Analysis for Expansion of Starbucks

Introduction:

The history of Starbucks starts in Seattle in 1971.Three friends Jerry, Zev Siegal, and Gordon Bowker who all had a passion for fresh coffee, opened a small shop and began selling fresh roasted , gourmet coffee beans and the brewing and roasting accessories .The company did well, but things began to change in 80’s.

First Zev Seigal sold out in 1980.Yet at that time, Starbucks was largest roaster in Washington with six retail outlets. In 1981 a plastics salesmen noticed the, number of drip-brewing thermoses that Starbucks was buying from Hammerplast, the manufacturer that he represented.

A brief history of Starbucks:

Starbucks has always been the place to find the world’s best coffees. But in 1971, you would have had to travel all the way to out first-and at that time, only – store in Seattle’s first Pike Place Market.

1970’s : The first Starbucks opens. The name comes from Herman Melville’s Moby Dick, a classic American novel about the 19th century whaling industry. The seafaring name seems to be appropriate for a store that imports the world’s finest coffees to the cold, thirsty people of Seattle .

1980’s: Howard Schultz joins Starbucks in 1982. While on a business trip in Italy, he visits Milan’s famous espresso bars. Impressed with their popularity and culture, he sees their potential in Seattle. He’s right – after trying lattes and mochas, Seattle becomes coffee-crazy

1990’s: The demand for great coffee allows Starbucks to expand beyond Seattle, first to the United States, then further a field. After becoming one of the first companies to offer stock options to its part-time employees, Starbucks becomes a publicly traded company.

2000’s: The Starbucks phenomena continues. At the time of writing Starbucks has more than 15,000 locations across the globe. In addition to our excellent coffees and espresso drinks, people now enjoy Tazo tea and Frappuccino and ice blended beverages.

Howard Schultz:

In 1982 Baldwin hired Schultz as a new head of marketing and shortly thereafter sent him to Milan to attend an international housewares show in Italy. Schultz went to Verona and had his first cafe latte. But he observed something more important than the coffee. The cafe patrons were chatting and otherwise enjoying themselves while sipping their coffees in the elegant surroundings. It was an “aha” moment as inspiration struck.

A great idea :

Schultz describes that moment as epiphany, ” why not create community gathering places like the great coffee house of Italy in the united States?” Could the old world meet the new world? If it succeeded , it would be marketing genius.

By 1983 the marketing manager had a vision of recreating the magic of romance behind the Italian coffee bar and wanted to test out the concept of selling the espresso by the cup.

II Giornale and Starbucks go their separate ways :

When Starbucks coffee is opened its sixth store in downtown Seattle, the coffee was a hit , it was an immediate success.

Schults, however branched out on his own and opened a coffee house named Italy’s largest newspaper , The Daily or II Giornale., Two months later , the new store was serving more than 700 customers a day , and it was selling 300 percent more than the Starbucks locations.

Sell out : This is my company now.

In 1987 the owners of Starbucks coffee company decided to sell their coffee business , along with the name, to a group of local investors for $3.7 million. Schultz raised the money by convincing investors of his vision that they could 125 outlets in the next five years. He also changed the II Giornale bare- breasted mermaid logo into a more socially acceptable figure. The company name changed from II Giornale to Starbucks, and finally he converted the six existing Starbucks, roasting shops into elegant , comfortable coffee houses.

The era of growth :

Starbucks coffee history was just beginning to take shape. Starting from a base of 17 store in 1987, the company expanded rapidly to other cities: Vancouver, Portland and Chicago.

By 1991 Starbucks has also expanded into the mail-order catalogue business and licensed airport stores and further into the state of California.

In1992 the company went public, and after the intial offering of public Starbucks continued to grow at a phenomenal pace that no one had ever seen in the coffee world before. By 1997 the number of Starbucks coffee stores grew tenfold, with location in United States, Japan, Singapore.

Other business extension :

Not satisfied enough with just a store house coffee, Starbucks expanded several other products and brand extensions.

Offering Starbucks coffee on United Airlines flights

Selling premium teas through Starbucks’ own Tazo company.

Using the internet to offer the people the option to purchase Starbucks coffee online.

Distributing whole bean and ground coffee to supermarkets.

Producing premium coffee ice cream wit Dreyer’s.

Selling CD’s in Starbucks retail stores.

The Starbucks shows how the once small regional roaster, selling coffee beans, became an international corporation with with more than 9000 locations in 34 countries serving 20 million customers or more a week. In fiscal 2004 , Starbucks reached a record 1,344 stores worldwide.

2. Objectives And vision:

Commitment to safety and customer service.

Low unit cost.

Strong branding.

Strong corporate culture.

To increase the loyalty with the average customer visiting the company at least twice a week .

By the year 2011 the consumer under thirty years of age should account for 35% of total sales.

Increase in the target market without detracting from older consumers.

To become the preferred coffee house established for the age group of the under thirties.

To increase the net profit margin to 12.5 %.

To increase the profit level by 15% per annum over the next ten years.

Mission Statement: “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow”

3. Features Of Starbucks :

Instant Coffee: This is not instant coffee as you know it .this is a rich , flavourful Starbucks coffee in an instant . Starbucks had found a way to offer a truly great cup of coffee that u can prepare by just adding water. Other instant coffees taste flat and lifeless.

It’s made with the highest – quality, ethically sourced 100% Arabica beans. The magic is in a proprietary, all natural process that we spent years perfecting. We micro grind the coffee in a way that preserves all of their essential oils and flavour. No other company takes this step, and it makes all the difference.

Sales And Expansion: Starbucks always choose beautiful location and atmospehere where people can enjoy their coffee. It opened its first locations outside Seattle waterfront station in Vancouver, British Colombia and Chicago, Illinois, that same year. At the time of its initial public offering on the stock market in 1992, Starbucks has grown to 165 outlets.

International Expansion: Starbucks is serving for all the coffee lovers in many countries in the world. Currently Starbucks is present in more than 55 countries across the globe.

Fair Trade: In 2000, the company introduced a line of fair trade products of the approximately 136,000 metric tons (300 million pounds) of coffee Starbucks purchased in 2006, about 6 percent was certified as fair trade.

4. Marketing Strategy Of Starbucks:

Starbucks’s marketing strategy involves positioning the local Starbucks outlet as a “third place”(besides home and work) to spent time, and the stores are designed to make this easy and comfortable. The cafe section of the store is often outfitted with comfortable stuffed chair. There are ample electrical outlets providing free electricity patrons using or charging their portable music devices or laptop computers. Most stores in U.S and some other markets also have wireless internet access (although this access is not free, as it is in some independent coffee shops).

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The company is noted for its non-smoking policy at all it outlets, despite its prediction that this would never succeed in markets such as Germany, where there are otherwise few restrictions on smoking. Outlets in Vienna and Mexico city, which have smoking rooms separated by double doors from coffee shop itself, are the closest company has come to making an exception. According to the company, the smoking ban is to ensure that the coffee aroma is not adulterated. The company also asks its employees to refrain from wearing strong perfumes for similar reasons. Starbucks generally does not prohibit smoking in outside seating areas.

Starbucks generally does not offer promotional prices on its products. It has a reputation for having pricey drinks, though as of early 2006 Dunkin doughnuts charged even more for a large cup of coffee ($1.95 vs. $1.80 at Starbucks). In late 2006, Starbucks announced that it would raise prices by $0.05 USD, at the beginning of new fiscal year, October 2, 2006.

5. SWOT Analysis:

Strengths

Revenue targets: Starbucks corporation is a very profitable organisation, earning in excess of $600 million in 2004. The company generated revenue of more than $5000 million in the same year.

Brand Awareness: It is a global coffee brand built upon a reputation for fine products and services. It has more than 10000 cafes in almost 55 countries.

Leading company: Starbucks was one of the top Fortune Top 100 companies to work for in 2005. The company is respected employer that values its work force.

Strong Ethics and Mission: The company has strong ethical values and mission statements as follows, ‘Starbucks is committed to a role of environmental leadership in all facets of our business’

Locations: Starbucks coffee shops locations are at convenient places like library, shopping malls and etc.

Weakness

Pricing: Pricing of Starbucks are higher as compared to the competitors.

Business spreading: The organisation has a strong presence in the United States of America with more than three quarters of their cafes located in the home market. It is often argued that they need to look for a portfolio of countries, in order to spread business risk.

Lack of internal focus: Starbucks lacks in internal focus as its focuses too much on its expansion.

Control on stores: Starbucks have less control on stores outside the U.S, and also ever increasing number of competitors in the market.

Dependant on retail market: The organisation is dependant on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should need the arise.

Opportunities

Added opportunity: Starbucks are very good at taking advantage of opportunities. In 2004 the company created a CD-burning service in their Santa Monica (California USA) cafe with Hewlett Packard, where customers create a own music CD.

Fair Trade Products: New products and services that can be retailed in their cafes, such as fair trade products.

Market penetration: Entry into Asian market like Pakistan, India, Bangladesh and also this market penetration is done even in several International countries.

Global Expansion: The Company has the opportunity to expand its global operations. New markets for coffee such as India and the Pacific Rim nations beginning to emerge.

Co-Branding: Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.

Threats

Coffee cost: Starbucks are exposed to rises in the cost of coffee and dairy products.

Customers Choice: Who knows if the market for will grow and stay in favour with customers, or weather another type of beverage or leisure activity replace coffee in future?

Copy cat brands: Since its conception in Pike Place market, Seattle in 1971, Starbucks success has lead to market entry of many competitors and copy cat brands that pose to potential threats.

Coffee pricing: Starbucks have variation in coffee prices in developing countries

Security: Security risk at crowded places can also be one of the major threat.

8. Porter’s Five Forces

The food or beverage industry is one of the growing industries today. A company need to analyse both macro and micro-environmental factors. Porter’s five forces ,model helps the companies to have an edge over rival companies and help to better understand the current market. Porter’s five forces are the internal factors that have a direct impact on the current market and helps to affectively compete in the market place.

• The threat of intensity of industry rivalry
• The threat of the entry of new competitors
• The threat of substitute products or services
• The bargaining power of Suppliers.
• The bargaining power of customers (buyers)

The threat of intensity of industrial rivalry:

Small speciality coffee shop chains and independent coffee shops – Costa, Nero in Europe; Caribou coffee, Van Houtte, Peet’s Coffee and Tea company in Canada and USA.

McDonalds – McCoffee

Dunkin Donuts

Nestle?

The threat of new competitors:

Starbucks has a very strong brand name which is built over a period of time. Any new competitor into coffee business need to invest lot of money for advertising and marketing to get set in the market.

Economies of scale – high economies of scale are required to compete with the already established companies.

Distribution channels – the top retailers have established powerful global distribution channels.

Well known brand names and difficult distribution.

The threat of substitute products or services:

Choosing less expensive alternatives than the luxury coffee that Starbucks offers.

Other substitutes of the coffee are the caffeinated soft drinks.

The bargaining power of suppliers:

Fair Trade. It ensures that the coffee farmers would be paid fairly for their crops

Increasing number of speciality coffee buyers.

Supply and price can be affected by multiple factors in producing countries, including weather, political and economic conditions.

The company buys coffee using fixed-price and price to be fixed purchase commitments, depending on the market conditions, to secure and adequate supply of quality green coffee.

Expansion: The Starbukcs will have power on its suppliers by how much the Starbucks expansion is done

The bargaining power of buyers:

Buyers play a significant role in the Porter’s forces and this scenario has a great advantage.

Buyers are the individual consumers who do not buy large quantites and do not have any influence over the price.

Presence of substitutes.

No switching costs.

High risk of backward integration.

7. Marketing Mix Strategy

The Starbucks brand, marketing mix is kept value with very good upshot. The steadiness of the product goes well with it’s price for very good products, the place are known as beign very comforting for customers apart from if the free way is next door. The atmosphere is so peaceful for customers. The product, price, place, promotion show evenness in the reputation of being a clean and upmarket coffee shop.

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Price:

The amount of money a buyer must give to the seller for a specific quantity of the product is the price of that product and usually consumers use this as an indicator of quality (Dalrymple & parsons, 1986). Price and quality determines the value of the product. When launched, Starbucks was expensive and was positioned in accordance with that. They always tried to deliver the high value promised to the consumers. They bought the quality beans, gave effective and efficient training staffs, and moreover, made an atmosphere to enjoy coffee, meet fellow people and ‘take a break’ from the busy life. These all justify and their pricing and show how price supported their positioning.

Product:

Starbucks tried to positioned themselves as a premium product in the coffee industry by creating a high standard, introducing innovative products and providing excellent service. Schultz knew how perishable the coffee was and they take care on coffee control, and hence carefully they monitored each step of coffee production. Usage of non-fat milk and introduction of Frappuccuino made a significant presence in the balance sheet of Starbucks. Moreover, they provided seasonal offerings such as strawberry and cream Frappuccuino in summer and ginger bread latte in Christmas, were introduced. Gradually food items such as cookies, pastries, salads, sandwiches made they way into the stores.

Place:

Distribution channels link the organisation’s product or service to its consumers; and in a producer consumer channel, as in the case of Starbucks maintaining personal relationship with the customers in significant (Brassington & pettitt 2000). As demand grew, these store clusters made them able to manage the increase traffic and to keep their competitive position. In the same way they took care about the service provided in the stores. Howard Schultz aimed to unlock the romance and mystery of coffee in coffee bars, and he knew how important the role of baristas in achieving that. Baristas experience in engage the customers was the heart of Starbucks experience. Thus they differentiated in the market by constantly providing higher quality service.

Promotion:

All marketing activities that attempt to stimulate buyer action or sales of a product can be considered as a promotion (Shrimp, 1977). Starbucks used to organise a big community event prior to the opening of its stores. Artworks are designed to boast the each city’s personality and it was used on commuter and T-shirts. They also recruit local ‘ambassadors’ from new partners and to customers to promote their brand. They dint use advertising but they used those funds for acquiring key locations. Starbucks tried to establish a national dominance before other speciality coffee bars into the picture.

8. PESTLE Analysis:

PESTLE analysis stands for Political, Economical, Social, Technological, Legal and Environmental analysis. PESTLE analysis provide macro-environmental factors that a company has to tale into consideration. It is useful as strategic tool for understanding maket growth or decline, business position and direction for operations.

Legal and Political factor:

The factors that include the stability of country in which Starbucks purchases its coffee and other raw goods. Coffee is grown in some pretty dicey areas. Also they proclaim to be environmental friendly, so they have to cosider how to protect the brand aspect in everything they do form increasing the shade of share grown and organic coffee, for providing a living wage that makes it to individual farmers, to have production techniques with low pollution rates.

Right now, Starbucks has two action suits pending since 2001. The law suits entitled Carr Vs Starbucks and shields Vs Starbucks are challenging the status of Starbucks California store managers and assistant managers as exempt employees under California wage and hour laws.

Starbucks also only imports all their coffee beans, so possibly threats could include a change in import laws. The change in the status as far as imports could greatly affect numerous areas of production for the company. For example if it cost more to import or the process is made more difficult the result could ultimately change in price, which would affect the level of consumption for Starbucks coffee.

Economic factors:

Economic factors are an important aspects that concerns the nature and direction of the economy in which the firm operates. Since the relative affluence of various market segments will affect the consumption patterns, companies must take this into consideration when planning its strategy.

The company’s net revenue increased from $1.3 billion fiscal 1998 to $ 1.7 billion in fiscal 1999 due primarily to the company’s store expansion program and comparable store sale increases. As a part of its expansion strategy of clustering store in existing markets, Starbucks has experienced a certain level of cannibalization has been justified by incremental sales and return on new store investments. This cannibalization, as well as increased competition and other factors, may continue to put downwards pressure on the company’s comparable store sales growth in future periods (www.Starbucks.com).

Social Factors

As a result from the economic factors Starbucks closely following their objectives, the company has installed a list of principles that further outline the company’s willingness to make sure that its affect on the environment is as positive as possible. These principle are stated as:

Understanding of environmental issues and sharing information with our partners.

Developing innovative and flexible solutions to bring about change.

Instilling environmental responsibility as a corporate value.

Measuring and monitoring each our progress for each project.

Encouraging all partners to share in our mission.

Recognizing that fiscal responsibility is essential to our environmental future.

The importance of these guidelines is further illustrated by the company’s mission to show leadership towards environmental issues. Starbucks does not just rest on its laurels, it demonstrates through participating and organising activities such as neighbourhood clean-ups. Further examples of the company’s action towards friendliness include the recycling and reusing of resources in order to enhance the lives of the people around the world (www.Starbucks.com). This illustrates the integrity of the company as they can sometimes sacrifice the opportunities if they don’t follow the company stands for. In addition to the waste reduction, Starbucks also aims to reduce energy usage and once again demonstrates this by doing energy audits and then using the result to change store design or procedures so that they save as much as energy possible.

Technological factor:

Starbucks has developed a web-site that allows its customers to buy speciality items and coffee directly through internet. Consumers can also research products, look up current financial info, current Starbucks store location and also see answers to some of the sites most frequently asked questions.

Coffee in Starbucks is made with 4 special but simple fundamental steps, firstly, use the right proportion of the coffee to water. Second the brewing process is short: third, use flesh, cold water heated to just off the boil; fourth, use fleshy ground coffee. Customers besides having coffee and flesh food in the shop. Starbucks also provides to go service and bottled which have different tastes like hazel nut, mocha, vanilla, caramel, etc. All those beverages are flesh food are handcrafted and may be customized.

Environmental Factors:

Starbucks has a wide range of business activity. These activities help company to use numerous channels of product distribution. With the company operating in many locations worldwide environmental factor plays a major role in marketing decisions. Each distribution channel affected differently and the company’s flexibility in the marketing plan allows the company to adjust their strategies to meet the needs of the environmental factors. Starbucks provides a work environment treating others with respect and dignity. The company embraces diversity as an essential component in the way Starbucks does business. Starbucks believe that the company should enthusiastically satisfied customers all the time and contribute positive to our communities and our environmental and recognise that profitability is essential to our future success (Starbucks.com, 2008).

Starbucks owns and operates its own facilities, warehouses and retail stores giving the company control of product design, shipping and receiving. The company’s strategy is to sell premium products and pricing the products as high as the market will allow. Starbucks brand awareness is very important and by introducing new products developing new distribution channels. Starbucks is one of the leading company in sales of coffee and coffee products in the domestic and global markets. The company’s management policies have allowed Starbucks to grow and prosper as an organisation.

9. Ansoff Matrix

Ansoff matrix allows companies to explore ways to grow business with existing products or services and new products in existing and/or new markets. This helps companies decide what action should be taken. Ansoff matrix has four combinations:

Market Penetration

Product development

Market development

Diversification

Market penetration: Market penetration is done when a company penetrates a market with the current products. It is important to know that the market penetration strategy begins with the existing consumers of the organisation.

Market development: This occurs when the market you are analysing make some sort of change or advancement. Using the Starbucks example, market development has occurred over the past couple of years as customers are becoming more health conscious. Preferences are moving toward different types of teas/drinks and customers are demanding more healthy alternatives. These factors have aided to market development, with different franchise popping up, such as Argos tea, which become direct competitor to Starbucks.

Product Development: In response to the market development mentioned above, Starbucks is introducing new product developments in order to compete with companies aiming to offer customers more health conscience drink options. Enter the new product, “Skinny lattes” and low fat/calorie syrups at Starbucks.

Diversification: Due to the saturation of U.S. coffee market, and the decreasing of their gross profit margin, Starbucks has started to move from having a concentrated business strategy to a diversification strategy. Starbucks has realised that once a market matures that it is too risky to b concentrated, and we agree that they should keep diversifying their business product lines in an effort to stay profitable, and competitive. They should diversify into products such as candy, bagels, and other food related products.

Conclusion

Starbucks has been increasing its debt every year, and at a pace that is faster than their assets are growing. This is why we chose the firm to slow down its expansion and its focus more on marketing their products. In such a saturated market as the one that they are in Starbucks needs to focus on increasing consumer awareness and to decrease debt as much as possible. In closing we believe that Starbucks can become even more profitable if they slow down their expansion and concentrate on the stores that they already have open.

Starbucks, its brand and products are at the maturity stage of product life cycle(PLC).

Change in a more and more competitive market is essential

“The Perfect Blend” will give Starbucks a new, unique and future oriented brand image.

(www.docstoc.com)

9. Starbuck’s Future:

Name president for European operations

Mark McKeon will be responsible for strategic entry and growth into Europe.

Plans to open at least 400 stores during 2000.

Enhancing information systems

Starbucks submitted plans to build or renovate at least 10 stores around the world. These store are designed or redesigned around green building principles. This puts Starbucks in line to meet its mandate to have all new stores be LEED certificate by the end of the year.

The company began converting all lights in its stores to LED technology in 2010. Starbucks estimates that 1,000 stores have undergone the lighting retrofit. The company expects this change significantly reduce its energy consumption.

Starbucks bought enough renewable energy certificates to have 25% of its electricity generated by clean energy sources. The company has a goal having a 50% of electricity produced by renewable energy in 2010.

10. Recommendations

Revamp the employee reward system

Large percentage of staff are under the age of twenty.

Benefits package focuses on medical, dental, and vision care, as well as employee stock options.

Outside of hourly wage, and semiannual raises, there are few monetary rewards.

Tighten focus on creating the “Third Place” environment.

Site has a very high employee turnover rate

Manager “Promoted” to a another site in hopes of improving their poor performance

Site has very poor handicapped accessibility

Conditions of restroom in each of our visits was poor and no baby changing area.

Focus Profitability Measures On More Than Just Staffing

Store is underperforming some high margin product segments

Too high focus on minimizing direct labour as a key to achieve profitability

Focus on high-margin items and profitable add-on sales

By increasing pastry sales by 33%, store would realise a $16K increase in contribution.