The following report is an external analysis of Starbucks with the main focus on competitor analysis and investigating the contemporary trends in the hospitality industry. The formal and extensive investigation has been based upon Case Study 23 ‘Starbucks’ Strategy and Internal Initiatives to Return to Profitable Growth’, and the report discusses the current competitive position and performance of Starbucks in relation to the coffee industry’s contemporary trends.
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The report has initially presented the history of Starbucks, moving on to the competitor analysis describing major competitions of Starbucks in Australia as well as around the world citing the major key values of each rival. The report then presents the current position of Starbucks in the industry, the swot analysis of the company and how the company has reacted to major contemporary trends. The report concludes with a roundup and an outlook into the future of Starbucks in Australia.
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Company Background
Starbucks was founded in 1971 by 3 friends who started the coffee house in Seattle, Washington. It was basically intended to sell whole bean coffee in only that one stand-alone shop but by 1982 the business had grown to include a chain of five stores selling both coffee and coffee beans, a facility for roasting the beans, and a whole sale business to cater to the local restaurants. It was during this time that Howard Schultz was recruited as a manager of retail and marketing. After a visit to Italy where coffee was considered a major attraction for Italian cafes, he sought to incorporate the idea into the American culture. He bought Starbucks from the original owners in 1987 for $ 4 million and started expanding his concept. His first priority and initial focus of the expansion was the customer who valued the Starbucks experience, great coffee, and a comfortable, casual and fashionable meeting place with relaxing, first-rate background music.
Starbucks thus grew rapidly in the United States reaching over 10,000 retail stores that represents almost 79% of the total revenue that is generated. Recently, Starbucks has refocused their attempt onto the middle-class market and have tried to expand through additional distribution channels which include grocery, joint-venture and online stores. Additionally, Starbucks has expanded into the international market including Japan, the UK, Australia, Mexico and China totalling the international retail locations to over 1600. Starbucks has also expanded into the entertainment avenue using mediums such as books, music projects and films to increase revenue.
The vision statement of Starbucks is to establish Starbucks and the recognized and respected coffee retail brand globally and become a national company with values and guiding principles that their employees would be proud of. From this vision statement, it can easily be observed that the company dreams to expand all over the world with brand recognition, positive appreciation and loyal following. The company also focuses on its vision of employee satisfaction by providing excellent health care facilities to evade its part-time employees.
Competitor Analysis
Since 1987, the specialty coffee industry has come a long way, both in terms of product variety and competitive rivalry. Unlike the early days, when Starbucks had to compete against small-scale and local speciality coffee retailers, the industry has now grown globally and Starbucks has to compete against organisations of different sizes and exposures. All of these competitors, although serving specialty coffee, are differentiated from Starbucks in one or more ways and they each have their own strong points.
Another main competitor of Starbucks is a Minneapolis-based specialty coffee chain, Caribou Coffee. There are similar to Starbucks in their attempt to create ‘The Third Place’ but the similarity ends there. In contrast to Starbucks, which tries to create an upscale European atmosphere, Caribou coffee brings together an all encompassing American atmosphere to their coffeehouses. After being founded in 1992, Caribou coffee has come a long way currently operating 500 stores, employing more than 6000 people from grossing revenues of roughly $ 230 million (Caribou Coffee, 2008). Caribou Coffee has designed their coffeehouses after rustic Alaskan lodges (Quelch, 2006). Often these coffeehouses include knotty pine cabinetry, soft seating and numerous fireplaces. In addition, there are a lot of premium newspapers and magazines that can be read as customers wait for their orders. Caribou Coffee also guarantees speedy service in addition to free refills. Other strong points include offer of free Wi-Fi in their coffeehouses, drive-through service and the provision of meeting rooms for rent (Caribou Coffee, 2008).
A. L. Van Houtte, a Canadian-based company, is another strong competitor of Starbucks in the Canadian region. Van Houtte serves nearly 3,000,000 cups of coffee each day through its hundred corporate outlets but their strong point is the design, manufacture and distribution of coffee making equipment through the subsidiary, VKI Technologies. Serving nearly 71,000 different workplaces in major cities throughout North America, Van Houtte is considered to create the largest coffee service network in the North American region (A.L. Van Houtte, 2005).
Another strong rival in the specialist coffee industry is Peet’s coffee and tea company which was the original inspiration for Starbucks. Peet’s coffee was purchased by the original three founders of Starbucks and moulded into Starbucks but later this was sold out to Howard Schultz, who then started aggressively expanding nation and worldwide. Originally based in Berkeley, California, Peet’s coffee has rebounded by recently opening a new roasting plant in Alameda, California which will facilitate it to twice over its current annual sales of almost $ 250 million. In 2007, the only three Peet’s coffee houses in Seattle metropolitan area outperformed all Starbucks outlets in the locality. This was basically due to Peet’s strategy which is to differentiate themselves from Starbucks by creating a super-premium brand of coffee. They super-premium brand of coffee offers the freshest coffee in the market by ensuring that coffee is delivered “roasted to order”. Coffee beans are roasted in small batches and shipped to retail shops within 24 hours ensuring a fresh aroma and flavour (Review: Despite Growth, Starbucks Can’t Dislodge Local Rivals, 2007).
Furthermore, Starbucks has to face rivalry from two large multinational companies, Dunkin Donuts and McDonald’s. Although both of these companies are quite old in the fast food industry, they have recently entered into the specialty coffee sector. Of these, the largest industrial rival is McDonald’s which originated from a single San Bernardino, California hamburger stand in 1948 and has evolved into the world’s largest restaurant chain having over 200,000 restaurants worldwide. In the United States alone, the fast food giant has over 14,000 restaurants in the grosses revenues in excess of $ 22 billion. The key strong point which has led to such successful expansion of McDonald’s is their consistent quality standards that they have achieved in addition to their quick service and low prices (Adamy, McDonald’s Takes on Starbucks, 2008).
Dunkin Donuts, on the other hand, who claims to be the world’s largest coffee and baked goods chain operates around 5500 franchises in the United States, 80 stores in Canada and almost 2300 stores throughout the rest of the world. In 2007, Dunkin Donuts had revenues in excess of $ 5 billion. Recently, Dunkin Donuts has put in a lot of effort and emphasis on coffee beverages. This has led to the strong key value of having an assortment of types, styles and flavours in their product line-up. The serve espresso, cappuccino and latte in an assortment of flavours including French vanilla, hazelnut, cinnamon and other numerous and exciting flavours. Another strong value of Dunkin Donuts is their ability to comprehend and quickly grasp business opportunities. When Starbucks temporarily shut down 7100 of their stores in 2007 to retrain their baristas, Dunkin Donuts quickly responded by increasing their operating hours through the night and offering small cappuccino, espresso and latte drinks at a price of $ .99 to grasp Starbucks customers (Adamy, Starbucks Upgrades Espresso Machines, 2007).
Current Position of Starbucks
Starbucks’ success so far can be attributed to five primary factors. The first of these factors was their ability to design a strategic approach to growth that quickly demonstrated the feasibility of their business model and took advantage of some key demographic groups. Next was their ability to attract the highest-quality employees through the implementation of a superior healthcare plan while reducing costs and giving equity ownership to all employees. The strategic alliance they had with conservation international allowed them to create a sustainable supply chain of high quality coffee.
The three previous factors helped enable them to foster the fourth factor in their success, a community environment in which casual social interactions could take place. The fifth factor to their success was their ability to adapt to the changing dynamics of their consumer demographics. All of these factors have allowed them to stay at the forefront of the specialty coffee industry.
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SWOT Analysis
In order to gauge the future performance of a company, we need to analyse how it performs currently, the company’s characteristics as well as those of the surrounding market. An excellent tool that are used for breeding these qualities is the Strengths, Weaknesses, Opportunities, and Threats analysis , also referred to as SWOT analysis. Looking into Starbucks specifically, we consider each of the four factors in this analysis:
Strengths:
Starbucks has an established brand name that is associated with high quality specialty coffee especially in the United States and also worldwide and as such it has a mutual edge over its less known rivals.
Starbucks also has an enormous number of locations in the domestic market as well as a good number in the international one as well. This allows them to execute new products quickly across a large demographic ensuring exposure to a large number of clientele and also preventing new entrants from gaining market share.
Another practice that gives the company good public image is Starbucks’ efforts to preserve the environment and be ethical in its dealings. Their affiliation with Conservation International and their care for their coffee farmers in the well-known phenomena and helped them gain a respectable position in the market.
Starbucks mission to make its stores a ‘Third Place’ for people by providing them a place to go besides work and home by offering comfortable chairs, cosy atmosphere and free Wi-Fi Internet has been a successful phenomena.
Starbucks has also successfully changed the concept of coffee being a commodity to a luxury item in the process has been able to increase and maintain coffee prices at much higher level than would have been possible, thereby increasing their net profits.
Weaknesses:
Although most people consider Starbucks coffee to be a luxury item, there is an increasing opinion that Starbucks charges too high a price. There is also a location inflexibility meaning that a cup of coffee in LA cost the same as a cup of coffee in Beijing.
The entire business of Starbucks rests on the coffee industry and if coffee turns out to be a fad, they must either diversify or go out of business whereas the rivals, for instance McDonald’s, have invested in a variety of industries.
Another weakness of Starbucks in going international is the lack of study of foreign cultures. They have tried to impose the Italian-cum-Americans culture in their global locations. For example, Starbucks has had to close down a majority of the locations in Australia because they fail to understand the Australian concept of coffee.
Another weakness of Starbucks is their lack of variety in flavours whereas their competitors offer a variety of flavours and tastes in the coffee products.
Opportunities:
By purchasing other companies such as XM Cafe, Seattle’s Best and Tazo Tea, Starbucks has the opportunity to utilise a different brand name to explore the market in a different niche. Starbucks also have the opportunity to cater specialty goods such as bottled Frappuccinos etc. to other companies.
By expanding globally, Starbucks has the opportunity to derive revenue from untapped resources worldwide.
Threats:
The biggest and most significant threat to Starbucks is a serious competition. Several companies such as Peet’s coffee and Coffee Bean are developing coffee products that will rival those of Starbucks whereas companies that are already established such as McDonald’s and Dunkin donuts that already have the infrastructure are focusing on quality coffee to add to their menus.
Another serious potential threat is that coffee is not a genuine need and is basically just a fashion and people may eventually grow out of it. If this occurs businesses that rely only on the coffee industry and do not have a vested interests in other segments may eventually run out of business.
Contemporary Trends
Coffee Drinking Habit in Australia & In the World
The habit of drinking coffee has been on the rise over the past decade and now more people are consuming coffee on a daily basis. This rise in demand for coffee has been seen as an opportunity especially by the companies producing specialist coffee products for examples Starbucks and Caribou coffee. This rise in demand has translated into more coffee outlets and virtually a coffee house at every corner.
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Coffee chains such as Gloria Jeans and McCafe have positively affected coffee consumption by attracting additional segments of the Australian public into the ‘cafe society’. With a 50% increase between 2001 and 2005, Gloria Jeans and McCafe outlets are approaching number one chain in Australia. However, Starbucks has enjoyed far less success with only 58 functioning outlets in the country so far. But despite the swelling number of cafes, Australia’s coffee habit still lags behind Japan, Italy and some Scandinavian countries. Coffee experts say that the next opportunity for Australian coffee market growth is in faster, cheaper coffee.
Fair Trade
Fair trade refers to the concept that one party should not enjoy benefits at the expense of the other. In terms the hospitality industry in general and the coffee industry in particular, this means that large organisations should not pursue strategies of ensuring low prices of coffee at the expense of farmers’ living standards. This is one of the ‘in’ trends where every company tries to portray itself as a company involved in fair trade policies which, in the eyes of the general public, in turn brands the company as ‘good’. Starbucks’ social responsibility strategy describes how Starbucks ensures fair trade and sets a high standard in the area of conduction of business. Since 2000, Starbucks has only been purchasing coffee that has been Fair Trade Certified meaning that it is only purchased from farmers who are able to show that they take good care of their employees and adhere to a minimum wage rate policy. This fair trade certification also ensures that those farmers are paid a guaranteed minimum price for their coffee. Starbucks has been going a little further by paying those certified farmers a price higher than the conventional coffee market rate. In this way, Starbucks has portrayed itself as a company which does not pursue low coffee prices at the expense of the farmers. As such, they have been able to show that they care about the social and economic consequences for farmers in these communities and this, in turn, has gone a long way in helping their brand image.
Coffee Health Risks
According to Harvard Women’s Health Watch, a few cups of coffee a day are a safe beverage and they even offer some health benefits. The latest research has not only confirmed that moderate coffee consumption doesn’t cause harm, it has also uncovered possible benefits. Studies show that the risk for type 2 diabetes is lower among regular coffee drinkers than among those who don’t drink it. Also, coffee may reduce the risk of developing gallstones, discourage the development of colon cancer, improve cognitive function, reduce the risk of liver damage in people at high risk for liver disease, and reduce the risk of Parkinson’s disease. Coffee has also been shown to improve endurance performance in long-duration physical activities. Even for people who drink coffee to stay alert, new research suggests that a person must be more alert if the coffee consumption is spread over the course of the day. However, all these benefits associated with moderation and excessive drinking still leads to a lot of health risks. Caffeine, coffee’s main ingredient is a mild addictive stimulant. And coffee does have modest cardiovascular effects such as increased heart rate, increased blood pressure, and occasional irregular heartbeat that should be considered. Studies have been largely inconclusive regarding coffee and its effect on women’s health issues such as breast health, cancer, and osteoporosis. But, the negative effects of coffee tend to emerge in excessive drinking so it is best to avoid heavy consumption.
This suggests an increasing need and want for coffee worldwide and as such it presents an opportunity for the specialty coffee industry. As moderation is the key, Starbucks will need to highlight this factor and show that drinking small light coffee drinks may be beneficial to health. They need to advertise this fact very broadly to convince the heavy, strong coffee drinking Australian public of this fact.
Environmental Leadership
Another contemporary market trend is being the leader in environmental conservation. companies these days hiring third parties to verify the management of waste, conservation of nature of resources, prevention of the wastage of water and energy, protection of water quality, preservation of biodiversity and reduction of the use of agrochemicals. Starbucks has shown a lot of initiative in continuous improvements of programs that will enable it to display its environmental leadership and have used independent third-party verification processes.
Social responsibility
Companies that are seen to be paying special attention to ensure, fair and humane working conditions for the employees, protecting the rights of workers, paying a fixed minimum wage rate, providing adequate living conditions and generally being more attention to the workers’ well-being are considered better than companies that are not. Starbucks has shown strong industry leadership in this area as well by ensuring all of these as well as going a little bit further by providing health care facilities to its employees, and compliance with child labour and forced labour requirements.
Home-made coffee
Consumption of home-made coffee has been on the rise and this has led to strong demand for high-quality roasted and ground coffee that can be prepared at home. Consumers are now seeking to replicate the quality and taste of cafes at home and there has been a strong increase in demand for both ingredients and coffee machines. According to Datamonitor’s Market Data Analytics (MDA) database, retail coffee sales in Australia grossed Aus $ 752 million and ranked second, only behind Singapore, in per capita coffee consumption amongst the Asian economies in 2008. Apart from opening coffeehouses, there is potential for Starbucks to increase sales of roasted coffee beans and coffee machines.
Conclusion
Although Starbucks has been a market leader in the specialty coffee industry, it has been showing a downward trend in both revenues and profits over the last couple of years due to its aggressive expansion strategy whereby company management has focused on the lateral expansion without paying attention to its vertical. Rival companies, for instance Gloria Jeans, have gone a long way by keeping to its locality but extending vertically. It is time that the management of Starbucks started thinking again in terms of quality rather than quantity, and thinking before leaping into international waters. Starbucks needs to identify and study foreign cultures and trends before expanding into those markets.
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