Introduction & Background
Founded in 1971, Starbucks is a premium roaster and marketer of speciality coffee and other related beverages/products, with operations in 65 countries across North America, Asia Pacific, Europe and the Middle East. Its products include whole bean coffees, handcrafted coffee, tea, and fresh food items sold through its prime stores and licensed national foodservice and grocery accounts. The company, which employs upwards of 191,000 people and is best known for its innovativeness in the industry, has been hugely successful since its inception. In July 2015, its annual revenues (trailing twelve months) stood at $17.7 billion, with a 14.57% profit margin and a 47.1% return on equity. The company’s market capitalization is $83.51 billion.
The company operates competitive foodservice retail spaces and offers consistent service quality, creating an exclusive customer experience. Value addition stems from its free, unlimited Wi-Fi connectivity and access to a news and entertainment portal (Starbucks Digital Network). Starbucks has succeeded in leveraging technology across all its distribution channels (fully owned and licensed stores, foodservice and CPG operations). Other than its distribution channels, the company uses the cloud- connected Clover coffee machines, mobile and internet applications (touchmyStarbucks, Starbucks app, eCard and Card Mobile). The integration of technology is such that marketing activities are easy, e.g. its loyalty program is easily applied to numerous channels. Starbucks’ strong financial position and low debt level allows it greater strategic flexibility, especially at a time when its larger competitors such as McDonald’s are struggling. Its revenues rose from $10.707 billion in 2010 to $16.447 billion in 2014, and the growth rate increased even further in 2015. See Appendix 1 for more details on the company’s financial performance.
Despite its meticulous commitment to the provision of premium quality products, the company has been hit by multiple quality hitches. In March 2014, for instance, Starbucks had to recall its Italian Roast 12 ounce Ground Coffee because of erroneous labelling, coming barely a month after the company withdrew ginger juice, organic sweet greens and coffee presses due to health and safety issues. In addition, Starbucks faces continuing lawsuits over varied issues, key among them being tax evasion. In 2012, the company is alleged to have diverted profits from its UK operations to Northern Ireland and other European nations to evade taxation. The company only paid $14.2 million since 1998, despite having realized upwards of $5 billion in taxable revenues. Contractual difficulties with Kraft Foods after the company discontinued its distribution arrangement with the former over what Starbucks alleges to be material breaches ended in a damaging lawsuit to both companies. These lawsuits have a detrimental effect on the company’s brand. Lastly, Starbucks remains too heavily dependent on the North American market, from which it draws more than 70% of its revenues.
With the growing public health concerns over lifestyle diseases’ epidemics in developed countries, largely associated with sugar-sweetened, fatty, high-energy beverages, the demand for healthy offerings is increasing. Conscious consumer preferences have shifted towards least processed foods, with market research indicating that in excess of 70% of US consumers believe that healthfulness was a major influence in purchase decision-making. Starbucks has an increasing presence in this market, having introduced its Evolution Fresh stores and menus that include vegan, vegetarian, organic and fresh fruits. Further, the company has made inroads into China and India, where rising disposable incomes and middle classes hold immense potential for Starbucks’ future. By the end of 2014, the company operated in excess of 1,132 stores in China and Asia Pacific, and it intends to increase this number to 3000 by the close of 2018. Additionally, the expanding proliferation of smartphones has opened up a new front i.e. the m-commerce channel, expected to rise by 28% between 2014 and 2017. Other than m-commerce, the office coffee segment (coffee vending machines) has risen by in colleges, private and government buildings across North America, which the company can successfully leverage.
Risk Management Plan
The most important positive risks include:
The increased role of technology in the distribution channels that creates cost efficiencies and greater customer satisfaction
The company may diversify away from its North American market. Starbucks only had 26.8% of its revenues from outside North America, even when the hot beverages markets in Europe, emerging economies in China, Asia Pacific, and Latin America may increase by up to 28% by the end of 2018. The company’s revenues from its Chinese and Asia Pacific operations rose by net revenues for FY2014 from CAP region increased 23.2% in 2014.
High potential for healthier food offerings, with 70% and 40% of customers indicating the importance of healthfulness and product ingredients respectively
The company intends to acquire 60.5% ownership of Starbucks stores in Japan
Increasingly strong financial performance
Increasing office coffee demand, with single-serve beverages representing 30% of office coffee service market
Expanding m-commerce market, expected to grow by 28% between 2014 and 2018
On the other hand, the negative risks include:
Potential brand and consumer confidence damage due to product recalls and perceived unethical business conduct due to tax evasion and other related litigation
Reduction in same stores revenues due to revenue cannibalization resulting from the high concentration of stores that effectively compete against each other.
Supply chain difficulties due rising wage bills and other input prices due to coffee bean fluctuations
Increasing regulatory compliance costs in developed economies
Risk Management Strategies and Conclusion
Evidently, Starbucks faces more opportunities than risks, which bodes well for its short-term success. To leverage these opportunities, the company should intensify its investment in technology across its distribution channels, with a particular emphasis on m-commerce, which is a nascent segment that promises the least competition. To rejuvenate its North American operations, investment in healthier beverage offerings and the office coffee segment is important given their rapid increase in the near past/future. Even most critically, to relieve revenue cannibalization in North America, and the market specific risks due to its over-reliance on the North American market, then company must be more aggressive in expanding into the emerging economies, notably China, and Asia-Pacific, Europe and Latin America. Problems in the supply chain can be dealt with by greater supplier diversification, use of swap contracts and risk insurance (PricewaterHouseCoopers 12).
MarketLine. Starbucks Corporation. New York: MarketLine., 2015.
PricewaterhouseCoopers. Project success through project risk management. London: PWC, 2011.
Rugman, A. M. and S. Collinson. International Business (6th Ed). London: Pearson Education, 2012.
Schultz, Howard. Onward: How Starbucks Fought For Its Life without Losing Its Soul. Seattle: John Wiley & Sons, 2011. Print.
Starbucks Corporation. Starbucks. 23 Jan 2015. 3 April 2015. <http://www.starbucks.com/>.
Wang, Helen H. Five Things Starbucks Did to Get China Right. 2015. 22 April 2015. <http://www.forbes.com/sites/helenwang/2012/08/10/five-things-starbucks-did-to-get-china-right/>.
Yahoo Finance. Starbucks Corporation. 14 Feb 2015. http://finance.yahoo.com/q?s=SBUX. 11 April 2015. <http://finance.yahoo.com/q/in?s=JCP+Industry>.