Sample Business Studies Paper on Starbucks Corporation

Starbucks Analysis

Introduction

Starbucks Corporation is an institution, which seeks to ply its trade in the United States since 1971. The company positions itself as a premier roaster, retailer, and marketer of specialty coffee on the global platform. The company’s product mix encompasses roasted, high quality; premium priced and handcrafted tea, coffee, and a variety of food items and beverages. Furthermore, the company also markets different products of tea and coffee and licenses the trademark that it uses through additional market channels such as national food service accounts, groceries, and licensed stores. The main objective of this essay is to conduct an analysis of Starbucks Company while focusing on among other factors, its financial performance, external and internal market factors that affect its ability to realize its international mandate.

Financial analysis

When perceived for a six-year period percentage and progress analysis, the financial position of Starbucks from 2008- 2013 assert that the revenue growth of the company dropped by -5.9% during the 2008/2009 financial crisis (IBIS World 1). However, in the financial years 2010 and 2013, Starbucks posted growth in its revenue with 13.7% in 2012. By the end of the financial year 2013, Starbucks posted revenue of approximately $14.9 billion (IBIS World 1).

In terms of the operating income margin, the company has been experiencing a substantial increase from 4.9% in the 2008 finical year to 15% by the end of 2012. The company posted an operating loss in 2013, which resulted in an operation margin of -2.2% because of the 2012 $2.8 billion litigation charge to Kraft food for termination of agreement (IBIS World 1). In terms of the company’s efficiency ratios, Starbucks has been able to increase its operation-ability with notable assets and inventory turnover ratios, which were very low in 2013. Furthermore, the company has also been experiencing an increase in its cash conversion cycle to as high as 54.7 in 2013 (IBIS World 1). The company should concentrate in this section to attain high efficiency. From the financial analysis it is possible to assert that he company has a low debt equity ratio of 0.29 with an impressive financial health as at 2013 (IBIS World 1).

External analyses

Industry overview

From an operational perspective, Starbucks Corporation operates and competes in the retail snack and coffee store industry. In 2009, the industry was subject to a major economic slowdown because of the global financial crisis and changes in the tastes of its customers with the revenue of the industry experiencing a decline of 6% to $26 billion (Starbucks1 Website 1). Prior to this crisis and market challenges the industry had been experiencing decades of exponential growth. However, in the period of the economic downturn there were changes in the resources spent by customers in luxurious activities such as eating out and an increase in technique of purchasing low priced food products rather than high priced coffee because of the limited disposable income. Following this economic crisis, the industry has been focusing on achieving an annual growth of 3.9% with the potential of reaching $3.5 billion in the United States market. For the realization of this growth, the industry envisions to develop strategies aimed at improving the economy, increasing the confidence of its consumers, and expanding their menu offering. In terms of market share, Starbucks is considered the most dominant with 36.7% share. There are other competitors such as Dunkin Brands (24.6%), McDonalds, Tim Heron, and Costa Coffee among other competitors (Starbucks1 Website 1).

The life cycle of the industry and concentration of market share

The industry, in which Starbucks operates, is established with a medium level concentration with Dunkin Brands and Starbucks owning about 60% of the market share. This has been considered as an element of competitive advantage for these companies because it provided them with the market power. This power is essential in the determination of the trends within the industry (Starbucks1 Website 1). Appendix 3 gives the details of the industry structure.

Industry profitability drivers and demand determinants

Within the coffee and snack industry, there are different factors that affect the demand for the products. These include per capita coffee consumption, disposable income, demographics, world pricing and health related attitudes. The snack and coffee industry is greatly influenced with macroeconomic factors, which have an effect on the growth in the percentage of disposable income in households. During the 2008/2009 financial crisis, there was a decrease in the percentage of disposable income in households because of increased levels of unemployment, stagnant wages. These resulted in a downward pressure on the revenue and the margins of profitability within the industry (Starbucks2 Website 1). An additional factor in the analysis of the demand for the products of the industry is the per capita consumption. This is based on the assumption that any form of increase in the levels of coffee consumption increases the amount of revenue collected in the industry. The main factors that drive an increase in consumption rates include the level of disposable income among target customers, level of economic improvements within a country, which would necessitate some form of reduction in customer budgets. This driver is considered to have negatively affected the market revenue (Starbucks2 Website 1).

For Starbucks and other competitors in the industry, coffee beans are the major inputs in the value chain of participants within the industry. The unpredictable and largely volatile prices of coffee beans are major determinants of the profitability margins and market costs (Ross 1). Since 2009, there has been an increase in coffee prices on the international platform. This is attributable to the growth in the demand levels hence resulting in shortage of the product. There has been a projection of a decrease in coffee bean prices by 2018 (Starbucks1 Website 1). This has the likelihood of translating into higher profit levels necessitated by lower market costs. Customer attitude towards health related issues also play an essential role in the determination of the demand levels of coffee and snacks provided by the industry. The increasing concern for consumption of healthy food products can be used in explaining the shift towards diets and healthy eating among company customers. This has been perceived as a potential threat to the company considering that the target customers are increasingly acquiring awareness on obesity and weight related issues. Furthermore, there has been a proactive shift among players in the industry in the development of strategies aimed at tailoring their menus towards healthier and organic products mix (Starbucks2 Website 1).

Porters Five forces and the snack and coffee industry

New entrants pose a moderate threat to this industry because the barriers of entry are less discouraging for the entry of new competitors into the market. The industry experiences a moderately high saturation level with a monopolistic competition structure defined by Starbucks and Dunkin Brands that own about 60% of the market share. For new entrants into the market, the initial investment cost is relatively low considering that it is possible to lease stores and equipment at moderate levels (Starbucks1 Website 1). Incumbent companies such as Starbucks possess a larger scope and scale. This helps them in achieving a learning curve advantage, which provides them with favorable access to raw materials from their suppliers.

The threat of substitutes in this industry is high. This is attributable to the existence of numerous and high quality substitutes to coffee. These substitutes include tea, fruit juices, energy drinks, water, and alcoholic beverages. It is also possible for consumers to make homemade coffee at a fraction of the cost they would incur in purchasing premium coffee from retailers such as Starbucks. Furthermore, the high threat of substitute can be attributed to the inexistence of the switching cost to consumers when choosing an alternative product. However, industry leaders such as Starbucks have developed strategies of countering this threat. They do this by using associate grocery stores to sell coffee maker and premium coffee packs. Despite these efforts the high threat of substitute still affects their profit margins (Starbucks2 Website 1).

The power of buyers to bargain is moderate to low pressure because of the plurality of buyers in the industry making it relatively difficult for one purchaser to demand concession of prices. The industry also offers products which are vertically differentiated for a diverse customer base. This explains the relatively low volume purchases that erode the powers of the buyers. Inasmuch as there are no switching costs with the presence of high quality substitute products, major players in the industry such as Starbucks price their products in relation to those of their competitors. The consumers in the industry are moderately sensitive to the premium coffee retailing because they a premium for products of high quality but are sensitive to excessive premium relative to product quality (Starbucks1 Website 1).

The bargaining power of suppliers is moderate to low pressure. This is because for major industry player such as Starbucks, premium Arabica coffee and coffee beans grown in selected regions are the main inputs in the value chain. This makes the switching cost between substitute suppliers moderately low. With its size and scale, established players such as Starbucks have the power of exploiting its suppliers but it maintains fair trade which provides the suppliers with relatively fair trade relations with the company. The suppliers are less threatening to the existence of Starbucks considering that their power is lowered by the forward vertical integration (Starbucks2 Website 1).

Competitive rivalry is high to moderate because the firm is characterized by the monopolistic competition with Starbucks owing the largest part of the market share while its closest competitors also possess relatively larger shares hence creating pressure on Starbucks (Ross 1). The consumers also have no switching cost when choosing an alternative company creating a high intensity in rivalry. However, Starbucks maintains a high-level competitive advantage because of its ability to differentiate products that it offers with services and premium products (Starbucks2 Website 1).

When assessed from Porters five forces, it is possible to argue that the aggregate industry evaluation basing on the strength of the forces and profits evidenced from the retail coffee and snack industry are moderate.

Internal analysis of Starbucks

Core competence of the company

For Starbucks, the core competence is in its ability to control their main product strategies of differentiation by giving a premium product mix which is characterized by high quality snacks and beverages. The company’s brand equity is built on its ability to sell high quality coffee while offering each of their consumers with a Starbucks’ experience that is unique. This experience is derived from the company’s excellent customer service in a clean and protected environment. This is perceived as an essential element in building customer loyalty. Other core competencies are in human resource management value based approach essential in building relationships with its suppliers hence driving a successful deployment of the company’s business strategy of being one of the most recognized brands on the global platform (Starbucks1 Website 1).

SWOT Analysis

Strengths

Starbucks has a strong market positioning and global presence with a 36.7% market share in the United States alone. The company also has other outlets in more than 60 countries. The company is able to leverage its brand equity by merchandizing. Starbucks has, over the years, been able to achieve superior economies of scale with supplier relationship and superior distribution channels (Starbucks1 Website 1).

The company sells highest quality products, which helps in boosting its competitive advantage and avoiding the standardization of its product quality.

Starbucks are strategically located and aesthetically appealing. Through its premium stores, the company targets high visibility locations, offices, and university campuses to make its intended sales. To boost its sales, the company provides free- Wi-Fi and environment for social gatherings (Starbucks1 Website 1).

Starbucks enjoys customer loyalty base, which has been facilitated by the provision of high quality customer services implemented through its customer loyalty programs.

The company also uses technology and mobile outlets such as the Starbucks App in boosting its popularity across the globe.

The diverse product mix offered by Starbucks ensures that the interest of its diversified customers are addressed

Weaknesses

Despite the provision of high quality products coupled with the Starbucks experience, the company is largely expensive especially in crises. This increases the rate of consumer switching to competitor products (Ross 1).

Starbucks is over dependent on the US market. The company generates most of its revenue from the US market making it highly sensitive and vulnerable to the economic down turns of the US market (Starbucks1 Website 1).

Just like any other large corporation, Starbucks often faces scrutiny and has to invest in corporate social responsibility initiatives and maintain high level of adherence to labor laws

Opportunities

The company has the opportunity of expanding its services into emerging markets. This can act as a strategy of reducing overdependence on the US market. Through its initiative of providing services in emerging economies, Starbucks has the ability to use its scale, experience, and size in acquiring new market shares in emerging economies (Starbucks2 Website, 1).

The company can expand its products mix by venturing into the production of fruit juice and tea products as this offers a smarter acquisition strategy.

There are opportunities of the company to expand its retail operations by selling its coffee products, iced beverages and mechanizes through smaller retail boxes (Rider 1).

There are opportunities in technological advancement. Recent partnership with Square, a mobile payment application creates an easier way for customer to pay and access Starbucks products hence giving more business to the company with advancement in technology (Rider 1).

Threats

Increased competition is the greatest threat faced by the company. Competitors such as Dunkin Brands, McDonalds are providing relets and highly competitive products. Dunking Brands is the closest rival with market share of 24.6% in the US (Starbucks1 Website, 1).

Unpredictable customer taste and changes in lifestyle choices threatens the success of the company. This is because more customers are shifting towards healthy products reducing preference for coffee (Starbucks2 Website, 1).

The global coffee market faces significant fluctuation in terms of the prices in the market of coffee beans of high quality which the company has no control.

With globalization there is an increase in economic integration, a financial crisis could have a trickledown effect from developed economies to emerging and developing markets hence affecting Starbucks sales and profitability in times of economic down turns (Starbucks2 Website, 1).

Starbucks value chain analysis

Primary activities

Inbound logistics- the company sources coffee from diverse beans producers with whom it shared relationship, which enhances an effective supply chain management

Operations- the company operates in approximately 60 countries with stores modeled on company licenses and operated stores

Outbound logistics- majority of the company’s product mix are soles that are in stores through retailers. Payments are sourced through prepaid Starbucks cards, point of sale and mobile payments.

Marketing and sales: the goring reputation and demand for premium quality product mix coupled with high quality customer service provide Starbucks with increased customer traffic and improved customer loyalty.

Service- the company has a reputation of providing superior customer service to its clients.

Support activities

Firm infrastructure-the company operates on that are of good design and aesthetically attractive. The company also has an effective financial, legal, and accounting department to support its infrastructure.

Human resource management- employees in the company enjoy benefits such as reliable payments, employee empowerment and an effective corporate culture.

Technology development- the company has been an active investor in innovative technology such as the Starbucks App and the Square Mobile Payment App

Procurement- the company produces its products from a diversified group of suppliers and as fixed contracts with minority of the suppliers.

Starbucks Corporation and resource based view analysis

Tangible resources: these are the physical and the financial assets that a company uses in the provision of values to its customers. From the company’s balance sheet, inventories comprise the largest portion of assets at $ 692 million of the $1.7 billion total current assets; cash and other financial equivalent comprise $269 million. The company owns five distribution and roasting locations and 9,000 company retail stores in about 60 countries (Starbucks1 Website, 1).

Intangible resources: brand recognition is the major intangible resource for Starbucks. The company enjoys appositive reputation emanating from high quality coffee and high quality customer service. Other intangible resources include strategic locations, highly skilled employees, and skills in citing new shops (Starbucks2 Website, 1).

Organizational capabilities:  an effective management at Starbucks has been able to improve on organizational efficiency by hiring highly qualified and experienced personnel. The company continues to expand and maintain its stores. This is an indication that location analysis has enabled the company to improve on its quality alongside that of its competitors (Starbucks1 Website, 1).

Recommendations

Starbucks greatest growth potential is in the international market. This makes it necessary for the company to consider investing in emerging markets such as South Africa, India, Brazil, and Mexico. These markets have a growing middle class population, which are the best target market for the company.

Under its international growth strategy, Starbucks should consider making transfers of its core competencies and capabilities in other states based on their economic prowess before engaging in gradual building of profit drivers within these countries as it continues with its international growth initiatives. With its strong brand, reputation the company has a great growth potential in tea and fruit juice products mix. It would be profitable to build up these products together with its core coffee products. The changes in consumer lifestyle and tastes towards healthy food products Starbucks has the responsibility of tailoring and expanding its menu to give healthier products offering in its products mix.

Coffee beans play an essential role in the company’s value chain yet it faces major fluctuations in terms of market prices. There is need for the company to mitigate the price volatility through the implementation of effective edging strategies such as contracts should be used in future lock their estimated quantity inputs at lower prices as a way of managing future costs.

There is need for the company to consider additional investment in technological advancement such as mobile applications. Such investment would boost its sales by streamlining the payment process and improve on efficiency of customer service.

Works cited

IBIS World: The Coffee & Snack Shop Industry in the US Report, October 2014

Rider, Anna. 3 Reasons Starbucks Stock is Hot Buy 2015. Investor Place.

http://www.nasdaq.com/article/3-reasons-starbucks-stock-is-a-hot-buy-in-2015-cm444245

Ross, Sean. 2015. The Biggest Risk of Investing in Starbucks Stock (SBUX).

http://www.investopedia.com/articles/markets/101415/biggest-risks-investing-starbucks-stock.asp

Starbucks Website1 (2016), “Our Mission,” Retrieved from http://www.starbucks.com/about-       us/company-information/mission-statement

Starbucks Website2 (2016), “Ethical Sourcing: Coffee,” Retrieved from             http://www.starbucks.com/responsibility/sourcing/coffee