The Strategic Position and Strategic Choices for Starbucks

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The Strategic Position and Strategic Choices for Starbucks

Introduction

The Starbucks Cooperation, (Starbucks Coperation, 2015) is one of the world’s leading coffee roasters and retailers of speciality coffee. From opening its first store in downtown Seattle in 1971, the global expansion of the Starbucks name has been rapid and strategic (Roll, 2017). In 2018, Starbucks accounted for 29,324 stores worldwide of which 15,041 of them are based in the firm’s home nation of the United States. This dominance within the American retail coffee and snacks sector has given them significant market power in determining industry trends. As a result, Starbucks strategically balances its customer loyalty, premium value coffee and homelike atmosphere within its shops to surmount its competition and excel with the American population.

When discussing the concept of strategy, it is important to note that it encompasses the means in which an organisation achieves their premeditated objectives (Grant, 2015). In order to successfully implement objectives and goals, whether they be profit or customer orientated, businesses and organisations need to formulate a strategy in which they work by. This includes understanding the strategic position of the organisation and setting out outlines and principals on how a company would address these goals.

Introduction to Michael Porters Framework

By using Michael Porters Five Forces framework, we can analyse and evaluate the industry environment by investigating external influences that shape the competitive market and through this theory, organisations can devise an optimal strategy to achieve success market (Greenspan, 2019). The five forces used to formulate these influences are the power of suppliers, the threat of entry and of new competitors, industry rivalry, threat of substitute products and finally the power of buyers. When we apply Porter’s five forces to Starbucks, we will be able to investigate the external environment that may affect Starbucks’ competitive environment.

Threat of new entrants

Another key area of Porters 5 forces framework is the threat of new entrants. This area concerns the extent of how a new entrant could pose a threat on existing competitors within the same industry (Wilkinson, 2013). Due to the competitive nature the retail coffee industry with the United States, it is argued that there is a moderate threat of entry from new competitors within the sector. This is due to the fact that it is considered to be only moderate level of initial investment in order to be able to operate within the industry (Geereddy, n.d.). In relation to Starbucks, it can be argued that they may feel a considerate threat from new entrants as smaller coffee retailers can quickly establish themselves on a localised scale due to the fact that they have lower supply needs and offer no switching costs for consumers (Sakal, 2018). On the other hand, large and established brands such as Starbucks lead the industry as they have advanced economies of scale and extensive brand development which has been achieved over a number of years (Greenspan, 2019). This plays favourably to Starbucks because due to their advanced and large global scale they have the necessary funds and developed distribution systems to be able to expand outside of the localised areas (Larson, 2008) and thus, outside of the United States. Although this is a relatively easy market to penetrate, larger firms such as Starbucks hold an advantage as they have more of a focused and developed customer service strategy which is apparent in all their stores (Greenspan, 2019). This consequently results in loyal customer retention who continually return to the Starbucks store.

Threat of substitutes

Included in Porter’s 5 forces framework is the potential threat of substitute products within the industry. This takes into account when a close substitute of a specific product exists within a market, it therefore increases the probability of consumers switching to alternative retailers for cheaper options (Chartered Global Management Accountant, 2013) or purchasing other commodities in place of the industry’s product (Wilkinson, 2013). For example, the price of a product determines whether customers are going to purchase it, if already established companies seek to charge higher than new entrants in order the diminish the level of threat, this can ultimately lead to customer migration and a loss of profits (Cleverism, 2014). In the case of Starbucks it can be argued that the threat of substitutes is very high as products such as caffeinated carbonated drinks like canned energy drinks and products from Pepsi and Coca-Cola are on the rise (Sakal, 2018). These products pose a threat on Starbucks’ in store sales as they have a significantly lower retail price and can be bought more readily from supermarkets. In addition, it could be defended that these substitutes threaten companies such as Starbucks as they are more convenient and accessible to customers; they do not require waiting in queues, face to face interaction with employees or as stated earlier, products like these can be purchased outside of Starbucks’ outlets. In order to keep up with this trend and lower the threat level from these products, Starbucks have developed their own range of canned ready-to-drink products in partnership with PepsiCo (PepsiCo, n.d.). This is displayed in Figure 1 below. Such as canned their Nitro Cold Brew (Lucas, 2019). On their website, they market these products as ‘a premium experience’ that can be taken anywhere you want (Starbucks Branded Solutions, 2019). Starbucks is strategically trying to overcome threats by new entrants by expanding their range of products by keeping up with market trends. For example, in 2012 Starbucks acquired American tea retailers Teavana Holdings Inc who produce and market premium tea products (Financier Worldwide , 2013). This move by Starbucks further cements their customer retention, by expanding into alternative products, under the same brand name of Starbucks. Nonetheless, the threat of substitute products competing besides Starbucks does amount pressure onto their margins; with the demand to be conceiving new ideas or rival products to reduce this threat and to be continually gaining competitive advantage.

Bargaining power of buyers

The bargaining power of buyers concerns the pressure and influence customers/consumers can put on firms to gain a reduction in price or an increase of quality of the product/ service being displayed (Corporate Finance Insitute, 2018). This power can have an impact on the competitive environment as it influences the industry’s ability to gain profits (Wilkinson, 2013). The bargaining power of buyers can be determined by factors such as the bargaining leverage of customers and the price sensitivity of the buyer. If the bargaining leverage is high, this results in greater price sensitivity which effectively gives the buyer a large amount of power. It potentially can have a detrimental effect on their trading as products are being marketed at a lower price, therefore profits are lost and consumer surplus is higher (Decter, 2017). In terms of Starbucks and the bargaining power of suppliers, negotiations on price for primary buyers like individual customers are incredibly difficult. This is partially due to the vast scale of this business; it would not be possible to charge exclusive prices to different customers. Due to the ample choice of takeaway coffee retailers within the USA, customers have the choice to swap to alternative retailers that offer the same premium coffee, but at a lower price. To some extent, it may be argued that Starbucks gives an opportunity to their consumers to bargain their prices due to their 25¢ reusable cup discount which was introduced in 2018. This discount encourages consumers to bring their reusable coffee cups and in return they receive a 25¢ discount off their order (Gabbatiss, 2018). Starbucks have also introduced their own line of reusable plastic coffee cups in order to encourage consumers to partake in this scheme. This strategic choice made by Starbucks aptly offers consumers a sense of bargaining powers while simultaneously benefitting from those who do opt into the discount scheme by offering the means to do so, such as purchasing one of Starbucks’ own brand reusable cups.

Bargaining power of suppliers

It is a known fact the relationship between producers within an industry and their suppliers is comparable to the contact producers may have with consumers (Grant, 2015). Suppliers have a large influence over the profit potential and competition of an industry, this is because suppliers have the ability to raise prices of supplies and modify the quality of merchandise sold to the producers (Mars, 2018). As included in their 2018 annual report, Starbucks have coined the Starbucks Global Social Impact Strategy, this aims to act ethically and sustainably when sourcing their coffee and in addition contribute to local communities (Starbucks Corporation, 2018). Due to the vast number of retailers of speciality coffee and the many suppliers of Arabica coffee beans, which is commonly used by retailers, companies have to differentiate their products in order to retain competitive advantage. This means that companies such as Starbucks look for higher quality goods in order to be distinct from other retailers, such as outsourcing from premium coffee farmers. Due to this demand, these farmers have the capability to negotiate with producers as speciality farmers are not short of clients, resulting in a high bargaining power for Starbucks’ suppliers (Larson, 2008). On the other hand, due to the sheer scale of the Starbucks corporation within the USA and the large supply requirements, their financial loyalty to suppliers holds a considerable weight. This consequently means that suppliers have a low bargaining power against Starbucks as their trade with the global brand is vital to their production.

Competition Rivalry

Continuing on, one of Porter’s 5 forces includes the intensity of rivalry with an industry. It considers the amount of competition within the environment in which an industry operates in how much impact this may have on profit (Wilkinson, 2013). For example, a very competitive market can have many negative effects for the companies involved as there is less room for negotiation of prices and lower profit margins (Martin, 2014). Considering the intense nature of the speciality coffee market in the USA, the competitive rivalry in this sector is very high. In the case of Starbucks, it falls into the monopolistic competition category. This means that it exists in a market where there are a high number of retailers of the same product/service and therefore many buyers of these products. In order to try competing with this, retailers try offer a differentiation of the product, (Schwartz, 2016). As previously mentioned, Starbucks holds the largest market share within the United States with 39.8% (Lock, 2018). Although this figure dominates the other key players within the speciality coffee industry, it could be said that this amounts pressure onto Starbucks to upkeep this influence within the industry and to be continuously creating strategic and innovative ways to keep their already existing clientele while also attracting more customers (Kaci, 2017). On the other hand, it may be argued that although this amounted pressure on Starbucks creates high competition, Starbucks dominates the industry through their product differentiation by offering high quality coffee products and services. Since 2018, Starbucks have extended their service by partnering with food delivery service, UberEats. Starbucks currently have 15 million users every month using this service across more than 500 cities across the USA (Santana, 2019). This venture gives Starbucks the upper hand within the industry as it creates more convenience for the customer and gives Starbucks another operating cash flow margin outside of their drop-in stores, thus increasing their competitive advantage. Positively, Starbucks maintains their competitive advantage within the industry by acknowledging and implementing their high customer service and strategic branding, which conclusively results in high customer loyalty towards the Starbucks brand (Dudovskiy, 2017).

SWOT Analysis

In order to successfully assess the strategic choices made by the Starbucks cooperation, it is important to determine what is are the future choices of the firm. To do this, we can apply a SWOT analysis. This strategy incorporates the strengths, weaknesses, opportunities and threats regarding competition within the industry, specifically in the USA and its internal project planning (Bbamantra, 2017). The strengths of the Starbucks company refer to the internal factors that influence their success within the industry. As a major player within the American retail coffee industry, it can be said Starbucks have successfully developed an accomplished business model. Starbucks keep their core values at the forefront of their decisions. This includes creating a luxury coffee drinking experience, which diversifies them from competition. Through this focus on quality and service, Starbucks retain loyal customers and therefore sustaining the profitability of its business (Lombardo, 2019). In order to identify the flaws within the Starbucks, it is important to analyse internal factors that may affect profitability. The Starbucks brand relies heavily on the US market and currently 49.8% of all Starbucks coffee outlets are in the USA (Eckstein, 2019). This means that Starbucks is very sensitive to economic variation and could result in instability for the brand. The second part of the SWOT analysis focuses on the external factors that could promote business growth and opportunities. The Starbucks corporation can boost their sales through the expansion of emerging markets. An example of this is that Starbucks have invested in the expansion of drive thru hubs for customers, in place of their usual dine-in outlets (Forbes, 2016). Starbucks anticipates that 80% of their current shops will have a drive thru option by the end of 2019. In terms of threats towards the Starbucks business, in March 2018 the superior court in California, Los Angeles ruled that producers of coffee in the state must have a cancer warning label on as a cause of the carcinogens in the drinks. This as a result led to people avoiding products such as these, leading to a loss of customer retention and damaged brand equity (Rosenberg, 2018).

Conclusion

Starbucks continually drives to pioneer the retail coffee industry within the United States. This is thanks to their effective implementation of strategic choices which has given them the chance to develop their strategic position outside of the US and into new emerging global markets, such as Asia. In order to sustain this success, Starbucks must play close attention to internal and external factors influencing their business and how to keep up with the everchanging climate of this industry and to stay on top. Starbucks’ biggest weakness can be said to be their pricing strategies, if they hope to stay on top, they must offer more competitive prices as other players within the industry are starting to offer a similar quality of beverage, but at a fraction of the price that Starbucks does. Ultimately, if this change is implemented, Starbucks could attract more customers and gain more profit. Overall, it can be said that Starbucks are strategically successful due to the impact they have had not just within in the speciality coffee industry, but globally; by redefining the household commodity of coffee, into a developed customer experience.