Coffee and Starbucks Essay

Gordon Bowker, Jerry Baldwin and Ziv Siegl founded Starbucks in 1971. Their goal was to sell the finest quality whole beans and ground coffees (Starbucks timeline and history, 2004). In 1982, Starbucks had grown to five stores and started serving coffee to restaurants and espresso bars. Harold Schultz was employed as the director of retail operations and marketing. Harold Schultz convinced the founders of Starbucks to open a downtown Seattle coffee bar, which opened in 1984. With the success of Seattle coffee bar, Schultz left Starbucks to start his own company named Il Giornale. In 1987, Il Giornale acquired Starbucks retail operations for 4 million dollars. In addition, Il Giornale changed its name to Starbucks Corporation and open locations in Chicago and Vancouver, B. C. (Starbucks timeline and history, 2004). Starbucks continued its expansion throughout the late 1980 and beyond. In 1991, Starbucks became the first privately owned U. S. Corporation to offer stock options to part time employees (Starbucks timeline and history, 2004). In the early 1990s Starbucks started setting up coffee shops in Nordstrom?  ¦s department stores, Barnes & Noble bookstores and ITT/Sheraton hotels. In 1995, the corporation began selling compact discs and formed an alliance with the Canadian bookstore, Chapters Inc. In 2000, Schultz promoted Orin Smith to the position of CEO. Schultz remained chairman for the corporation. This allowed Schultz to focus on Starbucks?  ¦ global strategy. Starbucks operates and licenses more the 7,500 coffee shops in more than 30 countries. Coffee Industry In the United States, coffee is the second largest import (Roosevelt, 2004). Furthermore, the United States, consumes one-fifth of all the worlds?  ¦ coffee (Global Exchange, 2004). The present industry is expanding. It is estimated that North America? ¦s sector will reach saturation levels within 5 year (Datamonitor. n. d. ). According to National Coffee Association (NCA), 8 out of 10 Americans consume coffee. In addition, it is estimated that half of the American population drinks coffee daily. The international market remains highly competitive. It is estimated that 3,300 cups of coffee are consumed every second of the day worldwide (Ecomall, n. d. ). The latest trends included dual drinkers, an increase in senior citizens consumption and a shift in consumption away from home. There has been a significant increase in the consumption of dual drinkers (NCA, 2004). Dual drinkers are people who drink both traditional coffee and gourmet coffee. According to NCA, 54% of America?  ¦s coffee drinkers are dual drinkers. Gourmet coffee is experiencing substantial growth with senior citizens. According to NCA, senior citizens coffee consumption leaped from 9% to 13%. Another trend is coffee consumption is moving outside the home. Coffee consumption away from home increased by 6%. Mission Statement The current mission statement is ?  §Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. This mission statement fits well with the general direction and the future strategies of Starbucks Corporation. Principles The following principles compliment both Starbucks mission statement and their strategies. Our recommendation is to keep the current mission statement and principles. ?aProvide a great work environment and treat each other with respect and dignity. ?aEmbrace diversity as an essential component in the way we do business. ?aApply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee. ?aDevelop enthusiastically satisfied customers all of the time. ?aContribute positively to our communities and our environment ? aRecognize that profitability is essential to our future success. SWOT Analysis StrengthWeakness ?aFinancial Resources ?aGlobal Presence ?aBeverage Innovator ?aReliance on US Domestic Markets ?aReliance on Beverage Innovation ?aInternational Expansion Problems OpportunitiesThreats ?aInternational Operations ?aContinued Growth of Gourmet Coffee Market ?aExpanding ? V Unit Clustering ?aSupply Risk/ Dependence on Trading Companies and Exporters ? aUS Market Reaching Saturation Levels ?aCompetition Internal Strength. A few of Starbucks strengths included strong financial position, name recognition and being creative beverage innovators. Starbucks has reported revenue from January to July 2004 as 409 million dollars, which gives the company a strong financial position. Starbucks has a strong global presence from its many stores and licensees units, which has made Starbucks a household name. Starbucks is known for their creative innovations of beverages. Starbucks is not afraid to experiment and test new drinks in their stores. Some of the beverages introduced are Fappuccino Blended Beverages or Iced Shaken refreshments. Internal Weakness Some of the weakness the corporation faces includes international expansion problems and dependence of the United States markets and beverage innovations. The corporation was forced to close a number of stores. These stores failed to entice potential customers and Starbucks was forced to end a joint venture due to the lack of success. Starbucks has a dependency on beverage innovation and US markets. It is estimated that 85% of the corporation revenues come from the United States (Datamonitor, n. d. ). Starbucks contributes its growth based on beverage innovations (Datamonitor, n. d. ). External Opportunities One opportunity deals with clustering its business units. Starbucks uses clustering to ensure domination in chosen geographical areas. This practice allows Starbucks to bring conveniences to customers and at the same time preventing new business from entering the market. The last two opportunities are profitability of international operations and the expected growth of the specialty coffee market. The profitability of international operations and the expected growth will give the company greater leverage into the world market and will promote new market expansions. External Threats. One major threat is the lack of superior coffee beans. The expansion of Starbucks operations and limited quantity of superior coffee beans may result in a shortage of supply. Other factors, which could affect the coffee beans, are weather, political and economic conditions. Organizations like Fair Trade could change or alter the coffee industry. Another threat to Starbucks is the dependence on trading companies and exporters for their supply of superior coffee beans. Although Starbucks has limited the risk by paying above average prices for the superior coffee beans, the risk is still there. The last threats are competition and market saturation. The success of the coffee industry will attract more competitors. A competitor with a serious financial backing and resources could compete against Starbucks (Datamonitor, n. d. ). It is estimated that if the current market growth continues saturation levels will be reached in five years (Datamonitor, n. d. ). Customer Satisfaction Customer Satisfaction is defined as the measure or determination that a product or service meets a customer’s expectations, considering requirements of both quality and service (www. eglin. af. mil/46tw/StrategicPlan/glossary.htm). A customer?  ¦s expectations of product quality, service quality, and price, then a firm will achieve high levels of customer satisfaction. On the other hand, if the customer?  ¦s expectations are not met, the customer will be disappointed and this is likely to lower the satisfaction level. Due to lowered satisfaction, the customer could choose to stop buying from the firm/company. There have been many studies done that have shown that high customer satisfaction increases the likelihood of corporate profitability. It also showed that the costs incorporated with keeping an existing customer are five times that of getting new ones The Starbucks Customer The Starbuck?  ¦s Corporation is the leading retailer in the coffee industry. The market size of the coffee industry in the United States for 2003 is near 18 billion. The company?  ¦s sales have increased 23. 9% in the year 2003. These statistics show how many people in the U. S. are drinking Starbucks coffee. Starbucks attracts a cult-like following, serving 25 million drinks a week at nearly 7,000 locations worldwide. At one time or another, just about everyone has been a customer at a Starbucks retailer. Based on research done on the Internet, we have identified who the typical Starbucks?  ¦ customer is. A typical Starbucks customer is a male or a female, age ranging from 18 to 55. In most cases, the Starbucks?  ¦ customer is a college student, businessperson or someone in their mid to late fifties. A Starbucks customer tends to be very loyal to the company and will not accept substitutes. The usage level of a typical customer is at least three times a week, for some; it is every day. The benefits sought by customers range from enjoyment, relaxation, energy, and reward. Those who are not in a hurry like to sit down for a cup of coffee, listen to the relaxing songs played at the shops, enjoy a conversation with a friend, or just way to be alone and study. Another important characteristic of a typical customer is that most of the customers are financially stable enough to be able to afford to spend at least $2. 50 for a small cup of coffee. A typical Starbucks?  ¦ customer spends and average of $40 to $65 a month for coffee drinks. However, there are many customers who spend well over $65 a month. Improving Customer Satisfaction According to Schultz, ? §our success is based on their continued trust in our people and our environment over long periods of time. † Redefining the industry you’re playing in doesn’t just mean hiring an agency to think up a fancy new slogan. To make it work, you have to offer high-quality new products and services that customers actually want, and that will reinforce the value offered by your core brand and expand the emotional connection your customers feel with it ( www. fastcompany. com from Issue 84 July 2004, Page 50 by:Alison Overholt). To continue the success that Starbucks had over the years, there must be ways to measure the customer? ¦s perceptions of the company. The customers are what make Starbucks what it is today, and to keep them we need to know what they expect from us. Based on research done on starbucks. com, it is evident that Starbucks values their customers. On the main page of the website there is a link to Customer Service; here the customer can ask questions or leave comments. This tool could be much more beneficial to the company if questions and/or comments could be asked by the customer. In the area of questions/comments-there is a drop down list of freqeuntly asked questions/comments, from this list the customer must pick. There could be many times when a customer has a question/comment, but it is not included on this list. The idea of having this link makes the customers feel that their opinions are valued, but there are a few areas that could be improved on that would be much more beneficial to the company. It is important that Starbucks asks for the opinions of their customers, but why only offer this online? Even though we have become such a computer savy world, there are still many people out there that are not computer literate. Many do not have access to computers, or some just do not know how to use them. This does not mean that these people don?  ¦t drink Starbucks coffee. To increase overall customer satisfaction, we should also incorporate a general product/service survey or some type of comment card in the retail stores. Surveys may seem tedious at times, but to help us find out information that could help our company in the long run, it is worth it. Surveys will give us an idea of how we can improve our product and service to satisfy the customer. Typical customer surveys are designed to measure: ?aOverall satisfaction ?aProduct-level satisfaction ?aImportance vs. satisfaction ? Timeliness of delivery ?aCustomer service process satisfaction ?aReturns and exchange process satisfaction ?aInterest in new potential products and services Included is sample survey that could be used to get a general idea of how our customers feel about our products and services. The main goal to achieve customer satisfaction needs to be: to find ways to deliver a great customer experience around your product or service. Customer expectations may be set, the idea is to exceed those expectations that they might already have. The recipe for a great cup of coffee includes four fundamentals, proportion, grind, water and freshness. Using the right proportion of coffee to water is the most important step in making great coffee. The shorter the brewing process, the finer the grind. The amount of time the coffee and water spend together affects the flavor elements that end up in your cup of coffee. Using fresh, cold water heated just off the boil is perfect for extracting the coffee?  ¦s full range of flavors. Use fresh ground coffee by grinding beans each time you brew the freshness is preserved. Starbucks quality is dependent on trading companies and exporters for its supply of green coffee. The company is looking to secure long term supply contracts, and in some cases has had to pay inflated prices in order to obtain such contracts. Starbucks responded to world coffee prices reaching 30-year lows during fiscal 2001 by offering suppliers more money to guarantee supply, and as such the risk of non-delivery on such purchase commitments is low. However, the nature of the business dictates that the company?  ¦s dependency on suppliers does put it at risk. Starbucks quality is at risk to the volatility of the supply and price of coffee. The company?  ¦s search for the superior standard coffee mean in can be adversely affected by multiple factors in the producing countries, including weather, political, and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of organizations and associations that have in the past attempted to influence prices of green coffee through agreements establishing export quotas or restricting global coffee supplies. The actions of these associations could cause a degree of costly disruption to Starbuck?  ¦s operations. Purchasing Guidelines Starbucks has also introduced coffee purchasing guidelines. The goal of these guidelines is to support Starbucks commitment to purchase coffee that has been grown and processed by suppliers who meet environmental, social, economic, and quality standards. Global coffee production can only be sustainable if it is economically viable, socially responsible, and environmentally sensitive at all levels of the supply chain. Over the past few years Starbucks has been working on the sourcing guidelines and they feel that is an important step that will help increase the production of high quality coffee and improve the health of the specialty coffee industry. With these guidelines, Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry. This initiative is part of a long-term partnership between Starbucks and Conservation International to promote methods of coffee production that help to conserve global biodiversity. To launch these guidelines, Starbucks will enlist the support of coffee suppliers who are sustainable advocates. Starbucks has instituted a flexible point system that rewards performance in sustainable categories. Points will be accrued based on a supplier?  ¦s ability to meet sustainability guidelines, and suppliers who earn more points in the program will receive higher purchasing preference when Starbucks purchases green coffee. Starbucks has a long-standing practice of paying premium prices for coffee, and has always paid an average of at least $1. 20 per pound. As part of this practice, Starbucks will provide additional premiums of up to ten cents per pound to vendors based upon how well their coffee samples meet the standards. These financial incentives will help defray the costs incurred by participating suppliers. Suppliers wishing to participate will be required to provide independent, third party verification of their performance against the guidelines. Starbuck?  ¦s hopes that the success of this program demonstrates to the rest of the coffee industry that they can benefit by producing coffee in a way that protects global biodiversity and improves the livelihoods of coffee farmers. The Three Keys to Quality Coffee The three keys to quality coffee are: 1)Quality Green Arabica Coffee – The best coffee beans produce the best cup of coffee. 2)Fresh Roasted – Great tasting coffee relies on how soon the coffee is brewed, and consumed after roasting. For coffee to be fresh, and best, it must be consumed within five days after roasting, three hours of grinding, and fifteen minutes of brewing. The first sign that coffee is stale is a bitter taste. 3)Proper Brewing ? V Temperature and time, brewing is the extraction of coffee flavor oils from the roasted grounds using water. The best temperature for optimum extraction is water just off the boil (195 degrees to 205 degree Fahrenheit). This temperature will extract the full range of flavors from fresh roasted beans. Time is a function of brewing method and grind size. There are many ways to brew good coffee. Steeping and espresso are the two best methods. Financial Analysis Total net sales for Starbucks Corporation were analyzed for 2001, 2002, and 2003. The company had a total net sales increase of $639. 9M between the years 2001 and 2002. Another net increase of $786. 6M in sales occurred between 2002 and 2003. This is a positive sign because in a growing company, of course, we would expect a consistent increase in sales. A result of the increase in sales in part is due to a recent innovation of drive-throughs being added for the convenience of its many customers. Net income increased substantially to 215. 1M in 2002. This was due to the boom in sales and good control of its cost of goods sold. Net income increased to $53. 2M in 2003. The coffee giant acquired Seattle Coffee Company from AFC Enterprises for $72. 0M in 2003, as well. Income from operations took a boost up from $281. 0M in 2001 to $318. 7M in 2002, a difference of $37. 6M. Income from operations saw a considerable upturn of $424. 7M in 2003. In a growing company we would expect income from operations to grow from year to year. Cost of sales continued to increase $237. 2M between the years 2001 and 2002 and it peaked again $335. 9M between 2002 and 2003. This is normal when sales are increasing significantly. Management Strategies From cappuccinos to lattes to just regular coffee, the quality of Starbucks fine coffee beverages is worth the cost in dollars. An article from the Internet stated ?  §At $43 in mid-June, a share of Starbucks (SBUX) cost 47 times what Wall Street analysts expect the coffee-shop chain to earn per share this year. The typical stock in the S&P 500 index trades at just 19 times earnings (Rosato, D. , 2004, p. 124). The article continued to state that management is projecting Starbucks earnings to grow to 20% every year for the next three to five years. With an amazing growth rate like that its no wonder that their growth far exceeds the typical S&P stocks growth rate by as much as three times. Starbucks has a very strong balance sheet. It has little long-term debt and $380. 0M in cash. It continues to expand its long-term assets and finances them from its own cash flow. If a company is in a state of expansion, we would expect long-term assets to increase. The total current assets for the year ending September 29, 2002 for Starbucks Corporation were $847. 5M. For the year ending September 28, 2003 total current assets grew $76. 5M. This gives us a good indication that the company is expanding. Inventory increased from $263. 1M in 2002 to $342. 9 in 2003. In a growing company, we would expect inventory to increase. An article in the Internet stated that in November 2001, Starbucks offered their own Starbucks card. It was a convenient way for coffee drinkers to pay quickly and easily for their morning cup of coffee (Kuykendall, 2004, p. 7). Starbucks sold roughly $18. 0M of these gift cards. This strategy is a great way to increase volume and unlike other cards Starbucks said, ?  §It had never charged the fee noted on its cards — $2 a month after on year ? V to anyone (Kuykendall, 2004 p. 7). Another vision to increase its financial strategy was the introduction of the Duetto combo prepaid/credit card in late 2003. An article on the Internet stated how the Chicago based Bank One Corp. called Duetto worked with Starbucks to generate a program where cardholders would receive rewards based on their spending habits. Starbucks conducted a survey to determine the gift that was most attractive to customers and Colette Courtion, director of Starbucks Global Card Services stated, ?  §Duetto cardholders receive a one-time $10 ?  §preload and 1% in so-called Duetto dollars that are automatically loaded on the stored-value side each month for every Visa purchase made. Starbucks also donates $5 to the Starbucks Foundation, after every customer?  ¦s first Starbucks Card Duetto Visa purchase (Martin, Z. , 2004, p. 22). A half-pound of coffee was one of the great appealing rewards, as well. Bank One and Starbucks were very well pleased with the markets positive response to the Duetto card. We are in agreement with these financial strategies and as a team, we concur that Starbucks Corporation should continue the card services as a strategic process that gives their company a great competitive advantage. A key strength of Starbucks is being a disciplined innovator. Frappuccino blended beverages and iced refreshments were new innovations and helped the growth of Starbucks. Starbucks should continue coming up with new kinds of beverages, as that is its core product. Perhaps a vegetable drink that is geared more toward the healthier population like a low calorie, low fat, and low sugar carrot drink that is actually providing the body with good vitamins and minerals. According to information retrieved from the Factiva database, Starbucks Price/Earnings ratio in the last twelve months was 56. 9 and its current ratio was 1. 8. Starbucks is on the right track with their strategies and they have done such an excellent job so far that we believe these strategies will continue to bring revenues for many upcoming years. Growth Starbucks Corporation has a good strategic growth plan currently to enhance their business and gain market share over their competitors. In this section of the report, it will go over Starbucks current ideas about their growth and give different recommendations in how some other ideas may increase their current and future growth. In the current high completive coffee market Starbucks has a good market share and are opening location across the world. Starbucks have opened their location in markets before any of their competitors has any of their location even around that market. Starbucks has a global brand name over their competitors. Starbucks Corporation has roughly 7,500 retail locations across the world, with majority are owned and operated in the United States of America. Starbucks currently has locations across 30 different countries to set their business in the market before any competitors due. Even with Starbucks aggressive move to open many locations across the world they have very little profit with their business. The reasons that Starbuck?  ¦s profitability is low because they?  ¦re trying to cease the market first. In the fiscal year of 2003, the company has a total of nearly 1,300 licensed retail stores, with 1,000 in Asia-Pacific region, 176 in Europe/Middle East/Africa and the remainder in America, excluding North America (Canada, Hawaii, Mexico, Puerto Rico, Peru and Chile). Starbucks is headquartered in Seattle, derives approximately 85% of its revenues and substantially all of its profits from its domestic US market. The US market is the market that gives them the most profit of all markets. Starbucks started most of their locations at cold states based that more coffee drinkers live in cold states. With the new innovation of the cold flavored coffee drinks increased their chance to open more location in warm clement locations. Even with the rapid growth of coffee businesses in the US Starbucks has a large market share and with any change the Starbucks may due their competitors looks to target. Starbucks looks to enhance their brand image in the US market to increase their product sales from the stores that carry Starbucks coffee drinks, like Seven Eleven that carry only Starbucks coffee only. Starbucks reliance on the beverage innovation is important for the Starbucks future growth. With the increase for coffee store based on the need for coffee because of the new flavors, coffee market is growing but Starbucks looks to bring a new innovation to the market. The only problem at hand would be how long will the need and growth of the market last. In the international markets need less innovation then the US market based that there are less competitors in the market. International markets may need to have certain products for their taste. Most often different countries have different customs and life styles that could change the need for each custom. By the fiscal year of 2004, Starbucks international market will achieve profitability. About 23% of the company?  ¦s stores locations that are profitable are located in North America markets that include UK and Japan. Currently the specialty coffee sector accounts for 15% of the US retail market, and which is already worth $21 billion. By 2005, the retail coffee market will be worth $22 billion, and the specialty coffee will account for 41% of the market. Also Starbucks are looking to invent a coffee ice cream and ice cream coffee drink. All of the ice cream has many different flavors and if the newly product takes of like it?  ¦s planned on doing. The specialty coffee products are now sold even at retail store based on the growing need for it. Starbucks is looking to open coffee and ice cream combined stores in start a new market. Starbucks currently sees that more and more coffee business are opening threw out the US by small business owners, so Starbucks is selling more stores to lessen the opening of small businesses. Starbucks feels that if they sell their name that more small business owner would rather have a well-known name to enhance their chances in doing well. Starbucks owners will learn and gain from the innovation and marketing ideas that Starbucks will give. Starbucks will grow faster if they sell of most or all of their location because their will be less need in maintaining their stores and more need in bring new ideas to the market. Now their competitors are franchising their location to. Most of the Starbucks locations in malls or in strip malls across the world. Currently Starbucks are building freestanding locations and designing a drive threw so their customers can have a more convenient way when needing their service. With these newly developed locations will have a food line. They?  ¦re looking to have hot food and cold food to compete with the Tim Horton coffee business. They are also looking to stay open 24 hours, seven days a week. Starbucks is looking to carry donuts, breakfast sandwiches, bagels and other morning food. Starbucks interest to change to compete with Tim Horton?  ¦s may hurt their business or help their business based on the cost involved in the change. Starbucks has concerns regarding the US store growth potential. Currently if the growth continues, saturation levels within the North American retail division will be reached inside five years, the reasons why Starbucks has some concern is that about 75% of the companies revenue growth and a greater portion of its profit. Before the US market becomes saturated, the US market sales growth will grow slowly over the next three to five years. With this change of saturation point coming, the pressure will be on the international Starbucks division will need to grow faster. Currently Starbucks global coffee market is very competitive, and must compete against the likes of restaurants, coffee shops, and street carts. Any major competitors, with a large financial background and the same resources as Starbucks can enter the market at any time and compete directly against the company. Starbucks feels that they have a good market share and are aware of competition on all levels and can maintain its operational performance if its to maintain its status as the world?  ¦s leading specialty coffee retailer. Starbucks was one of the first coffee businesses in the market and will try to be one of the last to leave. The recommendation to Starbucks Coffee that if they are going to grow in the market faster than their competitors is not to change their business to be more like Tim Horton?  ¦s and have their own identity. Currently Starbucks started the wireless Internet access in their stores and now every competitor is doing it. Also, it will help Starbucks if they would enhance the online service to provide laptops and other computers at their locations. They should have online ordering of coffee so when business people need to go fast they can order online and pay online to have a faster way in getting there coffee. With the innovation of new products, Starbucks should think in expanding in creating a coffee machine that can be place at schools, hospitals, and other companies that may need coffee and late hours or that don?  ¦t need a store. They currently market their own coffee brand coffee to purchase at other store but they should have it accessible online to order. The best thing that Starbucks has going for them is that none of its direct competitors are selling their product at store and online. With the increase in people that drink specialty coffee, Starbucks should innovate more different flavored coffee to increase their potential growth currently and in the future. The international looks to be the best growth for their business and they should invest more into locations and countries. Summary In order to ensure future success, we feel that Starbucks should implement the following suggestions. To improve customer satisfaction, Starbucks should include a section where customers actually ask questions and/or leave comments both in store and at their website. In addition, Starbucks should incorporate a survey to measure customer satisfaction. To ensure quality, Starbucks should continue its current practices. The practice includes securing long-term contracts, paying premium prices for coffee and additional premiums to suppliers to ensure quality needs are meet. To guarantee financial security, Starbucks should continue its role as a disciplined innovator. Starbucks should continue to promote the use of Starbucks cards and Duetto combo prepaid credit cards. An important part of Starbuck continued growth is emphasizing their unique image and to continue to provide the latest technical advancements. Starbucks should start expanding by providing coffee machines at schools, hospitals and other similar organizations. These strategies will continue to promote Starbucks as a leading retailer in a highly competitive coffee industry. Starbucks Customer Survey Dear Customer: I want to thank you for giving us the opportunity to serve you. Please help us serve you better by taking a couple of minutes to tell us how we are doing. We appreciate your business and want to make sure we meet your expectations. Attached you will find a coupon good for 1 free coffee.