Starbucks in 2009

STARBUCKS IN 2009 Starbucks issues and causes Starbucks share price went down from the peak of $40(October 2006) more than 75% over the next two years. The sale and operating profits decreased 73. 1 million dollars compared to the last year in 2008 (Table 1 in the Appendix). The growth rate of Starbucks store sales decreased 8% in 2008 (Starbucks Corporation, 2008). 60. 00% 50. 00% 40. 00% 30. 00% 20. 00% 10. 00% 0. 00% 2005 2006 2007 2008 ROA ROE The chart above shows the ROA (return on assets) and ROE (return on equity) ratio of Starbucks has generally gone down between 2005 and 2008.

STARBUCKS IN 2009 3 Following are five main factors that caused Starbucks downturn in 2008: 1. Economic environment—Great Recession The global economic decline began in 2007 and took a sharp downward turn in September 2008. Due to this recession, each U. S. household lost an average of approximately $5,800 in income, and gross domestic product declined 6. 2 percent annualized (PEW, 2008). 2. Competitors Some independent coffee shops, such as Caribou Coffee (U. S. ), have imitated the operating model of Starbucks and have expanded and become national chains.

In addition, fast food chains, including McDonald’s, Burger King, and Dunkin’ Donuts, started to provide coffee and get favorable comments.

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Consumer performance

Customers, especially coffee-lovers, became connoisseurs through the education process of coffee, which is a part of “Starbucks Experience”. Those educated customers would look for superior alternatives to satisfy the appetite. Another factor that affects sales is local preference. Customers could prefer different flavors and different types of coffee in different regions and areas.

Ignoring the custom is the main aspect that leads to the failure of Starbucks in Australia. STARBUCKS IN 2009 4 4. Excessive store expansions One of Starbucks’ operating strategies is to increase its market share by continuing to open new stores in the existing market, and expanding stores in the new market to support its long-term strategy. During the recession, Starbucks did not slow down the expansion which resulted in 300 store closures and 6700 job losses in 2009. In 2008, cost of sales increased from $3999 million to $4645 million from the previous year. The store operating expenses have increased $528. 0 million between 2006 and 2007; and the long-term debt has also increased from $2. 7 million in 2006 to $550. 9 million in 2007 (Table 1 in the Appendix). 5. “Starbucks Experience” brand dilution Although Starbucks has already created a distinguished mission and value for the last twenty years, consumers’ perception towards the “Starbucks Experience” has changed rapidly. Consumers are becoming too familiar with the brand and consider Starbucks’ product overpriced compared to other coffee stores in the market. Many questions arise to if consumers really value and recognized the “Starbucks Experience”.

Starbucks current strategies and evaluation

Rediscover and Revitalize Starbucks Experience The “Starbucks Experience” includes the high quality coffee beans, employee involvement, community relations, social purpose, the layout and design of the stores, STARBUCKS IN 2009 5 and Starbucks location strategy. Howard Schultz’s strategy is to redefine the core brand value. Although the company has a well-established image in the market in the past twenty years, the same distinctiveness and concept might not have the same appeal to the consumers in the second decade of the twenty first century. . Revise mission statement and objectives: According to the Starbucks Corporation report for Fiscal Year 2008, Starbucks aims to establish itself as one of the most recognized and respected brands in the world through continuing expansion of its retail operations, growing its specialty operations, and pursuing other opportunities by introducing new products and developing new channels of distribution. This strategy shows that Starbucks place their attention on the scale and leading position of the company, and underestimate the importance of branding and differentiation.

Both the fast expansion and over diversification would hurt the brand concept and cover the outstanding features, which could be proved by the decreased gross margin showed in the following graph. STARBUCKS IN 2009 6 Gross Margin of Starbucks 0. 53 0. 52 0. 51 0. 5 0. 49 0. 48 0. 47 0. 46 0. 45 0. 44 2006 2007 2008 Gross Margin 3. Re-emphasize core value Although one of the “Starbucks Experience” location strategies is to cluster 20 or more stores in each urban hub, Howard Schultz have re-emphasized the core value of the company and reduced store expansions in 2008.

Under operating expenses, it shows the total of $266. 9 million in restructuring charges as the company is reducing retail stores that are not profitable. The total net stores opened in United States were only 445 in 2008 year ended, compared to 1065 net stores opened in 2009 year ended. Starbucks also closed 64 stores in Australia due to the highly competitive environment of European culture influences. Instead of opening more retails in the city, the company has increased the drive-thru stores in the suburban locations in the U.

S. and Canada, with approximately 35 percent and 31 percent of growth between 2007 and 2008. The decision of restructuring stores in 2008 cause a great lost in the company. However, the changes were necessary for the company to re-focus and re-define its core value of “Starbucks Experience” which leads the company to a fresh start in the following year. STARBUCKS IN 2009 7 4. Reconnect with customers through community projects and social responsibility “Perhaps we have the opportunity to be a different type of global company.

One that makes a profit but at the same time demonstrates a social conscience”, this was Schultz’s vision for the company and showed his concern for re-establishing Starbucks social responsibility. In 2008 Starbucks held their annual meeting in New Orleans and used this as an opportunity to raise 10,000 volunteers to take part in various community projects to help rebuild this area. They have also created what they call Starbucks Shared Planet; which focuses on ethical sourcing, environmental stewardship and community involvement.

Starbucks knows how important it is to their customers that they are socially responsible and offer something different and outstanding in comparison to their competitors. 5. Review operating practices Starbucks operates in both company-operated and licensed retail stores, and provides packaged coffee, tea and other branded products through a licensing relationship with partners. Starbucks installed new coffee making equipment, which cost millions of dollars, to emphasis the “hand-made” feature. They also revised the food menu and removed the non-core products to avoid the conflict among concepts.

Around 84 percent of total net revenues during fiscal 2008 came from the company-operated retail stores. By maintaining and developing company-operated retail stores, it could help keep the leading position and the experience provided by Starbucks STARBUCKS IN 2009 8 based on the superior customer service to reflect personality and build loyalty. On the other hand, the strategy of licensing rights to operate retail stores and produce branded products through partnership improves the awareness of Starbucks and reduces barriers to developing new markets through the local advantage of partners.

Although it brought up the operating expenses both in U. S. and international markets, upgrading the coffee machine is a positive approach to keep consistency with the “Starbucks Experience” and Starbucks image. Once the coffee is made individually from freshly ground beans, the customers would notice the “hand-made” feature, which results in a different perception from other competitors. Since foodservice sales accounted for 17 percent of all products and Starbucks gained about 5 percent of total revenues through providing food in the U. S. market, food is still a crucial element of the business.

Therefore, it is necessary to seriously think about reinventing the food menu—distinguishing the conflicts and then removing the products that really affect atmosphere—rather than cancelling all the options. 6. Remain shareholder value Base on the annual report of Starbucks in 2007 and 2008, the company did not pay cash dividends to share holders, as well as in the near future (Starbucks, 2007&2008). The factors that influenced the stock price are comprised of company’s operational and financial performance, current and future industrial condition, and external economic situation. STARBUCKS IN 2009 9

In 2008, investors were concerned about the current situation of Starbucks as many companies were facing bankruptcy, the stock price went down quickly due to selling stocks to receive cash. In order to increase the confidence of shareholders, the CEO of Starbucks pronounced that company would keep forces on create long-term shareholder value. During the financial crisis, it was hard to let people believe in the future. Starbucks must make changes on their performance to satisfy the investors. However, the data shows that it was continuing deteriorated. The operating margin and net margin kept falling, which would disappoint shareholders. . 16 0. 14 0. 12 0. 1 0. 08 0. 06 0. 04 0. 02 0 2005 2006 2007 2008 Operating Margin Net Margin

Re-emphasize employee values to the company

After Schultz returned as CEO, he was driven to reignite his commitment to his employees in which he referred to as partners. In the past the company has done many STARBUCKS IN 2009 10 things to insure a workplace that people would be proud to work for. Schultz offers full health care benefits to all employees including part time; by doing this the company has dramatically lowered their turnover rate compared to other companies in the industry.

During the hard time of reduced revenues Schultz realized the importance of bringing the full “Starbucks Experience” to each and every customer, and to do that he needed to have dedicated employees. Losing a knowledgeable and trained barista meant losing their valuable customer relationships that they have created. Schultz took human resource very seriously and made sure to meet with all levels of the company to reconsider and realign their purpose and principles and re-establish their connection with their customers.

From Schultz’s perspective focusing on and improving the “Starbucks Experience” was just as important, if not more important than number crunching. Analysis and recommendations It is important for Starbucks to utilize three main stream strategic tools to see the issues of the organization and make action orientated plan. 1. SOAR analysis Strengths

• • • • Strong business ethic Consistency within stores Many locations, equalling convenience Well known brand recognition STARBUCKS IN 2009 11

• • • • • Clear positioning Loyalty to customers Strong company culture Quality of product International presence

Opportunities

• • • • • Continuous cooperation with local farmers Conducting more research before quickly penetrating area Recognize consumer behaviour regarding new trends in the coffee industry Focusing on potential competitors (McDonalds/Tim Hortons) Sponsorship of local community events Aspirations

• • Recreate “Starbucks Experience” Implement third place, “Home - Work - Starbucks” Results • • Measure by re-establishing SOAR every 3, 6, and 9 months Measured by aspirations becoming strengths and opportunities becoming results 2.

Competitive analysis Based on the Porter’s Five Force model, the competitive environment that Starbucks faces could be considered in following five aspects: STARBUCKS IN 2009 12 Bargaining power of suppliers—low Starbucks purchases large amounts of coffee beans directly from farmers all over the world, and they have built a relative stable relationship with some high quality coffee providers. Under this circumstance, the suppliers are at a disadvantage in the bargaining. Bargaining power of buyers—low Individual customers who consist of the majority of the target market usually do not have bargaining power, compared with a large corporation.

In addition, customers have gradually accepted the slightly higher price of Starbucks because of the increasing awareness that they are paying for not only the coffee and food, but also the service and experience. Threats of substitutes—medium The substitutes of coffee could be tea, juice, soft drinks, milk, and other kinds of drinks. Since the similarity among these groups is relatively low, especially for coffee-lovers, and the distinct flavor and functions, coffee is a special category.

However, considering the experience that Starbucks wants to provide to customers, some other retail stores, such as ice-cream stores, would also target on the same market, which is the substitute of the “Starbucks Experience”. STARBUCKS IN 2009 13 Threats of potential entrants—high Starbucks has a large amount of potential entrants, including ? New ventures that have plan to enter the market and become big corporations or national chains ? ? Local independent coffee shops that provide high quality imported coffee. Large national chains, such as Tim Hortons and Burger King, that start to serve gourment coffee and become high-end.

Since the entry barrier of the specialty coffee industry is relatively low, new entrants could share the market and develop their loyal customers without high technology and heavy investment. Rivalry among existing firms—high Most coffee-shop chains that provide high-end coffee and relaxing experience would be considered as existing competitors of Starbucks. The competitive situation would vary enormously from country to country. The most typical and powerful competitors are Caribou Coffee, McDonald’s, and Dunkin’ Donuts. ? Caribou Coffee is the nearest competitor in the U. S. arket, which has 495 coffee shops in 15 states and ? In 2001, McDonald’s-run coffee counters were placed inside of McDonald’s stores, offering espresso drinks as well as teas and pastries. Consumer Reports magazine rated McDonald’s regular coffee as better tasting than Starbucks as well as other STARBUCKS IN 2009 14 national competitors 6 years later. In January 2008, McDonald’s announced it would begin installing coffee bars, called McCafe throughout its US stores, and priced , these drinks between $1. 99 and $3. 29. By comparison, Starbucks’ comparable drink versions were priced between $2. 65 and $4. 5, a premium of approximately one-third (Seaford & Culp & Brooks, 2008). ? Starbucks considered Dunkin Donuts as an indirect competitor that competed within the lower-end convenience-oriented fast-food market; however, Dunkin Donuts pursued an aggressive growth strategy that shifted its positioning to coffee, and reached the top selling retailer of coffee-by-the-cup in America at 2. 7 million cups a day by 2006 (Seaford & Culp & Brooks, 2008). Besides, Starbucks also needs to grab market share from Nescafe and Lavazza who introduced sophisticated easy-to-use coffee system that help customers make good coffee at home. . Value chain analysis Firm Infrastructure The “Starbucks Experience”, including the store design and layout, involves a unique experience that the consumers will not receive it anywhere else. Starbucks also incorporates local stories and culture when designing the store; this creates a community involvement and more personal experience for the customers. Customers who buy Starbucks product are not only purchasing a simple beverage, they STARBUCKS IN 2009 15 are purchasing an experience and bring back the value for the company.

Human Resource Starbucks believes in a workplace where people are treated equally and respectfully; also to inspire them and to share in its success. The company offers extensive training for their employees, to involve them in the company culture. Starbucks creates value and company morals for their employees by providing them with great health benefits and empowering them in the decision making process. Employees then create value for the company in return by selling Starbucks product. Technology Development Starbucks is always trying to be innovated in the market by introducing new technologies and creative products.

The POS system provides efficiency when placing customer orders and it also detects sales on specific products for managers to monitor certain sales patterns. Starbucks’ Verismo machine also plays an important part of the company’s technology development by providing fast production of high quality beverage to their customers. Procurement Starbucks has a huge buying power internationally and has a great long-term relationship STARBUCKS IN 2009 16 with the local coffee beans suppliers. This helps the company control costs, in turn being able to create greater value and profit for the organization.

Operations From selecting and searching high quality coffee beans all over the globe to the cup of coffee prepared by certified Baristas; Starbucks’ operation process creates a standardized guideline all across the organization by the efficient service from all level of employees and management. Outbound logistics Starbucks’ distribution system is expansive, including the storefront retail stores, licensed products and brand, as well as airport terminals. The company also offers mobile apps, and loyalty cards for regular customers to provide efficiency and show appreciation of their business to the company.

Marketing and Sales In order to provide greater consumer value, Starbucks has created many loyalty programs for return customers as well as frequent promotions and new flavored beverages to keep its product interesting. The company also focuses on holiday season products such as holiday flavor beverages and merchandises to add value for the existing products. STARBUCKS IN 2009 17 Recommendation: Considering the increasing average price of coffee beans resulted from the resource shortages, Starbucks would face a higher costs of material and more powerful suppliers.

Planning vertical integration to unite or own the valuable farms and plants could effectively guarantee the supply and control costs. Maintaining a clear brand image and position and holding the principles and concepts that have long been implemented are effective approaches to survive Starbucks within the fierce competition. The unfavorable opinions of customers towards VIA instant coffee make it clear that aggressive expanding and changing for competition would confuse consumers and lose market.

Since in-store atmosphere, free Wi-Fi, and considerate customer service are no longer the unique features of Starbucks, it is necessary to create new ideas to develop “Starbucks Experience” that makes Starbucks different. Figuring out more ways that are consistent with the core value of the brand to integrate and re-launch the concept of “Starbucks Experience” to motivate customers by turning familiar things new. STARBUCKS IN 2009 18 Appendix Table 1. The table of figures showed in the graphs: 2008 ROA ROE Gross Margin Operating margin Net Margin 12. 67% 8. 88% 0. 470 0. 057 0. 036 2007 29. 45% 19. 72% 0. 00 0. 132 0. 084 2006 25. 32% 20. 19% 0. 517 0. 136 0. 086 0. 145 0. 092 2005 23. 65% 22. 21% STARBUCKS IN 2009 19

References

Grant, R. M. (2010). Contemporary Strategy Analysis (seven editions). Chichester: John Wiley & Sons. PEW. (2009). The Impact of the September 2008 Economic Collapse. Retrieved January 31, 2013, from http://www. pewtrusts. org/our_work_report_detail. aspx? id=58695 Seaford, B. C. & Culp, R. C. & Brooks, B. W. (2008). Starbucks: Maintaining A Clear Position. Journal of the International Academy for Case Studies, 18(3), 39-57. Starbucks Corporation. (2008). Fiscal 2008 Annual Report.

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