MGT 5170 Applying Strategy for Manager

• Strengths: Aesthetically pleasing store atmosphere, ever-changing drink menu and snack options, worldwide brand and other acquisitions
• Weaknesses: rapid store expansion, advertising expense, raised prices on drinks, underperforming with younger coffee drinkers
• Opportunities: “Starbucks Delivers”, increasing the number of stores with drive-thru windows, international growth in currently penetrated markets
• Threats: Health-conscious society, competitors with lower priced items

Alternatives

• Discover new and globally sustainable ways to enhance in-store experience in an effort to attract potential customers and maintain current customers
• Providing healthier food and beverage options for their health-conscious customer base
• Lowering prices to match industry competitors while leveraging brand’s reputation

Recommendations

Starbucks should begin offering its consumers with healthier food and beverage options to appeal to younger, more health/price conscious customers.

Implementations

1. Reduce the number of sugary drink and food options on menu and introduce lighter, healthier ones
2. Utilize stronger marketing approaches throughout different channels to present healthier menu
3. Continue using mobile app and increase delivery collaborations to reach more customers and offer convenient purchasing

Starbucks’ Background

Starbucks is a US retailer of specialty coffee, known especially for its offerings of premium and high-quality coffees, teas, a variety of food items and other beverages. It is well-known for its brands including Teavana, Tazo, Seattle’s Best Coffee, and Evolution Fresh, just to name a few. Found in over 76 countries and with nearly 200,000 employees, Starbucks is premier roaster, marketer, and retailer of specialty coffee around the world. Upon its increased success in the early 2000s, the brand began exploring the option of entering into global markets. With the increased competition met by its closest competitors, Starbucks started to struggle to keep its lead within its industry in the US although it obtained nearly 40% of market share as a coffeehouse chain (Statista, 2016).

In 1995, Starbucks decided to take a look beyond its traditional market and traditional consumers, and decided that entry into the licensing agreements with other companies would be the best approach, strategically speaking, in order to maintain its competitive advantage and ultimately, its success. Optimistically, the approach was meant in the hopes of receiving the same success in its current market by now offering its products in hotels, airports, and university campuses in order to generate more revenue. Starbucks also used this same approach in its international expansion by licensing reputable local companies within its target host country to operate new Starbucks stores in addition to opening more company-owned-and-operated stores (Thompson, 2018, pp. C-358).

Strengths

Aside from the high-quality and premium-priced coffee offered by Starbucks, the company’s strengths lie in its stores aesthetically pleasing atmosphere and décor, its wide variety in coffee/beverage and food options, and its brand acquisitions including brands such as Teavana, Tazo, and Ethos Water (Thompson, 2018, pp. c-365).

Weaknesses

Although rapid store expansion had been an effective strategy in Starbucks’ success in the past, it has now been proven to be one of the company’s weaknesses. Highly expensive advertising campaigns aimed at reaching markets, including younger coffee drinkers, in addition to keeping up with competitors such as McDonalds are also weaknesses in Starbucks’ current strategy (Thompson, 2018, pp. C-365).

Problem Statement

Starbucks does not seem to be attracting a new audience and increasing foot traffic in its stores. Although US sales have grown by 4% in the first quarter of 2019, the coffee giant’s inability to draw more people into its stores is a growing concern for the retailer (Taylor, 2019).

Opportunities

Potential opportunities for Starbucks include further development and implementation of its Starbucks Delivers platform it has started as of late 2018 in conjunction with UberEats to offer delivery of your choice any Starbucks menu option, anywhere and at any time (Telford, 2019). Increasing the number of drive-thru windows at current stores can be a possible opportunity for Starbucks, allowing for quicker and convenient service for customers (Taylor, 2019). Lastly, increasing growth opportunities in international markets have been increasing Starbucks’ revenue and overall profits in recent years (Thompson, 2018).

Threats

According to an article in the Wallstreet Journal, high sugar levels in Starbucks’ drinks have steered away health-conscious consumers and in result, the retailer has suffered with decreased sales (Jargon, 2018). Society’s conversion towards being health-conscious has posed a threat to Starbucks’ profits. Competitors such as McCafé and Dunkin Donuts have also threatened Starbuck’s success due their significantly lower priced coffee/beverage options, possibly causing potential and recurring customers to opt into the cheaper options. Due to the decrease in store traffic, Starbucks has increased its drink prices by 1 to 2 percent to compensate for the decreasing traffic in its US stores (Telford, 2019).

Financial Analysis

Currently, Starbucks’ sales are slowing down, announcing that it had only expected a 1 percent growth in same-store sales for the third quarter of 2018 – the lowest it had performed within that last nine years prior (Wolf, 2018). According to Investor Press, financial reports presenting store sales growth showed that there had been an increase in the segment – up from 2 percent in April 2018 to 4 percent in March 2019. This growth, however, can be attributed to sales influence, cost saving initiatives, and employee investments funded by savings from U.S. tax law changes and etc. (Investor Press, 2019). This same factor can be the basis for the growth in operating income which grew 12 percent to $899 million in this year’s second quarter, an increase from $801.3 million in quarter 2 of with a 21 percent change. Revenues were down at the end of the quarter of 2019 in comparison to 2018’s second quarter with the retailer stating that it was due to licensing its CPG foodservice to Nestlé at the end of quarter 3 in 2018 (Investor Press, 2019). The company also experienced a significant decline in its operating income and margin, both down 36 percent and 820 bps respectfully, attributing both to its licensing with Nestlé (Investor Press, 2019). 

The Asian markets being the highest growth segments for Starbucks shown to have had revenue increased by 9 percent in the second quarter of 2019 compared to the previous year. Store counts have also increased which is a possible factor in its increase in operating income and margin (Investor Press, 2019). This is further indication of Starbucks’ potential in its China/Asia Pacific segment.

Alternatives

Discovering new and globally sustainable ways to enhance in-store experience in an effort to attract potential customers and maintain current customers can be the next step in making positive improvements to Starbucks’ current strategy. According to the case by Thompson, one of the three key elements in Starbucks’ sourcing strategy is to “work with small coffee growers to promote cultivation methods that were environmentally sustainable” (Thompson, 2018). With this way of thinking, Starbuck could use its store to target eco-friendly buyers with new initiatives that will reward customers with their efforts in supporting the cause, all while moving towards providing support in making coffee a “sustainable agricultural product”.

Providing healthier food and beverage options for their health-conscious consumer base would be a great idea for the coffee retailer. Being that its sales were hurt in 2018 due to buyers being more aware of health risks in high sugar and fat consumption, re-evaluation of the contents in most beverage offerings would be beneficial alternative strategy for Starbucks (Jargon, 2018). Though the company may face the challenge of keeping the same sweet and decadent flavor while significantly reducing the sugar levels, Starbucks may find that its health-conscious consumers won’t mind that the flavor of their favorite drinks have slightly changed.

Lowering prices to match industry competitors while leveraging brand’s reputation is an alternative strategy that seems reasonable given Starbucks ‘current stance within the industry. In relation to its biggest competitors, Starbucks’ price options are significantly higher than those of McDonalds and Dunkin Donuts, who both offer similar coffee drinks and other beverages as well as snacks and other meal options. With Starbucks’ 1 to 2 percent price increase, the retailer will see a marginal decrease in the stores’ traffic, causing potential customers to redirect to its convenient and lower-priced competitors (Telford, 2019).

Recommendations

The best recommendation is for Starbucks to begin offering its consumers with healthier food and beverage options to appeal to younger, more health and price-conscious consumers. With Starbucks struggling to keep consumers in stores, it would be the best time for the retailer to offer its consumers with the opportunity to take the “driver seat” when it comes to managing the sugar levels in their drinks. According to the Wallstreet Journal, Starbucks’s Teavana infusions, which rolled out summer of 2017, were a success with sales up 14 percent in 2018 (Jargon, 2018). These infusions in addition to other cold refreshments have given buyers control in the beverages sugar content.

Following industry trends would also aid in keeping store traffic higher than its current state. One of Starbucks’ current major challenges in attracting younger consumers into their stores (Taylor, 2019). According to an article in Business Insider, younger coffee drinkers are increasingly going to niche independent coffee shops because of their “more authentic vibe and modern atmosphere” (Taylor, 2019). Currently, Starbucks is piloting it coffee delivery, something that its younger audience will always find attractive (Taylor, 2019). Finding a way to harness that same energy Starbucks’ had in its earlier years can definitely be the push they need to attract younger consumers and perform higher with that targeted segment.

Implementation

Offering its consumers healthier drink and food options is an important strategy that will help Starbucks regain its supremacy as a coffee retailer and reverse its rapid sales decrease. Marketing that they are aiming to produce a healthier menu and products will be the push they need towards a positive direction. The newest trend is for companies to announce that its products are organic, non-genetically modified, and gluten-free. Starbucks reminding its consumers that they too are offering products that are healthy options for its customers will instrumental in reviving sales.

It is also important for Starbucks to announce its new approach, taking to social media, websites, blogs and its mobile application to inform consumers, primarily its youngers audience, of their new approach in making fresh coffee, teas, juices, and other beverages and food/snacks on-the-go healthier. This will provide an easily accessible information sharing outlet from the retailer to its consumers all while being cost-effective for the retailer who has spent hundreds of millions on advertising campaigns to compete with other coffee retailers (Thompson, 2018).

Appendix

References

Taylor, K. (2019, April 26). Starbucks still needs to solve a massive problem, as analysts worry about 'anemic' traffic. Retrieved June 30, 2019, from https://www.businessinsider.com/starbucks-traffic-problem-not-yet-solved-2019-4

Telford, T. (2019, January 22). Starbucks isn't as popular as it used to be. So it's trying out delivery. Retrieved from https://www.washingtonpost.com/business/2019/01/22/starbucks-isnt-popular-it-used-be-so-its-trying-out-delivery/?noredirect=on&utm_term=.18bed202eb47

1. (2016, August 2). Market share of major U.S. coffee chains. Retrieved June 30, 2019, from https://www.statista.com/statistics/250166/market-share-of-major-us-coffee-shops/

Thompson, A. A. (2018). Starbucks in 2018: Striving for Operational Excellence and Innovation Agility (5th ed.). McGraw-Hill.

Jargon, J. (2018, August 30). Starbucks' Frappuccino Gets a Sugar Makeover. Retrieved June 30, 2019, from https://www.wsj.com/articles/starbucks-frappuccino-gets-a-sugar-makeover-1535621400

Starbucks Reports Q2 Fiscal 2019 Results. (2019, April 25). Retrieved June 30, 2019, from https://investor.starbucks.com/press-releases/financial-releases/press-release-details/2019/Starbucks-Reports-Q2-Fiscal-2019-Results/default.aspx

Wolf, L. (2018, July 26). Growing Competition from Both National Chains and Neighborhood Coffee Shops Threatens Starbucks' Supremacy. Retrieved June 30, 2019, from https://www.nreionline.com/retail/growing-competition-both-national-chains-and-neighborhood-coffee-shops-threatens-starbucks