Howard Shultz and the senior management at Starbucks have to decide how to react to the opportunities that are being made available because of their rapid growth. The decision for a strategic growth plan has to be made in the near future. This will prove to be key for Starbucks reaching their long-term goal of becoming the most recognized and respected brand of coffee in the world.
Starbucks is currently the industry leader in specialty coffee. They purchased more high quality coffee beans than anyone else in the world and keep in good standings with the producers to ensure they get the best beans. Getting the best beans is only the first part, Starbucks also has a “closed loop system” that protects the beans from oxygen immediately after roasting to the time of packaging. They did this through their invention of a one-way valve which let the natural gasses escape but keeping oxygen out. This gave them the unique ability to ensure freshness and extended the shelf life to 26 weeks. Starbucks isn’t only about the coffee, it’s also about a place where people can escape to enjoy music, reflect, read, or just chat. It is a total coffee experience. The retail outlet has been responsible for much of Starbucks growth and has contributed substantially to their brand equity.
The Starbucks case doesn’t mention many weaknesses. The main one, however, is their supply chain operations. This hasn’t caused any problems yet but they mention that handling four business units is becoming challenging. They have yet to come up with a long-term solution for such possible problems.
As mention earlier Starbucks has many opportunities of which it can take advantage. These include a joint venture with McDonald’s, where the restaurant giant would supply its customers with Starbucks coffee. Another is the bottled Frappuccino product that Pepsi and Starbucks have created. This has had a very positive response in the test markets and posses to be a lucrative option. Starbucks could also look at the vertical integration possibility of producing its own beans. This could prove to be very successful if they can capture a significant amount of the production they could become a price setter in the coffee commodities. Also because small coffee retail outlets are so trendy it is possible for them to set up more of these shops and expand into international markets. Sweden, Denmark, Finland, and Holland consume the most amount of coffee per person. This a large market that Starbucks should seriously consider exploiting. The specialty coffee market is stable and will be around for a long time. This is supported by the stats that once people appreciate a high quality coffee they don’t go back and the lifestyle need these coffee bars fill. It has become a community-gathering place.
A company should also be aware of the threats of competing in a particular industry. One such threat is the one of political unrest or currency changes in the counties from which it acquires its beans. If Starbucks can’t get the high quality beans they will not be able to survive. This is another reason for the vertical integration. Another threat is the one that their competitors create. Their competition is not only from other large international coffee houses but also from small local coffee houses in specific areas. Once a retail coffee outlet gets set up and acquires customers it is hard to capture these people. This is why Starbucks must concentrate on defining its brand image. The coffee retail business is also very easy one to enter because of the little capital that is required. However this is changing because of the quality that is becoming expected.
I will discuss four possible alternatives that should be seriously considered. The first has to deal with McDonald’s. Starbucks has a great opportunity to increase sales by selling coffee through McDonalds, but it doesn’t fit Starbucks image of quality and luxury because McDonalds is know for its “McValue”. I believe that Starbucks could create a special brand of coffee just for McDonalds that doesn’t use the Starbucks name. McDonalds would then have a high quality coffee without Starbucks having to be associated with them. McDonalds may not want their coffee if doesn’t bear the Starbucks name.
The second alternative is to push the Frappuccino product that both Pepsi and Starbucks created into national distribution. If the test market data is accurate this should prove to be successful and very lucrative. I personally can’t see how this would be successful but there are many people with different taste preferences than me. The results showed that 70% of testers became repeat customers, which is practically unheard of. The figures show that this could result in revenues of $300 million by 1999. This is far to good of an opportunity to pass up.
Another alternative is franchising their coffee carts. I believe that would spark lots of interest and provide a fast move into many markets. They should franchise the carts and not the retail stores because the carts would be a turnkey operation and once all the retail stores are in place both nationally and internationally they will produce a profit and earn back the financing that would be required. Also the carts would be easy to run and could be set up at busy street corners and such without having to purchase expensive real estate. These carts would have to provide the same quality and service as the regular coffee houses.
The last alternative involves each of the previous but would also include vertical and horizontal integration. For Starbucks to be a continued success and to gain more control they have to start producing their own beans. This could happen gradually but it has to be done. If they could eventually be the main producer of high quality coffee beans they would create a sustainable competitive advantage and alleviate the threat of another gaining this position. The horizontal integration I propose is to start selling their coffee into the grocery market. Even with this market decreasing it still hold a significant proportion of coffee purchases. Once people try their product from a grocery store it would entice some of that market to go to a Starbucks retail outlet where there would be a greater selection of coffee to choose from at similar prices.
The best alternative is the last one discussed in the previous section. For this to be successful it has to be implemented correctly. The first stage of implementation would be to try and get a deal with McDonalds without using the Starbucks name. This will provide the company with extra cash. This cash should be used to set up international locations in the heaviest coffee drinking countries. This has to be done quickly as to get the jump on other that may also be considering this type of a move. At the same time they should be selling franchise right for the coffee carts. This will provide an increased cash flow as well. During all of this Starbucks should be looking at coffee producers who are in financial trouble or are looking at selling their farms. This has to be done discretely as not to cause unnecessary bad press. After they run a couple of these coffee producing farms for a few years they should be able to see how the whole operation works and determine its viability. Once it’s proven viable they should send out simultaneous offers to the biggest producers as to catch them and other coffee companies off guard.Starbucks also should be getting into the bottled Frappuccino as soon as possible. They should leave the introduction of the product up to Pepsi because of their past experience. They should leave their entry into the grocery store market until some of these other strategies are implemented. This will prove to be the best strategy for Starbucks being able to reach their long-term gaol.