Starbucks Coffee Case Solution

Introduction

In 1971, the Starbucks started its operation in Seattle as a seller of coffee beans and coffee making equipment and brought the Italian coffee drinking culture to the United States. In 1987, Starbucks bought its own stored and started to open new stores in the United States. The company went public in 1992. The company started internationalization in 1990 and bought its first store in Canada, outside the United States.After that the company pursued its relentless international expansion and bought fifteenth stores in different countries such as japan, Far East and Singapore and become one of the leading company over the world.Starbucks deals in high quality coffee, tea & some other beverages. Along with this, they also serve high quality food. These products are sold through several different channels such as food service accountants, grocery and licensed stores The Company grew tremendously and by 2009, the company had over 17000 stores in 56 countries. The Star bucksper form over and above in comparison to the market and its competitors. The company offer different types of coffee. The revenue of the company grew from 160 million in 1993 to 10 billion in 2009. The company has recorded 30% revenue growth from 1993 to 2009. (RESUMING INTERNATIONALIZATION AT STAR BUCKS 1, 2019)

Problem Statement

Starbucks is known as one of the market leader in its industry and enjoys a tremendous growth from last two decades. However, increase in the market competition has slowed down the growth of the company. The company is facing different challenges such as global recession and increase in coffee prices and loss of potential customer due to high competition. Starbucks is planning new and different strategies in order to remain profitable.

Situational Analysis

Industry Analysis:

The concept of the coffee bean was discovered in 13th century in Yemen and Ethiopia. By 17th century the coffee reached to the different parts of the world including Europe, and the United States of America etc. Early in 17th century the coffee was sold in form of beans out of barrels at consumers’ homes. The sale and consumption of the coffee was highly increased by 2010, as 501 billion cups of coffee were being consumed on an annual basis, and retail sales had grown by 6.9 per cent annually to reach $48.2 billion. According to the International Coffee Organization(ICO), the historical annual growth rate of coffee consumption was approximately 2.5%. However, this rate fell to 1% during economic recession in 2009-10. The consumption of the specialty coffee on daily basis had risen from 3% to 17% from 1995-2008. However, in the United States, the sales of specialty coffee did increase from $8 billion to $13 billion from 2001 to 2007. The market share of the specialty coffee increased from 1% – 20% in 1981 to 2006. Most of the coffee shops in the coffee industry serve special coffee. The big competitors in the coffee industry are McDonald, Starbucks, Costa Coffee, Dunkin Donuts, Café Coffee day, Caribou Coffee and Dietrich coffee. Europe is one of the largest continent in coffee consumption in comparison to the other continents in the world.

SWOT Analysis:

Strengths:

Starbucks is one of the market leader in its industry and enjoys a tremendous growth. The company is serving different types of coffees in order enjoy a large consumer base. The company is focusing on expansion, and by 2009 the company had 17000 stores throughout the world. The company introduced drive through service at most of its stores which made it easier for the customers to take benefits from the services Starbucks offered. Starbucks launched different types of coffee for different income class such as instant coffee and specialty coffee. One of the largest coffee buyer in the North America. The company is using different strategies and different modes in entry (vertical integration) such as local partners, licensed joint ventures and subsidiaries. (Galea, 2015)

Weakness:

Starbucks faced volatility in their growth and performance. As the company has large stores all over the world which reduced its quality. Most of the customers of Starbucks are also the consumers of other fast food chains. While expanding their stores the company has less focus on consumer services. The company may increase its prices due to the increase in the prices of coffee, which ultimatelylasts negative effects on the end consumer of the Starbucks. The strategies implemented by Starbucks are easier to be imitated by its competitors.

Opportunities:

The company has an opportunity to focus on product development along with maintaining its quality. The company has to use different advertising activities to maintain its relationship with consumers. The demand for special coffee increased which provide an opportunity to the company to enhance the quality of the coffee and more emphasis on core services.The company also involved in related and unrelated diversifications. The demand of the coffee is increasing in the United States.

Threats:

Starbucks is facing an intense competition in the domestic as well as in the international market due to the existence of numerous competitors  in both the markets. The company has a big threat from McDonalds as McDonalds has entered into the coffee sector and it already has 14000 store in the United States and its coffee sales did increase by a significant level of  15% in 2006. The prices of coffee bean has been increased, which effects on the prices of the products which Starbucks offers, because of which the company can face the misfortune of shrinkage in its  profitability. Another threat of the company is McDonald’s preparation of a coffee that is Seattle’s Best brand coffee, a brand owned by the company.

Porters Five Forces Model

Threat of New Entrants:

The threat of new entrance in the coffee industry is considered to be high. As coffee can be served by any independent small café or kiosk, which requires low capital for operations.

Bargaining Power of Buyer:

The bargaining power of buyer in the coffee industry is considered to be high. As the customers have a lot of substitutes and the variety of flavors of coffee available in the market and the market is composed of high number of sellers who serve coffee. Although the switching cost is also low in coffee industry,which is why the bargaining power of buyer in coffee industry is considered to be higher.

Bargaining Power of Supplier:

The bargaining power of suppliers in the coffee industry is considered to be moderate. As the producers of the coffee beans are farmers, and the large number of suppliers are available in the market.However, the quality of the coffee beans also matter. The buyers purchase coffee beans in a large quantity due to high consumption rate, which is why the bargaining power of suppliers is considered to be moderate.

Threat of Substitutes:

The threat of substitute in the coffee industry is also considered to be moderate. As the numerous number of substitutes of coffee is available in the industry, such as tea, juices, sparkling water, fresh juice& smoothie kiosks, soft drinks, energy drinks and other beverages. Although numerous kinds of coffee are available in the market with different processing method and flavors. However, in the United States and some of the other countries the consumers are habitual of the coffee in their daily life,and for them the brand and quality of coffee also matter. All these reasons make moderate threat of substitutes in the coffee industry.

Rivalry among Competitors:

The rivalry among the competitors in the coffee industry is considered to be high. As the coffee industry is composed of various competitors, and differentiation among the products is quite low. While the consumption of the coffee is increasing worldwide, and more than 500 billion cups are consumed each year.

Financial Analysis

In the financial analysis, different ratios of the Starbucks and McDonalds are taken. The data of 2008 and 2009 are taken for comparison. The industry average is taken by the sum of all three competitors’ ratios. The different ratio includes current ratio, profit margin, debt to equity ratio long term debt to capital ratio, gross margin, return on asset and return and equity. The debt to equity ratios shows the debt paying ability of the companies, while the margins and return ratios show the profit earning abilities of the companies…………..

 

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