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Starbucks Coffee Company Essay

Executive Summary

1. Starbucks product isn’t only about the goods it provides, but the services and the experience of going to a starbucks as well.

2. Starbucks has two main end user groups, to which Starbucks product has many different aspects that are beneficial to them.

3. SWOT internal analysis reveals strengths of brand image and high standards and weaknesses in over saturation and lack of diversity. Externally, Starbucks has opportunity to expand and diversify to avoid threatening competition and reliance on individual products.

4. Porter’s Five Forces analysis displays threats from high consumer and supplier bargaining power, a large amount of substitutes and a low chance of new competitors although high competition with current competitors.

5. Historically, Starbucks has employed saturation and awareness strategies.

6. Current strategies reflect environmental analysis as Starbucks aims to expand and diversify, as well as raise social awareness and accountability.

7. Starbucks’ competitive advantage draws from its strategies of differentiation, technological advancement and unique atmosphere.

Product Description & Benefits.

Starbucks is an internationally renowned brand, with 20,891 stores in 64 countries. The Starbucks product is not just a range of beverages and food; it is the service, the culture and atmosphere and the sustainability that can be expected in all of its stores. Starbucks represents this in their mission statement: to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time. The more obvious part of the product is the coffee as well as other drinks and food, but another significant part of Starbucks product is it’s goals in caring for its community and being an ethical and environmentally friendly corporation.

Starbucks’ large market share can be accounted to specifically targeting two main end-user groups and catering the product to their needs. Customers both male and female ages 25-40 make up for a massive 49% of Starbucks total business. Judging by their age we can assume these consumers are most likely working with greater disposable income, and we can assume working people are often busy travelling and on the go. These ages are also typical of people with new families. Another target audience is young adults aged 18-24 who make up 40% of Starbucks total business. Commonly people this age are studying, travelling, and enjoy socialising and hanging out. Generally judging on the age group they will have less income and if they are students they may have no job or only have part time work.

The brand image of Starbucks plays a strong part in appealing to consumers. Starbucks’ brand image symbolises wealth and status. Starbucks utilises this by targeting the working adult and creating loyalty to its brand. Starbucks also appeals to young people as they have a strong brand image of being, quite simply, cool.

Through many of the benefits of Starbucks we can understand how loyalty is an important role in why it’s customers prefer it to other cafes.There are many Starbucks cafes worldwide, and wherever you are in the world you know what to expect when you walk into a Starbucks café. Starbucks has a strong sense of consistency throughout its branches, from the menu, to the service and often the appearance of the café. This makes Starbucks a welcoming and a familiar place wherever you are buying coffee.They also benefit their consumers by being so widely available making it easy to find a Starbucks.

Consequently, it is beneficial to travelling and working people who can find a Starbucks in unfamiliar places, providing the coffee and service they know and enjoy. The café itself is part of the service; customers have the option to sit and stay or takeaway as it suits them. The café provides a great meeting place for young adults to socialize or study and also benefits adults who need to work, meet people or get something to eat or drink during the day. There is free Wi-Fi available which is especially appealing to young people for both study and social networking as well as beneficial to older consumers with work to attend to.

Starbucks meets a range of consumer needs by having a very large variety of drinks available, and customisation is a significant part of their appeal to consumers with 87,000 different drink combinations. Because they have such a large variety, they have an option for nearly anybody and this makes Starbucks more appealing over other coffee shops. Young adults have a greater partiality to customisation, as they appreciate having many choices of different flavours and combinations. Older consumers, especially those on the go, often know what they want to order (e.g. trim flat white, long black) but benefit from the consistent menu, which always has their drink available.

Loyalty is gained not only from the consistency of high quality products and service to the customers but also from the way in which Starbucks values the community and environment. Howard Schultz, CEO of Starbucks Coffee summed up what makes Starbucks successful in saying “we have no patent on anything we do and anything we do can be copied by anyone else. But you can’t copy the heart and the soul and the conscience of the company.”

Company’s International Strategy

Starbucks is clearly a leading coffee branch that has been very successful over the past 30 years, with its constantly growing market share. However, in order to further develop a company, they must first assess their internal and external environment to evaluate the organisation’s current position. Internal and external assessment provides an opportunity for an organisation to plan, implement and evaluate their operations.

SWOT analysis helps to assess the company’s internal strengths and weaknesses as well as their external opportunities and threats. Starbucks’ strengths are high quality coffee beans, strong brand image, excellent employee management, power within the industry, and unique strategy. Starbucks is one of the most powerful brands in the world (ranked 54th for the world’s most powerful brands by Forbes) and is the most powerful brand in the coffee industry. This prevents new entrants from gaining market share and has helped the organisation to remain competitive. On the other hand, they have some weaknesses; one of the main weaknesses is the fact that the entire business relies on the coffee industry.

If the coffee industry faces a hard time, it will have a bad influence on Starbucks directly. One of the main reasons an organisation becomes a Multinational Enterprise is to diversify themselves against the risks and uncertainties of the domestic business cycle. However, Starbucks has over-saturated the US market with more than 3 quarters of their business located in the home market. If their home market goes through a recession, this will have a huge impact on its business. Also, their relatively high coffee price increases competition with low priced brands.

After assessing the company’s internal strengths and weaknesses, an organisation then evaluates its external environments. Starbucks may extend their supplier range such as developing new products, not only their coffee but products like health and organic drinks, considering there are emerging groups of people seeking well-being products. They could also expand their business to more countries especially developing countries such as China and India. Regardless of the fact that China has a strong tea culture, Starbucks has been very successful. They currently have more than 600 stores in more than 50 cities in China, yet it is only the beginning. The market share for Starbucks is still growing however, compared to past years; it is not doing so well.

The main reason for this is because of the new competitors who entered the market, for example, launch of McCafe from McDonald’s. Increased competition and competitors resulted in a higher bargaining power of buyers that lowers the market price for coffee which made it even harder for a brand who sell expensive, high quality coffees, to compete in the market. Starbucks coffees’ main ingredients are coffee beans and milk. A rise of coffee bean and dairy product prices, as a result of various non-government activities, have a strong influence on the company which may result in a significant drop in their market share. As mentioned above, Starbucks was successful in China.

Though copyright law in China is vulnerable and trademark infringement is a huge problem for all companies who are operating in China. Finally, while the earnings in the US and China remains strong, the profit from the European market has fallen due to a different regional tastes and coffee culture that resulted in a just recognisable increase in total revenue. Overall, these are Starbucks’ internal and external environments assessed using SWOT analysis. Starbucks should work through their weaknesses and threats especially their decreasing customer base due to increased competitors. Also, they should create or develop their competitive advantages through their strengths and opportunities.

Furthermore, another method that helps to assess for the external environment is ‘Porter’s Five Forces Analysis’. It is a strategic tool that is used to analyse the level of competition within an industry. There are five stages to assess: bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat from substitutes, and rivalry among existing competitors. The bargaining power of buyers is high due to an increasing number of influential competitors and the fact that there are no or minimal switching costs to other companies. No or minimal switching costs means a customer can switch to its competitors easily and a growing number of competitors means that there are even higher chance of a customer switching to other companies. The degree of threats of new entrants depends much on its location for example, markets such as UK and US are already highly saturated and as such there are limited chances of a company entering the market.

Also, due to the substantial amount of financial resources associated with buildings and property being required to enter the market, the threat of new entrants to the industry to compete with Starbucks is low. The bargaining power of suppliers is also very high. The world demand for coffee is fierce and coffee beans are available only in certain geographical areas such as, Africa, Latin America and some parts of Asia. There are a wide range of substitute products for Starbucks or their coffee including tea, soft drinks, water, juice and energy drinks. This, combined with an increasing focus on the negative effects of caffeine from media and among consumers, increases the percentage of consumers switching to its substitute products.

Also, there are locational substitutes such as pubs and bars where groups of people can gather and spend time away from their house and work environments. Overall, due to an increased number and power of its competitors, especially, McDonald’s (McCafe), Caribou Coffee and Dunkin Donuts, as well as many others from small local coffee shops to large global brands, the rivalry among existing competitors is very high. Unlike the early 90’s where Starbucks begun to expand, there are copious numbers of influential competitors in the market all over the world resulting in very high competition within the industry. Starbucks needs to work on how to reduce the growing power of its competitors and to gain its market share in the long-term.

Starbucks holds a strong competitive advantage over its rivals mainly due to its large market share and powerful brand image. Through constant innovation and expansion, Starbucks has maintained a loyal customer base and a competitive standing within the market. The company has employed strategies such as diversifying its products, attempting to gain a larger market share internationally, such as in China, developing sustainability, such as the use of reusable cups and adapting to new methods of marketing, including social media. Starbucks has also come under scrutiny for some of its marketing techniques which include saturating the market and intentionally placing pressure on competition.

Due to its early entry to the market, Starbucks was able to solidify its position and reputation. Starbucks originally built this reputation using strategies which were designed to make it the ‘third place’ people spend their time, along with work and home. This similar setting of comfort set Starbucks apart from its competitors and began the culture that now represents the company. Starbucks then began saturating areas within the United States, which created an awareness of the company whilst putting pressure on smaller businesses and competitors. As stated, Starbucks came under scrutiny for its practise of buying out other businesses and saturating the market, with some stores operating at a loss, in order to put competitors in an unfavourable position.

The saturation of markets, originally in the US and later worldwide, has created a huge awareness and familiarity of the Starbucks brand. The company, therefore, has a very unique strategy; Starbucks spends less than 1% of its annual revenue on advertising, relying largely on word of mouth advertising. Comparing this to the fact that its competitors spend hugely on its advertising on media (Dunkin Donuts spent more than 83% of its budget on TV and McDonald’s spent 97%), this is very surprising. Starbucks also cuts back on it’s advertising costs through its increasing use of social media advertising.

Keeping up with trends such as social media has allowed Starbucks to stay relevant at this lower cost. To illustrate their effectiveness in social media marketing: they are the highest downloaded food and drink app. Further technological advantages Starbucks uses are cloud controlled coffee machines and cloud integrated equipment and staff which allow quicker transfers of information and greater data gathering. This point of difference creates a competitive advantage that Starbucks uses to maintain its dominant position.

Furthermore, Starbucks has begun to focus on diversifying its products with a heavier focus on substitutes and complementary goods such as tea and food. With tea becoming increasingly popular in the West, this allows Starbucks to have a lesser reliance solely upon coffee and creates another point of difference from its competitors. Similarly, Starbucks acquired La Boulange bakery in 2012 in order to increase the quality of its food offerings and again diversify its products to attract a larger customer base and decrease its reliance upon the coffee trade. The adoption of these emerging markets allow Starbucks to not only create greater offerings and secure its place within them, but also to become more competitive with rivals where they couldn’t before.

An area in which Starbucks has proven to be focusing on is ethical and environmental responsibility. This reflects modern consumer interests and is of greater importance to Starbucks due to its international exposure. In 2013, a reusable cup was introduced at $1 each, while offering a discount on purchased coffee. This both increased overall revenue and created an environmentally responsible image. According to a YouGov Omnibus survey, taken in January 2013, 28% of Americans had already bought, or planned to buy the reusable cup, showing the importance of the move. Starbucks’ focus on environmentalism reflects the companies focus on improving its image and its understanding of the consumer. In order to further this image again, Starbucks is currently switching its coffee sources to fair trade and aims to be 100% ethically sourced by 2015. As a further display of its social awareness, the company offers its employees an extensive range of benefits and a pay rate higher than its competitors, which resulted in a high employee loyalty, hence, less staff turnover and higher productivity.

Finally, one of the larger challenges that Starbucks had faced was expanding internationally and catering to different tastes and cultures worldwide. The aim behind Starbucks’ expansion was to bring the Starbucks experience to the world. Currently, Starbucks is largely focused in expanding in China due to its size and relevance as an emerging world power. Here, Starbucks has an advantage of brand awareness which aids in establishing a dominant position in China, as well as other markets.

Keeping up with trends in tastes and technology also helps Starbucks expand internationally; with the emergence of the tea drinking market into which Starbucks is investing and the global increase in communication which Starbucks capitalises upon with its social media and cloud based ventures. It is important for Starbucks to continue looking internationally for its business expansions due to having already saturated much of the US and therefore to reduce its dependence on the US market and its tastes.

It is clear that Starbucks is able to continue to be competitive offering its premium priced coffee due to its constant innovation and understanding of its consumers. Starbucks consistently stays ahead of the competition in its technological advances, expansion, social awareness and product development which makes it recognisable and desirable and reduces said competition in the market. The environment which Starbucks presents creates a willingness in the consumer to pay premium pricing for the service as a whole rather than just a coffee. This is ultimately what has differentiated Starbucks from its competitors and allows it to maintain a strong and growing loyal customer base where customers will be less inclined to switch between companies.

The Starbucks company itself possesses several times more market share than any of its competitors and therefore have an almost monopolized status as an entity in the huge coffee industry. It is Starbucks’ large competitive advantages which allow them to hold this position. Not only that, the coffee giant has been able to sustain its presence for over forty years. This begs the question: is Starbucks able to sustain their competitive advantages in the future?

Firstly, what are these competitive advantages? Starbucks puts a lot of focus, time and energy into differentiating itself from the competition. This can be seen in the design of its coffee shops around the world, the music played there and the types of products it sells, such as jazz CD’s, thermos’, key chains and coffee-brewing equipment. It is clear to see that Starbucks sets itself apart with the vivid attention to excellence. This differentiation is achieved by the fact that no matter which Starbucks coffee shop you visit the atmosphere will be the same, thus giving the company a status of independency and uniqueness; not following any preconceived ideas. This provides customers with a sense of belongingness which in turn results in sustained business success from loyalty of customers, unmatched by competitors.

As our contemporary lives are heading towards a faster and more efficient fashion, Starbucks makes sure to keep current on the latest technology, often times pioneering the latest in technological and communication advancements for its business and customers, far ahead of the times for a coffee shop. This dominance in technological communication is a competitive advantage which not only allows for quick and sustained adoption, but also builds relationships with its customer base. For example, Starbucks was one of the first companies to adopt location-based promotions and mobile payments.

In general, retail stores will set up shop in locations based on demographics, locations of competitors, locations of own stores, traffic patterns and so forth. However, instead of following the rest of the sheep, Starbucks CEO Howard Schultz had a different idea. Schultz decided that his strategy focused on heavily increasing the foot traffic in one specific part of town. By clustering a specific part of town with coffee shops Starbucks quickly achieved market dominance with this competitive advantage.

Starbucks boasts the highest frequency of weekly visiting customers out of any American retailer, with over 20 million weekly visitors. Even more so impressive is that the company spends less than 1% of its annual revenues on advertising, against the typical 10% rather, the Starbucks competitive advantage relies on word of mouth. They believe that by creating an intimate and welcoming environment in their stores, as well as providing a great cup of coffee, customers will not only return, but do the advertising for them.

Starbuck’s, with its clear points of difference, has created a loyal customer base which is willing to continue paying premium prices for the ‘Starbucks experience’. As Starbucks’ annual revenue increases have been consistent over the past ten years (see table 1), from $3.3 billion to $13.29 in 2012, this experience seems greatly successful and as such it is hard to imagine these competitive advantage formulae and successes being unsustainable for the foreseeable future.


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