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Starbucks & Food Service Industry Analysis

Sarah Fitzgerald

Lauren Norris

Matthew Mariella

Towson University

Business Strategy and Policy

July 15, 2008

Section One: Overview of the Industry

The company Starbucks inhabits within a very large industry called the Food Service Industry. This industry covers places, institutions, and companies responsible for any meal eaten away from home. (Wikipedia) Within the Food Service Industry reside serval smaller industries, such as Restaurant, Leisure & Entertainment, Grocery Stores and Catering. (Hoovers) The industry specifically covered in this analysis is the Restaurant Industry. This encompasses those places that serve prepared meals and beverages, the two subdivisions of this industry are Quick Service Restaurants, QSR, and Full Service Restaurants, FSR. (Hoovers) QSRs are those fast food restaurants such as McDonalds and Burger King. FSRs are those sit down and be served restaurants such as Ruth’s Chris or Olive Garden.

Products & Services

The products and services of the Restaurant Industry do not vary a great deal. The products are food and beverages. Now the quality of the food and beverages varies from restaurant to restaurant and from QSR to FSR. The services work the same way. The services in the Restaurant Industry are delivery, making the product and serving the product. Depending on the specialty of the restaurant depends on the speed and quality of the services listed.

Industry Size

The size of the Restaurant Industry is quite large. It is the second largest employer after the government, projected to employ an estimated 13.1 million people in 2008, which is over 9% of today’s work force. (National Restaurant Association) There are well over 900,000 locations in the United States alone. (National Restaurant Association) In one typical day in the United States there are over 130 million individuals will be patrons of the Restaurant Industry. (National Restaurant Association)

Financials

The amount of money spent in the Restaurant Industry is amazing. It is projected that it will produce $558 billion this year alone. The predicted amount that will be spent a day on food and beverages is about $1.5 billion. (National Restaurant Association) An employee in either QSR or a FSR will earn around $35,000 in wages and tips this year. The typical QSR makes a profit of around $800,000 a year, usually consisting of around 25 employees. (Hoovers) The typical FSR makes a profit of around $1.5 million a year and usually employs about 50 employees. (Hoovers) In 2006 the average household spent over $2,600 for food in this industry. (National Restaurant Association) It is projected that the drinking places alone will make at least $16 million, but the eating places will make the most topping out at $376 million this year. (National Restaurant Association)

Competitors and Competition

The amount of competitors within this market is quite vast. It ranges from the independent Chinese restaurant around the corner to the intimate dining bistros to the large global McDonalds. But the top competitors are all that need to be mentioned. The top five competitors within this market from most successful to the least successful are McDonald’s, Yum! Brands, Darden Restaurants, Brinker International and finally Starbucks. These are the major players in the Restaurant Industry.

The type of competition that is used in this industry is the Multi-National Competition. This industry is all over world, in most all countries there are restaurants and especially McDonalds. This type of competition applies to not only the Restaurant Industry but the Food Service Industry as well.

Market Share

Yahoo Finance compared the top five competitors to the NASDQ in order to see where each competitor stood in comparison to the NASDQ. From February1, 2008 till April 23, 2008 all of the five competitors were above the NASDQ. After the 23 of April Starbucks dropped and fluctuated up and down but never came above the NASDQ since. Then in June the stock began to plummet and hasn’t come up yet. Darden has been the highest since February 1, 2008 and has stayed the highest of all the competitors.

Attractiveness of the Industry

In order to know the “Attractiveness” of an industry the Porter’s Five Forces Model is used. It evaluates the threats of new entrants, power of the buyers, power of the suppliers, the intensity of competition, and the threat of substitutes.

The threat of new entrants in the Restaurant Industry is high. The ability to open a new restaurant is expensive but still able to be done. The power of the buyers is very high. The ability for a buyer to decide that he/she doesn’t want a McDonald’s burger then he/she just goes across the street to the Sonic or Burger King or Jack in the Box or the FSR that serves burgers. The power of the suppliers is high as well. The ability to sell needed products to this industry is easy, the amount of different restaurants that need straws or napkins or paper cups is numerous. If the supplier does not get one contract with a company they can try to get the other FSR or QSR. The intensity of competition is very high. The amount of written ads and commercials comparing one competitor’s product to another competitor’s product are numerous. Each competitor bad mouthing their rival’s product telling buyers how inadequate it is. The threat of substitute is high too. The ability for a competitor to take the place of another is easier than in other industries.

Forces Impacting the Environment

There are at least three forces that impact the Restaurant Industry, consumer income, quality of the food and the quality of the service. The main force impacting the industry is consumer income. The amount of money used to go out for a meal is great than the amount used to eat at home. If the consumer does not have the money to spend on extra food when there is food already at home the consumer won’t. The other two forces are not as important. The quality of the food and the service at the FSR or QSR affect whether a patron will return to the establishment or not.

Dominant Strategies

The strategies that are used in the Restaurant Industry vary from restaurant to restaurant. It seems all strategies are represented within this industry. If considering each restaurant by them self it is easier to see which strategies are used. The Hybrid strategy is used for McDonalds while Olive Garden uses the Global strategy.

Section Two: Overview of the Specific Firm

Starbucks Coffee Company started out as Starbucks Coffee, Tea and Spices, which was founded by three partners, Jerry Baldwin, Zev Siegel, and Gordon Bowker in 1971 in Seattle, Washington. The founders got their inspiration from their friend Alfred Peet, who founded Peet's Coffee & Tea in 1966 in Berkeley, California; the three founders saw the opportunity for this type of specialty retailer in their area.

Howard Schultz joined the company in 1982 as the Director of Retail Operations and Marketing. After a trip to Italy, he realized that espresso drinks could be sold in the United States as well. Howard Schultz persuaded the founders to start selling espresso drinks in area restaurants, which was an instant success. He purchased the company in 1987, changed the name to Starbucks Coffee Company and started selling espresso drinks in the stores. Starbucks are now located in 43 countries around the world (Starbucks, 2008 b).

Relative Position of Starbucks

Starbucks is the number one specialty coffee retailer in the world. However, the company is currently struggling in the U.S. market for several reasons. For one, consumers’ tastes and preferences have changed; they are now becoming more health conscious and do not want sugary drinks or food items. Other factors include: the slowing economy and rising fuel costs, which has many consumers less willing to pay a premium price for coffee products (Adamy, 2008).

The company is also experiencing the effects of the organizational life cycle, as the company has reached the saturation point in some U.S. markets. Some U.S. markets actually had Starbucks stores competing against one another because there were so many in a one mile radius (Adamy, 2008).

The company’s expansions efforts have backfired, affecting sales and jeopardizing the firm’s success. The company recently announced that it will be forced to close 500 locations that currently are not performing well or expected to provide acceptable returns in the future. Starbucks would like to believe that they were victim to their own success, but analysts believe that the company chooses poor store locations and as a result the quality of its existing locations has deteriorated. Starbucks previously forecasted that it would open 250 new stores next year, but now plans to open less than 200 new stores in the upcoming year (Adamy, 2008).

The good news is that Starbucks is still growing, due to their expansion efforts in markets outside the United States. Last year, the company opened 2,500 new stores across the globe, which is an astonishing 7 new stores per day. Starbucks now plans to direct its growth effects in international markets, instead of its domestic market (Adamy, 2008).

Products & Services

Starbucks purchases, roasts, and sells high-quality whole bean coffee products worldwide. The company produces fresh, rich-brewed coffees, and Italian-style espresso beverages. Starbucks also sells premium teas and water. While the company primarily operates in the beverage domain, the company also operates in the food, merchandise, and entertainment domain. Starbucks sells pastries, sandwiches and salads, along with coffee-related accessories and equipment such as home espresso machines, coffee brewers and grinders, coffee mugs and accessories, premium chocolates, and various gift items. Furthermore, Starbucks provides access to music, books, and films. Besides selling these products in-stores, Starbucks also sells some of these products online and through mass retailers (Standard & Poor’s, 2008).

Market

Starbucks has locations all over the world, operating in 43 countries; although the company primarily operates in the United States, Canada, the United Kingdom, Thailand, Australia, Germany, China, Singapore, Puerto Rico, Chile, and Ireland (Standard & Poor’s, 2008). Starbucks has 7,087 company-operated stores and 4,081 licensed stores (Starbucks, 2008 a).

Strategy

Starbucks pursues a differentiation strategy. They offer a range of unique products that can be sold to consumers at a premium price. The company also has a unique atmosphere and knowledgeable employees that help the company distinguish it from competitors. Another part of the company’s strategy is expansion. Starbucks became the largest specialty coffee retailer in the world through its expansion efforts.

Competitive Advantage

The company’s strategy has ultimately provided Starbucks with a competitive advantage over rivals. Starbucks has unparallel brand recognition and enjoys the advantages of having massive economies of scale. However, the company is struggling and may not be able to sustain this competitive advantage unless the company re-evaluates its strategy.

Financials

Starbucks reported significant losses in their quarterly income statement on their March 30, 2008. Revenue decreased by $241.6 million, from $2,767.6 billion in December 2007 to $2,526 billion in March 2008. Profits decreased by $162.3 million from $1,581.6 billion in December 2007 to $1,419.3 billion in March 2008. Operating income decreased by $154.9 million from $333.1 million in December 2007 to $178.2 million in March 2008. Net income decreased by $99.4 million from $208.1 million in December 2007 to $108.7 million in March 2008 (Yahoo Finance, 2008).

Starbucks’ stock is at a record low. The stock closed on July 14, 2008 at $14. per share. The stock is worth less than half as much as what it was worth two years ago. The high in July 2006 was $38.02 per share. The stock is also worth less than what it was worth during the initial public offering, 16 years ago. In 1992, the initial public offering was $17. per share (Yahoo Finance, 2008).

S.W.O.T. Analysis

Starbucks strengths include its strong brand-name recognition, large retail distribution system, quality products, unique atmosphere, extensive product list, good supplier relationships, strong financial history, and strong human resources (Lussier, 2006).

The company’s weaknesses include relying primarily on a single source for income (coffee sales), being dependent on suppliers, and high prices relative to competitors (Lussier, 2006). Starbucks has also struggled with the sale of merchandise that is unrelated to its core competencies. For example, the company sometimes only sells two books a day, through its in stores distribution channels.

Starbucks has the opportunity to expand into new overseas markets, and untapped U.S. markets. Another opportunity may include increasing brand-name recognition by developing new products that are related to the company’s core competencies (Lussier, 2006).

As previously stated, Starbucks is currently experiencing some problems. The company is being threatened by the economy, rising fuel prices, and changing consumer tastes and preferences. Furthermore, Starbucks is entering the mature stage of the organizational life-cycle in some U.S. markets. As far as for the company’s international operations, the two major threats are the economic and political conditions (Lussier, 2006).

Section Three: Core Competencies and Value Chain

Mission

Starbucks mission is to establish the company as the premier purveyor of the finest coffee in the world, while maintaining its principles as the company grows. Starbucks principles include providing a great work environment, embracing diversity, applying high standards of excellence, satisfying customers, contributing to the community and the environment, and recognizing that profitability is essential to future success (Starbucks, 2008 c).

Core Competences

Starbucks core competencies are brewing quality coffee and creating an Italian style espresso bar atmosphere. Starbucks also views its employees as a core competency. It puts them through 24 hours of training within their first 2-4 weeks of employment. (Starbucks, 2008) Employees are expected to know everything about the company and its various coffees. When a customer walks into a Starbucks store they should smell the fresh coffee aroma, get greeted by the employee, and enjoy the best brewed coffee in the world.

Value Chain

Starbucks uses a lot of suppliers for many different things. It needs many things other than coffee beans in order to give the atmosphere that makes Starbucks what it is. It gets milk, syrup, coffee beans, pastries, and drinks from various food and beverage suppliers. Starbucks gets operational items like manufacturing equipments, IT hardware/software, paper products, books, CDs, and coffee accessories from suppliers. Since Starbucks offers over 30 different blends of coffee, it needs different coffee beans from around the world. Starbucks wanted to make sure that every supplier had the same equal opportunity to supply them and at the same time, which went parallel to Starbucks vision. It teamed with TiVA to create a supplier accreditation program which allowed coffee bean vendors to rate themselves based on five criteria. The five criteria are economic issues, social conditions, environmental impacts, verification, and quality. If any supplier gets a 100 percent on the test, they qualify for a $.10 increase per pound of coffee beans. TiVA is in charge of the delivery and management of the new program. (Starbucks, 2008) The core competency is maintaining an environment where people from allover the world can come and enjoy coffee. Starbucks has also tried to expand into new markets with strategic alliances. Starbucks currently has over 6000 strategic alliances. (Isidro, 2004) It teamed with Apple in order to get into the music/mp3 business. (Starbucks, 2008) Starbucks teamed with Hershey chocolate in order to offer Starbucks tasting squares, chocolate bars, chocolate covered coffee beans, and 5 different truffles. (Gordon, 2008) Starbucks has also partnered with Jim Beam to offer Starbucks brand liquor. (USA Today, 2005) Bank One has recently created a Visa credit card for Starbucks which can be used as a normal Visa and a Starbucks card. (Starbucks, 2008) PepsiCo was also teamed with Starbucks in order to offer non-coffee drinks such as the Starbucks Frappuccino lines and Starbucks double shot. (Forbes, 2002) Dreyer's Grand Ice Cream Holdings sells Starbucks brand ice cream. (USA Today, 2005) It has also begun to sell books, CDs, DVDs, teas, and hot cocoa.

Distribution is where Starbucks really separates itself from other coffee vendors. In 2007 Starbucks had more then 8500 stores in 43 countries which is its main way of distribution. Most of those stores has a drive thru which was convenient for on-the-go customers. Starbucks also teamed with Sysco in order to transport its coffee products to over 18000 grocery stores and has over 6000 food service accounts. In 2003 it purchased Seattle Coffee Co. which added 12000 grocery stores to its list. Customers can also go online to purchase Starbucks coffee and merchandise. Its webpage has a place for businesses to order Starbucks brand coffee, tea, hot cocoa, paper products and amenities.

Starbucks is very large so every time it makes a purchase, it can utilize economies of scale. Starbucks also focuses on making freshly brewed coffee and creating a perfect environment for customers. It has expanded into many different parts of the food and beverage industry as well as the entertainment industry but it focuses on its core competencies and lets other companies do what they do best. All of the expansions are related diversification which helps strengthen the core competencies. Since Starbucks trains their employees so vigorously, it helps them in the long run because every employee knows exactly what Starbucks is all about and they take pride in what they do. The supplier accreditation is also a huge benefit as well because it ensures that suppliers have the same visions and goals as Starbucks.

The downside to Starbucks value chain is that it is so dependant on other companies. It relies heavily on coffee bean distributors to supply them with premium coffee beans. It also relies heavily on its strategic partners. Starbucks has received a lot of criticism and luckily none of their alliances have fallen apart because of it. Another weakness is that because they are trying to expand its core competencies, it has been loosing sight of its primary one.

Section Four: Analysis & Recommendations

Analysis

Starbucks has grown into a huge success but not without criticism and hard obstacles. Starbucks is a premium coffee vendor which means that it uses expensive inputs to produce the best output. The problem is that economy is going into a recession and people are making alternate spending choices with their disposable income. Other competitors offer coffee beverages and even espresso drinks at less then half the price of a Starbucks coffee. Starbucks has also expanded so much that its stores are competing with each other. People are also becoming more health conscious and don’t want to drink a beverage with a lot of sugar and caffeine. Because of its rapid growth and external factors that are slowing business, Starbucks has a great deal of unsold inventory. It also expanded into the entertainment industry which has been dying ever since Napster and the availability of free downloading. Starbucks is also receiving a lot of criticism about it’s coffee beans and its unfair competition strategies. Starbucks is buying smaller coffee companies which some people think is unfair. It is also only using 3.7% of fair trade coffee beans in its coffee. Fair Trade promotes fair competition in international sales and cuts out intermediaries who rip off farmers with unfair prices. (O.C.A., 2007)

Luckily for Starbucks, its management team has also taken a strategic management course. Starbucks is closing 600 of its stores and closing 12000 jobs. It has ended its entertainment deal and no longer offers free mp3 downloads or DVDs. It is still keeping 600 WiFi locations which allow consumers to connect to the internet through the Starbucks store and get onto iTunes. It has also started cutting some costs by using pre-ground coffee beans and it is toying with the idea of $1 refillable coffee short drinks. It has been expanding into new markets for the past few years and continues to look into other markets which could help its environment.

Recommendations

We feel that there are still other things that could be done to promote the growth of Starbucks. Its core competencies are making premium coffee and by offering $1 coffee drinks and by using pre-ground coffee beans, it is robbing its stores from quality and aromas. Refocusing on making premium coffee the way that it is supposed to be made would help bring the passion and environment back to the Starbucks culture. Going into the entertainment industry was not a bad move but going into CD and DVD sales was. If Starbucks offered free entertainment in their stores such as free internet connection in all stores, it might attract new consumers. Choosing smarter locations for its stores would be a good investment, such as implementing locations in crowded cities or untapped universities. Expanding its sales of ice cream, liquor, and chocolate could also be a good idea in order to capture more of the market. College students do not go along with Starbucks’ culture so seeking talented employees that are passionate about coffee which would promote the atomsohpere Starbucks is looking for and needs.

As a team we do not suggest that individuals should invest their money in their stocks within such a descending company. Starbucks has a great deal to over come in order to gain back what they have lost, both in the stores and in the market. The main problem they face is a fixing the problems they created from themselves.

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