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Report on Starbucks Business Environment

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Starbucks Business Environment Report

Introduction

            Coffee has been part of Korean culture since its introduction in the late 1800s. The commodity has become prominent in the South Korean market which has been ranked the 14th largest economy with a GDP of US$ 1.4. With coffee becoming a popular beverage, Starbucks started opening stores in 1999 with almost 80 new branches every year. In a way, it became a symbol associating Starbucks coffee with the South Korean lifestyle choice. The company produces products that are considered luxury and coffee in South Korea can go higher than $10. However, with the recent universal economic slowdown, coffee consumption has gone down because people now have fewer savings and less disposable income. This paper will discuss how Starbucks has been able to maneuver in the ever-changing business environment. It will also further look into factors that have been influencing Starbucks’ operations. 

Background

Currently, Starbucks boasts more than 17,000 coffee shop outlets. Their designs are recognized for having a theme that provides a relaxing ambiance. The outlets are typically located along high-traffic streets and high visibility areas. The company’s main source of green coffee beans is from farmers in coffee-producing provinces. As such, it is crucial that the company maintains good relations with suppliers for a constant supply. The company experienced a shock in 2009 because of the global economic crisis that saw consumers spending less on luxury and changing tastes. It then grew at a slower annual growth rate of 0.9% until 2013 with a revenue of over $29 billion worldwide. Growth can be enhanced by increasing consumer confidence and providing the customers with a wide menu since economic conditions are external factors that are out of control. Starbucks has continued to dominate the market, with a market share of 36% over competitors like McDonald’s, Costa Coffee, and Dunkin.

Starbucks Business Environment Report

Considering coffee is now a culture of the Korean people, the number of coffee shops has reached the level of saturation in the market. However, the company is still expanding rapidly in the international market. But with low barriers to entry to the coffee market, Starbucks is facing stiff competition. This means that the consumption trends are being influenced by competition from similar beverages, the economy, health of the nation, education level, and consumer’s average income. Given all that, the Korean coffee culture is still firm, and people are willing to pay more to drink coffee in a relaxing environment.

            With the ubiquity of coffee houses in the South Korean market, many are worried to what extent the trend will continue with some streets in the cities having more than seven coffee shops. Starbucks has one tool that is likely to survive whatever downturn that may hit its South Korean competitors, its American taste. The American culture is something the South Koreans have had a strong affiliation with, since the end of the Korean War. They are in a better position because of their US association and lifestyle that young people adore (Haskova, 2015).

Financial Performance Analysis

Looking at Starbucks’ financial performance since the last recession in 2008, the company experienced a -5.9% drop before picking up again in 2013. Since then the company has been recording revenue growth of more than 12%. Operational income margins have also increased significantly from 4.9% to 15% in 2013, partly as a result of Kraft Foods litigation charge worth $2.8 billion for their decision to terminate an agreement they had. This charges should, however, be discarded as operational loss because they are an extraordinary and unexpected event. Important to note is the company’s efforts in increasing its cash conservation cycle too more than 54.7% from 2013. This has made Starbucks boast about its financial performance with low debt.

Competitive Advantage

Starbucks has been successful in creating organization and environment around its workforce, and it has made it a key asset and thus the source of sustainability. Developing a corporate culture, providing employee stock ownership programs and benefits have helped Starbucks to craft pride that is workforce treated with dignity. It also advocates for empowering management of various branches to make decisions without the need for top management referral as they are encouraged to see themselves as part of the company. The approach has been beneficial to Starbucks for reducing the expense on employee turnover and attracting more skilled and passionate workers.

Technology and Innovations

This is one area that Starbucks has vigilant on to offer their customers the best experience. A good example is the use of Starbuck card that has enhanced service delivery, faster, and more efficient. With the larges youth population and internet users, Starbucks has partnered with Compaq that will provide free wife services in their coffee shops. The company also has Square to integrate its app with a mobile payment app to enhance their services to the customers. They also award customer loyalty through the program. Thus they have set the bar ahead of their competitors especially with the fact that the number of mobile money transfer users is growing rapidly in South Korea. Starbucks has also introduced a more effective Mobile Pour delivery system. This will assist them in the future in expansion in their distribution channels thus fetching more revenue (White, 2004)

Economic Influences

These are the major factor that influences the decisions and direction the company is going to take depending on the economy under which they operate. As mentioned before, Starbucks just like the other coffee companies had suffered a major blow during the economic recession of 2008. Various stores closed down as a result, and many had the worst decrease in profit margin. The economic recession also affected the consumer’s decision on the frequency at which to consume coffee as it was a luxury. Starbucks suffered because of its reliance on the customer’s discretionary expenditure. At the time also, McDonald’s had presented a stiff competition by providing the premium coffee at a cheaper cost.

Environmental Influences

With the growing concerns on pollution by plastic bags, Starbucks started reducing the sizes of their garbage bags and paper napkins in 2004. This effort reduced their waste production by around eight hundred and sixteen metric tons. Their coffee cups became the first to be approved for use as a recycle content by the US Food and Drug Administration. In 2005, Starbucks received an award from the National Recycling Coalition Recycling Works Award. Also, they encouraged their customers to carry reusable cups to receive a 10% discount. This shows how Starbucks has received recognition internationally for its effort to cut down on use of plastic materials.

            Ethics is an element that Starbucks work to achieve. Being the largest buyer of coffee beans in South Korea, most of its price justifications has a direct connection to the company ethics. They have prioritized equality and fairness when dealing with coffee growers and suppliers over profitability. As per Starbuck’s mission statement, it has reinvested some of the revenue in health care for the coffee growers’ board and its staff. This is in a way an incentive to attract more farmers to maintain supply (Kim, Zhang, & Lee, 2009).

PESTLE Analysis of South Korea

1. Political Analysis

The political landscape in South Korea has been stable since the advent of democracy about three decades ago. Among the currents strengths that make the political climate in South Korea to be stable are: power centralization, strong foreign relation and economic reforms being accorded political goodwill.

2. Economic Analysis

The government of South Korea has done a commendable job in supporting the country’s economic structure. The reforms have made the countries economic to experience unprecedented growth. The sector of export has made the economy of South Korea to blossom. However, declining FDI have been negating the gains made in the country’s economic growth.

3. Social Analysis

The minimum wage that South Korean workers get is relatively higher compared to those of neighboring countries. On the same note, the literacy rate of the country happens to be among the highest in the globe. South Korea has to grapple with the problem of an aging population due to low fertility rate.

4. Technological Analysis

The highly educated work force coupled to the availability of sophisticated infrastructural facilities has made South Korea be among the global leaders as far as technological advancements are concerned. The country leads in internet penetration and usage in the world. On the same note, there exists a very small gap between innovation and subsequent commercialization.

5. Legal Analysis

The judiciary of South Korea is based on the court system of the United States and Germany. The country is grappling with the shortage of judges. The constitutional court maintains check on all the decisions made by the government. There is the provision of industrial courts where commercial related disputes are tried.

6. Environmental Analysis

The South Korean government is promoting the environment through the formulation of laws that inhibit pollution. In fact, the focus has resulted in the establishment of eco-parks throughout the country.

Starbucks Porter 5 Forces Analysis

  1. Bargaining Power of Suppliers

Bargaining power by coffee suppliers can exert pressure to raise prices of Arabica beans mainly used by Starbuck in the production of dark roasted coffee. Another threat can be a general reduction of the quality of beans grown considering that most of the Arabic beans farmers in South Korea are small and medium-sized farmers. These farmers have no organization or unionization making have minimal bargaining power. As such, those who grew Arabica beans made their sells directly to specialty coffee retailers and hence dependent on their sustained business.

  1. Threat of  New Entrants

As stated before, Starbucks is working under an industry environment that is full of potential new entrants to the market. The specialty coffee industry in South Korea has not adopted a high premium for the country’s economies of scale. Even though the coffee companies who have access to the national distribution channel have had some discounts over goods bought in bulk, the advantage has been minimal. This shows that there are legal barriers to entry into South Korean specialty coffee industry. Back in the late 1980s, barriers to entry to the coffee, the market was attributed to specialization, product differentiation, high switch costs, limited access to quality Arabica coffee, and limited location choices (Vaidhyanathan, 2017).

  1. Competitive Rivalry

Starbucks leads the industry, and its value shows its dominance in the market. However, it still competes with some food service retail companies in categories like quick-service restaurants, fast foods, and beverages sales. There have emerged large companies producing high-quality coffee beverages at affordable prices thus taking away some of Starbucks’ loyal customers. Considering no barriers to entry to the market, if the number of such companies becomes large enough, it will affect Starbuck’s profits and sales. Such companies include McCafe that provide their customers with cappuccinos and espressos for less than $5. This has placed it in a high-margin beverage market that has for long been dominated by Starbucks.

  1. Threat of Substitutes

Just like competitors, substitutes present another threat, even though minimal, to Starbucks. The kind of services and environment that Starbucks provide can also be provided in bars and cafes. The vision is offered their customers a humble place where they can hang out with family, friends, and meet new people. Well, this can also be provided by substitutes such as parks, community centers, and restaurants. Substitutes to the coffee itself include soft drinks, smoothies, and energy drinks which some people prefer in the summer. As early mentioned, to address this issue, Starbucks needs to expand its products range to include non-coffee drinks such as blended sodas, Tazo Tea, and Frappuccino drinks while maintaining the vision of the company.

  1. Bargaining Power of Customers

The customers that Starbucks target have a high bargaining power. The power stem from the availability of many products that can substitutes Starbucks products. On the same note the bargaining power of the customers is heightened by their ability to access information concerning the range of choices that they have in the context of products that Starbucks deals with.

Maintaining the Quality of Arabica Beans

To ensure consistency in the quality of Arabica beans purchased, Starbucks adopted strategies to secure important supply-chains and make deep connections with the local coffee farmers. Instead of utilizing their power of dominance to forcefully lower the prices of beans in the market, they opted to take a route that will see them encourage social change and forming an alliance with the conservation international. Their objective out of this alliance was to minimize risk, preempt competition, try to overcome government barriers, and enhance international expansion. By partnering with Conservation International, they stand a better chance to strengthen their legitimacy when dealing with other NGO’s. This has enabled Starbucks to achieve economies of scale and positive contribution the South Korean communities and the international environment.

Target Consumer Segment

Since its foundation, Starbucks’ target was the upper-income class consumer. With a majority of South Koreans living comfortably above the poverty line, many had the disposable income to spend on the luxury services they offered. Starbucks has made sure that this customer segment has been fully penetrated in South Korea such that additional growth can only be experienced if another firm focuses on the middle and lower income segments. This group can easily be motivated by offering discounts. In the last few years, there have been two significant entrants into the government: McDonald’s and Dunkin’ Donuts. The two have presented a stiff competition to Starbuck forcing them to have more discount and reduce their prices to fit the two giants. They had the ability to affordable specialist coffee that was what the middle and lower class segment wanted. Starbucks was keen to utilize this opportunity as failure to which it will lead to future diminishing profit margins (Mukharji, 2016).

            As the coffee industry in South Korea evolution, we can project that there is no tendency to have consolidations. Scholars argue that mobility barriers and consolidation are one thing, thus and increase in one will lead to an increase in the other. Low mobility will hence open doors for new firms to enter the market and replace the ones that have been unsuccessful. The Korean market’s key contributors to the mobility barriers are the accumulation of experience and proprietary knowledge.

Recommendations

Starbucks has the opportunity to expand into the international market. They should look into how to make their products affordable for developing countries. Countries like India will provide a huge market if they adjust their operations to suit the middle and lower class who are the majority. The company should also strive to diversify their products to accommodate changing consumer tastes and seasonal preferences. Starbucks should also continuously come up with innovations to ensure they stay ahead of their rivals in the increasingly competitive market. Acquisition can help the company reduce the risk associated with such competitions and acquire more international market share.

Conclusion

Starbucks has come a long way in the coffee industry. It is an icon in South Korea for providing the best quality coffee in an ambient environment where families and friends can have a good time. The company is the leading coffee retailer in South Korea and now expanding to new international markets such as the US. Given their saturation in North Korea, the best way for the company to increase their profits is by providing a variety of products and opening new stores. Operation wise, Starbucks has gained impressive performance with their strategies that are employee centered which has enhanced the quality of their services and hospitality. Looking forward, the app and card services they provide should receive more focus as the global turn into a digital universe.

References

Garthwaite, C., Busse, M., Brown, J., & Merkley, G. (2012). Starbucks: A Story of Growth. doi:10.4135/9781473977273

Haskova, K. (2015). Starbucks Marketing Analysis. CRIS – Bulletin of the Centre for Research and Interdisciplinary Study, 2015(1). doi:10.1515/cris-2015-0002

Kim, M., Zhang, B., & Lee, J. (2009). Dynamic and Static Influence Models on Starbucks Networks. 2009 International Conference on Advances in Social Network Analysis and Mining. doi:10.1109/asonam.2009.50

Mukharji, A. (2016). Modernization and the Starbucks Initiative. Diplomas and Diplomacy, 97-102. doi:10.1057/978-1-137-58653-7_15

Vaidhyanathan, S. (2017). 1. How to read Starbucks, or why intellectual property matters more than you think. Very Short Introductions. doi:10.1093/actrade/9780195372779.003.0001

White, C. (2004). Starbucks: the third place. Strategic Management, 766-772. doi:10.1007/978-0-230-55477-1_29

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