Coffee and Starbucks Essay

Starbucks has been the most successful coffee chain using their aggressive expansion strategies to surpass its competitors. Through its expansion, Starbucks has focused on creating a dense network of stores all around US, while also opening up new locations all around the world. However, Starbucks’ aggressive expansion strategies have posed major threats to its financial health such as tight cashflows, increase debts, poor liquidity ratios and etc. In addition, this approach can exacerbate competition among close Starbucks stores. Due to the aggressive expansion, Starbucks has lost its internal focus in its core business coffee and its unique â€Å"Starbucks Experience – third place†. The issues are how Starbucks can stay profitable in the future and at the same time sustain its dominant position in the gourmet coffee industry. We have examined the industry analysis that focuses on the industry trends, the firm competitive environment and followed by a SWOT analysis on Starbucks. Finally, we look at the company strategy analysis that focuses on the Starbucks’ strategic intent and its strategic position. From these analyses, we recommend a few options where Starbucks should pursue moving forward in order to avoid further decline and sustain its dominant position. .:Company Background & History:. Starbucks Coffee, Tea and Spice was established in 1971 by Jerry Baldwin, Zey Siegel and Gordon Bowker in Seattle to sell roasted coffee beans and coffee machines. (See Exhibit 1 for timeline) At that time, the founders’ philosophy was to provide high quality coffee and educate the public the art of appreciating fine coffee. It was the founders’ passion and strong commitment on educating the public that attracted Howard Schultz to join Starbucks in 1982 as the head of the marketing department, overseeing the company’s retail stores. On one of his business trips to Milan, Italy, Schultz stumbled upon an opportunity to revamp Starbucks and shift its focus from its original business activities. Schultz’s new business proposition for Starbucks was to serve freshly brewed coffee at their outlets which he sold to the founders without success. After many unsuccessful attempts, he left the Company. In 1987, Schultz acquired Starbucks from the founders and changed its name to the more abbreviated ‘Starbucks’ and modified her logo to what we see today. After the acquisition, he introduced the idea of ‘The Starbucks experience’ to all Starbucks’ outlets; that is to create a comfortable atmosphere for patrons to relax. From then on, every Starbucks outlet was the perfect duplicate of this concept. In 1992, Starbucks had launched an IPO and its common stock was being traded on the Nasdaq. In 1995, Starbucks venture overseas and formed a joint venture with SAZABY Inc to open Starbucks stores in Japan. In 1996, Starbucks first oversea outlet was opened in Tokyo. Today, Starbucks has a total of 7,087 Company operated stores and 4,081 License stores in US. Additionally, it has 1,796 Company operated stores and 2,792 Joint Venture and License store operating in other 43 countries. .:Definition of the Industry, Competitors and Scope of Analysis: Generally, Starbucks is in the Food and Beverages industry. However for the purpose of this paper, we would define Starbucks to be in the gourmet coffee industry with the following competitors : †¢Coffee Bean and Tea Leaf; †¢Costa Coffee; †¢Caribou Coffee (See Exhibit 2 for a brief write up on reasons for the choice of these competitors and some background information of them) For the purpose of this paper, our analysis will be focusing on Starbucks in US and Australia. The next section provides an overview of the gourmet coffee industry and the competitive environment in US and Australia. .:Overview of the Industry:. .:Political Forces:. Generally both the US and the Australia political situation appeared to be well established and stable. This will provide a good platform for both current businesses and new businesses to operate in. In US, despite the current verge of recession, the political mood is still likely to favour increased regulation of businesses. In addition, even though international tensions are likely to remain but their impact on political stability and economy will remain minimal. Similarly in Australia, the political climate is likely to remain relatively stable. Although the relationship between the federal government and the states had been rocky in the past; it has improved after the introduction of a more stable formula for revenue distribution. .:Economical Forces:. US: Real economic growth is expected to slow from an estimated 4% in 2008 to 3. 8% in 2009. The modest slowdown reflects the impact of lower demand from its trading partner. As these exists imbalances in the economy and the poor short-term outlook for growth, it is assumed that conditions in the US are now recessionary and that growth will remain very weak in 2009. This will in turn affect the GDP and the disposable income of its residents. Australia: Traditionally, rapid growth in Australia has been slowdown recently due to recession. Improved monetary and fiscal management have reduced macroeconomic volatility, but risks and imbalances are present. The low domestic savings rate renders the banking system dependant on foreign financing. The current account deficit is large, and international financial markets may start to worry about the underlying causes. Bubble conditions also seem to exist in the housing market. .:Socio-cultural Forces: Consumers’ Perceptions and Disposable Income:. US: There had been an increase in coffee consumption in the US market though the rate had slowed down in 2005 posing threats to coffee retailers. Recently, US consumers had increasingly opt for healthier hot drinks such as tea and RTD beverages which affect coffee consumption rate. The trend is likely to continue, leading to decline in coffee consumption. Australia: Coffee sales had experienced quite lukewarm growth from 2000 to 2005. The culture of cafe had caused more people to opt for on-trade sales coffee at the cafe instead of home-brewed coffee. According to BIS Shrapnel, people increasingly tend to go to cafes for their coffee and there is an increase of 50% within 2 years in coffee consumption. .:Technological Forces: Technological Developments:. Technological changes have created many new products and processes. It helps to reduce costs, improve quality and lead to innovations which in turn benefits consumers as well as organizations. Many organizations in the gourmet coffee industry had recognized the importance of providing wireless internet access and Wi-Fi hotspots to its patrons. These technology advances had created a leisure place for patrons to surf net or hang out after home and work. Most of the organizations had also introduced automated coffee machines to speed up the brewing process so as to shorten waiting time. To further improve business operations and efficiency, some organizations have also make use of information technology systems to help them run their businesses more smoothly. .:Environmental Forces:. With major climate changes occurring due to global warming, many organizations in the gourmet coffee industry had increased their environment awareness by reduced the usage of disposable cups to serve coffee and increased the use of ceramic mugs. Furthermore, the organizations had also reduced the size of their paper napkins, paper bags and in store garbage bags. The organizations were also encouraged to purchase Fairtrade certified coffees so as to promote responsible environmental and economic efforts. The following section presents our analysis of gourmet coffee industry with the aid of Michael Porters 5 Forces model. .: Analysis of Gourmet Coffee Industry- Porter 5 Forces:. Please refer to exhibit 3 for the criteria used for the scoring of each forces and an analysis of each forces. Force #1: Threat of New Entry:. †¢Threat of new entry is high. †¢High start up cost involved in purchasing equipments, sourcing for coffee beans and training barista. †¢Strong brand identity leading to high switching cost for consumers Score: 10 Force #2: Threat of Substitutes:. †¢Substitutes are gourmet coffee of a different brand †¢Current gourmet coffee industries is saturated †¢High switching cost. †¢Threat of substitutes considered to be relatively high Score: 6 Force #3: Bargaining Power of Suppliers:. †¢Majority of commercially available coffee beans come from a few industrializes countries. †¢Increase the cost of coffee houses in sourcing and gaining access to these high quality coffee beans. †¢Bargaining power of suppliers is relatively high Score: 5 Force #4: Bargaining Power of Consumers†¢Bargaining power of customers is relatively neutral. †¢Current player gained brand loyalty †¢Product differentiation helps to retain current customer and attract new customers. †¢However price sensitive customers might seek for cheaper alternative. Score: 0 Force #5: Rivalry between Competitors:. †¢Intensity of rivalry is moderate. †¢Brand identity and high switching cost is relatively unfavorable to new player that has just entered the market. Score: 3 Conclusion:From the above analysis, we noted that the threat of new entry, the bargaining power of the supplier and threat of substitutes are relatively high. On the other hand the bargaining power of the consumers is neutral and the intensity of rivalry is moderate. Hence from the above.