In 1971, Starbucks Corporation was founded by America in Seattle, Washington. The company is a premium retailer, marketer and roaster in the world of specialty coffee around the world. In about 62 countries, Starbucks has 19,767 stores that are company operated where around 182,000 employees work. They deal with the beverages like high quality coffee, tea and food items that are handcrafted and roasted. They also sell a wide variety of tea and coffee products that are sold by other channels like grocery, licensed stores and nationalized food service stations. There is marketing of products that mix with other brands within Starbucks like Tazo, Teavana, and Starbucks VIA, Evolution Fresh, Seattle’s Best Coffee, Verismo and La Boulange. Until 29th September 2013, $14.89 billion was the total revenue of Starbucks.
Starbucks primarily deals with the operation and competition in the snacks store and retail coffee industry. In 2009, the company faced a major economic crisis and slowdown due to the change in the consumers taste. This led to a major decline in the industry revenue in United States to 6.6% that is to $25.9 billion. However, the industry had a consistent growth for a decade. Due to this economic crisis, the consumers started purchasing low priced food items and started avoiding high priced coffee and other drinks. They started spending less on the luxurious food items. The average growth rate of the company was slow as it rose from 0.9% in 2008 to current $29 billion in 2013 in the revenue industry in United States. The forecasting for the company in next five years is that it will grow at a rate of 3.9% with $35.1billion in the United States revenues. The improvement in the economy, expansion of menu and offerings and increase in the consumer confidence would help the company to gain this future growth rate within the company. In the world of coffee, Starbucks dominates as its market share is 36.7% with competitors like Dunkin Brands with 24.6%, Costa Coffee, McDonalds and Tim Horton as shown in the Appendix 1.4
The company has a medium level competition that is in the mature stage in which the Dunkin Brands and Starbucks make up the maximum of the market share that is 60%. This gives them the immense power to determine the industry trends in the United States.
The demand for the snack products and Starbuck’s premium coffee is greatly driven by many factors like disposable income, per capita coffee consumption, demographics, world based coffee pricing and the people’s attitude towards health. The company is greatly affected by the household disposable growth that is the macroeconomic factors. At the time of recession, there was a decline in the income of the household disposable as there was stagnant wages and unemployment in the state. Moreover, it caused a downward pressure on the profitability and revenue of the industry. The increase in the demand of the industry is also due to another crucial factor like coffee consumption per capita in which there is increase in the consumption of snacks and coffee shops thereby increasing the revenue. This is due to the increase in the income of household disposable, improvement in the economy and relaxing of budgets among the consumers. These driving factors pose a positive effect to the industry’s revenue. By 2014, the coffee consumption per capita is expected to increase.
The price of the coffee beans greatly determines the profitability margins and market costs as the coffee beans are the basic input that adds to the industry value chain of participants. In the recent years, there is a remarkable increase in the price of the coffee and as a result, there is shortage in terms of supply. Until 2018, there is a decrease in the prices of coffee beans that will translate into higher profitability and low market costs. The demand in the industry is also determined by the attitudes of the people towards health. In the year 2014, there was shift in the eating habits, diet and lifestyle among the consumers. This shift posed a potential threat to the revenue of the industry as the people are becoming aware of their health in terms of overweight and obesity. As a result, the company’s menu showed proactive shift with tailoring of food items that are healthy products mix and organic substances.
The Starbucks premium coffee is made from coffee beans like Arabica Coffee is grown in the selected areas that provide standard inputs. This results in moderately low effect cost switching between the substitutes and suppliers.
The incumbent brands like Starbucks counter the entry of these suppliers by scaling the economies in terms of improved efficiency, low cost and a huge market share. There is differentiation in terms of product quality, store experience and real estate locations of Starbucks as compared to the new entrants that experience a moderately high barrier.
Being an encumbering firm, Starbucks has large scope and scale that yield the favorable access and learning curve advantage in terms of raw material and also in the building of relationship with the suppliers.
The factors like resources, brand equity, price competitions and real estate locations are moderately high in terms of retaliation from the branded companies that leads to the creation of moderate barrier for the new entrants.
Although Starbucks have the power to take advantage of the suppliers because of its scale and size, it maintains a C.A.F.E program that is coffee and farmer equity in certified fair trade coffee. This provides a fair status in partnership that yields low and moderate power to its suppliers.
Starbucks have monopolistic competition with closest competitors and large market share that have a significant effect on the market share. This creates significant pressure on teh industry.
The five force analysis gives a clear picture of the industry analysis that the strength of forces and profitability in the snacks and coffee industry is moderate.
The offering of high quality premium product mix, beverages and snacks gives Starbucks the ability to leverage effectively the customer needs by product differentiation strategies. Starbucks sell the premium quality of coffee and provides a unique experience to the consumers of Starbucks and that is the way the company has built its brand equity. Moreover, it also provides superb customer service and maintains a clean hygienic environment that reflects the community culture of their operation and helps to build customer loyalty on a high degree. The human resource management is its core competence that is value-based which helps in establishing string relationships with the internal and external suppliers. It also drives the expansion into the international markets with successful deployment of its business strategies. It also maintains its long-term objectives and strategies and horizontal integration through alliances and smart integration makes Starbucks the most respectable and recognized brand in the world.
The generic value chain of Starbucks: Analysis
Operations: Starbucks is operating in around 60 countries with their licensed stores and company operated stores being modeled.
Inbound logistics: They source their coffee from the diverse producers of coffee beans. They have a strong relationship with the suppliers that make up the efficient supply chain management system.
Outbound logistics: The product mixes of Starbucks are generally sold in store and the coffee, tea, iced beverages and fresh fruit juices in the large box retailers. The payments are greatly done in the form of mobile payments, point of sale and prepaid Starbucks cards.
Sales and Marketing: The investments made in the marketing activities are generally insignificant as it mainly relies on the growing reputation in terms of product mix of high quality and in the customer services that are superior giving a Starbucks Experience that drives the consumers to use their products and visits stores.
Service: The Starbucks hold reputation in the delivery of providing customer services at supreme level to the consumers.
Human Resource Management: Employee empowerment, great benefits and amazing corporate and organizational culture of Starbucks make the human capital with efficient management.
Firm Infrastructure: They have great appealing stores that are well designed. They also have efficient level of accounting, finance and legal departments that greatly supports the company’s infrastructure.
Technology development: The investments in mobile app and other innovative technologies are use widely by the Starbucks consumers.
Procurement: The Company obtains its products from a wide range of suppliers and also has fixed contacts with many suppliers.
3.4) VRIO analysis of Starbucks: (Appendix 4) this framework is used for the analysis of the detailed competitive position and strategic positioning of Starbucks Corporation.
Since the time of its inception, Starbucks followed product differentiation in terms of offering premium product mix, coffee, iced beverages, locations and customer service. This offers the company to build premium value brand that is too costly for other companies to imitate. It has also followed a strategic alliance that is shrewd and in smart acquisitions making. The franchising model and the stores operated by model orientation were not followed by Starbucks. Rather, the key acquisitions such as Bay Breads in the form of premium bread products, Teavana in the form of tea products and Evolution Fresh in the form of fresh fruit products are made by Starbucks that is product diversification strategy. The Appendix 7 provides a whole list of the strategic alliances, joint ventures and acquisitions of the Company. The acquisition history, strategy in shown in the Appendix that is product, horizontal and market extensions acquisitions provided in the acquisition history. Starbucks followed another crucial strategy for its growth in the international expanding markets like the emerging and developed markets. It is geographically diversified and is successful in their operation which helped them to operate in around 60 countries. All these strategies derived serious competitive advantage for Starbucks.
The six year analysis from the year of 2008 to 2013, the revenue growth has declined with a drop of -5.9% due to the 2008 recession. However, since the year 2010, the revenue has shown a healthy growth from the financial years from 2010 to 2013. It has a growth rate from 13.7% and posted revenues of $14.9 billion in the financial year 2013. The Company’s operating margins of income have increased from 4.9% to 15% since 2008 to 2012 during the financial year. In the year 2013 the Company has an operating loss that resulted in the -2.2% during that year. This caused them litigation in terms of $2.8 billion to the Kraft Foods that terminated the agreement with Starbucks. This was considered to be the extraordinary event that discounted from the healthy operational performance of the Company. Starbucks ROA was 17.8% and ROE was 29.2% that is quite impressive with 17.8% and 29.2% in 2012 financial year. The efficiency ratios of Starbucks are impressive with operational efficiency of inventory turnover ratios and impressive assets of 5.4 and 1.51 respectively for the financial year 2013. However, the cash conversation cycle of the Company has increased to 54.7 in the financial year where the company should concentrate to reduce so that it attains high efficiency. The financial growth and ratio calculations are provided in Appendix 5. With low debt leverage and good financial health Starbucks boasts with a equity or debt ratio of 0.29 for the financial year 2013.
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