INTRODUCTION

The focus for the strategic management will cater to Starbucks Corporation in engaging to appropriate information and research ways as the corporation had began in the year 1971 when the academics English teacher , history teacher and writer opened a store called Starbucks Coffee, Tea and Spice in the touristy Pikes Place Market in Seattle. Thus, there is a need to understand the market and industry processes of Starbucks and must be able to integrate valid and reliable SWOT analysis so as to determine future strategies for business development and growth in the global market.

SWOT ANALYSIS

Starbucks Corporation is a specialty coffee retailer, producing and selling a wide variety of hot and cold beverages, as well as pastries and confections, through 8500 coffee shops across 32 countries worldwide. The company recorded an increase in revenues and profits. It faces the threat of reduction in margins due to rising dairy costs.

Strengths

Global presence

Starbucks has a widespread global presence. The company operates about 8500

retail store locations, the majority of which are company owned and operated across 32 countries worldwide. The companys widespread presence provides it with widespread brand recognition and a strong customer base.

A disciplined innovator

Starbucks is a disciplined innovator. The company effectively manages its innovation time line generating consistency in same store sales. In fiscal 2002, the company introduced new Frappuccino Blended Beverages, and in 2003, the "Iced Shaken" refreshments product line was launched. In 2004, it introduced the new Frappuccino Light blended coffee. Starbucks ability to roll out new products relatively quickly is a considerable competitive advantage for the company.

Increase in revenues and profits

The company recorded revenues of $5294.2 million during the fiscal year ended September 2004, an increase of 29.9% over 2003. The companys revenues grew at a compounded annual growth rate of 25% from fiscal 2000 and fiscal 2004. Furthermore, the operating profit of the company during fiscal 2004 was $610 million, an increase of 43.7% over fiscal 2003. Its net earnings also increased by 46% in fiscal 2004. This significant rise in revenues and profits provides the company with a strong financial base and enables it to undertake new business ventures.

Clustering of company units

With the continued growth of the coffee market, the company has looked to expand its business, including those areas where it has an established presence. Working on the

basis that a key driver of business is the convenience of the companys outlet location, Starbucks has targeted clustering its units so as to dominate particular areas. The financial reward derived from this practice has been found to be considerable, as new outlets have not been found to eat into the business of existing outlets. A continued strategy of unit clustering, and a focus on stores that have convenient access for pedestrians and drivers, represents further opportunity for Starbucks to capture an increasing share of the coffee market.

Source: (January 2005). :

Weaknesses

Reliance on US market

Starbucks, headquartered in Seattle, derives approximately 85% of its revenue from its domestic US market. Given the company is an international brand with wide ranging operations, it should be looking to generate a greater proportion of revenues from outside the US. Such is Starbucks reliance on this market, the company entire performance will be materially affected should the companys US unit under -perform, as a result of economic conditions or increased levels of competition.

Reliance on beverage innovation

An important long-term risk to the companys stock is a lower valuation caused by a slowdown in US sale store growth. Starbucks store sales growth has been largely driven by beverage innovation, but there are questions over how long this can last.

Diminishing return from beverage innovation, one of the companys competitive strengths, would have a significant adverse effect on the companys performance.

Lower revenues and income per employee

The company generates lower revenues and income per employee as compared to the industry average. Its revenue per employee was $71,544 during fiscal 2004, as compared to the industry average of $110,841. Furthermore its net income per employee is $5294 as compared to the industry average of $9500. The companys lower returns per employee as compared to the industry average reflects adversely upon its employee efficiency.

Lower return on equity than peers

The companys five year average returns on equity have been lower than the industry average. Its five year average return on equity was 13.65% as compared to the industry

average of 15.09%. The company would need to effectively manage its finances to ensure that returns are at par or higher than industry average.

Problems in some international operations

The company has been facing certain difficulties in some of its international operations. Starbucks has faced problems of expansion, with a number of openings failing to be successful. Starbucks has experienced continued same-store sales sluggishness in its Japanese operations. Also, in 2003 Starbucks Coffee International ended its joint venture with the Delek Group of Israel. Following this decision, Shalom Coffee Company, the joint venture between Starbucks Coffee International and the Delek Group, closed its six Starbucks stores in Tel Aviv. This adversely affects the international operations of the company and thus the growth prospects in the region.

Source: (January 2005).

Opportunities

Growth in coffee market

The specialty coffee sector accounts for roughly 15% of the US retail coffee market, which is worth $21 billion. By 2005, the retail coffee market is expected to be worth $22 billion, and the specialty coffee sector will grow to account for 41 percent of this market. Starbucks has a market share of over 40 percent of the specialty coffee market and the anticipated growth in this category will offer the company considerable opportunities for further growth and expansion in the near future.

New product

Starbucks has expanded its beverage categories by signing an agreement with the wine and spirits group Jim Beam Brands to develop and market a Starbucks branded coffee

liqueur drink. The link up with Jim Beam Brands will give Starbucks access to a nationwide sales and distribution network, and a partner with proven track record in product development and marketing. In the US, cordials and liqueurs represent a $4-5 billion opportunity and approximately 20 million cases. Liqueurs flavored with coffee or often mixed with coffee represent a substantial segment of the liqueur market. Additionally, US specialty coffee consumption is on the rise. Furthermore, research indicates that there is a significant overlap between consumers of liqueurs and consumers loyal to the Starbucks brand which provides the company a strong revenue potential.

Market expansion

The company is targeting 15,000 international stores in the next few years. Starbucks expects major expansion potential in China. The company is also looking towards markets such as Brazil, India, Russia for expansion opportunities. Starbucks sees China as its next big international opportunity. Citing its large urban population, rising economy and increase in coffee consumption, Starbucks estimates that China could ultimately be one of its largest markets. In China, the company will continue to focus on current markets such as Beijing and Shanghai along with rapid expansion in new cities. This would provide the company with new opportunities for revenue growth.

Source: (January 2005).

Threats

Volatile coffee markets

The supply and prices of coffee experience high volatility. The companys requirements for quality standard coffee exposes it to multiple factors in the producing countries, including weather, political and economic conditions which may adversely affect the companys business. 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 disruption to Starbucks operations.

Rising dairy costs

The company faces the threat of rising dairy costs. Dairy prices have risen considerably and this could adversely affect Starbucks margins. Raw milk prices in 2004 are expected to be above the 2003 levels. Milk and other dairy products

represent between 3% and 5% of sales, and sustained increase in prices could affect the companys margins.

Slowing US retail sales

The company faces long-term concerns regarding its US store growth potential. If current growth continues, saturation levels within the North American retail division will be reached within five years. This represents a considerable concern for Starbucks, given that over the last two years, domestic retail has been the source of about 75% of the companys revenue growth and an even greater proportion of profit growth. Before reaching saturation point, US retail sales growth will slow considerably over the next three to five years, further increasing the pressure on the international division to justify the companys investment in expansion.

Competition

The global coffee market is a very competitive sector, and Starbucks must compete against the likes of restaurants, coffee shops, and street carts. A major competitor, with substantially greater financial, marketing and operating resources than Starbucks, could enter this market at any time and compete directly against the company. The US specialty coffee market continues to grow, and an increasing number of firms are

looking to enter the market. Starbucks must be aware of competition on all levels and maintain its operational performance if it is to retain its status as the worlds leading specialty coffee retailer.

Source: (January 2005).

RESOURCES LED AND MARKET LED STRATEGIC DEVELOPMENT

Moreover, Mr. strongly believed that Starbucks success was heavily dependent on customers having a very positive experience in its stores. This meant having store employees who were knowledgeable about the companys products, who paid attention to detail, who eagerly communicated the companys p assion for coffee, and who had the skills and personality to deliver consistently pleasing customer service. Many of the baristas were in their 20s and worked part-time, going to college or pursuing other career activities on the side. The challenge to Sta rbucks, in s view, was how to attract, motivate and reward store employees in a manner that would make Starbucks a company that people would want to work for and that would result in higher levels of performance. Thus, wanted to cement the trust that had been building between management and the companys workforce. The companys profitability had improved to the point where could pursue another employee program he believed would have a positive long-term effect on the success of Starbucks a stock option plan for all employees.12 Schultz wanted to turn all Starbucks employees into partners, give them a chance to share in the success of the company and make clear the connection between their contributions and the companys market value.

Starbucks believed that its efforts to make the company an attractive, caring place to work were responsible for its relatively low turnover rates. Whereas most national retailers and fast-food chains had turnover rates for store employees ranging from 150 to 400 percent a year, the turnover rates for Starbucks baristas ran about 65 percent. Starbucks turnover for store managers was about 25 percent compared to about 50

percent for other chain retailers. There was evidence that Schultzs approaches, values, and principles were affecting company performance in the intended manner. One Starbucks store manager commented, "Morale is very high in my store among the staff. Ive worked for a lot of companies, but Ive never seen this level of respect. Its a company thats very true to its workers, and it shows. Our customers always comment that were happy and having fun. In fact, a lot of people ask if they can work here." The expansion process, Starbucks created zone vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores.

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Business Level-Strategy:

The business strategy of Starbucks' is identical to the corporate level strategy since the company is a single business company, focusing on only coffee-related products and retail stores.

Corporate Level-Strategy:

Starbucks corporate strategy has been to establish itself as the premier purveyor of the finest coffee in the world, while maintaining their uncompromised principles as the grow. The firm principles of the company are seen with its maintenance of a great and proven work environment for every staff member in its retail stores. It upholds diversity and promises the highest standards for its products. The company satisfies customers and gives back to the community and the environment. Also, Starbucks persists to be profitable and it is. They live by a strict, slow growth policy completely dominating a market before setting its sights further abroad. This strategy has gained them the advantage of being one of the fastest growing companies in the country.

Structure and Control Systems:

Starbucks believes that their employees are one of their important assets in that their only sustainable advantage is the quality of their workforce. They have accomplished building a national retail company by creating pride in the labor produced through an empowering corporate culture, exceptional employee benefits, and employee stock ownership programs. The culture towards employees is laid back and supportive. Employees are empowered by management to make decisions without management referral and are encouraged to think of themselves as a part of the business. Management stands behind these decisions. Starbucks has avoided a hierarchical organizational

structure and has no formal organizational chart. The company has both functional and product based divisions. There is some overlap in these divisions with some employees reporting to two division heads.

Starbucks has become a well-known company for selling the highest quality coffee beans and best tasting coffee products. It was one of the first companies to realize that the real money to be made was in beverage retailing, not just coffee beans. Starbucks created a coffee for the coffee connoisseurs and go to great lengths to acquire only the highest quality of coffee beans. They have set new precedence by outbidding the European buyers for an exclusive crop of coffee beans, which produces one of the best coffees in the world. Roasters of Starbucks coffees are extensively trained for one year. Starbucks has the distinction of being the public's educator on Expresso. They have also recently started to expand to packaged and prepared tea in response to the growing demand for this product. There are no other national coffee bar competitors in the same scale as Starbucks. Starbucks is the only competitor in the coffee bar market that has a recognized brand image. The difference between Starbucks and other coffeehouses is that they own all their stores and do not franchise. Starbucks stores operates in most metropolitan areas of the United States and also has a direct mail business to serve customers in every state. They have introduced gourmet flavored decaffeinated coffees as well as specialty flavors and whole bean coffees for the faithful

coffee drinkers. They have also added light lunch fare to their menu. Starbucks had recently expanded its emphasis internationally as well as there are opportunities waiting in possible joint ventures with other corporations to design new product associations with Starbucks' coffee.

MERITS OF POTENTIAL FUTURE STRATEGIES

Starbucks has become a great successful company in the coffee bean and beverage business and its strategy has been very effective. From the beginning, Schultz, the company's owner, has professed a strict, slow growing policy. He feels it is also important to keep all the stores company owned to improve and grow the business further. To further grow, Starbucks will need to expand further in other areas of the United States as well as internationally. Future joint ventures will expand the products into grocery and convenience store shelves through bottled beverages and ice cream flavors. Other joint ventures will allow further expansion into the brewery business, which will produce beer with Starbucks' coffee beans. Other partnerships will bring new products for Starbucks, such as jazz CDs, and tandem units with bagel bakeries. As the company expands, the culture and corporate strategy must be maintained for success. This will ensure the health of the organization throughout any future expansion. Starbucks Corporation purchases and roasts high quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italianstyle espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, and a line of premium teas, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of distribution.

Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino coffee drink and a line of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected brand in the world. Starbucks specialty operations strive to develop the Starbucks brand outside the Company-

operated retail store environment through a number of channels. Starbucks specialty operations include retail store licensing agreements, wholesale accounts, grocery channel licensing agreements and joint ventures. Starbucks specialty operations also include direct-to-consumer marketing channels. In certain licensing situations, the licensee is a joint venture in which Starbucks has an equity ownership interest. During fiscal 2000, specialty revenues accounted for approximately 16 percent of the Company's net revenues. Although the Company does not generally relinquish operational control of its retail stores in North America, in situations in which a master concessionaire or another company controls or can provide improved access to desirable retail space, the Company may consider licensing its operations. As part of these arrangements, Starbucks receives license fees and royalties and sells coffee and related products for resale in the licensed locations. Employees working in the licensed locations must follow Starbucks detailed store-operating procedures and attend training classes similar to those given to Starbucks store managers and employees.

Starbucks publishes and distributes a mail order catalog that offers its coffees, certain food items and select coffeemaking equipment and accessories, and the Company maintains a web site at with an on-line store that allows customers to browse for and purchase coffee, gifts and other items via the Internet. The Company believes that its direct-to-consumer operations support its retail store expansion into new markets and reinforce brand recognition in existing markets.

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RECOMMENDATION AND CONCLUSION

In conclusion therefore, Starbucks was on its way to becoming the Nike or Coca-Cola of the specialty coffee segment. It was the only company with anything close to national

market coverage. The company's most immediate objective was to have stores in operation and be able to become recognized and respected brand of coffee in the world. The company's efforts to greatly increase its sphere of strategic interest via its joint ventures as well as move to sell coffee in supermarkets, and the possibility of marketing fruit-juice drinks and candy under the Starbucks label represented an ongoing drive on Schultz's part to continually reinvent the way Starbucks did business. For the recommendation, Starbucks should be able to sustain the company's growth and make the business become strong global brand, Schultz believed that the company had to challenge the status quo, be innovative, take risks and alter its vision of who it was, what it did, and where it was headed. Under the owners guidance, management was posing a number of fundamental strategic questions that are to be noted and realized: What could Starbucks do to make its stores an even more elegant milieu that welcomes, rewards and give surprises to customers? What new products and new experiences could the company provide that would belong to and be associated with Starbucks? and how could Starbucks reach people who were not coffee drinkers?

The company had the best real estate team in the coffee industry and a sophisticated system that enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. The company's site location track record was so good that and had closed only 2 of the 1,500 sites it had opened. Starbucks must continue the fixed-price purchase commitments in order to secure an adequate

supply of quality green coffee beans and to limit its exposure to fluctuating coffee prices in upcoming periods. When satisfactory fixed-price commitments were not available, the company purchased coffee futures contracts to provide price protection.
Although Starbucks

enjoyed success in the past few years, there are a few obstacles looming. Since the popularity of the coffee house idea has grown, some cities wish to issue regulations on the coffeehouses due to complaints of late night patrons becoming uncontrollable. The cost of coffee beans is expected to rise in the future due to lower supply, which may tighten the margins on coffee merchants. The higher costs have cut into markets, which have heightened the competition in a crowded market. People are cutting down on caffeine but the consumption of decaffeinated coffee has not seen an increase as Starbucks is interested in gaining recognition and growth in Europe, they will not be pioneers in the European coffee market as they were in the United States. Then, what

are useful strategic

paths should Starbucks pursue to achieve its objective of becoming the most recognized and respected brand of coffee in the world?

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