Starbucks: A Global Coffeehouse Giant

Origins and Growth

● Founded in 1971: Starbucks began as a small coffee bean retailer in Seattle's

Pike Place Market, founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker.

● The "Third Place": The founders envisioned Starbucks as a "third place"

between home and work, a place for community and relaxation.

● Howard Schultz's Vision: In the early 1980s, Howard Schultz joined Starbucks

and was inspired by Italian coffeehouse culture. He led a transformation,

emphasizing espresso-based drinks and a welcoming atmosphere.

● Rapid Expansion: After acquiring Starbucks in 1987, Schultz spearheaded

aggressive expansion, opening stores across the United States and eventually

worldwide.

● Public Offering: Starbucks went public in 1992, fueling further growth and

innovation.

The Starbucks Experience

● Premium Coffee: Starbucks is renowned for its high-quality coffee beans,

sourced from around the world.

● Diverse Menu: The menu offers a wide range of beverages, including espresso-

based drinks, brewed coffee, tea, and Frappuccinos.

● Food Offerings: Starbucks also provides a variety of food items, such as

pastries, sandwiches, and salads.

● Comfortable Ambiance: The coffeehouses are designed to create a cozy and

inviting atmosphere, encouraging customers to linger and socialize.

● Digital Innovation: Starbucks has embraced technology, offering mobile

ordering, payment, and loyalty programs.

Global Dominance and Social Responsibility

● Global Footprint: Starbucks has expanded into numerous countries, adapting to

local tastes and preferences while maintaining its core brand identity.

● Ethical Sourcing: The company is committed to ethical sourcing practices,

working with farmers to improve their livelihoods and protect the environment.

● Community Engagement: Starbucks supports various community initiatives,

including youth education and environmental conservation.

Challenges and Future Outlook

● Increased Competition: Starbucks faces competition from other coffee chains

and independent coffee shops.

● Changing Consumer Preferences: As consumer tastes evolve, Starbucks must

adapt to new trends and preferences.

● Economic Factors: Economic downturns can impact consumer spending and

affect Starbucks' business.

Starbucks: Company Structure and Strategy

● Global Expansion:

○ Opened largest Starbucks store (Reserve Roastery) in Shanghai, China

(Dec 2017)

○ Opened first store in Uruguay (April 2018)

○ Plans for 10 stores and 130 jobs in Uruguay by 2020

● Organizational Structure:

○ Uses Strategic Business Unit (SBU) structure

 ○ Regional Presidents report to CEOs and COOs (details in Exhibit 1, not

provided)

● Leadership:

○ Howard Schultz - Executive Chairman

○ Kevin Johnson - CEO and President

○ Regional CEOs for: Japan, China, Tata Starbucks (India)

○ COOs for each region

● Values/Vision/Mission:

○ Vision: "To be the premier purveyor of the finest coffee..."

○ Mission: Blends grand goals with catering to individual customers

○ See full statements on company website: https://www.starbucks.com/

● Operating Segments:

○ Americas (US, Canada, Latin America)

○ China/Asia Pacific (CAP)

○ Europe, Middle East, and Africa (EMEA)

○ Channel Development

Starbucks' Operational Breakdown

Segment Performance

● Americas: Dominant segment, contributing 70% of total net revenue.

● China/Asia Pacific (CAP): Significant growth potential, contributing 14% of

revenue.

● Europe, Middle East, and Africa (EMEA): Lagging behind other segments, with

5% of revenue.
 ● Channel Development: Includes sales through grocery stores, etc., contributing

9% of revenue.

● Other Segments: Non-reportable segments like Teavana and Seattle's Best

Coffee, contributing 2% of revenue.

Store Operations

● Company-Operated Stores: Account for 57% of total net revenue.

● Licensed Stores: More prevalent outside the Americas, accounting for 43% of

total stores.

Recent Performance (Q1 2018)

● Net New Stores: 700 stores opened.

● Overall Operating Income: Declined 1% due to EMEA segment's poor

performance.

● Americas Segment: Strong performance with 7% revenue growth and 2%

operating income growth.

● CAP Segment: Solid growth with 9% revenue growth and 20% operating income

growth.

● EMEA Segment: Lagging behind with 8% revenue growth but 11% decline in

operating income.

● Channel Development: Stable performance with 1% revenue growth.

Starbucks' Financial Performance and Industry Overview

Financial Performance

● Q2 2018:

○ Same-store sales increased 2% globally, 2% in the US, and 4% in China.

 ○ Revenue increased 14% to $6 billion.

○ Company-owned store revenue increased 15.1%.

○ Licensed store revenue increased 14.4%.

○ Focus on licensed stores in Americas and EMEA, company-owned stores

in China/Asia.

● Q1 2018:

○ Starbucks Rewards membership increased 11% to 14.2 million.

○ Mobile Order and Pay accounted for 11% of US company-operated

transactions.

○ Starbucks Card used for 42% of US and Canada company-operated

transactions.

○ Opened 700 net new stores globally.

○ Returned $2 billion to shareholders through dividends and share

repurchases.

● Financial Statements (2016-2017):

○ Revenue increased 5.02%.

○ Gross profit increased 4.25%.

○ Operating expenses increased 4.85%.

○ EBIT increased 3.04%.

○ Net income increased 2.38%.

Coffee Industry Overview

● Global Coffee Market:

○ South America is the major coffee-producing region.

○ Brazil is the largest producer and exporter.

 ○ Vietnam and Colombia are other major producers.

● US Coffee Market:

○ Largest market share with 45.8% of global retail coffee sales.

○ Starbucks and Dunkin' Donuts dominate out-of-home retail market.

● Coffee Consumption Trends:

○ Increasing consumption in China, UK, and Japan.

○ Average consumption: 1.64 cups per day.

○ Coffee consumption increases with age.

Starbucks' Financial Position and Industry Trends

Starbucks' Balance Sheet Analysis (2016-2017)

● Assets:

○ Cash and Short-Term Investments: Increased 19%

○ Accounts Receivable: Increased 13%

○ Inventory: Decreased slightly by 1%

○ Property, Plant, and Equipment: Increased 9%

○ Goodwill and Intangibles: Decreased by 10% and 15%, respectively

● Liabilities:

○ Accounts Payable: Decreased 1%

○ Other Current Liabilities: Decreased 18%

○ Long-Term Debt: Increased 23%

● Equity:

○ Retained Earnings: Decreased 6%

○ Paid-in Capital and Other: Increased 70%

US Coffee Market Trends

● Single-Cup Coffee:

○ Rapid growth from 2011 to 2016, reaching 41% of dollar sales.

○ Market has matured, and growth has slowed in 2017.

○ Household penetration of single-cup brewing machines peaked at around

30%.

○ Prices have declined to 10-year lows.

● Out-of-Home Coffee Consumption:

○ Sales increased 3.3% in 2016.

○ Low unemployment and economic growth are driving factors.

○ Shift towards single households and fewer children is contributing to

increased out-of-home consumption.

Starbucks' Competition and Dunkin' Brands

Competition in the Coffee Market

● Primary Competitors: Specialty coffee shops and quick-service restaurants

(QSRs)

● Major Rivals: Dunkin' Brands and McDonald's

● Market Share: Starbucks leads the market, but competition is intense, especially

outside the US where McDonald's holds a significant share.

Dunkin' Brands

● Core Business: Coffee and baked goods

● Strong Brand Loyalty: Ranked #1 in customer loyalty for 9 consecutive years

● Global Presence: Over 11,500 restaurants in 40 countries

 ● Diversified Offerings: Hot/cold coffee, baked goods, donuts, bagels, breakfast

sandwiches, ice cream, etc.

● Expansion Plans: Aiming to add 1,000 net new Dunkin' Donuts locations in the

US by 2020.

● Strategic Focus:

○ Maintaining and increasing morning sales (before 11 AM)

○ Strengthening afternoon sales through menu innovation and value offers.

Dunkin' Brands' Strategies for 2018

● Focus on Cold Beverages: Prioritizing Cold Brew, Iced Coffee, and Frozen

Dunkin' Coffee.

● Expanded Beverage Offerings: Introducing more espresso products and

premium tea and frozen beverage options.

● Breakfast Sandwiches: Emphasizing morning sandwiches, including

reintroducing popular items and offering flavored bacon.

● Donut Innovations: Leveraging seasonal holidays and ensuring availability of

best-selling donuts.

● Health and Wellness: Eliminating synthetic dyes from food and beverage menu.

● Value Offers: Launching Dunkin' Deals to attract customers.

McDonald's
● Strong Financial Performance: Increased global comparable sales, operating

income, and earnings per share.

● Shareholder Returns: Returned $7.7 billion to shareholders through dividends

and share repurchases.

● Investment in Technology: Modernizing customer experience and redefining

convenience.
 ● Global Expansion: Opening 1,000 new restaurants, primarily through

franchising.

Keurig Green Mountain and Dr Pepper Snapple Acquisition

● Strategic Acquisition: Keurig acquiring Dr Pepper Snapple to compete with

Coca-Cola and Starbucks.

● Market Expansion: Entering the global soda business and strengthening coffee

business.

● Industry Trend: Increasing demand for ready-to-drink coffees.

● Market Share: Keurig's market share in coffee pods declined from 40% to 23%

between 2013 and 2017.

Starbucks' Future Plans and Industry Dynamics

Starbucks' Strategic Initiatives

● Reserve Store Expansion:

○ Opening 20-30 Roasteries and 1,000 Reserve stores globally.

○ Expanding Reserve bar locations to 20% of total Starbucks stores.

○ Launching Princi bakeries in key markets.

● Enhanced Customer Experience:

○ Offering premium coffee experiences in Reserve stores.

○ Introducing new beverage and food offerings.

○ Leveraging technology to improve customer convenience.

● Employee Benefits and Welfare:

○ Increasing wages for US employees.

○ Expanding parental leave policies.

○ Investing in employee training and development.

Strategic Partnership with Nestlé

● Global Coffee Alliance:

○ Nestlé obtains rights to market Starbucks brands in at-home and away-

from-home channels.

○ Starbucks receives $7.15 billion and retains significant stake.

○ Collaboration on single-serve capsule systems.

Competitive Landscape and Future Challenges

● Intense Competition:

○ Dunkin' Brands' aggressive growth initiatives pose a significant threat.

○ McDonald's and other QSRs are expanding coffee offerings.

● Balancing Growth and Profitability:

○ Managing costs associated with store expansion and employee benefits.

○ Ensuring consistent quality and customer experience across different

formats.

● Navigating Changing Consumer Preferences:

○ Adapting to evolving consumer tastes and preferences.

○ Staying ahead of trends in the coffee industry.

Starbucks' future success will depend on its ability to execute its strategic initiatives,

maintain its brand reputation, and effectively navigate the competitive landscape.

PESTLE Analysis for Starbucks

Political Factors

● Government Regulations: Starbucks, like any multinational corporation, is

subject to various government regulations, including labor laws, tax regulations,

and food safety standards.

 ● Trade Policies: International trade policies, tariffs, and quotas can impact the

cost of sourcing coffee beans and other ingredients, as well as the export of

Starbucks products.

● Political Instability: Political instability in countries where Starbucks operates

can disrupt supply chains, increase operational costs, and impact consumer

sentiment.

Economic Factors

● Economic Cycles: Economic downturns can lead to reduced consumer

spending, affecting Starbucks' sales, especially in discretionary categories like

premium coffee.

● Inflation: Inflation can increase the cost of raw materials and labor, impacting

Starbucks' profitability.

● Exchange Rates: Fluctuations in exchange rates can affect the profitability of

Starbucks' international operations.

● Consumer Income Levels: Rising disposable incomes in emerging markets can

drive demand for premium coffee products.

Socio-Cultural Factors

● Changing Consumer Preferences: Evolving consumer preferences, such as a

growing demand for healthier and more sustainable products, can influence

Starbucks' product offerings.

● Lifestyle Trends: The rise of the coffee culture and the increasing emphasis on

convenience and personalized experiences can benefit Starbucks.

● Health and Wellness Trends: Consumer awareness of health and wellness can

impact the demand for sugary drinks and high-calorie food items.
Technological Factors

● Digital Innovation: Starbucks has leveraged technology to enhance the

customer experience through mobile ordering, payment, and loyalty programs.

● Supply Chain Technology: Technological advancements can improve supply

chain efficiency and reduce costs.

● Cybersecurity Threats: As Starbucks relies heavily on technology,

cybersecurity risks can pose significant challenges.

Environmental Factors

● Climate Change: Climate change can impact coffee bean production and

quality, affecting Starbucks' supply chain.

● Sustainability Initiatives: Consumers are increasingly demanding sustainable

practices, and Starbucks has implemented various initiatives to reduce its

environmental impact.

● Resource Scarcity: Scarcity of water and other resources can affect the

production and distribution of Starbucks products.

Legal Factors

● Labor Laws: Compliance with labor laws, including minimum wage and overtime

regulations, can impact Starbucks' operating costs.

● Intellectual Property Rights: Protecting brand reputation and intellectual

property is crucial for Starbucks.

● Food Safety Regulations: Adherence to food safety regulations is essential to

maintain consumer trust.

SWOT Analysis of Starbucks

Strengths
 ● Strong Brand Recognition: Starbucks has a globally recognized brand,

associated with quality, premium coffee, and a unique store experience.

● Diverse Product Offerings: The company offers a wide range of products,

including coffee, tea, and food items, catering to various customer preferences.

● Strong Loyalty Program: Starbucks Rewards program fosters customer loyalty

and provides valuable insights into consumer behavior.

● Global Presence: With a vast network of stores worldwide, Starbucks benefits

from economies of scale and diverse revenue streams.

● Innovative Culture: The company is known for its innovative approach to

product development and customer experience.

Weaknesses

● High Costs: Starbucks' premium pricing strategy and emphasis on high-quality

ingredients can make it less affordable for some consumers.

● Supply Chain Vulnerabilities: Reliance on global supply chains can expose

Starbucks to risks such as price fluctuations, quality control issues, and

geopolitical uncertainties.

● Competition: The increasing competition from other coffee chains and quick-

service restaurants can erode market share and profitability.

● Negative Publicity: Negative publicity, such as controversies related to labor

practices or environmental issues, can damage the brand's reputation.

Opportunities

● Expanding Global Presence: Starbucks can continue to expand its global

footprint, especially in emerging markets with growing middle-class populations.

● Digital Innovation: The company can leverage technology to enhance customer

experience, improve operational efficiency, and drive sales.

 ● Product Diversification: Expanding into new product categories, such as ready-

to-drink beverages and merchandise, can generate additional revenue streams.

● Sustainability Initiatives: By focusing on sustainability, Starbucks can attract

environmentally conscious consumers and build a positive brand image.

Threats

● Economic Downturns: Economic downturns can reduce consumer spending,

impacting Starbucks' sales and profitability.

● Rising Input Costs: Increased costs of coffee beans, labor, and other inputs can

erode profit margins.

● Changing Consumer Preferences: Shifting consumer preferences towards

healthier and more affordable options can pose challenges for Starbucks.

● Intensifying Competition: The competitive landscape is constantly evolving,

and new entrants and innovative products can disrupt the market.

EFE Matrix for Starbucks

An EFE Matrix (External Factor Evaluation Matrix) assesses the external factors that

affect an organization's performance. It helps identify opportunities and threats in the

external environment.

Here’s an EFE Matrix for Starbucks:

Factor Weight Ratin Weighted Score

g

Economic Factors

Economic growth rate 0.15 3 0.45

Interest rates 0.10 2 0.20

 Inflation rates 0.10 3 0.30

Exchange rates 0.10 2 0.20

Sociocultural Factors

Changing consumer 0.15 4 0.60

preferences

Health and wellness trends 0.10 3 0.30

Demographic shifts 0.10 3 0.30

Technological Factors

Digital innovation 0.10 4 0.40

Supply chain technology 0.05 3 0.15

Political Factors

Government regulations 0.05 2 0.10

Trade policies 0.05 3 0.15

Environmental Factors

Climate change 0.05 2 0.10

Sustainability initiatives 0.05 4 0.20

Total 3.95

Rating Scale:

● 4 = Major Opportunity

● 3 = Minor Opportunity

● 2 = Major Threat
 ● 1 = Minor Threat

Note: The weights assigned to each factor reflect their relative importance to Starbucks'

performance. The weighted scores are calculated by multiplying the weight of each

factor by its rating. A higher total weighted score indicates a more favorable external

environment.

This EFE Matrix provides a quantitative assessment of the external factors affecting

Starbucks. By analyzing these factors, Starbucks can develop strategies to capitalize on

opportunities and mitigate threats.