Starbucks

Coffee is a huge market within the food and beverage industry. Among all beverages, coffee has become the most popular worldwide. Consumption of coffee has reached at least four hundred billion cups of coffee a year. More than fifty-three countries have engaged in large-scale production of coffee for international trade. Millions of people work in the coffee industry, mostly harvesting coffee beans from around three billion coffee trees to produce seven million tons for commercial sales making coffee one of the widely traded commodities in the international market. (Coffee-Statistics.com, 2007) Quality is one of the value creating factors in the coffee market and only twenty percent of the total coffee beans harvested are premium beans so that these also fetch high prices. Specialty coffee sales constitutes one of the most vibrant sectors in the coffee industry because of the volatility of trade and prices. Although there are numerous specialty coffee retailers in different countries, there are only a limited number that have reached global status. Starbucks is the number one retailer of specialty coffee with presence in about thirty-five countries. As the specialty sector leader seeking to maintain its competitive leadership, it would be important to determine which strategies are appropriate for the company and the means of strategizing for its various divisions or business units across the world through BCG, SPACE and IE matrices.

2. Starbucks Products

Starbucks has divided its products and services into three categories: beverages, food, and non-food products. Beverages include coffee, tea, fruit juices, sodas, and coffee liqueur. Food products include salads, sandwiches, pastries and ice cream. Non-food items include mugs and other novelty items sold at Starbucks stores. These products are marketed under three brands: Starbucks, Seattle’s Best Coffee, and Torrefazione Italia. (Starbucks, 2007a) Starbucks has diversified its products and services as well as brands to match its international market.

Starbucks’ coffees served in stores fall under a number of themes: regional, brewing and grinding, and blending.  Regional themes express the areas where the coffee beans used in the concoction came from. Source comprise an important product value indicator, since only a limited number of regions in the world produce the finest quality coffee by growing coffee trees at 5,000 feet above sea level. First regional theme is ‘Latin America’, where Starbucks source coffee beans for use in 14 blends and concoctions. Second regional theme is ‘Africa/Arabia’ from where coffee beans are imported in blending 7 distinct concoctions. Third regional theme is ‘Asia/Pacific’ including 5 blends using coffee beans and ingredients from this region. There are also 9 multi-region blends combining various coffee beans and ingredients from different regions. Brewing and grinding themes express the manner of preparing the coffee beans to derive strong or mild, sweet or sturdy, smooth or intense. There are four dark roast blends. (Starbucks, 2007b) Blending refers to how coffee beans and ingredients are single served or mixed—brewed coffee, espresso, frappuccino, latte, etc—or served hot or cold. (Starbucks, 2007c) The wide range of coffee products has allowed Starbucks to tap into various markets and market segments by infusing regional and cultural tastes into its products. Every year, Starbucks develops new blends and concoctions based on international markets targeted for expansion.

3.1 SPACE Matrix

Creating a SPACE matrix for Starbucks involved the determination and rating of the variables representing the firm’s financial strengths, competitive advantage, environmental stability, and industry strengths. Average or mean ratings for each category were calculated. In the matrix, financial strength and environmental stability represent the Y-axis and competitive advantage and industry strength represent the X-axis. Values for the factors under Y and X axes were added and plotted, before drawing a line from one point to the other. The Space matrix for Starbucks shows that the firm falls under the upper right quadrant or the aggressive quadrant. This means that Starbucks forms part of an industry that is stable and continually growing. As an industry player, Starbucks holds a strong financial position and experiences key competitive advantages. This implies that Starbucks should capitalize on its key internal competences , which are financial strength and competitive advantage, to develop and expand existing products and services to create higher comparative value for consumers, develop existing markets, tap into new markets, diversify products horizontally or vertically, and widen supply chain and distribution networks. Through these strategies, Starbucks can gain a wider market share of loyal customers to make it difficult for new players to enter the market or its closest competitors to influence customer switching.

3.2 Boston Consulting Group (BCG) Matrix

Deriving the BCG matrix of Starbucks requires a comparison of its cash usage that represents the rate of market growth with cash generation that represents its market share. By comparing the market share and growth rate of the US, International and Global Consumer Product Divisions, it can be shown that these divisions fall under different categories. The US division operates with a high market share and low market growth rate, indicating that this division is a cash cow. As a Cash Cow, the US division of Starbucks should be ‘milked’ by extracting as much profit as possible while investing as little as possible to important areas such as product development. By doing this, accumulated profit can be used to develop the other business units with potential to become Cash Cows. The International and Global Consumer Product Divisions have low cash generation and with high cash usage as indicated by the low levels of revenue generated and corresponding low profit levels. As such, the divisions are Question Marks that are experiencing rapid growth while also consuming large amounts of money. However, since these divisions still have low market share, they are not generating that much cash. This means that Starbucks needs to determine whether these divisions have the potential to become Cash Cows, if so then cash from the US division will be diverted to these divisions for product and market development.

3.3. Internal/External Matrix

Starbucks’ IE matrix was derived by listing and rating, using and 1 to 4 scale, the internal and external factors of the company to create the Internal Factor Evaluation (IFE) and External Factor Evaluation (EFE) for each division before determining the average scores for IFE and EFE for each division. Circles are then plotted in a nine-cell matrix with the X-axis representing the IFE and the Y-axis representing the EFE. Size of the circle plotted determines the share of the division in aggregate revenue while the pie division represents the profit contributed by the division. The position of the circles in the nine-cell matrix indicates that the US market is dissected into the ‘Grow and Build’ and ‘Hold and Maintain’ categories. This means that it holds the strategic options of penetrating current markets and developing its product and/or developing its market or engaging in backward, forward or horizontal integration depending upon emerging market opportunities. International and Global Consumer Product Divisions remain under the ‘Hold and Maintain’ category so that these division should concentrate on penetrating markets and developing products for these markets.

 

References

Coffee-Statistics.com (2007). Coffee Statistics. Retrieved November 2, 2007, from http://www.coffee-statistics.com/coffee_statistics.html.

Starbucks (2007a). For Business. Retrieved November 2, 2007, from http://www.starbucks.com/business/default.asp?cookie%5Ftest=1.

Starbucks (2007b). Coffee Menu Board. Retrieved November 2, 2007, from http://www.starbucks.com/ourcoffees/menuboard.asp?category%5Fname=Coffee+Menu+Board.

Starbucks (2007c). Beverage Lineup. Retrieved November 2, 2007, from http://www.starbucks.com/retail/beverages.asp.

 

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