An Industry and Company Analysis

Jonathan Brydon Richard Gutierrez Jacob Henson Christopher Hutchins Josh Nelson Mitchell Rehak Katie Rustmann Krystal Wolf

Table of Contents
Brief History and Introduction.....................................................................................3 Industry Overview......................................................................................................5 Chief Business and Economic Characteristics.............................................................9 Driving Forces...........................................................................................................15 Competitive Forces...................................................................................................22 Competitive Positions...............................................................................................28 Predictions................................................................................................................33 Key Success Factors.................................................................................................39 Industry Attractiveness.............................................................................................44 Company Analysis....................................................................................................46 Current Performance................................................................................................46 SWOT Analysis..........................................................................................................55 Competitive Strengths..............................................................................................62 Relative Cost Position...............................................................................................64 Strategic Issues and Problems..................................................................................69 Choices/Options for Starbucks..................................................................................72 Build Substantial Competitive Advantages...............................................................73 Appendix..................................................................................................................77 Bibliography.............................................................................................................78

Industry Analysis
Fast Food Restaurants 72221 NAICS Coffee and Snack Shops 72221B NAICS Specialty Coffees 2095 SIC
Introduction to Starbucks

In 1971, the Starbucks name was first introduced in Seattle by Gordon Bowker, Jerry Baldwin, and Ziy Siegl. The name and logo were named after the famous Moby Dick. In 1982, Howard Shultz joined the company to help with retail sales and marketing. At this point in time the Starbucks company only had five stores and were selling to espresso stands and restaurants. The very next year Shultz traveled to Italy where he saw just how popular coffee bars were. He then convinced the owners to open their own version of this coffee bar, and it was a huge success. The following year Shultz left the company to open his own coffee bar called the Il Giornale. The turnaround of the Starbucks name came in 1987 when the owners sold off the Starbucks name because of the inability to control quality. Shultz saw his opportunity and swooped in and bought the companys retail operations for $4 million
(Starbucks.com and Proquest).

In the late 1980s Starbucks focused much of its energy on expansion and actually lost money during the expansion process. In a two year span from 1987 to 1989 the company went from around 15 stores to 55. In 1991,
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Starbucks became the nations first privately owned company to offer stock options to their employees. In 1992, the company went public and started selling its coffee in Nordstroms department stores. The following year Barnes and Nobles bookstores started selling the Starbucks brand in their cafes. By the end of 1993 the company had just under 300 stores under their belt. In 1994, the Sheraton hotel franchise was the next big name to carry Starbucks coffee. In 1995, the company partnered up with PepsiCo, and together they produced a bottled coffee drink. In addition, they agreed to terms with Dreyer's to produce a coffee flavored ice cream (Starbucks.com
and Proquest).

In 1996, Starbucks decided to start expanding to different countries. They started in Japan and Singapore. Just two years later Starbucks expanded to the United Kingdom. In 1999, they bought Tazo a tea company and Hear music. At the turn of the century Shultz handed over the CEO position to Orin Smith, but Shultz still remain the chairman of the company to focus on the companys global strategy. In the early part of the decade Starbucks began to take expansion to a new level. By the end of 2001 the company had 1100 stores worldwide with new stores popping up in Austria, Switzerland, Spain, Greece, Germany, Mexico, and Latin America

(Starbucks.com and Proquest). In 2003, Starbucks added Seattle's Best Coffee

Brand to their list of conquests for $72 million and at the end of the year Starbucks had a total of 7,225 stores. This deal was huge for Starbucks because it added 150 more coffee shops.
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Starbucks is the number one retailer in specialty coffee, but Starbucks is not only known for their coffee but also for their roasted beans, coffee accessories, and teas. Starbucks is a global giant which covers over 40 countries with more than 16,000 stores. Half of these stores are operated by Starbucks and the remaining stores are licensed and franchised to qualified recipients. In addition, Starbucks started to market their coffee in grocery store chains. A huge part of their business is licensing the Starbucks brand. Half of the 16,000 plus stores are ran by franchises. Starbucks also

increased market presence by adding a coffee flavored ice cream that is produced by Dreyers. They also added their own flavor of liqueur. It is easy to see that Starbucks was destined to be a great company from the very start of the company (Starbucks.com and Proquest).

Industry Overview

Starbucks is one of the largest, fastest growing companies in the world. Therefore, it is involved in several industries as defined by the NAICS. We will cover Fast-Food Restaurants, Coffee and Snack Shops, and Specialty Coffees. Starbucks position in each industry varies greatly as the size, competition, and economic characteristics of each of these industries also vary. In this analysis we will cover parts of each industry relevant to Starbucks, how Starbucks is functioning in each one, the past and present of

each industry, and where the industry appears to be headed in the future. We will also discuss competitors of Starbucks, where they stand compared to Starbucks, and how they affect Starbucks strategic decisions. To conclude this analysis, we will make predictions for the industries discussed and reveal any successful factors that have helped Starbucks maneuver successfully in each industry. Fast Food Restaurant Industry Starbucks is involved largely in the fast food industry. This is the most broad and saturated industry that Starbucks competes in. With industry giants like McDonalds and Wendys/Arbys Group, Starbucks market share is much smaller, only 6%, compared to the other industries we will discuss. However, this industry has a major affect on decisions that Starbucks makes in order to stay competitive against these different types of restaurants. Starbucks still sees potential for growth in this market due to several social and economic phenomena, such as the growing consumer trend towards eating healthier foods and the growing percentage of disposable income. The following table represents data from the last five years and predicts growth for the next five in the fast food industry (ibisworld.com).

The following pie chart shows the segments and products of the fast food industry. Starbucks falls in the Snack and non-alcoholic beverage bars category that holds 13.1% of this market.

Fast Food Industry Market Shares (2010)

McDonald's Corporation Yum! Brands Inc. Wendy's/Arby's Group Inc. Starbucks Corporation Burger King Corporation Doctor's Associates Inc.
www.ibisworld.com

12.7% 9.7% 6.6%

5.9% 5.1%

5.0%

Coffee and Snack Shops Industry This industry is made up of businesses that prepare and serve specialty snacks and nonalcoholic beverages, including ice cream, frozen yogurt, cookies, donuts, bagels, coffee, juices, smoothies, or sodas.
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Customers can consume these products in the establishment or takeout/drive-through (ibisworld.com). This industry is quite a bit more narrowed than the former. This is a major market for Starbucks as they dominate 32% of this industry and continue to grow.

Specialty Coffee Industry Despite many beliefs, coffee originated in Ethiopia. At the beginning of the twenty-first century, coffee was the world's second most traded commodity after oil. Specialty coffee has been defined as "a coffee that has no defects and has a distinctive flavor in the cup." Arabica coffee accounts for 70 percent of the world's coffee production. Specialty coffee remains one of the fastest-growing food service markets globally, due to the explosion of coffee shops, namely Starbucks (Specialty Coffee, Galenet). Evaluation of
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this industry is critical in the research of Starbucks due to their product expansion into pre-packaged coffee beans and grounds that are sold in supermarkets and other retail outlets, which in 2010 accounted for 7 % of total revenue according to Hoovers Company Information.

Chief Business and Economic Characteristics

Industry Structure Life Cycle Stage Mature Revenue Volatility Regulation Level Technology Change Barriers to Entry Industry Globalization Medium

Medium

Medium

Capital Intensity Medium Industry Assistance Concentration Level

Low

None

Low

Competition High Level (ibisworld.com) The industries that Starbucks competes in have many of the same Medium business and economic characteristics, as seen above. These industries fit within the largest segment of disposable income spending which is food and beverages. After surging over the past decade, these industries experienced a major slowdown in 2009 due to economic woes and partially to changing

consumer tastes. In the past five years, IBISWorld estimates that revenue grew at an average annual rate of 2.0%. After revenue declined by 6.5% to $24.7 billion during the recession in 2009, it began its upward climb in 2010 with growth of 3.2%. In 2011, industry revenue is expected to continue to climb with growth of 4.0% (ibisworld.com). During 2009, consumers spent less on luxury items like gourmet coffee, and when they did, they purchased lower-priced items. High-priced coffee retailers such as Starbucks and other non-essential foods lost the battle for shrinking budgets (ibisworld.com). The following graphs show how coffee consumption did not drop substantially when consumer spending did. However, statistics show a drop in total sales revenues for most coffee retailers as shown in the following graph. Since this industry holds consistently high demand through periods of low disposable income, consumers choose to buy coffee at supermarkets and corner stores rather than an expensive gourmet cup of coffee such as Starbucks.

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As mentioned earlier, consumers have also become more aware of their eating habits due to rising health concerns over the last decade. While

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many retailers have responded by expanding the number of healthy options on their menus, the general trend toward healthy eating has hurt the industry's unhealthier segments, such as donuts, hamburgers, and French fries. In the last five years, employment in this industry has grown at 1.1% per year to 479,856 employees. Also, due to weak market conditions, the number of new stores has increased only slightly at an average rate of 1.5% to reach 48,857 in 2011 (ibisworld.com). Since this industry is in the mature stage of its life cycle, companies are looking for new ways to grow in current markets and expand into possible new markets. Revenues in these industries are slightly volatile, which creates the need for flexibility in competitors. Due to recessions, industries can fall off the map for a certain period of time, or hit high numbers in good times. However, it is usually consistent. The industry recovered in 2010, as consumer spending began to increase and consumers started using more disposable income on satisfying fixes such as coffee and other snacks. Industry revenue growth is expected to continue in 2011 and 2012. As the economy recovers, demand for coffee increases and the addition of healthy menu options, to account for growing social pressures, abates some of the concerns for the health risks associated with high fat, high calorie foods. In an attempt to combat slumping sales, industry leaders have expanded their product lines to offer higher-margin items like iced coffee drinks, new breakfast items and healthy snacks, in order to reverse the trend
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and try to boost sales. After seeing success in other companies such as McDonalds, many major chains, including Starbucks, are also investing in international growth as part of their long-term strategy. Starbucks, in particular, views China as a market that has large potential for growth and lasting profitability. In the next five years to 2016, industry revenue is forecast to grow at an average rate of 4.1% per year to reach $32.5 billion (ibisworld.com). Capital intensity for these industries is medium. This is determined by the ratio of capital to labor costs. To calculate the ratio, wages and depreciation, from cost structure, are used as proxies. IBISWorld calculates the ratio as 0.16:1. This implies that about $0.16 is spent on the use and replacement of buildings and equipment for every dollar spent on wages. As such, this industry is deemed to have a low to medium level of capital intensity (and higher level of labor intensity) (ibisworld.com). This means this industry is affected more by economic factors such as unemployment as opposed to capital factors like the price of steel. The industry is labor intensive given the need for personal, face-to-face service and labor input in all areas from acceptance of deliveries, order-

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taking, serving and cleaning, as well as in the management of each store (ibisworld.com). Concentration level, regulation level, and technology development are all in the medium range. The industry is not as concentrated as, say, the automobile industry, which suggests room for growth and more market domination. This can be attributed to the consistently high demand for coffee products, regardless of economic conditions. As a food service industry, the USDA has strict regulations over these industries pertaining to the health and well being of the general public. However, it does not compare to the high level of regulation governing such industry as aviation; therefore, regulation levels are considered medium. There is also not much pressure to become extremely innovative in developing new technologies within this industry. However, with todays technology, there is consistent pressure across all industries to compete on innovation. Companies in these industries, such as Starbucks, have implemented technologies such as the Starbucks Card or the ability to pay for your coffee directly from your smart phone. This in turn, provides better customer service by speeding up the transaction process. Even though industry globalization is low, many companies are beginning to see the value in expanding to international markets, and the industry can expect to see a growth in this segment. Starbucks current CEO, Howard Schultz, got many of his ideas while traveling through Italy and seeing popularity of gourmet coffee shops in other parts of the world. He brought these ideas to the U.S. and capitalized on the opportunity. Currently,
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many companies are trying to develop in countries such as China, where they see great potential for sales and continued growth. Many domestic operators will continue to expand internationally. International expansion is anticipated to be the largest source of revenue and profit growth for major players over the next five years. Asia and the Middle East are regions where domestic fast-food brands have not saturated the market yet, and where operators are currently experiencing their strongest growth (ibisworld.com). Barriers to entry are very low in this industry. It is very easy to access the resources needed to join in the fast food or specialty beverage industry. Again, the high demand for this type of product and ease to access low amounts of capital needed to start a coffee shop, make it easy for anyone to open a Ma and Pop coffee shop on any corner. Finally, one of the most noticeable characteristics is the high level of competition across these industries. Given the low barriers to entry and the high demand in this industry, competition has become fierce. Intense competition will likely continue over the next several years. This factor will include significant price-based competition and an increased emphasis on the constant introduction of new goods. As mentioned, most fast-food chains will continue to evolve and launch new healthy food substitutes and expand on their current product lines. Major competitors will attempt to expand revenue and profit by providing a variety of meal options, including fresh salads, pastries, or coffee products. They will also continue to diversify into new markets, such as cafes and full-service restaurants. These operations
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will mock what Yum! Brands is already doing (with several brands like KFC, Taco Bell and Pizza Hut under one roof) at existing and new locations. Given these characteristics, this industry demonstrates monopolistic competition as its market structure. Competitors use location, product mix, and store atmosphere differentiation to establish a market niche. In monopolistic competition, there are many producers and consumers, which keep any one business from obtaining total control. Consumers generally believe there are non-price differences in products, such as quality, time spent being served, product variety, atmosphere, etc. Again, barriers are low in monopolistic competition. The producers involved have a degree of control over the price of products. There is very intense competition which leads to product differentiation being a major asset to companies.

Assessing Forces for Change

Starbucks Corporation is largely the world leader in their industry, making it somewhat of a difficult task to find forces that will drive their company to change. With that said, their company is not perfect and many studies found flaws that were apparent. We gathered as much information as possible and used Porters five forces framework to help assess factors for change. Threat of Potential Entrants

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One of the main driving forces for change at Starbucks is their threat of prospective entrants. Since Starbucks is the world leader in its industry, they have regularly controlled access to many channels of distribution. Starbucks has displayed their power over distribution channels by setting a strategy for their suppliers to follow, something we will discuss in the buying power of suppliers. Starbucks was ranked by Fortune in their Top 20 Most Admired Companies and ranked 1st overall in the food industry (CNN.com). One of their key attributes to success is innovation. Starbucks is constantly revolutionizing the coffee industry while also firmly distinguishing themselves in the food and beverage industry. Many distributors in the industry, like Starbucks, are becoming broader in product range. This industry differentiation is an opportunity for Starbucks, and a threat to potential entrants. As mentioned, the industry is one of the fastest growing, which makes competition for market space high and the threat of new entrants also high (with a low success rate). Rivalry Within the Industry Another force that Porter describes is rivalry among existing firms. As stated, direct U.S. competitors are McDonalds Corporation, Dunkin Brands Incorporated, Nestle Ltd., and Einstein/Noah Bagel Corporation. Starbucks says it expects its own single-cup packaged coffee business to generate $1billion of annual sales in the future. The implications of this are, as previously mentioned, that many of Starbucks' customers do prefer convenience, over waiting in stores. The competition, however, is not equally
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balanced when arguing company sizes; Einstein/Noah Bagel Corporation operates about 500 cafes in the United States, while McDonalds has over 13,000 stores nationally and Dunkin Donuts operates in over 36 states with over 5,000 stores (7,000 international) (finance.yahoo.com). Comparatively, in 2007, Starbucks had over 15,000 locations in over 20 countries. While it is apparent that Starbucks Corporation has major competitors within the industry, the competition has little brand loyalty in comparison to that of Starbucks customers. Starbucks Corporation is the premier retailer, roaster and brand of specialty coffee in the world. Smaller competitors, however, create potential threats to the company, as we will discuss later. An expansive growth in the coffee industry market and the threat of substitutions are, among others, risks facing the company. In the budding market, competition is high and Starbucks main competitors are promoting comparable products, including fine brews as well as quality foods. Threat of Substitute Products Porter's next force principle takes into account the threat of substitute products. There are many substitute products in the specialty foods and services industry and according to Mary Coulter, the best way to evaluate this threat is to ask whether other industries/companies can satisfy the customers need (Coulter). Other beverage industries can satisfy the customer's need for a drink, and other food industries can satisfy the customer's need to eat, but what companies can do both? The answer: Starbucks. There are obviously good substitutes to Starbucks' products, but
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this is why image is very important for Starbucks, as well as the company's ability to innovate and differentiate. There is a large threat of substitute products in the food and drink industry, but Starbucks has created an image, and has separated their company from competition so that many of their substitute products are actually a part of their daily business. At a Starbucks coffee shop, a customer can eat ice cream (or drink iced beverages), and drink a Pepsi, while his friend drinks tea while eating a pastry. And that very thought, to many customers, satisfies their needs, leaving little to no room for substitute products or companies to come in and pocket Starbucks loyal customers. Bargaining Power of Buyers (Customers) Porter's next industry force for change is the Bargaining Power of Buyers. Any of Starbucks' customers are considered the buyers. As you know by now, a standard Starbucks customer orders relatively small amounts of their products (anything from a cup to a bag of coffee) and their main strengths, differentiation and exclusivity, are the main reasons why customers prefer to purchase at Starbucks. And as seen through many studies and some individual familiarity, we know that there is an enormous selection of coffees at a Starbucks' coffee shop. A plan that was devised by Starbucks management to reach larger quantities of customers, the Preferred Office Coffee Provider, was one in which companies and organizations could buy the coffee and tools necessary to brew "the perfect cup of Starbucks Coffee," in large quantities for their offices (starbucks.com).
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With that in mind, it was evident that Starbucks managers strategically made this the only prospect found on their website for a consumer to buy a mass amount of their products so they could keep the power over buyers. With that said, we saw great supplying power for Starbucks on their website, Starbucks.com; the possibility of buying a large number of products that span across the coffee market, from your basic coffee blend, to music (giving the customer little buying power with regards to other suppliers that offer this wide range of products). We saw threats to Starbucks in the fact that customers face no marginal costs in switching premium coffee suppliers from Starbucks to another forgone premium coffee supplier. Another threat that was exploited by potential Starbucks' customers is the ability to brew their own coffee. Starbucks has vigorously tried to equalize this threat by offering the previously mentioned, Preferred Office Coffee Providers, as well as directions on how to make the perfect cup of Starbucks Coffee at home. This attempt has broken into some market segments, but it is evident that their customers do have some bargaining power in the industry. Bargaining Power of Suppliers The last force that Porter assesses for change is the bargaining power of suppliers. Coffee is one of the world's largest traded commodities in the United States, with South and Central America producing the majority of coffee traded in the world. This pie graph gives the breakdown of the worlds

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production of coffee with South and Central America accounting for approximately 65% of all production.

Starbucks not only relies on both outside brokers, but also the direct exporters for the supply of coffee. The distribution of coffee is affected by weather conditions and the health of coffee trees that produce beans. According to the many experts in the industry, the chief competitors in the coffee business have seen profits plateau and even decline in some cases because of over-crowding in the market, which ultimately gives the coffee suppliers bargaining power. According to a Starbucks Case Profile, the price of the coffee bean could rise in the future due to lower supply and heightened demand. For the industry, these are alarming threats. Starbucks often seeks to buy coffee that is superior to its competitors, and because of this, they have conventionally paid first-rate prices for its environmentally friendly (or green) coffee, coming in at anywhere from $1.50 to $2.00 per pound (starbucks.com). In the strategic plan for Starbucks, nowhere mentioned are there alternate types of beans Starbucks must buy. However,
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Starbucks has demonstrated how little control its suppliers truly have by showing their commitment to superior products. At the turn of the millennium, Starbucks announced new guidelines for their purchases, which were developed in partnership with The Center for Environmental Leadership in Business guidelines. Quality control checks, social responsibility, environmental concern, and economic issues were the basis for these guidelines. With that said, Starbucks would only allow brokers and exporters who could meet their high standards to supply the industry leader. In turn, because of Starbucks strict guidelines for their product, the distribution industry, consequently, has few companies that can comply with the regulations. This is a potential threat for the prosperity of Starbucks Corporation. Starbucks often equalizes this threat by paying a premium of up to ten cents per pound of coffee to vendors based on how well their coffee meets Starbucks' standards (starbucks.com). Former executive director of the Center for Environmental Leadership in Business, Glenn Prickett, said, "With these guidelines, Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry." Starbucks has an unprecedented degree of control over its suppliers in an industry where it is possible for suppliers of premium coffees to have an enormous amount of bargaining power. Workforce Planning (Retirement of the Baby Boomers) Prior to the millennium, the most significant generational issue facing corporations was attracting and holding on to bright new talent. Today, the
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generational scales have changed. It is no longer the youngest employees who are causing concern; it is the most experienced employees who are causing concern with their plans of retirement. While many of Starbucks employees at cafes are young, many upper level administrators and managers are getting ready to retire, proving that the predicament of retiring baby boomers will hit Starbucks' management significantly. This factor is something they will need to take into account when assessing their company and as these managers leave the company, future Starbucks leaders will need to retain and transfer their knowledge. To succeed, public companies, like Starbucks, should have built their leadership pipelines by now and put their strategic plan into action.

Competitive Forces

The competitive forces of Starbucks have also continually evolved as the company has grown and entered different industries. When Starbucks first opened in the 1980s, there were two main coffee industries: retail and specialty. The retail industry consisted of companies such as Folgers. Starbucks, then, solely existed in the small-scale specialty coffee industry. The industry at that time was split up into two types of competitors, those who sold flavored coffees and those who sold unflavored coffees. Starbucks chose to compete in the unflavored category because they felt that the flavored syrups ruined the flavor of the coffee beans. Due to the fact that

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there was really no competition (because of two separate industries and the separation between flavored and non-flavored specialty coffees) the consumption was very inelastic. Therefore, there was not very much competition between the prices of rivals. Due to the low level of competition and change in demand, it did not take long for the industries to evolve and grow. Starbucks now competes among many different sizes of companies rather than just small-scale specialty shops. They have also expanded into other industries including those of fast food and coffee and snack shops. Even though all of these industries fall in the food and beverage spending category, we will look at how Starbucks compares to companies in each separate industry. Fast Food The largest competitors to Starbucks exist in the fast food industry. It is said that these companies focus mainly on selling premium coffees quick and at a low price. They have price superiority and start a lot of price wars that lead to high competition within the industry. Even though they may have the lowest prices, many Starbucks supporters say that they lack the atmosphere that Starbucks has. Two main companies that Starbucks competes against in this industry are Dunkin Donuts and McDonalds. We will break them down in the next few paragraphs and look at how they perform as well as how they are a threat to Starbucks. Dunkin Brands, Inc.

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Dunkin Brands, Inc. is a privately held company that runs both Dunkin Donuts and Baskin-Robbins brands. Dunkin Donuts, the one that we will be focusing on for the analysis, has approximately 9,000 locations in 30 countries and is the worlds leading doughnut shop. It is also the largest coffee and baked goods chain. When Starbucks shut down for a few hours in the evening in 2008, Dunkin Donuts took advantage of the situation. They opened their doors during that time, from 5:30- 9:30 pm to serve one dollar cups of coffee. They have also started selling more breakfast foods, such as sandwiches, so they could move their image more towards a breakfast bistro and increase their competitive advantage against Starbucks and McDonalds. McDonalds The strategy of McDonalds seems to be very clear: low prices, fast, and at a consistent quality. It does not seem that this type of strategy would be in competition to Starbucks, but in fact it creates a huge competitor to the coffee shop. Originally, McDonalds only sold regular brewed coffee. In 1993, however it introduced the idea of McCafe, its own brand of espresso. The idea took off very well, and was introduced to America in 2001. The new strategy did not go over very well and was not accepted in America. McDonalds was very determined to develop the idea and in 2003 it changed its plan. It started to renovate the atmosphere and replace the bright red, plastic booths with large brown leather couches. They wanted to create an atmosphere more like that of Starbucks. They have continued to renovate
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and have also incorporated large espresso machines on their counters. They did this in order to create a sense of theatrics and fun. Even though some still believe that McDonalds is not really a competitor, the numbers show that it, in fact, is a major one. During the recession of 2008-2009, McDonalds market share grew at a pretty reasonable amount. At the end of the first quarter in 2008 they showed income of $946.1 million or 81% of the market share. At the end of the same first quarter in 2009, it showed income of $979.5 million or 87% of the market share. In addition to this, some of the stores showed a sales increase totaling up to 4.7%. While some say that this was a temporary competitive advantage due to price superiority during a recession, this cannot be determined yet. It will be interesting to see what the future holds. Coffee and Snack Shops While some companies within these three different industries overlap, some new companies are incorporated when including the players in the coffee and snack shop industry. As previously mentioned, this industry is comprised of businesses that prepare and serve specialty snacks and nonalcoholic beverages, including ice cream, frozen yogurt, cookies, donuts, bagels, coffee, juices, smoothies, or sodas. Even though these companies do not always compete directly with Starbucks, they do compete indirectly as the purchasing power of buyers is only so large. Some of the key

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competitors that are most closely related to Starbucks and not already mentioned in other industry analysis are Cinnabon, Inc. and Greggs. Cinnabon, Inc. Cinnabon is a service chain that has developed franchising opportunities to expand its business. The shops are mostly located in malls, airports, and other areas that have a lot of traffic on a daily basis. Even though Cinnabon is primarily famous for its cinnamon rolls, it does offer a wide variety of products, one being coffee. It has grown over the years to approximately 750 shops around the world. Like previously mentioned, it is not a direct competitor to Starbucks being that it does not offer a large amount of specialty coffees or the atmosphere; however, it can fulfill that craving for the cup of coffee and something sweet to snack on. It also has the potential to collect the extra spending money of Starbucks' customers, indirectly affecting the profits of Starbucks. Greggs Greggs is not a known competitor for Starbucks in America, but it is a large competitive force in the United Kingdom. It consists of over 1,400 shops in the United Kingdom who serve snacks and foods from pastries and other bakery items to sandwiches and healthy choices. A lot like Cinnabon, the shops are commonly located in high traffic areas like malls and airports. The competitive advantage that they have against Starbucks is the fact that they do serve healthier choices and have a wider variety of products. These
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advantages appeal to customers who may want a light meal while they enjoy their coffee or have companions that may want something other than a coffee product. Specialty This industry is mostly comprised of smaller coffee shops that are more directly competitive towards Starbucks. They are very different in each area depending on their geographical locations. Some of their main advantage points are that they can easily appeal to the demographics of the area and change their product line and atmosphere accordingly. Starbucks has a harder time doing so because it is so large and generic. Two main competitors in this industry are Caribou Coffee and Peets Coffee and Tea. Caribou Coffee Company, Inc. Next to Starbucks, Caribou Coffee operates the second largest coffee chain that is non-franchised. It has approximately 400 stores in 30 states; most of these are located in Minnesota. The chain is a lot like Starbucks in that it offers fresh-brewed coffee, specialty coffee drinks, baked goods, whole bean coffee, and brewing supplies. It also sells its roasted coffee and other merchandise to retailers (such as grocery stores) and foodservice suppliers. Unlike Starbucks, it is designed to please its location more. The shops are designed like lodges and have fireplaces to create a more American, homey, and comfortable atmosphere. Another difference is that the shops also all have meeting rooms that may be rented out to customers.
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Peets Coffee and Tea Peets Coffee and Tea has approximately 190 coffee shops, mainly located in California. Similar to Starbucks, it offers coffee, specialty drinks, biscotti, herbal tea, pastries, mugs, brewing equipment, and products sold to retail stores. However, in contrast to Starbucks, Peet's does not partake in any licensing or franchising, so it can have more control over its shops. This also means that it grows a lot slower as it has trial and errors with a few stores; this has greatly affected the profitability of the whole company. Even though it is growing at a slower rate, many believe that it will be Starbucks' key competitor in the future. This is because it is so closely related and has the same marketing strategy. It focuses on the same high-class group of people as its clientele. It also continuously advertises new items to let customers try new items and different blends.

Positions of Competitors
Starbucks opened their first store in 1971 during the start of the specialty coffee boom. From the 70s specialty coffee increased the number of retailers from around 70 to over 400 by 1989. During this period coffee sales moved from just a product purchased at the supermarket to a special treat that was purchased by, an educated urban resident with the disposable income to spend on fine coffee. Specialty Coffee Industry

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In 1987 when Starbucks started to expand, their chief competition was still the specialty coffee retailers. They provided fine coffee (they refused to sell flavored coffee) and coffee type drinks such as lattes, espresso, frappaccinos, etc. that appealed to this urban demographic. In addition, they provided a setting that was more like a club or pub where their customers could go and visit with their friends and/or just relax. This resulted in Starbucks developing a niche market that has catapulted them to the top of the specialty coffee retailers. By the end of 2006 the specialty coffee industry had reached sales of $12.27 billion. An estimated sixteen percent of American adults say they consume specialty coffee daily with almost 63% saying that they had specialty coffee occasionally. These numbers are up three and four percent respectively since 2002 and show the rise in popularity of the specialty coffee industry. By 2009 the Specialty coffee had grown into a $13.65 billion industry with growth expecting to hit $18 billion by 2012. Starbucks sales in 2009 were $9.6 billion compared to around $500 million for Green Mountain and $262.5 million in sales for Caribou. Starbucks is still the clear winner in the competition for sales among the specialty coffee retailers. They are not only beating their competition, they are beating them by a very large margin. Starbucks is the industry icon for specialty coffee and has stores all over the country selling their coffee.

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Coffee and Snack Shops Industry Starbucks has now moved beyond just competing with specialty coffee retailers. They have the distinction of currently competing in three separate markets. The first we have already discussed which is the small specialty coffee retailers. The second competitive market is the Coffee and Snack Shop. Starbucks not only sells coffee, they also sell baked goods and accessories. This includes pastries, breakfast items and coffee paraphernalia. In this market they have stronger competition. One of their competitors is Dunkin Brands Inc. Dunkin Brands has 14,848 locations across 44 countries with 9,087 of those locations being on the United States. They boast that they have the worlds largest coffee and baked goods chain. Dunkin sells donuts, coffee and ice cream. In recent years Dunkin has put much more emphasis on their coffee market including lattes, cappuccinos and espresso. Dunkin saw the value in this market and have entered into the competition with a very strong position. There are other competitors in this group such as Krispy Kreme Doughnut Corporation and Einstein Noah Restaurant Group, but they do not have a very large piece of the market compared to Starbucks and Dunkin Donuts. Krispy Kreme has 224 domestic locations and owns about 3% of the market. Their total company revenue is expected to show approximately a 3.4% decline for the last five years to fiscal 2012. Einstein Noah owns 2.5%
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of the Coffee and Snack Shop industry and has 683 locations across 37 states. They are showing a steady growth with 0.7% increase in 2010 and are expected to show a 5.6% increase by the end of fiscal 2011. While neither one of these companies pose a serious threat to Starbucks, they can still take small chunks out of Starbucks' market share. Starbucks had $11.26 billion in sales in 2010 while Dunkin Donuts had approximately $7 billion in sales for the same period. Krispy Kreme estimated roughly $363 million with Einstein estimating $412 million in 2010. Starbucks is clearly a dominating force in this business segment as well as in the coffee specialty market, but with new competition coming into the market they are being challenged at a much higher level compared to previous competition. Fast Food Restaurant Industry Around 2001, Starbucks was pulled into a new market category that they had previously not competed in at all. In 2001 McDonalds entered into the coffee market in America after success in Australia. Previously McDonalds and Starbucks would not have been seen as competitive with one another. Two things happened around the same time that drew Starbucks and McDonalds closer together in the Fast Food market. Based on the boom in coffee in the last 20 to 30 years, McDonalds tried to improve their basic coffee that was being sold with their breakfast items. This improvement was
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a success and led them to try and obtain some of the growing market for specialty coffees. McDonalds has provided similar coffee type drinks that compete with Starbucks at a lower cost including lattes, mochas, and a Frappe which is direct competition to Starbucks Frappuccino. This is expected to increase sales for McDonalds by around a billion dollars. This combined with an article in Consumers Report in 2008 that rated McDonalds drip coffee as better tasting than Starbucks has spurred McDonalds forward. McDonalds is also remodeling some of their stores, referred to as McCafe, to have a more relaxed setting similar to the Starbucks stores and provide Espresso machines and baristas. This shows that McDonald's is trying to copy the success of the Starbucks setting which in many ways is the cornerstone of their business. Around the same time that McDonalds was introducing their new coffee options Starbucks also took actions that would pull them more into the category of Fast Food. Starbucks started to build stores that had drive thru windows like the fast food restaurants use. They also started to provide more breakfast type foods beyond just their normal pastry fair. This has resulted in Starbucks basically entering into the Fast Food competition. In 2010 McDonalds had 12.7% of the market, Yum Brands (which consists of Kentucky Fried Chicken, Pizza Hut and Taco Bell) had 9.7%,

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Wendys had 6.6% of the market, and Starbucks had 5.9% of the market, which was higher than Burger King that only had 5.1% of the overall market.

So while Starbucks still dominates both the Specialty Coffee market and the Specialty Coffee and Snack market they do not dominate the Fast Food market. Why is this a concern? Starbucks isnt really a fast food franchise. This is an indication of how competitive the overall coffee market is becoming. Starbucks has to adapt and solidify their place in the overall market. They have moved from an environment where they only had to deal with like companies into a competitive world where companies that were previously not even really interested in the coffee market, much less actively trying to compete and be at the top, are entering into the market and targeting sales in order to increase their revenue.

Predictions

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The Specialty Coffee trade is a strong and emerging industry in the United States. Here are a few coffee consumption trends from The National Coffee Drinking Trends study: Daily consumption of coffee beverages among consumers remained unchanged as compared to 2009, with 56% of adults partaking. 84% of consumers have not changed their consumption habits despite the economic environment. 40% of the coffee consumed is now gourmet. Coffee preparation at home is up 4 percentage points with 86% of past-day coffee drinkers reporting that they made coffee at home ("2010 National"). Today, specialty coffee sales adds up to $13.65 billion, one-third of the nations $40 billion of sales in the coffee industry. As the recession hit, it was assumed that specialty coffee would be one of the first things cut down upon. This was not the case. Historically, America was the country that drinks the most coffee, but according to sales figures, it was revealed that Americans are still willing to pay for good coffee. It was stated in an article about specialty coffee that, The sales growth rate for the specialty segment is four times that of traditional coffee with projections the category will top $18 billion by 2012 (Hensley). If we look ahead, much of the industrys growth will remain in the specialty coffee segment. It is obvious that this shift will occur.

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In the strategic environment, Starbucks is not in much danger, being that they are the industry leader. Starbucks mostly calls the shots, giving them an advantage, as the others follow, trying to get some sort of recognition as number two. They are devoted to controlling the industry they have created. It is evident that the coffee industry has a huge pool of competitors, which inevitably leads to rivalries. To stick out in this mass of companies, one must differentiate from the rest. This industry is characterized by monopolistic competition, which thrives on competitive differentiation. Like in the realestate industry right now, it is very much a buyers market. With all of the different choices, flavors, foods, and price points for the coffee businesses, the customers have a wide array of stores trying to pull them in. From the business side of things, the question becomes, who will likely make what moves? As previously stated, Starbucks Corporation is the major leader in the Specialty Coffee Industry. The closest competitor that Starbucks would need to worry about is Dunkin Brands Inc., as the rest of the industry is scattered

with tons upon tons of other specialty companies. To anticipate what Starbucks competitors would do next, we move our attention to what they have done in the past. When the recession hit, all

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industries felt some sort of repercussion. Einstein Noah Restaurant Group, owner of Einsteins Bagels (2.5% market share), launched several different choices for their customers to choose from. Some of these options included a new 400 calorie breakfast menu, a premium Frozen Strawberry Lemonade, the $1.99 Chicken Bagel wrap and re-introduced the Bagel Poppers, and the Saladwich Sandwich. All of these efforts resulted in the company only experiencing a 1% revenue decline in 2009 (Major Companies Starbucks, 2010). Einsteins responded to the recession by changing up their menu, adding different items to appeal to different people, as well as adding cost-friendly choices. Dunkin Brands Inc. is taking a similar approach. The company has just rolled out a new, delicious-looking, bacon, egg, and cheese biscuit. In doing this, Dunkin Donuts will attract a whole other crowd. Those who prefer McDonalds-esque breakfasts will now have the choice to go to Dunkin Donuts, and with convenience, get their coffee there as well. With this first move towards improving their breakfast menu, expanding to more than just donuts, it is easily assumed that these steps will continuebringing new customers with it. If seen from an industry perspective, the Specialty Food Store Industry will be putting many competitive moves into action in the next few years. The future regions of growth will most likely start with the increase in demand for organic foods. According to the US Department of Agriculture, organic food is by far the fastest-growing food industry in the world, with growth occurring in new farms, products and processors ("Industry Outlook"
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2010). Companies in the Specialty Food Store Industry will more than likely notice a growing demand for organic food that will stay for the long haul. Organic food is expected to account for more than 5.0% of the US food market by the end of 2015 ("Industry Outlook" 2010). Previously, sales from organic products remained small, but they are growing much faster than the food industry as a whole. Premium or high-end goods are forecasted to continue to shoot revenue growth upward. Given the similar food market, gourmet and specialty food marketed in stores, like in the coffee industry, provide a level of competition. Over the next five years, IBISWorld forecasts that [The Coffee and Snack Shops] industry revenue will increase at an average annual rate of 4.1% to $32.5 billion (www.ibisworld.com). It is predicted that the industry will resume its growth trend starting back up in 2012. As anticipated, as the economy turns around, unemployment drops, and customers feel more comfortable spending money on non-necessity items, the coffee and snack shops will benefit to the expected annual rate of 2.3%.

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The intense competition between companies will likely continue throughout the next few years, but now the focus of competition will be price-based, as well as an added emphasis in product development. IBISWorld is predicting that most chains will introduce new healthy food alternatives and expand their current product lines (www.ibisworld.com). They continue to explain how domestic operators will continue to expand internationally. This is expected to be the most popular option. Yes, it is costly, but is anticipated to be the largest source of revenue and profit growth for major players over the next five years (www.ibisworld.com). As stated many times before, the economy is finally turning around. With this, the Coffee and Snack Industry will continue to grow, the demand for coffee will increase, and people will loosen up about how their money is spent. If companies do as expected and expand their menus to include new, healthier alternatives to their older items, this should entice customers, even more, to spend their money. As noticed by observing at the projected Revenue Outlook, the future of this industry looks promising. The last industry to take a look at is the Fast Food Industry. Just like the others, this industry is growing at a predicted annual rate of 2.5%, and worth up to $208.16 billion over the next

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five years. It is an obvious observation that as the economy improves, fastfood restaurants will wreak the benefits. Luxury spending on things such as eating out will return to be a normal thing for most Americans. IBISWorld has also predicted that over the five years leading to 2015, personal consumption expenditure is expected to increase at an average annual rate of 2.5% (www.ibisworld.com). If the information from the previous industries studied is taken into account, it is easily expected to see competition at a very high level continue in the future. Similarly to the Coffee and Snack Shops Industry, the competition will include substantial price-based competition and an increased emphasis on the regular introduction of new products (www.ibisworld.com). Healthy alternatives will most likely be the first introduced, followed by an expansion of foods already produced. Major players in this industry will start to offer alternatives to the classic red-meat burger, trying to attract a more expansive pool of customers. They will also become more aware of areas of expansion, such as cafes and full-service restaurants (www.ibisworld.com). Again, like before, international expansion is foreseen. As consumer spending increases and people loosen their grip on their purses and pocketbooks, this will translate into fast fixes, like fast food. With the international growth intensifying into a popular option, the revenue of the major fast-food chains will continue to increase. As seen in the chart to

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the right, the revenue growth for the Fast Food Industry will level off eventually around 2015, as growth rates approach historical levels and operators are forced to contend with the market saturation issues they have grappled with over the past 10 years (www.ibisworld.com). In looking at the Food Retailing Industry report, by large percentages, retailers have common strategies about what theyll do next: Nearly all intend to address competitive concerns by emphasizing perishables (99%), and by developing store brands (88%), and by offering natural and organic products (84%), and by improving the shopping experience (74%), and by catering to health and wellness concerns (73%) and by lowering prices (72%) (Merrefield). In an article titled, Fundamentals of Coffee Business Success, it is recommended to use something close to the Hedgehog Concept. It was not clearly stated as the Hedgehog Concept, but explained it exactlyfocus on small aspects of the company, such as knowledge and performance, rather than only on profit and loss. If this advice is taken, the companys employees will find that their business life will be a lot more enjoyable, but also the company as a whole will be more likely to find financial success (www.ineedcoffee.com).

Success Factors
First Mover Advantage

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Beginning from the moment Howard Shultz bought Starbucks in 1987, he envisioned a company with aggressive expansion ideas in the premium coffee industry. The original plans of Shultz was to open 125 stores in the first five years of expansion, but this number was low compared to what was actually opened. In 1988, they opened 15 stores to more than double the original number of 11, bringing the total to 26. The amount of stores only grew in the following years: in 1989 they opened 20, 1990 they opened 30 more, in 1991 they opened 32 stores, and a whopping 52 stores in 1992. In the five year expansion, Starbucks opened a total of 150 stores, topping the plan by 25. At this point in time, Starbucks mainly focused its stores in the Pacific Northwest region. Furthermore, in order to maintain high quality and customer service Starbucks decided not to explore franchising, but instead chose to own and operate the stores at the company level (Larson). Whenever you hear about Starbucks, you always hear "a company that was made one cup at a time." This is because of the strategy they had in place. They decided to simultaneously expand to areas outside of their comfort zone. Starbucks chose to expand in the Chicago, Illinois area and the Vancouver, Canada areas. This expansion was very risky, but it was designed to prove that their business plan would stand the test of time and be able to prove the feasibility of the company. In addition, they wanted to test the different markets before going on an all out expansion of the company.

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Expansion East The main reason Starbucks chose to expand into the Chicago area was because it faced numerous challenges not present in other cities in the Midwest and east coast cities. Two of the largest basic coffee companies were based here, Folgers and Maxwell House. Both of these companies had the brand recognition and resources to impede the expansion attempt made by Starbucks. What upper management at Starbucks really wanted to know was if they thought Starbucks was worth throwing resources at to stop their expansion. In addition, Starbucks wanted to know if stores that were far from headquarters could operate efficiently and at the same time have a solid infrastructure. One of the main problems with building stores away from headquarters was that of quality. Would quality be maintained after being trucked in from several thousands of miles away? However, to solve this problem Starbucks put their perishable items in flavor lock bags. These bags allowed them to transport 5lb bags without the risk of losing freshness. At first, the Chicago stores were not successful, and this forced Starbucks to reassess their situation in their location matrix and their pricing and hiring process. There were three reasons why these stores were originally unsuccessful. The first reason was because of the locations they chose to put their coffee stores. With the frigid cold temperatures and the wind playing factors, people would not leave their buildings to get coffee.
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They should have put stores in the lobbies of the busiest buildings. The second mistake was that they hired inexperienced managers to run their stores. Because of the distance between Chicago and Seattle, it was hard to convey the ideals and methodology of Starbucks to baristas hired there. Lastly, Starbucks did not make pricing adjustments due to the higher cost of goods and rental prices. Starbucks learned many things from the openings in the Chicago area and made the necessary changes to include: closing the unattractive locations and reopening in lobbies of high traffic locations, hiring more experienced managers, and raising prices. Their expansion into Vancouver was met with a lot less resistance because the city was similar to Seattle's demographics, and this helped ensure future investors of the company's viability (Larson).

California Expansion Until 1991, Starbucks mainly focused the concerns in the Seattle and Chicago areas. California represents an immense market with an ideal demographic makeup and open attitude toward high quality and innovative foods. Los Angeles was chosen to be the main hub for Starbucks because of its status for being trendsetters and Hollywood's ties to the rest of the country. For Starbucks this was an immediate success. The Los Angeles Times named Starbucks the best coffee in America before the first store was
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in place. A hidden advantage was the implicit celebrity endorsements made by paparazzi by showing photos with celebrities holding a cup of Starbucks coffee (Larson). The Catalog Starbucks used their catalog service to place stores where a significant number of people were ordering bags of coffee through their mail order catalog. This catalog served two purposes, it helped Starbucks with location choices and it allowed them to sell to people who did not have a store near them. In addition, this catalog gave Starbucks the ability to further expand their loyal customer base before physically entering into that market. Employee Satisfaction Howard Shultz once said about his employees, These people are not only the heart and soul but also the public face of the company. Every dollar earned passes through their hands. Employees are Starbucks number one reason for success. With huge amounts of resources and time Starbucks can capture the highest quality employees. One way that Starbucks can attract these great employees is by raising health care benefits to anyone who works 20 hours or more per week. Knowing that there were high costs associated with raising benefits, Starbucks reasoned that they would attract higher quality employees and at the same time reduce turnover and decrease overall expenses. When the company first opened it cost the company $3000 to train a barista, and $1500 for full health care benefits.
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The average fast food industry turnover rate ranged from 150 to 400%; Starbucks was only 60% at the barista level and 25% at the managerial level which are the lowest in the industry. In the long run there is no doubt that the increased health benefits did indeed save the company money (Starbucks.com and Larson). The Starbucks corporate team started bean stock, which is a stock ownership plan for their employees. The idea behind bean stock was that every employee would be eligible to receive stock options and this is based in proportion to their pay level. Stocks options were originally offered at 12 % of employees base pay but were later increased to 14%. In addition, Starbucks started an employee forum every quarter which gives employees an option to speak their minds by encouraging questions and suggestions. After this forum was established the word employee was no longer used but instead the word partner is used (Larson). Arabica Coffee Beans It is important for Starbucks to maintain the quality of the Arabica beans, and they pursue different strategies to ensure that the quality stays high. Starbucks entered into agreements with Coffee and Farmer Equity Practices (CAF) to maintain a long term stream of high quality coffee and at the same time enhancing the coffee farmers' living standards. Three major principles came out of this agreement, 1) was that Starbucks would receive a sustainable amount of coffee beans from a stable source of farmers who
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were not influenced by trading partners, 2) was to maintain the integrity of Lambs farm, and 3) to make sure that the farmers lived in societies that were safe and healthy. This agreement helped lower the amount of lesser quality beans and therefore suppressed the price of coffee. This agreement gave farmers who followed the guidelines a leg up when Starbucks makes buying decisions. With the supply-chain in mind, CAF allows Starbucks to lock in the highest quality suppliers of beans which ultimately gives our company a competitive advantage over our competitors. The farmers, who invest in this plan, will now have incentives to stay with Starbucks or risk switching cost (Larson).

Overall Industry Attractiveness

As we have mentioned, Starbucks currently operates within three industries as defined by the NAICS: Fast-Food Restaurants Coffee and Snack Shops, and Specialty Coffees

Each of these segments are somewhat related; however, their coffee and snack shop and specialty coffee segment basically consists of various similar characteristics. To begin with each industry is somewhat narrower when compared to the fast food industry that they are also considered to belong to. Despite this fact, the coffee and snack shop aspect of their overall

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industry attractiveness is their bread and butter. Starbucks currently represents an astounding 32% of this industry and continue to grow, making them one of its largest players. This is the industry that they need and have focused the most on. They have entered into contracts with various suppliers in order to meet their desires for global expansion, so the current socio-political environments of the nations mentioned in the sections below more than certainly have been taken into consideration. Key success factors in this segment are clearly related to their ambitious plans for global expansion because Starbucks has all but halted their domestic expansion (GlobalData) and focused almost exclusively on the former. Another fact that illustrates the need for concentration on this segment for the advancement of overall industry attractiveness is that their specialty coffees segment (consisting of retail store sales) only comprises 7% of their total revenue. It is also wise to mention the largest segment in which Starbucks operates, Fast Food Restaurant Industry. Despite their relative insignificance as compared to giants such as McDonalds, it is worthwhile for them to pay crucial attention to this segment, for instance, because McDonalds and Starbucks may differ in market share in this industry but Starbucks holds a larger market share of the segment that McDonalds seeks to capitalize on: Coffee. So to operate in parallel industries makes key success factors dependent on the level of information on competitors that also drives change. Though Starbucks should continue to focus on its most important
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segment, the Coffee and Snack Shop, it is crucial to pay careful attention to this segment as well in order to achieve their optimal industry attractiveness.

Company Analysis
Current Performance
When analyzing a company to develop a strategy the first and probably the most important factor to take into consideration is its performance. This allows you to closely identify the companys goals as well as to track its progress towards them. It also helps you compare its performance to the standards set forth by the company internally as well as those set by the environment external to the company. This performance measurement also opens the eye to what is known as Total Quality Management and allows the analyst to identify areas that need improvement. In analyzing Starbucks' performance, we will consider many variables including accounting criteria, financial criteria, marketing criteria, human resource management criteria, and by style of management. Accounting Criteria

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B a la n c eS h e e t( inm illio n s )
Cash Net Receivables Inventory Plant, Property & Equipm ent Total Assets Accounts Payable Long-Term Debt Total Liabilities Retained Earnings Liabilities + Equity 2009 $666 $271 $664 $2,536 $5,576 $267 $549 $2,531 $2,793 $5,576 2008 $322 $329 $692 $2,956 $5,672 $324 $549 $3,181 $2,402 $5,672 2007 $438 $287 $691 $2,890 $5,343 $390 $550 $3,059 $2,189 $5,343 2006 $453 $224 $636 $2,287 $4,428 $340 $1.96 $2,200 $2,151 $4,428 2005 $307 $190 $546 $1,842 $3,513 $220 $2.87 $1,423 $1,938 $3,513

Even though the amount of Starbucks' total assets has gone up and down from year to year, they have had a steady growth over the last five years. It has done pretty well on keeping its receivables at a small amount and not getting in over its head in money owed to the company. Its inventory has been at a pretty safe, steady level; and we have not seen any huge, irregular spikes. This can allude to the fact that they have a pretty steady cost and inventory control and can forecast pretty efficiently. Property, plant and equipment were at a steady growth until 2008. This is most likely due to the recession and Starbucks decision to close and sell a few of its shops.

Liquidity
2009 Current Ratio Quick Ratio 1.2 0.86 2008 0.79 0.48

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It is very important for firms to maintain a good level of liquidity, so they can pay their bills in a timely manner. Liquidity refers to how quickly and easily one can covert its assets into cash to pay short-term debt. Current liquidity can be calculated by comparing the amount of current assets to the amount of current liabilities. As one can see, Starbucks increased its liquidity to greater than one from 2008 to 2009. The fact that they have beat the benchmark equal to one shows that they have a fair amount of liquidity; however, researchers say that a good level of liquidity is equal to two. While they have done a fair job at paying off their short-term debt, they still have improvement to make before they meet the good benchmark. The quick ration is also known as the acid-test ratio. It takes into consideration inventory when looking at liquidity. It is very similar to liquidity, but it looks closer at the short term. The ratio takes current assets minus inventory and compares it to current liabilities. This is probably a better measure for Starbucks, because if it is having a hard time and has to liquidate assets to pay off debt, it will probably most likely not be able to liquidate its inventory very quickly. Researchers say that a good benchmark for the acid-test ratio is one. In 2008, Starbucks did not have a very good ratio, but between 2008 and 2009, they made a huge improvement. They are fairly close to one in 2009, but there is still plenty of room for improvement. Financial Criteria

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Income Statement (in millions)

Revenue Cost of Revenue Gross Profit Operating Income Net Income 2009 2008 $9,774 $10,383 $7,750 $8,390 $2,024 $1,992 $562 $503 $390 $315 2007 $9,411 $7,215 $2,196 $1,053 $672 2006 $7,786 $5,866 $1,920 $893 $564 2005 $6,369 $4,771 $1,598 $780 $494

The net income of Starbucks is at a pretty strong level. As you can see, they once again took their hit between 2007 and 2008 due to the recession starting. However, their profits have gone back up in 2009. Their cost of revenue pretty fairly matches their amount of revenue across the board. They have also had a strong amount of cash flow adequacy shown by their operating income. This cash flow adequacy allows them to operate, invest, and finance without being forced to liquidate any assets.

Profitability
Gross Profit Margin Net Profit Margin Return on Assets Return on Equity 2009 55% 4% 7% 12% 2008 19% 3% 5% 12%

Starbucks also has a pretty decent gross profit margin for 2009 (it dramatically increased compared to 2008 again). Gross margin takes revenue, less the cost of goods sold and compares it to the actual revenues. In laymans terms it measures the firms financial health and therefore how well it is operating taking out other factors. It is most commonly due to a decrease in cost of goods sold. The fact that there is such a dramatic
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increase between 2008 and 2009 shows that the management of Starbucks did a superior job of cutting the cost of goods sold over the time period. The net profit margin is also more commonly known as the profitability of the firm. An increase in profit margin is by far a better statistic to look at than just an increase in earnings. An increase in profitability directly shows that there is improvement being made in the company. The net profit margin for Starbucks increased from three percent to four percent from 2008 to 2009. Therefore, they are in fact improving. Better ways to understand this ratio is to read it like so: if the company has a 4% profit margin, it has a net income of $0.04 for every $1.00 sold. Starbucks has a good net profit margin compared to Caribou who had a ratio of two percent in 2008 and three percent in 2009. Return on assets is also known as return on investments; it measures the profitability of a company given its amount of assets. It comes into play when comparing companies of different sizes. It is simply calculated by taking the net income of the company and dividing it by the total amount of its assets. It shows how much of the net income is directly related to the amount of assets or investments put into the company. In other words, it tells you how well management is doing at turning investments directly into profit. It has increased two percent from 2008 to 2009, showing that management has showed a great deal of improvement and that the increase in profitability was not only due to other environmental factors, but also to

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the management of the company. In comparison to Caribou, who had an ROA of -18% in 2008 and 5.9% in 2009, Starbucks is doing well for the industry. Return on equity is similar to return on assets, but instead of taking the amount of capital investments into consideration, it uses the amount of stockholders equity. The return on equity of Starbucks is at a high percent, but there was no increase from 2008 to 2009. Even though there was not an increase, the high percentage both years shows that Starbucks has a high amount of market strength, taking into consideration the industry it is in. For example, Caribou had an ROI of -37% in 2008 and 11% in 2009. Even though Caribou had a greater amount of improvement, Starbucks is still performing better.

Management Criteria

Asset Management
2009 Asset Turnover Inventory Turnover 1.8 6.5 2008 1.8 12.1

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Asset turnover is the amount of sales directly related to the dollar amount of assets. It is calculated by dividing revenue by assets. It measures how effective the company is at turning assets into revenue. The ratio has stayed the same over the time period indicating that it is very efficient in turning assets into revenue. However, it is lower than Caribou, who has a ratio of 2.8 for both years. This is most likely due to the significant difference in the amount of assets between the two companies and the fact that Caribou is much more concentrated to a specific area. Inventory turnover shows how much of a companys inventory is sold to customers and replaced throughout the time period. It can be calculated by dividing sales by inventory. The inventory turnover for Starbucks has been cut in half from 2008 to 2009. The numbers overall are pretty low, due to the low market. However, management could use significant improvement here.

Debt Management
2009 Debt to Equity Debt to Assets Times Earned Interest Ratio 2008 0.83 1.28 45.30% 56.10% 14.8 9.4

The debt to equity ratio measures a companys leverage and is calculated by dividing its total liabilities by the shareholders equity. It is better to have a low ratio because that means that the company is not taking on more debt in order to grow. The ratio has decreased from 2008 to
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2009, which is a sign of improvement. It also runs very close with Caribou, one of its closest comparable competitors which has ratios of 1.03 (2008) and .85 (2009). The debt to assets ratio shows how much risk the company has under its belt. It calculates how much of its assets have been purchased on debt by dividing the total amount of debt by the total amount of assets. As one can see, roughly about half of Starbucks assets are purchased on debt. However, management decreased this amount by 11% from 2008 to 2009. This is a significant improvement. The times-earned-interest ratio illustrates how capable the company is to pay off its debts. It tells how many times a company can cover its interest charges on a pre-tax basis. Both ratios for 2008 and 2009 are very high and are increasing. This shows that Starbucks is very capable of paying off its debts, if need be. After looking at all three of these ratios and taking all of them into consideration, one can infer that Starbucks does an excellent job at managing its debt not only as a company in itself, but also compared to other companies within its industry. Marketing Criteria Starbucks does not focus on advertising for their marketing. Instead, they focus on their image and appealing to their customers in their everyday

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lives. Compared to other companies in the industry, Starbucks puts far less money into marketing. They have recently started promoting environmental-friendly operations. They also focus on human resource management to increase their employee satisfaction. This will, in-turn, will increase their customer service and promote a positive image for Starbucks. As long as they continue to please their customers, and expand their business through word-of-mouth, they do not have to put a huge amount of money into advertising. Human Resource Criteria Starbucks human resource management is probably its larges intangible assets. Even though it employs a total of 1000 full-time, 60,000 part-time, and 7400 other global employees, it still strives to please all of them. They follow the philosophy of leave no one behind in all of their employee benefits and fringe benefits. Upon being hired, every employee is given twenty-four hours of in-store training. They are also then qualified to partake in all of the benefits. Starbucks provides full health care benefits to anyone who works more than 240 hours in a quarter. This is outstanding, because most companies only provide benefits to full-time employees. As mentioned earlier, they also have the Bean Stock. As a reminder, the Bean Stock is employee stock options that the employee can purchase with up to 14% of their gross pay. They are able to purchase this stock at a discount of 85% of FMV. This is not only a benefit to the employees, but it

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also in turn benefits Starbucks. Since the employees own part of the company through these stock options, they care more about the profitability and growth of the company. They also incorporate the Future Roast, which is a 401K plan for all employees. Starbucks matches employee contributions up to 4%, which is a pretty reasonable amount, given that employees also have the stock option benefits. The highest matching percentage that I have seen by a large company is 8% (USAA- which is well-known for its benefits). The main difference in Starbucks and other companies is the fact that Starbucks makes these benefits available to all employees, and most other companies just do so for full-time employees. In addition to these basic benefits, Starbucks also has other policies that satisfy its employees. For example, post-9/11, they extended their military reserve policy to benefit their employees that are enrolled in the services. Not only do all of these benefits make the employees feel like they have value, but they also lead to high employee satisfaction rates. The average job satisfaction for Starbucks is 82% compared to the average of 50%. In fact, the average satisfaction rate for Hewitts Best Places to Work is only 74%. Once again, not only does this phenomenal human resource management satisfy the employees, but it also affects the performance of Starbucks. Employee satisfaction leads to better performance, greater customer service, and lower turnover rates.

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SWOT Analysis Overview

Starbucks SWOT Analysis Strengths Sound Financial Performance Weaknesses Overdependence on the U.S. Market

Potential Store Operation Product Recalls Wide Product and Brand Offering Opportunities Strategic Growth Initiatives

Threats Government Regulations

Third Place Experience

Intense Competition

Focus on Emerging Economies

Supply of High Quality Arabica Coffee Beans (Source: GlobalData)

A SWOT (Strengths, Weaknesses, Opportunities, and Threats) is an evaluation of a project, business venture, or company. We did one of our company (Starbucks) because we would like to know some of the external and internal factors that will make our decisions for the future favorable or unfavorable. The broad product/brand offering compliments the strategic innovation initiatives of the company through new products and appeals to a more extensive consumer market. Its retail activities allow the company to expand at an exponential rate. The company operates in a highly59

competitive red ocean. If the company is unable to maintain the quality that they currently offer, as well as the loyalty of their customers, they could be in a position that they have yet to experience (i.e. lessened market position). Strengths Unparalleled Financial Performance As shown in Current Performance of this paper, Starbucks strong financial position helps it in achieving stability and the necessary margins for funding to expand its operations as well as target new markets. To recap, the company reported revenues of $10,707.4 million (USD) during the year (ended October 2010), an increase of 9.54% over 2009. The company reported an operating profit of $ 1,419.4 million during the fiscal year 2010, an increase of 152.56% over 2009. The increase in operating profit resulted in the increased net profit levels (GlobalData). This current performance is an absolute strength that is certainly a competitive advantage that most competitors envy. Potential Store Operations Starbucks expanded retail business has enabled it to increase its market share as well as dive into other markets and become one of the leading coffee retailers. As everyone knows, the company sells its products through retail stores (both owned retail stores and licensed stores). Its retail stores are featured at high-traffic and high visibility positions. Starbucks also
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locates stores in shopping malls. It focuses on locations that provide convenient access for both pedestrians and drivers. At the end of fiscal year 2010, the company had a total of 8,833 company-operated retail stores and 8,025 licensed stores. In 2010, Starbucks opened 13 company-owned stores in the US and 97 internationally. Starbucks also sells its products through licensed retail store operations. In 2010, Starbucks opened 166 licensed stores in the US and 335 internationally to the public. Additionally, to provide more access and convenience for customers, Starbucks has made efforts to expand development of Drive-thru retail stores (GlobalData). Wide Product and Brand Offerings Starbucks has an unequivocally diversified product and brand offering in the target market segments, as already discussed. In addition to food services, non-food items include mugs, travel products, coffeemakers, coffee grinders, storage containers, seasonal novelty items and Starbucks cards. It also sells beverages which include bottled Frappuccino beverages and Starbucks DoubleShot espresso drinks at various retail locations. The portfolio of the companys brand includes premium Tazo teas, Seattles Best Coffee and Torrefazione coffee. The company's diversified product and brand portfolio supports the innovation process, which, in launching new products, appeals to a broader customer base and enhances its revenue stream (GlobalData).

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Weaknesses Overdependence on the US Market In terms of geographic spread, with respect to its revenue, the company lacks a global presence equal to its domestic one. Starbucks sells its products in the Asia Pacific, Europe, Middle East and African regions. Even though it has operations worldwide, the contribution of revenues from the international segment is significantly less than its domestic counterpart. A significant amount of the companys sales are generated from the US region. Thus, the companys operations are principally located in the US. During 2010, Starbucks obtained about 78% of its total sales from the US market, while its International segment accounted for 22%. If the company concentrates only on the US, however, then it would lose out on the potential Blue Oceans arising in the international market. The geographical concentration increases the risk the company is exposed to, acting as an obstacle for the expansion of the company (GlobalData). Product Recalls In 2009, the US Consumer Product Safety Commission, with the company, announced the recall of about 550,000 Starbucks Barista Blade Grinder and Seattles Best Coffee Blade Grinder, manufactured by Tsann Kuen (Zhangzhou) Enterprise. The recall was made after they received reports of the blades failing to turn off or turning on unexpectedly, posing

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the threat of lacerations. These grinders were sold by the company between 2002 and 2009. Furthermore, recently in 2010, the company recalled 12,200 glass water bottles due to laceration hazard. The recall was made after the company received reports of the glass water bottle breaking when the consumer removed or inserted the stopper, posing a hazard to consumers. Product recalls such as this will cause unexpected expenditures, besides a negative impact on consumer confidence (GlobalData). Opportunities Strategic Growth Focus The company is focused on strategic growth, which provides expansion potential for the company, and impacts its performance positively. In October 2009, Starbucks and China agreed with the Yunnan government for planting coffee in the region. Starbucks is also expanding the portfolio of its non-branded brands. In 2009, Starbucks started selling VIA Ready Brew an instant coffee in its shops across the US during year 2010. In 2010, the segments revenue increased due to the launch of Starbucks VIA Ready Brew by approximately $22 million. The instant-coffee market is estimated at $17 billion. Hence, the company can leverage its presence in European countries like the UK to tap the massive market segment potential (GlobalData). Third Place Leader Experience The companys goal is to become the leading retailer and brand of coffee in each of its target markets by selling the highest quality coffee and
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products by giving each customer an individual Starbucks Experience. It owes its success to the up-and-coming trend of its coffeehouses as a convenient third place out of home and work, perfect for casual meetings and a calm experience away from the hassle of daily life. In addition, Wi-Fi internet access in all stores also makes it a place where customers can work. Events also take place at Starbucks, keeping with the company's strategy of making their locations a community center and to garner the loyalty of local customers. Hence, their strategy of making its retail viable by selectively opening stores in existing markets and opening locations in new markets supports its long- term strategic goals (GlobalData). Focus on Emerging Markets Concentration upon realizing the emerging market opportunities in regions such as China, India, Russia, and Brazil is a main goal for the company. China is expected to become the second largest market for the company, after the US. The company predicts potential for thousands of stores in the country. With the company expecting to open about 500 international stores during 2011, more stores are likely to be in China, where the company has about 800 stores. Also, in 2010, the company has increased in Japan through consumer packaged goods, and also opened about 30 stores in China. According to IMF forecasts, the Chinese economy is expected to grow at 10.5% in 2010 and 9.6% in 2011, largely due to the increasing domestic demand. Furthermore, the Indian economy is anticipated to increase around 9.7% in 2010 and 8.4 % in 2011. India is one
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of the most rapidly changing countries globally. Also in 2011, Starbucks Coffee Company contracted into a Memorandum of Understanding with Tata Coffee, one of the largest suppliers of premium coffee beans in India. In summation, the company can expect to highly benefit from the strong economic growth provided by the emerging markets, particularly from China and India (GlobalData). Threats Government Regulations Starbucks, being a specialty coffee roaster and retailer, is subjected to numerous regulations by federal agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency and the Department of Commerce, as well as state regulations, regarding the production processes, product quality, packaging, labeling, storage, and distribution. Furthermore, they are subject to regulation by the Federal Trade Commission. The company is restricted to certain health and safety regulations, including those issued under the Occupational Safety and Health Act (OSHA). The failure to comply with the various regulations may expose Starbucks to liabilities or harm existing operations, which could decline in its profitability (GlobalData). Intense Competition

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Starbucks markets are highly competitive with the entrance of more new players. Starbucks competes with various manufacturers and distributors of coffee products that have significantly greater financial, marketing and distribution resources. The companys other competitors include coffees sold through supermarkets, specialty retailers and specialty coffee stores under the whole bean coffee segment. Furthermore, the companys whole bean coffees and its coffee beverages compete indirectly against all other coffees in the market. As mentioned, the company's chief competitors include McDonald's Corporation, Allied Domecq, Green Mountain Coffee Roasters, Diedrich Coffee, Caffe Nero, Aroma Cafe, Barista, Cafe Republic, Caribou Coffee and Costa Coffee. If the company is not able to preserve their product quality and loyalty, this competition could lessen the sales of the company, and thereby hinder its market position (GlobalData). Supply of High Quality Arabica Coffee Beans The companys business depends on the availability of high quality Arabica coffee beans. Starbucks roasts coffee beans from various regions to produce different blends of coffee. The political and economic circumstances in those regions, with Africa, Indonesia, and Central and South America, could become unsound, which might affect the companys ability to purchase coffee. If Arabica coffee beans from a market become unavailable or too expensive, then the company may be forced to withdraw particular coffee types and blends or replace coffee beans from other regions in blends. Common substitutions and changes in product lines could lead to cost
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increases, and changes in the gross margins. Thus, the political uncertainty in growing regions could decrease the availability of Arabica coffee beans necessary for the operation and growth of the business (GlobalData).

Competitive Strengths

As you can see from the SWOT analysis above, Starbucks has key strengths in: Innovation / Wide Product Offering Distinctive Brand Name Unparalleled Financial Strength

Starbucks has a reputation for new product development and creativity. Starbucks sustains a competitive advantage by constantly looking for new ideas, new products, as well as new experiences for guests. For example, the company hires designers to come up with artwork for commuter mugs. Starbucks forte is incorporating differentiated features such as their different flavored and seasonal coffees that no other company offers. As stated earlier, Starbucks launched a Smartphone app in January which allows users to pay for coffee or latte with a barcode. The app has already experienced 3 million people who have bought their coffee from their phones. Once a user registers his/her card to the app, all that is needed is to hold the phone to a scanner that will charge them for their purchase. Testing done by Starbucks has shown that this is fastest way of payment.

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The organization is dependent on another main competitive advantage, the retail coffee. This could make them slow to diversify into other sectors should the need arise. Starbucks also has an established relationship with Kraft Foods, the largest food and beverage corporation in the U.S. For instance, Starbucks sells its branded packed coffees and teas in grocery and warehouse club stores throughout the US through its licensing relationship with Kraft Foods. Starbucks Corporations most valuable resources and assets, with regards to a distinctive competency, are unquestionably their premium product and their brand. Almost everyone in the world knows that Starbucks serves premium coffee brew and holds high standards with concern to all their products. This, in turn, has produced a world leader in the coffee industry and made their brand distinguishable wherever you go. One customer on their website was quoted saying, Starbucks is not just a pound of coffee beans, or a mocha latte, rather, a total coffee experience, which some people find euphoric (starbucks.com). Although their resources may be imitable, many companies would not be able to sustain the growth and prosperity that Starbucks has and will continue to have. It is evident that the Starbucks brand is one of their greatest assets and clearly, that is non-imitable. With statistics showing their continual growth, Starbucks, undoubtedly, has been able to sustain their advantage and become an industry leader.

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Relative Cost Position

The relative cost position (RCP) is a method for estimating the full cost of a company's product relative to its competitors. Strategic Questions: In what areas do our competitors have the biggest cost advantage? What is driving competitors profitability? How much flexibility would our competitors have in a price war? What is the clients position? What are the strategic implications of the full potential cost position?

Tactical Questions:

Where should we focus our cost reduction efforts? (e.g. wage rates and amounts of raw material inputs)

Which cost elements would decrease significantly with an increase in scale?

Which cost elements might benefit from different business practices?

The first step in conducting a relative cost position is designing a value chain. Value Chain The value chain examines an organization's functional activities and how they create customer value. We will discuss where Starbucks strengths and weaknesses are. Porter believed that there are 5 primary activities and
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The 5 primary activities

4 support activities involved in the value chain and they are designed to increase customer value. It is one thing to know what these activities are, but we must know how well our organization is performing these activities (netmba). Inbound logistics covers the receiving and warehousing of raw materials and the distribution process. Operations are turning our inputs into finished goods. In our company, this is turning the coffee beans into actual cups of coffee/espresso. The third level of the value chain, outbound logistics, is the warehousing and distribution of our finished goods. Marketing and sales, is finding out what customers want and how much sales we produce. Lastly, service is support for our customers after they receive their product(s) (netmba).

The second step in the cost position is to identify cost elements and drivers. Raw materials accounts for 25% of total costs, packaging is 7%, direct labor is 17%, indirect overhead is 8%, advertising accounts for 15%, and sales and marketing is 20%. Some of the cost drivers that can influence raw materials are quality of ingredients, mix and volume of ingredients, amount of waste, and the cost of the ingredients needed. What kind of packaging is used, the size of packaging, what material is being used, and
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whats the cost per package are some of the forces that control the packaging aspect. Direct labor depends on the number of total employees employed and how many hours they work, the hourly wages that are paid, and if there is overtime or benefits. Indirect overhead are things that are not directly related with the production of goods. Some of these items include: non-direct labor costs, wages and benefits, utilities, number of coffee machines, how much the coffee machines cost, how old are the machines, and what are the maintenance costs. Advertising is based on what is spent on advertising. Sales and marketing cost drivers are things like trade promotions, consumer promotions, number of sales people, and the wages and benefits paid to these sales people. The third step is to scour different information and sources for cost data on competitors; it is important to be persistent and creative but at the same time being ethical in retaining this information. There are multiple places to get information about your competitors including: current employees, labor unions, financial analysis, government fillings, and product brochures. Some of the different government agencies that offer information about different companies are: The U.S.

environmental protection agency, U.S. department of labor, equal employment opportunities commission, and by examining patents and trademarks. The next step in calculating our relative cost position is to calculate the full costs position and savings which allows us to focus on areas
Cost Saving Levers

with the greatest potential cost savings (netmba).

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Price- Negotiate with suppliers and quality of ingredients. Amount used- what kind of ingredients are used and the total amount of ingredients understanding your competitors' cost structures at-the Wage and Rates are same there time unions involved that could understanding our companys full potentialpossibly cost position. increase rates.

The key to evaluating a relative cost analysis is gathering and

Staffing- how many employees are needed to run each store.

There is no surprise that Starbucks has higher prices amongst their competitors, but this price difference can be explained by the level of customer service that is instilled at every Starbucks location. Starbucks only hires the best people, and pays them well above the industry average.

Strategic Issues and Problems

One of the Worlds Most Ethical CompaniesEthisphere 2007 to 2010

Most Ethical Company, European Coffee IndustryAllegra Strategies 2009 to 2010

100 Best Corporate CitizensCorporate Responsibility Officer/Business Ethics 2000 to 2010.

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These are only a few of the many awards that the Starbucks Corporation has received for being an ethically sound company. It is clearly stated on the Starbucks website, Through our unwavering commitment to excellence and our guiding principles, we bring the unique Starbucks Experience to life for every customer through every cup. With that in mind, it is hard to find a flaw in the companys mission or strategy. The Starbucks Corporations original success came from its creators abilities to break away from the red ocean coffee industry, and redefine the way that the specialty coffee industry functioned. This industry is in a period of rapid growth. The specialty coffee industry has developed in direct response to a growing consumer demand for quality experiences. Before Starbucks came into the picture, there was a preconceived notion that coffee was just coffee, and that it could not be sold at a premium. By ignoring this type of thinking, a blue ocean was created in the form of specialty premium coffee, and Starbucks was able to thrive. However, if the company wishes to continue the same success, the industrys success factors must be revisited and reassessed. Some common questions that keep popping up include: Will consumers continue to be okay with, and pay a steep price for specialty coffee in order to enjoy the atmosphere of a store or the exceptional customer service it offers? Have McDonald's and Dunkin' Donuts entrance into the specialty coffee industry redefined the success factors by offering high
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quality coffee at substantially reduced prices?

Will customers be attracted to the other options competitors are introducing, and in result, be distracted from Starbucks brand and ambiance?

Questions such as these lead an industry leader, such as Starbucks, into an analysis of their companythis would include their systems, organization, and structural setup. As an industry moves from the beginning stage of development where there are few competitors and limited barriers to entry, it then continues into the growth stage. This leads to an increase of competition, and then in time, most industries approach maturity. Many firms in this stage of development will find it difficult to compete (http://espresso101.com/newsletter/422). During this transition from a growing industry into a mature industry, it becomes very important that Starbucks realizes what changes need to be made in order to acclimate seamlessly. Doing this successfully is very important, especially if Starbucks wants to continue to be the industry leader. All of this is reliant on achieving functioning efficiency while keeping up the ability to create new products and having great customer service. A company like Starbucks has the main concern of competitors surpassing them. This already has happened in the area of cost, and if product quality is surpassed as well, then Starbucks is in big trouble. To avoid this, it would be extremely advantageous to keep a close eye on the industry and market competitors, specifically those that sell similar products,
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whom we have discussed. With many industry competitors having Starbucks as their main target of competition, it is critical that the company as a whole find ways to provide high quality coffee, but at a competitively low cost. Starbucks is mainly a word of mouth and reputation company. They do not spend a lot of money on television commercials or advertisements. Compared to other top companies like Microsoft, Google, and Coco-Cola, Starbucks has spent significantly less amount of money

on advertising. In the side-by-side comparison, it is interesting to see how substantial the difference is between all of the companies and the amount of money Starbucks spent on advertising in previous years. This proves the above statement of how they build most of their business on their branding and by creating happy customers and making the brand part of a culture (www.marketingpilgrim.com, 2007). With the coffee industry still in its growing stage, Starbucks needs to be focused on creating new innovations, marketing strategies, and game changers. This corporation is the industry leader, meaning they get to call the shots, but if not careful, can be surpassed by the growing competition. Starbucks should also reassess the factors, which have made them successful and see if those will still work. The economy is ever-changing as
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well are the consumers in itthis causes companies to have to adapt to these said changes. If the proper tweaks and changes are made, it is to be assumed that Starbuck will remain to be the industry leader in specialty coffee.

Options/Choices for Starbucks

From the gathered information, we have come up with three options that Starbucks could consider. First, continue to expand into international markets. As stated, China is their primary target currently. We suggest continuing to seize international opportunities at a constant but steady pace. Second, expand on their already broad menu. Third, devise a new marketing strategy. Starbucks has but only touched the available and potential global markets. There is much more room for expansion and growth. Using its financial strength, international experience, and long standing relationships, Starbucks can blossom into an international business powerhouse. However, this process must be steady. The expansion strategy must incorporate the core competencies and advantages of the company. They must find excellent people to foster the process of expanding to a new country. The business ties they have created over the years must be used carefully and not put too much strain on any suppliers and put the entire company at stake. Expanding internationally would also force the company to rely on
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other markets than the United States, which we determined to be a weakness. As an industry leader, many companies are benchmarking Starbucks. Given this, Starbucks can implement a proactive strategy that includes new and innovative menu and convenience items; perhaps, implementing deli items such as Paninis or wraps. This would continue to further differentiate the Starbucks brand, which, as we have determined is key, in competitive markets. Starbucks also has the opportunity to change their marketing strategy. From spending very little, relatively, the company could boost spending to include things such as TV ads and other untested marketing outlets, as least as a trial. Most major competitors involved in cutthroat competition include major forms of advertising a key for differentiation. This could possibly be an opportunity to expand their brand recognition, especially with the new logo, and if our second suggestion is adopted, inform loyal customers of new menu items.

Build Substantial Competitive Advantages

In 2008 Starbucks was faced with the reality that, while they were dominating specialty coffee, they were heavily impacted by the recession.

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They took action and closed approximately 600 stores in the US and reduced staff by almost 1000 people. Even after taking this action Starbucks still saw a decline in total net revenue in 2009. During that year, total revenue fell 5.9%. This was offset by reduction in cost of around 6.6%. The restructuring, reduction in stores (both in the US and international) and the reduction in personnel resulted in Starbucks still ending up with an increase in net earnings of 23.9% or $390.8 million. As Starbuck continues to recover from the recession they can protect their place in the market by doing a couple of things. First, even though they are being challenged by major fast food restaurants such as McDonalds, they have to realize they cannot really compete as a fast food chain without stepping out of their niche market. Starbucks needs to continue to stick to the strong base that the company has using all the resources that they currently have in place. A perhaps higher priority for Starbucks is the method with which they handle future expansion. Starbucks expanded at a very rapid pace leading to oversaturation in some markets. They were on every corner in some areas which appeared to lead to loss of profitability for some stores. This is indicated by the results seen when Starbucks reduced the number of stores in 2008 and 2009. During that time they managed to still increase net earnings despite a fall in net revenue as a result of reduction of stores.
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Therefore as they move to increase stores in the future, as the economy improves, they need to avoid making a similar mistake. Like McDonalds, and many other profitable chains, Starbucks needs to have a controlled territory for each store which will help ensure the profitability of each store. This helps protect not only profitability but also protects the integrity of the franchise and the brand image of the corporation and to some degree the exclusivity. They will need to decide what is more important; having a large numbers of stores that do a good business or fewer stores that have a great business. They also need to determine if they are better served with being more accessible (in places like Target, supermarkets, etc.) or keeping with their original coffee shop/club type atmosphere or if they can maintain a balance of the two. Starbucks' most sustainable advantage is their employees. Their method of making each employee feel like they are part of the store is a great business practice. Each employee feels ownership of the store they work for and that trickles down to how and why they work. At other stores, such as McDonalds, most employees seem content to show up, do as little as possible, and leave. This leads to higher turnover. Training employees is very expensive and every time a trained employee is fired or quits, in essence, customer service as a whole goes down. The customer sees this, and it is reflected in the customer service that every patron receives.

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The attitude of a Starbucks is different. There are many things that separate the Starbucks' experience from everywhere else. Sure, there is the music, the free wireless internet, and the comfortable chairs and couches but, what most people don't realize is that it starts with the employees. You could put all of those things in a McDonalds and for the most part it would not change the way people felt they were treated and served. The employees create the atmosphere and sustain it from when the customer enters the store until when they leave. It is the employees making it their own that leads them to learn more about their job and take pride in it. The happier they are, the longer they stay and before you know it, you've got a veteran crew that knows not only their job but the jobs of everyone around them. The happy employee at Starbucks is why there are happy customers in Starbucks, and happy customers are the key. After all, the customer is why businesses operate.

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Appendix

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Fast Food Restaurants. (2010). Ibisworld. Retrieved April 16, 2011, from http://ww w.ibisworld.com/industry/default.aspx?indid=1676 "For Business." Starbucks Coffee Company. Web. 4 Apr. 2011. <http://www.starbucks.com/business>. "Fortune: Most Admired Companies: Top 20." Business, Financial, Personal Finance News CNNMoney.com. Fortune, Dec. 2006. Web. 28 Mar. 2011. <http://money.cnn.com/magazines/fortune/mostadmired/top20/>. Hensley, R. (n.d.). West Coast Specialty Coffee. Retrieved from http://www.specialtycoffee.com/ME2/Audiences/dirmod.asp?sid... Hetzel, A. (n.d.). Fundamentals of Coffee Business Success (INeedCoffee.com). INeedCoffee Caffeination Information. Retrieved April 18, 2011, from http://www.ineedcoffee.com/07/coffeebusiness IBISWorld USA - Industry and Company Research Reports and Information. (n.d.). Retrieved April 18, 2011, from http://www.ibisworld.com Search "Starbucks" Industry Outlook. (2010). Ibisworld. Retrieved April 16, 2011, from http://www.ibisworld.com/industryus/industryoutlook.aspx?indid=1046 Larson, R. C. (2008). Starbucks a Strategic Analysis Past Decisions and Future Options. Unknown: Unknown. Maher, M., & Stickney, C. (2008). Managerial Accounting: An Introduction to Concepts, Methods and Uses. Mason, OH: Thomson South-Western.

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Major Companies Starbucks Corporation | Dunkin' Brands Inc. | Other Companies. (2010). Ibisworld. Retrieved April 17, 2011, from http://www.ibisworld.com/industryus/Majorcompanies.aspx?indid=1973 Merrefield, D. (n.d.). Competitive Moves and Food Safety Scares Researched. Supermarket News | Grocery, Wholesale and Food News | Food Companies | Green Food, Food Recalls. Retrieved April 18, 2011, from http://supermarketnews.com/viewpoints/competitive-moves-food-safety-researched/ "SBUX: Summary for Starbucks Corporation- Yahoo! Finance." Yahoo! Finance - Business Finance, Stock Market, Quotes, News. Web. 20 Mar. 2011. <http://finance.yahoo.com/q?s=SBUX>. "Specialty Coffee." Encyclopedia of Emerging Industries. Online Edition. Gale, 2011. Reproduced in Business and Company Resource Center. Farmington Hills, Mich.:Gale Group. 2011. http://galenet.galegroup.com/servlet/BCRC Starbucks Company Timeline. (n.d.). starbucks.com. Retrieved April 3, 2011, from news.starbucks.com/images/10041/AboutUs-Timeline-FINAL3_8_11.pdf "Starbucks Corporation - Financial and Strategic Analysis Review." GlobalData. GlobalData, 20 12 2010. Web. callisto.ggsrv.com. Retrieved April 10, 2011, from callisto.ggsrv.com/imgsrv/Fetch? banner=4d783910&digest=4e3e150ac6b2668cbd0f6279596d4306&contentSet=SWOT &recordID=239921_GDRT33172FSA Starbucks Corporation. (1 April). Hoover's Company Records,15745. Retrieved April 10, 2011, from Hoover's Company Records. (Document ID: 168165941).
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Starbucks Newsroom: News. (n.d.). Starbucks Newsroom: Home. Retrieved April 25, 2011, from http://news.starbucks.com/news/ Strategic Analysis- Relative Cost Position (RCP) (48 Slides). (n.d.). Scribd. Retrieved April 12, 2011, from http://www.scribd.com/doc/35339572/Strategic-Analysis-Relative-CostPosition-RCP-48-Slides Thaeler, J. (2007, October 16). What top brands spend on advertising. Retrieved from http://www.marketingpilgrim.com/2007/10/what-top-brands-spend-onadvertising.html Value Chain Analysis. (n.d.). NetMBA Business Knowledge Center. Retrieved April 10, 2011, from http://www.netmba.com/strategy/value-chain/ What a difference a decade makes. (2008, November 16). Retrieved from http://esp resso101.com/newsletter/422

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