Profit & Solutions Management Research Publication Series
Researched & Written by Deb (Debadip) Bandyopadhyay
Starbucks Corporation is an American multinational chain of coffeehouses and roastery reserves headquartered in Seattle, Washington. As the world's largest coffeehouse chain, Starbucks is seen to be the main representation of the United States' second wave of coffee culture. As of early 2020, the company operates over 30,000 locations worldwide in more than 70 countries. Starbucks locations serve hot and cold drinks, whole-bean coffee, microground instant coffee known as VIA, espresso, caffe latte, full- and loose-leaf teas including Teavana tea products, Evolution Fresh juices, Frappuccino beverages, La Boulange pastries, and snacks including items such as chips and crackers; some offerings (including their annual fall launch of the Pumpkin Spice Latte) are seasonal or specific to the locality of the store.
Headquartered in the Starbucks Center, the company was founded in 1971 by Jerry Baldwin, Zev Siegl, and Gordon Bowker at Seattle's Pike Place Market. During the early 1980s, they sold the company to Howard Schultz who – after a business trip to Milan, Italy – decided to make the coffee bean store a coffeeshop serving espresso-based drinks. Schultz's first tenure as chief executive, from 1986 to 2000, led to an aggressive expansion of the franchise, first in Seattle, then across the U.S. West Coast. Despite an initial economic downturn with its expansion into the Midwest and British Columbia, the company experienced revitalized prosperity with its entry into California in the early 1990s through a series of highly publicized coffee wars. Schultz was succeeded by Orin Smith who ran the company for five years, positioning Starbucks as a large player in fair trade coffee and increasing sales to $5 billion. Jim Donald served as chief executive from 2005 to 2008, orchestrating a large-scale earnings expansion. Schultz returned as CEO in the middle of the 2008 financial crisis and spent the succeeding decade growing its market share, expanding its offerings, and reorienting itself around corporate social responsibility. Kevin Johnson took over from Schultz in 2017, and continues to serve as the firm's chief executive.
Many stores sell pre-packaged food items, pastries, hot and cold sandwiches, and drinkware including mugs and tumblers. There are also several select "Starbucks Evenings" locations which offer beer, wine, and appetizers. Starbucks-brand coffee, ice cream, and bottled cold coffee drinks are also sold at grocery stores in the United States and other countries. In 2010, the company began its Starbucks Reserve program for single-origin coffees and high-end coffee shops. It planned to open 1,000 Reserve coffee shops by the end of 2017.[8] Starbucks operates six roasteries with tasting rooms and 43 coffee bars as part of the program. The latest roastery location opened on Chicago's Magnificent Mile in November 2019, and is the world's largest Starbucks. The company has received significant and sustained criticism about its business practices, corporate affairs, and role in society. Conversely, its franchise has commanded substantial brand loyalty, market share, and companyThe coffee industry has significantly changed, and the strategies that conventionally worked in 1970s and 1980s may no longer work. Traditionally Starbucks purchased and sold only high-quality coffee at a premium price. However, the coffee experience that was special in the last decades is no longer unique, and the company has failed to recognize these changes in customer tastes and preferences. Additionally, competition has increased, and there are competitors selling the same quality of coffee at a lower price. Starbuck’s attempt to make its coffee special will only harm its sales volume as consumers will buy from competitors (Giovannucci, 2001). Below is a graph for annual revenue performance per employee in the four major coffee dealers in the U.S.
The coffee industry has changed and the decision to close 600 stores in 2007 is an indication that the company needs to change its current strategy. After conducting an industry analysis with the help of Porter Five Forces, it is clear that competition and Fair trade have affected our business. The analysis revealed that the young coffee consumers are not as sensitive to coffee taste as the elderly users. Additionally, the varieties of beverages have increased, and they offer alternatives to coffee (Batsell, 2001).
The analysis indicated that the reasons for the decline in the Starbucks’ sale are that the older generation that valued the club-like environment over a cup of coffee has reduced significantly (McClure, 1999). The decision to introduce so many products affected the trust that customers had on the integrity of Starbucks’ coffee. Finally, the process of creating new stores was not well thought-out, and it only created an imaginary growth while the fundamentals of the business remained the same or deteriorated (Mathew, 2008).
I recommend closing of more stores, reduce our product lines and change our target market from the specialty to mass branding.
Closing more stores in the U.S., China and Europe will help the company reduce operational costs. The company has been making losses in most of the recently opened shops, and they should all close. The company needs to sell these stores so that it can use the money to aggressively market its products and fund research and development (Pendergrast, 1999).
The company should reduce its product line to earn back the trust from the coffee lovers. The perception of the quality of Starbucks coffee has been affected by the many brands. By specializing in two or three brands will make the marketing activities easier and cheaper. The company will not have to employ so many promoters for its coffee (Quelch, 2008).
In the current market conditions, most customers are sensitive to the product prices and not the quality. It is essential that the company find ways of reducing the cost of production of our coffee so that we can decrease the price of coffee. Our prices should be able to compete with competitors’.
These changes are critical for Starbucks’ survival and its future performance. Failure to take these corrective measures will see the company share price continue to go down, and this may attract a hostile takeover, and the company will be no more. Competitors are watching keenly into the problems of Starbucks, and are eagerly waiting for the strategy the company will take so that they can decide on their next move. Starbucks dominance in the coffee industry in the past creates a feeling of success among hostile investors. Some have waited for a long time for the current situation to occur so that they can take over the company at a cheap price.
References
Batsell, J. (2001). Starbucks Achieves Worldwide Renown with Some Costs. The Seattle
Times. 83(2), 33-37.
Gill, D. (2013). Starbucks Shares Looking Frothy; Where is Howard’s Head? Retrieved on 06th June 2015 from http://ycharts.com/analysis/story/starbucks_shares_looking_frothy_where_is_howards_head
Giovannucci, D. (2001). Sustainable Coffee Survey of the North American Specialty Coffee
Industry. New York Times. 15(2), 25-32.
Mathew, L. (2008). The decline of the empire of Starbucks. Retrieved on 06th June 2015 from http://www.spectator.co.uk/columnists/any-other-business/852391/the-decline-of-the-empire-of-starbucks
McClure, R. (1999). Starbucks soon to have it Made in the Shade. Seattle-Post Intelligencer. 3(2), 53-67.
Pendergrast, M. (1999). Uncommon Grounds: The History of Coffee and How It Transformed our world. New York: Basic Books.
Quelch, J. (2008). How Starbucks’ growth destroyed brand value. Retrieved on 06th June 2015 from https://hbr.org/2008/07/how-starbucks-growth-destroyed
http://ycharts.com/analysis/story/starbucks_shares_looking_frothy_where_is_howards_head
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