This strategy was combined with the company's focus on CAFE-based compliance and support for Fair Trade-based trading practices with coffee suppliers. This renewed focus on managing their supply chains to tighter levels of profitability and performance metrics including increasing quality standards has led to a significant reduction in operating expenses and control of variable costs (Starbucks Investor Relations, 2011). Starbucks was also able to manage costs of closing locations effectively, and when this strategy was combined with supply chain cost savings, greater focus on in-store profitability and faster new product introductions, Starbucks was able to reverse a negative trend on gross margins and profitability. Beginning in FY 2010 and continuing through the current fiscal period, Starbucks continues to see their gross margins and operating profits including Net Margin, Gross Margin and EBITDA Margin. Figure 1, 5-Year Trend Margin Analysis Shows Impact of Strategic Marketing shows the aggregate impact of these decisions on overall company profitability. Starbucks has a business model that is highly reactive to changes made in product and service mix yet ironically, as history shows, is less receptive to price changes. With the increase in prices on new beverages rushed through research & development (R&D) Starbucks has created a reason for their most loyal customers to come back and visit them at least 16 times a month (Starbucks Investor Relations, 2011). This 16-visits-per-month figure is the breaking point in customer loyalty for the company; their marketing strategies revolve around this figure and set it as a goal for continually gaining new visitors to their stores. It is the watermark or objective of long-term marketing efforts to earn the right to serve customers 16 times a month (Starbucks Investor Relations, 2011).
In aggregate, the focus on strategic marketing and the streamlining of supply chains to fuel global growth in China has led to significant gains in gross margins to 58.4%, increasing operating margins to an all-time high of 13.3%, attaining a net contribution margin of 13.4%.
What these financial metrics indicate is that even in the middle of a global recession, Starbucks continues to excel at managing the research and development (R&D) strategies, quickly translating innovation into revenue. In conjunction with this core competency of making R&D spending translate into revenue, the company also has the ability to launch new products globally extremely well, synchronizing efforts and ensuring a high degree of profitability in the process (Harrison, Chang, Gauthier, Joerchel, 2005). Third, the integrated nature of their supply chains to fuel growth in China, which is what the senior management team has openly called their "next U.S." also contributes to reducing variable operating costs while increasing gross margins. Combining all of these factors together account for 60% of gross margin contributions in their latest fiscal year (Starbucks Investor Relations, 2011). The blistering, rapid pace of Starbucks global growth can be attributed to these core strengths in R&D, new product development and introduction, and excellent management of their supply chains globally (Kanter, 2010). In retrospect, investing even more in R&D and increasing the pace of new product introductions would have had an even more profitable effect on their corporate financials vs. completing a price reduction temporarily in 2009 which tended to alienate loyal customers who took it as a message that the brand was cheapening itself.
Despite these strategies however, Starbucks still faced significant inventory levels throughout the FY 2009 and 2010 timeframes and is just now fully recovering from these conditions today. At their worst, Starbucks was challenged with a series of liquidity shortages primarily in their North American markets (Starbucks Investor Relations, 2011). The cash cycle metrics for this time period are shown in Figure 2, 5-Year Trend Operations Cycle Shows Impact of Strategic Marketing. Cash cycles continue to improve in addition to Inventory Turnover, which steadily is decreasing from the highest in the company's history during FY2009.
The strategy of investing heavily in R&D to quickly develop and launch new products is a proven strength of Starbucks and was instrumental in turning the company around in FY2009. The focus today from a competitive standpoint is to transform this rapid pace of innovation and new product introductions into earing 16 or more visits per store. As early as 2002 Starbucks realized that this connection of R&D to increased foot traffic existed, yet found the connection elusive to promote and continually gain traction with globally (Plog, 2005). What transformed the company was a study completed showing which customers had the highest lifetime customer value (LCV) and their preferences for how they learned of new products and what experiences they expected in the stores (Starbucks Investor Relations, 2011). What the study showed from a competitive standpoint that the entire experience, not just the drinks, or the light food items, had a much more immediate impact on CLV than any aspect of pricing or promotion (Starbucks Profile, 2005). Starbucks realized they were most trusted for the quality of the experience and drinks, not having a competitive price or even known for having special deals during the holidays.
Globally Starbucks was focusing more on China than many areas in Europe and throughout the rest of the world, with the potential to significantly increase profit per square foot in that nation's stores. Starbucks quickly realized that the Chinese stores also delivered the highest levels of profits and Return on Investment (ROI) of any of their locations glob ally. Figure 3, Financial Analysis of Regional Marketing Strategies shows a comparison of store portfolios and new store economics, based on their filings with the Securities and Exchange Commission (SEC) and annual reports (Starbucks Investor Relations, 2001).
Figure 3: Financial Analysis of Regional Marketing Strategies
Source: (Starbucks Investor Relations, 2011)
Starbucks prioritizes their investment initiatives on R&D, enriching their in-store experiences to drive up CLV, and managing their supply chains to ethics and quality. This has given the company a very strong, defensible market position globally and further strengthened their competitive position in the U.S., which continues to be their largest market. The competitors that Starbucks most often contends with for market share include Dunkin' Donuts primarily through the Eastern and Central U.S., Caribou Coffee, and a series of smaller chains. No other chain has the global breadth and depth of retailing, R&D operations and the ability to translate innovation into revenue with the speed of Starbucks. While they are challenged with smaller competitors in regional markets and at times with backlash against globalization in other nations, Starbucks still commands well over 70% of global market share for coffee retailing in the markets it competes in (Starbucks Investor Relations, 2011).
Overall Strategy Effectiveness
Starbucks realized in 2009 that their organizational structure was actually inhibiting growth, not contributing to it. As a result, the company re-organized its sales and same-store visits, improve Chinese supply chains and Asian operations, and improve the retailing products sales. The re-organization also brought about a stronger focus on accountability fo sales and marketing by market segment and business unit, further leading to increased profitability and growth. As a result of this alignment, the company is today setting a goal of launching 30,000 retail locations by next year (Starbucks Investor Relations, 2011).
In terms of corporate culture and strategy Starbucks continues to emphasize creating a foundation for individual and group achievement, personal and professional growth, and a focus on giving employees a chance to see the impact of their efforts on the success of the company (Webb, 2011). The senior management at Starbucks continued on corporate-wide programs that define a culture of achievement and recognition both on an individual and group level (Starbucks Investor Relations, 2011). The company has also shifted its culture by concentrating on analytics to measure in-store performance and the results of continual testing on new procedures for creating the over 68,000 versions of drinks that can be ordered in a fully-functioning Starbucks (Starbucks Investor Relations, 2011). As a result of these initiatives Starbucks has a strong learning-based culture (Starbucks Investor Relations, 2011).
In terms of ethical nature of the company and its strategies, Starbucks is considered a leader in the areas of Corporate Social Responsibility (CSR) Programs and Fair Trade. This program was initiated in 2000 and continues today with the focus on the Coffee and Farmer's Equity Practices (CAFE) organization that Starbucks is a charter member in. This initiative continues to be a thought leader and highly effective in ensuring the viability of growers globally is protected from severe price competition and price gouging. By enforcing these standards, Starbucks has helped to stabilize the global supply chain for coffee and related products, saving it from consolidation. If that had occurred, pricing for coffee would have eventually skyrocketed and hundreds of growers would have been forced out of business. Starbucks has successfully stabilized this vital connection…