Starbucks Expands Its Horizon Essay Sample

The fact that Starbucks has made three acquisitions in last three years is an example of horizontal integration. Starbucks was essentially a coffee joint. The acquisition of Evolution Fresh Juices and Teavana is a product diversification towards a substitute or rather similar commodity. Tea is seemingly a closer substitute to coffee than juices. This will enhance product differentiation and enhance the competitive edge of Starbucks. It will also increase the market power and lead to monopoly power as well. This is more so because coffee is usually consumed in the mornings. But the expansion towards tea and juices would mean the business gets going throughout the day and this entails increase in sales.
The acquisition of La Boulange Cafѐ and bakery has two implications. Firstly, it is an expansion towards a complementary product. This has a potential to increase the demand for the beverages, that is tea coffee and juices as well as the bakery products because a large number of consumers would like to have their preferred drink along with some savory to make a wholesome meal, breakfast or snack. Secondly this entails an entry to another related market where Starbucks faces competition from Panera Bread and Chipotle. This kind of cross marketing has some risk attached to it in terms of whether the acquired entity can stand strong in the face of competition.
The three acquisitions that have flashed in the news will certainly lead to economies of scale as the products will be retailed in the existing stores with the existing infrastructure. Though some increase in cost is obvious as the sale of the new products will require some specialized sales persons. Apart from that additional investment may be required as many of the stores were meant only for coffee, so the infrastructure needs to be expanded to accommodate tea juices and bakery products.
The horizontal integration has some other risks too. The expansion towards related products also means that the firm is moving away from its status as a coffee specialist. The advantages and market power it had acquired through complete specialization may receive a setback. For a long time the brand was associated with coffee. The brand loyalty of coffee lovers may receive a jolt. Another implication is that ordering tea as coffee is ordered in Starbucks may not find heat with tea lovers.
One has to admit, of course, that the positive elements of the series of acquisitions are stronger. The marriage with Evolution Fresh juices is slated to last for a long term as the firm was already looking for investment into new techniques to produce more healthy juices which aim was fulfilled through this acquisition. The improvement in quality will increase the value of the brand in the health food segment. It is also important to note that Evolution Fresh was not made to compromise with its business ethics as the founder of the Evolution fresh had to do in a previous event of acquisition and had to quit business on grounds of business ethics getting jeopardized. It needs to be emphasized that sale of Evolution fresh can make the brand stand strong against Jamba Juice. This is because of the investment in machine that could cold-press fruit so that the nutrients are not lost in the juice making process. Some compromise had to be made as some products had to be modified for greater consumer satisfaction. It was found that the Essential Greens were not sweet enough so had to be spiked with apple juice. The more customer orientation should have positive effects in increasing sales.
Starbucks had made attempts to diversify towards ready to eat category before, which have failed. But since this is an acquisition where the acquired entity retains its brand name the bakery products is likely to sale by the virtue of the brand’s popularity and previous track record. The same logic applies to Teavana as well.
Finally, the Starbuck should also pay heed to some words of caution. It should be remembered that the Pepsico received a severe jolt when it attempted to diversify towards snacks and cereals. It had expertise and brand value in the soda business and the shift in focus resulted in severe setback.
The acquisition by Starbuck should be welcomed as it means diversification towards commodities which are substitutes and complements for coffee. The product differentiation will give more market power to the company. But it also has to face competition in markets where it is a new entrant and lacks specialization. Since the entry into the ready to eat section has come through an established brand the risks are few. Though the bulk of Starbucks sales is still concentrated in coffee the acquisitions have given scope of market expansion which is evident from its increase in sales in the last quarter. Though analysts have spread word of caution, bringing forth the example of Pepsico when it attempted to move towards snacks and cereals, Starbucks runs less risk as its venture has greater economies of scope. It has the potential of becoming a chain of food joints like the McDonalds which has received success worldwide as it offers a range of product that can cater to different sections of consumers. This also allows some degree of risk spreading. The expansion towards new products can presently be comfortably managed from the turnover from the coffee business. But in near future the expanded segment can significantly acquire market power and sales revenue to outweigh the coffee counterpart and each segment can serve as a support to the other. The company is all set be a monopolistic competitor in the beverages section, health food zone and ready to eat market segment.These three acquisitions and any further plans of acquisition should be terms of corporate laws so that it does not lead to monopolization. Apart from a few adhered risks the horizontal expansion should be flagged off with optimism.