Starbucks: a brief strategy overview

By John Dudovskiy


Starbucks Coffee Company is a global coffee company and a coffeehouse chain headquartered in Washington, the US, and the company operates 18,000 retail stores in 60 countries (Starbucks Company Profile, 2012, online). Starting operations in Seattle in 1971, adherence to its mission statement of ‘to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time’ coupled with an aggressive utilisation of international market expansion strategy have contributed to net revenues of more than USD11.7 billion generated during the financial year of 2011 (Fiscal Annual Report, 2011).

Since entering the UK market in 1998, Starbucks currently operates 607 stores in the UK, and there are 128 Starbucks licensed stores in the country (Fiscal Annual Report, 2011). However, the company is faced with significant challenges in the UK market that relate to tax issues, and these challenges are threatening with negative implications on  Starbucks growth prospects in the UK.

Starbucks operates in a highly competitive industry with the top competitors including Costa, McDonalds, Dunkin Brands Group and others. Moreover, the company faces stiff competition from local cafes as well.

Starbucks has licensing agreements with a wide range of companies and “the company’s significant licensing agreements include the North American Coffee Partnership, a joint-venture with the Pepsi-Cola Company in which Starbucks is a 50% equity investor, manufactures and markets ready-to drink beverages, including bottles Frappuccino beverages and Starbucks DoubleShot espresso drinks in the US and Canada” (Company Description, online, 2011).

Starbucks Corporation Financial Analysis

A brief Starbucks Corporation financial analysis for the year of 2010 will ensure greater depth to the current report. Starbucks faced serious financial difficulties at the end of 2007 and beginning of 2008 partially associated with the global financial crisis. However, the company performance started to improve the following years once Howard Schultz was appointed as Starbucks CEO, Chairman and President in 2008 (Annual Report, 2010).

Namely, during the fiscal year of 2010, Starbucks achieved record revenues of $10.7 billion, with the operating income of $1.4 billion ($857 million increase from 2009) (Annual Report, 2010). Moreover, $600 million cost savings have been implemented in the fiscal year of 2010 compared to the previous fiscal year through a range of measures.

In total 52% of sales took place within company-operated stores, whereas the remaining 48% of sales have been generated through licensed stores. Within company-operated stores 76% of revenues were generated by the sales of beverages, 17% through the sale of food, 3% through the sale of whole bean and soluble coffees, and the remaining 4% of sales were generated through the sales of coffee-making equipment and other merchandise (Annual Report, 2010).

Moreover, “the operating margin expansion was driven by increased sales leverage and the continued benefits from operational efficiencies. Comparable store sales growth at company-operated stores was 7% in fiscal 2010 compared to a decline of 6% in fiscal 2009” (Annual Report, 2010, p.28).

Major Challenges Facing Starbucks

A set of major challenges faced by Starbucks Corporation have been identified as a result of the above conducted analysis. Specifically, these challenges can be summarised into the following five points.

  1. Market saturation. The catering market in general and Starbucks niche market in particular is highly saturated in developed countries with a range of global brands such as Costa, McDonald’s, and Dunkin Donuts and numerous small local cafes and coffee shops.  This situation presents a massive challenge for Starbucks in terms of increasing its revenues through attracting new customers.
  2. Increasing dependence on suppliers. Starbucks has a high level of dependence on its suppliers, because coffee beans suppliers can only be contracted from specific regions favourable for coffee production in terms of climate.
  3. Increasing prices of coffee beans. The price of coffee beans is increasing and this fact puts pressure on cafes in a global scale (Tesslar, 2010). However, Starbucks is more vulnerable to be negatively affected by this increase in price than others, because Starbucks prices are already considerably above the market average.
  4. The emergence of new competitors. New competitors are emerging for Starbucks in forms of energy drinks produced by increasing numbers of companies, especially leading supermarket chains as well as increasing numbers of bars and pubs that offer the services of ‘third place’ experience.
  5. Frequent changes in the market trends. Population is increasingly becoming aware of the downsizes of caffeine in terms of negative effects to health through various channels and this tendency presents a considerable challenge to Starbucks in terms of ensuring the long-term growth of the company.

Evaluation of Current Situation within Starbucks Corporation

The plan formulated above represents an effective strategy for achieving a long-term growth for Starbucks Corporation. However, the current situation within the company also needs to be taken into account upon the implementation of the plan and if necessary alternative approaches available to the company need to be explored or necessary modifications need to be introduced to the existing plan.

Nevertheless, the following points represent the most noteworthy aspects of the current situation within Starbucks that might affect the implementation of the above proposed plan.

Starbucks has a leadership position in the market.  This position has been achieved through concentrating on offering good quality products and excellent level of customer services. Moreover, the company has achieved record sales of $10.7 billion, for the fiscal year of 2010 (Annual Report, 2010). The current position of the company might prove to be an obstruction on the way of implementation of proposed plan because the management might consider the plan to be unnecessary being confident of their strong position in the marketplace.

Nevertheless, the leadership position in the marketplace should not be taken for granted by Starbucks management and they are recommended to implement the proposed plan in order to gain further competitive edges in the marketplace and achieve long-term growth for the company.

Starbucks Corporation has been around for 40 years. The rationalised plan that has been proposed for Starbucks in this report implies some changes in corporate culture as well. For instance, the shift from Laissez Faire management style to inspirational management would involve significant changes in Starbucks corporate culture. However, the changes in corporate culture might prove to be extremely challenging to implement, because the current corporate culture in Starbucks has been formed for as long as 40 years and has been solidly established among employees.

Starbucks has faced the accusations of supporting the Israeli Army. Although more than two years have passed since there were protests against Starbucks brand in general, and it’s CEO, Chairman and President Howard Schultz in particular for allegedly supporting Israeli Army against its long-term conflict with Palestine its damage to the Starbucks brand has not been fully recovered. The company has released official statement saying that it does not support Israeli Army, but nevertheless, the impact of the incident might still be an obstruction in the way of implementation of the proposed plan.

Alternative Approaches Available for Starbucks Corporation

On the face of the weaknesses of the proposed plan that have been discussed in the previous section a set of alternative approaches available for Starbucks Corporation need also to be discussed and to be taken into account.

One of the most appropriate alternative approaches for the company would involve extending its product ranges dramatically and offering various types of foods within Starbucks stores. Specifically, Starbucks can offer specific types of fast food in addition to its current range of products and thus dramatically increase its sales volume. It has been estimated that more than 50 million people in US alone depend on fast food and the amount of money spend on fast food by Americans alone exceed 110 billion USD annually (Fast Food Statistics, 2011, online).

Moreover, another alternative approach for Starbucks would relate to adopting franchising model of the business. “A franchise is the agreement or license between two legally independent parties which gives a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)” (Pradhan, 2009, p.188). So far Starbucks Corporation has preferred to operate under licensing business model mainly because this model provides the opportunity of better quality control of products. However, franchising business model can also be integrated into Starbucks operations with the same high level of quality control like it is done in McDonald’s, and thus the amount of revenues for Starbucks can be dramatically increased.

Recommendations: Rationalised Set of Approaches for Starbucks Corporation

On the basis of above discussions general recommendations can be formulated for Starbucks Corporation that can assist in long-term growth for the company upon successful implementation. Specifically, these recommendations can be formulated in the following six points:

First, Starbucks management should increase its focus on the quality of customer services. Offering a high level of quality of customer services has already been adopted as one of the main sources of competitive edge by Starbucks Corporation. However, sometimes this principle is compromised for cost-saving purposes. Specifically, currently it is a common practice for some of the stores to reduce the number baristas on the floor and thus compromise the quality of customer services.

Such a practice has to be abandoned by Starbucks management and the level of customer services has to be dramatically increased by a set of other related means. The store manager has to be made responsible to ensure the excellent level of customer services and the members of staff who received compliments from customers have to be duly rewarded.

Second, the inspirational management style should be promoted among Starbucks managers. The current Laissez Faire style of management has to be replaced with inspirational style of management within all Starbucks stores in order to achieve greater efficiency in many levels. Along with other numerous benefits inspirational management style would provide the opportunity of increased level of employee motivation with less financial resources.

Third, Starbucks senior level management should adopt an innovative approach towards all business processes. This report has identified the current marketplace to have become highly competitive due to a range of specific reasons. Therefore, Starbucks senior level management should actively promote innovativeness towards any business processes at all levels within the company in the search for competitive edge in the marketplace. Employees at all levels have to be encouraged to make suggestions regarding the better ways of doing things, and the store manager are recommended to experiment with these suggestions, and implement the ones that prove to be beneficial in terms of increasing efficiency in one way or the other.

Fourth, Starbucks management should increase their focus on the creation of ‘third place’ environment. The creation of ‘third place’ environment, a place outside of home and work environments formally has been adopted as one of the main strategies by Starbucks. However, not enough initiatives are being introduced to use the full potential of the concept. In other words, a range of changes have to be introduced within Starbucks stores in order to promote them as ‘third place’ environment in a more effective manner.

Specifically, playing areas for children have to be introduced within the stores, as well as the density of the positioning of tables have to be re-arranged in order to ensure the privacy of each individual or group of customers. However, it has to be acknowledged that the level of implementation of this specific recommendation depends on the area and other specific characteristics associated with each individual store.

Fifth, Starbucks should own coffee plantations. The current report has identified that the prices of coffee beans are increasing on the global scale and this tendency is most likely to continue. Accordingly, Starbucks Corporation is recommended to work towards buying plantations within a set of coffee producing countries. Such a strategy will prove to be beneficial mainly in two ways. Firstly, upon developing expertise after a specific period of time Starbucks would be directly able to control the quality of coffee beans being produced.

Second, having bought the coffee plantations for many years, Starbucks would gain the advantage of remaining unaffected of increasing prices of coffee in the years to come, and thus the company would have a strong competitive edge in the marketplace in terms of offering lower costs than the competition.

Sixth, Starbucks should increase its presence in Chinese and Indian markets. Starbucks has already some stores in Chinese and Indian markets, but the company is strongly recommended to increase its presence in both countries because the rapidly increasing standard of life in China and India coupled with the increasing forces of globalisation creates demand for western style coffee houses. The implementation of this recommendation is going to prove highly beneficial in terms of increasing the revenue of the company through market expansion.

 Factors Affecting the Implementation of Recommendations

Upon the implementation of recommendations specified above the following factors need to be taken into account and appropriately addressed:

Another global economic crisis. Although the majority of countries and businesses have fully recovered from the negative consequences of the global economic crisis of 2007-2010, there is no guarantee that an analogue of the crisis is not going to take place in the foreseeable future. Nevertheless, if another global economic crisis takes place in the foreseeable future then the recommendations formulated for Starbucks that require considerable amount of financial investments like market expansion and redesigning of the stores may have to be delayed until indefinite period of time.

Draught or other environmental crises on African continent. The impact of environmental factor on the implementation of recommendations is great, because any cases associated with draught or other types of environmental crises on African continent is going to delay the implementation of the recommendation related to the purchase of plantations until the consequences of the environmental crisis are fully eliminated.

The level of economic policies in China and India. The recommendation related to increasing the presence of Starbucks in Chinese and Indian markets is subjected to the level of economic policies in these countries. Specifically, Chinese or Indian government may introduce specific regulations negatively affecting the operations of multinational businesses like Starbucks operating in the country in order to protect local businesses and other considerations.

Starbucks Corporation Report uploaded on April 2017 contains the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Porter’s Five Forces, Value Chain analysis and McKinsey 7S Model on Starbucks. Moreover, the report contains analyses of Starbucks’s business strategy, leadership and organizational structure and its marketing strategy. The report also discusses the issues of corporate social responsibility.

Starbucks Corporation Report


Category: Finance