Competitive dynamics and future trends in the U.S. coffee industry

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 Threats And Opportunities For Starbucks

Starbucks is well-positioned to take advantage of the shift to more experiential marketing and in-store customer experiences. This is one of the most significant opportunities for the company in the near-term and needs to be used for increasing customer loyalty and long-term customer growth. Starbucks' internal analysis has shown that when a customer visits 16 or more times a month, they generate on average six times the gross contribution margin of less loyal customers (Starbucks Investor Relations, 2013). Starbucks continues to also invest in customer experience research programs, driven by the backlash from their low-price strategy originally started in 20087 and that continues to this day. The most hardline, loyal Starbucks customers felt that the low price points cheapened the brand and made it less prestigious (Yu, Fang, 2009). This led to aggressive use of customer satisfaction and customer listening programs, all leading up to a Starbucks Community approach to aggregating and using feedback to better manage customer expectations and satisfaction (Starbucks Investor Relations, 2013). In response to the opportunities in the U.S. coffee market, Starbucks already serves 30 different varieties of coffee, over two dozen types of specialty drinks and over a dozen food times (Starbucks Investor Relations, 2013). Starbucks' internal research has shown that 67% of all beverages purchased are built-to-order, meaning they are designed specifically to the customers' request (Starbucks Investor Relations, 2013). Starbucks is well-positioned to capitalize on the mass customization trend of drinks as a result. Another aspect of potential growth for Starbucks is taking a leadership position in the use of technologies in coffee retailing. Today Starbucks reports that 30% of all in-store transactions are paid for with pre-paid cards that have been electronically enabled or recharged online with funds (Starbucks Investor Relations, 2013). Starbucks also completes 3 million mobile transactions a week in the United States alone according ot their latest annual report presentations (Starbucks Investor Relations, 2013). They also have 10 million mobile users and predicts mobile will be 10% of all sales by the end of 2013 (Starbucks Investor Relations, 2013). Starbucks is very well positioned to take a leadership role in the use of technology. In terms of downside risks, there is the continually fluctuating economic condition of the United States, its relatively high unemployment rate, and the continual pressure on wages as employers are increasingly not paying raises every year. Starbucks is seeing the impact of these financial conditions ion their Average Collection Period and Days To Sell Inventory ratios, shown in the financial analysis in Appendix A. Note their Profitability Ratios are exceptionally strong right now, which gives the company added financial strength to weather economic turbulence.