Developing Competitive Advantage Report
Starbucks’ Economic Environment
Starbucks Corporation is a leading American coffee-house chain and coffee company. Started in 1971, Starbucks today operates in more than 23,000 locations in some 64 countries (Griffins, 2016). The economic environment describes all the economic factors that have an impact on the operations of a business (Gilbert, 2008). Businesses rely on the economic environment not just for their needed inputs, but also for the sale of goods and services. Starbucks is affected by such factors of the economic environment as inflation, interest rates, and unemployment, among others (Burns, 2012). These facts impact the buying decisions of consumers at Starbucks. Inflation is the increase in price relative to a standard measure of purchasing power. Inflation occurs in case the aggregate demand grows at a faster rate than the aggregate supply. It affects the cost of living negatively, meaning that consumers find it hard to afford products sold by Starbucks. It also raises the interest rate, thus making it harder for Starbucks to secure loan facilities. In addition, high levels of unemployment lead to a reduction in the number of consumers capable of purchasing products at Starbucks.
Evaluation of Starbucks’ Current Competitive Advantage
Although Starbucks is a coffee giant, the company has been experiencing a slowdown in sales due to increased competition from other companies selling similar products in the market. To maintain a competitive edge in the market, Starbucks has resorted to the use of various strategies:
Product Innovation:
One way in which Starbucks has managed to maintain its competitive edge in the market is by remaining a leader in terms of product innovation (Baron, 2015). For example, the company recently launched Pumpkin spice latte, and this led to an increase in over 150,000 visits to its stores in the first two days following its launch (Trefis Team, 2016). Consequently, the company experienced a 30 basis points increase in its national QSR market to 6.96% even as other competitors like Dunkin' and McDonald's experienced a decrease in market share after launching the same coffee seven days earlier.
Broad differentiation
Starbucks makes use of a broad differentiation strategy to gain a competitive advantage in the market. This particular strategy entails concentrating on a wider segment of the total market, as opposed to niche segments of the market (Ireland, Hoskisson and Hitt, 2012). In this case, the market served by Starbucks has been defined by their coffee drinkers. Thus Starbucks endeavours to prepare coffee orders that are tailored to the diverse and broad needs of its customers (Wang, 2012). The company enjoys diversified, yet unique product offerings and this too is a source of competitive advantage (Fuggetta, 2012). In order for the company to successfully implement this strategy, they offer differentiated service and quality in coffee sales even as they endeavour to diversify their product offering to encompass the sale of Starbucks coffee outside their stores via partnerships with PepsiCo, and acquisition of other stores like Tazo tea (Daniels, 2016). The high quality of service and products offered at Starbucks' shops hook customers with the result that customers end up purchasing other Starbucks labelled products like Starbucks brand liquor and bottled coffees.
Adapting to changing consumer preferences
Starbucks has always remained open to changing consumer preferences and tastes (Thakor, 2011), and this flexibility has enabled the company to enjoy success in the Chinese market for example, where tea drinking is more popular than coffee. This flexibility has seen the company introduce almond milk and other non-dairy alternatives like soy milk and coconut milk into its stores (Trefis Team, 2016). The decision to embrace dairy-free products is based on the findings of a research study by Mintel which showed that almost half (49%) of Americans drink non-dairy milk products, but not exclusively. Therefore, projections show that by 2020, the sale of dairy milk shall reduce by 11% (Mintel, 2016). The adoption of non-dairy products will thus enable Starbucks to boost its sales and hence maintain its market share.
Non-franchising
Starbucks has declined to franchise its stores even as a majority of the quick-serve restaurants have been quick to do so. A franchisee model enables the franchisor to outsource the risk of their capital investment in the business, thus resulting in exceedingly higher margins (Hoy and Stanworth, 2014). It also helps to improve store expansion, thus allowing the company to grow and remain profitable. However, Starbucks is opposed to franchising as the company banks on its culture and value to realise growth and expansion.
Focus on food
According to Daniels (2016), cold coffee beverages, along with food innovations are two of the main areas of focus that will ensure the company's future growth. Currently, sales from food account for 20% of the revenue generated by Starbucks. The company plans to double its current food business in the next five years. This will be realised by offering customers meals throughout the day, as opposed to just snacks. Starbucks is working towards the establishment of partnerships to increase the popularity of a complementary food and coffee menu, in addition to making food one of its key growth drivers in the future. This has seen Starbucks enter into the brunch business. Presently, the company is testing a brunch menu for the weekend in its 70 locations across the western U.S. Additionally, the company has formed a partnership with Princi, a bakery company of Italian origin. Under this partnership, Princi shall be granted permission to sell fresh food at selected premium restaurants owned by Starbucks.
Starbucks’ Competitive Position in the next 3 years
As competition in the coffee market intensifies, Starbucks seeks to remain competitive by increasing revenue growth, sales growth, earnings per share growth, and comparable sales growth (Lussier, 2014). In order to realise these objectives, Starbucks seeks to pursue the following strategies:
Increasing number of Stores:
Starbucks is focused on increasing the number of its stores in operation as well as changing the company’s store mix (Trefis Team, 2016). Over the next five years, Starbucks is projected to add an additional 12,000 stores globally, thereby increasing its total number of stores to 37,000 (Jones, 2016). Based on this growth in the number of stores, the company projects a 10 percent rise in revenue growth in its global operations, as well as a 15 to 20 percent EPS growth. Starbucks is now focused on opening drive-through coffee stores in the suburbs and urban areas, as opposed to opening additional dine-in restaurants (Starbucks, 2016). Moreover, Starbucks is also focused on opening up additional express stores in such major cities as Seattle, New York, and Boston. With this growth strategy, Starbucks hopes to realise enhanced store penetration. Nonetheless, store cannibalisation could hamper the projected incremental growth of the new stores being opened.
Cannibalism as used in marketing strategy describes the decline in the sales revenue, market share, or sales volume of certain products due to the introduction of a novel product by the same producer (Díaza, Martín-Consuegraa and Estebanc, 2015). In this case, there is the fear that opening up the drive-through coffee shops will eat into the market share of the existing dine-in Starbucks restaurants, leading to a reduction in their market share, sales volumes, and revenue. This is because the stores will be opening similar products and services. This notwithstanding, Starbucks hopes to realise a 5% rise in sales growth from its U.S. operations (Starbucks, 2016).
Elevated coffee experience:
Over the next few years, the coffee market is poised to realise a multi-fold rate of growth. Towards this end, Starbucks has positioned itself to ensure it remains the most preferred coffee shop. The company plans to offer its customers an elevated and highly customised coffee experience (Strom, 2014). For example, the company targets its premium customers with Roasteries. The Roasteries will initially target 10 Roasteries providing various forms of coffee experiences, including Reserve coffees roasted on-site to specifications, and the ability to interact with baristas. Moreover, Starbucks through its partnership with Princi will be offering Princi foods as another strategy to promote foods in its establishments (Jargon, 2016). The company also seeks to target the upper-middle class with the premium Roastery experience at Reserve Stores albeit at a lower cost. BY delivering high-quality coffee to customers, Starbucks hopes to deal with the problems of ubiquity and competition.
Launching new customer occasions:
Over the past few years, Starbucks has witnessed a significant growth in the number of customers visiting its stores over the lunch hour. Such an increase in customer growth is largely due to the improved food offering by the company, the availability of more fresh food items to customers, as well as strength of the company’s tea platform. In December 2016, Starbucks launched its nitro cold brew brand to be sold in some 500 selected stores across the U.S. (Starbucks, 2016). These developments are intended to entice an even greater number of customers to visit the company’s stores by means of offering them novel and innovative beverage and food options. The goal is to increase the market share and with it sales volumes. Increasing the at-home coffee share:
As telecommuting becomes entrenched in the modern world, it means that an increasingly larger number of workers will be forced to work from home. This could have a detrimental effect on the average sales recorded at various Starbucks restaurants during the morning rush hour, especially in their drive-through stores. To take advantage of the situation at hand, the consumer product goods departments at the company are seeking to stimulate the demand for at-home coffee. Consumer product goods largely entailed K-Cups and packaged coffee (Boone and Kurtz, 2014). Presently, the company remains the leader in K-Cups, although the industry has experienced a considerable decline from its former peak. In order to stimulate demand in this segment of the market, Starbucks has entered into partnerships with various companies, including Tingyi in China, Pepsi in Latin America, and well as Anheuser-Busch. These partnerships are aimed at enabling Starbucks to increase the market share of its ready-to-drink segment with projections showing that this segment will enable Starbucks to realise a 10% year-on-year growth over the next five years. Presently, Starbucks holds three-quarters (75%) of the ready-to-drink segment in the U.S. with the latest partnerships poised to give the company an extra market share of the ready-to-drink market estimated at $ 1 billion (Bidness Etc., 2016).
Extending Starbuck's Digital Wheel:
Starbucks has one of the most robust and the largest mobile ecosystem consisting of over eight million mobile paying customers, and over 12 million members of the company’s Starbucks Rewards Royalty programme. In December 2016, the company launched its extended digital flywheel. This is an innovative ordering system that enables customers to place orders using a messaging interface and voice command. In this way, customers can enjoy unparalleled convenience and speed, along with improved customer engagement and loyalty using the Starbucks app. The Starbucks digital flywheel also offers customers access to one-on-one personalisation. In this way, Starbucks is in a position to offer customers direct, personalised order combinations, thereby increasing engagement and growth.
Recommendations to Achieve Competitive Position
Growth potential:
While Starbucks has set its eyes on increasing the number of stores in the suburbs of major cities and towns in the U.S., the international segment still holds the biggest growth potential for the company's growth. In particular, the emerging markets of China, Brazil, India, Mexico, and South Africa are characterised by a rising middle-class population and these particular segments offer considerable opportunities for Starbucks to increase its projected number of stores internationally and hence serve more customers. Embracing this strategy will also go a long way in improving the sales volumes of Starbucks and by extension, the company's profitability. The company has already made considerable headways in the Indian and Chinese markets where it has partnered with renowned brands such as Tingyi in China and Tata in India. These partnerships will go a long way in enhancing the uptake of the Starbucks brand. Nonetheless, these markets still possess a lot of untapped potential that the company needs to pursue. A key recommendation here is that Starbucks should focus on winning locally as a means of growing these emerging markets. In other words, Starbucks needs to transfer its strategy of customising its products and service delivery to the tastes and preferences of customers in these local markets. Moreover, the management team at these emerging markets should be given the freedom to tailor the format of the stores to local tastes and to also introduce local product mix. Finally, the prices should reflect the tastes, needs, and lifestyles of the various individual markets.
Transfer of core capabilities and competencies:
Starbucks boasts of the ability to employ differentiation strategies and to embrace innovations in order to offer its customers the unique experience of its high-quality snacks and beverages as its core competencies. Starbucks's brand equity hinges on the ability to offer its customers a unique “Starbucks Experience” through the sale of its finest coffee. This “Starbucks Experience” is derived from a culture of providing high-quality customer service, in addition to serving its products in clean and well-maintained stores (Smallwood and Ulrich, 2004). This culture should be transferred into the emerging market as well in order to give the company an edge over its competitors. On the other hand, Starbucks's core competencies are the values of the company’s human resources who endeavour to cultivate strong external and internal relationships with customers and suppliers. This too, should act as a key driver in propelling the expansion of the company into the emerging market in a bid to increase the size of its stores and realise increased revenue.
Starbucks should also embrace its strategy of entering into smart alliances and acquisitions of like-minded businesses as another strategy for international expansion. This will not only aid in the realisation of its long-term strategic goal but also ensure that Starbucks remains one of the most respected and recognised brands globally.
The Ready-to-drink (RTD) segment promising both in the United States and in the emerging market. The company needs to focus on more partnerships like the one it recently entered with Anheuser-Busch to manufacture, package, distribute, and sell RTD tea across the U.S. market (PR Newswire., 2016). This can be realised by making more acquisitions like the acquisition of Teavana in 2012. Such partnerships are desirable as they will enable Starbucks to use its brand name in terms of leveraging its production and distribution capabilities not just in the U.S. RTD market, but also in emerging markets like China and Brazil where these beverages are also gaining popularity. Consequently, Starbucks will help push its sales revenues from its operations in the international market.
Mitigating the price volatility of coffee beans
To Starbucks, coffee beans remain a key ingredient in the company’s value chain and the commodity has been enduring considerable fluctuations in terms of prices. Considering that Starbucks is always on the lookout for high-quality coffee beans, it is important that it finds a way to mitigate these price volatilities. One way of doing this is for Starbucks to institute future contracts as an effective hedging strategy. This will ensure that Starbucks manages future fluctuations in the price of the commodity without suffering extensive losses.
Digital Wheel Strategy:
Starbucks should also consider implementing its Digital Wheel strategy in the emerging market as a means of driving sales and customer loyalty. High mobile loyalty is an effective strategy for Starbucks to use as a driving force for its growth and revenue given that mobile app users have been shown to spend thrice as much as the consumer at Starbucks (BI Intelligence., 2016).
References
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Jargon, J., 2016. Starbucks invests in high-end Italian bakery Princi. The Wall Street Journal. [Online].
Jones, C., 2016. 2 Starbucks on every corner? Chain to open 12,000 more. USA Today. [Online].
Lussier, R.N., 2014. Management Fundamentals: Concepts, Applications, & Skill Development. New York: Sage Publications.
Mintel, 2016. US sales of dairy milk turn sour as non-dairy milk sales grow 9% in 2015. [Online].
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Thakor, A.V., 2011. The Four Colors of Business Growth. Cambridge, Mass.: Academic Press.
Trefis Team., 2016. Starbucks Is Maintaining Its Competitive Edge. Forbes. [Online].
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