Abstract
The research paper evaluates the mergers and acquisitions activity of Starbucks Inc. to understand the impact of such activities on small and medium scale firms, and whether the large scale companies such as Starbucks Inc. are actually able to dominate small scale firms and benefit out of the acquisitions.
Our analysis revealed that Starbucks Inc. was able to generate a phenomenal growth through two of its latest acquisitions. However, we were cannot generalize the situation here as our research paper was based entirely on qualitative basis and we recommend the analysis to be performed on quantitative data for a good number of dominant firms that had acquired small and medium scale companies to achieve diversification or any other synergies.
Introduction
The paper is commissioned to discuss the impact of growing competition and business scales on the existence of small and medium scale companies, who are being targeted by industry behemoths to fulfill their organizational objectives.
It is considerable that dynamic challenges in the new millennium and legendary changes in the market environment have reshaped the entire global business. While product life cycles have become shorter, competition is going aggressive day by day. Therefore, it is the accelerated competition and abrupt changes in the business compositions that are making the small and medium scale entities as soft targets by large companies who use the tool of merger and acquisitions to put the small and medium scale companies in an intricate situation, and since these companies lack adequate resources to counter the merger or acquisition demand by big companies, they end up being dominated and lose their existence to large companies. On the other hand, large scale companies, who despite of having enough capital and other resources to fuel growth, cites these small companies for diversification and growth benefits as these companies had already passed their infant stage of business cycle and this provides an added advantage to large scale companies, as rather than spending on the viability of the project, they can directly use the product and markets of the merged or acquired company to achieve growth.
In this paper, we will be unfolding the multiple events relating to acquisition activity of Starbucks Inc., which in light of growing competition from existing rivalry, has always used medium scale companies to achieve the diversification and counter the competitive threats. Important to note, Starbucks Inc. is just one example of how industry behemoths have succumbed relatively small companies to achieve the growth or diversification while leaving the small companies dominated during the whole process. To prove our point, we will also use financial statistics to validate the view as how Starbucks benefited from the acquisition activity.
Background and significance
Evaluating the impact of mergers and acquisitions from the viewpoint of small and medium scale entities, a research paper titled ‘’ Strategic Issues Relating to Corporate Mergers and Acquisitions for Small and Medium Companies ‘’ cited that during the current environment of intense competition and need for capital resources, small and medium scale entities become soft targets for mergers and acquisitions. Moreover, since these entities do not have the professional expertise to understand critical matters related to M&A, they tend to fall weak in comparison to large firms who end up dominating the weaker firm and the negotiation is usually ended in favor of the large firm.
Therefore, evaluating the findings of empirical research from the qualitative point of view, we are analyzing how Starbucks Inc. which, when faced with the competitive threats used the tool of mergers and acquisitions as part of which relatively medium scale firms were acquired for favorable terms. However, it is considerable that the research paper is based on qualitative terms and moreover, taking a generalized view on just one company will not be a prudent decision.
Discussion
Over the years of its establishment, Starbucks Inc. has achieved a strong brand equity as the largest coffee retailer around the globe. However, a large part of the company’s success is sourced from million dollar acquisitions it underwent in order to purchase a relatively medium-scale company. While the history of acquisition events of the company is huge, we will restrict this discussion to two of the latest acquisitions by the company in 2011 and 2012 and explain how Starbucks Inc. has effectively used mergers and acquisitions to expand into new territory with the acquisitions of relatively smaller companies.
Issue with Starbukcs Inc. and using M&A to counter it
It is evident that Starbucks Inc. is an undisputed leader as the coffee retailer, however, a sharp focus on just one product, i.e. coffee had posed a threat to the company and rivals like Dunkin Donuts and Mcdonalds had started infiltrating into the market and were claiming the market share of Starbucks. In response, it was necessary for Starbucks to expand its product offering. However, while the company was keen to add more products to its menu, it wanted to stick to its commitment to offer a healthy menu. Accordingly, Starbucks made two acquisitions, i.e. Evolution Fresh in 2011 and Teavana in 2012, in order to counter the competitive threats and achieve diversification at the same time.
-Acquisition of Evolution Fresh:
In commitment to its ethical practices of enhancing the customer experience with innovative yet healthy and nutritious products, Starbucks Inc. acquired Evolution Fresh Inc., a premium juice supplier, in 2011. With this acquisition, Starbucks Inc. entered $50 billion Health and Wellness sector and at the same time, continued to expand its on-the-go menu on healthier and nutritional terms.
Important to note, Evolution Fresh is a premium juice supplier and is the only market player that proceeds its own raw fruits and vegetables. In addition, the company raises the quality and nutritional benefits in its juice category by using the technology called, High Pressure Pasteurization (HPP) because of which the company is able to offer never heated juices to the customers.
Therefore, such a business model was in complete alignment to that of Starbucks Inc. and while Stabrucks was looking to counter the competitive threats by expanding its product offering and yet stick to its ethical value of offering healthy and nutritious products to its customers, Evolution Fresh was a perfect acquisition for the company and the target company was acquired for $30 million.
Thereafter, with the acquisition of Evolution Fresh, Starbucks was able to bring a unique premium juice product menu to the marketplace through differentiated branding ad experiencing, similar to what it had pioneered with differentiated coffee related products from time to time over the period of 40 years.
-Acquisition of Teavana Holdings
Post leveraging the brand equity into the premium juice segment with the acquisition of Evolution Fresh, Starbucks Inc. soon entered the realm of tea retail with the acquisition of Teavana Holding in 2012 at a price of $650 million. The acquisition was yet again a major step of Starbucks to expand into a new territory and counter the competition through a healthy product menu.
Important to note, Teavana Holdings Inc. is known for high-end loose leaf teas which it sells in stores located in sub-urban shopping malls. However, with Starbucks Inc. located around the United States and in multiple location across the globe, the company will grow Teavana footprint beyond suburban malls by adding tea bars at its cafes, in particular at locations in Middle-East and Asia where tea is more popular than coffee.
According to the industry experts, acquisition of Teavana by Starbucks will allow the coffee retailer to expand beyond traditional cafés and tap the opportunities in the $40 billion tea market around the globe. In fact, this is not the first time Starbucks have showed interest in the tea business as the company already owned Tazo Tea brand since 1999 and the past experience with Tazo will serve as a learning laboratory for the company to simultaneously develop Teavana as a premium brand through a two -tiered approach to the fast-growing tea category, since Teavana is a premium loose leaf tea while Tazo is a bagged tea product sold in supermarkets.
Financial impact-Before and After
While the core objective of acquisitions of Evolution Fresh and Teavana Holdings was to increase the product offering and expand the business into the new territory, however, no such activity can be rated as successful until the acquirer taste the financial success. It is considerable that Starbucks categorize Evolution Fresh and Teavana Holdings(and other acquired companies such as Seattle Best Coffee and Digital Ventures) under ‘All Other Segments’, and over the period of three years, the segment revenue has increased from $208.6 million to $496.9 million, recording a phenomenal growth of 138.20%.
Evaluating the success
We initiated the discussing citing the issue of competitive threats being faced by Starbucks Inc. from rival companies such as McDonalds and Dunkin Donuts because of expanded product list offered by rival companies.While Starbucks stuck to its ethical objective of adding healthy and nutritional products to its menu, and acquired Evolution Fresh and Teavana Holdings, the company was still successful in countering the competition of its rivals and retaining the ace market share.
Our analysis revealed that over the period of three years since the acquisition of these two companies, the segmental earnings of the company surged by 138.20%, while the total revenue increased from $10534.5 million in 2012 to $15197.3 in 2015, recording a growth of 44.26%.
Henceforth, we can conclude that Starbucks Inc. was successful with its mergers and acquisitions activity.
Implications
Initiating the research paper by collecting literature evidence we found that researchers agree that at times of mergers and acquisitions, large firms are able to dominate the target firms which operate on small or medium scale. We then analyzed the validity of the opinion of the researchers by analyzing the mergers and acquisition activity of Starbucks Inc, which had a long history of acquiring small firms to expand its territory and product offering. However, we pertained our analysis to the two recent acquisitions of the company and still found that the company has generated a phenomenal growth from the acquisitions and has successfully generated additional revenues through these acquisitions.
However, since our research was based on qualitative terms and that too just one firm, we really cannot generalize the whole concept on the outcome of this research.
Recommendations
As stated in the previous section, since our research was based on qualitative terms and that too just one firm, we really cannot generalize the whole concept on the outcome of this research, therefore, to rectify this error, we need to collect more quantitative data and then analyze the same using statistical tools to analyze the data.
References
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Md. Abdur Raquib, M. P. (2003). Strategic Issues Relating to Corporate Mergers and Acquisitions for Small and Medium Companies . Asia Pacific Management Review, 99-112.
SKIDMORE, C. C. (2012, November 15). Starbucks Buys Teavana Holdings For $620 Million. Retrieved February 21, 2016, from Huffington Post: http://www.huffingtonpost.com/entry/starbucks-buys-teavana-holdings_n_2136048.html?section=india
Starbucks Inc. (2011). Starbucks Acquires Evolution Fresh to Establish National Retail and Grocery Health and Wellness Brand. Retrieved February 21, 2015, from http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-newsArticle&ID=1629169
Starbucks Inc. (2012). Annual Report 2012. Starbucks Inc.
Starbucks Inc. (2015). Annual Report 2015. Starbucks Inc.
