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Table of Contents
Key Strategic Issues with Starbucks:
A very popular and frequently used term in managerial and business context is strategy. The modern era backed by the benefits of globalization has given rise to a multitude of business entities that are striving to achieve success in one way or the other. It has been found that several companies despite having a strong marketing plan and sound financials in place might not be able to achieve the desired goals and much of it has to do with their inability to identify the right move to be made at which point in the timeline. Different business models require the application of different strategies. The following report aims at identifying how a competitive strategy can help in business development. The report will present this by analyzing the case of Starbucks Coffee. The report will demonstrate identification of strategic issues, focussing on relevant theoretical concepts, application of strategy model and conclude it with the summarization of key findings.
“Bigger challenges are facing Starbucks” – Andria Cheng. January 26, 2018
The first-quarter earnings report of Starbucks in 2018 was not a promising one. The President and CEO of Starbucks, Kevin Johnson cited reasons such as failure of limited-time holiday drinks and merchandise to deliver the expected results, drop-in frequency of visits by Non-Starbucks Reward customers which was an outcome of change in routines during the holiday season and the decline in US mall traffic that impacted the sales of Starbucks mall outlets. However, the case study highlights a seeming shift in consumer preferences, an important reason which has not been discussed by the company during its quarterly report announcement.
The case study highlights various studies indicating that consumers prefer spending time at home and are more inclined to brewing their artisanal craft coffee. The second important shift identified is in the context of changing preferences towards ready-to-drink coffees and other beverages specifically an emerging trend of creating nitro-infused cold brew coffee. Market research by NPD Group shows that the demand for in-home craft brewing is majorly led by millennials, many of whom are working from home. The Mintel study projected that the ready-to-drink coffee segment is on the rise with expected expansion aiming at 67 per cent between 2017-2022 and can be a potential threat for the coffeehouse sales in the US. Similarly, Nielsen study showed a surge in liquid coffee that has been found to become new-age popular beverage, being highly found in supermarkets.
Starbucks which is also keeping a constant track on various market researches additionally states the competition it receives from Quick service restaurants like McDonald's whose McCafe gives a strong competition and other artisanal craft coffee shops and FMCG brands Nestle have also been identified to give good competition in the business. Starbucks has identified several plans to counter the prevailing competition and challenges which includes expanding the high-end roastery shops, allow accepting mobile payments from non-reward loyalty customers and collaborating with credit card companies such as Visa and Chase to introduce Starbucks loyalty points on various purchase points. Besides the company is also planning to expand its product line by offering its range of craft coffee, nitro cold brew and fresh food assortment.
Profit Cannibalization: Cannibalization occurs when a company introduces a new product to replace the old product which leads to a loss in sales. In the caser of Starbucks, this is happening due to their increase in the number of outlets (Huttunen, 2018). In urban locations, there is too many Starbucks outlet as a result of which the consumer has the free will to visit and enjoy the coffee without having to get loyal to just one. This has led to a concern with the decline in individual sales although the overall sales graph of the company shows increment (Haddon, 2020).
Changing Consumer Preferences: The coffee industry like several other food and beverage segments is undergoing radical transformations. People are now becoming health conscious and are refraining from cream and sugar-laden coffee cups that were once most sought after. Instead, a new trend of artisan craft coffee, cold brew and fruity beverages is picking up fast (Fuller and Rao, 2017). These trends have significantly impacted the revenue for the company and highlight an urgent need for the company to adapt to changing preferences.
Growing competition: The company is witnessing competition from popular brands like McDonald's and Dunkin Donuts which have fast become popular with their coffee and breakfast offerings, thereby creating a cause of concern for Starbucks (Honack and Waikar, 2017).
The decline in Mall sales: The changing shopping behaviour of customers has drastically affected the mall foot-fall in the USA. As a result, the impact of the decline in mall traffic is highly borne by Starbucks which has coffee outlets in several malls (Allen, 2019).
Acquisitions not so profitable: The impact of declining mall sales also led to Starbucks closing down on Teavana stores which it acquired as part of its competitive strategy in 2012 (Glowik, 2017, pp.157–167).
Business strategies can be understood in the following manner:
Starbucks uses the Differentiation Strategy to gain a competitive advantage over other competing brands like McDonald's and Costa Coffee (Haskova, 2015). The company is known for its premium customer service (uniquely writing customer names on the coffee cups to enhance the personal touch) (Chang, 2020). The company focusses on in-store experience and wants the customers to feel different about their time at Starbucks. In the attempt to differentiate the company ensures that customers don’t just call their regular coffee ‘coffee’ but say “bring me a Starbucks”. Also, the customers feel equally good experience while purchasing their Starbucks on the way (Chang, 2020).
The various corporate strategies can be understood as follows (Cleberg, 2019):
Starbucks uses Product Development and Diversification strategy in its business model (Haskova, 2015). It has not restricted itself to a brand that merely sells coffee. The company also provides a variety of beverages that range from soft drinks, tea, healthy drinks (recently included) to bottled water. The company also offers side menu options to support its coffee which include sandwiches, wraps etc. This diversification helps the company enhance the customer experience and keeps it effectively strong in competition against its rivals (Haskova, 2015). Moreover, the diversification strategy enables the company to increase the life of the original product which can otherwise diminish as with an increasing number of coffee brands it would not be possible to survive without a diversified offering which is nothing but an additional value-add to retain the customer (Sawhney, 2018).
In terms of Product Development, Starbucks is constantly adapting to changing consumer preferences and expectations. The company’s latest entry into creating cold brew coffees for its customers along with the high-end roastery café’s wherein the baristas and bartenders are experimenting with different coffee concoctions exemplifies how the company is involved in maintaining its market share through adaptation to changing demands and product developments (Gupta, Nagpal and Malik, 2018).
An acquisition is a process wherein one business entity ‘buys’ another business entity intending to attain control over the operations and business model of the other entity (Tang, 2019, pp.57–61). It is different from a merger process wherein two or more companies combine their resources to create a third different entity (Tang, 2019, pp.57–61).
Acquisitions may be horizontal which means acquiring firms within the industry, vertical which means acquiring the suppliers or distributors of the acquiring firm or related acquisition which means the acquisition of firms in different yet related industries.
Starbucks' primarily operates utilizing acquisitions and has a list of businesses it has acquired in the past decade (Glowik, 2017, pp.157–167). The company does not follow the concept of franchise systems unlike most of its competitors such as McDonald's and Dunkin Donuts and operates through joint ventures and company-owned stores in international markets. The acquisition strategy has primarily been responsible for helping Starbucks enter the key international markets. Besides, it contributes towards the product diversification thereby helping the company maintain a strong position in the industry. Popular acquisitions done by Starbucks include Teavana (Tea and Accessories), La Boulange (Bakery Chain), Evolution Fresh (Bottled Fruit Juices), Seattle Coffee Co. (Packaged and Brewed Coffee) and Ethos Water (Bottled Water).
However, the company in light of the declining mall traffic in the US and owing to non-profitability of certain acquisitions has also called off and shut down various acquired businesses (La Boulange, Teavana and Evolution Fresh) which has made many analysts in the industry question the acquisition strategy adopted by the company (Cheng, 2018).
Increase Market Share in local and international brands against competing brands, make business sustainable for its stakeholders, provide better customer service and to adjust to customer demands
Closure of stores to gain a more focused approach to existing outlets across the globe. identifying changing customer trends and practices to adapting to them and enhancing the customer experience by incorporating the new tastes and preferences in a high premium customer service format.
The performance of the strategies can be periodically monitored by analysing sales and revenue generation and customer feedback. This will reflect in their quarterly and annual results as well as stock market performance.
The strategy is a fundamental part of any business organization. It is essential to formulate an efficient strategy process through meticulous planning and analysis if a company wants to survive the competing business environment. The following report talks about how a competitive strategy helps in business development by taking the case of Starbucks company which is a well-known coffee giant that is popular for its premium-priced coffees backed with high end and personalized customer service. The case study highlights various issues that the company is facing wherein declining individual store sales, need to adapt to changing customer preferences, decline in mall traffic particularly in the US and not so profitable acquisitions mark to be the key issues. The identified concepts that apply well to Starbucks entail that the company applies differentiation strategy to justify its premium pricing based on high customer service, it follows the path of diversification to include compatible product offerings that support its coffee menu intending to provide a comprehensive product and sustain competition from rival brands and the most important strategy that the company follows is that of acquisitions that it does by way of horizontal integrations. The strategic model formulated for Starbucks that show the various identified objectives, strategies and the process in which they can be executed marks the conclusion of the report.
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