Starbucks Strategies for Growth Beyond Borders
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Starbucks Strategies for Growth Beyond Borders
- 1. Starbucks: Now and beyond MBA525 Team 5 Presentation Presented by “Team 5”: Denisa Dobrin, Colby Foster-Baker, Jen Allison, Geoffrey MacLennan, Renee Volk NECB (2012), MBA 525, Managerial Economics Prof.: Dr. Ned Gandevani 1
- 2. Agenda • Company Profile • Market Demand (Colby) • Pricing Strategy (Colby) • Market Size (Jen) • MBA525 Team 5 Presentation Production Scale / Scale of operation (Jen) • Market Structure (Geoff) • Conclusions, Recommendations, Q&A (Renee) Starbucks mission statement: “To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” (Starbucks.com 2
- 3. Company Profile • First store in Seattle, 1971 • Currently 18,000+ stores in 60 countries • Employs approximately 149,000 people • Revenue: MBA525 Team 5 Presentation • 2011 at $11.7 billion • 2012 at $13.3 billion • Operating Income: • 2011 at $1.7 billion • 2012 at $2.0 billion 3
- 4. Market Demand • Historical Demand • $13.3 billion in revenue in 2012 (14% increase from 2011) • 7% increase in global sales • Will market demand for Starbucks be robust in the next 12 MBA525 Team 5 Presentation months? • International demand should increase • 15% sales growth in China/Asia Pacific during 2012 fiscal year • 154 new stores opened in China/Asia Pacific region in 2012 • Plans to open additional 600 stores in China/Asia Pacific • Domestic demand remains strong • Moved up to 3rd largest American restaurant chain in 2011 • New offerings to expand retail chain demand 4
- 5. Market Demand (cont.) • Will market demand for Starbucks be robust in the next 12 months? • Branching into new markets MBA525 Team 5 Presentation • Teavana Holdings, Inc. – specialty tea products • Verismo™ - single-serve home brewing system • Evolution Fresh™ - high-end specialty juice retailer 5
- 6. Pricing Strategy • What is Starbucks pricing strategy? • Broke “Skim Pricing” mold by sustaining premium prices • Competitor’s prices have risen to compete • Factors affecting Pricing • Competition MBA525 Team 5 Presentation • McDonald’s offering “premium” coffee at low $1 prices • Controls largest market share • Consumer Attitudes • Established as quality and innovation leader • High level of brand trust 6
- 7. Pricing Strategy (cont.) • Economic Conditions: Global Financial Crisis • Standard drink prices lowered by $0.05 to $0.15 • Specialty drink prices raised by up to $0.30 • Overall, sustained premium pricing levels MBA525 Team 5 Presentation • Does Starbucks pricing strategy make sense? • Re-branded the “cup of Joe” and established market for high-end coffee houses • Customer’s very willing to pay for perceived high quality beverages and exceptional service • Premium pricing strategy is more profitable as economic efficiency efforts are underway 7
- 8. Current Scale of Operation Just how big is Starbucks? • 17,00 stores in 55 countries • 60 million customers world wide • 160,000 employees MBA525 Team 5 Presentation Processing and Distribution • Roasting plants • Co-manufacturers • Tea • Distribution Centers 8
- 9. Current Scale of Operation (cont.) Market Share • In 2010 Starbucks had 33% of the coffee store market Convenience Market Share (USA) Stores & Gas Stations MBA525 Team 5 Presentation 13% Local & McDonalds Regional 7% Specialty Coffee Shops 47% Starbucks 33% 9
- 10. Current Scale of Operation (cont.) • 2011 fastest competitor is Dunkin Donuts • Expansions • China • Products MBA525 Team 5 Presentation • Structure recommendations 10
- 11. Cost Structure Sticking it out in tough times • 2008 Economic Crisis • Sales ↓ • Expenses ↑ MBA525 Team 5 Presentation • Outsourcing agreements • 70% tied into agreements • Globalized process and improved efficiency at lower costs • Cost cutting measures • Store closings domestically and internationally 11
- 12. Shut Down Effect Could the Shut Down Rule apply to Starbucks? • Cost of product vs. Sales • Food sales doubled MBA525 Team 5 Presentation • Introduction of new products • Teavana • La Boulange Short run vs. Long run 12
- 13. Market Structure • Starbucks operates within a Monopolistic Competition structure • What is a Monopolistic Competition Structure? MBA525 Team 5 Presentation • No major barriers to entry into market • There are many competitors • Each competitors product is differentiated • Each firm able to make independent decisions on price and output 13
- 14. Market Structure (cont.) • Coffee Industry • No Major Barriers to entry • McDonald’s and Wendy’s upgraded coffee offerings • Independent coffee shops MBA525 Team 5 Presentation • Differentiated Competitors • Fast Food Chain Restaurants (McDonald’s, Wendy’s) • Coffee - Donut Chains (Dunkin’ Donuts, Honey Dew) • Premium Coffee Chains (Peet’s, San Francisco Coffee House) • Independent Coffee Houses 14
- 15. Market Structure (cont.) • Starbucks within a Monopolistic Competition • Starbucks Differentiation From Their Competition • Considers themselves a premium coffee provider MBA525 Team 5 Presentation • Offers premium product and experience • Customer loyalty programs • At Home Products 15
- 16. Fiscal Cliff • How will the Fiscal Cliff Impact Starbucks • Strong 4th Quarter leading into Fiscal Cliff MBA525 Team 5 Presentation • Brand Resilience within the United States • Strong Growth Projections in Asian Market • Strong Corporate Leadership • Starbucks Takes Responsible Approach 16
- 17. Government Regulations • What impact does government regulations have on Starbucks? • Starbucks is committed to full compliance with laws, rules, and regulations in all countries MBA525 Team 5 Presentation • U.S. Food and Drug Administration cracked down on alcohol- caffeine drinks • No immediate additional regulation seen on caffeine drinks under 80 milligrams • Government concerns centered on marketing of caffeine product to children 17
- 18. Recommendations • Grow presence in key Asian markets • Starbucks has been expanding its presence in Asia particularly in China and India • China’s and India’s economy are growing quickly • In China, the Gross domestic product growth of 10.3% in fiscal MBA525 Team 5 Presentation year 2010 and 9.2% in fiscal year 2009 (Starbucks Corporation SWOT Analysis, 2012) • More than 160 cities in China have a population greater than one million (Starbucks Corporation SWOT Analysis, 2012). • Middle class population in China is expected to double by 2025 and in increase in India • The Market within India is primarily tea drinkers but the coffee consumption is rising • Starbucks can capitalize on this market 18
- 19. Conclusion • Demand for Starbucks is going to increase over the next 12 months • In 2012 alone, • Starbucks has expanded into three new markets Specialty juices, Teas, and At home brewing options for customer MBA525 Team 5 Presentation • Revenue increase 14 % 2011 to 2012 Current pricing strategy is simple yet effective • Built a brand and atmosphere customers are willing to pay for and keep coming back for. • They are innovation, produce quality products, and are well respected • Starbucks has a strong presences in the market and is known 19 for their premium products
- 20. “Team 5” would like to say: THANK YOU! MBA525 Team 5 Presentation 20
- 21. References • Certner, J. (2012). Starbucks: For infusing a steady stream of new ideas to revive its business. Fast Company, (163), 112-149. • 6 Tips to De-Commoditization. (2012). Foundry Management & Technology, Vol. 140 Issue 5, p31-32. Retrieved from: http://web.ebscohost.com/ehost/detail?sid=f606cfa5-eef1-4883-af2b- ab9794bc7cab%40sessionmgr115&vid=5&hid=111&bdata=JnNpdGU9ZWhvc3Qtb Gl2ZQ%3d%3d#db=buh&AN=77242931 MBA525 Team 5 Presentation • ABC News. (2012, April 30). Starbucks Seeks Success in Tea Leaves. Retrieved from: http://abcnews.go.com/Business/story?id=88266&page=1#.ULFEgmeDqKJ • Abilla, P. (2010). Part 2: Starbucks, why lean, why now? Schmula, Retrieved from http://www.shmula.com/starbucks-why-lean-why-now/5639/ • Cooke, J.A. (2010). From bean to cup: how Starbucks transformed its supply chain. Supply Chain Quarterly. Retrieved from: http://www.supplychainquarterly.com/topics/Procurement/scq201004starbucks/ • Farrell, D., Remes, J., Agrawal, V., et al. (2003). New horizons: Multinational company investment in developing economies, McKinsey Global Institute. Retrieved from: http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_a nd_growth/new_horizons_for_multinational_company_investment 21
- 22. References (continued) • Fontevecchia, A. (2012, January). Time to buy Starbucks? K-cup, same-stores sales surging. Forbes, 28-28. Retrieved from: http://necbproxy.egloballibrary.com/login?url=http://web.ebscohost.com /ehost/detail?vid=3&hid=112&sid=c30de638-4135-4e0a-bbf4- fe418be33dc0%40sessionmgr104&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d# db=buh&AN=70566309 • Harrington, D. (2011, June 5). Starbucks coffee 2011-2012 – Starbucks locations expand, Starbucks Revolution, New Starbucks logo. Espresso & Coffee Guide. MBA525 Team 5 Presentation Retrieved from: http://www.espressocoffeeguide.com/2011/06/starbucks- coffee-2011-2012-starbuck-locations-expand-starbux-revolution-new-starbucks- logo/ • Hsu, T. (2012, June 15). Starbucks to upgrade food by buying artisan bakery chain. Los Angeles Times. Retrieved from: http://articles.latimes.com/2012/jun/05/business/la-fi-starbucks-bakery- 20120605 • James, D. (2007, July 30). Investigating the trend of skim pricing. Helium, Retrieved from http://www.helium.com/items/493518-investigating- the-trend-of-skim-pricing • Jargon, J. (2010). Slow down, Starbucks tells baristas. Wall Street Journal, Retrieved from http://www.theaustralian.com.au/archive/business- 22 old/slow-down-starbucks-tells-baristas/story-e6frg90x-1225938127889
- 23. References (continued) • Lehnat, S., Gore, D, Corn, M., Love, B., & Boggs, K. (2010). Starbucks coffee: 2011-2013 advertising & marketing plan. Retrieved from: http://samlehnert.com/wp-content/uploads/2012/02/starbucks.pdf • Marketwatch.com. (2012). Annual financials for Teavana Holdings, Inc. Retrieved from: http://www.marketwatch.com/investing/stock/tea/financials • McKinsey Quarterly. (2011). Starbucks’ quest for healthy growth: An interview with Howard Schultz. McKinsey Quarterly, 2, 34-43. Retrieved MBA525 Team 5 Presentation from: http://necbproxy.egloballibrary.com/login?url=http://web.ebscohost.com /ehost/detail?sid=81aff90f-a58e-4db9-bf60- 0878c8c2a3c5%40sessionmgr115&vid=22&hid=104&bdata=JnNpdGU9ZWhvc3Q tbGl2ZQ%3d%3d#db=buh&AN=60260234 • McWhinnie, E. (2012, January 4). Competition in the coffee industry is heating up. Wall St. Cheat Sheet. Retrieved from: http://wallstcheatsheet.com/trading- markets/competition-in-the-coffee-industry-is-heating-up.html/ • Microeconomics - Competing as Starbucks. (n.d). Microeconomics - Just another Edublogs.org site. Retrieved from: http://microeconomicsalberta.edublogs.org/competing-as-starbucks/ • Miller, C.C. (2010, March 24). Starbucks still sees growth, as well as dividends. Deal BookNew York Times. Retrieved from: http://dealbook.nytimes.com/2010/03/24/starbucks-still-sees-growth-as-well- 23 as-dividends/
- 24. References (continued) • Mohammed, R. (2009, August 24). Starbucks’ new pricing strategy: The beginning of the end?. Pricing for Profit, Retrieved from: http://www.pricingforprofit.com/pricing-strategy-blog/starbucks-new-pricing- strategy-beginning.htm • Morrison, M. (2011). Bang for its Starbucks: Hits No. 3 despite limited spend. Advertising Age, 82(18), 1-100. Retrieved from: http://web.ebscohost.com/ehost/detail?sid=143615dc-c327-4e02-af1b- 1764da507bd2%40sessionmgr15&vid=4&hid=119&bdata=JnNpdGU9ZWhvc3QtbG MBA525 Team 5 Presentation l2ZQ%3d%3d#db=buh&AN=60405463 • O'Farrell, R. "Starbucks Pricing Strategy", Demand Media retrieved from: http://smallbusiness.chron.com/starbucks-pricing-strategy-10544.html • Our Heritage | Starbucks Coffee Company. (n.d.). Starbucks Coffee Company. Retrieved November 12, 2012, from http://www.starbucks.com/about-us/our- heritage • Parikh, R. (2012). America’s energy dependency: will government regulation of caffeine bring the caffeine companies to a crash? William & Mary Business Law Review. (3)2. 644-666. Retrieved from: http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1043&context=wmblr • Patton, L. (2012, Nov. 14). Starbucks with Teavana moves Schultz beyond coffee roots. Retrieved from: http://www.bloomberg.com/news/2012-11-14/starbucks- 24 to-buy-teavana-for-620-million-to-add-tea.html
- 25. References (continued) • Saporito, B. (2012, June 25). Starbucks’ big mug. Time. (179)25. 51-54. Retrieved from: http://web.ebscohost.com/ehost/detail?sid=81aff90f-a58e-4db9-bf60- 0878c8c2a3c5%40sessionmgr115&vid=27&hid=10&bdata=JnNpdGU9ZWhvc3Qtb Gl2ZQ%3d%3d#db=buh&AN=76906112 • Shook, J. (2009, August 07). [Web blog message]. Retrieved from: http://www.lean.org/shook/DisplayObject.cfm?o=1085 MBA525 Team 5 Presentation • Starbucks Corporation SWOT Analysis. (2012). Starbucks Corporation SWOT Analysis, 1-11. • Starbucks Corporation. (2012, November 01). Starbucks reports record fourth quarter and fiscal 2012 results [Press Release]. Retrieved from http://news.starbucks.com/article_display.cfm?article_id=713 • Starbucks. (2011). Our Starbucks Mission. 1-32. Retrieved from: http://globalassets.starbucks.com/assets/eecd184d6d2141d58966319744393d1f. pdf • Starbucks. (n.d). | Microeconomics discussionpuneetaujla. Retrieved from http://puneetaujla.wordpress.com/starbucks/ 25
- 26. References (continued) • Starbucks: new pricing strategy aims to preserve both quality and quantity. (2009). MarketWatch: Global Round-up, 8(10), 40. Retrieved from http://web.ebscohost.com/ehost/detail?vid=3&hid=13&sid=f606cfa5- eef1-4883-af2b- ab9794bc7cab%40sessionmgr115&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ %3d%3d#db=buh&AN=44705820 MBA525 Team 5 Presentation • Teavana Holdings. (2012, Sept. 4). Teavana Holdings, Inc.announces second quarter fiscal 2012 financial results. Retrieved from: http://ir.teavana.com/phoenix.zhtml?c=246215&p=irol- newsArticle&ID=1731304&highlight • Wang, H. (2012, August 10). Five things that starbucks did to get china right. Forbes, Retrieved from: http://www.forbes.com/sites/helenwang/2012/08/10/five-things- starbucks-did-to-get-china-right/ • Yousef, H. (2010, January 20). Starbucks posts grande earnings. CNNMoney.com. Retrieved from: http://money.cnn.com/2010/01/20/news/companies/Starbucks_earnin 26 gs/index.htm
Notas del editor
- *Speaker Notes*Hello everyone! A warm welcome to all the new members of the Starbucks Board of Directors and congratulations on being elected!My name is Denisa Dobrin and I am joined here by my superstar teammates: Colby Foster-Baker, Jen Allison, Geoffrey MacLennan and Renee Volk. Together, we form the magnificent “Team 5”. You will hear from each of us today in the order I have mentioned.Well, let’s get started! “Team 5” is excited to present you a comprehensive overview of Starbucks, which we have entitled: “Starbucks: Now and beyond”. We have designed this presentation to give you a better understanding of the primary issues facing the organization today. Our research and analyses will also include a forecast of how the company may perform in the next 12 months given the current economic climate.
- *Speaker Notes*I will start our today’s agenda with a brief review of the history of Starbucks and an evaluation of the current status of the organization. My teammate, Colby, will follow up with an introduction in the topic of market size. She will focus on analyzing the current market demand for Starbucks products and services and assess the firm’s current pricing strategy. Next, Jen will dive deeper in the subject of market size and discuss to what extent the company’s current scale of operation and production is appropriate, given the firm’s market size and potential. Our team’s recommendations for potential changes to the company’s cost structure will be included in this section. These changes are meant to increase efficiency and we hope you will find them not only useful, but also applicable. Finally, Geoff will talk about the market structure of Starbucks, projecting how the company’s business prospects will be affected in the next 12 months. It is here that you will hear more about Monopolistic Competition and the way Starbucks is preparing to handle the all feared and fast approaching Fiscal Cliff. Geoff will also do a quick look at the impact of government regulations on the Starbucks’s daily operations and market structure. Renee has the last word and the all important job of providing you with a final review of our presentation, which includes conclusions, recommendations and answers to any questions you may have.
- *Speaker Notes*First, a few words about the Starbucks Company. Starbucks serves millions of cups of coffee each year, all around the world, while offering an upbeat and comfortable environment. The first Starbucks store opened in 1971 in the Seattle market. Starbucks started as a roaster and retailer of whole bean and ground coffee, tea and spices (Our Heritage). Today, Starbucks is a national and global success with more than 18,000 stores across 60 countries (Starbucks Corporation, 2012). Starbucks has experienced some difficult times when the Global Financial Crisis struck in the fall of 2008. Since then, Starbucks has seen a steady incline in the stock price and financial performance. In less than four years, Starbucks stock price has been as high as $62.00 per share, and revenues have increased almost 36 percent since 2009 (Marketwatch.com, 2012). This can be attributed to an expansion of their product line into food products and juices, as well as a global expansion into Asia. Now I will invite my teammate, Colby to give you some details about Starbucks Market Demand and Pricing strategy.
- *Speaker Notes*In fiscal year 2012, Starbucks’ net revenue reached a record $13.3 billion, representing a 14% increase over 2011 net revenue. Much of that increase was due to a 7% increase in global sales. This represents a substantial increase considering the current state of the global economy. A significant portion of Starbucks’ 2012 growth and sales have come from countries outside of the United States, particularly in the China/Asia Pacific regions. 2012 Sales in China/Asia Pacific grew by 15% due, in large part, to an 11% increase in the number of transactions (Starbucks Corporation, 2012). This increase in daily sales and total sales per ticket indicates strong market demand internationally. Starbucks wisely chose to capitalize on market-seeking foreign direct investment opportunities. In 2012 alone, they opened 154 new stores in China/Asia Pacific (Starbucks Corporation, 2012). Over the past 12 years, Starbucks has deployed a carefully planned strategy to build market demand in the wholly untapped Asian market (Wang, 2012). They expect the strong short run market demand to continue into fiscal year 2013 and are planning to open an additional 600 new stores in the region. In 2011, Starbucks became the third largest American restaurant chain, behind only McDonald’s and Subway. They surpassed Burger King and Wendy’s, and did so while spending considerably less in advertising than these companies. Starbucks was able to increase revenues in 2010 by starting to offer value combo meals, which consist of coffee and breakfast items such as pastries or sandwiches. Starbucks’ combo meals are higher priced than dollar-value items at other restaurant chains. “By nature, Starbucks is poised to gain in one of the fastest-growing dayparts in restaurants: breakfast. “Breakfast is the final frontier of growth in this country, and coffee is growing as well," said UBS restaurant and packaged-food analyst David Palmer” (Morrison, 2011).
- *Speaker Notes*Starbucks’ continued focus on broadening their product and service offerings only serve to increase overall market demand. Most recently, they released the Verismo™ System by Starbucks, a single-serve home brewer that is “now available at more than 6,400 locations including participating Starbucks retail stores in the US, Canada and select international markets, Verismo.com, and specialty retailers in the US and Canada” (Starbucks, 2012). The Verismo™ attempts to extend their reach past their restaurants and prepackaged drinks and into consumer’s home. This market, while not wholly untapped, is up-for-grabs as many consumers jump onto the single serving beverage craze. Due to Starbucks’ premium pricing, many consumers limit their purchases but, with the ability to brew Starbucks-level beverages at home, many will opt for this at-home brewing system. In August 2012, Starbucks announced the expansion of production and distribution capacity of their branch of high-end specialty juices, Evolution Fresh™. Additionally, they opened two new Evolution Fresh™retail locations in Seattle, Washington and San Francisco, California. Clearly, Starbucks is not content to be largest specialty coffee retailer but intends to be provide specialty beverages of all kinds to appeal to a larger share of the market “Starbucks is something of a corporate paradox. The company is a multinational giant and growing, especially through branches overseas and new packaged goods in the grocery aisle. At the same time, it is able to introduce risky ideas quickly, systematically, and sometimes idiosyncratically, much like a startup” (Certner, 2012, p. 115).On November 14, 2012, Starbucks announced the acquisition of Atlanta-based tea retailer Teavana Holdings Inc. for the total of $620 million cash (Wall Street Journal, 2012). This purchase further demonstrates Starbucks strategy of broadening their business into other areas. Teavana represents great demand potential for Starbucks over the next 12 months. Revenue has grown at least 34 percent annually, and at least 36 percent increases annually in gross income, since 2009. Teavana reported annual revenues in 2012 of $168.1 million, and gross income of $101.27 million (Marketwatch.com, 2012). Starbucks already owns Tazo brand tea, having purchased them back in 1999. These two distinct brands give Starbucks the ability to position themselves to be major players in the beverage industry on a global level going forward.
- *Speaker Notes*Starbucks’ pricing strategy is relatively simple, yet it works because of the consistently excellent experience that they are able to deliver to their customers. When Starbucks first entered the market, their pricing strategy could be defined as “skim-pricing.” Typically, a new product enters the market at a high price and, as demand lessens and competition increases, prices are dropped. This tactic is used primarily for the short term with new products in order to capitalize on the excitement of newly launched products. Surprisingly, Starbucks broke the “skim-pricing” mold in that they did not eventually lower their prices to better compete. “Instead of Starbucks prices going down, (…) competitor’s prices have risen and directly compete [with Starbucks] at the premium pricing level” (James, 2007). Due in part to their premium prices, Starbucks is viewed as a high-end cup of coffee and is the “leader of the coffee market. As an individual company, it controls several times more market share than any of its competitors. More than just a high-priced coffee shop, Starbucks offers a combination of quality, authority and relative value. (...) Starbucks' pricing strategy has a lot to do with how it positions itself as an authority on coffee, allowing the company to charge premium prices. Thus, when Starbucks introduces new products at higher prices, consumers are willing to pay extra without even having tried the products because they associate the Starbucks name with high quality” (O’Farrell). As they branch out into other products, such as home brewers and juices, Starbucks can benefit from their reputation as a high-quality leader.
- *Speaker Notes*Even as the global financial crisis became more of a factor in pricing strategies, Starbucks was able to sustain their premium-level prices. In 2009, they lowered the cost of their standard drinks such as coffees and lattes by $0.05 to $0.15 in response to economic concerns. At around $2.40 per standard drink, that only represents a decrease of around 2% to 6%. At the same time these decreases in standard drink prices occurred, Starbucks raised prices on specialty drinks by up to $0.30 which represented a 8% increase. They hoped to preserve quality and quantity by balancing the menu’s offering and impact. Around this time, Starbucks also contemplated offering a low cost $1 coffee to compete with outlets like McDonald’s but decided against it. The general feeling was that their loyal customers would not migrate to McDonald’s simply over price (“Starbucks: new pricing,” 2009). Starbucks has successfully built a loyal customer base that is not swayed by price alone. As Starbucks knows well, most markets are not dominated by companies that focus on the lower end of the price scale. “In fact, it is often noted (with surprise!) that the dominant player in a given market is able to maintain its dominance even with higher prices. The classic example of this is Starbucks, which de-commoditized the coffee market. Starbucks replaced the fifty-cent cup of Joe with a $2.00 "low end" product, and successful offerings as high as $4.95” ("6 tips to de-commoditization," 2012). Starbucks is a prime example of a company that has established a long term pricing strategy that is built on quality focus, allowing higher premium pricing. Starbucks pricing strategy is a strong one since they have effectively established themselves as the quality and innovation leader. Customers worldwide trust the Starbucks brand and, therefore, they are able to keep prices relatively static. Static pricing allows for increased revenues through cost reduction efforts. “Findings suggest that there are enormous opportunities for [multinational] companies to create value by taking full advantage of falling barriers in regulation, transportation costs, communication costs, and infrastructure” (Farrell, 2003). Starbucks is positioned to increase revenues by taking advantage of these opportunities and continuing with their well established and profitable pricing strategy.
- *Speaker Notes* Starbucks’ current scale of operation consists of approximately 17,000 stores which serves nearly 60 million customers worldwide in 55 countries (Harrington, 2011). They currently have 160,000 employees, 5 company-owned coffee roasting plants, 24 co-manufacturers, and 1 tea processing plant. Starbucks’ distribution is quite impressive with 9 regional distribution centers, 48 central distribution centers, 6 “green coffee” warehouses, and make roughly 2.7 million deliveries a year (Cooke, 2010). We feel Starbucks’ current scale of operation is appropriate given its market size and expected global growth potential of around 10-12% over the next few years.
- *Speaker Notes* This chart shows that as of 2010, Starbucks’ market size was around 33 percent of the store purchased coffee market in the United States, (Lehnart, 2010). Local & Regional Specialty Coffee Shops had 47%, Convenience Stores & Gas Stations had 13%, and McDonalds had 7% of the market share.
- *speaker notes* As of 2011, it appears that Starbucks’ fastest growing competitor in the market is Dunkin’ Donuts. Starbucks has domestically maintained 32.6 percent of market share compared to 23 percent for Dunkin’ Donuts (McWhinnie, 2012). Starbucks has been experiencing strong market share internationally and has been expanding rapidly in China with the company owning 70% of the coffee market (Harrington, 2011). Starbucks has also bought renowned tea company, Teavana, to boosts its market in tea (Patton, 2012). Other areas of expansion into the market include: K-cups, new breakfast foods, utilizing La Boulange to improve their food market, and the Versimo coffee maker. With newer innovations Starbucks can continue to compete and surpass the competition. Starbucks appears to be positioned well to take on their competitors like Dunkin Donuts, and are already taking steps to improve upon their overall customer experience. The company is integrating a rewards card for when you buy products at either a Starbucks store or at the grocery store. We believe this effort to link the sales of at home products with in store rewards will bode well for building market share in both sectors for Starbucks over the next 12 months. It does not appear that Dunkin Donuts or any of their competitors have a similar program to this scale.
- *speaker notes* When the economic crisis hit in 2008, Starbucks’ cost structure was exposed as being inadequate. While sales were in decline by 10 percent, the supply chain expenses in the United States alone rose 10 percent. Starbucks store growth had exceeded their supply chain models’ capability. Combining this with rapid store expansion that was cutting into existing store sales, Starbucks had a huge problem on their hands that needed to be addressed immediately. Starbucks’ assessment of their supply chain revealed that up to 70 percent of their operating supply chain costs were tied to outsourcing agreements (Cooke, 2010). Starbucks did this because of the rapid expansion of locations needing to have supplies shipped to them quickly. Starbucks implemented changes in their supply chain functions that globalized the process and greatly improved efficiency while lowering costs. In addition to supply chain improvements, Starbucks imposed additional cost cutting measures. From mid-2008 through 2009, Starbucks closed 800 stores in the United States and 100 additional stores internationally (Yousuf, 2010). By revamping their operations, Starbucks was able to save $580 million in expenses (Yousuf, 2010). We believe that Starbucks is positioned well with their cost structure. The purging of excess costs in 2008 and 2009 made them a much more efficient company. Their supply chain operation is now global, giving them an advantage against their competitors. As Dunkin Donuts starts to expand more outside of their northeast United States concentration, they will need to develop logistical procedures that will allow them to responsibly control costs. This can only bode well in the long run for Starbucks as long as they can continue control these costs.
- *speaker notes* Every company can face the possibility of the “shut down” rule. When the cost of the product exceeds sales then a company needs to find a way to remarket that product or pull it out of the market. Starbucks is well known for their popular coffee, but what about their food and tea products? Food sales at Starbucks have grown by double digits over the last two fiscal years. Starbucks has also teamed with La Boulange Bakery to improve their food line and expand their company beyond coffee. Tazo tea sales are about $1.4 billion a year and sold in grocery stores as well as the popular coffee shops. The addition of the popular Teavana will also strengthen tea sales. Looking at the success Starbucks is having with these products, it does not appear that the “shut down” rule will apply in the short run. They will need to review viability of each of these items over the long run to gauge how they are performing and whether they need to exit that area of the market. I will now turn the presentation over to Geoffrey who will go over Starbucks’ market structure.
- *Speaker Notes*Thank you, Jen. I’d like to talk about Starbucks market structure. Starbucks operates within a Monopolistic Competition market structure within the coffee industry. A Monopolistic Competition structure has four characteristics. First, there are no major barriers to enter into the industry. Second, there are many competitors within the market, in large part because there is such a high demand for coffee. Third, while there are many competitors in the industry, each one has a slight differentiation of their product that tries to set them apart from the rest within the industry. And last, each firm has the ability to make independent decisions regarding their pricing and output levels with their marketplace.
- *Speaker Notes*Based upon these parameters, how can we determine that Starbucks fits into the Monopolistic Competition structure? First, we look at the barriers to entry. It is very easy to enter into this market, whether you are a large corporation like McDonald’s, or a small start-up business. Next we look at the differentiation between Starbucks’ competitors. Starbucks is competing with four basic groups within the coffee industry. First, they are competing with fast food chain restaurants like McDonald’s, offering coffee as part of their menu. Starbucks also competes with national coffee-donut shops like Dunkin Donuts. Like the fast food restaurants, these places offer their product at lower prices than Starbucks, but tend to have less coffee options and more food items to choose from. Starbucks also competes with premium coffee chains similar to them like Peet’s and San Francisco Coffee House, as well as independent coffee houses.
- *Speaker Notes*Starbucks feels that they are different than any other coffee provider in the industry. They take pride in differentiating from their competitors by offering a premium product and experience to their customers. Starbucks sells premium coffee drinks that can be enjoyed in an up-scale, relaxing environment. Their baristas offer assistance to the customers, enhancing the Starbucks experience. CEO Howard Schultz has stated he feels that a visit to Starbucks should involve “romance and theater”, and that “it is a far cry from the pit-stop-like experience of eating a meal at the world’s biggest fast food chain” (The Economist, 2008). This experience is, in part, what allows Starbucks to charge higher prices for their coffee than their competitors, helping to drive revenues higher for the company. Starbucks also differentiates themselves by offering a customer loyalty programs and at home products that customers can buy on grocery store shelves.
- *Speaker Notes*An important topic that needs to be discussed when analyzing any company going into 2013 is the impending U.S. Fiscal Cliff. On January 1, 2013, unless a deal can be struck between Congress and the White House, automatic tax increases and budget cuts would kick in to help alleviate growing debt concerns. Tax increases and budget cuts could slow down the fragile recovery within the economy, sending us back into a recession. This could have a substantial impact on consumer spending in the United States over the next twelve months. CEO Howard Schultz believes that they are positioned well to handle such an event if it were to occur. In the fourth quarter of 2012, Starbucks posted stronger than expected earnings, and raised their expected earnings per share for 2013. They believe that they will be able to achieve 15 to 20 percent growth globally in 2013 (Booton, 2012). Starbucks believes that their brand has resilience within the U.S. market to handle an economic downturn should it occur in 2013. Starbucks is also in the midst of experiencing high growth within the Asian region. In Asia, they experienced revenue growth of 23 percent in the fourth quarter of 2012 compared to the fourth quarter in 2011. (Starbucks,2012). Starbucks’ has a strong management team that believes in taking a responsible approach to running a corporation, and believes the government should take the same approach. CEO Schultz has been quoted this month stating that America needs to take a responsible approach to ensure that the country’s fiscal problem is fixed both in the short run and the long run (Feitelberg, 2012).
- *Speaker Notes*Finally, I’d like to discuss the impact of government regulations upon Starbucks. Starbucks’ corporate policy states that they are “committed to full compliance with the laws, rules, and regulations of the countries in which it operates” (Starbucks.com, 2011, p.12). Recently, the U.S. Food and Drug Administration cracked down on the sale of alcohol-caffeine drinks, due to the masking effect of caffeine upon the depressant effects of alcohol (Parikh, 2012). This leads to questions as to whether this could lead to further regulation of caffeine products. Some government agencies have targeted trying to limit the sale of drinks in excess on eighty milligrams of caffeine to anyone under the age of nineteen (Parikh, 2012). It does not appear that there is any type of regulatory attention aimed at coffee at the moment. It does appear the FDA is looking at the marketing and distribution of caffeinated products at children. Starbucks will want to be aware of this.Now, I’d like to hand off to Renee for our recommendations and conclusion.
- *Speaker Notes*Recommendations for Starbucks would be to grow their presence in the Asian markets. They have already started to grow into China and Asia but there is much more room for growth. The middle class in China is expected to double by 2025 and their economy is growing quickly. The gross domestic product growth of 10.3% in fiscal year 2010 and 9.2% in fiscal year 2009 and income has risen thus increasing their disposable income (Starbucks Corporation SWOT Analysis,2012). The increase in income ultimately leads to an increase in demand for goods in the country. Additionally, more than 160 cities in China have population greater than one million. All of these factors together will allow for Starbucks to increase their brand and satisfy the growing demand. Within India, the market primarily consist of tea drinkers however the market is expanding and coffee consumption is increasing due to changes in the demographics and rising middle class population. According to the Tea Board and Coffee Board of India, they consumed around 700,000 tons of tea in 2010 compared to 75,000 tons of coffee (Starbucks Corporation SWOT Analysis,2012). If Starbucks leverages their strong brand and their current market presence, they can expand and succeed in the fast growing Asian markets.
- *Speaker Notes*Within 2012 alone, Starbucks has expanded into three new markets offering new products such as specialty juices, teas, and at home brewing options for customers. Not to mention the 14 % revenue increase from 2011 to 2012 shows the demand for Starbucks products will increase over the next 12 months. Part of their strength and reason for demand is their simple yet effective pricing strategy. They have been able to build a brand and atmosphere customers are willing to pay for and keep coming back for. Starbucks innovation, quality products, and well respected brand have allowed them to keep prices static thus keeping customers happy. While the coffee industry as a whole is crowded with plenty of options, Starbucks has carved out their niche as a premium product that allows them to successfully charge higher prices for their products. Their aggressive growth projections, particularly in emerging markets, should allow them to maintain the success they have had operating within this structure.
- *Speaker Notes*Thank you for watching our presentation and we're looking forward to your comments and questions on the discussion board!