Introduction
Starbucks Corporation is a company founded in Seattle, Washington in 1971 and is a premier retailer, roaster and marketer of specialty coffees around the world. (Annual Report 2015) In 2015, Starbucks reported a staff of approximately 180,000 employees over 19,760 company licensed and operated retail stores in over 60 countries worldwide. Roasted and handcrafted high-quality and premium coffees, tea and fresh food items as well as other beverages make up their product mix.(Annual Report 2015) Starbucks also sells coffee products and tea, as well as licenses its trademarks through multiple other channels like grocery, licensed stores and national food service business accounts. Starbucks also engages with other brand name in its porftolio of companies that includes Teavana, Seattle's Best Coffee, Starbucks Refreshers, La Boulange, Verismo and Tazo. As of September 29th 2015, Starbucks had a total revenue of 15.61 billion dollars. (Annual Report 2015)
External Environment Starbucks competes primarily in the retail coffee and snacks industry category. In 2009, this industry experienced a significant slowdown following the economic downturn of 2008 coupled with shifting consumer tastes. Industry revenue at this time declined over 6.5% to 25.8 billion.(Marketline 2014) Prior to this, the industry experienced an expansive decade of consistent growth. During the economic downturn, consumers spent less on luxuries such as eating and drinking out, preferring to buy lower priced products and produce their own coffee at home due to budget shrinks. From 2008 until 2013 therefore, the industry grew at a small annualized rate of growth of 0.9%, with current industry revenue at $36 billion in the United States.(IBISWorld 2015) Market analysts forecast that the industry will grow at an annualized rate of growth over the next 5 years at 3.8% and may potentially grow to $39.1 billion. (IBISWorld 2015) This growth would be sourced primarily in a stronger economy paving the way for increased consumer confidence as well as menu offering expansion across the industry. Starbucks is a market dominator in this industry with a share of over 36.6%. Its major competitors are Dunkin Brands at 24.7% and other competitors like Costa Coffee, Tim Horton's and McDonalds taking the rest of the market.(IBISWorld 2015) The industry for retail coffee and snacks is in a mature stage of its life cycle and has a medium concentration level. (IBISWorld 2015) Only two companies, Starbucks and Dunkin Brands, make up more than 60 percent of the share of the market. This gives them significant leverage in determining industry trends. Industry demand for premium coffees and snacks is driven mainly by factors that include per capita consumption of coffee, disposable income, health attitudes, as well as world coffee prices and contingent demographics.(Marketline 2014) The industry faces very high sensitivity to fluctuating macroeconomic factors that may affect household disposable income growth.(IBISWorld 2015)
During the recession, the disposable income declined because of a rise in unemployment and stagnated wages. This in turn placed downward pressure on profitability margins and industry revenue. (IBISWorld 2015) A significant aspect of demand analysis includes per capita coffee consumption where consumption increases leads to an increase in coffee and snack shop revenues. The main driver in increases in consumption are linked to increases in disposable income, since downward pressure on personal budgets leads to increased spending. This driver is positively correlated to market value. In 2016, coffee consumption is expected to increase on a per capita basis.(IBISWorld 2015)
Porters Five Forces Analysis In the Retail Coffee and Snacks Industry, the threat of new entrants is considered moderate. Barriers to entry are not high enough to prevent or discourage new entrants. Saturation of the industry is considered moderately high, as the industry operates with a largely monopolistic structure of competition. New entrants may enter the market with only a small to modest investment. Store space can be leased, as well as equipment, and coffee beans and milk and other in store foodstuffs may be acquired without great expense. In a local context, mom and pop or otherwise locally owned coffee shops are able to compete with behemoths like Starbucks largely because the consumer faces relatively no switching costs. To be successful in the industry, there is a moderately reasonable chance for business success.(IBISWorld 2015) That said, a relatively easy market entry is met early with incumbent brands such as Starbucks who have already achieved economies of scale in production. Starbucks has refined its operations so well, placing a fairly high barrier on new market players to be able to differentiate themselves in terms of prime real estate, in-store experience and product quality. Starbucks' greater scope and scale has been gained via learning, and this means they are afforded a greater learning curve advantage as well as favorable deals and prices in their supply chain. Smaller market entrants should also expect a moderately high level of retaliation from established companies like Starbucks. Effectively, retaliation effectively operates as a significant entry barrier. Threat of substitutes in high in this industry. Many coffee alternatives exist that are just coffee, and there is also tea, fruit juice, water, energy drinks. The social experience of Starbucks could be substituted with patronage at bars and pubs serving nonalcoholic beverages . Home produced coffee from consumers with premium coffee makers is extremely cost effective, resulting in a fraction of the expense compared to purchases from premium coffee retailers like Starbucks. Starbucks, it may be noted, actually seeks to counter and wrangle profit even from this threat by simply making and selling its own brand of high end premium coffee makers, as well as stocking premium coffees, teas, iced beverages and lattes or other milk based drinks suitable for home production and use. Substitution threats, nevertheless, still impose pressure on margins. Buyers enjoy moderate to low bargaining power pressure. The high population of buyers restricts a single buyer successfully demanding a price concession. The industry offers vertical differentiation. Consumers make relatively low purchases by volume, and this fact diminishes buyers' power. Industry leaders like Starbucks continue to engage in competitive and strategic pricing of its product mix. Consumers are known to be moderately sensitive to retail prices as they are known to concern themselves of excessive price premiums if quality demands are not satisfied. There is low to moderate pressure on the bargaining power of suppliers. Costs of switching between suppliers remains moderately low for corporations as commodities like Arabica beans have standard inputs. Starbucks, because of its multinational status, size and economies of scale, has the ability to put great downward pressure on suppliers. Yet it maintains a Fair Trade certified coffee as well as a program that provisions farmer equity in a sustainable way (C.A.F.E. program), giving its suppliers a fair partnership which gives them a low amount of bower in the bargaining process. (Annual Report 2015) Suppliers pose a low threat of forward vertical integration and competing against Starbucks, given Starbucks' size as well. (Marketline 2014) This also lowers suppliers' relative power. Starbucks, due to its scope and size, forms one of the if not the most important contract a supplier will have. due to quantities and duration and long term security. This lowers the suppliers' scope even further. The intensity of competitive rivalry can be characterized as high to moderate. (Marketline 2014) The industry has monopolistic competition, with Starbucks being the dominant company and having the largest share of the market. Its competitors also take a significant share, however, and this puts some serious pressure on Starbucks' to maintain margins. Consumers face no switching costs, contributing the situation. Starbucks' ability to maintain competitive advantage in product differentiation with its premium level of services and products creates competition at a moderate intensity level. Growth rate in the industry has reflected its mature status with moderately low growth rates and this increases the relative competitive intensity as all seek to take market share from Starbucks. (Marketline 2014) In conclusion, a Porters five forces analysis instructs us to a conclusion on aggregate: profitability and the strength of forces in the retail coffee and snacks industry are considered to be moderate at this time. Areas of Weakness
Starbucks remains the market leader in the competitive industry. Its major threat exists in its high price points and self-cannibalization that has come from over crowding. In the United States, this has been especially problematic, as Starbucks operates over 8078 stores. Starbucks may also experience lower growth rates in its overseas expansions due to its high price points. It is in a particularly powerful situation with respect to its suppliers, yet with respect to the customers, the industry is such that the customer has all the power: he or she faces no switching costs. In times of economic duress, consumers can simply forgo paying premium prices on a highly substitutable product that can be bought at the next street corner over for a fraction, or made with hot boiling water in the office or at home. Persons in developing countries may not convert to the level of sales and conspicuous consumption Starbucks experienced during its major growth trajectory during the booming bubble-based economies of North American and to some extent Europe through the late 90's and early 2000s. Stakeholder Analysis Starbucks continues to develop and expand its corporate social responsibility initiatives to meet the concerns of its different stakeholder groups. The following list names the main stakeholders to Starbucks Coffee: a) employees, b) customers, c) suppliers, e) investors. Starbucks has an excellent track record of prioritizing its employees in its efforts. Its organizational culture is aligned on a principle of employees first. Recently, Starbucks elected to offer 100% tuition remission for continuing or returing students who wish to complete their degtrees through Arizona State University online. This benefit was developed through a contract with the major research university and makes a giant leap forward for demonstrating to other corporations that education benefits can be dispersed to employees in a financially sound manner. Starbucks sees its customers among its primary stakeholders, and this commitment to customer service has been the foundation on which the brand has grown. Starbucks develops cafe unique policies to meet the individual needs of its customers, organizing a communal feel at its cafes and having prizes and contests to elect "customer of the week." (Annual Report 2015). Starbucks involves a number of corporate social responsibility initiatives to improve its image that it is dedicated towards ethically handling its supply chain. Its C.A.F.E. program is one of the first of its kind, as it was a voluntary gesture to provide a greater compensation and bargaining power to some of the world's most vulnerable groups, such as indigenous farmers. Starbucks' C.S.R. efforts in this domain takes a comprehensive approach. Starbucks' commitment to its investors as stakeholders has proven true. Starbucks recovered from its significant period of decline beginning late 2007 around the time of the recession and today is on a growth path trajectory. (Annual Report 2016).
In all of these ways, it can be said with confidence that Starbucks is an ethical company in todays global economy with a clean and attractive track record with respect to its commitment to Corporate Social Responsibility.
References
IBISWorld (2015). Coffee & Snack Shops in the United States. Retrieved from IBISWorld database.
MarketLine. (2014). Starbucks Corporation. [company profile]. Retrieved from MarketLine Advantage database.
Starbucks Corporation. (2015). Starbucks Corp: 10-K. Retrieved from LexisNexis Academic database.
