Starbucks store closures and strategic repositioning in 2008

Starbucks

Strategic Issue

In 2008, Starbucks closed 600 underperforming stores.

Most of these stores had been opened within the past couple of years, and had failed to gain business the way that most older Starbucks stores had. With the move, the company essentially ended a strong growth phase and moved towards a more mature position in the market.

The significance of this move should not be lost on Starbucks management. For the past twenty years, the company has been on a very aggressive growth trajectory. They were able to build their brand successfully in many nations, some of which did not even have a coffee drinking tradition. In becoming an icon, Starbucks was able to carve out a unique position in the market and defend that position against a wide range of potential rivals.

The store closings are symptomatic, however, of a new paradigm emerging, both in terms of the external environment and in terms of the ways in which Starbucks runs its business. Company management now needs to realize that there are a number of changes that culminated in the store closings. Management needs to craft a new strategy for Starbucks, given the new environment they are facing. Such a strategy will not only avoid the need to close more stores, but will allow the company to continue to grow.

Analysis: Long and Short-Term Effects, the Economy and New Competitors

For the short-term, the store closings were damage control. As a result of Starbucks management to meet their aggressive expansion targets, they began to set aside previous criteria for determining locations (Linn, 2008). That criteria had meant that in the past it was very rare for a Starbucks to close. The great locations guaranteed a high degree of visibility and a sufficient amount of traffic into the store to maintain profitability. Many of the new locations, however, did not have the same degree of high traffic and visibility.

Thus, one of the key short-term effects of the store closings has been that Starbucks has scaled back its expansion plans dramatically. The company now realizes that it must choose its locations wisely if it is to succeed. You cannot open a Starbuck just anywhere and expect it to draw traffic.

Another short-term implication is with respect to the product offering. Starbucks had, for a time, tried to expand into non-core product lines, be it selling CDs or hot breakfasts (Ibid.). With sales down and stores closing, Starbucks management needs to evaluate its own decisions and came to the conclusion that they had lost sight of their core mission. The company had grown through a successful differentiation strategy and this had been replaced with distractions such as breakfast. The company has in recent months reverted back to its roots as a high-end coffee shop in recognition of its most significant value proposition.

In the long run, the move is symptomatic of two major changes in the company's operating environment. One is the declining economy. This has resulted in decreasing same store sales as consumers give up their expensive coffee habits for more affordable ones at low-cost competitors.

Those competitors represent the second major change in the company's operating environment. Prior to the past couple of years, Starbucks faced competition mainly from coffee shops that operated a similar model. Those shops ultimately had difficulty competing head to head with Starbucks. In recent years, however, Starbucks has come under increasing competition from other large food chains such as McDonald's and Dunkin Donuts. These competitors have strong assets bases and already generate traffic to their stores. They have made coffee a priority component of their operations, which has both undercut Starbucks in terms of price but also taken away some of the mystique of the coffeeshop. As a result, Starbucks has been forced to compete more on the basis of price, and against stronger competitors than in the past.

The long-term implications of this are that Starbucks will likely struggle to maintain its previously high margins. This will impact profitability. The new profitability equation will hurt more Starbucks stores. Indeed, in January 2009 the company announced that it would close a further 300 stores in the U.S. Competition and the economy have been cited as the reasons for these additional closures (McCall, 2009).

The problems in the economy are more than simply the economic downturn. Fuel prices are expected to climb back towards the levels of early 2008, which should also have a negative impact on Starbucks. The company relies heavily on ground and sea shipping within its logistics chain. The increased cost of getting supplies, be they beans or napkins, to its stores will squeeze margins from below at the same time as low-end competitors force Starbucks to lower its prices.

Thus, the competitive and economic environment has become increasingly unfavorable for Starbucks in recent years. Starbucks may be running out of profitable growth opportunities. Moreover, it is being forced to evaluate the long-term viability of its competitive offering. Starbucks sells the "Starbucks Experience" as much as it sells coffee (McCall, 2009). Thus, the company needs to evaluate the elasticity of demand for that experience, if other firms are able to sell the same coffee at lower prices.

Recommendation

It is recommended that Starbucks continue with Asian expansion. The impact of the global economic slowdown is likely to be less pronounced and less prolonged in Asian markets, since they are far removed from the epicenter. Growth opportunities remain strong as market penetration is as yet at levels far below that in North America. Furthermore, the appeal of Starbucks in Asia lies in the Starbucks Experience, not the coffee (JETRO, 2009). This gives Starbucks a stronger competitive advantage in Asia than they enjoy in North America.

This recommendation addresses a number of key strategic issues for Starbucks. First, it promotes growth at a time when the company is faced with contraction in the domestic market. Continuing growth overseas can offset the impact of the contraction, enabling Starbucks to continue to grow revenues and increase profits for the shareholders. The Asian markets have limited competition. If McDonald's, et. al are reducing margins domestically, the company should turn to overseas markets where they can enjoy the same high margins as always. Again, this will offset some of the impacts of competition in North America. Moreover, the faster Starbucks gets bigger the less likely it is to face competition in Asian markets. Those nations do not have strong chains the likes of McDonald's who could be potential competitors. Thus, achieving market saturation in Asia will give Starbucks a sustainable competitive advantage in those markets.

Implementation

To implement the recommendation, Starbucks should invest more of its money into the partnerships that are running the Starbucks franchises overseas. These firms need to be compelled to expand more rapidly and Starbucks should be willing to provide financial and logistical assistance if necessary.

The firm should double the pace of new store openings in Japan, China and the United Arab Emirates. They should also investigate other large markets, such as India. India has many of the same market characteristics of China. It has a large middle class in the hundreds of millions. India's cities are densely packed, necessitating the need for a "third place." The nation's middle class looks to the West for cultural guidance, as do the Japanese. And while India is a tea-drinking nation, so are China and Japan. Thus, Starbucks has the experience now with respect to finding ways to attract tea-drinkers to its coffee shops.

Lastly, Starbucks should not ignore the domestic market to expand more aggressively into Asian markets. The domestic market, however, offers less potential in the future than do the Asian markets. Thus, Starbucks should divert resources from opening stores in North American (900 new stores have closed or will close quickly) towards opportunities in Asia.