Credit Crunch’ Role for the Starbucks Company Activity

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Table of Contents

Introduction
Starbucks strategies before the recession
Starbucks and its strategies after the recession
Conclusion
References

Introduction

The start of the recession that led to a credit crunch spelt doom for many businesses around the world, the shortage of funds to expand and improve business for business organizations and the shortage of funds for consumers to buy products led to closure in worst case scenarios and change of strategy by companies which intended to survive (Hynson, 2010 p. 3-12). Credit crunch can be defined as a state which there is a short supply of cash to lend to business corporations and consumers and the interest rates are very high, the other names of credit crunch are credit squeeze are credit crisis. Therefore during this time the availability of loans, investment capital and all other forms of credit are scarce and very expensive (Hynson, 2010 p. 7).

It is claimed that the credit crisis of 2007 was triggered by a liquidity shortfall in the United States banking system, the dollar being the worlds largest currency of international trade therefore, led to the collapse of many financial institutions around the world especially Europe the United States banking system was accused of using unsound business policies and models that lead to the credit crunch (Gross 2010). Furthermore the government’s lack of a comprehensive legal framework to govern the United States banking system also came into question. The United States government was forced to intervene and bail out bankrupt financial institutions such as A.I.G and other companies such as General Motors’ (Tovstiga, 2010 P. 38-40)

Financial institutions were not the only business corporations that were affected, but also small businesses felt the heat. with little money for consumers to spend and massive job losses companies were forced to rethink their strategies and business models in order for them to be able to scan the environment and find new opportunities that would enable them tap into new opportunities and at the same time stabilize their revenue flows and survive in such a hostile business environment (Johnson et al. 2008, p.55)

Starbucks is one of the many companies in the coffee and beverage industry that were affected by the credit crunch and was forced to re-strategize and change their business model in order to survive in the harsh dynamic environment when the credit crunch struck (Tovstiga, 2010 p. 38-44). Starbucks is a public listed company that is in the industry of restaurants’ that sell retail coffee and tea, and retail beverages, but Starbucks also has an entertainment division and a music brand. Furthermore the company seasonally markets books, music and films in specific localities. Starbucks is known to make low end beverages for the mass market which are low and fairly priced and Starbucks also makes high end premium beverages which are highly priced and appeal to its loyal customers (Starbucks 2010).

The credit crunch has led to massive unemployment in the United States of America furthermore many stores have closed down reducing the level of business activity not only in the united states of United States of America. The failure and closure of financial institutions such as A.I.G and Lehman Brothers, Merrill Lynch and others meant that the awarding of credit for business purposes had become stiff and therefore companies were to raise capital by other means (Gross 2010).

Consequently the faith of the people in the united states economy fell sharply (Hynson, 2010 p.31-45).Therefore companies had to survive on shoe string budgets and depend on their strategic leaders and financial departments to come up with cost saving measures that would help them save on funds. Innovative companies that spent millions of dollars in product development were forced to halt any activities of that were considered expensive and capital intensive until the situation became clearer and the American economy became better (Gross 2010).

Corporate strategies are strategies are strategies govern an organizations growth, stability, or retrenchment, the strategies also determines the markets and industries that the firm will operate and compete in, furthermore it dictates the manner in which the top management coordinates, transfers resources and cultivates capabilities among product line and business units (Koontz and Weihrich 2009, p.89). Between 1980 and 2007 Starbucks had a very simple strategy this was a strategy of growth and therefore Starbucks gradually grew from a small company in Seattle to a global giant in the restaurant industry.

Starbucks strategies before the recession

With increased market opportunities starbucks over the last 20 years before the 2007-10 recent recession decided to employ a diversified growth strategy which can either be concentric meaning diversifying your products but remaining in the same industry or conglomerate which means diversifying your products but entering into different industry. Starbucks initial ambition was to have a total of 40,000 stores worldwide.20, 000 in the U.S and 20,000 worldwide (Starbucks, 2010).

A growth strategy is an overall corporate strategy that helps an organization increases its operations and customer base in order to realize a growth in revenues and net profits (Wheelen & Hunger 2002, p. 139-145). The strategy usually is capital intensive and consumes a lot of investment capital that goes into purchase of equipment technology, employees and other resources and without good management systems is likely to fail due a challenged posed by it as far as coordination and communication is concerned (Wheelen & Hunger 2002, p.122).

Starbucks has used both strategies of competition and cooperation by expanding its product mix and depth. Starbucks sells everything from tea to bottled water, salad, cakes and has announced plans to enter the energy drink market; this is clearly a form of concentric growth that has its business limited to restaurants and foodstuffs. The entry of Starbucks into the entertainment business in the form of books, music and films is a type of conglomerate growth strategy whereby Starbucks ventured into the entertainment industry which was totally unrelated to the restaurant and foodstuff industry (Ring & Perry 1985).

For a business to achieve its corporate strategies business strategies are formulated, business strategies focus on improving competitive position of a company’s area of operations. In order to achieve its corporate goals Starbucks either follows a competitive strategy or a cooperative strategy or both in any ratio (Steiner 1997). When a company formulates a competitive strategy it can either choose to differentiate its products or adopt a low cost model depending on the scope of its target market (Porter 1990).

Starbucks pricing model depends on either a product is low end product or a high end product, this is because there exist both premium highly differentiated products such as the Frappuccino’s and caramel Macchitos, while lattes and brewed coffee which are less differentiated less premium products. A high price is therefore charged for high end differentiated products and a low price is charged for less differentiated products which are more popular and more mass market oriented. The danger of adopting generic competitive strategies by companies is that competitors can easily imitate. High levels of differentiation may prove costly and hard to maintain when consumers become more price sensitive, this is according to Paul (2008) an expert in new product design and development.

As far as cooperative business strategies are involved Starbucks have embarked on a partnership with Apple whereby Apple added a Starbucks entertainment area to the iTunes store. This application sold similar music to that being played in Starbucks stores. Furthermore Starbucks introduced WI-FI in its stores to enable its customers access the internet and download their favourite tunes as they drink their beverages. Functional area strategies were focused on delivery of quality coffee and beverages and ensuring the coffee experience by the barristers.

After over twenty years of growth and expansion Starbucks started experience revenue decreases and a sharp fall in profits due to the recession of 2007-10. This was mainly due to a reduction purchase volumes by consumers. Stiff competition from McDonald’s and Dunkin Donuts who were in fact charging lower and attacking Starbucks through their marketing campaigns such as advertisements’, further worsened the situation for Starbucks.

The existence of the credit crunch meant that many consumers Starbucks’ area of operation meant that consumers became more prices sensitive (Miller 2009). This is likely to happen when the supply of money in an economy falls dramatically while many people demand for money which is short in supply therefore companies go out searching for cheaper alternatives of capital that don’t charge high rates of interest (Gorrod 2007, p.56).

Due to the unfolding events and the dynamic environment that now starbucks was being faced with it was the duty of the top executives to come up with an entire and comprehensive plan that would enable Starbucks pursue its business purpose without compromising its brand value. Therefore the recession acted as a trigger for implementation of new and better strategies that would stabilize the business model of starbucks and strengthen it as it dealt with its competitors to serve the same market of coffee lovers (Wheelen & Hunger 2002, p 16-17).

Starbucks and its strategies after the recession

When the United States and the global economy experienced the credit crunch in 2008 many corporations in all the sectors of the vibrant American economy including Starbucks were forced to re-evaluate their strategies and business models in order to cope with the changing environment (Hynson, 2010 p. 3-12). Many businesses which did not consider changing their environment were forced out of business. This resulted to slow economic growth, reduced expenditure and loss of jobs. Previous assumed consumer behaviour that had been previously predicted had suddenly changed and therefore businesses had to gather data and come up with programmes that would fit their consumers (Olsen and Eadie 1982, p.89).

When consumers become price sensitive they therefore search for much cheaper alternatives including substitutes, therefore with shortfall in supply of money the bargaining power of buyers increase and the bargaining power of suppliers fall and therefore consumers switch to the next best alternatives in terms of price (Kotler 2006, p 44). This is the case whereby consumers switched to much cheaper products of sold by McDonalds and Dunkin Donuts. Starbucks is a prospector with fairly broad product lines that focus on product differentiation and marketing opportunities (Wheelen & Hunger p.66-67) were forced to change their strategy. From an overall growth strategy of growth and expansion that Starbucks had pursued for almost 20 years Starbucks was forced to change its corporate strategy to one of stability and retrenchment.

The unpredictability of predicting when the credit crunch could end tight competition meant that for Starbucks to realize and stability it would be forced to search for other opportunities. Therefore the Starbucks decided to pursue a retrenchment strategy that would in turn have saved them about $ 500 million (Lisa 2008).

Retrenchment is a strategy that a company follows when a company sees that it has a weak competitive position in all or some of its product lines that are performing poorly. If certain strategic business units in certain geographic regions make loses and not profits companies may be dragged down by them. This strategy if successful eliminates weak products and weak strategic business units’ resulting to saving costs (Goodstein et al. 1993, p 46).It may often involve contraction which is considered a quick first aid action to stop bleeding by cutting back on size and reduce costs (Felkins et al. 1993, p.28).

On July 2008 Starbucks announced that it would be closing approximately 600 stores around the united states that were underperforming this meant that Starbucks was forced to abandon its previous growth strategy (Lisa, 2008). The economic situation at the time was highly unsuitable, volatile and unpredictable as a result of the credit crunch during the recession. Since McDonalds and other competitors decided to lower their prices for coffee then Starbucks was forced to retaliate in the same way by lowering the prices of its low end products.

Such a move would mean lower profit margins per unit for Starbucks but an increased purchase volume which was good considering the economic situation. According to Miller (2009) a journalist working with New York Times who has a background in business and economics, explains that Starbucks went ahead to exploit consumer loyalty among its diehard fans, knowing that it could get more revenue streams from it’s more loyal customers. Such a marketing strategy is known as market skimming/milking whereby a company maximizes revenue streams by charging extra on its premium products (peter and Philip 2006, p. 144).

Furthermore American giant went ahead in the same month of July 2008 to announce that it would close down about 60 of its 84 stores in Australia, many critics however claim that Starbucks failure in Australia was because of its inability to understand the coffee culture of Australia as opposed mainly to the credit crunch. On January 28 2009 C.E.O Howard Schultz went ahead to announce plans for further downsizing and closure of other 300 stores in line with its turnaround strategy that aimed at reducing costs and increasing efficiencies.

This move was to result to loss of approximately 7000 jobs in addition being a good leader who leads from the front the board went ahead to approve the C.E.O’s suggestion of reducing his basic salary from $1.2 million to $ 10,000, all aiming to reduce costs and save the restaurant giant money furthermore In January and February Starbucks shut down 990 stores and an approximated 19,000 barristers and other workers lost their jobs (Lisa, 2008)

Starbucks claims it has 700 stores which serve around 2 million customers in Britain daily, some of their loss making stores were also shut down in Britain to avoid further loses. Starbucks hired consultancy firm CB Richard Ellis to analyse its lease and rent agreements because the company believed it was being overcharged rent and even having their premises in the right location. After which Starbucks was forced to renegotiate their lease and rent agreement with their landlords and relocate to more prime business areas.

During the same credit crunch Starbucks decided to get rid of some of its product lines which did not bring in enough revenue streams. According to the Boston Growth Share Matrix which is a grid that is used to portray a company’s strategic business portfolio by calculating their growth rate and relative competitive position respectively to assist in decisions that involve further either investment or divesture as far as business strategy is involved. Products which consume a lot of financial resources and occupy a very small market share are known as dogs which lack potential for growth and those called question marks which consume a lot of cash for them to grow and become market leaders are occasionally cut of or put in a halt when organisations face a credit crunch (Hedley 2002, p 12).Therefore products such as decaffeinated coffee which fall under this category had their mass production halted and were only to be produced with the express request by the customer themselves, the production of other products such as sandwiches were also halted.

Conclusion

Tough times call for tough measures therefore companies should prepare themselves adequate for the rough times ahead by creatively coming up with strategies that save on costs and expenses without necessarily compromising the quality and brand value attached to their flagship products. Furthermore this companies should avoid spending exorbitantly on capital expenditures otherwise are considered to be very risky and uncertain not guaranteeing returns.

The 2008 global recession had a hard impact on local and global businesses. The credit crunch that resulted meant that consumers had little money in their hands to spend. Furthermore this meant that will little money available to the consumers companies had to compete amongst each other to get this little money and sustain their businesses. The consumers became price sensitive and therefore their bargaining power increased thereby forcing companies to re-examine their business models and reformulate their strategies in-order to survive and make profits this may require the companies to change their product and marketing mix to it to adopt a low cost model that is less capital intensive and offering consumer cheaper options in the menu.

Starbucks is a multinational company in over 55 countries which is known for its restaurants and excellent coffee also had to abandon from original path of growth and rapid expansion that it had experienced in the last decade before the beginning of the recession and the credit crunch. From having a rapid expansion that involves massive consumption of resources and growth plan should initiate an emergency response to react to the current situation then and therefore chose a turnaround strategy which is basically retrenchment. It is that strategy that was able to save those costs and increase their efficiencies and bring them back to the path of profits by putting a hold on any expansion goals and concentrate solving the challenges that arise out of the current business environment.

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