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Starbucks

A Market Oversaturated

Bill Fleming, Haimanot Kassa, Jose A Leal, Rigoberto Huerta,

Team A - Part II

October 22nd, 2018

MGT 362.C1

Prof. Pham

Contents

Executive Summary 3 What are the main reasons for the slow growth of Starbucks in America? 3 Will Starbucks’s new brand of reserve and premium locations help the Starbucks label? 3 Will the change in leadership alter the situation with Starbucks? 4 Chapter One: Introduction to the Firm 4 Chapter Two: Analysis of the External Environment 4 Chapter Three: Internal Analysis 6 Chapter Four: Cultural Assessment 7 References 9 Appendix A 10 Appendix B 11 Appendix C 12 Appendix D 14

The Starbucks Corporation is an American coffee company and a coffeehouse chain (Starbucks.com). After its founding, the company experienced fast growth both nationally and abroad becoming one of the most recognized brands globally. Although the company experienced fast growth and success, Starbucks has had many setbacks. Additionally, the company has matured, and its growth outlook seems limited.

Starbucks was selected as the subject of analysis for this project due to the many interesting challenges and changes it is facing. While Starbucks stores continue to be a popular destination amongst coffee drinkers, the company is facing high competition and market saturation. In this report, we will highlight some of the urgent issues the company must address and will recommend strategies for the company to mitigate possible risks when competing in an oversaturated market.

The collaborators of this report are Starbucks customers. Therefore, the relationship between the company and the authors is that of a “consumer”. The authors’ objectives is to develop a strategy; regardless of the heavy competition, to retain current clientele and generate new business in order to reach a Net Profit margin increase of 25% in 2019 and 30% by 2020.

Starbucks is currently facing many challenges ranging from changes in leadership to discriminatory practices in its stores. However, one of the most urgent issues that demand attention and to be kept in scope is high competition and market saturation. For the company to continue to experience success and growth, the company must continue to innovate and appeal to the customer, as well as to revisit its number of stores and presence in the market.

Unlike its competitors, consumers have labeled Starbucks as a “basic” brand (Taylor, 2017). Starbucks used to be considered an upscale establishment, but that notion has begun to shift to a basic brand as consumers have become bored with the Starbucks brand. Newer independent concept coffee and roasting shops are beginning to open across the U.S. As a response, Starbucks has announced a line of premium or reserve shops. The company is expected to give a unique upscale feel at an estimated 1,000 of its stores, in efforts to shed the “basic” label off (Robinson, 2017).

Although coffee consumption in America continues to increase, Starbucks has experienced slowed growth at an estimated 3% per annum. Unlike in the earlier years, the company is suffering from market penetration by upscale gourmet coffee shops and an oversaturation of similar “basic” coffee shops. In addition, an over saturation of Starbucks shops is hurting the brand. Since 2012, Starbucks has increased to having 3.6 locations within a one-mile radius (Franck, 2017).

Starbucks has shifted its expansion plans from opening standard retail shops to identifying specific higher income locations and targeting specific demographics. Although focusing on the current company’s business model would enable Starbucks to focus on quality and service, creating an upscale concept for specific market sectors may help shed the basic label and cure the oversaturation issue. Thus, Starbucks needs continue to innovate to attract and retain customers.

A change in leadership from former CEO Howard Schultz to new CEO Kevin Johnson during challenging times leaves stakeholders hoping to see Mr. Johnson ushering in a wave of change and bringing innovative ideas. The purpose of this project is to develop a strategy that captures the consumer’s view and expectations from the moment they enter a Starbucks coffee shop. The project will help the company to incorporate the need to diversify its brand into the upscale coffee shop Starbucks was once known for.

Established in 1971, Starbucks Coffee is a shining example of an American small business success story. As of July 2018, Starbucks is an international company with 28,720 stores and franchises across the globe. Starbucks prides itself in being identified as one of the best companies to work for‒great benefits and opportunity for advancement. Starbucks has become a social activist company tackling political and inequality issues, as well as establishing fair trade practices with coffee growers across the globe (Starbucks, 2018).

However, Starbucks now faces considering having over-saturated the retail coffee market in the United States, as well as changing trends in consumer coffee consumption and the threat of new entry by multiple gourmet coffee retailers in congested urban environments. In addition, the political climate and ongoing changes in trade relationships between America and many of its trading partners could potentially have a negative impact on the cost of imports. Although Starbucks is the leading coffee company in the world, several changing factors could impact its future capability to compete.

In order to help Starbucks deal with its current challenges and prepare for a bright future, we will use a variety of tools and approaches. We will start with relevant news and financial articles to assess some of the issues currently facing the brand. Once we have an idea from the research what we should be looking for, key performance indicators (KPI’s) and analysis of the company’s recent financial statements will be used to evaluate financial performance and trends of the company as well as its franchises. We will be looking for the story in the data as well as its trends especially that back up our research. Benchmarking will also be used to compare the company with rival competitors and within the company’s many franchise operations again to see what is happening at the store level across the country and the world. Additionally, we plan to use Porter’s five forces model to properly assess the industry as a whole and understand Starbucks relationship with its suppliers, customers, rivals, substitutes and what external pressures may be limiting profits and determine where and how those pressures could be alleviated to increase profits in the long term.

After applying all these tools for analysis, we will identify the best strategy for Starbucks to move forward to maintain and continue its storied success and avoid any future problems or potential pitfalls.

Starbucks initially differentiated itself as a premium product with a premium customer experience. Thus, establishing a premium brand significantly differentiated from the rest. This positioning allowed for a premium price. Since then, many competitors have followed suit, imitating its products and ambience. From McDonald’s and Dunkin Donuts to the other coffee chains, and independent coffeehouses (that owe their wide market acceptance to Starbucks’ creation of the market). To combat the increased competition, we seek to help Starbucks rejuvenate the customer experience and invigorate the brand to retain current clientele and generate new business to reach a Net Profit margin increase of 25% in 2019 and 30% by 2020.

First, we will look at relevant news and trends identifying the problem. Then we will do an external analysis of the industry for Starbucks’ position in the form of a SWOT analysis focusing on the opportunities and threats. Then we will conduct Porter’s five forces model analysis as well to determine the competitive industry environment and where profit is being squeezed or could be increased.

In recent years the Starbucks brand has suffered. Ironically, as a by-product, if its widespread success and growth it has become ubiquitous and labeled as “basic” by its customers (Taylor, 2017). What used to be a trendy and premium brand has become the norm and therefore no longer noteworthy. Similar quality coffee can now be bought in fast food restaurants, and coffeehouses dot the landscape (including many Starbucks). So, Starbucks is at a crossroads where it no longer stands out as exceptional, and so its brand is slowly losing its luster.

The external portions of the SWOT analysis reveal several opportunities and threats (see appendix B). The first opportunity is in developing markets. The developed markets are already saturated with Starbucks and other coffeehouses. This leaves the logical choice of going to emerging markets where they can capitalize on growing economies and a rising middle class. Business diversification offers a chance to reduce dependence on current revenue streams and can open new ones, possibly in less crowded spaces. Partnerships with other firms may improve sales by increasing distribution (Lombardo, 2018).

Using Porter’s five forces model (see appendix C) we see that the threat of entry is moderate. Operating costs and supply chain costs are moderate for a new entrant. Branding cost is high and takes both time and capital. Although this doesn’t hold profitability to low levels it doesn’t allow for exorbitant profits either. The power of suppliers is weak as there is a large supply globally with a large variety. Suppliers are not large or concentrated. This increases profitability. Large coffee chains like Starbucks to command a greater share of industry profits than suppliers do. The power of buyers is strong; mainly because switching costs are almost non-existent. Additionally, there are many substitutes available to consumers, as substitute options are abundant. Thus, making the power of substitutes is a strong force. Substitutes are even stronger when you add in the fact that similar drink products are available to customers at lower prices than what Starbucks offers. Rivalry among competitors is strong because of a large number of firms with only moderate diversity and the ease of switching for consumers (Greenspan, 2018). These three factors: buyers, substitutes, and rivalry, combine to hold prices low and inhibit greater profitability.

The external analysis reveals considerable pressure from threats of competition and substitutes. To address this, Starbucks needs to increase differentiation from those threats. Initially, products were major differentiators but over time have proved to be imitable by almost anyone (including McDonald’s). Its store environment of a welcoming “third place” was also a key differentiator and still is compared to the substitutes and some competitors. Unfortunately, some coffee houses have successfully imitated Starbucks store environment. Customer satisfaction, and a uniquely positive customer experience could be a way to stand out from the competition and increase customer loyalty. This could also raise switching costs in the mind of the consumer. Unless the brand can differentiate, it risks continued lowering of the brand image and eventually eroding of its ability to charge a premium. That hurts bottom-line profits and eventually shareholder’s stock price.

Since its founding Starbucks has experienced a fast and robust growth thanks to the ability of the company to deliver a customer experience unlike anything is seen before. Due to this new concept, the Starbucks brand became one of the most recognizable brands in the world. Howard Schultz, Starbucks’ founder, first purchased a whole Arabica bean shop company in Seattle’s Pike Place Market, which morphed into a successful global corporation. Inspired by “Milan’s coffee culture, in particular, the role the neighborhood espresso bars played in Italian’s everyday social lives” (Moon & Quelch, 2006), Schultz created a “third place,” away from home and work, for a customer to enjoy. Schultz believed that by having happy partners (i.e., employees), partners would, in turn, provide high-quality customer service. Thus, in its efforts to nurture a happy work environment, Starbucks offers generous compensation and health insurance policy to its employees.

Although the company was very successful with its revolutionary Starbucks experience, market research data shows that consumers’ satisfaction is declining (Moon & Quelch, 2006). Moreover, research shows that Starbucks’ consumer base has shifted from the well-educated and more established consumers to the younger, less educated, and lower income earners. Furthermore, research shows that a high priority for the younger customer base is timeliness. As efforts from Starbucks provide a faster service, the customer experience is less of a priority for Starbucks partners. Due to the inconsistency and neglected customer experience, customers are getting confused with Starbucks identity and bored with the brand. This dilemma of providing timely services at the cost poor quality customer service poses an interesting challenge for Starbucks. On the one hand, Starbucks’ high-quality customer service was known for the personalized customer service baristas provides customers. On the other hand, this level of personalized service takes time to create. As Starbucks’ menu have an increase (which means baristas have a higher list of customizable orders), baristas have to choose between providing a quality customer service or completing customers’ orders. As Starbucks faces high competition in a saturated market, the company must leverage its internal resources and capabilities to elevate the customer experience to the next level.

Given that Starbucks, more than just selling coffee, sells the Starbucks experience, must create strategies that allow the company to meet the various needs and preferences of its customer base. Starbucks has a long list of resources and capabilities other coffee chains can only dream about (please see Appendix D). For example, Starbucks has an information system that can create synergies to enhance customer experience (Wailgum, 2008). Furthermore, the company has a strong social media presence, which allows Starbucks to reach millions of customers instantly. Also, the company has a large store footprint, which allows the company to combine the convenience of online shopping with the real feeling of brick-and-mortar shopping. Due to the company size, Starbucks has built strong relationships with growers around the world. This gives Starbucks a competitive advantage, as smaller coffee shops do not have these relationships. These capabilities and resources are complemented by the strong leadership of the company’s CEO and its leadership team. Although small and independent coffee shops can be agile in creating strategies, they do not have the expertise a seasoned executive has.

Some of Starbucks’ challenges are self-inflicted wounds (e.g., store cannibalization). In its efforts to be innovative and produce new products, the company has made working conditions for its partners less desirable. Additionally, partners are too preoccupied with completing complex beverages, more so, than to providing high-quality customer service. Moreover, as Starbucks menus keep on increasing, baristas are less knowledgeable about the various ingredients its products contain. The once desirable personal Starbucks experience is turning to that of a fast food experience. Starbucks must make effective use of its internal resources and capabilities, create synergies, and build on strong relationships with growers to ensure Starbucks’ products are the finest products coffee lovers can buy. Additionally, the personalized Starbucks experience should complement these high-quality beverages.

It is suggested that “a happy employee is a productive employee”, and this certainly holds true when it comes to Starbucks employees. Starbucks has created a work culture that is diverse, inclusive and empowering. At the very foundation of the Starbucks employment experience is the inclusiveness and incorporation of each and every employee into the fabric of the company. Starbucks employees are referred to as “partners”, which highlights the importance of the employee’s contribution to the success of the company. Starbucks hires a diverse workforce including people with disabilities and supports “Partner Networks” which are employee resource groups that represent employees from different backgrounds. (Starbucks Careers, 2018) Employee resource groups are a fundamental component of a positive employee experience, these provide employees with a group and a place to feel accepted and to belong to; it also provides a networking platform for career development, mentoring and coaching. (Why employee resource groups still matter, 2017). Starbucks is invested in its workforce and provides a number of benefits not widely offered in the food industry or to hourly employees, these include health insurance, stock buying options, and tuition reimbursement. (Chris, 2015)

Successful organizations aren’t simply a result of a published mission statement and a claim of being inclusive. Instead, they are a result of effective leadership that inspires, encourages and engages team-members both as individuals and as part of a team (7 Howard Schultz Leadership Style Principles, 2015). Starbucks is an exemplary company that was reinvented by its innovative and transformative leader, CEO Howard Schultz. Mr. Schultz is not simply focused on developing a multi-billion dollar coffee brewing empire; he put in place several components required to create a successful business that provides a good service to customers. For example, the Starbucks experience, product quality, and taste is consistent throughout its global stores, Schultz sees extreme value in understanding the Starbucks customers and the employees, creating partnerships, and establishing Starbucks as a community gathering spot for coffee and what is referred to as the third place (home and workplace being the first two). (7 Howard Schultz Leadership Style Principles, 2015)

Not only has Mr. Schultz succeeded at energizing his workforce, he has also been able to energize the media and the public by advocating for social issues such as encouraging discussion about race, asking customer to not bring firearms into his stores, tackling youth unemployment and executing a company-wide anti-bias training to address a discriminating occurrence at a Philadelphia store (Howard Schultz at Starbucks: Coffee, Activism and Controversy, 2018). Starbucks has the reputation and the global influence to take on social issues that are of importance to both customers and employees.

Although much of Starbucks’ success is accredited to its partners, the values and guidelines that make up the culture of the company are at risk of diluting as the company continues to expand. The larger the company (including franchises), the higher the change of a disconnect to the primary mission of the company and the central leadership team. (The Culture Case Study of Starbucks, 2017)

Mr. Schultz stepping down as CEO of the company creates both a window for opportunity as well as multiple risks. Mr. Schultz has been accredited for the massive company growth and implementation of a culture of social consciousness. In the past four decades, thru his approach in creating a “moral leader” out of the company, Schultz strived to create an organization where profit and conscience were balanced (Sorkin, 2018). Starbucks’ new CEO Kevin Johnson will face a similar challenge faced by Apple’s CEO Tim Cook when replacing Steve Jobs: Keeping the company on a progressive and innovative path. Both Mr. Johnson and Mr. Cook face the similar dilemma of identifying how much of the previous leadership style is to be retained, and if changes are made, how will these impact the work culture and workforce morale. During the month of November 2018, Starbucks is scheduled to take a stab at reorganizing by eliminating a number of corporate level positions in an effort to begin the process of “Shaking up” the organization (Whitten, 2018). Reorganizations run the risk of generating fear and resistance, specially if these are conducted in a sweeping manner instead of targeted (Another Reorganization? What to Expect, What to Avoid, 2003). Mr. Johnson is seeking to energize leadership’s velocity of innovation in reference to customers and its partners (Whitten, 2018). Starbucks appears to have identified an area of improvement when it comes to the diversification of products and services for customers, but most importantly that its partners need to be brought back to committing to the company’s core values; any improvement to the customer experience can lead to profit growth and retention.

Chapter Five: Strategy Formulation: Exploration of alternate strategies and their probable impact and explain how you choose the strategy to pursue. Do include a clear statement of the old and new objectives of the firm before you launch into the details of your discussion. You should draw what you have learned from this course and your marketing course for this section. This section is where you pull together all the analyses you have conducted and discussed into a Ly-Huong T. Pham, MBA, Ph.D. Page #3 coherent looking-forward strategy extending to 3 to 5 years. You should consider crafting a final statement of the new Strategy in no more than two or three sentences. If you can’t then your new strategy is probably too complicated.

5. Strategy Plan components

1. Mobile cart and delivery stores

2. Customer experience: Deepen customer experience through digital innovation such as delivery service, digital ordering, cashless payment, rewards, and personalization.

3. Price increase

The chosen strategy is Customer experience

In order to reach a net profit margin of 25% increase by 2019 and 30% increase by 2020 Starbucks will refocus on customer experience.

By rejuvenating its commitment to service excellence SB will differentiate from competitors.

These improvements will increase the growth rate through reinforcing brand loyalty, retain and increase sales with existing clients and attract new ones.

Rigo’s part

3) Discuss a coherent looking-forward strategy extending to 3 to 5 years

From the get-go, Starbucks was able to create a special connection with customers. By asking baristas to learn the name of frequent customers, Starbucks baristas were able to provide a personalized experience to customers. Complementing Starbucks individual connection to customers, was Starbucks’ extensive menu options. Although, various coffee shops and fast food restaurants sold coffee, none of these coffee shops innovate the coffee industry. Starbucks revolutionized the coffee industry, not only by creating a personal connection between Starbucks and customers, or by creating a third place (away from work and away from home), but also by creating innovative exciting coffee drinks. The crafting of these factors gave birth to the Starbucks experience and allowed the company to charge a premium for it.

As the Starbucks experiences has aged and customers are getting bored with the brand, Starbucks must once again revolutionize the coffee industry. To do so, Starbucks should explore: explores mobile delivery methods, depend the virtual Starbucks experience, and leverage grower relations to obtain to quality products. The delicate crafting of this factors will increase value to customers, which will allow the Starbucks to charge premium prices.

Independent coffee shops have saturated some parts of the coffee market. For Starbucks to still gain growth, we suggest Starbucks takes advantage of the popularity of the mobile food truck concept and explore this mobile delivery option. For example, it would be innovative if Starbucks trucks bring products to office areas and places where construction constraints limit the Starbucks’ brick and mortar growth.

Another are where Starbucks can innovate is in the virtual world. Although, Starbucks already uses mobile apps receive orders from customers, Starbucks exploit this technology even further. For example, Starbucks could use the app to show how and where coffee beans are being grown. Additionally, the company can show how by buying a cup of coffee customers make a direct positive impact on growers around the world. Additionally, the Starbucks app can be used to place orders for home consumption. Customers place orders to products like coffee beans, grown coffee, coffee beans, mugs, etc. This concept will also help Starbucks stay close to the Generation Z, as they are heavy tech users.

As independent coffee shops keeps on saturating the market, Starbucks must be able to differentiate itself from the competition. Starbucks must do by providing to quality customer service and by selling the best coffee available. Starbucks has the grower relationships and capital to ensure the company get the best coffee beans grown around the globe. This differentiation will allow the company to create value for customers and increase prices.

4) Craft a final statement of the new strategy in no more than two or three sentences.

Chapter Six: Implementation: This chapter will provide your recommended action plans how you envision the company’s strategy being amended in order to achieve a better match between the requirements of its environment and the company’s internal potential for competitive advantages. Do include any organizational changes that are results from your analyses.

Another Reorganization? What to Expect, What to Avoid. (2003, July 02). Retrieved November 12, 2018, from http://knowledge.wharton.upenn.edu/article/another-reorganization-what-to-expect-what-to-avoid/

Chris, J. (2015, August 25). 7 Howard Schultz Leadership Style Principles. Retrieved from

http://www.josephchris.com/7-howard-schultz-leadership-style-principles

F. (2017, January 09). The Culture Case Study of Starbucks. Retrieved from http://shaunfrankson.com/starbucks/

Greenspan, R. (2018, September 07). Starbucks Coffee Five Forces Analysis (Porter’s Model) & Recommendations. Retrieved from http://panmore.com/starbucks-coffee-five-forces-analysis-porters-model

Lombardo, J. (2018, August 30). Starbucks Coffee Company SWOT Analysis & Recommendations. Retrieved from http://panmore.com/starbucks-coffee-swot-analysis

Moon, Y., Quelch, J. (2006). Starbucks: Delivery Customer Service. HBS No. 9-504-016. Boston, MA: Harvard Business School Publishing

Term Paper - Project Outline

SWOT Analysis

Michael Porter's Five Forces

Starbucks VRIO Framework