Resuming Internationalization at Starbucks
Starbucks is the premier roaster, marketer and retailer of specialty coffee in the world. The first Starbucks store was opened in Seattle in 1971. The current CEO, Howard Schultz, joined the company in 1982 and decided bringing the Italian coffee-drinking culture to the United States. In 1992, the company went public. In 1996, with the home market becoming increasingly saturated, Starbucks opened the first outlet in the Far East. Ever since, the company has pursued a relentless international expansion. By 2012, Starbucks had achieved a global reach of 18,066 stores in 62 countries.
With revenues grew on average 30 per cent per year, Starbucks experienced substantial growth from $160 million in 1993 to $10 billion in 2009. In 2007, Starbucks had a presence in 56 countries through approximately 17,000 stores. However, Starbucks’ relentless march had been slowed by increasingly intense competition and rising coffee bean prices between 2007 and 2009. After 2007, demand for Starbucks’ products was badly hit by the global economic recession. At the end of fiscal 2009, nearly all of the approximately 800 US Company-operated stores, 61 stores in Australia and 41 Company-operated stores in other International markets had been closed. Approximately 70 per cent of the stores that were closed had been open for fewer than 3 years. In the third quarter of 2009, The company achieved the first profit since the first quarter of 2008 by the self-save closure. Finally, CEO Schultz made Starbucks backed to the growth trend. But as the criticism the company had received on a number of fronts, he needed to decide again how to approach international markets.
The 5 forces approach is used in this part and the aim of this analysis is determining the attractiveness of the industry and understanding factors driving past, current and forecast industry profitability.
Barriers to Entry: A cup of coffee could be served from many kinds of sources, such as independent operated coffee shops, quick-service restaurant, specialty coffee shops, and international retailers. Considering different types of independent operated coffee shops, the barriers of this industry is not that high. However, being one of recognized and respected band in this industry needs standard quality and high level of capital to support. In this case, the barriers to entry are medium.
Bargaining Power of Suppliers: The coffee beans are mainly plant in Latin America, East Africa and South Asia. Exporters collect coffee beans which are already roasted from farmers and trade with retailers all over the world. Although there are plenty of suppliers in the industry, with the increasing consumption globally and the decreasing production in the large coffee producing countries, the average wholesale price for coffee had increased twofold between 2001 and 2010. The suppliers still keep strong power on bargaining.
Bargaining Power of Buyers: The customer have lots of choices even though there will be a variety of request on flavor for different people. They also have low switching cost because of many competitors and brands in the market. Product differences are small and price sensitivity is high. All of these reasons give consumers strong bargaining power.
Threat of Substitutes: There are a number of substitutes in the market to buyers. Juice, Tea and other beverages could be another choice for people. There are also many kinds of coffee related products recognized by different making process. In some regions which coffee drinking is not the main habit in daily life. For example in China, Tea obtains considerate market shares in beverage market.
Competitive Rivalry: Coffee industry possesses intense competition. The differentiation of products between different entities is low and easy to replicate. Worldwide demand of coffee is growing. More than 500 billion cups of coffee were being consumed yearly. Meanwhile, hundreds of exist competitors led to low switching cost of customers.
Starbucks roast 4 hundred million pounds coffee annually. It has high quality requirement on coffee beans. In that case, the company cultivates the stable relationship with its own suppliers. So Starbucks has high cost on switching suppliers. However , Starbucks highlights and chases the experience that their customers can obtain in coffeehouse. The company positions itself as the third place besides workplace and home. This high level of experience and also good quality coffee raise the switching cost of customers and reduce the power of bargaining.
Starbucks stands one of the most recognized and respected brands in the world. It has the largest chain stores, which is operating approximately 18,000 stores in 62 countries. Besides high coffee’s quality, the strongest advantage of the company is the experience it delivers to the customers. Starbucks is not just passionate purveyors of coffee, but everything else that goes with a full and rewarding coffeehouse experience. The company also provides well offers to employees compared with other competitors in the industry.
Starbucks has high price in the market based on its quality and so-called experience. The main was the high cost of the products. It contains the rent of the stores where located in very popular districts. The company offers good paid to their employees. And also, it is influenced by the coffee beans’ price. Starbucks’ main target consumers are well educated white collars. So it is influenced by the cycle of economy to some extent.
About 79% of the revenue comes from the company-operated stores, which means Starbucks has low levels of diversification. The company need to develop more kinds of products to meet different demand. There are great opportunities in local market, the company could focus on the expansion to emerging economies. The smart phone and moving technology is developing really fast. From online promotion to offline sails, new form of sail brings the company more opportunities.
Local competitors could be the direct threat to Starbucks on internationalization. The model and the style is easy to be replicated by new entrants. High cost is the weakness of Starbucks and also brings threats compared with other competitors. The saturated demand in some market needs to be considered carefully in future strategy.
SWOT Analysis of StarbucksStrength
-Largest chain stores
-Quality and experience
-Well employees treatmentWeaknesses
-Influenced by economy
-Expansion on emerging
-Online to Offline model
-Chain stores could promote the diversification
-New technology such as App would be used widely
-Good financial statement provide capital on emerging
-Reduce the influence by diversification and emerging
-New model could enhance sails and also get lower on the price Threats
-Competitors in local market
-Rising price of the cost
-Saturated market-Good reputation has strong competitive power in new market
-Hard to be replicated
-Reliable loyalty of customers
-High cost could bring the competitors more opportunities
-Close stores after crisis in saturated market
Company-operated versus licensed stores
Starbucks set the mix form of company-operated and licensed stores in a given market. About more than 70% revenue is generated from company-operated stores. See the below chart.
Actually, Starbucks could be considered has both forms of chain and franchise stores. The chain stores consist its main profit annually. Compared with Mcdonald’s, the very success in franchise model worldwide, Starbucks has its own advantages on internationalization. The company has the absolute dominate right to decide every aspects of a new store. It contains the decoration style, location picking, training new employees and so on. This form could fully maintain the value and culture of a company. To Starbucks, the experience of the customers and the spirit are the target and the core value of their products. Its mission is to inspire and nurture the human spirit. Company-operated store is the right way which could assure that the value will be delivered completely. After repurchased the shares of some stores in some first level cities in the world, Starbucks shown its insist in the quality on the expansion road.
However, this form costs more higher than franchise. Starbucks need to decide main issues such as the store’s design respectively. The most important is, without local partner, the company will hardly know and understand the real demand and then provide the suitable service. These real problems could not be ignored on internationalization. Local Competition
After entering the new market, what is waiting for Starbucks is the intense local competition. Starbucks has to face new problems and balance the profits and its belief in coffee.
The Price Discrimination in different countries was questioned by media. Starbucks was doubted on the reasonability of price. High price compared to the other coffee retailers let Starbucks to be luxury products in some developing countries. High cost is the main reason of the price. Sails to some extent rely on the growth of economy. This brings more chances to local competitors.
Coffee is not the irreplaceable drink in people’s daily life in some countries although the consumption of coffee is increasing annually. This situation requires Starbucks obtain brilliant ability on innovation and diversification on products. Providing tea products and acquiring tea producer’s company is the necessary strategy in featured markets.
Starbucks needs to compete with local competitors and international retailers after entering the new market. For example, Mcdonald’s possesses stable relationship with local partners based on its stores and also has long time experience than the others. The wide spread network and well understanding to the local market provide McCafe a perfect stage. The local competitors also have obvious advantages on cost and distribution.
After experienced the stores closure issue, Starbucks was doubted and received criticism for going and expanding too fast. Actually, Starbucks did not stop its pace on internationalization. According to the numbers provided by the company in 2009, there are about 800 US. company-operated stores were closed out of 1000 planned closure globally. The measurement of Starbucks could be considered as an adjustment which emphasized on the demand saturated market. Its global expansion is still going on especially in the developing market which obtains tremendous potential demand such as China. However, on the road of expansion worldwide, Starbucks still has variety of problem which need to deal with. No matter how its strategy is adjusted, Starbucks should maintain its quality and experience to their customers. Their belief on coffee is the only sustainable way to the future.
Resuming Internationalization at Starbucks; Richard Ivy School of Business, The University of Western Ontario
Starbucks’ Annual Reports of 2012