At present, Starbucks is a good buy, a good stock hold, and a company poised for continued success. As with any maturing company, Starbucks is challenged to grow and change in a manner that continues to bolster its bottom line, while attracting and retaining a loyal customer base. To this end, the company clearly faces several key issues, including: 1) whether it can expand beyond its historical presence as a coffee business, without losing touch with its core retail origins; 2) whether the company can continue to create value through diversified offerings; and 3) whether competition is a significant threat to the company’s business model.
In brief, 1) the company can and will continue to expand beyond its coffee shop origins without destroying its core competencies; 2) the company has and will continue to create value through diversification including food and juice businesses; and 3) competition from fast food companies and their increased coffee specialty offerings is not a significant business threat.
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"Starbucks Corporate Diversification".
Starbucks started with company owned coffee shop locations and has largely stuck to such model, unlike many other quick service outlets. As noted in the chart below, there is a large difference in the % of stock value attributable to corporate and franchise owned outlets, as between Starbucks and McDonalds (Trefis, n.d). While the two businesses are substantially different in origin, they both compete to provide consumers with food and beverage offerings and have tremendous brand identity and presence worldwide. Starbucks has also ventured into retail offerings and has found tremendous success with its cold to-go Frappucino drinks and the Via instant coffee packets, both of which can be found at the grocery store, the convenience store, and in the chain outlets.
By electing to maintain more company owned stores than franchise outlets, Starbucks clearly foregoes some revenue from royalty and franchise fees, while incurring in many instances, more in human resource and other related costs. In doing so however, the company has maintained excellent control and management over growth, quality, and financial resources. This has bode well for Starbucks over the years and there is no obvious reason to deviate from the same. Its investments have appeared to be prudent and its forays into other distribution channels, including grocery, have been prudent and consistent with the company’s commitment to quality.
In terms of diversification, the company really appears to understand and remain committed to growth along these lines. Through the acquisition of La Boulange and Evolution Juice, Starbucks has wisely invested in long terms partners in growth (Omazic, 2014). Recognizing a need and an opportunity to provide more than just coffee in the marketplace, the company is capitalizing on strategic expansions designed to increase and enhance the offerings available to its loyal customers. By offering healthy, high quality food and drink, both in stores and eventually at retail (a la Via and Frappucino), these diversification efforts clearly help to create both perceived and actual value. In a nod to diversified tastes both domestically and abroad, the company’s commitment to its tea (Teavana) and instant coffee (Via) lines is also significant. There is also the commitment to customer experience evidenced in loyalty programs, high speed WiFi offerings in store, and an ongoing effort to offer new and different experiences through specialty roasting outlets and evening time offerings.
With respect to competitive threats, the company has always remained steadfast in its commitment to a quality coffee offering at retail. Recent overtures by brands such as McDonalds and Dunkin Donuts, in terms of specialty coffee additions to their menus, is not something that Starbucks is likely going to have to worry about, either in terms of threat to market share, or to growth rate. If anything, those mass quick service retailers should likely be more concerned about cannibalizing each other’s businesses, as opposed to what Starbucks’ position is in the market. The appeal of each outlet is clearly different, in terms of price, selection, and more. If anything, the ability of Starbucks to serve more than just the coffee drinker, through its increasingly diversified food and beverage offerings, may well serve as a threat to other competitors.
Alternatives and Recommendations
In terms of corporate diversification and strategy, Starbucks should continue to stay its chosen course. The company has clearly been through numerous business cycles since its inception and has weathered even the most challenging situations handsomely. The three primary issues: expansion beyond the coffee shop realm; value through diversification; and competitive threat are readily handled by the current path that Starbucks is taking.
First, the company has long been expanding beyond the traditional coffee shop business and has absolutely not destroyed its core business over the longer term. Without question, some of the forays have been less successful than others, however, Starbucks has readily demonstrated an innate ability to persevere and to make difficult, but prudent decision. For instance, when the business was tanking in conjunction with the financial market meltdown in 2008, the former CEO came back into the business, stripped away all the smoke and mirrors and brought the company back down its core competencies, going so far as to retrain all the baristas, and to remain committed to preserving and rewarding its human capital, irrespective of Wall Street pressures. A few years later the company was forced to make another difficult and costly decision in terminating a retail marketing agreement with Kraft Foods with respect to the sale of its product through retail channels. While the partnership had grown the company’s retail market exponentially, and the early termination ended up costing Starbucks billions, literally, the company has since proved that such move was worth it. In the long run, it was more important for Starbucks to control its retail destiny, than to continue on the existing course with Kraft Foods.
Next, there is the issue of creating corporate value through diversification. There is hardly a retail brand where this has been better addressed, than Starbucks. The company clearly recognizes a trend before most others and has not fallen short in its urgency to secure a foothold in the market with health and wellness offerings through the Evolution Juice lines, and with gourmet or upscale foods to accompany its beverages, through the acquisition of La Boulange. Starbucks is no longer simply catering to the coffee drinker, as customers literally from eight to eighty, can enjoy coffee, tea, juice, drinks, pastries, salads, sandwiches, and more. A parent no longer has to settle for McDonalds coffee, simply so the rest of the family can be appeased at the same time. What Starbucks seems to be doing well with such diversification, is to be doing so at a reasonable pace, using strategic test markets and gradual roll outs and product line introductions, versus wholesale bombardment or inundation of new products market wide. In the same way that bottled Frappucinos and Via instant coffee packets have become part of the retail grocery experience, one can anticipate the Evolution and La Boulange products making the same or similar migration, backed by the Starbucks name and reputation for being synonymous with quality.
Lastly, there is the issue of competition from other quick service restaurants such as McDonalds or Dunkin Donuts. Both of these entities are heavily franchise driven and offer a product that is clearly aimed more at the masses, in terms of accessibility, lower price points, and a historical fast food association. While each of these companies may be upping their beverage quality, efforts, and range of offerings, the true coffee aficionado will likely remain loyal to Starbucks. Moreover, there is a higher likelihood that McDonalds and Dunkin Donuts will actually compete more with one another than with Starbucks, and that any cannibalization of market share or erosion in profit bases, will occur as amongst these two companies as opposed to Starbucks (Lim, 2014).
Given the foregoing, Starbucks would be well served to consider the following alternatives and recommendations:
Stick with the company’s core competencies and start by doing coffee (and tea) right. Be the best that it can in these areas in terms of quality and service, which will clearly serve to differentiate Starbucks offerings from the others.
Resist the urge to increase franchise stores in an effort to reap fees and royalties and shirk payroll and other responsibilities, and instead, focus upon the benefits derived from retaining all of the income within the company itself. Company owned units also allow for more quality control, and the freedom to experiment with what might work in one market versus another. Closer control also creates an environment where growth can be better paced and new market offerings controlled at an appropriate pace for the given time, as opposed to rolling out wholesale changes at once, which is what has to happen under the large franchise based model.
Continue to make difficult decisions, even where they may represent financial risk or expend more political or consumer loyalty capital than may be desired at the time. It is those hard decisions (at the time) that typically reap the greatest rewards over the longer term.
In terms of diversification, Starbucks must remain committed to spotting and capitalizing upon trends before others in the marketplace. The cold pressed juice strategy must be pursued aggressively, with Evolution being positioned as an alternative or an add on to the existing coffee offering in the coffee shops, and the preeminent juice offering at retail, synonymous with the Starbucks quality standard upheld through its coffees. As sugar consumption and the importance of alkalinity for health, become increasingly mainstream notions, the juice offering will matter more and more.
La Boulange and the other food offerings being explored by the company, are critical to a successful diversification strategy. Providing the potential for a meal experience in the in-store units is critical, especially where the offerings are upscale, unique, healthy, and always quality driven. Maintaining such standards and the affiliation with the Starbucks name will also create demand and brand identity in the competitive “grab and go” segment in retail outlets such as grocery stores.
The efforts at expanding the Teavana and Via lines will also be a key way in which the company can diversify up and away from the competition. These products give Starbucks an opportunity to move up and away from the ‘fast food’ market and to cross over into retail channels as well as international markets, where preferences may run even more strongly towards tea, and/or the conveniences of an instant coffee product.
The company should also remain observant of the actions taken by competitors such as Dunkin Donuts or McDonalds in the marketplace, but should focus more of its investments in diversification and expansion, rather than fighting these marginal threats through marketing or product line expenditures aimed simply at squelching competition. At the retail level, McDonalds and Dunkin Donuts products are going to rely on a lower price point and perhaps more appeal to a lower common denominator. Starbucks would be well suited to maintain its quality and specialty image, while still remaining accessible to all through its stores and retail offerings.
From a financial perspective, the company would be well served to continue on the path that it has in the past. Steady growth, attention to market threats, paced diversification, and the flexibility to undergo some financial stretching or stress if and when the market demands the same.
Starbucks future success really turns on its willingness to continue on the existing path, staying creative and innovative along the way. The stock has always been a decent value, and a reasonable long term hold for the prudent investor. This is not a company that has demonstrated any wild swings in service, offerings or quality, nor has it veered recklessly away from its core competencies. The changing world has required the company to stay flexible, and to diversify wisely, and that in and of itself, has been among its many hallmarks of success.
- Barney, Jay B., Hesterly, William S. Strategic Management and Competitive Advantage, Concepts and Cases. 2015, 5th ed. New York, NY: Pearson.
- Lim, Paul J. (July 25, 2014). Dunkin’, Mickey D’s, or Starbucks? The Surprising Winner of the Coffee War. Time.com. Retrieved October 7, 2016 from: http://time.com/money/3028578/dunkin-donuts-mcdonalds-starbucks-coffee-wars/
- Omazic, Tamara (May 2014). Siren Song. OSR.com. Retrieved October 6, 2016 from:
https://www.qsrmagazine.com/competition/siren-song?page=2 - Starbucks Overview (n.d). Trefis.com. Retrieved October 6, 2016 from: https://www.trefis.com/company.jsp?hm=SBUX.trefis&from=pdf#
