Starbucks – Going Global Fast

Introduction and Background

Starbucks does specialize in coffee as well as several other related beverages, notably the Italian type Espresso beverages, premium teas selections, complementary products and coffee accessories, blended beverages as well as coffee and beverages equipment. With upwards of 11,500 outlets and over 8,000 stores in the United States and Canada alone, the company’s major brands include Tazo Tea, Starbucks, Starbucks VIA Ready Brew and Seattle’s Best Coffee. The company does employ upwards of 137,000 people across the US, Europe, the Middle East and Asia Pacific. Its operations are divided into four administrative segments that include the Global Consumer Products, International, the United States and Other (Data Monitor Inc 12). Recently, the company did add an additional operating segment to the business, when it began administering Seattle Best Coffee separately, along with a number of innovative digital ventures. The company buys coffee beans from multiple coffee producing regions in the world, which presents a further, particularly important strategic background, not least because of the intricate trade and communication practices that are requisite to operate a supply chain as far and wide as Ethiopia, Rwanda and Costa Rica. Dairy products are sourced from the UK, Canada and the US through multiple channels that include local and regional, as well as specialty suppliers.

STARBUCKS’ STRATEGIC PROBLEM: MARKET SATURATION AND GLOBAL EXPANSION

Despite the fact that the company realized upwards of $1,419.4 million in profits in 2010, as compared to the previous year’s $563 million, the company is facing falling revenues and possible declines in revenue over the coming years. Starbucks is faced with difficult need to increase its profitability in the market that has become more and more saturated, not just by equally strong competitors, but perhaps most significantly, by Starbucks’ own outlets. With the exception of eight states in the US, all the major towns and cities across Canada and the United States are home to over 11,500. Seattle for instance is estimated to have a Starbucks outlet for every 94,000 residents, which has reached even the company’s own limit of coffee shop saturation. IN New York city, there are upwards of 124 Starbucks Cafes over its 24 square miles, with even more stores and outlets scheduled in the coming few years (Nistal 3). The difficulty facing the company is not only the concentration of its outlets in a nearly saturated market, but perhaps more critically, because of the equally rising concentration of competitors in the same market. This has a detrimental effect on the industry’s prices, as well as multiple other non price variables, that are sure to affect the sales and profitability of all the industry players operating in the saturated American and Canadian markets.

With declining sales at home, the company has opted to exporting its business model and ideas to the world, with the establishment of upwards of 5,507 stores across China and the UK among other regions (Data Monitor Inc 12). The global expansion presents a great opportunity to increase sales and profitability, but it also comes with critical cultural, economic and other strategic challenges, that are just as menacing to the company. To begin with, foreign ventures bring reduced returns, mainly because they are operated by franchised local operators which limit the ability of foreign franchises to help shore up the company’s growth in revenues, profitability and future sustainability of the business model and brand.

The increasingly saturated market problem faced by Starbucks and its major competitors is even more exacerbated by the difficulties of a fully matured company and products. The important baby boomers’ market that the company thrived catering on at its inception is aged and dyeing. The company is currently pursuing a near desperate strategy to weather the increasingly hostile yuppie population that will form an important part of its future market, notably with the introduction of newer products and increasing convenience (Data Monitor Inc 12). These strategies may be critical to pulling in the younger crowd of tea and coffee-loving customers, but in the short term, it has spurred a hostile reception from the old-timers, who are a critical component of the company’s current market.

STARBUCKS INTERNAL AND EXTERNAL ANALYSIS

The global economy has experienced a tremendous recovery, following the global economic crisis, effectively presenting a great opportunity for globally operation organizations. With an estimated 4.8% expansion in 2010, there are even greater incentives for expansion offered by the emergence of China, Brazil, Russia and India’s economies, that have posted increase middle class populations. China posted a near 7.7% growth in its economy and Brazil experienced a 3.4% expansion in the economy. Global inflation rates stood about 8%, while the rates of interests have remained relatively low, with central banks across the world struggling to fight off the remaining effects of the global recession. As compared to upwards of 9.8% in 2007, global unemployment rates have reduced to just over 6.4% (Data Monitor Inc 15). In Starbucks core market, the US, its rate of unemployment stands at 9.1%, while the country has experienced a GDP growth rate of just less than 1.7% over the third quarter of 2011, despite the record low interest rates (Yahoo Finance 1).

Financial Highlights (Yahoo Finance, 2011)

Fiscal Year

Fiscal Year Ends:
3/10

Profitability (ttm)

Profit Margin
10.13%
Operating Margin
12.97%

Income Statement (ttm)

Revenue
11.51B
Gross Profit
6.26B
EBITDA
2.05B
Net Income to Common
1.18B
Diluted EPS
1.53
Earnings Increase/Quarter
34.21%

Balance Sheet (mrq)

Total Cash
1.98B
Total Debt/Equity
12.97
Current Ratio
1.98
Book Value/Share
5.83

Cash Flow (ttm)

Operating Cash Flow
1.36B
Levered Free-Cash Flow
639.58M

With revenues reaching in excess of $10,707.5 million in 2010, largely drawn from the US segment posting the highest percentage (70.6%), followed by the International segment with 21.4%, Starbucks faces even greater prospects for expansion. The company has a wide geographical reach that could be further be boosted with expansion. With operations in upwards of 50 countries by the close 2010, its ability to dominate markets beyond the US is nearly unlimited (Yahoo Finance) . Increased foreign franchises, coupled with multiple other company-owned global retail outlets have increased in the recent past, following its investments in Brazil and Asia Pacific. Starbucks has also increased its distribution channels.

This has been ensured through third party tie-ups, increased food service accounts, domestic and foreign partnerships among other arrangements (Starbucks Corporation). The company has sought alliances with companies as varied and wide as Courtesy Products, Green Mountain Coffee Roasters, AMC Theatres, Delta Airlines and Burger King. Further, in order to improve customer service and experience, the company has extensively invested in improved customer interfaces. Starbucks launched its mobile payment early in 2011 for upwards of 6,000 stores across the US and Canada. This was coupled with the established of the Starbucks digital network, which was developed in collaboration with Yahoo Inc., New Word City, LinkedIn, Good, Foursquare, Bookish Reading Club and The Weather Channel, which will see the provision of free, multi channel web content to all its stores.

Its financial might and experienced staff give it enormous research and innovation capabilities. Its R&D team, which is charged with the development new equipment, beverage products and food, has been critical in keeping the company ahead of its competition, with trail blazing products such as the Starbucks VIA Ready Brew among others. To bolster this even further, the company has increased its R&D spending to over $9 million annually.
It faces multiple internal challenges too, not least because of the all too frequent product recalls that have dented the market’s perception of the products, but perhaps most crucially, pointing to an even bigger weakness in its health and safety standards characteristic of the product development and distribution process. Early in 2010, for instance, the company recalled upwards of 11,000 of glass bottles from its US market, while a year earlier, the company was ordered by the US Consumer Product Safety Commission to withdraw upwards of 530,000 Starbucks Barista Blade units Grinders from the markets, among a series of other embarrassing recalls. In addition, the company equally faces a number of threats to its products and business model that may proof detrimental to the company’s long term profitability and survival. The most important challenge that threatens Starbuck’s supply chain is presented by the globally rising coffee and other commodity prices (Starbuck Corporation). Increases in oil prices, crop failures and multiple political difficulties have conspired to ensure there is reduced quantity of coffee supplies as well as increased prices across the supply chain, which in turn has necessitated the increase of the prices of Starbucks’ products (Berfield 1). The price of Colombian Mild Arabica has for instance risen by upwards of $1.45/lb, with similar varieties boasted up to 45% price increases.

In addition, the costs of labor across the developed world, notably the United States have soared with the equally increasing costs of leaving. This has been made worse by the slow economic recovery experienced in the company’s core market, the US. There are still considerable recessionary pressures on the US economy that present a challenge to Starbucks strategy of increasing its sales.

STARBUCKS’ STRATEGIC SOLUTIONS

Increased Global Expansion

The tremendous economic developments in China, Brazil, South Africa, India and Russia present an important opportunity for Starbucks to increase its high end coffee and beverages products. With increased global economic GDP, increased household incomes, coupled with a reduction in the global unemployment rates, there is a massively increased disposable income among the populations, which will provide an important economic foundation to re-invent Starbuck’s growth and profitability. Upwards of 160 cities in Chine for instance have a population reaching over 1 million, while the IMF anticipates the middle class population to double its present size by the close of 2025. This will effectively provide an upwards of 400,000 million people’s demand for the company’s product (Data Monitor Inc 8). In addition, Starbuck’s international presence is still limited, with the International division only contributing to less that 21% of its annual revenues. The company currently runs less than 500 outlets in China, despite the relatively high sales rates.

The global expansion option is will prove critical in giving the company a new lease of life, critical in weathering the market saturation at home, but it does as well come with a variety of challenges. To begin, the food business is subject to extensive and diverse cultural factors, which will inevitably influence Starbucks performance. India and Africa’s populations for instance are known for drinking tea as against Starbucks’ mainstay, coffee. In addition, France’s strong labor unions and high wages, coupled with the government’s regulations, not dissimilar to multiple other countries such as Venezuela will prove to be a massive challenge to overcome (Data Monitor Inc. 15). There is a further difficulty presented by Starbucks’ business model involved in its foreign franchises, notably, partnerships with local operators to build its enterprises. While this reduces the cost of establishment, it is equally reduces the returns from such ventures, and remarkably boosts the company’s expansion that would once again saturate its markets abroad.

Development of New Products and Services

Actually, the saturation of the US and Canadian market’s did result from the flooding of the market with similar, easily substitutable products by Starbucks, Doughnuts, regular coffee shops and restaurants. Consequently, the ability of different chains to differentiate their products and use their brands earn greater revenues was massively reduced. It is perfectly possible for Starbucks to reinvent itself through its products, which will allow it to curve new niches in the saturated markets at home and other developed economies. Given its massive R&D capabilities, financial and human resources, the company’s capacity in R&D is unsurpassed in the industry. It is notable that Starbucks has already taken steps towards the attainment of this strategy.
Changes in the company’s main course, with the installation of automatic espresso brewing and vending machines in over 800 outlets will boost convenience and service delivery, with the possibility of attracting more convenience seeking consumers. Other innovations include the introduction and issuance of over $70 million worth of Starbucks cards as well as the potentially revolutionary, the blended Java, faster services and web technology (Data Monitor Inc 7). Pre-ordering and different options will as well prove significant. Others include the introduction of high speed internet services involving more than 1200 North American stores.

Targeting Generation X (The Yuppies)

Starbucks was build around the baby boomers, and until the revenues and profitability leveled off, this population had remained kind to the company and its competitors. The demographics have changed remarkably, and there is a growing young population with increased disposable incomes (Holmes, Bennett, Carlisle and Dawson 72). These population groups are commonly attracted to luxurious products and services, and in order to capitalize on these opportunities, it is critical for Starbucks to re-invent itself and its products to serve the needs of image conscious young people. Provision of internet connectivity, web content and automated brewing and vending machines will go a long way in ensuring this, but greater image building initiatives and products will prove critical in fully realizing this alternative.

Close poor Performing Outlets

Increased competitions in some areas, coupled with multiple demographic changes have resulted into lackluster performance by some of the company’s stores and retail outlets. Where it is feasibly impossible to turn the performance around in the near future, the company should close down or sell off those stores. In addition, the resources realized from this would be critical in financing its other expansion and innovation efforts (Starbucks Corporation).

BEST POSSIBLE STRATEGIC COURSE

Neither of the above options is solely capable of facilitating the company’s renewal in the face of changing social, political and economic environments. The best, practicable alternative available to Starbucks is a two-pronged solution that will incorporate increased global expansion and increased product innovation (Holmes, Bennett, Carlisle and Dawson 68). Global expansion is critical, not just because of the market saturation in the US, but also because of the home country’s slow growth rates, high unemployment rates as well as high levels of competition. The global economy is on the contrary, large and growing, presenting a tremendous opportunity for Starbucks to grow as well. While expansion will seek to capture new markets, product and services innovation will be critical in reclaiming Starbucks’ lost market from its competitors, or winning the much younger populations at home.

FUTURE IMPLICATIONS

Global expansion is a viable alternative that would however serve Starbucks for the short term. Its global revenues and profitability are likely to rise within the next five to twenty years, with the company’s value rising during the same period. The capital outlay is initially going to be high, especially if the company will heavily rely on its finances to finance its global expansion. In the long run, Starbucks competitors in the American beverage market will as well increase their ventures into the foreign markets and when this is coupled with millions of local coffee shops, hotels and restaurants, there is a massive possibility that even these markets will in the long run be equally saturated. As such, the only viable and sustainable strategy lies in the ability of the company to continuously invent new products, services and adapt its image to find new markets within its old, saturated mature markets.

CONCLUSION

Starbucks short term success and survival in the long term is dependent upon its ability to remain flexible, and adapt to the constantly changing economic, political and social environments across not just the United States and Canada, but across the world. The global economic crisis has proven to be a critical difficulty that has tested the strategic decisions and options for many organizations, but perhaps most critically; it has served to bring out important internal and external environmental challenges facing organizations such as Starbucks, effectively highlighting the need for innovation and change. Innovation is certainly the only viable solution that will allow the company to succeed and survive long term competition and changes in the global economy, as opposed to the massive global expansions that many companies have commonly preferred.

Works Cited

Berfield, S. “It‟s Schultz vs. Schultz at Starbucks” BusinessWeek, 10/8/2009, Available at: http://www.msnbc.msn.com/id/32336151/ns/business-consumer_news/ [Accessed 6/11/2010]

Data Monitor Inc. Starbucks Corporation: Company Profile. New York: Data Monitor Inc., 2011

Holmes, Stanley Bennett, Drake, Carlisle, kate and Dawson, Chester. “Planet Starbucks: To Keep Up the Growth It Must Go Global Quickly,” BusinessWeek, December 9, 2002, pp. 100–110

Nistal, Oscar. Starbucks-Going Global Fast. London: McGraw Hill

Starbucks Corporation. Starbucks Announces Store Partnership Model with Community Organizations in Harlem and Los Angeles. Oct 4, 2011. Retrieved from http://news.starbucks.com/article_display.cfm?article_id=574

Yahoo Finance. Starbucks Corp. Oct 11, 2011. Retrieved from http://finance.yahoo.com/q/in?s=SBUX+Industry