The People versus Starbucks - Case Study Example

Starbucks - Case study Name Professor Institution Course Date Starbucks - Case study Table of Contents Starbucks - Case study 2 Table of Contents 2 1.0 Introduction 3 2.0 Starbucks current situation 3 3.0 Strategic Issues and Problems  4 3.1 Global Market Demand and Risks 4 3.2 Socio-Cultural Issues 5 3. 3 High Coffee Bean Prices and Shortage suppliers 6 3.4 Regulations and Trade Restrictions 7 4.0 Analysis and Evaluation 8 4.1 Global Market Demand and Risks 8 4.2 Socio-Cultural factors 9 4.3 High Coffee been prices and shortage of suppliers 10 5.0 Recommendations 10 6.0 Conclusion 11 7.0 References 12 1.0 Introduction Starbucks is a multinational American coffee corporation. The company was first established in 1971 in Seattle, Washington. The company has grown over the years to be largest coffeehouse globally (Starbucks 2014). The store made instant success, with sales surpassing anticipations. Starbucks website (2014) claims that the company now operates in 64 nations with 23,188 stores consisting of 12,974 in the US, 1,551 in Canada, 1927 in the United Kingdom 1,897 in China and 1,088 in Japan. The competition has since grown in the industry making Starbucks to rethink and evaluate its strategies. Based on a comprehensive research, this case study will identify strategic issues and problems. It will also analyze and evaluate the problems and provide extensive recommendation addressing the identified problems.  2.0 Starbucks current situation Starbucks is basically a strong brand that is recognized for its quality coffee (Starbucks 2014). The company is now operating in 64 countries with several stores and also has a global presence. Starbucks (2014) posits that the company has a large customer and has even gone ahead to introduce a customer loyalty program that targets both teens and adults. The loyalty program was integrated for the registered Starbucks Card users providing packages like the free Wi-Fi access (Starbucks 2014). Starbucks started testing the mobile app for Starbucks cards, a stored value mechanism where customers could access pre-paid money to buy products at the company. Starbucks launched its inclusive mobile app platform in 2011 (Starbucks 2014). Starbucks is normally recognized for selling quality coffee, but also offers other cold and hot beverages, sandwiches, pastries and snacks. Recently, the company overhauled its menu to offer products such as baked goods and salads with no high-fructose and artificial or corn syrup or ingredients (Davis 2008, p.21). Despite performing well for several years in many countries, the company has faced low sales recently in some countries. After struggling with stiff domestic competition, the company closed its six stores in Israel in 2003, claiming that there were "on-going operational problem" and a "complex business settings (Wiggins 2008). In 2009, Starbucks also confirmed the shutting down of a further 300 not well-performing stores and doing away with 7,000 positions (Starbucks 2014). This is sign that customer visits had declined reducing sales tremendously. Starbuck’s stock prices also reduced in the process. 3.0 Strategic Issues and Problems  Over the years, Starbuck’s growth has been stirred by its mission statement which is “to enthuse and foster the human spirit through principle of one person, one neighborhood and one cup at a time” (Starbucks 2014). Also that it has often been, and will often be about quality. Since its establishment in 1971, Starbuck has become the biggest coffeehouse in the world (Starbucks 2014). However, getting into global markets has proved to be very challenging. Complexity of the foreign expansion reflects on challenges unexpected in local business. 3.1 Global Market Demand and Risks As started earlier, Starbucks business became a success within a short time. As the competition grew in the coffee industry increased, Starbucks thought it’s time to enter into new markets and increase its global presence. Starbucks (2014) contends that in 2013, Starbucks had expanded and operated in 64 countries and had 23,188 stores. For Starbucks, locating the perfect global market to expand its business proved to be challenging. Coffee is one of the products that depend on disposable income. The economy is one factor that keeps on dwindling, and for that matter, Starbucks found it hard to establish that high disposable income and if it would still remain stable (Murphy 2007, p.1). The company was also unsure of which market could generate the high demand for their high quality coffee. This all relied on several crucial factors like disposable income level, demographics and globalization among others. As a trend, Starbucks has expanded rapidly in the past 10 years and over that period, the company has experienced hardships in the management of its stores. Numerous stores all over the world as well those in the UK and Israel had to be closed (Murphy, 2007, p.1). However, the corporation continues to get out of coffee sector with numerous product line extensions, a situation that could affect the company negatively. 3.2 Socio-Cultural Issues According Davis (2008, p.22), Cultural and social factors are one of the strategic aspects that affect starbuck’s marketing and sales. The company is regarded as globalization icon and must pay attention to what consumers consume. One of the major aspects of Starbuck’s strategy is its focus on the quality of food, facilities and service (Davis 2008, p.23). In the global markets, client preferences are very much different from one country to another. This has been a big problem for Starbuck even as it enters new markets. As such, it ought to address these concerns when deciding on the location to set up its stores. This means that businesses or organizations have to be very watchful to recognize the ways that customers feel about and use particular products prior to planning their marketing strategy (Lyons 2005, p.15). Social opponents posit that Starbucks and many other businesses with American origin are not just taking their brands to international level, but are “Americanizing” the cultures of the world (Helm 2007). In fact, prior to coming to China, majority of Chinese nationals hardly ever consume coffee (Perreault, Cannon & McCarthy 2009). Due to such beliefs, Starbucks became a target for anti-globalization activists boycotting against the drinking of coffee from Western countries and what they believed to be exploitation by western companies (Davis, 2008). These complaints were not just from Asian region only, but also from European countries such as Australia, Germany, Italy and France (Davis, 2008) in protection of their real culture uninfluenced by materialism and consumerism. Culture does not just affect the product of the company but also the employees. A company cannot just employee the locals in its new market because this may cause the company to lose control. Due to that, Starbucks sent some of its employees to work in different countries. The company has had to suffer cultural diversities, which to some extend get down to performance (Lyons 2005, p.14). 3. 3 High Coffee Bean Prices and Shortage suppliers Over the years the prices of coffee have been increasing all over the world (Starbucks 2014). Farmers have hiked their prices claiming that the cost of production from machines to labor have gone up. Starbucks has also been left with little choice but to increase their prices. Armstrong & Kilter (2009) claim that as a company, which depends on disposable income, customers have had to complain of the prices while others opting reducing their visits to Starbucks coffee store. Increase in coffee prices have also increased supplier bargaining power but affecting quantity of raw coffee the company is purchasing from suppliers. Wiggins (2008) claim that in 2008, the company had to double its purchases to avoid the risk of the ever-increasing prices. In new markets, which import coffee, Starbucks has had to increase its budgets for purchasing coffee beans. Starbucks Corporation is renowned for brewing Arabica coffee that is produced in Brazil. The coffee price increased was on what was believed to a reaction to an extended drought in Brazil coffee growing regions (Wiggins 2008). Researchers claim that hot and dry weather came at a bad time making beans to take time in maturing. Furthermore, Brazil is accountable for one-third of the coffee produced worldwide. Considerable production loss in Brazil caused the Arabica coffee supply to fail to meet the demand. In 2011, Arabica coffee price surged to a high level of $2.82 per pound, making coffee brewers including Starbucks to pay extra for the coffee beans. Starbucks spent extra $200 million in 2011 and 2012 because of increased prices (Starbucks 2014). The company was capable of offsetting majority of the cost increase by means of cost cutting somewhere else, but Green Mountain coffee was incapable to uphold its margin following the price elevation. For that reason, Starbucks gross margin reduced 1.5% points after the corporation ratified price increases (Starbucks 2014). 3.4 Regulations and Trade Restrictions In the last quarter of 19th century, trading networks and blocs started to emphasize on the in importance fair trade practices (Perreault, Cannon & McCarthy 2009). The campaign has intensified and currently fair-trade advocates are challenging the global business system to offer a fairer and more sensible pact for level playing ground. In a nutshell, they are discouraging monopoly within the industries or markets. This has even made countries to create strict laws within their business systems. Quite perhaps one of the notable challenges Starbucks is experiencing is the varying trade regulations, which could affect the business’ ability to target particular markets (Lyons 2005, p.27). Other nations may impose restrictions on its new stores than in the UK, and it could be hard to operate and maximize profits in these markets (Grant 2010, 759). Before getting into a particular country, market research must be conducted to completely understand how this could affect the company. 4.0 Analysis and Evaluation 4.1 Global Market Demand and Risks From the time Starbucks was just a Seattle based coffeehouse company it has expanded to a global market leader, based in numerous countries with several stores (Starbucks 2014). Besides this amazing growth, Starbucks is experiencing an increasingly saturated domestic market. Starbucks has reached its upper limit of coffeehouse saturation, particularly where it has concentrated in many years such as affluent suburbs, shopping malls and cities (Cateora & Graham, 2007). When several outlets are opened in one city or town, the outcome of this is self-cannibalization of other outlets at the rate of nearly 30 percent (Cateora & Graham, 2007). As mentioned earlier the company has 23,188 stores consisting of 12,974 in the US, 1,551 in Canada, 1927 in the United Kingdom 1,897 in China and 1,088 in Japan. This is an evident that the company has been trying to lock competitors out of the market by opening numerous stores in one place (Grant 2010). This has come to haunt the business since its outlets are now competing among themselves. It has also made people protest of consumerism and monopoly. Consequently, the business has had to decide on a globalization strategy to target into other new markets. So as to select the best site or location to expand in a foreign country, particular different factors must be assessed. Lyons (2005, p.17) asserts that while many people think that Starbucks has been conducting a thorough research before getting into the new markets, the truth is that the company does not conduct continuous research to understand changes that is happening so first in economy of countries it operates its business. This is evident by the fact the Starbucks has closed many outlets in the recent past. Starbucks closure started in 2003 and has continued to today. The company shut six stores in Israel amid stiff competition from local rivals in 2003. In 2008 and respectively, the company closed 600 stores in the US and 61 stores in Australia respectively (Starbucks 2014). In 2012, Starbuck began closing most unsuccessful European stores. 4.2 Socio-Cultural factors Cultural and social issues affect most multinational business and Starbucks is not left out. Two cultural and social issues which affect entry into global markets must be tackled by Starbucks. Helm (2007) argues that the first issue to be tackled is the customer preference to their menus, facilities such as the outlet, and general environment. The second issue that needs to be addressed is the workforce diversity in order to increase performance (Thompson & Strickland n.d). To some extent, the company had addressed these issues but that is not enough since business environment changes so fast. Not everyone have similar eating habits or schedules, hence preparing a comprehensive plan to handle the issue (Davis 2008). For instance, Chinese did not drink coffee before Starbucks set up their outlet in the country. In short, the company introduced a totally different aspect to them. For them, they were better off with their tea and other drinking products. Convincing them that Arabica coffee which Starbucks offered is what they were lacking would prove to be a tall. Incorporating their recognized products in their menu would help them introduce their coffee in a continuing process. Similarly, it had to handle cultural diversity with care. For instance, Starbucks Coffee has to conform to the HALAL obligations in the work environment as per Asian countries’ requirement, particularly Malaysia (Davis 2008). In Malaysia, people of Islamic faith allowed to put on their scarf to work as a way of adaptation to their culture. 4.3 High Coffee been prices and shortage of suppliers According to Helm (2007), the questions that Starbucks could be asking before venturing is what the alternatives they have if their supplier do not have plants in new markets. Most of their coffee comes from Brazil meaning they may not necessarily have their distributing centers in Starbucks target markets. It can only be positive to get into markets where coffee bean is abundant or there can be easy supply. Apparently, for a Starbucks, availability and enough supplier of Arabica coffee bean of high quality is a must (Murphy 2007). To be more convenient and efficient with their operations in new market, the company ought to have closely available suppliers, establish good communication and transportation to avoid delays (Grant, 2010, p.759). The coffee markets are facing an ever increasing prices and hence need to set aside extra budgets every year to cater for the increase. In 2011 and 2012, the company had to use extra $200 million due increased prices (Starbucks 2014). Similarly, they have to build good relations with their existing supplier to serve those even in their new markets. 5.0 Recommendations From the problem identification to analysis and evaluation, the research has established that there are still some features of the companies’ strategy which require to be fixed. The company is operating in turbulent markets. The company is also still getting into new markets while closing its stores in unprofitable markets. It would be recommended that the company carry out research and establish markets that are similar to the ones that have continued to do well. Such markets should also have few trade restrictions. Canadian market can be considered to be similar to the US one. The economy of Canada is strong and Canadian dollar is most of the time stable and have similar value to that of the US dollar. Canada has lower trade restrictions on entry. It is not a secret that there is a market demand for Starbucks ‘ product in many foreign markets, however, some of its store equally register low sales due to culture and low disposable income among others, and it could be essential to amend menus and adjust some practice to satisfy the consumer demography and cultural needs. So as to work with its existing suppliers to new target, Starbucks Corporation must establish good relationships and attractive deal to get constant supplier at competitive prices. To reduce risks of losses in the new markets, Starbucks can possibly get into a joint venture with other established companies which can guide it in establishing itself. 6.0 Conclusion Starbucks is currently enjoying the dominance of coffee industry due to its strong brand and global presence. The company has continued to use its strength and its market share over the years. However, its business is now threatened with increased competition, high prices of coffee bean, global risks, shortage of suppliers, and socio-cultural issues. There are several opportunities that Starbucks can still exploit comprising of trying to invest in successful and similar markets, and creating joint venture and partnership with established companies in new markets to reduce global business risks. This will also reduce competition coming from other markets players. 7.0 References Armstrong, G & Kilter, P 2009, Marketing: An introduction (9th ed.), Upper Saddle River, NJ, Pearson Education Cateora, P & Graham, J 2007, International Marketing, New York, McGraw-Hill Irwin. Davis, R 2008, The people vs. Starbucks, New Internationalist, Vol. 410., No. 1, pp. 21-24. Grant, R. M 2010, Contemporary Strategy Analysis. 7th ed, Hoboken, NJ, John Wiley & Sons. Helm, B 2007, Saving Starbucks’ Soul, Viewed on 15th June 2014, from http://www.businessweek.com/magazine/content/07_15/b4029070.htm Lyons, J 2005, Think Seattle, act globally. Cultural Studies, Vol. 19, No.1, pp. 14-34. Murphy, J 2007, Converting a region of tea drinkers to Starbucks, Asia’ Media & Marketing Newspaper, Vol. 16, No. 1, pp. 1 Perreault, W. D, Cannon, J. P & McCarthy, E. J 2009, Basic marketing: A marketing strategy planning approach (17th ed.), New York, NY, McGraw Hill. Starbucks 2014, Starbucks Official website, Viewed on 15th June 2014 from http://www.starbucks.com/ Thompson & Strickland (n.d.), Strategic Management - Concepts & cases, Viewed on 15th June 2014 from http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html Wiggins, S 2008, When the Coffee Goes Cold, Financial Times. Walters, D & Rainbird, M 2007, Strategic Operations Management - a value chain Approach, New York, Palgrave. Read More