External Analysis of Starbucks 1 Running head: STARBUCKS

External Analysis of Starbucks Nancy Vu MGMT 4340 Strategic Management Dr. Uchenna Nwabueze March 6, 2011

External Analysis of Starbucks 2 Table of Contents

1.0.0. Executive Summary ...............................................................................................................4 2.0.0. Company History ...................................................................................................................5 2.1.0. Background ...........................................................................................................................5 2.2.0. Purpose of this study .............................................................................................................6 3.0.0. External Analysis ...................................................................................................................7 3.1.0. General Environmental Analysis ..........................................................................................8 3.1.1. Demographic Segment ..........................................................................................................8 3.1.2. Economic Segment .............................................................................................................10 3.1.3. Political/Legal Segment .......................................................................................................11 3.1.4. Socio-Cultural Segment ......................................................................................................12 3.1.5. Technological Segment .......................................................................................................13 3.1.6. Global Segment ...................................................................................................................14 3.1.7. Summary of General Environment Analysis ......................................................................16 3.1.8. Driving Forces ....................................................................................................................16 3.2.0. Industry Analysis ................................................................................................................19 3.2.1. Description of the Industry .................................................................................................19 3.2.2. Industry Dominant Economic Features ..............................................................................20 3.2.3. Market Size .........................................................................................................................22 3.2.4. Market Growth Rate ...........................................................................................................22 3.2.5. Industry Trends ...................................................................................................................24 3.2.6. Five Forces Analysis ...........................................................................................................26

External Analysis of Starbucks 3 3.2.6.1. Threat of New Entrants ....................................................................................................28 3.2.6.2. Power of Suppliers ...........................................................................................................28 3.2.6.3. Power of Buyers ...............................................................................................................29 3.2.6.4. Power of Substitutes ........................................................................................................29 3.2.6.5. Intensity of Rivalry ..........................................................................................................31 3.2.7. Summary of Industry Analysis ...........................................................................................32 3.3.0. Competition Analysis ..........................................................................................................32 3.3.1. Industry Competitors ..........................................................................................................33 3.3.2. Rivals Anticipated Strategic Moves ....................................................................................35 3.3.3. Summary of Competitive Analysis .....................................................................................38 3.3.4. Key Success Factors ...........................................................................................................39 4.0.0. References ...........................................................................................................................40

External Analysis of Starbucks 4 1.0.0. Executive Summary The Starbucks Corporation is the largest coffee chain in the United States and internationally. To better understand the coffee industry, the purpose of the paper will provide a detailed external analysis on Starbucks global operations. Included in the study will be an explanation on Starbucks initial founding history followed by its background as well as the purpose of the study. In addition, the paper gives a detailed assessment of the external analysis which consists of six portions. The first portion is the general environment analysis of the coffee industrys operations and the way it factors in the demographic segment, the economic segment, the political/legal segment, the socio-cultural segment, the technological segment, and the global segment. The second portion, driving forces, explain how developmental forces effect and drive the industry. The third portion is the industry analysis that depicts the industry, its dominant economic features, market size, market growth rate, and industry trends. The fourth portion focuses on the five forces analysis that portrays how the industry reacts to the threat of new entrants, how the power of suppliers affects bargaining, how the industry controls the power of the buyer, how the availability on choices of substitutes have affect over products, and how the intensity of rivalries scan be strong or weak. The fifth portion considers the competition analysis to describe the industry competitors and how they may compete in the marketplace. The sixth portion relates to the key success factors that describe what strategies are needed to be successful and competitive in the marketplace. This sums up and concludes the external analysis of Starbucks.

External Analysis of Starbucks 5 2.0.0. Company History In 1971, the first Starbucks opened its only store in the Seattle, Washingtons historic Pike Place Market to provide quality coffees to the people of Seattle (Starbucks, 2009). In 1982, Howard Schultz joined with Starbucks to advise them of his experience with espresso drinks that could benefit the company (Starbucks, 2009). With that idea, Starbucks has implemented espressos along with their coffee drinks. Between 1985 and 1987, Schultz created the II Giornale to offer drinks made from Starbucks coffee beans and later gains Starbucks assets to change its name to Starbucks Corporation (Starbucks, 2011). In addition, the company is able to offer full health benefits to their employees (Starbucks, 2011). By the 1990s, Starbucks sales have allowed them to expand beyond Seattle, into the United States and worldwide (Starbucks, 2011). Starbucks further became one of the first U.S. companies to offer a stock option program to its part-time employees and becomes a publicly trading company under the trading symbol SBUX (Starbucks, 2009). As Starbucks continues to grow and expand in grocery stores, they introduced the Frappuccino coffee drink and acquired Tazo tea (Starbucks, 2011). By the 2000s, Starbucks presence worldwide to serve its customers reached over 16,000 stores in 48 countries (Starbucks, 2009). In addition, Starbucks introduce its licensing agreements with national Fair Trade organizations, obtains the Seattle Coffee Company, opens the first Farmer Support Center, and among others (Starbucks, 2011). 2.1.0. Background Starbucks has an explosive and demanding history of high-quality coffee beans and drinks. In the last five years, the coffee company has established itself as the leader in the coffee industry with continuous market growth and expansion. In 2006, Starbucks movement to go green and help the environment by saving trees each year led the company to launch the industrys first paper

External Analysis of Starbucks 6 beverage cup (Starbucks, 2011). In 2007, Starbucks desire to improve health conditions moved the company into using 2% milk in their drinks and eliminating all artificial trans fat (Starbucks, 2011). In 2008, the company announced the acquisition of the Coffee Equipment Company as well as its brewing system (Starbucks, 2011). Additionally, Starbucks initiated an online community called My Starbucks Idea to receive customers feedbacks, introduced one of the topselling coffees known as Pike Place Roast, and commitment to have good business ethics with their Starbucks Shared Planet (Starbucks, 2011). In 2009, the company introduced coffee packets called Starbucks VIA Ready Brew Coffee (Starbucks, 2011). In addition, Starbucks initiated a loyalty program through myStarbucks, Starbucks Card iPhone apps, and Starbucks Card Mobile payment (Starbucks, 2011). In 2010, the company offered free Wi-Fi for customers in an effort to remain competitive in the market (Starbucks, 2011). Offering this type of service creates convenience and attracts more loyal customers to its stores. As of 2010, over 16,858 stores are available in which people all over the world can meet to interact as well as even work over a cup of coffee, teas, drinks, and among other treats (Starbucks, 2011). 2.2.0. Purpose of this study The purpose of this study is to identify, analyze, and review the external environment of the Starbucks Corporation chain of coffee to determine its ability to move forward and prosper in the general environment, industry, and marketplace. Analyzing the industrys trends and forces will help the company understand where they are positioned through new and existing powers. Furthermore, to study the on-going competitive strategies of the external developments will enable the company to determine if adjustments need to be made in order to be successful. Moreover, using these tools of industry to assess Starbucks external environment will shed light on their strategies to fit the external situations.

External Analysis of Starbucks 7 3.0.0. External Analysis The external analysis is an assessment of the external environment in which the coffee industry operates in. This is based on all the relevant factors and influences that are important to shaping a coffee companys current strategies. The factors include the general environmental analysis, the industry analysis, the five forces analysis, the competition analysis, and the key success factors in the coffee industry. To continuously analyze the current situations of the external environment, Starbucks will be able to identify and determine its opportunities and threats in the coffee industry. From there, management can further develop strategies to take advantage of any opportunities and to minimize the companys threats.

External Analysis of Starbucks 8 Source: Gamble, J.E., & Thompson, A.A. (2011). Essentials of strategic management Figure 1

3.1.0. General Environmental Analysis The general environment analysis focuses on the industrys macroenvironment for factors and influences outside of the companys boundaries. Since these factors are out of the companys control, a company would continuously use this assessment for better development of competitive strategies to compete in the changing market. As shown in Figure 1, these factors to consider in the on-going assessment are: demographic segment, economic segment, political/legal segment, socio-cultural segment, technological segment, and global segment. 3.1.1. Demographic Segment The demographic segment is the lifestyles and societal values of the general population. In the United States, the consumption of coffee in this industry has continuously grown as consumers are more aware of the coffee varieties and quality. Based on a 2008 report by the National Coffee Association (NCA) of the USA, daily coffee drinking of a gourmet beverage consists 17% of the adult population up from a 14% in 2007 (Current Trends, n.d.). Coffee consumption per day has also increased between 2005 and 2008 by people of ages 18 to 24 (Current Trends, n.d.). According to National Coffee Association (n.d.), between 2008 and 2010, total coffee consumption has also increased amongst the adult age group as seen in Figure 2 below.

External Analysis of Starbucks 9

Source: National Coffee Association. (n.d.). 2010 National Coffee Drinking Trends Study. Figure 2

Additionally, there is an average of 2.5 cups of coffee consumed per day in 2005, an average of 3.1 cups of coffee consumed per day in 2007, and 3.2 cups of coffee consumed per day in 2008 (Current Trends, n.d.). Adults may once think of coffee as the morning beverage consumption before work or even an after dinner drink, but the 18 to 24 age group seems to think differently (Current Trends, n.d.). The culture of coffee shops are now suited as a place for younger people to gather or hang out over additional flavors in their coffees (Current Trends, n.d.). The consumption of iced coffee is much higher in 2008 as opposed to 2007 (Current Trends, n.d.). These days, iced coffee can be found conveniently at McDonalds, Dunkin Donuts, Burger King, and so on. In addition, sales have increased with the availability of single serve coffee

External Analysis of Starbucks 10 systems like the Senseo, Tassimo, and Keurig (Current Trends, n.d.). From 2007 to 2008, daily gourmet coffee drinkers for adults of ages 25-29 increased from 13% to 19% (Current Trends, n.d.). For young adults, coffee drinking was reported 47% in 2007 and 44% in 2008, a decrease (Current Trends, n.d.). As for coffee drinkers of ages 18 to 24, they have the fast growing segment in the market with 26% in 2005 and up to 37% by 2007 (Current Trends, n.d.). As for coffee drinkers of ages 40 to 59, reports show that there were 59% in 2007 and increased to 61% by 2008. As for coffee drinkers of age 60 and over, they consume the most coffee daily with 74% of adults (Current Trends, n.d.). Overall, reports show that coffee consumption is consumed across many age groups of the American culture. As the standards for coffee consumption was once for older adults, younger people are now looking to be a part of this demographic to get their favorite type of coffee. 3.1.2. Economic Segment The economic segment plays a big role in the environment in which a company operates. The current economy is in a period of tough times for people and companies to adjust to these conditions. The changing market conditions such as the increase in oil prices and even raw materials changes consumers views on where and how they are willing to spend their money. Finances affect everyone daily so there should be careful consideration into what product or service is deemed necessary or for luxury uses. Everyone has different circumstances or particular situations they are facing with. With the prices of goods and services on the rise, the consumer has tough decisions to make and whether or not they will pursue spending as much on premium coffee. Thus, companies would have to continuously determine what type of strategies they should put into effect to remain competitive in accordance to the economic conditions. According to the National Coffee Association (n.d.), prepared coffee of quality was increasingly

External Analysis of Starbucks 11 available in 2007 along with the launch of premium coffees by quick service restaurants making the sector very strong (National Coffee Association, n.d.). However, the rising prices of gas and raw materials cause coffee prices during this period to also increase which results in home coffee consumption (National Coffee Association, n.d.). To be competitive, the coffee companies need to quickly adjust to the changing economic times by exercising strategies that betters suits the market conditions. 3.1.3. Political/Legal Segment The political and legal segment of the general environment analysis deals with the governmental legislations and regulations. The coffee beans that companies may acquire are usually from distant places not in their reach. Similarly, companies may not know what type of conditions the people work in to harvest the coffee beans. These people could be working in poor conditions, working long hours, lacking education, and even being forced into labor as children (Stephens, n.d.). Injury could further result from working long hours and without complying with proper safety requirements to this low paying job (Stephens, n.d.). For these reasons, the fair trade coffee looks to stay away from this cycle of exploitation by implementing rigid regulations (Stephens, n.d.). There are also regulations in place for the difference in price per pound and the cost required to produce beans (Stephens, n.d.). If not, the price paid may leave producers and workers in continued poverty (Stephens, n.d.). Fair trade organizations goal is to stop these types of appalling situations from occurring by setting a minimum price for coffee beans as well as ensuring companies profit for the beans they produce (Stephens, n.d.). In regards to the legal segment, the coffee industry is facing food safety legislation in Washington with the possibility of having tremendous impact (National Coffee Association, 2010). The National Coffee Association looks to improve the food safety system but disregards modifying a Senate bill that

External Analysis of Starbucks 12 requires traceability back to the first intermediary after the farm and record keeping back to the farm (National Coffee Association, 2010). There is also the attempt to have the passage of a Senate bill void of onerous provisions that provide no corresponding public health benefit which could interrupt the importation of the majority of coffee imported into the U.S. (National Coffee Association, 2010). Moreover, NCA looks to have its concerns heard by those negotiators and that the final amendment will take into account the unique aspects of the coffee supply chain (National Coffee Association, 2010). Being involved in the industry will affect the future of the coffee industrys future and economic health (National Coffee Association, 2010). 3.1.4. Socio-Cultural Segment The socio-cultural segment takes into account the attitudes of society and cultural values. Over 2 billion people consume coffee regularly worldwide, so coffee basically becomes a necessity for many people today (Coffee, 2007). However, it is of question on how many people wonder where their coffee beans are grown and about the social and environmental effects of their coffee choices (Coffee, 2007). Today, coffee comes from South America, Central America, and Southeast Asia (Coffee, 2007). Of the two main specials of coffee beans, the environment impacted has strong correlation with deforestation, soil degradation, and water pollution (Coffee, 2007). Deforestation occurs in fifty countries but thirty-seven are for coffee producers (Coffee, 2007). Coffee beans grown in the full-sun requires cleaning out forest areas which destroys surrounding ecosystems (Coffee, 2007). Poor soil quality is also a result of maximizing coffee production through monocropping as well as the use of pesticides and chemical fertilizers which results in soil erosion over time (Coffee, 2007). During coffee producing, the coffee pulp that was once used as mulch in the field are now frequently discarded

External Analysis of Starbucks 13 in nearby rivers which further pollutes the water causing low oxygen levels for marine species (Coffee, 2007). Socially, the impact of coffee production has greatly created demand for coffee farmers livelihoods (Coffee, 2007). For instance, the high demand of coffee globally caused farmers to rapidly plant trees that overproduce in quantity and further resulting in low coffee prices to all producers (Coffee, 2007). Additionally, the tedious process involved in obtaining coffee beans from farmer to consumer causes the money distribution throughout the supply chain to vary. Coffee famers and laborers would receive about 7% while roasters and retailers take on a bigger portion of 29% and 22%, respectively (Coffee, 2007). Overall, the negative effects of business practices could affect industry earnings. 3.1.5. Technological Segment In the technological segment, changing technology plays a vital role in any industry. Keeping pace with technology will be important for a company to remain competitive. The coffee industry comprises of many kinds of technology from planting to harvesting and from production to distribution (Technology, n.d.). The uses of coffee makers, coffee-making robots, robot farmers, and among others are the equipment used in the coffee industry for the coffee production (Technology, n.d.). The modern coffee makers these days include the Keurig system. This new technology of coffee machines makes it convenient for people on-the-go with the ability to brew a single cup of coffee within a minute (Modern Coffee, 2011). Among this, the Clover brewing machine is automated and designed to produce custom single-cup brews (Harris, 2008). Although the Clover has been used by high-end specialty coffee houses in the last couple of years, Starbucks has acquired the company making it a bit tougher for these coffee houses to differentiate themselves (Harris, 2008). With the emerging technology in the coffee industry, some of the questionable criteria a company should look into includes: Does the

External Analysis of Starbucks 14 technology produce better coffee?; Does the technology create new efficiencies and save money?; Does the technology solve a difficult problem with a better solution, or does it actually make matters more complicated?; Does technology replace a human? (Harris, 2008). Thus, a company can use advancements in technology to the best of its advantages to overpower their competitors. 3.1.6. Global Segment Coffee is considered to be the second largest traded commodity only falling short of petroleum in the world (Coffee, 2007). The conditions for the production of coffee beans cause coffee to be grown at distant countries. As for the sales of single-serve coffee pods, the U.S. comprised of $600 million of 2010 global sales of $4.3 billion of which does not include machines sales (Baertlein, 2011). In addition, Starbucks Chief Executive Howard Schultz mentions that the single-cup coffee segment is growing faster than any other segment in the global coffee industry (Baertlein, 2011). More importantly, the future growth in worldwide coffee and tea industries is expected to rely on key factors health, quality, and premiumisation (Global Hot Beverages, 2011). The global market for hot beverages such as coffee and tea are expected to reach $69.77 billion in value and 10.57 million tons in volume terms by the year 2015 (Global Hot Beverages, 2011). In addition, the coffee would enjoy modest growth because superior quality specialty espresso-based drinks are exceptionally popular with the young generation while the popularity of tea is based on its health benefits (Global Hot Beverages, 2011). While North America has the highest per capita consumption in the world, coffee consumption is a global phenomenon, where the majority of coffee consumers are coffee addicts and others are fascinated by its exceptional aroma and taste and among other reasons (Global Hot Beverages, 2011). According to Datamonitor (2010), the Figure 3 and Figure 4 below show

External Analysis of Starbucks 15 the global hot drinks market (retail sales of coffee, tea, and other hot drinks) value for 2009 grew by 4% to reach a value of $68,030.9 million.

Source: Datamonitor. (2010). Hot Drinks Industry Profile: Global. Figure 3

Source: Datamonitor. (2010). Hot Drinks Industry Profile: Global.

External Analysis of Starbucks 16 Figure 4

3.1.7. Summary of General Environment Analysis By understanding the circumstances comprised by the factors of the general environment analysis, a company has the potential to grow within the industry and market through the ongoing assessments of the environment for further adjustments of strategies. In the demographic segment, building a loyal relationship with extensive consumers is the key to success in a competitive market so strategies should be geared towards consumers preferences. To overcome the threats of the economic segment, the industrys focus is on lower costs, differentiating selections in menus, higher level of employees effectiveness, minimizing waste, and so on. For the political/legal segment, laws and regulations are in place to avoid appalling situations that producers face, those involved in coffee sales, and food safety. In the socio-cultural segment, the attitudes of society and the cultural values is to understand that coffee growing and producing impacts the environment greatly but consumers demand for coffee consumption engages coffee producers to meet needs. In the technological segment, a company can reinvest in technology for new innovations to retain and even increase customer base. In the global segment, commitment from a companys supporters is needed as well as embracing change can increase revenues and help the industry grow beyond the United States. 3.1.8. Driving Forces Driving forces can be comprised of many developments that affect or influence an industry to a great extent; thus, these forces can shape the way the industry operates. Companies should monitor these forces that could affect their business from remaining competitive. Four causes are considered to be driving forces in the coffee industry including globalization, regulatory

External Analysis of Starbucks 17 influences and government policy changes, entry of major firms, and growing buyer preferences for differentiated products. Increasing Globalization The first driving force is globalization. To reach the level of top leaders in the coffee industry, there needs to be expansion beyond the U.S. and into the global markets for increase in revenues and market shares. With globalization, there is also more opportunity to grow and reach a larger segment of the worlds population. Extending into different markets suggests less reliance or dependence on a single market. Companies can also be more profitable and gain the competitive edge over its rivals through expansion. Regulatory Influences and Government Policy Changes A second driving force is a regulatory policy change that affects the people harvesting the coffee beans. These people may be working long hours in poor conditions with low pay and no safety for their well-being. For these reasons, the fair trade coffee looks to stay away from this cycle of exploitation by implementing rigid regulations (Stephens, n.d.). There are also regulations in place for the difference in price per pound and the cost required to produce beans (Stephens, n.d.). If not, the price paid may leave producers and workers in continued poverty (Stephens, n.d.). Fair trade organizations goal is to stop these types of appalling situations from occurring by setting a minimum price for coffee beans as well as ensuring companies profit for the beans they produce (Stephens, n.d.). Entry of Major Firms A third driving force is the entry of major firms. In the coffee market, there consists of retail sales and foodservice sales. An existing large coffee company like Starbucks could gain attention from other companies outside of the coffee industry that are looking to compete in its sector. One

External Analysis of Starbucks 18 example would be a large hamburger company in foodservice sales like McDonalds who had initiated their own line of coffee beverages to compete against Starbucks. Growing Buyer Preferences for Differentiated Products A fourth driving force is the growing buyer preferences for differentiated products instead of a standardized commodity product. Adults may once think of coffee as the morning beverage consumption before work or even an after dinner drink, but the culture of coffee shops are now suited as a place for younger people to gather or hang out over additional flavors in their coffees (Current Trends, n.d.). The consumption of iced coffee is much higher in 2008 as opposed to 2007 (Current Trends, n.d.). These days, iced coffee can be found conveniently at McDonalds, Dunkin Donuts, Burger King, and so on. Companies continue to create new innovative coffee beverages to meet changing customers preferences.

Regulatory Policy Changes

Entry or Exit of Firms

Increasing Globalization

Growing Buyer Preferences

Driving Forces Source: Nancy Vu Figure 5

External Analysis of Starbucks 19 3.2.0. Industry Analysis According to Datamonitor (2010): The global hot drinks market grew at a steady rate during 2005-2009, largely remaining below 4%. This trend is expected to continue in the forecast period. The global hot drinks market generated total revenues of $68 billion in 2009. Coffee sales proved the most lucrative for the global hot drinks market in 2009, generating total revenues of $36.9 billion, equivalent to 54.2% of the market's overall value. However, the economic downturn has caused tough situations for companies all around the industry. This impact has majorly affected the way U.S. consumers drink coffee and in 2007 the worlds biggest coffee shop chain Starbucks reported its first ever quarterly fall in traffic at its U.S. based outlets (Drink, 2010). This downtown further continued to deteriorate in 2008 and 2009 in which Starbucks had to close 600 stores and cut its expansion plans (Drink, 2010). Thus, this company is not immune to the economic downturn (Drink, 2010). The U.S. recession of 2001 to 2003 proved to have strong sales growth for Starbucks while retailers were in trouble; however, the coffee-shop market is opposite now since it is more mature with less room for growth (Drink, 2010). Although Starbucks is a leader in coffee shops in the U.S., other food service chains such as McDonalds, 7-Eleven, Dunkin Donuts, and Burger King are a threat due to their improvements in quality coffee. Additionally, there is interest in tea as sales are on the rise due to the widespread awareness of health benefits (Drink, 2010). 3.2.1. Description of the Industry After oil, coffee is the most traded commodity and the largest source of export earnings in the developing world (Ramirez-Vallejo, 2002). The coffee market is a multibillion dollar industry with continuous growth. This market consists of both retail and foodservice sales. With a market

External Analysis of Starbucks 20 value of $44 billion in 2007, it is expected to increase to $59 billion by 2015 (Coffee Market, 2008). Although foodservice sales for coffee comprises of 87 percent of the market in 2007, it is expected that the retail sales will grow more quickly due the economic conditions (Coffee Market, 2008). For this reason, consumers are purchasing branded packaged premium coffee at retailers for home brew instead purchasing at the foodservices. As the coffee trend begins to dominate the retailers, retailers are signaled to increase their product offerings. In Portland, Coffee Bean Internationals Joe Prewett suggests the addition of a seasonal coffee program to add new flavors for incremental growth (Canning, 2010). In Fort Worth, U.S. Retail for Mother Parkers Tea & Coffee Inc.s Brian Reilly saw growth in breakfast blends and half-caffeine offerings (Canning, 2010). After all, coffee is a part of many Americans daily diet which allows a shoe-in opportunity for producers of home brew coffee to fill in the gaps (Drink, 2010). 3.2.2. Industry Dominant Economic Features With the growing demand for higher premium coffee, the attractiveness of this industry is growing amongst retailers. The coffee industry competes locally, regionally, and globally with many rivals and new entrants. Even though market demand is strong, most of the demand goes towards high-quality premium coffee as the coffee industry is more mature. With each coffee shop competing with consumers money, profit margins are being pushed down to make their product more appealable. The product differentiation between the coffee brands is relevant. There are similar products sold, but the style and taste of each product differs with each brand of coffee. The product innovation within each coffee brand is high; each is trying to differentiate their products to be first-to-market with next new developments. Technology plays a role in helping each brand to stay efficient in customer service, but it is not necessary as long as they keep up with customer demand in their own way. As far as vertical integration goes, most coffee

External Analysis of Starbucks 21 shops operate in multiple stages of the industry. By being vertically integrated, there is a cost advantage by operating and controlling multiple steps of developing their products. Economies of scale pertain to the coffee industry by giving them more bargaining over their suppliers. As seen below in Figure 6, average price paid to producers decreased overtime as compared to the increasing average U.S. retail instant coffee price. Finally, a certain degree of a learning curve does exist in the coffee industry. By accomplishing this learning curve, they develop ways of being cost efficient in their everyday operations.

Source: Buggey, T. (2007, Summer). Storyboard for Ivan's morning routine. Diagram. Journal of Positive Behavior Interventions, 9(3), 151. Figure 6

External Analysis of Starbucks 22 3.2.3. Market Size Coffee bushes are perpetual keeping production rising in the face of falling prices (RamirezVallejo, 2002).

Source: Buggey, T. (2007, Summer). Storyboard for Ivan's morning routine. Diagram. Journal of Positive Behavior Interventions, 9(3), 151. Figure 7

According to Ramirez-Vallejo (2002) in Figure 7: In the last five years, production grew an average 3 percent annually, adding 9 million bags of excess supply to the unprecedented 27 million bags already in stock. Over the same period, total consumption grew at only 1.5 percent. Further, per capita consumption of coffee in importing countries, where young people are more inclined to soft drinks, actually decreased. 3.2.4. Market Growth Rate The coffee market is a multibillion dollar industry with continuous growth. This market consists of both retail and foodservice sales. With a market value of $44 billion in 2007, it is expected to increase to $59 billion by 2015 (Coffee Market, 2008). Although foodservice sales for coffee

External Analysis of Starbucks 23 comprises of 87 percent of the market in 2007, it is expected that the retail sales will grow more quickly due the economic conditions (Coffee Market, 2008). For this reason, consumers are purchasing branded packaged premium coffee at retailers for home brew instead purchasing at the foodservices. According to Ramirez-Vallejo (2002): An estimated 100 million people directly depend on coffee for their livelihoods, including farmers and their families, coffee pickers, market intermediaries, and industry employees. And almost 25 million people are coffee farmers, most of them cultivating less than 10 hectares apiece in about 80 countries in Africa, Asia, Latin America, and the Caribbean. These small landholders provide around 70 percent of the world's coffee supply. Unskilled labor accounts for more than 60 percent of the total production cost on coffee farms. This characteristic, plus coffee's ease of cultivation, makes coffee production very attractive for poorer countries such as Vietnam, whose government decided in the early 1990s to promote coffee production and export. In 2000, Vietnam became the world's second-largest coffee producer, displacing Colombia.

External Analysis of Starbucks 24

Source: Buggey, T. (2007, Summer). Storyboard for Ivan's morning routine. Diagram. Journal of Positive Behavior Interventions, 9(3), 151. Figure 8

3.2.5. Industry Trends Despite the downward economic conditions, consumers are still keeping their daily habits of coffee. In 2010, the numbers have remained unchanged as compared to 2009, with 56% of adults partaking (National Coffee Association, n.d.) Although 84% of consumers have not changed this habit, the new trend would be more towards coffee consumption prepared at home

External Analysis of Starbucks 25 (National Coffee Association, n.d.). Moreover, the home brewed coffee is 4% higher (National Coffee Association, n.d.). In addition, gourmet coffee consists of almost half or 40% of coffee consumption as seen in Figure 9 (National Coffee Association, n.d.).

Source: National Coffee Association. (n.d.). 2010 National Coffee Drinking Trends Study. Figure 9

According to Ramirez-Vallejo (2002): Five traders dominate 48 percent of the world market, five importers manage 46 percent of the total coffee exports, and five roasters control 55 percent of this volume. In Germany, Kraft Jacobs Suchard and Tchibo/Eduscho control 56 percent, and in Japan, Ueshimo Coffee and Key Coffee hold 43 percent of the market. U.S. brands Maxwell

External Analysis of Starbucks 26 House (Kraft Foods) and Folgers (Procter & Gamble) represent 56 percent of the U.S. market. Most coffee is still consumed at breakfast in homes and restaurants; the ubiquitous Starbucks Coffee Company buys less than 1 percent of the world's coffee supply. One of the reasons Starbucks profits in its niche is because the price of coffee is a small component of the final product's price. Even if Starbucks adjusts its final price when coffee prices change, these changes are so small they do not affect demand. The breakdown of where a dollar spend on roast ground coffee in the U.S. went in the 1990s can be seen below in Figure 10.

Source: Buggey, T. (2007, Summer). Storyboard for Ivan's morning routine. Diagram. Journal of Positive Behavior Interventions, 9(3), 151. Figure 10

3.2.6. Five Forces Analysis The intensity and competition in the market between the differing coffee selections are the reason why companies should turn to Michael Porters Five Forces. Using the five-forces model

External Analysis of Starbucks 27 of competition helps a company to understand and build better business strategies in the coffee industry in order to gain a competitive advantage. These competitive forces to consider in evaluating the industry for market attractiveness include the threat of new entrants, the power of suppliers, the power of buyers, the power of substitutes, and the intensity of rivalry.

Source: Gamble, J.E., & Thompson, A.A. (2011). Essentials of strategic management Figure 11

External Analysis of Starbucks 28 3.2.6.1. Threat of New Entrants The threat of potential entrants would be of low to medium risk in competition strength due to the numerous existing coffee companies. For instance, a big company like Starbucks would not be affected by new entrants into the industry. Starbucks is already too well-known and popular for them to be impacted. The only impact that they will currently see is from existing competition in other big companies. For a new and unknown entrant to be at Starbucks level, this would have to take a long period of time and capital to be in the market of already existing competitive coffee companies. It would also be difficult to differentiate products because of all the existing leaders in the industry. If a new entrant were to join, they may just be there but not be able to build a fast and good reputation. Thus, the threat of new entrants would be far from high competition to a company like Starbucks. Although it is quite easy to enter the market due to suppliers and distribution chains with little regulation, the new entrants may face a price war with existing players and may be difficult to compete effectively with established players (Datamonitor, 2010). Furthermore, the leading players typically operate with high economies of scale allowed by bulk production and this may constitute a considerable entry barrier for newcomers (Datamonitor, 2010). 3.2.6.2. Power of Suppliers For the competitive force in the coffee industry to be strong or weak depends on (1) the extent to which suppliers are able to shape the terms and conditions of sale of the items they supply to an industry and (2) the nature and extent of supplier-seller collaboration in the industry (Gamble and Thompson). When the suppliers power is weak, it is due to the availability of other coffee companies goods and substitutes as well as low switching costs. Companies would be able to move from supplier to supplier because there are no shortages and a lot of coffee offerings from

External Analysis of Starbucks 29 others. When the suppliers power is strong, it is due to the incentive that they would get when companies are inquiring high switching costs to go to other suppliers. These suppliers would have better leverage and be able to take force in determining the terms and condition of sales. In this case, the power of supplier is low because of the vast amount of coffee producers available with no shortages. As seen previously in Figure 7, production outweighed consumption in a 2 to 1 perspective in the last five years creating excess supply; production grew 3% annually while consumption grew 1.5% (Ramirez-Vallejo, 2002). 3.2.6.3. Power of Buyers When it comes to coffee, different buyers have the ability to negotiate in amount of quantities and kinds available that they wish to purchase. For this reason, buyers have a high bargaining power due to the availability of being able to easily purchase from another company if they are not satisfied or among other reasons. According to Ramirez-Vallejo (2002), Starbucks is able to profit due the pricing of obtaining the coffee is so low as compared to the products final price. The breakdown of where a dollar spend on roast ground coffee in the U.S. went in the 1990s can be seen previously in Figure 10. Additionally, the high demand of coffee globally caused farmers to rapidly plant trees that overproduce in quantity and further resulting in low coffee prices to all producers (Coffee, 2007). 3.2.6.4. Power of Substitutes Coffee is a type of hot drink that is an important part of daily life in many countries. The other popular hot drink product would be tea since people can consume for healthier living. In the perspective of a hot beverages market, this limits the threat of substitution which suggests lower threat risks. The potential substitute would be soft drinks or other various drinks. According to Datamonitor (2010), the high proportion of the population consuming hot drinks products is

External Analysis of Starbucks 30 unlikely that such substitution would substantially impact upon sales. In the perspective of a coffee market, coffee companies are threatened by the availability of substitute products that could slightly replace their own sales which makes the competition strength to be moderate. Coffee is many times larger than the tea segment in terms of value (Global Hot Beverages, 2011). There are vast amounts of other beverages, tea, and coffee available at ones convenience whether it is over the internet, in grocery stores, at gas stations, at home, and so forth. When a person does not feel satisfied to what they are consuming than they will more than likely find a substitute to replace their existing purchases. With the growing concern for health benefits, tea may just satisfy that need for health conscious people. Thus, consumers perceptions these days are that tea is a healthy beverage (Canning, 2010). Moreover, the studies show that tea lowers the risk of coronary artery disease, heart attack and some cancers which drives tea market sales (Global Hot Beverages, 2011). For these reasons, consumers may actually be inclined more towards tea than coffee resulting in a substitute for the coffee market. In the chart below, coffee is the largest segment of the global hot drinks market, accounting for 54.2% of the market's total value (Datamonitor, 2010). However, tea comprises 38.3% of the global hot drinks market (Datamonitor, 2010).

External Analysis of Starbucks 31

Source: Datamonitor. (2010). Hot Drinks Industry Profile: Global. Figure 12

3.2.6.5. Intensity of Rivalry The intensity of rivalry is high due to the competition between all the coffee sellers. There are wide selections and product offerings that exist between all of the coffee companies to maintain growth in the market. As said before, people can easily switch between their preferred choices of coffee in an instance. Sellers would have to find ways to gain that competitive edge to get referrals to expand their market share and win over customers to remain brand loyal. As the concern for being healthy rises, more competition will be faced against the tea market. Additionally, new innovations such as the convenience of instant coffees and other beverages for home consumption are introduced in the market for people who are price conscious. Since there is much competition in the market, a brand may decided to do promotions by lowering prices

External Analysis of Starbucks 32 causing aggressive price wars that ultimately fail to stimulate strong value growth in the sector (Drink, 2010). 3.2.7. Summary of Industry Analysis Overall, the coffee market has considerable attention and competition between each of the companies offerings. Each of Porters five forces has impact on these businesses in one way or another. The threat of new entrants and the bargaining power of suppliers would be of lower risks. The excessive amounts of coffee available would not be much of a threat in this mature market when an unknown entrant enters or when trying to bargain with suppliers since there are low switching costs. The bargaining power of buyers and the rivalry among competing sellers would be on the opposite end whereas the threat of new substitutes could go either way depending on the perspective taken. Since there are large quantities of coffee available in the market, buyers have the bargaining power to select. Likewise, rivalry amongst competitors would be the multitude of coffee available to consumers making it very competitive for companies to build loyal customers to gain a competitive advantage since people could easily switch to another. In the coffee industry, substitutes would be of moderate threat as opposed to the hot drinks industry. By understanding the level of competition among each of the forces, companies can use this assessment to the better their strategies and market share. 3.3.0. Competition Analysis The global coffee market, comprised of both retail and foodservice sales, is a multibillion dollar industry with continuous growth. Although foodservice sales for coffee comprises of 87 percent of the market in 2007, it is expected that the retail sales will grow more quickly due the economic conditions (Coffee Market, 2008). This suggests the attractiveness of this industry is growing amongst retailers. Even though market demand is strong, most of the demand goes

External Analysis of Starbucks 33 towards high-quality premium coffee as the market is more mature creating much rivalry in the global coffee industry. With regards to foodservice sales, as a dominant leader in the coffee industry, Starbucks main competitors are Caribou, Panera Bread, McDonalds, and Dunkin Donuts as illustrated in Figure 13.

High

Starbucks Panera Bread Caribou Dunkin Donuts McDonalds

Low Low

Price and Quality

Degree of Service

High

Strategic Map Source: Nancy Vu Figure 13

3.3.1. Industry Competitors Starbucks

External Analysis of Starbucks 34 Starbucks specializes in the sale of coffee and other beverages at more than 17,000 stores operated and licensed in the U.S. and over 50 countries across the globe (Starbucks, 2011). As of January 2011, the company operates 8,870 company-operated stores and 8,139 licensed stores (Starbucks, 2011). The company purchases and roasts high-quality whole bean coffees and sells them, along with fresh coffees, Italian-style espresso beverages, cold blended beverages, premium teas, complementary food items, coffee-related accessories, and CDs (Datamonitor, 2009). Caribou Found in 1992, Caribou Coffee company is the second largest company-owned premium coffeehouse operator in the U.S. based on the number of coffeehouses (Caribou Coffee, 2010). As of October 2010, the coffee company has operations in 410 company-owned coffeehouses and 129 franchised and licensed locations (Caribou Coffee, 2010). Caribou Coffee offers premium coffee, espresso-based beverages, specialty teas, baked goods, whole bean coffee, branded merchandise, and other coffee related products (Caribou Coffee, 2010). The company also sells products to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues, and e-commerce channels (Caribou Coffee, 2010). Panera Bread Panera Bread Company operates in the U.S. and Canada with 12,100 employees (Datamonitor, 2010). As of December 2010, the company is quickly expanding across North America, operating 1,453 company-owned and franchise-operated bakery-cafes in 40 states in Ontario, Canada (Panera Bread, 2011). The company provides fresh baked goods, sandwiches, salads, soups, custom roasted coffees, and other caf beverages (Datamonitor, 2010).

External Analysis of Starbucks 35 McDonalds McDonalds is one of the largest foodservice retailing chain with operations in over 32, 478 fastfood restaurants in over 100 countries (Datamonitor, 2010). Of these restaurants, more than 6,200 are operated by the company and more than 26,000 are operated by franchisees (Datamonitor, 2010). The company is known for selling its burgers and fries but other key product offerings include chicken sandwiches, salads, desserts, sundaes, and among beverages such as milk shakes, soft drinks, coffee, and flavored tea (Datamonitor, 2010). Dunkin Donuts Dunkin Donuts is the worlds largest coffee and baked goods chain, serving 3 million customers daily (Dunkin Donuts, 2011). As of December 2010, there are 9,760 Dunkin Donuts stores globally, including 6,772 franchised restaurants in 35 United States and 2,988 international shops in 30 countries (Dunkin Donuts, 2011). The company sells 52 varieties of donuts, coffee beverages, bagels, breakfast sandwiches, and other baked goods (Dunkin Donuts, 2011). 3.3.2. Rivals Anticipated Strategic Moves Dunkin Donuts Dunkin Donuts looks to increase market share by focusing on geographical expansion, coffee sales and new menu options, and among others (Datamonitor, 2005). To adapt to the consumers changing preferences, Dunkin Donuts creates customer loyalty by having its stores conveniently available in plenty of locations; for instance, four or five stores may be available within half a mile of each other (Datamonitor, 2005). Dunkin Donuts also does not set the trend in the market since they look to see what other companies do first. For instance, after Starbucks introduced its Frappuccino, Dunkin Donuts came out with its Coolatta and saw beverage sales soar (Datamonitor, 2005). Dunkin Donuts also promises to deliver a cappuccino within a minute

External Analysis of Starbucks 36 (Datamonitor, 2005). Additionally, the company markets itself as a low cost alternative to Starbucks (Datamonitor, 2005). Thus, Dunkin Donuts execution strategies are stressing geographic expansion, beverages rather than carb-laden doughnuts, and a focus on raising per visit spend (Datamonitor, 2005). McDonalds With over 32,000 of McDonalds restaurants operating in 117 countries, the foodservice retailer globally serves more than 60 million people daily (McDonalds, 2011) This gives the company leverage in financial and operational resources to advantageously compete. Strategically, McDonalds has implemented a re-imaging program of the restaurant (Sawers, 2009). McDonalds offers a wider food selection, organic milk, a variety of coffee choices, and free WiFi Internet service for its customers (Sawers, 2009). Implementing the re-imaging program has resulted in a 5% to 6% increase in restaurant sales. In addition, McDonalds competitive strategy concerns a low cost, menu differentiation, and identifying strategies that enables the firm to maintain successful performance (Roy, 2009). Panera Bread Paneras presence in the U.S. retail bakery-caf sector is strong with operation under its trademark names Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Caf (Datamonitor, 2010). To build a customer base for strong business growth, Panera focuses on offering high quality food, fresh baked goods, soups, salads, caf beverages, and other products through on-premise sales (Datamonitor, 2010). Serving about six million customers weekly, Panera is recognized for driving the nationwide trend of specialty breads and high level of customer loyalty for its customer service (Datamonitor, 2010). To keep pace with customers changing preferences and target new customers, Panera regularly reviews their menu and makes

External Analysis of Starbucks 37 updates (Datamonitor, 2010). Moreover, innovation in the menus gives the company a competitive advantage over its rivals as well as generates higher sales and profits through increase customer traffic (Datamonitor, 2010). Caribou Coffee Caribou Coffee has operations in over 500 locations in 16 U.S. states and the District of Columbia as well as several countries outside the United States (Caribou Coffee, 2010). The company looks to deliver a comfortable and welcoming environment for its guests with a unique blend of expertise, fun, and authentic human connection (Caribou, 2010). Additionally, the company supports the sustainability of coffee and allocates funds to help its communities build clinics, finance schools, invest in reforestation efforts, and support water-cleaning programs (Caribou Coffee, 2010). Caribou Coffee was always built on the belief of having the best coffee but was not delivering that culture to every customer (Tan, 2010). When Caribou Coffees CEO Mike Tattersfield and his team assessed each of its stores major issues, they have discovered that there exist real estate problems (Tan, 2010). Thus, the company got everything reinvented from its logo, to its marketing plan, and to its expansion strategy (Tan, 2010). Caribou Coffee closed the problematic stores and further elevated the entire brand experience for customers resulting in a 500% stock increase for 2009 (Tan, 2010). While the company has the best financial performance in its history, Starbucks struggled with massive closures and falling stock prices (Tan, 2010). Tattersfield says, Were at an advantage that were still small Starbucksis over 15,000 stores, and in the U.S., our licensed business is 500 allowing the companys manageable size affords it the ability to refocus on the details (Tan, 20010). Other strategies used are understanding what customers respond to by focusing on exceptional quality and improving the in-store experience by making every item, such as food, on the menu boards as high-quality as

External Analysis of Starbucks 38 the coffee (Tan, 2010). The company also took an approach to introducing hand-crafted mochas to the industry; this addresses opportunities for different times of the day and new customers who are normally not attracted (Tan, 2010). Caribou Coffee also looks for opportunities to connect with customers and the community on deeper levels as well as contribute to the in-store experience by making coffee in front of customers (Tan, 2010). To build the brand, the company also needed to evolve from a branded coffeehouse to a braded coffee company which is what they did making the Caribou-brand coffee available at 7,000 stores (Tan, 2010). Caribou is also not interested in being the biggest, but is determined to being the best coffeehouse and branded coffee company in the U.S. (Tan, 2010). Starbucks Starbucks has a wide geographic presence in over 50 countries with 8,870 company-operated stores and 8,1,39 licensed stores (Starbucks, 2011). This provides access to new markets and reduces the companys business risks (Datamonitor, 2009). Starbucks uses innovated and cost effective strategies to build its image including billboards, freestanding inserts in newspapers products and samplings, as well as innovative schemes such as paying for a day of free parking in a downtown area (Datamonitor, 2009). Starbucks popularity and strong brand image enables the company to attract and gain additional customers to its stores leading to additional revenues. 3.3.3. Summary of Competitive Analysis The competition within the coffee industry is stiff with many companies and brands to adhere to customers changing needs and to gain customer loyalty. Thus, the industry is fierce in regards to price, quality of products, customer service, location, and overall customer experience (Datamonitor, 2010). With this understanding, it is of great importance for a company to be able to create distinguishing products and customer service in order to successfully compete in an

External Analysis of Starbucks 39 intense market. In addition, continuously reviewing the internal environment, customer environment, and the external environment will help the company understand what changes need to be made to perform effective strategies. Without keeping pace to these trends, companies may be unable to attain its goals and objectives when consumer loyalty level drops. The customers are what keep the company financially stable. 3.3.4. Key Success Factors The internal environment, the customer environment, and the external environment are what the company needs to assess to determine whether their strategies needs to be altered to meet changing conditions of the market and of consumers preferences. This assessment should be reviewed on an on-going effort to remain competitive and successful. If there needs improvement, a company needs to reinvent itself to avoid further losing market share (Datamonitor, 2005). A company could also do repositioning strategies to market itself as a lower cost alternative (Datamonitor, 2005). For instance, McDonalds and Dunkin Donuts offer good quality coffee at a lower price than Starbucks. Another strategy to consider may be increasing geographically to appeal to a larger market spread (Datamonitor, 2005). Expansion strategy could follow customer demands and needs as this creates convenience for customers to boost sales. Among these strategies, there should be great customer service, differentiating products and menu variety, offering quality products, great experience in-store, effective and efficient employees, effective marketing, and so on. Building customers loyalty will help a company gain a competitive advantage over its rivals as well as attract new customers.

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