Remote industry description and characteristics

Starbucks

Coffee Industry:

Assessing Competitive Dynamics on the Future of Starbucks

The United States is one of the most profitable markets for coffee globally, generating $29B in sales in 2012, yet it is also one of the most volatile from an economic and supply chain perspective as well. The many challenges Starbucks faced in 2009 and the decision to lower prices was one driven by the mercurial nature of the U.S. coffee market consumption patterns specifically (Starbucks Investor Relations, 2013). The purpose of this analysis is to analyze the current trends in the coffee industry and predict future trends based on economic and market analysis. The second objective of this analysis is to evaluate future trends in terms of their implications on the future of the U.S. coffee industry. The third objective is to complete an analysis of how these trends will evolve into threats or opportunities for Starbucks.

Analysis and Predictions Of Future Trends In The Coffee Industry

The U.S. coffee market grew just 1% from 2008 to 2013 and ins projected to experience very low growth of just 3.9% from 2013 to 2018 (Samadi, 2012). This industry is also challenged with significant costs and generated just $1.7B in profits, paying $7.7B in wages (Samadi, 2012). According to IBIS Research there are 40,054 coffee service and selling establishments in the United States as of 2013, with 42% being coffee shops, 21% snack shops, 15% donut shops and the mix being a variety of bagel and bakery, restaurant and cafe businesses (Samadi, 2012). Economic factors driving the growth of the U.S. coffee industry include discretionary income including consumer spending, the trend toward healthier eating, increase in per capita coffee consumption, and the direct effects of the consumer confidence index on discretionary spending (Starbucks Investor Relations, 2013). The U.S. coffee industry is in the mature phase of its lifecycle, experiencing medium-level revenue volatility and medium-to-high levels of capital intensity, all leading to an exceptionally high level of competitive pricing and service intensity (Starbucks Investor Relations, 2013). Despite these significant competitive pressures, there is only a median level of investment in new technologies (Yu, Fang, 2009). Clearly there is the potential to sue technology more efficiently and economically in the U.S. coffee market for greater profitability and growth. The U.S. coffee market is also experiencing significant fragmentation, where the tens of thousands of smaller shops are being cannibalized by larger, more well-funded chains. This cannibalization of the market is being driven not on price, but on the customer experience being delivered and in-store experience overall (Yu, Fang, 2009). These factors of the experiential aspect of retailing coupled with the flexibility large coffee chains provide in terms of drink types, has led to further cannibalization of smaller coffee shops unable to compete on these factors.

Analysis Of Future Trends In The U.S. Coffee Industry

The most significant future trend of the U.S. coffee industry today is the shift in merchandising, marketing and in-store experiences, all aimed at generating a higher level of customer loyalty. The key to profitability in a stagnant-growth market such as the U.S. coffee industry is to concentrate on nurturing customer loyalty and repeat business (Yu, Fang, 2009). This is one of the galvanizing forces in the industry today where larger chains can afford to create an entire in-store environment for customers, while the smaller coffee shops cannot. The experiential aspects of coffee retailing will accelerate over the next year as more retailers follow market leader's approaches to providing free Wi-Fi and other amenities (Starbucks Investor Relations, 2013). A second significant trend is the willingness of more coffee drinkers and consumers in the U.S. To rely on social media in general and social media specifically for recommendations of what brand(s) to buy from, how often, and what specific products are the most interesting and valued by their reference set (Bernoff, Li, 2008). This is having an immediate economic effect on brands, in addition to further forcing the fragmentation and cannibalization of the U.S. coffee market (Samadi, 2012). A corollary to these market trends is the increasingly high levels of expectations from coffee consumers for one-of-a-kind, specialty drinks, or mass customized coffee drinks that are specifically designed to their preferences and tastes (Yu, Fang, 2009). The future trends in the U.S. coffee industry revolve around greater customization, personalization and experiential marketing, all aimed at creating greater customer loyalty, which in turns leads to higher profits and greater viability of both the independent stores and the chains (Yu, Fang, 2009).

Analysis Of Threats And Opportunities For Starbucks