Analysis Memorandum - Starbucks

Governmental Action……………………………………………………………………………...8

Organization and Teams…………………………………………………………………………. 9

Stakeholders…………………………………………………………………….………………..10

Current Environment…………...………………………….…………………………………….11

References…………………………………………………………….………………………….13

TO: Jack Harris, President Crisis Consulting

FROM: Carmen Hendrickson, Vice President, Governmental Affairs

DATE: June 21, 2019

SUBJECT: Company Overview

Introduction

Starbucks is an American coffeehouse chain. Due to the changes in government actions such as the increase of minimum wage and updates to the food safety laws, the company has to adjust and conform to the changes in remuneration structures. Although this may have some implications, there are a few methods that the company can use to compensate for the deficit that will be incurred due to the increase in operational costs. As compared to closing or winding up a number of outlets, the organization can alternatively carry out measures to counter these governmental actions. We will, therefore, perform an opportunity, strength and weakness analysis of Starbucks, go through some implications of government actions toward raising of the minimum wage, the current business environment, and a few actions Starbucks can take in order to neutralize these implications.

Overview

Business Profile/ Background

Starbucks has four operating segments namely; Americas, China, Europe and channel development. According to Osnabrück (2014), it’s difficult to get the accurate values of market share in each of these segments. However, Statista (2018) estimates Starbucks’ market share in the United States as 39.8%. In China, the market share is approximately 70% (Osnabrück, 2014). The company has both domestic (US based) and global competitors. The major competitor in the United States’ Coffeehouse industry is Dunklin which commands about 22% of the market share (MarketWatch, 2019). Globally, UK based Costa Coffee comes second after Starbucks in in the coffeehouse industry while McDonalds leads in the wider restaurant industry. Other competitors include; J.M. Smucker, Nestle, Reily Foods, Kraft, Caribou Coffee, Peet's Coffee & Tea, Massimo Zanetti and Keurig Green Mountain (MarketWatch, 2019).

Opportunities

There is a trend of high market growth in the emerging markets where Starbucks operates. High growth rates in emerging markets. For example, Starbucks presence in China (one of the emerging markets) suggests the possibility of further expansion into the future. Firs of all, China has a large population that’s estimated at 1 billion. It is estimated that China’s middle class will increase 600 million people by 2022 (Reynolds, 2018).

Secondly, the growth potential of the single-serve coffee market beyond the United States is quite promising. Being a relatively new offering that received great reception in the United States, it’s expected to generate more sales in overseas markets. Furthermore, the company has already entered into the premium single serve solution with Courtesy Products (Starbucks Inc, 2018). The courtesy coffee products also have a high potential of growth. They include the Starbucks CV1 1500 1 Cup Coffee Maker which can be used for commercial or home purposes (Starbucks Inc, 2018). Lastly, the popularity of flavored coffee in the united states provides an opportunity for future growth. Customers have enjoyed the taste and flavor of sustainably grown coffee over the last decade (Starbucks Inc, 2018). This has been influenced by the preferences of healthy living.

Threats

For most Starbuck’s products, there’s a high price sensitivity among the customers. In this case. Starbucks business model is dependent upon consumer discretionary spending meaning that rapid economic shits can reduce the amount of purchases that customers undertake. The price sensitivity is particularly reported when prevailing macro-economic conditions reduce the amount of money available to consumers for discretionary spending (Starbucks Inc, 2018). Global economic shifts may include international trade disputes and economic policy changes in global trading blocks such as the European union. Domestically, job losses, increase in interest rates, high taxation, lower access to credit, rises in energy costs and economic uncertainty also have the potential to reduce the purchasing power of consumers.

Secondly, Starbucks experiences high competition from large and small local competitors. All Starbucks markets including single-serve and ready-to-drink coffee beverage and also packaged coffee have been subject to Increased global competition (Starbucks Inc, 2018). Of course, Starbucks does not occupy leadership positions in all the channels and markets where it operates. New large entrants into this business cause a major threat to the position of Starbucks in the various markets. Also, both large competitors and small ones that offer high-quality specialty coffee beverages are a threat to the profitability of Starbucks.

Thirdly, some of Starbucks’ business areas are heavily dependent on partners. For instance, the company depends entirely on Nestle for its channel development business where Nestle sells and distributes packaged goods and other Starbucks’ foodservice products (Starbucks Inc, 2018). Failure by Nestle to honor the existing agreement can lead to significant challenges in the growth of Starbuck’s brand. It also disrupts the supply chains leading to a decline in profitability

The high labor costs in retail business are a major influence to the operations of Starbucks. When these costs are unstable during an accounting period, the company is likely to experience significant shifts in revenue. Labor discord and disruption can also affect the company’s activities in a negative way.

The overdependence on one operating segment (the Americas segment) is also a major concern for Starbucks. For example, the financial results of 2018 showed that the Americas segment (mostly the US and Canada) contributed more than 68% of the total revenues (Starbucks Inc, 2018). This means that a decline in this segment can hinder the initiative to expand operations in other countries.

Natural disasters, geopolitical events, civil wars or terrorism affect the customer’s ability to acquire the products of Starbucks. In particular, terrorism and wars usually result into avoidance of public places and public gatherings meaning that consumers cannot visit Starbucks cafes. Political instability and anti-American sentiments in certain foreign markets equally affect the popularity of the company’s brands.

Lastly, the heavy reliance on information technology for day-to-day operations implies that interruptions or failure of that technology harms the company’s ability to maintain stable operations. The key operations that would be affected by such failures include; supply chain management, administrative functions, use of Starbucks Cards, mobile payments, online delivery services and a couple of other interdependent functions (Starbucks Inc, 2018).

B. Governmental Action

The company is expected to comply with food-safety regulations in the United States. Failure to comply can result in adverse actions by the FDA. In particular, the operations of Starbucks may be affected by government-initiated product recalls. FDA regulated products which include more than eighty percent of all foods consumed in the United states can be recalled from the market when it is evident that they are either defective or potentially harmful (FDA, n.d.). In this case, the food or beverage products of Starbucks could be recalled by the FDA if they are associated with beverage-borne illnesses or cases of food contamination. This type of product recall would not be voluntary but as a result of the FDA’s concerns.

FDA initiated recalls are classified into Class 1, class 2 and class 3 with the first class (class 1) being the most dangerous products which have the potential to cause serious health problems and even death (FDA, n.d.). The process of an FDA product recall starts with an alert to the agency detailing the problems of a particular product. The alert can be made through inspections in a processing facility or reports through the agency’s reporting systems. Alternatively, the FDA can hear about the problem through the Centers for Disease Control and Prevention (CDC) (FDA, n.d.). This is the most probable avenue that FDA might use to order a recall of Starbucks contaminated products.

After the FDA has learnt about the health problems associated with Starbucks products, the next step would be to alert the public. It makes the recall public after getting sufficient evidence to declare the problem a serious hazard. The recall decision is publicized via news media to reach out to a large population that had acquired/bought the products. Press conferences by the FDA may also be used to confirm the recall as official. In the last step, the FDA reviews the corrective actions taken by the company to determine whether the product was reconditioned or otherwise destroyed.

For Starbucks, a government-initiated recall would definitely have negative implications. The negative publicity that’s associated with such a recall will affect the company’s reputation and the customer’s general confidence in Starbucks’ products. This will in turn affect the market share in light of the increasing competition from both large and small competitors. The negative publicity in the United States may also affect sales in other countries owing to the use of digital media that enables cross-border sharing of information.

C. Organization and Teams.

Starbucks businesses are operated via a matrix organizational structure in which there’s an intersection of; Functional hierarchy, Geographic divisions, Product-based divisions and Teams (Meyer, 2019). Compliance falls into the functional hierarchy and would thus be run at the company’s corporate office. In this context, Starbucks has a Retail Food Safety (RFS) which is mandated to oversee compliance with food safety standards.

The Retail Food Safety (RFS) team takes up the role of enforcing food safety standards in order to prevent foodborne illnesses in all Starbucks businesses. It makes sure that certain central competencies are adhered to in line with the company’s priorities on food safety and quality (Ladders, 2019). In a nutshell, the RFS team manages the development, improvement and unceasing refinement of food safety programs, quality of retail offerings and regulatory programs. It supports operational leaders by providing insight and feedback on critical food and beverage safety issues.

In more specific terms, the Retail Food Safety (RFS) team analyses customer feedback along with additional audit data. It also maintains Quality assurance files of suppliers to ensure that coffee that is supplied meets the required quality standards. The team also preserves effective communication networks to enhance the dissemination of food safety information among partners and suppliers. The team critics business initiatives to ensure that they meet Quality, Product Safety and Regulatory standards and proposes appropriate mitigations for pervious shortcomings (Ladders, 2019)

A past recall incident due to food safety concerns occurred in China when the company stopped the sale of drinks with milk in all its Chinese outlets. This came amidst death reports due to poisoned dairy products (ABC News, 2008). In this case, one of Starbucks’ milk suppliers known as Mengniu was linked with the contaminated milk products (ABC News, 2008). A statement by Starbucks defended the move to withdraw beverages that contained milk by declaring that the safety of customers came first.

D. Stakeholders

Starbuck’s internal stakeholders include employees, baristas, managers and the board of directors. The external stakeholders are the suppliers, consumers, lobbyists the government regulators and investors. When it comes to the political process, the board of directors, top managers and lobbyists have been fundamental.

The board of directors and the top management are guided by the company’s recognition of its responsibility to advocate policies that enhance the favorable conduct of business. In this case, a policy was adopted in 2010 to foster transparency in the political contributions that the company makes beyond what the law requires. The policy public policy issues that may benefit the Starbucks business. At the end of the year, the top management outlines corporate political contributions and expenditures to shareholders

On the other hand, lobbyists help the company to negotiate their needs with key political actors in order to foster the wellbeing of the company. In the past, Starbucks has hired Preston Gates Ellis & Rouvelas Meeds LLP as a lobbying firm to enhance negotiations with the Senate finance committee (Cumming, 2005). The lobbying firm used its contacts to make calls and arrange for a meeting with the chairman of the Senate Finance Committee, and the chairman of the Republican conference to discuss the interests of Starbucks (Cumming, 2005).

E. Current Environment

Internally, Starbucks enjoys a good relationship with employees. It can also be associated with a good financial health. The consolidated revenues for 2018 were estimated at $24.7 billion which represented 10% increase from 2017 (Starbucks Inc, 2018). Starbucks has thus maintained its status as a respected brand in the world for a long time. By 2018, the company was still pursuing its expansion goal by adding stores in both developed and emerging markets. However, its biggest challenge in all these initiatives seems to be the ever-growing competition especially in the developed markets. This can be offset by investing more in the emerging markets such as China.

For the issue involving discrepancies in the food and safety standards, the negative publicity associated with the product recall would reduce the consumers’ preference of Starbucks’ products. in the end, the competitive factors will work against Starbucks leading to a decrease in total sales and associated revenue. This means that the recall would have far reaching effects especially if the management does not manage it properly.

The board of directors would most probably contact local, state and federal political actors to negotiate for a decision that promotes the best interests of the company. These would most likely be the individuals whose political campaigns were funded by the company. Hired lobbyists would also use their contacts to initiate a favorable political action. At this point, the political actors will use their influence to pursue actions in which the company can avoid additional legal action following the recall potentially harmful products. The track record of the company or corporate giving activities may be used as defense to avoid adverse legal actions.

References

ABC News. (2008). China Starbucks cuts milk drinks after poison deaths. Retrieved from https://www.abc.net.au/news/2008-09-20/china-starbucks-cuts-milk-drinks-after-poison/516140

Cumming, J. (2005). Cautiously, Starbucks PutsLobbying on Corporate Menu. Retrieved from https://www.wsj.com/articles/SB111325665533003948

FDA. FDA 101: Product Recalls. Retrieved from https://www.fda.gov/consumers/consumer-updates/fda-101-product-recalls

Ladders. (2019). Quality Assurance Manager, Retail Food Safety, Global Food Safety. Retrieved from https://www.theladders.com/job/quality-assurance-manager-retail-food-safety-global-food-safety-starbucks-burbank-ca_38641682

MarketWatch. (2019). Coffee 2019 Global Trends, Market Size, Share, Status, Market Analysis and Forecast to 2025. Retrieved from https://www.marketwatch.com/press-release/coffee-2019-global-trends-market-size-share-status-market-analysis-and-forecast-to-2025-2019-03-14

Meyer, P. (2019). Starbucks Coffee’s Organizational Structure & Its Characteristics. Retrieved from http://panmore.com/starbucks-coffee-company-organizational-structure

Osnabrück, F. (2014). Strategic Management Report – A Strategic Pathfinder for STARBUCKS. Retrieved from http://Fachhochschule Osnabrück Faculty of Business Management and Social Sciences Master in International Business and Management Strategic Management Report – A Strategic Pathfinder for STARBUCKS/

Reynolds, B. (2018). Starbucks: Aggressive Global Expansion Means Growth Percolating. Retrieved from https://www.newsmax.com/finance/benreynolds/starbucks-global-expansion-percolating/2018/10/01/id/884301/

Starbucks Inc. (2018). Starbucks Reports Q4 and Full Year Fiscal 2018 Results. Retrieved from https://stories.starbucks.com/wp-content/uploads/2019/01/Starbucks_Q4_FY18_Earnings_Release.pdf