Starbucks Coffee, Tea, and Spices, was founded in 1971 in Seattle’s Pike Place Market. The name was later changed to Starbucks Coffee Company. Starbucks later entered the public marketplace through their initial public offering on June 26, 1992. Stated Objectives Starbucks has several objectives for success as a company. The objectives are as follows: • “The Company’s objective is to establish Starbucks as the most recognized and respected brand in the world. ”(www. starbucks. com) • Focus on the core customers • Operate as environmentally friendly as possible Offer superior customer service • “Apply the highest standard of excellence to the purchasing, roasting, and fresh delivery of our coffee”(www.
starbucks. com) • “Recognize that profitability is essential to our future success”(www. starbucks. com) Evaluation of Objectives Starbucks strives to obtain brand recognition worldwide through high quality products and services. The strong focus that is put on the customer at Starbucks is apparent from the atmosphere and the staff that the company employs. The staff is well taken care of as far as compensation and benefits.
To be environmentally friendly Starbucks gives to numerous philanthropic efforts. In addition to giving they have also established their own charities throughout the years. The company offers industry leading health benefits that begin after initial ninety days that include medical, dental, and vision. Full-time and part-time employees are also eligible for stock option grants through Bean Stock, which is the company’s wide stock option plan. To achieve profitability and keep up with the costs of employee benefits, Starbucks has expanded at an astounding rate domestically and around the world.
The company currently operates in all 50 states in the United States as well as the District of Columbia, and worldwide in 43 countries. The future success of Starbucks is heavily dependent on global success in emerging markets where Starbucks has introduced their products. The objectives that Starbucks has established for their success are being implemented in a way that has made them successful since their inception. There strategies and tactics have created one of the most valuable and well-known brand names in the world.
The future of the company is heavily reliant on these objectives and is critical to their overall mission, which is to “establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow” (www. starbucks. com). Evaluation of Strategies In an effort to maintain its momentum, Starbucks has several key strategies that it will implement in an attempt to continue its growth as a company and grow its profitability. The first of those strategies is to further expand operations.
The bulk of those expansions will be in international markets. With stores currently located in 50 states numbering over 11,000 locations domestic expansion is limited. Although Starbucks can continue to open stores in the domestic market it is likely that it has begun to see a reduced level of return on those store locations because they are situated in locations that are not as profitable or are cannibalizing revenues from stores that are currently in operation. In the international market, Starbucks has only “1,796 company-operated stores” and “2,792 joint venture and licensed stores. These store locations range from Australia and Canada to Saudi Arabia and Russia. With such a small presence over such a large area it is likely that further globalization will result in greater levels of profitability than further saturation of domestic markets. Another strategy to further the Starbucks brand is the growth of specialty sales and introduction of new products. Such products and sales most recently included a “Semi-Automatic Espresso Machine,” which was developed in unison with BMW and “Starbucks Limited Reserve, a new line of rare and exquisite coffees. By furthering the level of differentiation and expanding its product base, Starbucks can build on an already strong portfolio of products in an effort to continue its growth in the market. Also, a larger offering of products will allow Starbucks to give customers fresh new products while possibly retiring products that have passed their prime. These new products will entice customers to continue to visit Starbucks stores to sample the new line. Finally, Starbucks plans on continued brand leveraging and the opening of new distribution channels to continue product penetration into the market.
Examples of further brand leveraging in an effort to open new distribution channels include “Starbucks Bottled Frappuccino Coffee Drinks in China through Coffee Partnership with Pepsi Co. and Starbucks Farmer Support Centers in Ethiopia and Rwanda. ” This strategy will help Starbucks in a multitude of ways. It will allow Starbucks to further develop itself outside of the United States and will increase its market penetration and visibility in the global market. This global diversification is essential to Starbucks continued growth because as earlier stated; returns in the domestic market are limited.
It is primarily through non-domestic opportunities that Starbucks can continue to develop it as a premier supplier of coffee and non-coffee related beverages. Also, global markets are showing greater signs of growth than current domestic markets, to ignore this growth would be detrimental to Starbucks future. Generic Strategy Outline and Evaluation With premium products and a distinctive atmosphere Starbucks has differentiated themselves from the low cost competitors that had dominated the market prior to its arrival.
Starbucks has developed their differentiation strategy with a unique and individualized product line along with a trendy setting to set themselves apart from competitors currently in the market and those that may be planning to enter. To set themselves further apart from competitors Starbucks has developed their own unique lingo and jargon that appeals exclusively to their target market. One of the key ingredients in Starbucks strategy was to capture a market that was almost entirely dominated by low cost providers in order to differentiate itself in a way that would allow a premium price to be obtained for its product offerings.
Prior to Starbucks emergence, coffee was a simple and low cost beverage that did not demand a lot of attention or decision making. Starbucks radically enhanced the simple beverage from simply sugar or cream to an experience that enabled the company to grow to “7,087 Company-operated stores and 4,081 licensed stores. ” With “More than 30 blends and single-origin coffees” along with “Hot and iced espresso beverages, coffee and non-coffee blended beverages, and Tazo teas” Starbucks was able to offer its customers what many other coffee providers were not able to, a significant amount of choices.
At Starbucks a customer can order any one of a multitude of coffee and non-coffee products in an almost endless array of variations. Such a selection of coffee beverages, coupled with an unsurpassed level of quality of these beverages, was almost unheard of at the time and gave customers a level customization that warranted the high prices that Starbucks charges for its products. Though the level of selection and uncompromised commitment to quality may have been enough to set Starbucks ahead of the crowd, the company did not stop there.
Another Focus of Starbucks was the setting in which it served its coffee blends. Unlike other providers of coffee that concentrates on the speed of delivery, Starbucks focuses on the setting of its establishments. In each of the trendy establishments Starbucks entertains its guests with “A selection of the best in music, books and film from both emerging and established talent. ” This attentiveness on the experience is another way that Starbucks differentiates itself from its competition.
While many of Starbucks competitors focus on simplicity and speed regarding the customer interaction, Starbucks is focusing on creating an inviting setting that adds value to the coffee through added peripheral entertainment which promotes the store as a destination and not simply a stopping point in route to a destination. Financial Analysis Performance Starbucks is performing at a steady and even pace due to the company’s ability to expand over ten years while keeping gross profit margin, return on sales and operating profit margin constant. This has led to incremental increases in net income.
This can be mainly credited to Starbucks continuous success and widespread popularity as a coffee house. In only thirty years they were able to go from 33 stores to almost 16,000 coffee shops worldwide at the same time they were able to maintain their level of performance. Debt Paying Ability Cash flow has increased ten times the amount in ten years due to the tremendous reach Starbucks has achieved over the past ten years. By investing this cash flow back into operations Starbucks has achieved a very strong brand name along with a large network of stores.
Innovation of new Starbucks exclusive products and beverages has also contributed to the company’s ability to repay debt. Starbucks’ ability to pay debt has gone down as Starbucks has incurred a large amount of short term debt along with the increases in benefits as the Starbucks operation grows. Capital Structure Right now Starbucks has acquired a significant amount of debt, in comparison to the last 10 years they are at an ultimate high. The rise in investment in property plant and equipment has caused Starbucks to take on a large amount of debt in short term borrowings.
This ensures increases in total liabilities to equity and total liabilities to assets and denies Starbucks the ability to pay off debts quickly. Amongst others investments they have expanded into the entertainment industry, collaborated with BMW Group Designworkers USA and Saeco to introduce a new semi-automatic espresso machine Starbucks Sirena. Also, they opened a Starbucks Farmers Support Centers in Ethiopia and Rwanda. Due to these new ventures they are at a slower pace at repaying their debts then ever before. Liquidity
Due to the ongoing expansion, new joint ventures and acquisitions there have been rises in short term debt and compensation over the past three years. This has had a negative effect on liquidity. More alarming is the net working capital, which may slow Starbucks global expansion and may force them to sell assets that are not giving them a significant return. With so many projects in the works, Starbucks is literally strapped with money in terms of liquidity. Activity Starbucks entire turnover rate seems to be fluctuating, but overall is consistent.
Though it may be rational to assume that inventory turnover would decrease during periods of expansion, this is not the case. This is a testament to Starbucks supply chain management prowess. Furthermore, the operating cycle stability is parallel with operations at this time. Starbucks SWOT analysis Strength • Dominant brand name that is known for premium coffee and related products o Their mission statement is “to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. • Has tremendous reach with over 15,000 stores world wide o At one point Starbucks was going at a rate of 3 and half stores world wide per day • Has a trained and dedicated workforce that gives superior customer service o Starbucks employees are considered “partners,” and given benefits such as health care for full and part time and stock options o One of Starbucks guiding principles is to “develop enthusiastically satisfied customers all of the time. ”3 • Starbucks is a leader in the coffee industry Has 42% of the coffeehouse marketplace o Their sales for 2007 was $9. 4 billion and had a net income of $672 million • Has a wide array of premium products • Has developed a trendy venue based on European coffeehouses • Has partnerships with other companies to increase reach o Starbucks has a long licensing agreement with Kraft Foods Inc to bring Starbucks whole bean and ground coffees in the grocery channel in the United States o Starbucks has an agreement with Dreyer’s Grand Ice Cream, Inc. ho distributes Starbucks coffee ice creams o Starbucks has a partnership with Pepsi Co to supply in bottled ready-to-drink coffee at several different retail locations. They currently hold 90% of this market • Has an integrate supply chain and collaborates with brokers to procure high quality coffee beans o Starbucks has a subsidiary called the Starbuck’s Coffee Agronomy Company whose job is to obtain high quality coffee beans at a flat rate Weaknesses Extensive training and benefits for the staff causes high costs o Starbucks cost for compensation for its employees was at $332,331, for 2007 • Excessive growth over the last decade and a half has caused an inability to expand anymore domestically • Jargon and setting of their coffeehouses discourages mainstream consumers • Has had difficulty in expanding in international markets o Starbucks is seen as an American icon and may be subject to anti-war protests and boycotts o Starbucks had to close stores in Tel Aviv because of the conflict between Israel and Palestine • Vulnerable to a cost leadership strategy McDonalds and other fast food restaurants are currently positioning themselves as a direct competitor with Starbucks • Net working Capital has been negative for a number of years and is currently at -$459,079 o A negative net working capital prevents Starbucks from expanding or obtaining new assets or companies Opportunities • Can expand in global markets o Both India and Russia have a young market where Starbucks has little presence • New technology allows better customer relations for retailers and more services offered o Starbucks recently unveiled the Starbucks card that can be custom designed and is able to be reloaded o Starbucks had a BMW design team develop the Sirena espresso maker Threats Increase in commodities such as dairy has increased costs o Starbucks tries to create a fixed cost for both dairy and coffee beans, but they are not immune to market increases in price • More competitive marketplace o McDonalds had a 15% increase in coffee sales in 2006 • Few barriers to enter the marketplace • Lagging economy is now in a recession o There is the possibility that an extended recession would push the public towards a less expensive alternative to Starbucks Problems and Issues Starbucks has several problems due to the lagging economy and the rapid expansion over the past decade and a half. Their expansion has hurt there net working capital.
Starbucks is not getting the same return on each store they did in years past. This is going to force Starbucks to close low performing stores domestically and may slow growth internationally Starbucks has prided itself on giving its employees or “partners” benefits such as health care to full and part time employees and stock options. With the amount of stores and employees they currently have these benefits have become massive costs that have hurt Starbucks bottom line. In 2005, Howard Schultz, the current Chairman, told legislatures that the insurance costs has had double digit increases in each of the last four years. He called this “completely non-sustainable. ”
Another increase in costs is the in the commodities market. With the dollar weakening and the rise in oil has increased the commodities market including coffee and dairy, two supplies that are essential to Starbucks success. With these rising costs Starbucks is susceptible to a low cost strategy. McDonalds and other food service organizations are using this strategy and taking market share from Starbucks. Starbucks business plans and objectives prevent Starbucks from competing with these restaurants directly. Their introduction of a breakfast sandwich was considered a failure and taken off the menu. Starbucks has recently received criticism for being anti union.
They fired Daniel Gross who was a union organizer and was fighting for higher wages. After the dismal the National Labor Relations board accused Starbucks of breaking the law thirty times while preventing union activity. Starbucks is also having problems overseas. As one of America’s biggest companies Starbucks is seen as an American icon and is at risk for anti war protests and boycotts in international markets. They had to close stores in Tel Aviv due to the Israel/Palestine conflict. Despite these setbacks Starbucks is still a major leader in their industry. To remain that way Howard Schultz and his upper management will have to come up with innovative, new strategic plans. Strategic Alternatives
After analyzing Starbucks’ objectives, financial status, and problems and issues we have devised five strategic alternatives designed to keep Starbucks competitive in the future years. The first and most obvious is positioning Starbucks as a low cost leader. For years Starbucks has been a trendy, expensive coffeehouse so this would be a drastic repositioning. This strategy would allow Starbucks to compete directly with McDonalds and takes away a major competitive advantage that McDonald’s has over Starbucks. The second strategic alternative is creating more innovative distribution strategies. This will increase Starbucks already tremendous reach. The distribution will be a combination of offering Starbucks products in different locations and offering a delivery service in urban areas.
By creating partnerships with high end restaurants, amusement parks, movie theatres, and large companies Starbucks will be able to bring their products to a new untapped market. In movie theaters and restaurants Starbucks would have to supply with the training, equipment, and the material necessary to sell Starbucks drinks. A tight partnership is essential to make sure they are selling Starbucks at the required quality level. With large companies and amusement parks Starbucks could create a miniature coffeehouse. The menu wouldn’t be as large as a regular coffeehouse but it would be run by Starbucks to ensure quality and that the brand name is intact. The delivery service would be in urban areas only and would be directed at offices.
The delivery would have a minimum dollar amount that customers would have to order and the drivers would need a container that could keep the coffee hot until the driver could get to the destination. An indirect benefit is that it may lower lines during peak hours because coffeehouse employees would not have to deal with one person ordering for his/her entire staff. The next plan would be to consolidate domestically while expanding globally. The Starbucks would have to close coffeehouses that are underperforming and/or canalizing the market. The expansion internationally would be at a much slower pace due to the negative net working capital and anti-American sentiment. The most untapped markets that Starbucks would focus on are India and Russia.
They currently have limited amount of stores in Russia and none in India. In both areas Starbucks will have to use partners in those regions to reach those markets. Another strategic alternative would be to cut costs in two areas. The first area is health care and stock options. These benefits need to be cut, particularly health care. Starbucks currently pays more in health care than in coffee beans. The first step is to increase enrollment from three to six months for part time employees. Also, health care will be reduced to a minimum for part time employees and stocks will only be offered to full time employees after a year. Stock options will not be available for part time employees.
Deductibles would go up for both part and full time employees but Starbucks will begin a wellness program for long-time employees and anyone who enrolls in the program would be offered discounts in health care. The wellness program will be designed to try to keep employees healthy therefore decreasing health care. The program would compel workers to make a yearly check up exam. There will be drug tests every six months and the drug test would test for illicit drugs and nicotine so anyone in the program would be unable to smoke cigarettes or chew tobacco. Starbucks would make a partnership with a national chain of gyms and employees in the wellness program would get a discount for signing up.
Another cost cutting measure will be to offer reusable rubber sleeves that will be available to the public for a dollar. These will replace paper sleeves that Starbucks already put on their coffee cups. These rubber sleeves have the added benefit for being good for the environment. The final idea is a customer relations contest. Customers will enter recipes for coffee related drinks to their local store. Each month the manager will pick one recipe and introduce it as the customer special of the month. Half profits will be donated to the charity of the winning consumers’ choice. This plan will hopefully develop relationships with customers and get more repeat business.
Evaluation of strategic alternatives • Low cost provider o Will it accomplish the objectives? While this approach will increase sales and repositions Starbucks towards the mainstream public, this doesn’t focus on their core customers and doesn’t increase Starbucks brand image as a supplier of premium coffee. o Will it address/solve issues? One of Starbucks problems is competition from low priced competitors such as McDonalds. This plan does allow Starbucks to take away the competitive advantage of McDonalds. o What is the impact of all functional areas? A low priced product puts a strain on operations and finance. With profit margins cut the idea there is pressure to cut costs.
This would mean lesser quality coffee beans and other materials that may compromise the brand image of Starbucks • Innovative distribution strategies o Will it accomplish the objectives? By increasing the reach of Starbucks these tactics will help them draw nearer to becoming the most respected and recognized brand in the world These strategies will also have the indirect benefit of reducing lines and help Starbucks offer superior customer service o Will it address/solve issues? While inventive distribution doesn’t deal with any specific problems, it will help them reach more consumers and increase profitability. o What is the impact of all functional areas?
All of these tactics will be initially costly. This will put a strain on an organization that already has a large amount of debt, but with partnerships and promotion of this strategy Starbucks will see a return on their investment • Consolidate domestically while expanding globally o Will it accomplish the objectives? With profitability being essential for success it is vital that Starbucks closes under performing stores while continuing to grow globally. This will also help establish Starbucks as the most recognized and respected brand in the world o Will it address/solve issues? The problem of expanding so quickly domestically is that it saturated and cannibalized the market.
Starbucks didn’t get the returns on some of its stores that they expected and the massive debt that Starbucks acquired o What is the impact of all functional areas? With the sale of assets and the reduced costs domestically by consolidating this should free up some cash flows and allow Starbucks to expand globally. This expansion will be slower and at a more deliberate pace than what they did in the years past in the US. • Cost cutting measures o Will it accomplish the objectives? While these actions go against the overall vision of Chairman Howard Schultz and how they take care of Starbucks’s employees, they are necessary to achieve the objective of profitability.
The wellness package will soften the shock and the public relations hit Starbucks will receive after the cutbacks, at the same time creating healthier employees who will decrease the overall cost of health care. The rubber sleeves fit the goal of being environmentally friendly o Will it address/solve issues? While still operating in the black the negative net working capital, due to the rapid expansion, is the o What is the impact of all functional areas? These measures will affect both finance and human resources/management. The financial division will see the benefits of the cost cutting measures. The decrease in compensation will allow Starbucks to reach its growth potential.
The human resources and management division will deal with the major changes along with the fall out from the employees from the cut in benefits. • Customer relations contest o Will it accomplish the objectives? This plan is designed for the core customers and will develop relationships with these customers o Will it address/solve issues? With the saturation of Starbucks in the domestic markets it is important to emphasis repeat customers and increase market penetration o What is the impact of all functional areas? This contest will be time consuming and the managers at each coffeehouse will have to invest significant time in this strategy Recommendations In order to assure success in the future we recommend the following alternative strategies.
First Starbucks will initiate a cost cutting measure that will include health care, stock options, and the introduction of rubber sleeves to replace the current paper sleeves that prevent customers from burning themselves. With these measures in place Starbucks can reduce costs globally as well as remaining environmentally friendly. Although the reduction of employee compensation goes against the culture of Starbucks, it is imperative to the future success of the company. A further way to decrease costs is to streamline operations domestically and continue expansion globally at a purposeful pace. Secondly Starbucks will initiate a customer involvement initiative.
The focus on the customer is the key element in this recommendation. The initiative will include recipe contests in local stores. Customers will have the opportunity to develop beverages based on personal taste preferences using only the ingredients available at Starbucks. The customer can then submit the beverage to the local store and have a chance to be selected as “customer concoction of the month”, in which a portion of the proceeds will be donated to the winning customers’ charity of choice. The implementation of this recommendation will continue the customer focus that Starbucks thrives on as well as, draw new customers to the local stores to boost revenues.
Cite this Starbucks Coffee Company Swot
Starbucks Coffee Company Swot. (2018, Feb 16). Retrieved from https://graduateway.com/starbucks-coffee-company-swot/