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Starbucks External
In order to perform an external analysis for a company, such as Starbucks Corporation, you need to first identify what industry the company is in. Once the industry is identified, fast casual industry, five different sections will help complete the analysis. First we will be identifying and describing the industry, secondly, we will be identifying the key success factors for a company in the fast casual industry. We will then discuss structural forces affecting the industry profitability using Porter’s five forces analysis. The fourth step we will be identifying and discussing the driving forces or macro-environmental trends that are creating opportunities and threats for the fast casual growth. Finally, we will summarize the opportunities and threats to the industry. All together this will give us a complete external analysis to help make realistic recommendations to further the client's company, Starbucks Corporation.
The Industry
The industry in which Starbucks Corporation performs business in is the fast casual industry. According to Hoover's, the NAIC code is 722513 and the SIC code is 5812 for this industry (2016). NAIC is the North American Industry Classification System and it classifies this industry as limited service restaurants. The industry is considered any establishment that provides food services where customers generally order items and pay before eating. Food and beverages can be consumed on premises, taken out, or delivered to the consumer's location (NAICS Association, 2016). “Fast casual restaurant is a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared and high-quality food than traditional Quick Service Restaurants, all in an upscale and inviting ambiance” (Trefis Team, 2014, pg. 1).
Fast casual restaurants tend to offer better quality and hygienic food rather than less nutritional quick service food outlets such as McDonalds. When customers go to McDonalds, they are more inclined to use the drive-thru and order the cheaper options and only spend a few dollars. Whereas customers of fast casual restaurants go into the stores, enjoy the atmosphere and the people, order and stay longer than a quick service restaurant. However, these customers are paying more for these various aspects of the business. For example, Chipotle, a fast casual restaurant, the meal can cost roughly double a McDonald's meal. McDonald’s average customer count has been diminishing by 1.3% for two consecutive years, whereas Chipotle, the average guest count has been rising by 5% and 2.3% in the last two years (Trefis Team, 2014). “According to Technomic’s 2014 Top 500 chain restaurant report, sales for fast casual chains grew by 11% and store count by 8% in 2013” (Trefis Team, 2014, pg. 4). Based on these statistics, the market size of the industry is growing rapidly. More and more restaurants where you order at a counter and the customer takes it to their own table or it is delivered to their table are popping up everywhere. These restaurants are suitable for a diverse group of people. Younger consumers want quick and easy, but they also want delicious and healthy; parents want the same. The restaurants in this industry are rapidly growing in sales. “A study completed in the first quarter of 2011 found that fast casual restaurants have been experiencing higher sales and higher traffic over the previous year, and restaurant operators are largely planning to increase capital expenditures in renovations and new locations (FranchiseHelp Holdings, 2016, pg. 4).”
The fast casual industry is not a new category of restaurants. However, due to the want and need to be healthier recently, these forms of establishments are quickly becoming more and more popular. The industry itself would be considered to be in the growth stage of the life cycle. In the growth stage, there is increasing competition and lower prices. As the company’s costs are reduced there is also greater customer awareness and an increase in their profits. This phase of the industry’s life cycle can also be referred to as the stakeout phase. The economies of scale for the industry are slowly being achieved and the barriers to entry are gradually becoming very high.
In the fast casual restaurant industry, the cuisine can consist of almost any variety of food and or beverages. This industry has a lot of competition and can be both highly and weakly differentiated. For example, Panera is an American fast casual while Chipotle is a Mexican fast casual. Starbucks is a pastry, sandwich and coffee fast casual while Burger-Fi and Five Guys are both burger fast casual restaurants. The industry itself has a lot of the same categories of restaurants, however, all burger places are not the same and each offers their own special features. Most fast casual restaurants offer a variety of food products in the food category as well as drinks. This industry also offers a more relaxed, lounge-like atmosphere for their customers that include comfortable seating and free Wi-Fi. Products such as these make it easier for people to spend more time in these fast casual restaurants and the ability to spend more money.
As previously stated, the competition in the fast-casual industry can be very aggressive. There are many different categories of restaurants nonetheless, many of the same category restaurants in this industry. The key competitors of a company in the fast casual industry such as Starbucks or Panera, Chipotle, Shake Shack, Burger-Fi, Five Guys, and many others. All of these restaurants offer very different food and beverage products. Although, all of these restaurants are relatively fast and use better quality food than fast-food eateries. The rivalries for the fast casual restaurant are in all major cities and larger neighborhoods. These competitors can be corporate owned throughout the world, franchised throughout the United States or even family owned in one city or area. This industry is very diverse in the rivalry companies it has. The fast casual restaurant industry is considered to be a fragmented market with its competition. No one company or restaurant can influence this market or industry in any direction. The industry consists of various sized companies all competing against each other and other industries.
Key Success Factors
The fast-casual industry derived from the fast food industry, with the goal of offering higher quality food and drinks at a slightly higher price. Because of that, a lot of the key success factors from the fast food industry have also been implemented in the fast-casual industry, with a few exceptions. Consumers are always looking for convenient locations, efficiency, and excellent customer service. The big difference between the two industries is that traditionally, fast-food chains have gained market share by offering simpler and cheaper alternatives while fast casual chains provide customers with higher quality meals (Nath, 2015).
When determining what the different success factors for the fast-casual industry are, we have to first look at what it means to be categorized as a fast casual restaurant. This industry is a good combination of the fast-food and casual dining restaurants. Except the fast casual concept fills a gap between the inexpensive fast food joints and full-service sit-down restaurants (Papal, 2015). Customers who choose a fast-food restaurant are looking for convenience and location rather than a memorable dining experience. Fast-casual restaurants are also more affordable than a casual sit down restaurant with a wait staff. Therefore, this industry fulfills both categories in a way that is easier and healthier for the consumers.
The fast food and fast-casual industry have seen a trend in more people leaning towards the fast-casual industry. There are several reasons for this. The fast-casual industry is focused on higher quality food with more availability for the customer while keeping the efficiency and speed of the fast food industry. The fast-casual industry is driven towards the younger generation where convenience over compromise is something they keep in mind. As many people get more and more active they want their experience to be as quick as possible. Starbucks is one company that wants to expand even further into the fast casual industry. Offering healthier and better quality food for their targeted customers.
Targeting the Millennial Generation
Companies in this industry that are going healthier are targeting the millennial generation where their parents feel comfortable with taking them out to a so called fast food restaurant, without being worried of bad food options or hidden ingredients. Capturing the millennia is a key success factor for any restaurant in this industry, especially Starbucks. Parents also tend to strive towards the phrase “Quality over price,” considering trends nowadays are to be as healthy as possible and, therefore, offering new and innovative products on menus is something to take into consideration (Xaxx, 2016). Targeting the millennial generation is a key success factor for a fast casual restaurant considering millennials have the greatest impact on the rest of their families and friends.
Convenience and Fast
The fast food industry is about convenience and speed. This is also a factor for the fast-casual industry in order for these restaurants to be successful. Consumers are always in a hurry, maybe more than ever before. The key has been to make higher quality food and drinks available to the customer as fast as the fast food industry does. This is why more and more fast-casual firms have started to offer a drive-through in many of their locations. Starbucks, in this example, has an advantage, as it is one of few in its industry who has implemented it already. Being effective does not just make the customer satisfied, it is also how the industry makes its money. The more products they sell, the more money they make, so if you are a firm in the industry that doesn't live up to the speed expectations, then you will lose both customers and your profit margins (Xaxx, 2016). Being in the right place at the right time, is a motto the industry follows very thoroughly. The location means everything to the customer. Change is nothing to be afraid of. Millennials embrace and welcome change and are not afraid to try out new products and services that they offer.
Brand
Considering the high barriers to entry in the industry, another factor that you, unfortunately, need in order to be successful, is a good brand. The most profitable companies are the ones that have established themselves as a leader in their particular industry by building a strong brand (Deluxe, 2015). The industry is full of global chains that are recognized on every continent of the world just by looking at the brand logo or name. Panera, Chipotle and, of course, Starbucks are all examples of extremely successful fast casual branding because it is self-marketed. Because of that, branding is a key success factor that is hard for new entrants to the industry to implement. It is something that develops over time and has to be recognized in order to be successful. Starbucks, in this case, is one of the few that has implemented a brand so powerful that people recognize it all over the world. Panera and Chipotle have also recognizable brands, but not as distinguished and globally known as Starbucks and its logo.
Impact on the Consumers
In order to succeed in the fast-casual industry, constructing an analysis of its competitive environment is a key factor itself, but being able to foresee any impact on the global economy is a driving force that Starbucks has done well. Starting off in the coffee industry while being observance for expansion into the fast-casual industry has made them who they are today. Their main competitors such as Panera Bread and Chipotle went on a diverse route. They started exclusively off in the fast-casual industry and are planning on staying there, but since Starbucks has such a high market share in the coffee industry, they have taken the advantage to move over to a different industry that will help them generate an even higher profit throughout their expansion. Expanding into different industries is not easy. It costs money, has high-risk factors and forces your business strategy to change compared to the originated strategy developed for the initiated coffee industry. We believe that the key success factors are something explicit to Starbucks core business structure that is exclusive for its competitors within the same industry and, therefore, is a huge success in regards to expansion into the fast-casual industry for Starbucks. Being innovative is key in today's economy, and in order to succeed in the industry, you have to target the right clienteles, being open to more quality items on the menu with the emphasis on convenience, speed, and branding.
Porter’s Five Forces Analysis
The threat of new market entrant into the fast casual industry is high due to the industry having low barriers to entry. If someone wanted to create a new fast casual restaurant within the industry, it would not take very much to start. In order to start a new restaurant in this industry you need to be able to afford a location, the food you will be cooking with and any other supplies needed. Although, the high cost of brand development is a major challenge to new entrants. Other than this, the low costs of doing business and supply chain costs pose a moderate threat for companies, especially Starbucks. The products offered in a fast casual industry are simple to produce, easy to come up with and easily differentiated. There are no switching costs for a consumer in the fast casual industry. Considering this, the consumer can easily decide to switch from American cuisine to Mexican cuisine or even to a different Mexican cuisine at any time. This makes the threat of new entrants high for a company in this industry.
The bargaining Power of Suppliers is low/medium because it depends on the specialty products the suppliers are purchasing. Companies within the industry such as, Chipotle and Panera Bread are purchasing specialty products for their specific niche so they pick out specific suppliers to deliver their goods and services such as coffee-farmers that deliver coffee beans, meat farmers for companies in the fast-casual industry to deliver specialty meat and specific farmers for wheat production.
The buying power of customers is low. The consumers who go into a fast casual restaurant do not have the ability to change the price of the product they are purchasing. The buyers of fast casual merchandise or food and beverages are large and few in number. However, the consumers have the power to choose a different restaurant to satisfy their needs. The low switching costs and availability of substitutes give the buyer an upper hand hence pose a high threat.
The threat of substitute products can be classified as high since the customers have many other restaurants and food options to choose from. If a customer wants very quick food and it does not matter to them if it is healthier or not, they can go to a fast food restaurant such as McDonald’s and other low priced alternatives. On the other hand, if the consumers of the fast casual industry wanted a nicer, fancier meal, they can go to a casual dining restaurant such as Chili’s. There are also other factors that contribute to a high threat of substitution such as low switching costs and the differentiation of cuisine.
The rivalry among competing firms within the fast casual industry is a medium threat. There are a large variety of equally balanced competitors in the industry. In order for a consumer to switch to a different fast casual restaurant, there is little to no switching cost. Although, the consumer may need to change the type of cuisine they are purchasing, that has little effect on the customer. In a fast casual restaurant, the fixed costs are not considered to be very high, therefore, the exit barriers are not very high either. Considering this, competitors can easily leave the industry, opening the market back up to other restaurants.
Based on the Porter’s five forces analysis this is a relatively attractive industry to be in. If someone with business experience had an idea for a fast casual restaurant and had the minimal funds needed to open the establishment, it would be fairly easy. The industry has a wide variety of what is wanted by consumers. As long as the fast casual restaurants offer better, higher quality food or beverages and a faster rate, consumers will visit the restaurant.
Macroenvironmental Factors
The macro environment factors facing Starbucks are fair. Regarding economic, the firm operates in countries with a relatively higher purchasing power, it is all inclusive regardless of race or age. The host states have working court systems and have adopted latest technology in running their operations. This move has facilitated cutting down of costs and increased efficiency of the firm.
Demanding a major success in the fast casual industry, Starbucks is setting standards for others to follow not only in the terms of service but also the atmosphere it provides in addition to the additional varieties of food it has added. As such, it can be inferred that there are driving forces that are impacting how Starbucks should adapt its strategy to entail advantage from the environment as well as the macro environmental trends.
In order to determine the driving forces and the macro environmental factors, it is essential to carry an analysis of political, economic, cultural and social factors affecting Starbucks is carried out so the various factors can be brought to light.
Social Factors
Looking at the social factors, lifestyle changes are critical to the fast casual industry. This is because lifestyle changes have an impact on how the company sustains and retains its market share. As people have a leaning towards healthy food, an addition of salads, sandwiches, and other healthy items add to the promising prospects the fast casual industry is focusing on due to a recent change in lifestyle. However, the same concerns may be harmful to a company's growth, given the health concerns if the company fails to source reliable suppliers and ensure high-quality fresh food as it is demanded by the customers.
In an effort to adapt to the change in lifestyle to most people, the fast-casual industry has added several new healthy items in its menu and also introduced several new offers. It appears that it is taking advantage of the changing macro-economic factors to attain a higher standing. This is the reason that a different strategy has been adopted to accommodate to the changing preferences of the audience and is a current driving force for the fast casual industry.
Political Factors
Looking at the political factors, there are several opportunities and threats that can affect the industry. There are a huge number of stores, that make it difficult to operate and manage considering all of the different laws and regulations. This is a big deal when it comes to the international stores in the fast casual industry. These restaurants can also incur high operating cost, and different tax policies within the various states and countries they have their restaurants, stores and retail shops. The competition within the industry is constantly growing and changing with new, healthier, and convenient fast casual establishments opening up all over the world. These companies must make sure they do not completely wash out the market when entering a new area. If a company is threatening another business greatly this can cause issues within the industry and the competitors.
A wide range of political factors is influencing sales in the industry. This is because how the company sources raw materials has evolved into a political factor affecting the business directly. As far as the macro-economic factors are concerned, the competition in the industry is growing. The major competitors who have given a new aspect to the fast casual industry are Panera Bread and Buddy Brew, who are adding to the difficulties faced by Starbucks. Panera Bread has added to the competition by adding a drive-through service whereas the sandwich chain Jimmy John's promotes convenient delivery options (Parpal, M., 2015). This is just some of the brief factors that determine the political/ legal aspect of the macroeconomic environment for the fast casual industry, and which important to consider in the future.
Economic Factors
As an economic factor, consumer buying power remains important to consider in the future. Given the declining economy and if a possible recession would occur in the future, consumer buying power is also subject to decline which equals decreased sales. Another factor to consider is translating profits from other branches in other countries can diminish the profits due to the strengthening of the US dollar. It has been revealed by Starbucks that 2% of total revenue was lost in 2015 due to the strengthening of the US dollar (Barkoukis, L., 2013). This is something to consider for the industry as well as an occurring recession in the future. Starbucks is yet the only one to have this currency issue compared to its competitors as it has expanded internationally.
Opportunities and Threats
Several opportunities exist for the industry when given the current macro environment. Not only are international markets emerging, but they are also creating an opportunity for business expansion and brand recognition. It is an unquestionable fact that the industry is utilizing its high-quality food and innovative ideas to make the name in the markets. It has entailed product diversification, attracting greater fame in the fast casual industry. Moreover, given the nature of the fast-casual industry, there is an opportunity for co-branding, brand extension and a new product line to be introduced.
As people are inclined towards healthier food options it means the fast casual industry are forced to change and adapt to the consumers lifestyle. This is one of the social factors the industry has to be aware of going into the future. It is an opportunity to expand and adapt to a changing lifestyle, but can be a threat if not done properly and profitable.
Several threats also exist for the industry. One of the macro-economic factors that can impact the fast casual industry negatively is a recession. The purchasing power of people is declining and people tend to spend less if their purchasing power decreases. Recession affects the whole market and can change the industry and customer behavior dramatically. It is, therefore, the company that sustains its market share the best, in the case of a recession, that will survive and continue to thrive in the market.
Based on our external analysis of the fast casual industry´s opportunities and threats Starbucks Corporation belongs in the fast casual industry. Using all of the information gathered in the external analysis, we can now look at the industry as a whole. We will compare the external analysis of the industry Starbucks belongs in with the internal analysis of the company itself. By doing so, we can see where Starbucks may be able to change within the industry and possibly improve themselves in the fast casual industry. We will then be forming our recommendations to help our client better themselves and the industry.
References
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