As the world’s number one specialty coffee retailer, Starbucks sells coffee drinks, food items, coffee beans, and coffee-related accessories and equipment. In addition, Starbucks sells whole-bean coffees through a specialty sales group and grocery stores. Starbucks has grown beyond coffee into related businesses such as coffee-flavoured ice cream and ready-to-drink coffee beverages. The purpose of this paper is to analyze Starbucks business strategy, customer value proposition, company’s operations and the risks to financial results and reporting in the short term. BUSINESS STRATEGY
The Starbucks former strategy was centered in offering a high quality product to a narrow consumer segment (coffee lovers), therefore, a focus strategy. Later on, primarily thanks to the vision of Howard Schultz, the company moved to the differentiation strategy which is defined by Porter as “differentiating the product or service offering of the firm, creating something that is perceived industry wide as being unique” . Some of the advantages of this strategy are: customers have a lower sensitiveness to price, opportunity for higher margins, creation of entry barriers thanks to customer loyalty and brand uniqueness
CUSTOMER VALUE PROPOSITION
The brand strategy was best captured by the phrase “live coffee.” From a retail perspective, this meant creating an “experience” that people would want to incorporate into their everyday lives. There were also three components to the branding strategy: Coffee – Starbucks offered the highest-quality coffee in the world and controlled much of the supply chain as possible to help insure that. Service – Or what was also referred to as “customer intimacy.” This included simple things such as remembering someone’s name or drink order. Atmosphere – Starbucks stated that people came for the coffee but stayed for the atmosphere. Therefore it was important to provide a comfortable atmosphere that allowed a sense of community. STARBUCKS OPERATIONS
Inbound logistics. Starbucks involve company agents in choosing coffee beans producers, communicate the standards related to the quality of coffee beans, establishing strategic relationships with suppliers and organizing the supply-chain management. Operations. Starbucks operations are conducted in two ways: direct operation of the stores by the company and licensing. For the most part, Starbucks is vertically integrated, controlling its coffee sourcing, roasting, and distribution through its retail stores. Outbound logistics. This has traditionally involved selling its products through its stores without any intermediates. However, a range of ready-to-drink coffee-based products are being sold through a set of leading supermarkets. Marketing and Sales. Starbucks has shown to use less of traditional advertising; instead relying more on its image advertising, such as movie and television placements. They also rely on word of mouth advertising achieved through the high quality of products and high level of customer services. Service. Providing superior level of customer services is one of the Starbucks’ main objectives and it is driven from the mission statement of the company. Accordingly, the company staffs are encouraged to go to great lengths in order to ensure the high level of customer satisfaction.
PORTER’S FIVE FORCES ANALYSIS
Rivalry among existing competitors is high within the industry Starbucks operates in with major competitors like McDonald’s and thousands of small local coffee shops due to its uncompetitive price all over the world and even in its domestic market. Starbucks customers possess large amount of bargaining power because there is low and minimal switching cost for customers, and there is an abundance of offers available for them. The threat of substitute products and services is substantial. Specifically, substitutes for Starbucks Coffee include tea, juices, soft drinks, and energy drinks, whereas pubs and bars can be highlighted as substitute places for customers to meet someone and spend their times outside of home and work environments. Starbucks suppliers have high bargaining power due to the fact that the demand for coffee is high in global level and coffee beans can be produced only in certain geographical areas. However, the threat of new entrants is medium in that the coffee market is changing. The need for
ambiance and a place to share is losing edge to the on-the-go alternatives, and should a new entrant come along with a different business model there is room for threat. THREE MAJOR SOURCES OF RISK
Starbucks positions their products based on quality and image. It is critical that Starbucks position their brand for what the brand stands for: an innovative industry leader that produces high quality products. Brand image, as already shown, is a goal that all the future functional strategies will work to attain. OPERATIONS
The risk of market saturation – One risk that faces Starbuck’s is its ability to maintain profitability with opening such a large number of stores in such close proximity to each other. Starbuck’s may want to consider slowing this expansion in order to maintain profitability. REPORTING – Commodity risks and their volatile impact on profit and loss – Starbucks have a big exposure to dairy—to milk and didn’t have any means of fixing price with their suppliers. When it comes to coffee, Starbucks’ coffee trading group, which buys coffee worldwide, executes the risk management.
Starbucks measure their risks, but they have the tools, using futures and some fixed-price purchases, to manage risk over the next 12 to 18 months. That said, Starbucks are looking to help them by designing structures to hedge much longer term—out two to four years. CONCLUSION
Starbucks success is achieved through a few factors:
Outstanding Quality of the coffee brewed
Excellent service provided at the stores
Fast growth of new stores all around the world
These factors not only have increased the sales but also the reputation among the coffee lovers. Starbucks encounters aggressive competition in all areas of its business activity. The market for each of their business segments are characterized by vigorous competition among major corporations with long-established positions and a large number of new and rapidly growing firms. Anyway, as Starbucks have a good financial capacity with good strategies it can overcome all the competitors to shine high as the first
class coffee purveyor.