"BA 453 Starbuck s business plan"
Starbucks Written by: Ericka Hartvickson Lukas Jones Richard Whitehouse Justin Young Bryan Kelly Peter Leiweke David Alex Selby Brandie Whitmire Table of Contents Executive Summary Company Background History and ownership Major successes Industry Analysis Product Unique features Sales growth and profit margins Pre-tax profits Industry data Maturity of product Trends Marketing and Sales Customer-End user profiler Distribution Pricing policies Stage in product life cycle Advertising/Promotion Competition Major competitors sales Intensity of rivalry Competitive advantages Entry and exit barriers Firm’s prices Firm advertising and promotions Management and Organization Structure Management team Control Compensation Conclusion and Recommendation Stage in organizational life cycle International expansion Appendix Financial statements Executive Summary Vision and mission statement “The bottom line is we always figured that putting people before products just made good common sense. So far, it’s been working out for us. Our relationships with farmers yield the highest quality coffees. The connections we make in communities create a loyal following. And the support we provide our baristas pays off everyday.” Vision statement is provided by Starbucks. Starbucks mission statement “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow”. Company Overview Starbucks was founded in 1971 in Seattle’s Pike Place Market by Jerry Baldwin, Zev Siegel, and Gordon Bowker. It started as a small coffee shop offering fresh-roasted, gourmet coffee beans along with brewing and roasting accessories. In the early 1980’s Howard Schultz joined the company and later bought it in 1987 with several other local investors. Starbucks became publicly traded in 1992 and by the end of that year there were 195 outlets in the United States. In 1999 they entered the music industry with the acquisition of Hear Music and then in 2006 they created Starbucks Entertainment to compete in the film industry.8 Currently, they are focusing on opening international stores. Product/Service Strategy Starbucks has brought a brand and culture to drinking coffee and is the leader in the trend of young coffee drinkers. They offer more than 30 blends of coffees, merchandise, fresh food, entertainment in the form of books, music and films, and Starbuck’s gift cards. Their main competitive advantage lies in the ambiance of their stores environment. This competitive advantage is supported by their three unique competencies of customer orientation, employees and customization. Starbucks strives to offer a personal experience for each customer ordering a cup of coffee that no other coffee house can emulate. Market Analysis The specialty coffee market is comprised of franchises, coffeehouse chains and independently owned coffee shops. The domestic market is saturated and in the maturity stage of the life cycle. The significant barriers to entry for the market include intense competition, market saturation and established brand identities. The low barriers to entry involve limited technological and low capital requirements. Rivalry amongst firms is fierce and primarily determined by location and brand loyalty. Market Plan Starbuck’s markets itself as a way of life rather than a coffee shop. Their marketing campaign is based around the ambiance of their stores and the personal experience they offer their customers. Starbuck’s customers prefer known brand names have large disposable incomes and are open to societal/cultural influences as well as personal recommendations. Starbucks positions itself as an extraordinary coffee house that offers the highest quality of service and product customization for their customers. Financial Plan In 2006 Starbucks experienced a growth in revenues of roughly 22% and is predicted to continue at a rate of 14% for the next ten years. The average profit margin is between 3 and 5%. They are expecting to experience a significant amount of international growth which will be reflected in their future and current cash flows. An important financial decision they made in 2006 was to acquire 100% equity in their Hawaii and Puerto Rico stores so they could better leverage resources and ensure brand consistency. It is decisions like these that create stability and sustainability for Starbucks. Company Background Starbucks was formed in 1971 in Seattle’s Pike Place Market by Jerry Baldwin, Zev Siegel, and Gordon Bowker. The original name was Starbucks Coffee, Tea and Spices.8 Howard Schultz joined the company in the early 1980s as the head of marketing. At the time of his arrival the major goal of Starbucks was to open a store in Portland.13 Schultz went on a business trip to Italy, where he realized that espresso drinks should be the future of the company’s Schultz asked “What would happen if you took the quality coffee bean tradition of Starbucks and merged it with the charm and romance of the European coffeehouse?” His answer was “Starbucks could transform the traditional American coffeehouse experience from the ordinary to the extraordinary.”13 In 1987, Schultz and several local investors bought the company, and they went public in 1992. By the end of 1992, there were 195 outlets in the United States.8 In 1999 they entered the music industry with the acquisition of Hear Music and then in 2006 they created Starbucks Entertainment to compete in the film industry.8 They are currently focusing on opening coffee houses internationally. Starbucks has been the leader in the trend of young people drinking coffee and managed to bring a brand and culture to drinking coffee again. Industry Analysis The specialty coffee industry is currently populated by a combination of franchises, coffeehouse chains, and independently owned coffee shops with average profit margins between 3%-5%.15 Most experts consider the specialty coffee market to be in the maturity stage of its industrial life-cycle, and probably close to saturation in the domestic market.15 Although the growth of this industry has slowed considerably since its peak in 2002, average sales have increased by nearly 20% in the last 2 years.6 Experts predict that this trend will continue at an annual rate of 14.1% reaching total revenues $18.9 billion by 2010.6 Specialty coffee houses offer a variety of products including traditional espressos, blended and ice coffees, sweet non-coffee drinks, teas, and an assortment of breakfast and lunch menu items. The customer’s experience when visiting a coffee house is what makes the product unique. A warm cozy atmosphere, trendy music and friendly staff are what create an unforgettable experience for the customer. Pre-tax profits for Starbucks in 2005 from retail operations were $5,391,927 and in 2006 they increased to $6,583,098.18 Starbucks other two sources of revenue come from licensing and foodservice. In 2006 licensing pre-tax revenues were $860,676 and foodservice was $343,168.18 Starbucks has made the transition from a small coffee bean brewery to an international specialty coffee house retail store. Opportunities Ease of entry – low capital requirements, limited specialized skills, and an increased demand contribute to the low entry barriers. Industry growth – industry growth has been substantial and is expected to continue, creating many opportunities for new firms. Buyer power – due to the extreme availability of raw goods, competition among suppliers and the access to information contribute to improved bargaining power for the buyer. Threats Brand identity – since other major brand identities have already been developed, it is difficult for a new firm to claim market share. Economies of scale – larger corporations with great buying power have the ability to create economies of scale, making it more difficult for smaller firms to compete. Substitutes – along with teas and sodas, the energy drink industry poses a significant threat to the specialty coffee industry. Marketing and Sales The Starbucks customer base is an extremely diverse mix that is always widening to include new types of consumers. Starbucks appeals to both young and old, offering products like sweet non-coffee drinks for children to the more traditional cappuccino for the older demographic. The age demographic has been slightly decreasing, with more appeals to a middle-class income, and an 18-34 age demographic.4 There are less college graduate customers than in the early 2000’s, falling from 78% to 56%.4 Some estimate that 90% of Starbucks customers are Internet users, leading Starbucks to promote heavily on its website.20 Men and women are targeted equally, with a slightly higher percentage of female consumers. Most ethnicities are represented in the market with Hispanics making up a large portion of the consumers.15 Starbuck’s customers prefer known brand names, and are open to societal/cultural influences as well as personal recommendations. Primarily Starbucks distributes directly to customers through its own retail stores that are located worldwide. Partnerships with grocery and other retail outlets have given Starbucks retail space within other retail locations. These limited operations provide customers with even more exposure to the brand. Finally, bottled drinks and ground coffee are available at many grocery outlets. The coffee house industry markets itself as a way of living, it has been said that a coffee house is a public place that people treat as if it were private. People find something very intriguing and entertaining about sitting in a public place drinking coffee, reading a book, chatting on their laptops and or socializing with friends. Many coffee shops have taken advantage of this trend and use it as an advertising and promotional campaign. Starbucks is one of the leaders in the industry of effectively using this new trend to market themselves. The specialty coffee house industry as a whole charges a premium for their coffee services. Their pricing policies follow in line with their marketing strategies. Since coffee houses market to individuals with a higher level of income they also charge more for their coffee. The customer identifies a high price with a high quality cup of coffee. Once again Starbucks is the industry leader in charging a premium price for their coffee services. As mentioned earlier Starbucks is in the maturity stage of the product life cycle. Due to the market saturation that they are facing they are turning to international markets for growth. Starbucks is dealing with the reality that they are an organization in the elaboration stage and that revitalization is critical for them to continue to succeed. Competition Starbucks sets the pace for the ‘specialty coffee industry’ and its main competitors often struggle to keep up. Sales growth in the industry has averaged around 20% the last two years.12 Starbucks had revenue growth of around 22% in 2006 over the previous year.12 Starbucks two largest competitors, Peet’s Coffee and Tea and Caribou Coffee Co., had revenue growth figures of 20.1% and 19.3% respectively.12 All three main competitors showed decreases in net earnings as a percentage of revenues. Starbucks dropped to 7.2% from 7.8% of revenues; Peet’s dropped to 3.8%; and Caribou coffee posted a larger than previous years’ loss of (3.8%).12 Product differentiation in the specialty coffee industry is more a factor of brand identity than actual product differences. Firms like Starbucks that have well established brand identities pose a serious threat to new firms who are trying to gain a foothold in the market. Rivalry amongst firms is primarily determined by geographical location and brand loyalty. Research shows that consumers of specialty coffee place a premium on quick service and convenience. For a smaller firm located in an area of concentrated competition this is a serious threat. However, this also means that there are opportunities for small firms who operate in areas with little or no competition. In a saturated location there is an extremely high intensity of rivalry among firms, the only way to escape this intensity is to find a new location that has not already been flooded with coffee houses. This is why Starbucks along with other firms is focusing on expanding to international markets. Starbucks coffee is priced slightly higher than their main competitors. A 16 oz. coffee will cost the consumer $1.70 whereas their main industry competitors will charge anywhere from $1.50 to $1.75 for the same drink.15 Overall, Starbucks delivers the most consistent quality and atmosphere of any of the major coffee houses nationally. They can afford to have their beverages priced on the higher end of the industry average without impacting their annual sales, market share, or rate of growth. Starbuck’s competitive advantages stem from their three unique competencies which are employees, customer orientation, and customization.13 These three competencies provide Starbucks with a competitive advantage over their competitors. Starbucks believes that its unique culture, the intimacy of its brand, and the uniqueness of the customer experience will keep people coming back. Starbucks refers to their stores as a “third place.”13 This third place is intended to capture a unique warmth that sets it apart from the first two places in most people’s lives: work and home. The ambience of the store must be inviting. It needs to be a place where a person will feel comfortable hanging out with friends or alone. This inviting environment is a major player in Starbuck’s competitive advantage. No other competitor has been able to capture the same environment that Starbucks offers its customers. This environment would not be possible without Starbuck’s staff which the organization refers to as partners. Their third competency is customization. The customer must be able to customize their order with the hands on assistance from a barista. Customization means satisfying each customer’s unique expectations, and often involves special temperatures, soy milk, and various pumps of flavor. Dave Olson, the senior vice president of Culture and Leadership Development said “It doesn’t matter how many millions or billions of cups of coffee Starbucks serves, if the one you get doesn’t suit you. Starbucks must be able to perform at the level of consistency for the individual automatically, and that’s really the promise.”13 These three competencies working together are what allow Starbucks to charge a premium for a cup of coffee and maintain a competitive edge over their competitors. Entry and exit barriers for the premium coffee house industry are relatively low. There are no large investments in machinery or inventory needed. In this industry the most important investments that need to be made are ensuring that there is a pleasant atmosphere, the acquisition of premium coffee beans, and purchasing the coffee equipment necessary to produce the beverage. Compared to other industries the barriers to entry and exit are relatively unimportant; the equipment purchased for operation can be easily resold, as can any property that was purchased. Most often, however coffee shops simply rent their locations, reducing the importance of barriers to entry and exit even more. The low barriers to entry, limited technological requirements, and low capital requirements are all major opportunities for firms seeking to enter the specialty coffee industry. Starbucks markets their company as a way of life rather than simply a coffee shop; they offer large meeting areas, wireless Internet, light snacks, and a multitude of drinks. They encourage their patron to stay and enjoy the environment while at the same time consuming their goods. Starbucks makes an effort to be the most consistent distributor of premium coffee. They want their customer to know that when they purchase a cup of coffee in the south of Florida it will be of the same quality as a cup purchased in Seattle, Washington. In order to maintain to this marketing campaign Starbucks spends 6% of their net revenue on selling, administration and general expenses. 19 Their competitors Peet’s Coffee and Tea and Caribou spend 9% and 52% respectively.17,12 Financial Reports See appendix for cash flow, balance and income statements. Management and Organization Starbucks operates under a divisional structure that is based on location. The divisional structure works best for Starbucks because it allows for easy growth, a greater focus on customer needs and the ability to broadly train managers. However, a downside of this structure for Starbucks is that it creates the potential for duplication of work at the lower and upper management divisions. This structure has supported Starbucks rapid growth and mission statement of customer satisfaction.13 Starbuck’s follows a differential strategy that supports them charging a premium for their products and creating an unique environment that is in align with their marketing strategies. Their current strategy tactics involve continuing to focus on growth, establishing a leadership position within company owned stores in key markets, leveraging the brand into new product categories and channels, and maintaining their values, culture and guiding principles. Starbucks currently operates in all 50 states, with 6,566 company-operated stores and 3,729 licensed stores.13 Additionally, Starbucks has stores in 41 countries outside the United States.13 Along with new store growth, the Starbucks workforce has grown from 100 employees in 1987 to more than 100,000 in 2006.13 Starbucks now offers more than 30 blends of coffees, merchandise, fresh food, Starbucks Entertainment (music, books, and films), global consumer products, the Starbucks card, and several other brands.10 Currently, they are opening five stores a day, 365 days a year.10 However, with this growth, Starbucks realizes that they must maintain their values, culture, and guiding principles to remain the best. They realize that the larger the company grows, the more difficult it will be to foster the unique Starbucks experience and maintain a differential strategy. One of the ways in which Starbucks organizes its company is with the standardization of skills. All of the employees at Starbucks are given a standardized training program that aligns each one with the goals and mission of the organization.9 It is important to the organization that the employees feel that they are empowered because Starbucks uses their employees as a competitive advantage over its competitors. Each employee is expected to know how to make countless combinations of drinks and relate to customers on a personal level.9 Starbucks has effectively used this employee feeling of empowerment tactic to create a unique atmosphere for customers and employees alike. In addition to low-level “baristas” there are nearly 40 senior Vice Presidents in both the international and domestic stores.9 Both, operating and strategic decisions follow a top down hierarchy to the professionals of the operating core.13 Business objectives are communicated from the senior vice presidents down to the store managers and on to ground level employees. Each store has only one general manager and up to two assistant managers.9 Starbucks has implemented a very successful compensation plan that once again provides the employees with a feeling of empowerment within the organization. It includes giving all employees working twenty hours a week or more stock options and health insurance. 9 Depending on the employee’s position the pay package may include a retirement savings plan, discount stock, management bonus plan, life insurance, adoption assistance, child and elder care services, discount merchandise and everyone gets a pound of free coffee per week.9 Starbuck’s mission statement’s first guiding principle is “to provide a great work environment and treat each other with respect and dignity”.9 Their compensation and employee empowerment tactics is how they manage to control their organization. Conclusion and Recommendations Starbucks is currently in the elaboration stage of the organizational life cycle and as such faces a number of challenges related to its current size and organizational structure. Teamwork within bureaucracy helps battle the sheer size of the company and decreases the difficulty for the top managers to work together with middle management in a timely fashion to achieve strategic goals. A team approach is achieved by creating formal control systems to facilitate the natural communication between top and mid –level managers. Using this system has allowed Starbucks to be able to avoid “red tape.” Starbuck’s Reward and control systems are tailored to each product and department that allows them to accurately measure and reward progress in each area. Starbucks relies on constant innovation by an institutionalized R&D department within the company. In their future operations Starbucks will be heavily reliant on this divisional structure. Refining and streamlining each operation will be the determinant of the organizations future success. Starbucks strategy for future operations is one that will focus on continued international expansion and the retention of domestic market share. We recommend that the global strategy that Starbucks should use for its international expansion is the multi-domestic approach. This strategy allows Starbucks to customize their product and marketing towards different national conditions and creates a maximum of local responsiveness. The multi-domestic strategy is inline with Starbucks core competencies of customer satisfaction and customization. Currently Starbucks uses three different strategies for international expansion: joint ventures, licenses, and company-owned operations. To retain its domestic market share Starbucks plans to continue its strategy of market saturation and focus on its “third place” mentality. However, it is possible that with this continued growth the organization will need to face the possibility of having to change to a low cost general strategy in contrast to their current differential strategy. This change of strategies would be detrimental to their image and customer base. Starbucks is successful because it is not a mass production automated company its success is created from its unique atmosphere, customization and employees.