the growing reputation of premium quality product mix
and superior customer services to give the „Starbucks Experience‟ to drive customers to
their stores and products.
5. Service - Starbucks has a reputation for providing supreme level of customer services to
their consumers.

8.2 Support activities

1. Firm Infrastructure. They have well designed, aesthetically pleasing stores. They have
efficient level of finance, accounting and legal departments to support the firm‟s
infrastructure.
2. Human Resource Management – Great benefits, employee empowerment and amazing
corporate culture makes Starbucks drive efficient management of human capital.

3. Technology development – Investments in innovative technologies like the well like

mobile app.

4. Procurement – Starbucks procures its products from a diverse group of supplier and has
fixed contracts with some of the suppliers.

9. Starbucks Key Strategies:

One of the key strategy that Starbucks followed since its inception is that of product
differentiation offering differentiators such as premium product mix, locations, coffee beverages
reputation and supreme customer service that translated to building a premium valued brand
which is costly to imitate for competitors. Starbucks has also followed a shrewd strategy of
strategic alliance and making smart acquisitions. Starbucks didn‟t follow franchising model and
operated company oriented stores and joint ventures in international markets. Starbucks has
made some key acquisitions such as Teavana (Tea products), Bay Breads (premium bread
products), Evolution Fresh (fresh juice products) etc. to use the product diversification strategy.
Starbucks acquisition strategy has been horizontal, product and market extensions acquisitions.

Starbucks Corporation - 2009 20

Another crucial strategy for Starbuck‟s growth has been its international strategies of expanding
into key developed and emerging markets to geographically diversify, and it has been highly
successful with operation spanning 60 countries. All these strategies have derived considerable
competitive advantage for Starbucks over its competitors.

9.1) 10 Secrets of Starbucks’ Global Success

1. Start small and expand carefully:

Starbucks was founded in Seattle in 1971 and it initially sold roasted coffee beans only.
Howard Schultz bought the company in 1987 when it had only six stores. It took nearly
three decades for Starbucks to reach its current status as the largest firm in its business.
Lesson: start small and grow gradually and carefully.
2. Leadership
Corporate and Strategic sustained leadership by Schultz is central to Starbucks.
Starbucks‟ strategy for success (conceived by Schultz of course) is to offer customers the
“Starbucks experience”, which means superior customer service, a „community
experience‟ (based on the Italian café model), a friendly ambience in its stores and, it
empowers customers to drive change (especially in terms of customization, peer-to-peer
marketing and consumer awareness). Moreover, Starbucks seeks brand loyalty and offers
perks to frequent customers.

3. The Customer is King

This goes beyond “the customer is always right” philosophy in three fundamental ways:
(i) If the customer is not happy with the product or service, set things right by remaking
the drink or offer a (free) food or drink item of the customer‟s choice; (ii) or offer a credit
to be used towards the customer‟s next visit; and (iii) offer perks to loyal customers
(Gold Card holders), such as specials, discounts and rewards.
4. Partners are the driving force in Starbucks' culture and business model
Baristas, supervisors and managers (as well as those higher up, such as regional directors)
are referred to as “Starbucks partners” (in other words, they‟re more than “just”
employees). Benefits extended to partners include stock options, health insurance and
educational programs. In addition, on top of the periodic staff meetings held by the store
manager, a special meeting (brainstorming and 'pep talk') is held, perhaps once a year, to
help staff at the store level deal with issues such as stress. A very positive approach to
dealing with partners.
5. Offer standardized Training
New employees receive training in the classroom and in the store(s). The training is
extended to all new partners (baristas, supervisors, managers and regional directors).

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 6. Friendly ambience
In addition to friendly service, stores are designed to exude a friendly ambience and
community spirit (as in the Italian café model noted above that was the initial inspiration
for Schultz when he launched Starbucks decades ago).
7. Innovate and Forge Partnerships
First, in terms of the product-mix, variety, or new offerings, innovation and forging
institutional partnerships is important. For example, the “flat white” (a version of the
latte) was recently introduced and beer and/or wine may soon be made available where
permitted. Second, the “Starbucks experience” can also be enhanced through
complementary initiatives, innovation, marketing and forging partnerships. Currently,
Starbucks is partnering with Spotify to stream music in its stores beginning this fall
8. Source Your Own Products Where Feasible
Starbucks‟ supply chain includes numerous products that they manufacture or process
(and own), under various brand names. This has the added advantage of facilitating the
marketing of its products at the store level and through secondary outlets.
9. Marketing and Brand Name Recognition and Diversification.
Starbucks uses various marketing tools, including newspaper advertising, direct mail (for
coupon distribution), and endorsement by celebrities (e.g. Oprah for its teas) and brand
name diversification (e.g. Tazo, Seattle‟s Best Coffee, Evolution Fresh, La Boulange, and
Teavana.). Importantly, marketing is innately a part of Starbucks‟ global success.

9.2 Starbucks Coffee’s Marketing Mix (4Ps) Analysis

Starbucks Coffee Company‟s marketing mix (4Ps) supports the company‟s industry position as
the leading coffeehouse chain in the world. The marketing mix identifies the main components
of the firm‟s marketing plan. Starbucks uses its marketing mix as a way of developing its brand
image and popularity. With the strongest brand in the industry, the company shows how an
effective marketing mix supports brand development and business growth. Starbucks also
changes its marketing mix over time, thereby emphasizing the need for the business to evolve its
various aspects to maintain competitiveness.

Starbucks Coffee‟s marketing mix (4Ps) indicates the importance of this marketing tool as a way
of ensuring that the firm promotes the right products at the right prices and places.

1. Starbucks Coffee’s Products

Starbucks continues to innovate its product mix to capture more of the market. This component
of the marketing mix focuses on what the business offers to customers. At present, the following
are the main categories of Starbucks products:

 Coffee
 Tea
 Pastries
Starbucks Corporation - 2009 22
  Frappuccino beverages
 Smoothies
 Merchandise (mugs, instant coffee, etc.)

This product mix is a result of years of business innovation. For instance, Starbucks added the
Frappuccino line after it acquired The Coffee Connection in 1994. The company also has an
ongoing product innovation process that aims to offer new products to attract and keep more
customers. Thus, this part of Starbucks‟ marketing mix involves beverages, food, and
merchandise.

2. Place in Starbucks Coffee’s Marketing Mix

The company offers most of its products through Starbucks cafés. This component of the
marketing mix determines the venues at which customers can access the products. In Starbucks
Coffee‟s case, the following are the main places used for the distribution of products:

 Cafés
 Online Store
 Starbucks App
 Retailers

Originally, the firm sold its products through Starbucks cafés. Through the Internet, the company
now offers some of its products through the online Starbucks Store. Also, the firm now sells
some merchandise through retailers. In addition, the company uses the Starbucks App to allow
customers to place their orders. This part of Starbucks‟ marketing mix shows how the firm
adapts to changing times, technologies, and market conditions.

3. Starbucks Coffee’s Promotions

Starbucks promotes its products mainly through advertising. This component of the marketing
mix refers to the communication strategies used to disseminate information about the firm and its
products. Starbucks‟ promotional mix is as follows:

 Advertising
 Public relations
 Sales promotions

The company advertises its products through television, print media and the Internet. The
company infrequently uses public relations, which has not always been successful for the
business. For example, Starbucks‟ Race Together public relations campaign was widely
criticized. In addition, the firm uses sales promotions, such as the Starbucks Card that customers

Starbucks Corporation - 2009 23

can use to get freebies. This part of Starbucks‟ marketing mix shows the core significance of
advertising, and the supporting roles of public relations and sales promotions for the company.

4. Starbucks Coffees Prices and Pricing Strategy

Starbucks uses a premium pricing strategy. This pricing strategy takes advantage of the
behavioral tendency of people to purchase more expensive products on the basis of the perceived
correlation between high price and high value. The company‟s coffee products are more
expensive than most competing products, such as McDonald‟s Premium Roast. Through this
pricing strategy, the company maintains its high-end specialty image. This part of Starbucks
Coffee‟s marketing mix directly relates with the firm‟s generic strategy, thereby helping the
business maintain its premium brand image

9.3 Starbucks Coffee’s Intensive Strategies (Intensive Growth Strategies)

Market Penetration

Starbucks Coffee‟s main intensive growth strategy is market penetration. This intensive strategy
supports the firm‟s growth by maximizing revenues from existing markets. Starbucks already has
presence in 65 countries around the world. To maximize revenues and growth in these current
markets, the company applies the market penetration intensive strategy by opening more
company-owned stores. Starbucks also applies this intensive strategy for growth through
licensing for merchandise and franchising in some countries, such as the Dominican Republic.

Market Development

Starbucks Coffee uses market development as its secondary intensive growth strategy. This
intensive strategy supports the company‟s growth by generating revenues in new markets or
market segments. For example, Starbucks Coffee plans to enter more countries. These countries
are mostly in Africa and the Middle East. In this intensive strategy, Starbucks grows by
expanding its global reach.

Product Development

Starbucks Coffee also uses product development as a secondary intensive growth strategy. This
intensive strategy involves creating new products to gain more revenues. Starbucks continues
innovating its product mix. For example, after the firm acquired The Coffee Connection, it
started offering Frappuccino at Starbucks cafés. Through such new products, Starbucks grows
through this intensive strategy.

Starbucks Corporation - 2009 24

9.4 PEST analysis of Starbucks

Political

Political factors include government policies, legislation and foreign influences. The political
factor influencing Starbucks are as follows:

Carr v. Starbucks Corporation and Shields v. Starbucks Corp

The political condition of Starbucks is not good as it should be. They are being blamed for the
violation of wage and hour laws. Starbucks has two pending class-action lawsuits filed by
Starbucks, California, employees for being improperly denied overtime pay. Starbucks‟s is
denying all liabilities in these cases, however; the company has agreed to the settlement in order
to take care of all of the plaintiffs‟ claims without having to get involved in any protracted
litigation. Now Starbucks is paying $18 million for the settling of the lawsuit case.

Kraft and Starbucks in billion-dollar legal fight

Again Starbucks is in news for it‟s within termination of the 12-year contract with Kraft. In 1998
Kraft and Starbucks entered into a retail grocery coffee business, which at the time was
generating less than $50 million in annual revenues. Since then, the business has grown to
approximately $500 million. This joint venture has marked a major shift for Starbucks'
consumer-packed business, a key building block in Chief Executive Howard Schultz's strategy to
drive future growth for the nation's largest coffee-shop chain. For the violation of the contract
again Starbucks would have to payout large amount as compensation.

Economic

The economic factors which affect the Starbucks could be inflation rate, import laws, exchange
rates, and interest rates.

As Starbucks Imports coffee from various countries so they really have to be aware of changing
imports laws which could hinder the importing. On the same way increasing and decreasing
inflation rate affects a lot of buying power of consumers

The Demand –price curve for the consumption of coffee commodity shows that with the increase
in demand of coffee, the price of coffee increases whereas with the decrease in price of coffee,
the demand decreases. So Starbucks has to be very careful while pricing looking at the
consumption rate of market.

This increase in demand of coffee increases when the coffee substitutes such as cold drink,
water, juice, tea, shake prices increases and if there is increase in the income of the consumers.
On the other hand the demand decreases if the price of substitute decreases, there is decrease in
the income of the consumers, and increase in the price of compliment.

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Socio-Cultural

Starbucks called them as “Starbucks Shared Planet” which commits them to do best for the
people and the planet both. For this they are using reusable cups and Starbucks is so responsible
about the community development that they made their goal as

We’d like Starbucks partners (employees) and customers to contribute more than one million
hours of community service each year.

Starbucks is trying their best to minimize the environmental impact, tackling of climate changes
and inspiring others as well to do the same and joining of non-governmental organizations.
Working with the NGO‟s has helped them a lot to do more of community involvement, ethical
sourcing and environmental stewardship.

Using the environmental, socially and economically responsible guidelines of Conservation

International, Starbucks is able to purchase the coffee under “Starbucks shared Planet”. They are
just using the Fair trade labeling organizations international and Transfair USA labelled certified
coffee. Starbucks is in collaboration with African Wildlife Foundation for the promotion of the
environmental responsible coffee. In the same way they have partnership with such organizations
like Ceres, United States green building coffee, Earth watch institute, save the children,
Sustainable food lab, Product (Red), Mercy Corps, International Youth foundations and Ashoka
youth ventures.

Technological

As technology factors shape appropriate organizational forms (McKelvey, 1982). Use of various
new and innovative technology leads to improvement in services at the cafe. There are various
agricultural and biotech development which has led to fast growing of coffee plants. Various
technologies are being used to minimize the labor cost and save time. They are trying to find the
new technologies to better serve the customer. Starbucks has introduced its card which has
attracted customers a lot and has made them to visit quicker. As discussed in environmental
factors Starbucks are trying to use in every store new fuel-efficient equipment for reducing the
emission of the gas. They are using more of the bio degradable material for recycling. They are
making their best efforts to advertise them through various means to reach to the people‟s mind
easily. Starbucks has made online shop locator to make the process easier for the customers to
reach to the store. Starbucks is also doing online delivery of their produced coffee. If customer
wants to use the coffee of their choice and want to use the brand of Starbucks they have better
option of buying the whole coffee packets from the Starbucks Coffee shop as well as online
coffee store.

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9.5 Generic Competitive Strategy

10. Recommendations & Conclusion:

 Starbucks biggest growth is in its International segment. The emerging markets of Brazil,
India, China, South Africa and Mexico with a growing middle-class population continue
to offer significant opportunities to add new stores and serve more customers. Starbucks
has already made significant inroads into the Chinese market but there still is a lot of
untapped potential growth in these markets. Starbucks should grow in these emerging
markets by winning locally. Starbucks must remain relevant to the customer in order to
grow in these markets, and its management teams should have the freedom to operate
within their overall framework to tailor store format, introduce local product mix and
price points to the needs, lifestyles and tastes of each individual market/community.

 Under Starbucks international strategy, it should transfer its core competencies and
capabilities country to country and then gradually build profit drivers in several countries
as it continues its global expansion in an organic way.

 Starbucks has great growth opportunities in Tea and Fresh Juice products mix. They
should build up these products along the same line of their core coffee products.

Starbucks Corporation - 2009 27

 Also as consumer tastes and lifestyle shift towards more snacks and beverages options,
Starbucks should tailor its menu‟s and expands to give healthier product offerings in its
mix.

 Coffee beans are a significant input into Starbucks value chain and there have been wide
fluctuations in the market prices of high quality coffee beans. Starbucks could mitigate
this price volatility risky by implementing an effective hedging strategy like future
contracts to lock in their estimated quantity inputs at a low swing price so that the future
costs can be managed to a greater extent.

 Starbucks growth strategy in the saturated U.S. market should focus on getting additional
penetration into untapped rural markets.

 Another growth sector is its packaged coffee packets and iced beverage products.
Starbucks should build better relationships with big box retailers to get premium shelf
space and increase the efficiency of this distribution channel.

 Further build and retain customer loyalty, by building on beta concept of on-the-go home
delivery.

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