Mmg 480 Week 1 Case Analysis Starbucks

Case Analysis for
Starbucks-Early 2008

October 4,2010
MKTG 480

By: Brandy Johnson

Instructor: Dr. Jeff Totten

Table of Contents

I. S.W.O.T. 3 II. Situation Analysis 5
III. Problems Found in Situation Analysis 7
IV. Strategic Alternatives for Solving Problem 8 V. Selection of Strategic Alternative and Implementation 9

S.W.O.T.

Strengths

• Established reputation/High brand recognition
• Strong financial background
• High visibility locations to attract customers
• Well trained/motivated employees/favorable work environment
• Low employee turnover
• Brand loyalty
• Product variety
• Good relationships with suppliers
• Leader in gourmet coffee industry
• Comfortable and relaxing environment “third Place”
• Highly knowledgeable employees
• Donates time and supplies to help environment

Weaknesses

• Small stores
• Many stores in United States
• Focused on one area/specialized
• High pricing compared to competitors
• Limited ideas for coffee types
• Succumbing to the fast-food model

Opportunities

• Starbucks Card in international markets
• Brand expansion/co-branding
• Advances in Technology
• New products
• More stores in international markets
• 166 million coffee drinkers and steadily increasing
• Increase in elderly coffee drinkers
• Increase in workforce coffee drinkers
• Utilize knowledgeable employees
• Brand recognition through environmental services
• Make new drinks to attract “health conscious” consumers

Threats

• Increased competition with lower prices
• Becoming too common/too many stores
• Succumbing to the fast-food model
• Loss of quality due to cost saving methods
• Rising prices of resources
• Running out of innovative ideas for coffee
• Consumer trends toward more healthy lifestyles
• Cultural/Political issues in foreign countries

Situation Analysis

Environment The number of coffee drinkers, in the United States, is steadily rising, which presents opportunities for Starbucks. More elderly people are coming out of their homes to socialize over a cup of coffee and stores are beginning to see more of the workforce stopping on their way to work for a better tasting cup of coffee. On the other hand, the economy is starting to see a decline in disposable income which can effect the amount of money allotted for luxuries, such as gourmet coffee. Consumers are beginning to look for a cheaper substitute for Starbucks overly priced coffee. Society is also beginning to lean toward more healthy lifestyles. If this trend continues, consumers will begin looking for a smoothie and/or herbal tea shop in place of Starbucks. The large amounts of caffeine and sugar found in coffee will cause health conscious consumers to stop purchasing Starbucks products. If Starbucks would consider offering discounts or coupons, they might be able to persuade consumers to purchase their coffee even with the decrease in disposable income. Also, if Starbucks would begin making more smoothies and herbal teas then the health conscious consumers would be more likely to consider Starbucks as a healthy drink stop.

Industry The three men that started Starbucks noticed an opportunity for an almost completely untapped industry.
Most companies did not consider cups of coffee to be a very profitable or expandable market, until Starbucks. Starbucks started selling their gourmet coffee at almost four times the cost of a regular cup of coffee and people flocked into their stores. Starbucks is now considered the number one leader in the gourmet coffee industry. Since Starbucks created this extremely profitable and somewhat simple market, many competitors have taken interest in trying their hands in the gourmet coffee market. Starbucks number one competition is McDonalds new line of gourmet coffee. McDonalds started selling McCafe coffee, which include items such as frappes and lattes with popular flavors such as mocha and caramel. The biggest advantage that McDonalds possesses is the price difference. McDonalds gourmet coffee is cheaper than anything Starbucks offers. Another company that is beginning to come up in the gourmet coffee world is Sonic. Sonic started selling items such as their Premium Roast coffee and their Java Chiller with your choice of caramel, mocha, or hazelnut flavors. Both of these competitors offer a cheaper substitute for Starbucks gourmet coffee. Another problem Starbucks is facing is the rise in dairy and coffee products and the loss of flavor due to their cost saving methods. The resources required to sell gourmet coffee is rising which will make it difficult to
compete with lower priced options. Starbucks also experienced a loss in flavor and quality when they started implementing things such as flavor locked packaging. Starbucks realizes they are using up all of their consumers resources in the United States and are turning to over-seas opportunities. France was very slow to accept Starbucks, due to France’s aristocratic position in the finer coffee and living styles. On the other hand, the expansion into new countries present a vast amount of opportunities for Starbucks. Starbucks not only has a whole new market of people to sell to but they can also begin implementing their Starbuck card which presents convenience for coffee drinkers and a guaranteed customer for Starbucks. Starbucks will need to reconsider their pricing strategy in order to compete with their low priced competition. Starbucks may also want to reconsider their cost saving methods in order to improve their quality.

Organization Starbucks main objective is to maintain their number one gourmet coffee status and to open 30,000 stores worldwide. The number of stores Starbucks currently has operating is 15,011, with roughly 10,300 in the United States and the remainder being over-seas. Starbucks recently experienced a drop in stock prices but their finances are still considered to be in very favorable limits. Starbuck takes great pride in their employees and shows this through good wages and benefits for all of their employees. They have trained their employees to be knowledgeable in the coffee field and call their employees “baristas.” The organizational structure and culture of this company makes everyone feel like family. The company knows that the success of the stores depends on happy and knowledgeable employees. The company also knows the importance of community involvement and values the concept of “going green.” Starbucks has honed in on the way their organization should be run and they are a valued company because of this.

Marketing Strategy Starbucks strategy has been to achieve maximum sales while ensuring “five star” customer service satisfaction and maintaining a high quality product and atmosphere.
Customer service satisfaction is one of the most important measures that Starbucks stands on. The firm principles of the company are seen with its preservation of a great and proven work environment for every staff member. They put their employees through a thorough, difficult, and challenging training program that educates every employee about the gourmet coffee industry. I cannot say that Starbucks “teaches“ but maybe “instills“ the importance of customer service and satisfaction through wonderful service standards and requirements. Starbucks strives to create an “experience” around the consumption of coffee. They want to create an inviting atmosphere where people can come to enjoy their coffee and feel relaxed and comfortable. Starbucks saw a 21% increase in their net revenue in 2007. The company’s net earnings, in 2007, were 673 billion dollars. Starbucks has a vast target market, it ranges from high school students to the working class adults. Coffee drinkers of all ages enjoy the flavors and atmosphere of Starbucks. Starbucks product is primarily gourmet coffee, although, they are branching out into retail sales. When Starbucks first started gaining brand recognition, cities could not wait to have a store built. Now, there is practically a Starbucks on every corner. The company uses prime
locations for all of their stores which increases the number of consumers who will stop. In 2007, Starbucks had about 11,000 stores in United States and 4,000 international stores operating. Starbucks pricing is relatively high, when compared to other coffee services. Most people are willing to pay these high prices because of the flavors Starbucks offers

KEY PROBLEMS

Starbucks Corporation has made some “serious strategic errors” and faced “increasingly strong competition” that has led to its stock price dropping from $36-$18 per share in 2008. Starbucks no longer has the huge edge over the competition that it did before. Other coffee organizations are doing all that they can to take away Starbucks business and customers. Also, Starbucks chooses not to offer special discounts or any special prices to loyal customers. This is not an intelligent move considering the increasing competition in the coffee industry, and the decrease of Starbucks’profits. Maintaining the growth that Starbucks once knew has now become a challenging task.

ALTERNATIVE COURSES OF ACTION

Starbucks has almost perfected the task of expanding, domestically and internationally. There are new coffee houses being built at an increasing rate causing increased competition for Starbucks. Starbucks has almost run out of places to build in the United States so I feel they should continue to expand their company in international markets. The advantages of expansion are profit increases, increase in market share, and the brand becoming even more widely known. However, the disadvantages could be the amount of money they would initially have to put into more expansion and the possibility of building in a hostile environment. Another strategic move that could give Starbucks the competitive edge it needs is new products. Almost every coffee shop that you go into now has a menu that reads very similar to Starbucks. If Starbucks were to come up with the next “big thing” in coffee, then this could give them a jump on the competition. The company should also start looking into making healthier options because society started showing signs of wanting to live healthier. The advantages are once again increased profit and market share, as well a potentially new client base that is responding to the new product. The disadvantages are the costs of research and development and the possible risk of the customers not responding to the new product. A third option that Starbucks could consider is offering discounts, sales, or special promotions. Offering a cheaper product will prompt customers to return to Starbucks rather than go down the road to McDonalds. Some consumers may feel that Starbucks is too expensive for them to even try the gourmet coffee so if the company chose to offer discounts or specials it could persuade new consumers to stop in at Starbucks. Once the new consumers experience the atmosphere and flavor of Starbucks, they might become loyal customers regardless of the price. The major advantages of this option would be attracting more customers which will increase profits and market shares. The disadvantage of this option might be that once the sales and promotion ends the consumers will just stop coming.

Selection of Alternatives

I feel Starbucks would benefit most from choosing alternative number two. Every competitor of Starbucks is beginning to copy the Starbucks flavor. People are beginning to choose these cheaper substitutes because they taste relatively the same to them. If Starbucks started thinking about new products and exciting flavors, it could attract more customers. I believe Starbucks should start making healthy options such as smoothies. They currently sell a few smoothies but they do not advertise them and have not perfected them. If Starbucks took the time to perfect their smoothies, make them a sought after breakfast drink, it would increase customer base and profits.