STARBUCKS UK

Strategic
Management Report
By Navneet Madan

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Contents
Introduction............................................................................................3
Background.............................................................................................3
Company Analysis..................................................................................3
External Analysis....................................................................................4
Industry Value and Growth.....................................................................4
Porters Five Forces and PESTLE Analysis...............................................6
UK Consumers Brand Perception of Starbucks and Its Competitors....11
Internal Analysis and Competitor Analysis...........................................13
Competitive Analysis and Distinctive Position against Competitors.....16
Concluding Internal and External Analysis............................................18
Competitive Advantage:.......................................................................19
Strategic Options..................................................................................20
Strategic Directions..............................................................................21
Suitability, Acceptability and Feasibility...............................................23
Strategic Method:.................................................................................26
Conclusion............................................................................................26
Recommendation..................................................................................27
Reflection..............................................................................................27
APPENDIX..............................................................................................28
APPENDIX 1...........................................................................................28
APPENDIX 2:.........................................................................................29
Bibliography..........................................................................................30

Executive Summary

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 A Fortune 500 company, Starbucks share prices reached its peak in 2006 and declined

unexpectedly in 2008. Although its business has picked up in 2011 with an increase in

operating profits, Starbucks has lost its market leader position to Costa, a chain coffee shop

business owned by Whitbread plc. Starbucks strategic issues are its decrease in marketshare,

negative brand perception that was invoked by its competitors and its devalued Starbucks

Experience that was its competitive advantage. A situational analysis of Starbucks was

conducted to indicate possible opportunities and threats. Internal analysis and competitor

analysis was conducted simultaneously to identify Starbucks distinctive capabilities and

weaknesses against competitors. Strategic options such as Market Penetration, Product

Development and Market development were assessed for their suitability, acceptability and

feasibility. Strategic choices that unravel three issues that Starbucks is challenged with are

presented in the report.

Please note that this report contains 3209 words. Figures, captions
and in-text referencing are excluded from the word count.

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Introduction

Background

Starbucks started in 1971 as a small shop but today its diversified business sells everything

from freshly brewed coffees, bakery, tea and coffee consumer products and merchandises

such as mugs and accessories(Starbucks, 2011). Globalization driven, it is one of the fastest

growing businesses today namely 261 on the Fortune 500(Grant, 2010). Its mission statement

is (Starbucks, 2011)

Company Analysis

Reached its peak in 2006(Grant, 2010) it had a stock increase of 26.7% per year over the

period of 1996/2006. There is a high correlation stating that Starbucks brand image

contributes 88.5% to its high stock price(Perera et al., 2009). However, case study analysis

conducted for the first assignment shows frontal attack of Starbucks(Baines et al., 2008) by

major fast food chains including McDonalds and Dunkin Donut after which its stock price

declined(Grant, 2010). A market leader in the coffee industry in 2006 in UK its share prices

decreased unexpectedly and consumers cafe survey in 2008 claimed it had poor quality and

was overpriced(Hickman, 2008). Starbucks marketshare fell in 2009(item1), then its overall

market share increased again but in UK its a different case. UK market hasnt been kind,

with Costa claiming market leader leaving Starbucks behind(Mintel, 2011b).

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 Item 1 Starbucks Stock Price from 2006 to April 2011 (YahooFinance, 2011)

While Starbucks has closed many of its outlets, possibly because of its flawed location-

cluster strategy(Grant, 2010), Costa has been expanding.(Keynote, 2010b; Mintel,

2011b). The research will address Starbucks issues in regards to its market share, brand

perception and devalued Starbucks Experience.

External Analysis

Industry Value and Growth

In 2010, the coffee shop market grew to 1.2 million, but UK industry is at a mature

growth stage(Kotler, 2003)(FIGURE1) where growth is evident but slower than the

previous years(Mintel, 2011b). Mintel forecasts positive growth till 2015, but UK is

expected to face another round of recession(Mintel, 2011b) hence, a slower growth till

2012 (FIGURE2).

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 UK Coffee
Retailing

Figure 1 Industry Life Cycle: UK Coffee Retailing Market (Grant, 2010)

Figure 2 Coffee Shops Growth Rate (Source: Mintel,2010a)

While half of consumers who drink coffee visit coffee shops, this figure has remained

unchanged for years supporting that it is certainly in the mature stage (Mintel, 2011b). As

Johnson describes, at the mature stage we should expect low growth, standard products

higher entry barriers, higher marketshare and lowest cost is the key to success(Johnson,

Scholes, & Whittington, 2008). Mintel provides the best and the worst case forecasts

(FIGURE3) of value of coffee shops from an expected 1.22 to 1.84(best case) or

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 1.14(worst case). It is depicted that the market will grow to a value of 1.51 billion in

2015.

Figure 3 Coffee Shop Industry Value Forecast for UK (Mintel, 2011b)

Porters Five Forces and PESTLE Analysis

The environmental analysis is described below (FIGURE4) and (FIGURE5)

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 Figure 4 SOURCES OF INFO (Grant, 2010; Keynote, 2010a, 2010b, 2010c; Mintel, 2011b;

Porter, 2004)

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 Figure 5 PESTLE ANALYSIS

A tea drinking nation, UK has also experienced tea price rises which have set the highest

record this year(Mintel, 2011b). However, tea suppliers have differentiated their products

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 to increase value and charge a higher price, by offering specialty tea for different

moods(Mintel, 2011b).Energy drinks have gained importance since they are better energy

boosters than coffee itself(Mintel, 2011b). Energy drinks are popular with the young, who

are also users of coffee shops(Keynote, 2010b). Buyers who are ABC1 social

grade(Mintel, 2011b) are 50% of the population and are numerous(FIGURE5)(NRS,

2011). UKs lower disposable income(Keynote, 2009), variety of differentiated coffee

products(Mintel, 2011a; Porter, 1979), and consumer needs that can be fulfilled by non-

speciality coffee shops has increased buyer power(Keynote, 2010c).

Figure 6 ABC1 SOCIAL GRADE IS COFFEE SHOP CONSUMERS(Mintel, 2011b; NRS,

2011)

Supplier power is elevated by Fair-trade coffee where beans are made from growers who

receive more than the market price(GaleAmericanIndustryOverviews, 2006) since prices

depend on demand and supply causing small farmers to sometimes get deficient

amounts(GaleAmericanIndustryOverviews, 2006). Starbucks has integrated backwards to

collaborate with coffee farmers in order to source the finest coffee available. Due to large

amounts required - Starbucks, Costa and Cafe Nero still buy from independent farmers

who have unions backing them(Porter, 1979), hence suppliers have medium power.

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 Prices of the coffee depend on environmental factors such as weather conditions, coffee

producing nations economy, and given that bad weather conditions and diseases have

struck main coffee producing nation, Brazil, prices are as high as

ever(Emergingmarketsmonitor, 2011). Current coffee shops are unable to absorb the price

increase due to VAT increase and extremely high coffee prices(Mintel, 2011b), this is

unlikely to attract new small entrants. Ability to buy in bulk, increase in capital

requirements, and access to target market specific locations will discourage small

entrants. Conversely, non-specialty shops as Pret-A-Manger, EAT and

McDonalds(Keynote, 2010a, 2010b; Mintel, 2011b) are amongst indirect competitors

who want a piece of the low growth and there is fear that coffee shops are losing their

unique selling point(USP)(Mintel, 2011b). Direct competitors as Costa, Cafe Nero and

Coffee Nation are extremely competitive and are expansion minded(Porter, 1979).

Although the product has high differentiation there is variety of differentiated options

available and combined with lower disposable income this contributes to medium buyer

power. These competitors are also very innovative with their menus and have changed

menus in the two years to follow consumer increasing unmet needs(Mintel, 2011b).

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 Figure 7 Market Share, Intense Competition (Mintel, 2011c)

The intensity of competition is high where Costa presents strong rates of sales and

operating profit and shown in Figure7 Costa has higher market share. UK is a tea drinking

nation, and increase in ageing population does not have a positive effect on coffee shop

visitation(Keynote, 2010b). Growth in number of working women and expected busier

lifestyles in the next years will unquestionably have a positive effect since women prefer

seated coffee bars than they prefer restaurants and pubs(Keynote, 2010a).

UK Consumers Brand Perception of Starbucks and Its

Competitors

Although consumers believe in the quality of Starbucks coffee, a high expectation of

value for money due to lower disposable income has lead consumers to perceive

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 Starbucks to be overpriced (picture2). Although CSR is not effectively conducted by

Costa(Mintel, 2011b), consumers are unaware, and therefore perceive Costa higher,

hence a better market share.

Picture 1 (Mintel, 2011b)

Picture 2(Mintel, 2011b)

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 Picture 3 (Mintel, 2011b)

The key success factors for this industry is strong relationship with coffee suppliers(Grant,

2010), strong brand loyalty(Clark, 2009), positive brand perception, fast paced innovation for

new product creation and location which is ability to secure new distribution channels where

competitors havent been located in. They should also have a unique selling point that isnt

easily imitated. Most importantly, quick coffee on the go will certainly benefit due to

increase in number of working women who are about to have busier lifestyles(Keynote,

2010a; Mintel, 2011b).

Internal Analysis and Competitor Analysis

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Figure 8 Capabilies (Grant,2010)

Since Starbucks has continuously raised consumer expectations for years(Mintel, 2011b), it

has become the benchmarking point for all coffee companies including Costa. Extensive

training of Baristas to be friendly, their ability to make coffee and develop relationship with

consumers is now just a Threshold resource(Johnson, et al., 2008). Starbucks has successfully

associated corporate social responsibility, high quality and inspiring to its brand name

(picture1, 2, and 3). Nevertheless, its extremely overpriced coffee constitutes to consumers

perception that it cares only about profits not excluding the fact that it supports huge causes

and charities(Starbucks,2011). Starbucks high quality is no longer an excuse to charge

extremely high prices, as quality is established by all competitors including Costa (Mintel,

2011b), espresso machines(Grant, 2010) and instant coffees. For example: exactly the pattern

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faced in U.S where McDonalds coffee was rated to taste better than Starbucks. Similarly, UK

agency Tangible tested 157 samples and concluded that 7 out of 10 consumers prefer Costas

Mocha Italia beans over Starbucks(Mintel, 2011b). As shown in Item2, tastes for all strategic

groups are similar.

Item 2 Sources:(Keynote, 2010a, 2010b; Mintel, 2011b)

Although criticised on quality, the core strength behind Starbucks brand is still the quality of

its products due to its ability to continuously innovate. Starbuckss strong R&D capability in

researching on food, beverages and equipment is an inimitable strategic capability due to it

being a first mover at the gourmet coffee shop market(Grant, 2010). In addition, Starbucks

also has intangibles such as established relationships with Kraft foods(Datamonitor, 2010),

Yahoo for in-house digital networking connectivity(Charles, 2011), 02 to take advantage of

geo-fencing marketing abilities(Mintel, 2011b).

An advocacy brand that attracts repeat consumers, it creates a strong brand with a healthy use

of social media marketing(Woodward, 2011). Through recommendation of fans it creates

strong bonds with a consumer which further translates into profits(Woodward, 2011).

Although it lags behind Costa, its mission to be a community coffee shop and its contribution

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to the community, can help create interpersonal relationships between the consumers and the

local Starbucks indicating a good practice.

Competitive Analysis and Distinctive Position against Competitors

Figure 9 Source: (Porter, 2004)

Although Starbucks tries to target lower income individuals by decreasing prices of cheaper

drinks by 0.25 and increasing prices of its higher prices by 0.25(Mintel, 2011b), which

shows that it would like to have a broader target, it still holds a differentiation focus since

main targets for coffee shops are ABC1 social grade segment as described above. Shown in

Figure9, when compared to its close competitor Costa, Starbucks has core competences such

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as fast paced innovation, its marketing capability but lowered due to negative brand

perception (picture1,2&3), and its extension line of coffee on the go will be valuable for the

emerging working women who have busier lifestyles.

Figure 10 Competitive Grid (Aaker,2005) Source of information provided in Appendix1

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Figure 11 Porter's Value Chain Analysis Source of Info: (Datamonitor, 2010; Grant, 2010; Starbucks,

2011; Woodward, 2011)

Concluding Internal and External Analysis

As shown in the value chain(Figure10), Starbucks rare and inimitable capabilities include

marketing, continuous innovation, human-resource(culture), financial strength and

relationship with suppliers. Weaknesses include operation (product recalls)(Datamonitor,

2010), negative brand perception, market share, taste and accessibility(picture 1,2&3), and

its Starbuck experience does not give high value for money like the price charged. Major

threats include future high coffee prices, ageing population, energy drink popularity and

entrance of more non-speciality shops. Opportunities include working women with busier

lifestyles, significance of social media marketing, value for money trend, and importance of

localisation.

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Figure 12 SWOT MATRIX (Johnson et al., 2008) Reasons for values are justified in the

Appendix 2.

Competitive Advantage:

Starbucks core competencies is its brand awareness, its relationship with suppliers,

relationship with big companies (Pepsi-Cola and Kraft)(Grant, 2010) and its proficiency in

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social media marketing to create higher customer advocacy(Gallaugher and Ransbotham,

2010).

Its Starbucks Experience is rare, inimitable but not as valuable as in 2006 either(Barney,

1995). Shown in SWOT Matrix, Starbucks main issue is its diluted Starbucks Experience

that doesnt express value for money which should improve to create a sustainable

differentiation-based advantage(Berns et al., 2009). It should utilise its strength such as

marketing capability, innovative capability and financial resources to create more intangible

value. As Robert Grant described, differentiation advantage can be created through

branding, advertising, design, service quality and new product development(Grant, 2010).

Strategic Options

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 Differentiation
Base
Focused

Market
Penetration

Market
Development
Strategic options Strategic
Directions:

Product
Development

Organic
Development

Strategic Method
Alliances:
Licensing and
Franching

Figure 13 Strategic Options Approach Followed. Developed from (Johnson et al,2008)

Strategic Directions

Already an industry standard, Starbucks strategic lock in(Johnson et al., 2008) and its strong

strategic capabilities will contribute to better strategic options. Starbucks bases of

competitive strategy is differentiation focus(Johnson et al., 2008). Strategic direction is

shown in the figure12 below.

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Figure 14 Ansoff Matrix (Johnson et al., 2008) Source of info (Starbucks, 2011, Aaker,

2005)

Market penetration is where an organisation gains marketshare(Johnson et al.,

2008). Therefore, in order to increase marketshare Starbucks must also continue

advertising to gain more consumers and revitalize its brand to hold current consumers.

According to WPP, when a brand reaches the Bonding stage, it has emotional benefits

and is willing to pay much higher. Although Starbucks has reached that stage in US

and with some segments in UK(Clark, 2011), it needs to gather more consumers who

are at the Bonding stage that will be willing to pay high and increase its marketshare.

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Figure 15 WPP Branding (Datamonitor360, 2006)

Starbucks should also develop new products targeted to the emerging working

women who are expected to have busier lifestyles, hence, a low calorie coffee drink

on the go. Apart from this, due to the growing popularity of energy drinks, Starbucks

has already created an energy boosting coffee drink(Starbucks, 2011). Its current

strategy of one community at a time is excellent to increase marketshare because

consumers have to find Starbucks more accessible than Costa as shown in

(picture1,2,3) and as stated earlier location is also a KSF. The suitability of the

strategies are accessed in TOWS Matrix(Figure13)

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Figure 16 TOWS MATRIX (Johnson et al., 2008) Source of information (Grant, 2010,

Gallaugher and Ransbotham, 2010, Datamonitor, 2010)

Suitability, Acceptability and Feasibility

Suitability is whether a strategy is addressing the key issues of the company in this case:

low marketshare(Mintel, 2011, YahooFinance, 2011), negative corporate brand

perception(Mintel, 2011) and less valued Starbucks experience(Mintel, 2011).

Suitability for Market Penetration options provided above is that it is advantageous for

Starbucks to become a Market Leader. By becoming a Market Leader, it can exploit

opportunities such as maintaining its current high pricing strategy therefore, a superior

product than competitors(Lynch, 2006). Moreover, it is in shareholders interest for

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Starbucks to exploit its brand awareness to create a positive perception and also to exploit its

Tazo brand by advertising it in order to gain more market share in a tea drinking nation.

Suitability for Product Development option is to exploit the changing population(Johnson

et al,2008) and demands of customers within the market. Starbucks already has an energy

boosting coffee hence, not a suitable choice(Starbucks, 2011). However, Starbucks can

utilize emotional advertising on social media to target specifically working women to

purchase their coffee on the go.

Suitability for market development option is to exploit opportunities in other communities,

since access is clearly a KSF for this industry. The market in Central London is becoming

mature(Keynote, 2010) and saturated with coffee shops, and moreover, competitors are

expanding to other locations, hence Starbucks has to exploit core competences in new

locations(Johnson et al., 2008) and not allow competitors to gain first mover advantage in

certain locations(Lynch, 2006).

Acceptability

Mission of shareholders: The annual shareholder report of Starbucks states (Lynch,2006)

The Companys retail goal is to become the leading retailer and brand of

coffee in each of its target markets by selling the finest quality coffee and

related products, and by providing each customer a unique Starbucks

Experience.(Starbucks, 2011).

Market Penetration: To gain marketshare to have advantage and become market

leader(Johnson et al., 2008)

1. Increasing the market share to become a market leader through advertising

2. Increasing the Starbucks Experience value

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As Starbucks high pricing strategy requires for it to be in a position to exploit superior

advantages than competitors, it is required for Starbucks to become a market leader and

exploit its current resources to create a more valuable Starbucks experience. The statement

provided in the shareholders annual report supports this and this strategy is advantageous as

it will increase share prices if consumers believe Starbucks is a superior brand. As this option

is a must for Starbucks to secure a superior position, the risk is lower than the return.

Acceptability for Product Development: Clearly Starbucks is a highly diversified business

and this has always been its goal(Starbucks, 2011), if it had to innovate new products for

existing customers to take advantage of the changes in demand, it would certainly be

accepted by the Shareholders(Grant, 2010). The risk is higher than market penetration but the

return is higher as well, since it allows Starbucks to exploit the increasing demand in UK

market effectively.

Acceptability for Market Development: As stated in the Shareholders annual report above,

Starbucks wants to become a market leader in each of its target market, in order to become a

market leader in the UK, it is required for Starbucks to penetrate new locations in UK. Since

this is a KSF, if it does not expand to other locations in every community, it will be at a

disadvantage; hence the return is higher than the risk.

Feasibility:

Market Development: To increase marketshare and change negative to positive perceptions

by advertising, Starbucks has to make full use of its financial capability and marketing

capability. As seen in its total assets, Starbucks has high financial capability(Grant, 2010). Its

marketing capability has always been one of its core strength(Starbucks, 2011); hence it is

feasible for Starbucks to advertise to gain marketshare. On the other hand, to increase

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intangible services, it has to make full use of its financial and innovative capability to provide

more services in store, in order to increase the value of Starbucks experience.

Product Development: Starbucks has excellent innovative capabilities on food and

beverages due to its highly advanced R&D(Datamonitor, 2010, Euromonitor, 2010), however,

this requires high financial capability which Starbucks clearly has. It is also required for

Starbucks to utilize its marketing capabilities to market the products effectively to the

emerging targets in order to exploit the situation fully.

Market Development: This requires financial capability and distribution capability(Johnson

et al., 2008), Since Starbucks has had more than 700 outlets in UK (Mintel, 2011)and 17,009

worldwide(Starbucks, 2011), it certainly has capability to build in new locations.

Strategic Method:

The strategic method utilised will be organic development(Johnson et al., 2008) for market

penetration and product development since Starbucks has the marketing and innovation

capability and direct involvement may help gain competitive advantage(Johnson et al., 2008).

The benefit of developing its marketing and innovation capability is higher than acquiring

any other firm. However, for fast action to compete with Costa, Starbucks should exploit

contractual strategic alliance(Johnson et al., 2008) such as licensing as it has done in the past

since number of stores and accessibility can directly increase its marketshare.

Conclusion

The main issues that Starbucks face is its loss of market leader position due to lower

market share, negative brand perception, and devalued Starbucks Experience.

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 Its marketing capability and innovation capability are its core competences, however

as seen in the SWOT Matrix, its financial capability requires Strategic Stretch.
Starbucks has the ability to become a market leader but it requires aggressive strategy

by utilising. Though it will face aggressive retaliation from Costa, Whitbread plc

brand, Starbucks has sufficient resources to compete.

Recommendation

All strategies provided above to become a market leader in UK must be followed and

all are suitable, acceptable and feasible.

Although the industry analysis is produced for 2011, the research information is from

2010, and Starbucks have made fast paced decisions and followed most of the

strategic options provided above including use of Geo-fencing technology to target

customers(Mintel, 2011) and digital content network in store to increase Starbucks

experience(Starbucks, 2011). It is also pursuing more opportunities to open more

community stores(Starbucks, 2011).

Reflection

The research conducted provided a full understanding of the rationale behind utilising

Porters Five Forces before PESTLE, as it helps identify direct environmental factors

impacting the coffee industry and Starbucks specifically. Moreover, the learning map

has enhanced this research experience, by providing specific actions required to

identify specific strategic issues hence, an uncomplicated learning outcome.

Overall, the research experience has posed quite a few difficulties as it is a new

concept for the researcher.

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APPENDIX
APPENDIX 1
Calculation of Marketshare for Competitive Grid. Information from marketshare table

provided in the report.

Costas most marketshare = (37.6/37.6)*5 = 5

Starbucks marketshare = (32.4/37.6)*5

Cafe Neros markshare =(14.3/37.6)*5

Differentiation, medium pricing: Checked the website for prices and made an assumption of

the differentiation level and their pricing strategy. Starbucks has as high differentiation as

Costa with extremely high pricing hence, it got lesser

Fast paced innovation: Checked the website and made an assumption. Starbucks has an

extremely vast line of product lines and has fast paced innovation, Costas product line is

much shorter.

Financial Capability is higher for Starbucks as it is a global business and Costa is support by

large Whitbread plc. Moreover, Cafe Nero is much smaller than the two.

Brand awareness and Brand Perception: Starbucks scored full in brand awareness but it has

negative brand perception, hence it scored lower than Costa.

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APPENDIX 2:

Marketing capability score: marketing/advertising can add value for all including increase in

working women and busier lifestyles because marketing capability allows advertising to be

specifically targetted at this group. Marketing can also help increase the value of the product.

Financial Assets can be depleted by higher coffee prices and penetration of non-specialty

shops if they do well.

Innovative capability: can help Starbucks innovate products and advertising can express its

innovation capability to differentiate its products.

Operation(product recalls): This can have an impact on further consumer purchase.

Negative brand perception: can have an effect on future purchase and does not help with

value of money trend.

Lower marketshare: can be further lowered by non specialty stores.

Taste and accessibility of the store: can be an impact on future purchase.

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