Starbucks struggled in the late 00s as a result of increased competition and the economic slowdown. However, the company has since righted its ship and now has a bright future. The firm has addressed its economic and competitive threats, and improved its internal performance. As a result, it is now well-positioned to take advantage of its opportunities, and faces few serious threats to its business. Starbucks is positioned to drive growth in three ways -- geographic diversification, consumer products and the juice business. It has a broad appeal among adults 18-40, and this demographic has ample disposable income. Thus, Starbucks has tremendous opportunities in marketing with its core audience and should be successful in the coming years as a result. Basic economic theory holds that if a firm is earning significant profits, other firms may enter this market to earn those same profits. The sheer scope of the Starbucks empire proved to be a barrier to entry for startup firms, but two major quick service chains were able to enter the market and threaten Starbucks -- McDonalds and Dunkin Donuts. These two chains launched a competitive assault on Starbucks, McDonalds in particular (Adamy, 2009) and the result was that Starbucks felt downward pressure on its pricing. Coupled with the economic downturn, the Starbucks' premium pricing was becoming a liability.
Starbucks is a quick service food chain that specializes in coffee and snacks. The company is the fifth-largest firm in the industry and the largest with a coffee focus (Oches, 2011). The company recorded revenues of $11.7 billion and a net income of $1.245 billion in FY 2011 (MSN Moneycentral, 2011). Starbucks was struggling in the late 00s, and forced to close a number of its stores in the firm's first-ever consolidation (Allison, 2008). The company responded by rehiring former CEO Howard Schultz and initiating a series of strategic maneuvers. Since that point, the company's revenue, profits and stock price have improved considerably (MSN Moneycentral, 2011). This paper will outline the environment in which Starbucks operates and the firm's responses to this environment. The objective will focus on the marketing aspects of the company's turnaround and strategy going forward.
When Starbucks found itself on the ropes in 2007-08, the company's macroenvironment and its poor responses to changes in this environment were major contributing factors to the company's woes. The first major factor in the macroenvironment was the economy. Although the company has a strong international presence, the majority of the firm's revenues and profits comes from the United States. Therefore, the economic conditions in the American market are critical to the company's success. Starbucks operates with as a differentiated player, charging premium prices for a premium product. At its core, the Starbucks product is caffeine, which is normally available at prices far below what Starbucks charges. As a result, Starbucks' product is a discretionary purchase, because any customer can trade down to a cheaper form of caffeine. When the economy began to contract and unemployment rose, the combination of customers losing jobs and fear being instilled in customers who still had jobs resulted in a collective tightening of the belt among Americans. As consumer spending declined, discretionary purchases were hit the hardest, and this had a significant impact on Starbucks. For a time, the company was forced to lower prices and adjust its image in order to attempt to stall sharp sales declines (Adamy, 2009). As the recession ended and economic growth slowly returned, Starbucks was able to rebound, in combination with some firm-specific actions that the company undertook at the same time.
The economy is the driving macroeconomic factor facing Starbucks. The other factors -- political, environmental, social, etc. -- play a less important role. For the most part, Starbucks is not affected by the political environment, as it deals is a legal commodity that is seldom subject to legislative scrutiny. The company's use of partners when opening branches overseas means that it usually avoids scrutiny from local governments abroad as well. The social environment plays a minor role only in Starbucks' business. The company once deflected pressure to adopt organic beans by pointing out that there were not enough such beans to meet the company's demand. Starbucks has shifted towards more ethical fair trade beans in recent years, as a result of societal pressure, but this only enhances the company's premium status and provides another benefit to consumers for which they are willing to pay.
The most important microeconomic environmental factor was the ...
Since that point in time, Starbucks has had successful responses to this competitive pressure. The company has been able to convince customers of the benefits of its offering. In addition, Starbucks has fostered stronger brand loyalty, and this has forced a more aggressive response from McDonalds to maintain competitive pressure on Starbucks. The coffee chain had struggled because it was losing its ability to convince customers of the value of its product, but restored sales and profit growth by restoring a premium value to its product.
The customers are another microeconomic factor, one that Starbucks has handled well in the past three years. The company was, for a time, losing customers because of the premium pricing for its products. Customers were worried about the economic environment, and this resulted in increased savings rates and less discretionary spending. As the economic environment stabilized, customers returned to Starbucks, realizing that they could afford it after all. The company also focused on marketing in order to bring customers back. This included pricing policies in 2008-09, place policies including a renewed focus on location selection in America and a strong focus on growth in Asia, and product policies that focused on increasing the degree of differentiation for the company's products. The results have been that Starbucks has restored its customer based and arguably built it into something stronger and more loyal now than it was before.
There are two different ways to look at the competitive environment for Starbucks. The first is to focus on the company's role as a caffeine delivery system. This puts it into competition with just about any other method of delivering this drug, from other coffee shops to store-bought coffee to energy drinks. This view is not always relevant, but certainly became so during the economic downturn when many consumers traded down to less expensive forms of caffeine such as grocery store coffee in an effort to save money.
A more narrow view of the competitive environment holds that Starbucks competes against other coffee shops specifically. This includes regional chains that imitate Starbucks, local shops, and other quick service firms that have attempted to mimic the Starbucks product offering (McDonalds in particular). For a long time during Starbucks' peak growth years, it competed largely against regional and local coffee shops. When McDonalds and Dunkin Donuts began to target Starbucks directly, this reframed competition for the firm. It was, for the first time since it began its expansion, competing against companies with a similar size and resource base. For Starbucks, this was a major threat, especially because those other firms were undercutting Starbucks. While local coffee competitors faced the same negative economic environment that the mermaid faced, other quick service restaurant chains had a captive audience and were able to sell their coffee to that audience, in addition to winning over others with their lower prices. As a result, Starbucks began to see itself as a quick service restaurant player rather than a coffee shop player. The company was successful in re-orienting itself to a new competitive environment, and this success has contributed significantly to its renewal in recent years.
Still, the competitive threat remains. Both McDonalds and Dunkin are large franchises with a national presence that operate on a low-cost platform. Their chain networks and deep pockets make them formidable competitors. A newer entrant to the U.S. market, Tim Horton's could also move into Starbucks' turf. This company is a dominant player in the Canadian coffee market, is well-capitalized and has extensive experience competing directly against Starbucks in Canada. With rapid expansion in the U.S. In its plans, Tim Horton's is a third competitive threat to Starbucks.
Starbucks competes with a differentiated strategy. This means that it charges premium prices for a premium product. This implies that the company's target market is focused on the upper income segments, but that is not the case. As the fifth-largest quick service chain, Starbucks appeals to a mainstream audience. The prime target is adults 25-40, and they account for 49% of the company's business. In addition to being a very large cohort, this group has sufficient disposable income to purchase Starbucks, and it has a need for caffeine given its long work hours and long commute times. The second-largest customer group for Starbucks is 18-24, and this group accounts for 40% of the firm's business. This implies that, since it is a much smaller cohort, the company appeals more to this demographic than it does to its larger adult…
Basic economic theory holds that if a firm is earning significant profits, other firms may enter this market to earn those same profits. The sheer scope of the Starbucks empire proved to be a barrier to entry for startup firms, but two major quick service chains were able to enter the market and threaten Starbucks -- McDonalds and Dunkin Donuts. These two chains launched a competitive assault on Starbucks, McDonalds in particular (Adamy, 2009) and the result was that Starbucks felt downward pressure on its pricing. Coupled with the economic downturn, the Starbucks' premium pricing was becoming a liability.
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