Starbucks Company Profile
Starbucks is an American company, which was established in 1971 in Seattle as a prime roaster, retailer, and marketer of coffee in the entire world. Currently, Starbucks has approximately 200000 employees working in 70 countries with 20100 licensed stores (Starbucks, 2016). Starbucks’ product mix is composed of high quality handcrafted and roasted as well tea, coffee and a number of beverages and other fresh food items. Currently, the company focuses on retail expansion, service and product innovation and these strategies have made it one of the respected and recognized brands in the world. Given its position in the market, it is important to determine why the economic and marketing models of Starbucks are successful to drive its sales. However, analysis of the coffee industry will provide an idea of why these models leave to be emulated.
Industry and Competitive Analysis
The coffee industry experienced a decline in growth in 2009 because of the world economic crisis and changing tastes and preferences by consumers. In the same financial year, the revenue in the coffee industry declined by approximately 6.8% to $25 billion. Before the decline in growth, the industry was experiencing growth for more than 10 years (Giovannucci, 2009.). The economic crisis made the consumers to spend less on luxurious goods and services such drinking high priced coffee offered by most leaders in the market. This behavior was facilitated by shrinking consumer budgets and incomes. The industry started growing at a slow pace of approximately 1% to 2% from 2008 until 2013 when the industrial revenues were approximately 30 billion USD in United States. The growth of the industry was facilitated by improved economies, expanded offerings in the industry and increase in the consumer confidence in relation to the consumption of the coffee. Currently, Starbucks enjoys the largest market share with other corporations such as Costa coffee, Tim Horton, and Mc Donalds with other companies taking the other share of the market.
Porter’s five forces analysis
Threat to Substitute
There are many substitutes to the coffee products in the market; these include fruit juices, water, sodas and energy drinks. In addition, alcoholic and non-alcoholic beverages also compete coffee in the market. Some of the coffee consumers make their own home coffee utilizing the premium coffee makers. This results from the differences in coffee prices as well as changing economic situations. The above factors make the cost of switching from coffee to other substitutes low. As a result, the threat to substitute is high.
Threat of Entry of New Players in the Industry
The threat is moderate because the barriers of entry of new players in the industry are not high. In addition, the saturation companies in the industry is moderate because the number of companies in the production and distribution of coffee products is low. At the retail level small shops are involved competition because there no switching costs involved (Giovannucci, 2009.). The entry of new players in the market is affected by large coffee companies such as McDonalds and Starbucks because of large economies of scale and improved efficiency.
Bargaining power of the consumers
The threat of bargaining power of consumers is low because there are many consumers in the industry and no individual has the power of determining the coffee prices. The sensitivity of the consumers in relation to premium coffee is moderate because of high prices of premium products but are more sensitive to the product quality. Absence of switching costs forces the rivals compete in terms of product prices affecting the consumer elasticity
Bargaining power of the Suppliers
Most of the players in the industry are large exerting pressure on their suppliers. These suppliers depend on the growth of the coffee companies such as Starbucks. However, there are specific rules to ensure that the suppliers have the ability to supply high quality beans. On the other hand, the suppliers operate in unions depending on their regions in order to affect the changes in price. This makes the threat to have moderate effect on the coffee companies
The intensity of the competition in the industry is high because of the presence of large companies such as Starbucks and McDonalds, which have significant share of the market as well as large sales and revenues (Bussing-Burks, 2009). Lack of switching costs also facilitates increased intensity of competition within the industry because other players can enter the industry.
Internal Analysis of Starbucks
The following financial analysis can be made in relation to operating revenues, growth, margins, returns, leverage and liquidity from 2007 to 2014. The company experienced negative growth of -5.9% in the 2008 to 2009 Fiscal year. This growth rate was facilitated by economic recession that transformed the consumption patterns among the customers (Starbucks, 2016). After Schultz took over as the Chief Executive Officer, growth rate increased with the company attaining revenue of $11.7 billion in the 2011-12 financial years, this was an increase of 9% in comparison to the previous financial year. Other average financial attributes from 2010 to 2014 are as follows:-
(i). Growth in operating income- 1.7 billion
(ii). Cash from operating activities -1.6 billion
(iii). Cash in investment activities-1 billion
(iv). Increase in gross margin- 58%
(v). ROE- average growth of 2%
Starbucks SWOT analysis
(i). Starbucks is a company with a strong financial base.
(ii). It is a respected and strongest brand in United States making it to have the largest market share. As of 2013-14 financial year, the company was valued at $6 billion and this position makes to command because of its low cost of production the economies of scale.
(i). High prices of its products
(ii). Variation of coffee prices in the market affecting the profit margins negatively
(iii). Unethical practices which lead to negative publicity
(i). The company can increase the number of retail stores and add more products in its portfolio to compete with the emerging substitutes
(ii). Expanding its target market to emerging economies such as China and India
(i). Economic and political disruptions affecting the supply of the coffee beans
(ii). Increased coffee prices beyond the control of the company
(iii). Stiff Competition from other coffee companies like McDonalds
Weighted Strength Analysis
Weighted rating of Starbucks
Total Weighted Strength Analysis=4.0
Marketing Mix Example
In regards to the product portfolio, the company offers high quality tea, premium coffee, Iced tea as well Italian beverages. Lemonades and cold tea are the main flavors of the Toza team (Starbucks, 2016). The company utilizes cultural phenomenon in developing its product portfolio. In addition, the company is always attempting to diversify and enhance its products in order to complement coffee in the industry (Starbucks, 2016). Numerous strategies are used in innovation and diversification of its products to achieve its objectives in the market.
When compared to its competitors in the market, the company charges premium prices for all its products. The management of Starbucks believes in the strategy of brand differentiation and is not involved in price war strategies to outdo its competitors in the industry. In addition, it offers wonderful services as well as a good environment that facilitates changes in prices of its products. The premium prices complemented by the quality of its products increases customer loyalty not only in the United States but in also other parts of the world.