Analysis of Starbucks

Corporation
By: Simran Chaudhary
(12000706)
 ANALYISIS OF STARBUCKS CORPORATION

TABLE OF CONTENTS

1 COMPANY OVERVIEW

2 EXTERNAL ENVIRONMENT OF THE RETAIL COFFEE INDUSTRY

2.1 Industry Overview and Analysis
2.2 Industry Life Cycle
2.3Industry Demand Determinants
2.4 Porter’s Five Forces
2.5 Industry Competitive Landscape
2.6 Major Competitors
2.7 Key Success Factors in Industry

3 INTERNAL ENVIRONMENT OF STARBUCKS

3.1 Core Competencies
3.2 Distinct Competency
3.3 SWOT Analysis
3.4 VRIO Framework Analysis
3.5 Value Chain Analysis of Starbucks
3.6 Starbucks’s Efforts in Emerging Economies
3.7 Covid- 19 Pandemic Response
3.8 Strategic M&A, Partnerships, Joint Ventures, and Alliances
3.9 Analysis of Financial Performance

4 RECOMMENDATIONS

5 APPENDICES

6 REFERENCES
1. STARBUCKS’S CORPORATE OVERVIEW:
Starbucks Corporation is an American multinational chain of coffeehouses and roastery
reserves headquartered in Seattle, Washington. Headquartered in the Starbucks Center, the company was
founded in 1971 by Jerry Baldwin, Zev Siegl, and Gordon Bowker at Seattle's Pike Place Market. As
the world's largest coffeehouse chain, Starbucks is seen to be the main representation of the United
States' second wave of coffee culture. As of early 2020, the company operates over 30,000 locations
worldwide in more than 70 countries. Starbucks locations serve hot and cold drinks, whole-bean coffee,
microground instant coffee known as VIA, espresso, caffe latte, full- and loose-
leaf teas including Teavana tea products, Evolution Fresh juices, Frappuccino beverages, La
Boulange pastries, and snacks including items such as chips and crackers; some offerings (including their
annual fall launch of the Pumpkin Spice Latte) are seasonal or specific to the locality of the store.

2. EXTERNAL ENVIRONMENT OF RETAIL MARKET FOR COFFEE

AND SNACKS:
2.1 Industry Overview and Analysis

Starbucks primarily operates and competes in the retail coffee and snacks store industry. This industry
experienced a major slowdown in 2009 due to the economic crisis and changing consumer tastes, with the
industry revenue in the US declining 6.6% to $25.9 billion. 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 grew at
a low annualized average growth rate of 0.9% from 2008 till 2013 with current industry revenues at $29
billion in the US. 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%, Dunkin Brands with 24.6% and other
competitors like McDonalds, Costa Coffee, Tim Horton’s etc.

2.2 Industry Life Cycle

This industry is in the mature stage of its life cycle. Starbucks and Dunkin brands have a considerable market
power in determining industry trends as they account for 60 % of market share.

2.3 Industry Demand Determinants

There are many factors which drives the industry’s demand for premium coffee and snack products such as:
 Disposable income
 Per capita coffee consumption
 Attitude towards health
 World pricing of coffee
 Demographics

During the recession, the decline in household disposable income due to increased unemployment and
stagnant wages caused a downward pressure on the revenue and profitability margins in the industry. Per capita
consumption is another important factor which determines the demand for retail coffee industry. It means the
increase in coffee consumption increases the revenue of coffee & snack shops. The main reason for increase in
per capita consumption is the increase in disposable income. It has a positive effect on market revenue. Per capita
coffee consumption is highest in Finland. Attitudes towards health also play an important role in determining the
demand in the industry. There is an expected shift towards healthy eating and diet among the consumers now, and
this could be a potential threat to the industry as they become more aware of issues related to weight and obesity.

2.4 Porter’s Five Forces of retail coffee and snacks industry:

Threat of New Entry : Low

 Economies of scale- Starbucks has achieved economies of scale by lowering costs and has improved it’s
efficiency. The economies of scale within the specialty coffee industry have increased as the size of the
top players has increased. Companies such as Dunkin’ Donuts and McDonald’s have national distribution
channels through which they can transport their specialty coffee at a relatively low cost compared to
potential new entrants who have no such developed distribution systems. (positive)
 Brand identity- There is a high cost of brand development. Starbucks already has a brand image.
(positive)
 Proprietary product differences – Product differences trait of industry are ambience of the store, social
responsibility of the company and brand identification. All these traits make it difficult for a new entrant
to gain a solid customer base. (positive)
 Capital requirements – For new entrants, initial investment is not significant as they can lease stores,
equipments etc at a moderate level of investment. (negative)
 Absolute cost advantages – Starbucks has a larger scale and scope, yielding them a learning curve
advantage. It is difficult for new entrants. (positive)
 Switching costs- At a localized level, small coffee shops can compete with Starbucks and Dunkin Brands
because there are no switching costs for the consumers. (negative)
 Government policy – Retail coffee industry does not have a monopoly. Government restrictions and
rules and regulations are not strict. (negative)
 Access to distribution – As the industry matures, the ability to access distribution channels has become
difficult. (positive)
 Expected retaliation - The expected retaliation from well-established companies for brand equity,
resources, prime real estate locations and price competition are high, which creates a moderate barrier to
entry. (positive)

Bargaining power of supplier: Low

 Supplier concentration – There are large number of coffee suppliers in the world. (positive)
 High switching costs – The main inputs into the value chain of Starbucks is coffee beans and premium
Arabica coffee which is grown in select regions. So costs of switching are low. (negative)
 Unique product – There are few viable substitutes for Starbucks. (negative)
 Viable forward integration threat – Technically, the farmers can forward integrate by setting up
smaller coffee shops and brewing their own batches. This is, however, extremely unlikely and has yet to
occur. (positive)
 Serves multiple industries - Currently, Starbucks has locked their coffee suppliers into long-term
contracts to dilute potential price volatility. These contracts have stipulations within them which place a
financial burden on the coffee suppliers if they choose to supply a different company. (positive)
 Marginal customer - Starbucks also forms a highly important part of the suppliers business, due its size
and scope, which make the power of the suppliers lower. (positive)
Bargaining power of customers: Low

 Concentrated or large volume buyer – There are many different buyers in this industry and no single
buyer can demand price concession. ( positive)
 Standardized product – There are no switching costs with high availability of substitute products.
(negative)
 High price to total purchase ratio – Size of individual purchases is small and single buyers do not hold
influence. (positive)
 Low buyer profits – Starbucks earns high profits. (positive)
 Viable backward integration threat - The buyers of specialty coffee do pose a credible threat of
backward integration. The ability of buyers to backward integrate is enhanced by the availability of all
information regarding the demand, market pricing, and supplier costs in the specialty coffee industry
through sources such as the World Wide Web. (negative)

Threat of Substitutes : High

 There are no switching costs for a consumer to switch to substitute products. (negative)
 There are many substitutes available to coffee such as tea, cold drinks, soft drinks, alcoholic and non-
alcoholic beverages. (negative)
 However, premium quality of Starbucks coffee and it’s brand loyalty moderates the threat of substitutes to
some extent. (positive)

Competitive Rivalry :High

 Slow industry growth – The industry is mature and growth rate is low which causes intense competition
among the rivals. Every competitor intends to increase its market share. (negative)
 Exit barriers – Exit barriers are not high. (positive)
 High concentration and balance – The industry has monopolistic competition. There are many other
companies of same size as Starbucks with significant market share. (negative)
 Product lacks differentiation or switching costs – Switching costs is low for customers and a number
of substitutes are available in the market. (negative)
 High diversity of competitors – Starbucks has diverse competitors further causing intense competition.
(negative)

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 Low.

2.5 Retail Coffee Industry Competitive Landscape

This industry is in a mature stage with a medium level concentration. Starbucks and Dunkin Brands make up
more than 60% of the market share, giving them considerable market power in determining industry trends.
2.6 Major Companies in the Retail coffee and snacks store industry

Starbucks(America), Costa Coffee(England), Tim Hortons(Canada), Dunkin Donuts(America),

McCafe(Launched in Australia), Greggs(England), Caribou(America)

2.7 Key Success Factors in the Retail Coffee Industry:

 Supply chain management – Companies in Retail coffee industry should have a proper
management in supply chain operations. Companies must develop mutually beneficial partnerships
with farmers around the world.
 Superior store locations – A coffee store in close proximity to places of interests and landmarks
will attract more customers. In addition to that, the store atmosphere enjoys a unique perception
among customers.
 Delivering premium quality products – Consumers are mainly quality sensitive and are willing to
pay higher price for premium quality products. So, companies should pay focus on delivering
premium quality products.
3. INTERNAL ENVIRONMENT OF STARBUCKS CORPORATION:
3.1 Starbucks Core Competence:

The core competence of Starbucks is its 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 strong internal and external relationships with suppliers.
It also maintains its long term strategic objective through smart acquisitions and alliances.

3.2 Starbucks Distinctive Competency:

Starbucks distinctive competence is its sustainable supply chain setup. Coffee bean is a seasonal
product. Each season the quality of coffee bean varies from one planter to others. To keep the level of
quality and availability, Starbucks has developed highly efficient supply chain. In 2008, they
transformed their supply chain to make it simpler and effective. They reorganized their entire supply
chain into 4 basic functions: plan, source, make and deliver. After reorganizing the supply chain, they
focused on reducing the cost and improving the efficiencies. Finally, they created a single, global
logistics system which helped them consolidate their far-flung supply chain.

3.3 SWOT Analysis

Strengths:

 Strong market position and brand recognition: Starbucks has a significant geographical presence
across the globe. It has its operations in over 70 countries. Starbucks is also the most recognized brand in
the coffeehouse segment with 40% market share in US market.
 Diverse product mix-Starbucks has a diverse product mix such as hot and cold drinks, whole-bean
coffee, microground instant coffee known as VIA, espresso, caffe latte, full- and loose-
leaf teas including Teavana tea products, Evolution Fresh juices, Frappuccino beverages, La
Boulange pastries, and snacks including items such as chips and crackers. 
 Highest quality of products – They give highest importance to their quality of products. 
 Location and aesthetic appeal of their stores-Starbucks target premium, high-traffic and high-visibility
locations. Their stores are visually appealing. They provide free wifi, great music, great service and a
warm atmosphere which forms a wider part of the ‘Starbucks experience.’
 Customer base loyalty – Starbucks have implemented loyalty-based programs to drive loyalty with the
Starbucks Rewards programs and Starbucks Card. The Starbucks Card is a value card program that
provides convenience, support gifting, and increase the frequency of store visits by cardholders.

 Weaknesses:

 Expensive products - Starbucks differentiate its products and provides premium quality products.
However, in times of economic sluggishness, consumers may switch to other companies products which
offers a price lower than the price offered by Starbucks.
 Negative large corporation image - : Like any large corporation, Starbucks does come under increased
scrutiny and have to invest in corporate social responsibility activities and maintain tight control over
labor practices.

Opportunities:

 Expand product mix and offerings - : Starbucks recently started to expand their product mix by
venturing into the Tea and fresh juice product offerings .This provides significant opportunities for
Starbucks.
 Enter into developing markets – Starbucks currently operates in 70 countries. It has the opportunity to
enter into new markets and make new market share.
 Partnerships or alliances with other firms - The industry environment also presents the opportunity to
strengthen the company’s presence and market share through partnerships or alliances with other firms.
 Expand retail operations - The Company can significantly expand its network of retail stores as part of
its push towards greater market share and more consumer segments.

Threats:

 Increased competition – Starbucks faces an intense competition from its competitors such as Costa
Coffee, Tim Hortons, McCafe, Dunkin Donuts and many others. All firms in the industry are fighting to
acquire highest market share.
 Price volatility in Global coffee market– Starbucks cannot control the market prices of high quality
beans. It poses a great threat to the company.
 Changing consumer tastes- 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.
 Market saturation in developed countries- Starbucks earns majority of its revenue from developed
countries and there is increased market saturation currently.


VRIO FRAMEWORK ANALYSIS

RESOURCES AND CAPABILITIES OF VALUE? RARE? COSTLY ORGANI COMPETITI

STARBUCKS CORPORATION TO ZED? VE
IMITATE? IMPLICATI
ON?
1.Prime and strategic locations Yes Yes No Yes Temporary
 High-traffic, high visibility locations competitive
advantage
2.Global brand recognition Yes Yes Yes Yes Sustained
 Most recognized brand in coffee competitive
house advantage
 Brand with highest market share
3.Aesthetic appeal and concepts of its stores Yes Yes Yes Yes Sustained
 Stores are visually appealing competitive
 Provide free wifi, warm atmosphere advantage
and stores have a good ambience.
4.Large size and strong global presence Yes Yes Yes Yes Sustained
 Operations in 70 countries competitive
 Economies of scale through superior advantage
distribution channels
5.Human resource management and company Yes Yes Yes Yes Sustained
culture competitive
 Employees are provided great benefits advantage
like stock options and retirement
accounts
 Healthy corporate culture
6.Customer loyalty Yes Yes Yes Yes Sustained
 Loyalty based programs like competitive
Starbucks rewards and Starbucks card advantage
drive loyalty.
 Starbucks Card is a value card
program that provides convenience
and increases the frequency of store
visits by cardholders.
7.Good corporate social responsibility image Yes Yes No Yes Temporary
 They build goodwill among the competitive
communities they operate. advantage
 Stores are community friendly,
focused on recycling and reducing
waste.
3.5 VALUE CHAIN ANALYSIS OF STARBUCKS CORPORATION

PRIMARY ACTIVITIES

 INBOUND LOGISTICS – Starbucks sources its coffee from various coffee bean producers. It has an
efficient supply chain management system and a great relationship with the producers.
 OPERATIONS – Starbucks is having its operations in more than 70 countries and the stores are modeled
in the form of company-owned stores or licensed stores. It has more than 30000 stores globally.
 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.
 MARKETING AND SALES - Starbucks invests more in superior quality products and a high level
of customer service than in aggressive marketing. However, need-based marketing activities are carried
out by the company during new product launches.
 SERVICE - Starbucks aims at building customer loyalty through its in-store customer service. A
signature retail objective of Starbucks has always been to provide customers with a unique Starbucks
Experience.

SUPPORT ACTIVITIES

 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.
 HUMAN RESOURCE MANAGEMENT - Starbucks employees are motivated through generous benefits
and incentives such as stock options, retirement accounts etc. It has a great corporate culture which leads
to efficient management of human resource.
 TECHNOLOGY DEVELOPMENT- Starbucks is very well-known for the use of technology, not only for
coffee-related processes but to connect to its customers. Many customers use Starbucks stores as a
meeting place because of free and unlimited Wi-Fi.
Starbucks also uses Apple’s iBeacon system, wherein customers can
order a drink through the Starbucks phone app and get a notification of its readiness when they walk in
the store.
 PROCUREMENT - Starbucks procures its products from a diverse group of supplier and has fixed
contracts with some of the suppliers.
 3.6 STARBUCKS EFFORTS IN EMERGING ECONOMIES:-

Starbucks key strategy is of product differentiation offering differentiators such as premium product mix,
locations, supreme customer service and its reputation in coffee beverages. It is a premium valued brand
which is costly to imitate for competitors. 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. 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 70 countries. All these strategies have derived considerable
competitive advantage for Starbucks over its competitors.

3.7 COVID-19 PANDEMIC RESPONSE:-

On March 20, 2020, due to the COVID-19 pandemic, Starbucks decided to close all the cafe-only stores in the
United States for two weeks. During that time, only drive-thru and delivery-only were to function. According to
the company representatives, all workers were to be paid for the next 30 days whether they went to work or stayed
home. COVID-19 lockdowns caused Starbucks to suffer a general 10% sales decrease, and a 50% decrease in
China where quarantine measures were especially strict.
According to the business website, "Marker" their coffee sales will not recover to pre-COVID-19 pandemic levels
until 2024. The analysts estimated Starbucks will owe $1.25 billion in rent over the next year at its 16,000
company-controlled stores. The company asked for reduced rent from landlords in May 2020 due to the decrease
in sales. As of early 2020, Starbucks controlled about 40 percent of the United States coffee market. In November
2020, Starbucks announced that it plans to open an outlet in Laos as it expands its network of more than 10.000
stores in Asian countries. Starbucks said it was monitoring the corona virus situation but is still aiming at an
opening in summer 2021.

3.8 STRATEGIC M&A, PARTNERSHIPS, JOINT VENTURES AND ALLIANCES OF STARBUCKS

YEAR STARBUCKS DECISION

November Starbucks announced that it plans to open an outlet in Laos as it expands its network of more
2020 than 10.000 stores in Asian countries.
November Starbucks opened its largest store ever on Michigan Avenue, Chicago.
2019
2018 Starbucks expanded its partnership with Uber Eats to bring its beverages to U.S. customers'
doorsteps.
December The world's biggest Starbucks store opened at HKRI Taikoo Hui in Shanghai, China.
2017
July 2017 Starbucks acquired the remaining 50% stake in its Chinese venture from long-term joint
venture partners Uni-President Enterprises Corporation (UPEC) and President Chain Store
Corporation (PCSC).
May 2017 Starbucks commenced its operations in Jamaica.
February Starbucks announced that it would enter Italy, with first location to open in Milan.
2016
April 2015 Starbucks announced its partnership with Kesko, the second largest retailer in finland with
stores opened next to K-Citymarket hypermarkets.
December Starbucks purchased Teavana for US$620 million in cash.
2012
 July 2012 Starbucks acquired Bay Bread, LLC and its La Balounge bakery brand.
February Company signed a joint venture with Ai Ni Group, one of the established coffee chain
2012 company in Yunnan.
January 2012 Starbucks created a 50:50 joint venture with Tata Global Beverages called Tata Starbucks.
Tata Starbucks owned and operated Starbucks outlets in India as Starbucks Coffee "A Tata
Alliance."
November Starbucks acquired Evolution Fresh inc.
2011
May 2010 Southern Sun Hotels South Africa announced that they had signed an agreement with
Starbucks to brew Starbucks coffees in select Southern Sun and Tsonga Sun hotels in South
Africa.
2009 Starbucks acquired full ownership of Starbucks coffee France.
2008 Company entered into an agreement to acquire The Coffee Equipment company.
2007 Entered into a music partnership with Apple Inc.
2006 Acquired Café del Caribe.
2005 Acquired Ethos Water Company based in Santa Monica, California.
2003 Acquired Seattle company.
2001 Entered into an agreement with Hyatt Hotels Inc.
1999 Acquired Tazo, a tea company based in Portland.

3.9 ANALYSIS OF FINANCIAL PERFORMANCE OF STARBUCKS:-

Looking at a five year period ratio & growth analysis of Starbucks’s financials from 2015 to 2020, we can see that
the revenue growth of the company has experienced an increase in revenue of approx $7000 million till financial
year2018- 2019. Starbucks posted a decline of 11% in revenue in the financial year 2019-2020 as covid-19
pandemic lead to lockdown globally and closing of stores resulted in no sales and hence affected the revenue of
the company. The company’s net income for the period 2015-2018 shows an increase of 60% which indicates
high profitability of the company. However, net income of Starbucks declined 79% from financial year 2018-
2020. Company suffered a great loss due to theCovid-19. Company’s ROI has increased by 157% during period
of 5 years from 2014-2019. The main reason for high ROI is their huge market share. Their premium quality
products lead to customer satisfaction. Therefore, increasing its ROI. Company’s assets have increased by 105%
over a period of 5 years which is mainly due to an increase in the long term investments made by the company.
Starbucks also posted an increase in the current and long term liability for the financial year 2019-20. Its current
liability increased $6168 million in 2019 to $7346 million in 2020. Long term liability also increased from
$19281 million in 2019 to $29871 million in 2020. The main increase in liability is mainly due to the increase in
long term debt of the company. Starbucks ROE has been negative (-57.689) for financial year 2019. Overall,
company is facing decline in sales due to the pandemic which has hit the whole world. But it will soon recover its
fall in profitability because of its premium quality products and high customer loyalty. Financial statements of
Starbucks have been shown in Appendix 1 and 2.
4. RECOMMENDATIONS:
1) 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.
2) Starbucks should tailor its menu’s and expand to give more healthy product offerings in its mix as
consumers taste and lifestyle may shift towards snacks and other beverage options.
3) Starbucks US market has reached saturation. So it should focus on getting additional penetration into
untapped rural markets.
4) 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.
5) 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 risk through 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.
6) Starbucks invest very little in advertising and marketing initiatives. It would be recommended that
Starbucks make significant investments in advertising and marketing initiatives in the face of increased
competition in the market.
7) 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.
8) Further build and retain customer loyalty, by building on beta concept of on-the-go home delivery.
5. APPENDICES:
APPENDIX 1: Balance sheet of Starbucks Corporation from FY 2015-16 to FY 2019-2020
APPENDIX 2: Profit and Loss Statement of Starbucks Corporation from FY 2015-16 to FY 2019-2020

APPENDIX 3: Starbucks operation in different countries

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