Starbucks Corporation Coffee Chain

Executive Summary

Starbucks Corporation has arguably been the most successful coffee chain in the past few decades, using their aggressive expansion strategies to push out much of its competition. Through its expansion, Starbucks has focused on creating a dense network of stores all around America, while also opening up new locations all around the world. By leading the retail coffee market, Starbucks is able to sell its coffee for a premium price and increase their profitability. Its success can be seen in the gradual rise of its stock prices from 1992 – 2007, reaching almost 6000% of their initial public offering 1.

Yet, in the recent year, the market has shown Starbucks to be in constant decline, as their stock has dropped about $15/share, a value they have been above since 2004. Also, looking at Starbucks’ SEC filings, we can see that its comparable store sales have decreased significantly in US markets since 2004. This has prompted Team Macchiato to evaluate Starbucks’ current strategies in addition to the retail coffee market as a whole. To evaluate the problem, one of the biggest questions to consider is to what extent is the “designer coffee” market just a fad.

In other words, will the allure of gourmet Starbucks coffee be maintained or will more appealing options threaten the success of Starbucks’ primary product? If the designer coffee market is indeed a fad industry, we need to evaluate Starbucks’ possible options to avoid further decline. Problem Definition The overarching question that we should answer is how Starbucks can stay profitable in the future. A good place to start involves evaluating the current market for coffee; from this point, we can gather information about market performance and determine the extent to which designer coffee appeals to current consumers.

Through market analysis, we can investigate whether or not the demand for gourmet coffee is wavering. We will evaluate whether coffee companies in general are having trouble maintaining profitability or if it is just Starbucks that has declined in recent times. If the market is indeed in decline, we must answer the following questions: ? If designer coffee is just a fad, is the temporary popularity approaching the end or has the fad already ended? ? What are the options available to companies like Starbucks that specialize in fad coffee products?

Afterwards, it is necessary to analyze Starbucks’s strengths, weaknesses, opportunities, and threats. From this analysis, we can determine Starbucks’s motivations behind their current 1 www. finance. yahoo. com, SBUX. 2 business strategies. Also, what strategies should Starbucks pursue in the future in order to avoid further decline and how can Starbucks counteract efforts from competitors? The Current Situation Compared to the rest of the market, during the past year Starbucks’ stock has steadily declined in value.

Meanwhile, Peet’s Coffee, one of Starbucks’ major competitors, has had its stocks perform about the same as the rest of the market, following the general trend of rises and drops that the market experienced. Since May of 2007, Peet’s stock has remained steady, peaking in December 2007 at 30 dollars a share, and reaching a low of 20 dollar a share in the middle of March 2008. Meanwhile, Starbucks has been on a steady decline, its stocks dropping by 50% of their value since May of 2007, from about 30 dollars a share down to 16 dollars a share.

The last time Starbucks stock was traded above 20 dollars a share was at the end of January 2008. In comparison, in th e past year, the lowest Peet’s stock has been was 19. 89 a share. Considering other minor competitors who have been encroaching on Starbucks’s coffee business, both McDonald’s and Burger King have been outperforming the market in the past year. Last year, Consumer Report rated McDonald’s coffee above Starbucks coffee for the first time. Another important financial aspect to evaluate is Starbucks’ comparable store sales, or the percentage of revenue growth among their existing stores.

Since Starbucks’ primary strategy is to expand at a much higher rate than its competitors, it is much more useful to get a sense of how Starbucks’ existing coffee stores are performing, rather than including their newly expanded locations. A glance at Starbucks’ SEC Filing for the fiscal year of 2007 reveals that Starbucks’ annual comparable store sales growth has steadily decreased from 11% in 2004 to 4% in 2007 in US markets 2 . In February of 2008, Starbucks reported that its comparable store sales contracted 1%, due to 2% increase in the average value per transaction offset by a 3% decrease in the number of transactions 3 .

Though their international comparable store sales growth has consistently remained around 7? 8%, their overall consolidated same? store sales growth has decreased from 10% in 2004 to 5% in 2007. This dramatic decrease in growth may be financial evidence that Starbucks’ performance as a specialty coffee chain is waning. When comparing net revenue growth instead, Peet’s and Starbucks both have shown a relatively consistent percentage for the past three years (18 – 20%)

As of late, Starbucks has clearly been declining compared to its main competitors and compared to the market. One cause of this may be the current economic downturn. The slowdown in the economy has changed people’s spending habits. According to the Associated Press, “Research by WSL Strategic Retail found that …premium brands or food and specialty coffees…are [among] the top areas where people are trimming their spending. ”  Starbucks considers itself a premium coffee provider, as is evident from the statement from The Economist “Howard Schultz once said that he finds it painful when people compare his firm, Starbucks, to McDonald’s.

The founder of the world’s biggest chain of coffee shops thinks a visit to Starbucks should involve “romance and theatre”, a far cry from the pit? stop? like experience of eating a meal at the world’s biggest fast? food chain. ”  According to The Economist, “Not all of Starbucks’ poor performance is of its own making. Prices for food commodities are at all? time highs, prompting the firm to increase prices twice in the past year. This has scared off customers, who have been defecting to fast?

food chains such as Dunkin’ Donuts or Panera Bread, which sell reasonable coffee for as little as a quarter of the price of a fancy Starbucks brew. ”7 Meanwhile, on one front, Starbucks has continued to embrace this legacy of unique excellence and high quality coffee. According to USAToday, Schultz “…says the company is having success in Boston and Seattle testing a premium coffee that sells for $2. 50 per cup, about a buck more than a similar cup of the regular drip coffee. ‘We’re going to go up in experience — not down,’ he says.”

 Facing competition from McDonalds and Dunking Donuts, Starbucks experimented with $1 bottomless 8oz. cups of coffee for a short time in Seattle. However, Schultz “…axed a test of dollar cups of coffee in Seattle”8. In addition, he’s specifically stated “We’re not in the fast? food business.

 Thus, as we can see, Starbucks is committed to remaining in the premium coffee and premium service industry. Though their slowdown is partially caused by the market, it is clear that other competitors have not been affected as badly, so internal strategy may be the cause for their decline. Their strategy of not stooping down to the level of a fast food provider, for example, may be hurting them during this economic downturn. Analysis of Starbucks Using Porter’s Five Forces. The Threat of Substitution Substitutes (Products)

Other beverages apart from Starbucks coffee and tea – Examples include soda, fruit juice, smoothies, water, beer and other alcoholic drinks ? Other “quick? grab” foods apart from pastries, muffins, doughnuts, etc sold at Starbucks. Examples include burgers, burritos, tacos, sushi, snack food Substitutes (Environment/Ambience) ? Lower? end or “less luxurious” coffee places ? Places that offer people a place to hang out, chat, relax or even work. Examples include tea houses, fast food places, ice? cream parlors, side-walk cafes, and bars and pubs .

The Threat of New Entry ? The entry barrier for the coffee industry is relatively low, even for premium coffee like Starbucks. Any large and well? funded company where capital is not a problem could be potential entrants. ? Some of the more current and ongoing threats of new entrants include fast food chains such as McDonalds, Burger King and Dunkin Donuts. 3. Competitive Rivalry ? Other coffee chains. Examples include Coffee Bean & Tea Leaf, Gloria Jeans Coffee, Peet’s, and San Francisco Coffee House ? Smaller privately owned coffee houses ? Secondary coffee providers.

Examples include McDonalds, Burger King, Dunkin Donuts 5 4. The Bargaining Power of Suppliers ? Not much bargaining power for coffee bean suppliers due to the importance of Starbucks’ business to any individual supplier, and the fact that Starbucks probably accounts for a large percentage of any individual supplier’s sales.. This gives Starbucks the ability to dictate the price of coffee bean sales. ? Similarly, suppliers of paper and plastic products, such as cups, napkins, lids, etc, have very little bargaining power due to the large amount of alternative sources Starbucks could draw from.

In addition, Starbucks has formed contracts with such suppliers, giving them effectively no bargaining power. ? There is more bargaining power for suppliers of technological innovations such as automated coffee machines, latte and espresso machines, etc because there are not as many suppliers for such equipment as there are for coffee beans. 5. The Bargaining Power of Buyers ? In the past, buyers did not really have bargaining power when it came to premium coffee such as Starbucks. The sheer scale of Starbucks’ business reduces the bargaining power of any single group of buyers.

? With newer entrants and competitors such as McDonalds who claim to offer premium roast coffee of reasonable quality for lower price, buyers now have slightly more bargaining power than they’ve had in the past. SWOT Analysis Looking into Starbucks specifically, we need to analyze how it performs as a company and whether or not it will continue to perform. In order to gauge this performance we look at both the company’s characteristics and those of the surrounding market and see what needs to be done for the future.

An excellent tool for gauging these qualities is Strengths, Weaknesses, Opportunities, and Threats analysis, also known as SWOT analysis. Considering the strengths of Starbucks: Strengths: Pretty much everyone, at least within the US, knows the name Starbucks and associates it with high? end coffees. In addition, people see Starbucks as the biggest and best in the business. This is a significant strength because Starbucks has a natural edge over its lesser? known competitors in that people already associate it with a high quality and popular experience.

The enormous number of Starbucks locations allows them to reach almost every domestic market as well as a good number of international ones. This allows them to implement new products quickly across a large demographic and ensures a large exposure of clientele to prevent new 6 entrants from gaining market share. Additionally, taking advantage of existing establishments such as Barnes and Noble and opening smaller cafes in other businesses allows them to expand their market while keeping costs low. This also allows them expand their marketing potential to different demographics.