Introduction
Starbucks is a leader in specialty coffee global business. It has more than 18,000 coffee shops worldwide. The Company is operating in 60 countries. Starbucks offers a number of products including ready-to-drink (RTD) coffee, tea, food items, roasted beans, and coffee accessories. The Company owns such brands as Torrefazione Italia and Seattle's Best Coffee (Starbucks, 2012) (Starbucks, 2012).
In this paper the issues of Starbucks strategy in UK will be discussed. At the present time, Starbucks has 700 stores in the UK. Starbucks has been switching to the organic growth strategy as a part of franchise model.
Brief Overview of the Company
Starbucks Company was founded by Jerry Baldwin, Gordon Bowker, and Zev Siegl in 1971 in Seattle where it has 1 store - Seattle’s Pike Place Market. The Company was named after the first mate of Moby Dick. The logo of the Company was inspired by the sea featuring siren from Greek mythology (Starbucks, 2012).
Currently, Starbucks emphasizes on the development of international market. The Company shifted to franchising which is a significant change in the Company’s international strategy. Franchising is supposed to greatly contribute to the UK revenues of Starbucks. The main aim of this strategy is sustain revenue growth rate by squeezing more locations into the available space. The strategy has several advantages including opening stores in small towns, opportunity to learn from local franchisees, and improvement of competitiveness in the UK market (Starbucks, 2012).
Analysis of External Environment of Starbucks
Porter’s Five Forces
Porter’s Five Forces Model helps analyze the specialty coffee industry. Analysis of the power of suppliers shows that there are several threats related Starbucks business. The first threat is connected with suppliers’ power over the price of specialty coffee. The major problems coffee industry faced are connected with increase in price for Arabica – the most sold coffee. Thus, coffee price increase made up 77% in 2010 causing a lot of problems to coffee industry. An increase in price made a negative impact on those competitors exploring low cost strategy (Danse and Wolters, 2003).
Another threat comes from coffee producers operating in specialty coffee market. Thus, in Europe, Starbucks competes with McDonalds and Dunkin Donuts. McDonald’s is aiming to overtake Starbucks struggling for a position of the number one coffee roaster. One more threat comes from buyers’ power. Buyers can decide that they do not need specialty product, are not satisfied with the services provided by a vendor or that the product does not fit their budget anymore. Contemporary coffee industry offers a lot of options for consumers. Consumers have the power to choose high quality product at a reasonable price forcing coffee makers to use a consistent strategy to fit the customers’ requirements (David, 2010).
Also, the coffee industry is subjected to the threat of new entrants. However, this threat is weak because coffee shops that are opening do not differ much from those opened by the main competitors. In addition, the level of competition is high making barriers for new entrants. Escalating price for coffee also contribute to raising barriers for new entrants in the market. The threat of substitutes in the specialty coffee industry is also weak because taste is the main criteria when choosing coffee. On the contrary to the energy given by coffee that cannot be substituted for energy drinks or tea, rich taste of specialty coffee cannot be substituted (David, 2010).
In whole, coffee industry is attractive because the growth rate of the industry is increasing. Coffee market occupies the second place in the world by the level of sales. There are several driving forces pushing specialty coffee market to further growth. The main driving forces of this market are innovation, opportunity for global expansion, globalization and marketing efforts.
PESTEL Analysis
Political Factors
The main concerns related political issues are connected with import of coffee beans from different countries. Each country exporting coffee beans has own tariff and customs regulation. Also, the Company assets can be subject to seizing by foreign governments. Starbucks should gain expertize in changes in policies of the countries it imports coffee beans from (David, 2010).
Economic Factors
The most noticeable factor influencing the UK economy is global recession of 2008-2009. This economic negatively affected both coffee makers and consumers. Operational costs raise decreasing profit margins. At the same time, the price of the product is rising while wages and purchasing power is decreasing. Despite of the fact that many customers had to cut their spending, consumption of coffee was not significantly influenced by the consequences of the world crisis (Bureau of Labor Statistics, 2011). However, consumption of coffee is poor making up approximately 3 kilograms each year per capita. Thus, the UK market has huge potential for development of coffee culture. In comparison to the US where consumers drink 3.3 cups of coffee per day there is still enough market space for Starbucks coffee in the UK (Danse and Wolters, 2003).
Socio-Cultural Factors
Socio-cultural element of the PESTEL analysis relates social responsibility and sustainability of business. Sustainability coffee business includes fair-trade certificates, organic certification, and The Rainforest Alliance. Besides, more attention is paid to buying coffee at fair price from coffee bean growers. Previously, coffee roasters used to buy coffee at low price despite of high demand for this product and high profit margins obtained by coffee roasters (ICO, 2011).
Being aware of this tendency to healthy nutrition, Starbucks adapts product offerings that match environmental and nutrition requirements. Also, the Company adopted a standard of 2% milk as well as non-fat milk products. Another issue is sugar intake: the coffee makers will have to reduce sugar in their beverages following contemporary requirements to food quality (Starbucks, 2012).
Technological Segment
Technology plays an important role in the UK specialty coffee industry. Technological innovations directly relate interaction with customers allowing for direct marketing of the products. For example, e-mail and sms allow for the companies sending offerings and special propositions. Such interaction is relatively cheap and available in comparison with traditional advertisement (Starbucks, 2012).
Product innovation is an important aspect of this segment. It is important to stay competitive in the conditions of fierce rivalry. Currently, the Company is experiencing switch from traditional coffee beverages to sustainable coffee (shadow and green coffees, organic coffee).
Also, more efficient processes significantly help improve services playing crucial role in coffee quality delivered to the customers (Pierrot, Giovanucci & Kasterine, 2011).
Environmental Factors
Greater attention is currently paid to ecological issues, healthy nutrition, and sustainability of coffee production. Sustainable coffee production includes efficient use of natural resources in the production process, ethical buying, and contribution to ecological movement (protection of rainforests) (Pierrot, Giovanucci & Kasterine, 2011).
Environmental sustainable coffee production may include reuse of coffee husks for heating, reduction of water consumption, reduction of soil pollution, buying coffee from the firms using organic fertilizers instead of chemicals, buying from organic farms or shade growing, buying from the firms that do not harm biodiversity (Danse & Wolters, 2003).
Legal Environment
It is a matter of crucial importance for Starbucks to be authorized to do business in a particular country as the Company operates in worldwide. As the Company operates across the UK, the business of Starbucks can be regulated by federal and local governments. Legal environment includes correct filling of contracts and tax forms, legally correct design of factory and store leases contracts, perfectly legal business entity applications. Also, legal factors include adherence to food regulations, labor laws, and other restrictions related specialty coffee business, especially regulations related advertising and marketing. Recently, a particular attention is paid to adherence of environmental regulation (Starbucks, 2012).
Analysis of Critical Success Factors
Brief SWOT analysis is represented in the Table 1 below.
The main strength of the Company is its strong brand name and wide range of products offered. The Company succeeded to develop good reputation internationally, thus, it can be called one of key success factors helping the Company to compete effectively. Another significant strength of Starbucks is high quality of beverages and services. Thus, the two critical success factors of the Starbucks Company are strong brand name and high quality of products and services provided to the customers (David, 2010).
These critical factors are crucially important for Starbucks business because they help compete in the market of specialty coffee globally. The critical success factors give the Company an opportunity to expand its market share in the UK, explore the strategy of sustainable growth, and develop coffee culture in the UK in future. The UK market has significant growth potential despite of fierce competition. As Starbucks succeeded to develop an essential competitive advantage, the Company has an opportunity to expand its market share in the UK market in future (Starbucks, 2012).
Strength and Weaknesses of Analytical Models
There were three tools for analysis of the Starbuck internal and external environment used, namely: Porter’s Five Forces Analysis, PESTEL Analysis, and SWOT Analysis.
Porter’s Five Forces
Porter’s Five Forces analytical model was chosen because it has a number of benefits including analysis of competitors and competitive advantage of the Company. The model also allows for analyzing competition in the industry level. In addition, this model provides vast information for conducting SWOT analysis. The main disadvantage of this model is that it is based on the assumptions that are not realistic. For example, Porter applied his model to classic perfect market that does not correspond with the real life situations. However, the model allows for making quick, structured, and easy-to-understand analysis of the current position of the Company in the market. This is the reason why this model was chosen (David, 2010).
PESTEL Analysis
Another analytical tool is PESTEL Analysis. It is a simple analytical tool helping understand current business environment in which the Company is operating. It may help the management of the Company reveal and evaluate threats, and then take necessary actions to eliminate or to minimize its impact. Another advantage of this model is the opportunity to reveal the strengths of the Company to develop the right strategy in a particular market. However, the model is subjected to the following disadvantages: threat of oversimplification, regular application of the model needed, involvement of ideas of different people, necessity to access quality data for analysis, and the risk of capturing too much data for analysis (David, 2010).
SWOT Analysis
SWOT analysis is a powerful tool in evaluating market strategy, business processes or a particular situation. It aims to identify internal and external factors that stimulate or leg certain process. It is a result of both quantitative and qualitative data offering full analysis of internal and external environment. In addition, it is simple and descriptive. The disadvantages of the model are as follows: it does not ranking mechanism allowing for evaluating the significance of each factor; the model is subject to ambiguity because one factor may have two sides; the model is subjective (David, 2010).
The models were chosen because they are simple, easy-to-understand, and give a quick insight of the Company’s position in the market. They also help analyze competitive environment, strength, weaknesses, opportunities and threats the Company is probably subjected to using minimum information.
Analysis of Starbucks Strategic Capability
Obviously, Starbucks needs to undertake the efforts to increase sales and strengthen its market position in the UK. The Company will have to respond to competitive forces and challenge external environment. The main objective of the Company is to use its internal strengths to overcome internal weaknesses to be able to realize its opportunities. Currently, the product of the Company is oriented to elite customers. As the income of customers dropped, the Company will have to develop new competency related mass market. Starbucks should develop a new strategy targeted mass market. Undoubtedly, the Company will succeed in development of this value chain with the level of expertize the Company used to establish (Starbucks, 2012).
Threshold Resources and Competencies
Quality of beverages can be threshold competency. If high standards of quality will not be observed, Starbucks will lose its position in the market. The Company emphasizes on quality of coffee and beverages and services developing its core competitive advantage. This level of quality and services can be achieved by harmony and high level of expertise in marketing strategies, operational efficiency, management capabilities, real estate, and human resource management (Starbucks, 2012).
Distinctive Resources and Competencies
The main distinctive competencies are strong brand name and a wide range of products offered. Starbucks is known all over the world. Many consumers buy coffee in Starbucks because it recommended itself as the best coffee company warranting elite quality of its products. Many people know that Starbucks product is created for educated and wealthy consumers who do not mind paying extra money for quality of the product and services. But the more important distinctive feature of the Company is that it can make its customers feel special (Starbucks, 2012).
Value Chain Analysis
Value chain of Starbucks consists of two parts: the first part is physical creation of the product, marketing the product, delivery system, services, and support activities; the second part is infrastructure and inputs creating value. The identification of these activities helps develop a strategic goal understand drawbacks of current business strategy. Well-organized value chain can create additional value without increasing of invested costs when customers are ready to pay extra cash for value added. Starbucks succeeded to develop such value chain using excellent management skills of its senior personnel. Currently, UK customers seek the opportunities to live wealthy life, like it was before world crisis. The income of personal sector had dropped significantly after crisis, but consumers are willing to proceed with wealthy style of life and Starbucks supports this desire (Starbucks, 2012).
Strategic Fit Analysis
Evaluation Match between Strengths, Weaknesses, Opportunities, and Strengths
Summarizing the results obtained from SWOT analysis, it is obvious that the Company should use the opportunities offered by its strong brand name and emphasize sustainable coffee production. Sustainable coffee production includes green, shadow, and organic coffees. This opportunity may help developing another competitive advantage aiming to compete effectively in the UK market. Starbucks have already launched this project being the pioneer in this field. Franchising strategy the Company currently emphasizes is the right strategy for expanding the UK market. This strategy will help generate value without additional investments that may increase the price of the product that is already quite expensive. Starbucks cannot participate in price wars because elite coffees costs are high. There is another opportunity to differentiate - use franchising strategy (Starbucks, 2012).
Tendency to healthy nutrition may negatively influence the Company revenues. Thus, it is important to further develop coffee culture in the UK. The Company may use growing interest for express foods to cultivate coffee culture. Thus, the strategy that is currently used by the Company contributes for the growth of Starbucks in the UK market. This strategy matches external environment Starbucks is currently operating.
The Company success factors including location of Starbucks coffee shops and cafés, successful marketing strategy, well-trained personnel and operational efficiency are matching market environment. The main condition of the market environment is high level of competition. Starbucks successfully competes in its customary market segment. Obviously, the Company should develop special strategy for mass market. For example, sell its products in supermarkets (Starbucks, 2012).
Recommendations
As the US market is saturated, expansion to global markets is the core preference. The UK market has potential for growth and the Company can develop new strategy using core competencies. One of the opportunities is to utilize franchising strategy. Franchising will provide the Company with financial strength that is necessary for further development of the Company. Usually, expanding new markets brings low revenues. However, the Company may implement franchising strategy to accelerate this process by implementing premium franchising fees. Thus, strong brand name can be financially rewarding for Starbucks.
The Company should pay more attention to advertising because it can bring good results at low cost taking into account the development of modern information technologies.
Conclusion
There were three types of analyses conducted in this project, namely: PESTEL Analysis, Porter’s Five Forces, and SWOT Analysis. Matching strengths, weaknesses, opportunities, and threats a new strategy was developed. This strategy was evaluated and appropriate recommendations were made.
Franchising strategy can help Starbucks establish strong brand name in the UK contributing to expanding its market share in the specialty coffee segment. Charging premium fees may help generate revenues contributing to strong positioning of the Company against its competitors. It was found out that Starbucks can develop strong brand name in the UK market expanding to local towns and entering the mass market offering its elite products.
References
Bureau of Labor Statistics, 2011. Regional and state unemployment — 2010. Annual Averages. Washington, D.C.: Department of Labor.
Danse, M. and Wolters, T., 2003. Sustainable Coffee in the Mainstream [pdf] Available at: <> [Accessed 05 December 2012].
David F. R. 13 ed., 2010. Strategic Management. New Jersey: Prentice Hall.
ICO, 2011. Sustainability Inititives. [online] Available at: <> [Accessed 05 December 2012].
Pierrot, J., Giovannucci, D. and Kasterine, A., 2011. Trends in the Trade of Certified Coffees. Geneva: International Trade Center (ITC).
Starbucks Company, 2012. Coffee. Available at: <> [Accessed 05 December 2012].
