MEMORANDUM
TO: Kevin Johnson, CEO
FROM:Naimul Kader, Joanna Williams, JohnAlfred Ritter, Danna Hazanovsky, Leta L Summers, Ricky Young
DATE: June 9, 2020
SUBJECT: Internal Analysis of Starbucks’ Competitive Advantage
Mr. Johnson:
Starbucks has experienced impressive growth over the past 30+ years. In the last decade, Starbucks has nearly tripled its annual revenue and quadrupled its net income. Prior to the pandemic that began to affect operations in late February, Starbucks’ growth has been relentless. Nevertheless, continued emphasis on our strategic initiatives will provide forward momentum and ensure continued success. The following memorandum presents our findings on Starbucks’ sources of competitive advantages, the major threats Starbucks faces, and recommendations based upon those threats.
Competitive Advantages
Excellent customer service is one source of Starbucks’ competitive advantage. Starbucks’ emphasis on ensuring a positive customer experience has allowed it to become one of the leading firms in the coffee industry. Meanwhile, Starbucks has also managed to pursue ground-breaking and sustainable sourcing and production initiatives. The coffee chain achieves uniqueness inclined to technological breakthroughs via assimilating technology into a wide range of business processes and procedures such as new product development, communication of the marketing message, completing sales and monitoring the level of customer satisfaction. Its stores are effectively positioned as a “third place” away from home and work, where people can spend time in a relaxed and comfortable environment with their friends or alone. Starbucks has always maintained its competitive advantage by being the leader in product innovation – take Pumpkin spice latte for instance – it has maintained its popularity through time by being flexible. It has embraced opportunities to adapt to changing consumer tastes and preferences, which sets it apart from its competitors.
Additionally, Starbucks has a competitive advantage due to its barriers to imitation. The company has casual ambiguity, as it has strengths in many areas.[1] Starbucks has a strong market position, with brand recognition and a loyal customer base. For example, the siren in the Starbucks logo is recognizable, and including the words "Starbucks Coffee" are longer required to know the brand.[2]Furthermore, the customer base and loyalty extend far and wide, as the company is spread and established internationally. Also, Starbucks has tacit knowledge demonstrated through how it treats is employees.[3] Each employee is a "partner" of Starbucks. The company provides healthcare benefits, education opportunities, as well as publicly traded stock.[4] For many individuals, Starbucks is their first professional job, where with these opportunities and benefits, the company has created a culture where the partners are creating good habits that can translate to other aspects of their lives.[5] This culture translates to the customer service experienced at each Starbucks location globally.
While other competitors like Dunkin brands rely on third parties to operate its supply chain, Starbucks has a vertical integration chain which has allowed them to maintain 10.1% market share by managing their own supply chain which allows them to ethically source 99% of their Arabica beans. Starbucks builds on its vertical integration by developing relationships with growers and brokers making long-term agreements which keep costs under control and earn steady profit margins.[6] This enables also them to be sustainable in such a volatile market where the smaller coffee shops are prone to price war.
THREATS
Over the next couple of years Starbucks needs to be agile as a corporation and adjust its business model in order to contend with the following threats: saturation, global growth, substitutions in terms of changing consumer taste/preferences.
The company is currently experiencing an over-saturation of stores in the United States.[7] Starbucks’ aggressive expansion in the United States entailed opening highly concentrated stores in metropolitan regions. The stores’ proximity to one another has resulted in cannibalization of its nearby stores' sales.[8] The reduction in same-store sales has overwhelmed Starbucks’ gross revenue growth. Although Starbucks’ gross revenue in these regions has seen reasonable growth, its same-store sales paint a different picture. Consequently, Starbucks began closing stores in 2018 in highly concentrated regions where stores have seen lower-than-expected returns.This may explain why Starbucks stock dropped by 11.38% while the market was up 4.10% during the same period.[9]
Global growth is another threat. Starbucks has been expanding aggressively into Asian countries such as China, but sales are not meeting expectations. Chinese culture is primarily a tea drinking culture and Starbucks see this as an untapped opportunity. Similarly, Starbucks will find it difficult to expand into regions such as the U.K., that already has a loyal following with Costa Coffee. Similarly, countries like Canada and Australia also have strong brand loyalty with Tim Hortons and Gloria Jeans, respectively.
Substitutes are the largest threat to Starbucks. There are many options of sodas, flavored water, fruit juice, and teas with additional brands joining the market. Energy drinks and healthier beverage options will make it increasingly difficult for Starbucks to maintain this market share. Starbucks possess the threat of being replaced by restaurants and bars serving non-alcoholic beverages like “Mud/WTR”, which is an all-natural tea that is marketing the idea of being better than coffee with value proposition – no side effects of “jitters and crash”.
RECOMMENDATIONS
One solution to Starbucks’ oversaturation of the U.S. is continued pursuit of foreign growth opportunities. Starbucks has begun expanding into foreign markets, most notably China. The growth, while mildly successful, has proven to be underwhelming.[10] The response from Starbucks’ expansion into China demonstrates the need to strategically differentiate products to be more attractive to consumer preferences in new markets it is entering. The high degree of competition in China has plagued sales and failed to quickly catch on.[11] By the end of this fiscal year, a start-up competitor of Starbucks that was started in 2017 will have more stores in China than Starbucks. Coupling a foreign-centric growth strategy with product offerings that correspond to the respective markets it is entering will enable continued growth and reduce reliance on a single market.
Starbucks has demonstrated how profitable pivoting from serving almost exclusively coffee products to offering a wide range of products and food can be. This past year, food accounted for nearly 20% of Starbucks sales. Continuing to develop a diverse mix of products will accomplish two primary goals. First, it will enable Starbucks to capitalize on the different consumer preferences among its various consumer segments. Second, diversifying its products offerings will enable Starbucks to capture non-coffee drinking consumers and remain relevant beyond the high sales morning hours. Expanding its drink and food menu will allow customers to return in the afternoon for less-caffeinated beverage options, lunch and late-afternoon snacks.
Starbucks should also continue to explore various store formats to include alternatives to build upon its already strong location strategy. Starbucks’ expansion into suburban areas with a greater focus on expediency has demonstrated the potential to expand the “third place” without losing the feeling of a welcoming space to gather between home and work.Starbucks finds itself sandwiched between the increase in availability of good coffee from Dunkin, McDonalds and the high end third wave chains such as Intelligentsia or Blue Bottle. A tailored approach to acquiring convenient and visible real estate to capitalize on pedestrian traffic in densely populated urban areas and automobile traffic flows in suburban areas will enable Starbucks to balance expanding into high-quality locations with maintaining the feel of a local coffee shop.Similarly, adapting some features of co-working spaces to provide offsite meeting opportunities, including potentially meeting rooms and “zoom” rooms, may provide another opportunity for Starbucks to grow in business areas.
CONCLUSION
Starbucks needs to maintain its emphasis on customer service and premium quality offerings while continuing to explore international growth opportunities in emerging markets and developing a diverse mix of product offerings attractive to local preferences. These steps will further strengthen Starbucks’ customer-orientated culture and its commitment to innovation, which will ensure that Starbucks remains relevant in the future. The above recommendations are critical to transforming Starbucks’ competitive advantages from parity (temporary) competitive advantages to sustained and durable competitive advantages stemming from their rare, valuable, and inimitable product offerings.
[1] Somaya, Deepak (2016). Business Strategy: Internal Analysis and Competitive Advantage.
[2] Flandreau. M. (2016). Who is the Starbucks Siren? Starbucks Stories and News. https://stories.starbucks.com/stories/2016/who-is-starbucks-siren/
[3] Somaya (2016). Business Strategy: Internal Analysis and Competitive Advantage.
[4] Rothaermel, Frank. (2017). Starbucks Corporation. MC Graw Hill Education MH0042 1259927628
[5] Duhigg, Charles (2012). The Power of Habit: Why We Do What We Do, and How to Change. London: Random House.
[6] Somaya (2016). Business Strategy: Internal Analysis and Competitive Advantage.
[7] Mourdoukoutas, Panos. (2018). Starbucks' Problems at Home and Abroad. Forbes. https://www.forbes.com/sites/panosmourdoukoutas/2018/06/27/starbucks-problems-at-home-and-abroad/#3f9b3ce364b5
[8] Mourdoukoutas, Panos. (2018). Starbucks' Problems at Home and Abroad. Forbes. https://www.forbes.com/sites/panosmourdoukoutas/2018/06/27/starbucks-problems-at-home-and-abroad/#3f9b3ce364b5
[9] Mourdoukoutas, Panos. (2018). Starbucks' Problems at Home and Abroad. Forbes. https://www.forbes.com/sites/panosmourdoukoutas/2018/06/27/starbucks-problems-at-home-and-abroad/#3f9b3ce364b5
[10] See, e.g., Mourdoukoutas, Panos. (2018). Starbucks' Problems at Home and Abroad. Forbes. https://www.forbes.com/sites/panosmourdoukoutas/2018/06/27/starbucks-problems-at-home-and-abroad/#3f9b3ce364b5; Patton, Leslie and Roeder, Jonathan. (2019). Starbucks Is Replicating Too Fast U.S. Growth In China. Bloomberg. https://www.bloomberg.com/news/articles/2019-12-03/starbucks-is-replicating-its-too-fast-u-s-growth-in-china
[11] Patton, Leslie and Roeder, Jonathan. (2019). Starbucks Is Replicating Too Fast U.S. Growth In China. Bloomberg. https://www.bloomberg.com/news/articles/2019-12-03/starbucks-is-replicating-its-too-fast-u-s-growth-in-china
