BUSINESS 478

Section D100

CASE SYNOPSIS FOR:

STARBUCKS CORPORATION

Group 5: Karen Wu
Krystal Zhang
Nelson Chien
Adams Ma

Date: March 11, 2015

 FIRM HISTORY

Starbucks Corporation (Starbucks) is an American coffee company based in Seattle, Washington. It is

the largest coffeehouse company in the world and serves a variety of beverages, teas, pastries and snacks.

Starbucks was founded in Seattles Pike Place Market by Jerry Baldin, Zev Siegl, and Gordon Bowker in 1971

as a roaster and retailer of whole bean, ground coffee, and tea (Starbucks, 2015). The three founders were

inspired to sell high quality coffee beans and named the company after the first mate in Harman Melvilles

Moby Dick (Starbucks, 2011). By 1983, Howard Schultz, the current chairman, president, and CEO of

Starbucks, had already joined Starbucks and convinced the founders to test out an Italian coffeehouse concept

at the store. The concept was a success and Starbucks established a sense of community (Starbucks, 2011). In

1987, Howard Schultz bought out Starbucks from its founders and started to expand rapidly (Starbucks, 2011).

Starbucks completed its IPO on the NASDAQ on June 26, 1992 (Starbucks, 2011).

Starbucks mission is to inspire and nurture the human spirit one person, one cup, and one

neighborhood at a time (Starbucks, 2015). Since then, Starbucks has been serving the best coffee possible

by selecting the highest quality coffee beans and roasting the balanced and rich flavor of the beans.

CURRENT SITUATION

Today, Starbucks offers the Starbucks Experience and the company is the largest global

coffeehouse chain. Starbucks current business model is a mixture of company-operated stores, licensees,

franchisees and joint ventures (Brennan, 2014a). The company has expanded to a broader range of products

including: coffee, handcrafted beverages, merchandise, fresh food, and consumer products (Starbucks, 2015).

As of December 2014, Starbucks brand portfolio consists of Starbucks Coffee, Seattles Best Coffee,

Teavana, Tazo, Evolution Fresh, La Boulange, and Torrefazione Italia Coffee (Starbucks, 2015).

Rapid Growth

As previously mentioned, Starbucks experienced rapid growth from 1987 to 2007, opening an

average of two new stores every day (Lepore, 2011). As of December 28th, 2014, the company has a total

of 21,878 stores around the world (Starbucks, 2015). For the fiscal year ending September 28th, 2014,

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Starbucks net revenues and operating income was $16.44 billion and $3.08 billion respectively

(Starbucks Coffee Company, 2014). In addition, the majority (73%) of Starbucks revenue came from

American markets then followed by EMEA, CAP, and the Channel Development segment at 8%, 7%, and

9% of total revenue respectively (Starbucks Corporation, 2014).

Figure 1: Starbucks Net Revenues & Operating Income

Note. Adapted from Starbucks Coffee Company Fiscal 2014 Financial Highlights, 2014. Retrieved from http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9MjY3NzM2fENoaWxkSUQ9LTF8VHlwZT0z&t=1

Social Conscience

Starbucks is concerned about production and fair trade of coffee beans. To ensure a long term supply

of high quality beans, Starbucks practices ethical sourcing. This includes responsible purchasing practices,

supporting farmer loans and forest conservation programs (Starbucks, 2015). Also, the company is trying to re-

duce its environmental footprint by reducing the usage of energy, water and recycling programs. Starbucks also

hopes to contribute one million volunteer hours to Starbucks stores communities by 2015 (Starbucks, 2015).

EXTERNAL ENVIRONMENT
General Environment

Demographic Segment:

Starbucks attracts consumers from all age levels, however there are two primary age segments

that tend to consume Starbucks Coffee: the baby boomers and the millennials. The baby boomers typically

earn more, indicating the greater likelihood of consumer spending on coffee and snacks. In terms of the

millennials, they tend to spend more on eating out than any other age segments, showing a great potential

in encouraging the sales (Brennan, 2014a).

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Economic Segment:

A positive correlation of disposable income and consumer spending seems to apply to the coffee and

snacks shops industry. When consumers disposable income increases, spending in the industry increases

accordingly. It is expected that consumer spending on coffee and snacks will increase in 2015, therefore seeing

an increase in sales for Starbucks as it is one of the major players in the industry (Brennan, 2014a).

Political Segment:

The coffee and snacks industry is subject to few regulations and varies from countries. Some of

the regulations include food safety and standards, labor relations, smoking bans and franchising laws

(Brennan, 2014a).

Sociocultural Segment:

Over the past five years, consumers are shifting to a healthier lifestyle, in which many are looking

for low fat and low sugar products. In order to keep the sales and maintain its position in the industry,

Starbucks had to adapt to the changing consumer lifestyle by expanding their menu to a wider range of

healthier options for consumers to choose from (Brennan, 2014a).

Technological Segment:

In order to bring quality service and reduce customer wait time, businesses need to invest in equipment

to minimize coffee brewing times, point of sale systems to assist store efficiency, as well invest in mobile apps

to bring further convenience to its customers. Also, many businesses had started to market themselves on social

media platforms to connect with its customers in reinforcing brand loyalty (Brennan, 2014a).

Industry Environment

Bargaining Power of Suppliers:

The bargaining power of suppliers is moderate to high as the price of coffee beans is increasing. As

Starbucks strives to bring high-quality coffee beans to its consumers, the cost of purchasing beans is relatively

high. Because there is a high demand of coffee globally and coffee beans can only be produced in certain

countries in the world, suppliers of coffee beans hold higher bargaining power (Starbucks Corporation, 2014).

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Bargaining Power of Buyers:

The bargaining power of buyers is high. Firms in the industry compete for customers on the basis

of price, location, food quality, consistency, style, presentation, food range, variety, and service (Brennan,

2014a). This combined with the fact that consumers face minimal switching costs means that the

bargaining power of buyers is relatively high (Brennan, 2014a).

Threat of Entry:

The threat of new entrants is high as the barriers to enter the industry are low. Businesses can

easily lower their initial capital costs by leasing the needed capitals. Moreover, franchises made the entry

to the industry even easier as everything is available for franchisees through the franchise agreements.

However, due to the highly saturated market, it is difficult to compete with Starbucks given its high brand

awareness and market share in the industry (Brennan, 2014a)

Threats from Substitute Products:

The threat from substitute products is high as consumers can choose to drink other beverages such

as tea, water, juices, energy drinks and soft drinks. The industry faces external competition from the

broader food service sector. This includes fast food restaurants like McDonalds, or other full service

restaurants that offer dining and take-out services (Brennan, 2014a).

Industry Rivalry:

Industry rivalry is high. As previously mentioned, firms within this industry compete on a

multitude of factors including prices, quality, location, and service. The US market has a medium level of

concentration, with Starbucks Corporation and Dunkin Brands Inc. accounting for 42.4% and 25.5% of

total market share respectively (Brennan, 2014a). In Canada, the industry concentration is higher, with

Tim Hortons Inc. and Starbucks Coffee Company accounting for 69.9% and 15.2% of total market share

respectively. Due to these high industry concentrations and the basis of competition previously mentioned,

industry rivalry is high for both the US and Canadian market. However, we note that industry rivalry is

medium in the Chinese market as the industry concentration is significantly lower (IBISWorld, 2014).

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Competitive Environment

As previously mentioned, the competition in the Chinese Caf industry is medium and the trend is

increasing. The concentration in this industry is low, with the top four companies of the industry

accounting for an estimated 15.4% of total industry revenue in 2014. The top three players in China are

Starbucks with 6.7% market share; Costa Coffee China with 5.9% market share and Beijing McDonalds

Foods Co., Ltd. with 5.1% market share (IBISWorld, 2014).

In Canada, the competition in this industry is high and the trend is increasing. The concentration in the

industry is high. The top four players in this industry have an estimated market share of 89%. Tim Hortons Inc,

with 69.9% market share, is synonymous with coffee in Canada (Brennan, 2014b). It is the largest food

service operator in Canada, and offers a broad range of food and beverage menu items including: soups,

sandwiches, wraps, baked goods, premium-blend coffee, teas, cold beverages, fruit smoothies, and other

espresso based specialty drinks (Brennan, 2014b). Tim Hortons marketing emphasizes its place as a national

icon, and the company has subsequently become a cultural fixture (Brennan, 2014b).

Competition in the US is high. The top four players in this industry are estimated to account for

72.6% of the total market share (Brennan, 2014a). Dunkin Brands Inc., a global retailer of donuts, coffee

and ice cream, which accounts for 25.5% of market share has over 10,000 locations in the US (Brennan,

2014a). Dunkins business model allows them to expand rapidly, in which over 99.0% of its retail

locations are being operated under franchise agreements.

Figure 2: Market Share of Major Players in the US Coffee & Snack Shops Industry

Note. From IBISWorld Industry Report 72221b Coffee & Snack Shops in the US, 2014. Retrieved from
http://clients1.ibisworld.com.proxy.lib.sfu.ca/reports/us/industry/majorcompanies.aspx?entid=1973

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 CURRENT STRATEGY

Business Level Strategy: Differentiation

Starbucks general business level strategy focuses on selling the finest quality coffee, tea and

related products, and by providing each customer with a unique Starbucks Experience (Starbucks

Corporation, 2014). Starbucks differentiates themselves from competitors through the Starbucks

Experience, which is built upon superior customer service and clean and well-maintained company

operated stores that are customized to reflect the personalities of the communities in which they operate

(Starbucks Corporation, 2014)This means that while Starbucks is focused on providing customers with a

diverse range of products in an upscale environment, it is also focused on providing a unique experience

to its customers. These 2 factors combined allow Starbucks to execute its differentiation strategy and

thereby build a high degree of customer loyalty (Starbucks, 2014).

Corporate Level Strategy: Related Constrained

The Starbucks brand was built on coffee, but Starbucks has also expanded into a number of

product lines. From Starbucks 2014 10-K form, we can see that their revenue mix can be broken into the

following broad product types: Beverage (58%), Food (15%), Packaged and single-serve coffees and Teas

(14%), and Other (13%) (Starbucks Corporation, 2014). From this we can see that Starbucks clearly

follows a related constrained diversification strategy, whereby 50-70% of sales are from one area but the

links between business areas are direct.

Figure 3: Starbucks Corporation Consolidated Revenue mix by Product Type (in Millions)

Note. From Starbucks Corporation Fiscal 2014 Annual Report Form 10-K, 2014. Retreived from http://phx.corporate-
ir.net/External.File?item=UGFyZW50SUQ9MjY3NzM0fENoaWxkSUQ9LTF8VHlwZT0z&t=1

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International Level Strategy: Transnational

As a multinational firm, Starbucks has stores in the US, Canada, Europe, the Middle East, Africa,

China, and the Asian Pacific. As previously mentioned, Starbucks is focused on providing each customer

with a unique Starbucks Experience. This means that the stores and products offered in each of these

geographic areas must be tailored to local culture, tastes, and preferences. However, there are also a

standard international menu that goes along with the tailored ones. Furthermore, Starbucks also

standardizes operations like store design, layouts, and quality of service to achieve global efficiency. It is

for these reasons that Starbucks employs a transnational international level strategy.

Cooperative Level Strategy: Licensing, Franchising & Joint Ventures

Starbucks business model uses a mixture of company operated stores and licensed stores, these

licensed stores pays Starbucks an annual royalty and licensing fees (Brennan, 2014a). On average, 50% of

Starbucks stores worldwide are licensed stores, which accounted for 10% of Starbucks total net revenues in

fiscal 2014 (Starbucks Corporation, 2014). However, we note that traditional franchising is used for Teavana

and Seattles Best Coffee brands, as well as Starbucks stores within specific international markets (e.g. the

United Kingdom ad France) (Starbucks Corporation, 2014). Starbucks also relies significantly on joint venture

relationships, particularly in international markets. Starbucks currently has joint ventures in numerous countries

including China, India, Japan, Chile, Argentina, Mexico, and many more (Starbucks Corporation, 2014). One

example is Tata Starbucks Ltd in India, where Starbucks teamed up with Tata Global Beverages to sell the

usual international Starbucks products along with Indian style products (Starbucks India, 2011).

STRATEGIC CHALLENGES
Brand Image

Starbucks success depends substantially on the value of their brand, and failure to maintain their

brand value will have a negative impact on their financial results (Starbucks Corporation, 2014). Due to

the vast number licensed stores and Starbucks extensive use of joint ventures in international markets,

their brand image is not always in their control. Therefore, Starbucks must find compatible companies to

enter into joint ventures with, while also finding innovative ways to maintain their brand image.

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Product Innovation

In order to maintain its brand image and sustain its growth, Starbucks must focus on relevant

product innovation and profitably new growth platforms (Starbucks Corporation, 2014). Starbucks needs

to achieve customers acceptable of these new innovative products while also maintaining demand for their

current offerings (Starbucks Corporation, 2014).

Competition

In the specialty coffee market, Starbucks faces intense competition with respect to product quality,

innovation, service, convenience, and price (Starbucks Corporation, 2014). Starbucks notes that they have

recently been facing significant and increasing competition in all these areas, and that they do not have

leadership positions in all channels and markets (Starbucks Corporation, 2014). For example, large

competitors in the US quick service restaurant sectors selling high quality specialty coffee beverages

could to lead decreases in customer traffic to Starbucks (Starbucks Corporation, 2014). Thus Starbucks

must find an innovative way to maintain and grow the demand for its products, and aim to achieve

leadership positions in its channels and markets.

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 Bibliography

Brennan, A. (2014a, December). IBISWorld Industry Report 72221b Coffee & Snack Shops in the US. Retrieved

March 10, 2015, from IBISWorld:

http://clients1.ibisworld.com.proxy.lib.sfu.ca/reports/us/industry/default.aspx?entid=1973

Brennan, A. (2014b, October). IBISWorld Industry Report 72221bCA Coffee & Snack Shops in Canada.

Retrieved March 10, 2015, from IBISWorld:

http://clients1.ibisworld.com.proxy.lib.sfu.ca/reports/ca/industry/default.aspx?entid=1973

IBISWorld. (2014, December). IBISWorld Industry Report 6730 Cafes, Bars & Other Drinking Establishments in

China. Retrieved March 10, 2015, from IBISWorld:

http://clients1.ibisworld.com.proxy.lib.sfu.ca/reports/cn/industry/default.aspx?entid=941

Lepore, M. (2011, March 25). 15 Facts About Starbucks That Will Blow Your Mind. Retrieved March 10, 2015,

from Business Insider: http://www.businessinsider.com/15-facts-about-starbucks-that-will-blow-your-

mind-2011-3?op=1

Starbucks. (2011). Starbucks Company Timeline. Retrieved March 10, 2015, from Starbucks.ca:

http://globalassets.starbucks.com/assets/0e40b1ea48b34b82ae0a987175f1df25.pdf

Starbucks. (2015, January). Starbucks Company Profile. Retrieved March 10, 2015, from Starbucks.ca:

http://globalassets.starbucks.com/assets/4286be0614af48b6bf2e17ffcede5ab7.pdf

Starbucks Coffee Company. (2014). Fiscal 2014 Financial Highlights. Retrieved March 10, 2015, from

http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9MjY3NzM2fENoaWxkSUQ9LTF8VHlwZT0z&t=1

Starbucks Corporation. (2014). Fiscal 2014 Annual Report Form 10-K. Retrieved March 10, 2015, from

http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9MjY3NzM0fENoaWxkSUQ9LTF8VHlwZT0z&t=1

Starbucks India. (2011, November 12). PRESS STATEMENT: TATA STARBUCKS LIMITED, 12.11.2012.

Retrieved from Starbucks.in:

http://globalassets.starbucks.com/assets/1e5a56429d1f4ee1ae2914256dc1024a.pdf