Elena Venturi matr.

103777
Enrico Maganzani matr. 97188

Starbucks Corp.
INTRODUCTION
The research project aims at illustrating an overview of the companys performance.
It begins from the foundation of the firm and then it focuses on the economic condition, with a
focus on the fundamental strategies. The primary objective of the study is to provide evidences
of Starbucks Corp. competitive advantage in the coffeeshop industry.
The project is based on official data gathered from Starbucks Financial report from 2005 to 2015
and from its main competitors report. However we based our analysis also using secondary
datas and graphs found on reliable websites. Sometimes it was necessary to manually gather
raw datas and elaborate them in the Microsoft office Excel tool, in order to gather information
needed for the discussion.

1. Company overall profile

1.1. Company history
Starbucks is an American coffeehouse chain which started with a small shop in Seattle in 1971 and
now operates in 22,519 locations worldwide.
The history of this successful company can be devided in 4 steps:

1. 1971-1987: The background

The first Starbucks opened in Seattles Pike Place Market in 1971 under the name of Starbucks
Coffee, Tea, and Spice, by three partners named Jerry Baldwin, Zev Siegal and Gordon Bowker.
Their main purpose was to sell high quality coffee beans and equipment .

Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first
mate in Herman Melville's Moby Dick, and because they thought the name evoked the seafaring

tradition of the early coffee traders. The new company's logo, designed by an artist friend, was a
two-tailed mermaid encircled by the store's name1.
The store in Seattle did not offer fresh-brewed coffee by the cup, but samples were sometimes
available for tasting.
The store was an immediate success, with sales exceeding expectations, partly because of a
favorable article in the Seattle Times.
A second Starbucks store was opened in 1972.
By the early 1980s, the company had four Starbucks stores in the Seattle area.
In 1981, Howard Schultz, vice president and general manager for a Swedish maker of stylish
kitchen equipment, Hammarplast, the filter supplier of Starbucks, paid a visit to No.1912 Pike
Place to watch this booming small business in action.
During this visit, Schultz was impressed by their knowledge of coffee, their commitment to
providing high-quality products, and their passion for educating customers about the value of
dark-roasted coffees.
Schultz was so struck from Starbucks that he decided to join the business because he saw a big
potential in that store and he had the vision for opening Starbucks stores across the United States
and Canada.
In September 1982, Howard Schultz took on his new responsibilities as director of retail operations
and marketing at Starbucks.
Schultz's biggest idea for Starbucks' future came during the spring of 1983 when the company sent
him to Milan, Italy, to attend an international housewares show.
In this occasion, Schultz had the opportunity to try several italian espresso bars, especially in
Piazza Duomo. Here he noticed that the atmosphere was comfortable and familiar, the barista
was smiling and friendly, there were chairs and tables where people could stop for a while tasting
their beverages and have a chat with friends. These bars were a quasi-public meeting places for
Milanese society.
This experience gave him the inspiration: Starbucks, he decided, needed to serve fresh-brewed
coffee, espresso, and cappuccino in its stores (in addition to beans and coffee equipment).
Going to Starbucks should be an experience, a special treat; the stores should be a place to meet
friends and visit. Re-creating the Italian coffee-bar culture in the United States could be Starbucks'
differentiating factor.
On Schultz's return from Italy, he shared his revelation and ideas for modifying the format of
Starbucks stores with Baldwin and Bowker bunt he encountered strong resistance.
They experimented an espresso bar corner in one of their stores and it was a huge success.
Despite the positive results, Baldwin was still reclutant to go forward with introducing beverages
in other Starbucks stores because he didnt want to enter in the restaurant business.
So Schultz left Starbucks in late 1985.
The next year he opened a coffee bar of his own in Seattle, named Il Giornale after one of Milan
newspapers, offering brewed coffee and espresso beverages in an Italian-style atmosphere with a
speedy service.
2. 1987-1992: Starbucks Corporation
In 1987 Jerry Baldwin and Gordon Bowker decided to sell the whole Starbucks operation in
Seattle: the stores, the roasting plant, and the Starbucks name.

http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html

Schultz decided to acquire it, so in 1987 he became Starbucks' president and CEO, he changed the
name in Starbucks Corporation and he started pursuing his vision of global expansion.
In the next several months, a number of changes were instituted. To symbolize the merging of the
two companies and the respective cultures, a new green logo was created: STARBUCKS COFFEE.
The result was a new type of store, a cross between a retail coffee-bean store and an espresso
bar/caf, that became Starbucks typical format in the 1990s2.
Simultaneously Schultz opened new stores in Chicago and Vancouver, the first one in Canada.
By 1989, 55 stores were operating.
In early 1990, the senior executive team at Starbucks draft a vision statement (Establish Starbucks
as the premier purveyor of the finest coffee in the world while maintaining our uncompromising
principles while we grow3).
3. 1992-2011: A public company
The company went public in 1992, the same year it opened its first stores in San Francisco, San
Diego, Orange County, and Denver. Its stores totaled 165 by year's end.
In 1993 and 1995 Starbucks opens two more roasting plant in Kent and in York in order to supply
the grown market of that years.
These early nineties are years dedicated to partnerships, joint ventures and acquisitions with the
purpose of the portfolios diversification, entering new markets and new counties.
In 1994 PepsiCo and Starbucks entered into a joint venture arrangement to create new coffeerelated products for mass distribution through Pepsi channels.
In 1995 Starbucks begins serving Frappuccino blended beverages.
Firstly it was born to respond to the high demand of an iced blended coffee drink during the hot
summers in California, then, after the acquiring of Starbucks of The Coffee Connection in Boston,
Starbucks launched the new product across all of its stores in the United States and Canada using
the name of a similar product offered by the Coffee Connection: Frappuccino.
Finally in 1996, after months of meeting and experimentation, through the joint venture with
PepsiCo, Starbucks decided to launch a shelf-stable version of Frappuccino in bottle.
Meanwhile Starbucks continued expanding in North America and in 1996 the company opened the
first store overseas in Japan and in Singapore. The Philippines followed in 1997.
Starbucks in 1998 entered into a long-term licensing agreement with Kraft Foods, Inc. for the
marketing and distribution of Starbucks whole bean and ground coffee into grocery, warehouse
club, and mass merchandise stores.
In the same year Starbucks launches its website and opens stores in England, Malaysia, New
Zealand, Taiwan and Thailand. At that point the total number of stores was 1886.
In 1999 Starbucks acquires Tazo Tea and Hear Music, a San Franciscobased music company.
In the same year the company opens stores in: China, Kuwait, Lebanon and South Korea.
In 2000 Starbucks expands in Australia, Bahrain, Hong Kong, Qatar, Saudi Arabia and United Arab
Emirates.
In 2001 it introduces the Starbucks Card and opens stores in Austria, Scotland, Switzerland and
Wales.
In 2002 Starbucks launches Wi-Fi in stores.
The expansion continues in Germany, Greece, Indonesia, Mexico, Oman, Puerto Rico and Spain.
The total number of stores in that year is 5,886.

2
3

http://www.mhhe.com/business/management/thompson/11e/case/starbucks-1.html
http://panmore.com/starbucks-coffee-vision-statement-mission-statement

In 2003 the company acquires Seattle Coffee Company, which includes Seattles Best Coffee and
Torrefazione Italia coffee.
New roasting facilities are opened in Carson Valley, Nev., and Amsterdam, Netherlands and new
stores are opened in Chile, Cyprus, Peru and Turkey.
In the next years the expansion continues both in geographical terms and in diversification of the
portfolio with acquisitions and new businesses.
Then in 2008 the company adopts the Mission Statement To inspire and nurture the human spirit
one person, one cup and one neighborhood at a time and it launches My Starbucks Idea,
Starbucks first online community.
The company also joins Twitter and debuts Starbucks Facebook page.
In 2009 Starbucks launches Starbucks Card mobile payment and in 2010 the company expands
digital offerings for customers with free unlimited Wi-Fi.

Source: http://www.stephabegg.com/home/projects/cartograms

4. 2011-Today: 40 years of Starbucks

In 2011 Starbucks celebrates 40 years anniversary and the company wanted to begin the next
chapter in its history so they changed the logo once more to mark this evolution: they eliminated
the words Starbucks and Coffee as they are now in iconic brand.
In 2011 Starbucks acquires Evolution Fresh, a company producing fruit juices, fruit smoothies,
gourmet soups, salads and signature bowls.
In 2012 the company introduces Starbucks Blonde Roast, a light roast coffee and acquires La
Boulange bakery brand to elevate core food offerings4.
4

http://www.starbucks.com/about-us/company-information/starbucks-company-timeline

Then in the same year the company acquires Teavana to transform the tea category.
In 2014 the company opens first Starbucks Reserve Roastery and Tasting Room in Seattle and
launches Starbucks Mobile Order & Pay and enhances its own iPhone app.
In 2015 Starbucks launches Cold Brew iced coffee and Evolution Fresh handcrafted smoothies.
The total number of stores, updated to June 28, 2015 is 22,519 5.

Source: www.cargocollective.com/hricht/Mapographic

1.2. Corporate governance and organizational structure

Starbucks Coffee Company is the largest coffeehouse chain in the world. The success of the firm is
partly due to the suitability of its organizational structure. The organizational structure of a
company influences management and leadership, communication, change, and other variables
very important to business success. Starbucks has an organizational structure that matches its
business needs6.
Overall, the structure of the company can be described as a pyramid.

5
6

http://www.starbucks.com/about-us/company-information/starbucks-company-timeline
http://panmore.com/starbucks-coffee-company-organizational-structure

Source: www.slideshare.net/mobile/ReillyWB/starbucks-strategy-12102942

The CEO - Howard Schultz-, the board of directors and the upper management oversee the
company from its headquarters in Seattle.
Regional managers oversee regional groupings of stores (a span of control of 8-10 stores for each
regional manager) and they report directly to the Starbucks Corporation.
At each store, a store manager acts as a chief. Under this store manager are a collection of shift
supervisor who act as managers on duty when the store manager is out.
Below the shift supervisor are the rest of the employees, referred to as baristas.
Employees specialize in certain tasks but often they work together in cross-functional teams.
Overall we can say that Starbucks has a decentralized authority because middle and lower
managers have decision-making responsibility. This flexibility is necessary for a firm like Starbucks
with such an expansion all over the world.
We can say that Starbucks is an organic organization where managers have autonomy to make
personnel decisions (like hiring or appraising employees), the span of control is wide, crossfunctional teams are often used and verbal communication is the most important form of
coordination of tasks.
Going more in detail, we can say Starbucks combines division and function in a matrix structure
which is an organizational form in which there are multiple lines of authority and some
individuals report to at least two managers. 7
The main features of Starbucks organizational structure are:
Functional Structure. The functional structure is a design that groups people into separate
functions or departments because they share common skills and expertise because they make use
of the same resources (Jones, 2013).
For instance, the company has an HR department, a finance department and a sales and marketing
department. These departments are located at the top levels of Starbucks organizational
structure, at the corporate headquarters and they can implement policies applicable to all
Starbucks coffee houses .
The functional structure, with the CEO at the top, facilitates top-down monitoring and control8.

7
8

http://itnlstrategicmngt.blogspot.it/2012/04/starbucks-structure.html
http://panmore.com/starbucks-coffee-company-organizational-structure

Geographic Divisions. Since Starbucks has locations all over the world, the company needs a
structure where activities are grouped by areas in order to respond to the requirements of the
different locations and in order to keep the company running smoothly and connected to the
leaders vision and strategic direction as Starbucks continue its global expansion and pursue
innovative strategic initiatives.
At present, the company has three regional divisions for the global market:
China and Asia-Pacific (all Asia Pacific markets and China),
Americas (United States, Canada, Mexico, and Latin America),
EMEA (Europe, Middle East, Russia and Africa).
In the U.S. market, Starbucks organizational structure involves further geographic divisions:
Western,
Northwest,
Southeast,
Northeast.
Each geographic division has a senior vice president.
So, every manager reports to two superiors: the geographic head and the functional head.
Each division manager is given a high level of freedom in adjusting strategies and policies to suit
specific market requirement and characteristics9.
Product-based Divisions. Starbucks also uses product-based divisions in its organizational
structure. These divisions are split according to the different product lines.
Coffee: 30+ blends and single-origin premium Arabica coffees
Handcrafted Beverages: fresh-brewed coffee, hot and cold beverages, Frappuccino,
smoothies, and Tazo teas
Merchandise: brewing equipment, mugs and accessories, packaged goods, music, and
books
Fresh Food: baked pastries, sandwiches, salads, oatmeal, yogurt parfaits, and fruit cups
Consumer Products: coffee whole bean and ground, instant coffee, and ice cream
This organization enables focus on certain product lines, allowing Starbucks to effectively develop
and innovate its products with support from its organizational structure.

Teams. Teams are used in different parts of Starbucks organizational structure but they are more
usual at the lowest levels of the organization, at the Starbucks coffee houses.
In each shop, the firm has cross-functional teams which collaborate providing a good service to
customers.
Teams in fact, bring effectiveness and efficiency to the service and they boost cooperation and
communication within the company10.

http://panmore.com/starbucks-coffee-company-organizational-structure
http://panmore.com/starbucks-coffee-company-organizational-structure

10

1.3 Companys portfolio (products, services, brands..)

The company purchases and produces, in minor quantity, and
roast high-quality coffees that it sells, along with coffee and tea
beverages and a variety of fresh foods , mainly through companyoperated stores. The firm also license its trademarks in order to
let stores and groceries to use Starbucksproducts.
Starbucks Corporations main brand (and logo) is Starbucks
Coffee, the company operates through Starbucks coffeehouses,
restaurants and grocerys stores, where packaged goods are
offered to customers. Sometimes the same location is used at the
same time as cafeteria and as grocery store.

Products
The products offered by the company widen from handcrafted beverages to consumer packaged
goods offered in starbucks and local groceries.
Starbucks has different product Lines:

11

Coffee, which ranges from packaged coffee beans (more than 30 blends) 11 to different
types of beverages in which the main ingredient is coffee, such as: Latte (in U.s it is Milk
with Coffee), Iced coffee, Frappuccino and Espresso.

http://globalassets.starbucks.com/assets/233b9b746b384f8ca57882614f6cebdb.pdf

10

Tumbler, a flat-bottomed beverage container having no handle. Starbucks produces and

offers various typologies of tumblers, also customer-personalized ones.
Food, the company began at the end of the 20th century to offer in its stores a wide
variety of food types from warm foods like muffin, croissants and sandwiches to cold food
such as Salads, ice creams, yoghurts, parfaits and fruit cups.
Coffee Equipment, from the coffee machines to the single serve coffee (coffe pods for the
machines).12
Mugs and accessories.
Music, Books and Gifts merchandise.

There are additional products offered by Starbucks Corporation, and each of the following will be
explained under the subchapter Brands13. Briefly, the mentioned products are:

12
13

Teavana and Tazo s Teas.

Evolution fresh s Juices and Smoothies.
Seattles best Coffees packaged coffee beans and coffee beverages.
La Boulange s French pastries and breads.
Ethos water s bottles of mineral water.

http://xiaomengmar100.blogspot.it/2013/11/chapter-10-product-concepts.html
http://www.starbucks.com/careers/brands

11

Services
Coffeeshops Atmosphere
As far as stores are concerned, it is important to note that Starbucks offers a unique atmosphere
in each of its caf. The major elements found in stores are:

The design of chairs, tables and sofas to make customers confortable;

Free electricity to charge consumers laptopos or smartphones;
Free Wi-Fi access through AT&T;
Some Shops offer also Book Shelves or gaming area to entertain and to encourage;
customers to spend some time inside.14

Starbucks main aim in offering such in-store services is to create a Third Place , that is the
additional place where you will spend most of your time (at home, at work and at Starbucks). So it
is a priority to let the consumer feel at ease in its shops.15

14

http://www.streetdirectory.com/food_editorials/beverages/coffee/what_makes_the_starbucks_coffee_experience
_special.html
15
http://www.fastcompany.com/887990/starbucks-third-place-and-creating-ultimate-customer-experience

12

Delivery Service
In the second half of 2015 Starbucks began the trial of offering a delivery service only in New York
City, within the empire State Building, and in Seattle.
In the first case the company will have employees from the Starbucks located in the building to
deliver beverages and food to customers who work there. Instead in Seattle, the company will use
vans, cars, and in some cases bycicles to deliver beverages and food to certain areas of the city.
Customers can use the Starbucks app to follow the status of their drink. In order to use the app,
customers have to be a member of the companys loyalty program. 16

Mobile App
The Starbucks company created and
implemented an App available for IoS and
Android operating-systems that permits to
the owner of smartphones to place their
order and pay for it on their phones, then
just arrive at the store to pick up their
coffee when the order is ready.17

16
17

http://time.com/3749438/this-is-where-starbucks-will-test-its-delivery-service/
http://fortune.com/2015/09/22/starbucks-order-pay-app/

13

Foodservice
Starbucks has an important role in the foodservice market. Its menu and high quality beverages
and food are distributed to Hotels, Airlines and Fast-Foods, but the Branded solution as it is
called by Starbucks, is present also as cafeterias in Colleges and in Private and National Healthcare
locations.

BRANDS
The Starbucks Corporation owns several Brands included the Starbucks one which was described
in the previous subchapters. In the following list the Brand La Boulange will also appear which
was recently closed, but it is important to describe it for the general analysis of the Starbucks firm.

Teavana
Starbucks Corporation acquired Teavana in 2012 for around 620 million $. 18
Teavana started its operations in 1997 in Atlanta (Georgia) and it offers a very large variety of teas
and herbal infusions such as: white, green, flavored & scented green, "blooming" white, black,
flavored & scented black, oolong, and pu-erh teas along with rooibos, herbal, and Yerba
Mat infusions.19 Teavana retail stores are around 350 and operate only in U.S.

18

http://www.huffingtonpost.com/2012/11/15/starbucks-buys-teavana-holdings_n_2136048.html
http://news.starbucks.com/news/teavana-oprah-chai-tea-debuts-at-starbucks-and-teavana-stores-in-the-u.s.aores-in-the-u.s.-a
19

14

Tazo
Tazo, the teas productor company, was purchased
by Starbucks in 1999.20
The company produces tea and herbals tea,
similarly to teavana, but in North America.
It uses a New Age marketing style and product
labeling.

Evolution fresh
On november 10, 2011 starbucks acquired Evolution Fresh.
The company, founded in san Bernardino in 1992, produces a line of premium cold-pressed juices
and invented in 2010 a new type of pasteurization method, known as HPP or high pressure
processing.
This new method permits the company to preserve for a longer period of time the juices and it
avoids the exposure of them to heat that some believe could damage the nutrional value of the
products.21

20

http://www.nytimes.com/1999/01/13/business/company-news-starbucks-acquires-tazo-a-tea-retailer-inoregon.html
21
http://www.bevnet.com/news/headlines/2011/at-expo-west-evolution-fresh-shows-its-under-pressure/

15

Seattle best coffee

Seattle best Coffee was founded in 1970
and began as an ice cream and coffee
retailer.22
In 2003 Starbucks purchased the company
and began to address to the working
class and the aim is to appear cheaper
than the more expensive Starbucks.
The menu is restricted to Hancrafted
Beverages based on coffee and milk shakes
and on Ice creams.

La Boulange
La Boulange was a bakery chain company, which produced fine french pastries.
Starbucks acquired the company in 2012 for about $100 million and at the time it seemed that this
steps aim was to directly enter thorugh La Boulange stores in the bakery market and to supply
the Starbucks stores with pastries.23
After 3 years, precisely nearly the end of 2015, the Starbucks Corporation decided to close La
Boulange Company and the true objective appeared to be, from the beginning, the acquisition of
the know-how and fine recipes needed to internally produce baked products.

Ethos Water
Starbucks created its own water brand named Ethos Water in 2001 with the
fundamental idea to help people in South Africa to access clean water. 24
The bottling plant that Starbucks uses for its Ethos customers in the western United
States is located in Merced, California.
The company donates 5 cents from every $1.95 bottle of Ethos to help people
worldwide get clean drinking water.25
22

http://www.seattlesbest.com/about-us
http://uk.businessinsider.com/why-starbucks-closed-la-boulange-bakeries-2015-6?r=US&IR=T
24
http://money.cnn.com/2007/10/31/smbusiness/Ethos.fsb/index.htm
25
http://uk.businessinsider.com/starbucks-ethos-bottled-water-from-california-2015-5?r=US&IR=T
23

16

According to Starbucks corporation website, through the Starbucks Foundation, Starbucks had
granted more than $12.3 million, to help support water, sanitation and hygiene education
programs around the world.26

1.4 International activities: Sales

Starbucks Corporation operates as a roaster, marketer, and retailer of specialty coffee in 68
countries worldwide, as explained in the previous subchapter.
In order to analyze the worldwide sales of Starbucks Corporation, we have gathered data from the
latest Financial year 2015 annual report of Starbucks Corporation and through Microsoft office
Excel we elaborated the information and reorganized them into graphs. 27
The following graphs show data that appear in the report reorganized in 5 market segments.
The companys revenues could be divided in the following segments:

Americas, which is inclusive of the U.S, Canada, and Latin America;

China/Asia Pacific (CAP);
Europe, Middle East, and Africa (EMEA);
Channel Development; includes products sold worldwide such as roasted whole bean and
ground coffees, premium Tazo teas, Starbucks- and Tazo-branded single-serve products
sold by non- starbucks owned grocery stores and convenience stores.
All other segments, including Teavana, Seattle's Best Coffee and evolution fresh sales.

Starbucks
Net Total revenues FY 2015
3%
6%

9%
America

13%

Cap (China, Asia Pacific)

69%

EMEA
Channel Development
All Other Segments

Fig 1.1

26

http://www.starbucks.com/responsibility/community/ethos-water-fund
http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MzIwNTI0fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=635893441270363710
27

17

The graph from Fig. 1.1 shows that the major part of the revenues comes from sales that take
place in the America segment.
Each revenue segment could be divided in :

Company-Operated Stores revenues

Licensed Store Revenues
CPG, Foodservice and Other Revenues: CPG, foodservice and other revenues primarily
include sales of packaged coffee and tea as well as a variety of ready-to-drink beverages
and coffe capsules for the machines and tea products to grocery and specialty retail stores
and revenues from the national foodservice.

Data in millions.
REVENUES

America

Cap

EMEA

Company-operated
stores

$
11.925,60

$
2.127,30

$
911,20

$
233,20

Licensed stores

$ 1.334,40

$
264,40

$
257,20

$
5,90

$
4,20

$
48,30

$
1.730,90

$
286,70

$
2.395,90

$
1.216,70

$
1.730,90

$
525,80

CPG, Foodservice and

$ 33,40
other
$
13.293,40

Net total

Chan. Develop.

Other Segments

Grand Total

$
19.162,70

Fig. 1.2

From Fig. 1.2 and 1.3 it is possible to note the predominant use of company operated stores over
the use of Licensed ones.

Starbucks revenue segmentation by Market

$14.000,00
$12.000,00
$10.000,00
$8.000,00

CPG, Foodservice and

other

$6.000,00

$4.000,00

Licensed stores

$2.000,00
$-

Company-operated
stores

Fig. 1.3

18

During the study we examined the growth trend of revenue in each segment and an interesting
point is that Starbucks is greatly increasing the growth of number of stores in the CAP segment, as
illustrated in the Fig. 1.5.
Moreover the revenue earned in the Asia segment is increasing over time, Fig 1.4.

Fig. 1.4

Fig 1.5
19

2.Corporate Strategy
Referring to Grants definition in his Contemporary Strategy Analysis volume (p.19 , 7th edition):
Corporate strategy defines the scope of the firm in terms of the industries and markets in which it
competes. Moreover Corporate strategy decisions include choice over in diversification, vertical
integration, acquisitions ,new ventures and horizontal integration; and the allocation of resources
between the different businesses of the firm. 28
In order to continue the analysis about the corporate strategy of Starbucks Corporation it is
important to underline the Long-term goal, that is the Mission of the firm : To inspire and nurture
the human spirit one person, one cup and one neighborhood at a time. 29
The Mission itself reveals that Starbucks is focusing its attention to the human body and to its
spirit and to do so the firms aim is to create high quality, healthy and delicious products.
Starbucks operates in different businesses grouped in the Coffeshop industry30, but the most
important business its the coffee one; in the following study the operations will be observed in
the light of the core business, but other operations will be also briefly explained.
The aim of this Chapter is to examine the way in which Starbucks is growing: through the accurate
analysis of different directions of growth strategy that are Vertical development, Horizontal
development and Diversification.
2.1 Vertical Development
One type of growth strategy for a company is to internalize vertically-linked activities of a specific
product filiere, also called vertical integration.
In this field Starbucks could be seen as one of the most vertically integrated company in the world.
In fact it internally possesses almost all the necessary activities in the production of coffee, from
the growing of the beans to the delivery in retail stores and every step enchance the competitive
advantage of Starbucks adding value compared to the choice of outsourcing the activities, because
the firms more effective in managing the operations than the market.
Starbucks through Merger and Acquisition operations and a single Joint Venture alliance is
acquiring upstream vertical activities for the production and toasting of coffee beans.
The Original activities in the Starbucks coffee filiere to its retailer shops, which offers a wide
variety of products, are:

28

Grant, Contemporary Strategy Analysis 7th edition, page 19.

http://www.starbucks.com/about-us/company-information/mission-statement
30
https://biz.yahoo.com/p/713conameu.html
29

20

Pastries Supply

Soft drink
Supply

Water supply

Teas Supply

Merchandising
Supply

Transportations

Coffee Beans
Production
(Farms)

Roasting and
Blending
Activities

Packaging of
roasted
coffee beans

Distribution

Sales in
Retail Stores
and
Foodservice
operations

The activities of Transportations , Packaging and Distribution are outsourced by Starbucks,

because they seem to be considered not critical in the whole process of creation of a high
quality coffee beans, beverages and food.
Examples of vertical Integration in Starbucks:
Roasting and Blending activities
The fundamental activities of roasting and blending coffee beans is fully owned by Starbucks
Corporation. It has, in total, 4 roasting plants in U.S.A, more in specific in in Washington,
Pennsylvania, Nevada and South Carolina and 1 facility in the Netherlands, in Europe.31
The mentioned backward-integrated activities are a key asset for Starbucks and it is confirmed by
the acquisition in 2003 of shops and roasting plants of Torrefazione italia, another caf and
roasting company. 32
The advantage of having such a process under secure control is to provide continously product

innovation (different blending and roasting procedures and experimentations) and to mantain
important know-how and secret recipes inside the organization.
La Boulanges pastries
Another example of backward integration is the supply of pastries provided by the acquisition of
La boulange stores and bakeries. It is a case of partial vertical integration, the supply of food
gained through the production in the bakeries are not enough to satisfy the whole need of pastries

31
32

http://www.foodprocessing-technology.com/projects/starbucks-roasting/
http://www.seattlepi.com/business/article/Starbucks-to-buy-Seattle-s-Best-Coffee-1112367.php

21

of the Starbucks stores and in this case contracts with external suppliers are needed in order tyo
mantain an adequate inflow of goods.
In 2015 Starbucks closed la Boulange stores and eliminated the brand, but the goal was to acquire
the necessary know-how, recipes and bakeries in order to produce internally the pastries under
the name of Starbucks Coffee. Finally it seems that Starbucks operation was succesfull in this
regard.
Tazo and Teavana teas
Similarly to the case of La Boulange, Starbucks acquired Tazo and teavana Companies in order to
produce internally tea infusions and supply its stores. In this particular case the production of
infusions is enough to mantain Starbucks stores fully supplied all over the world and it is possible
to refer to a full vertical integration as far as the supply of teas is regarded.33 Starbucks
Corportation, through the acquisitions, is trying also to succesfully enter the tea market.
Ethos Water
The supply of Mineral Water since 2005 is partially supplied by the internal construction of a plant in
California.

Evolution Freshs juices

The acquisition of Evolution Fresh and the further creation of plants and stores are one of the
biggest investment for Starbucks. The premium juices created by the acquired company are
premium quality and the control of the value chain and supply of juices is becoming a key asset for
Starbucks. Juices customers are increasing and the will to consume top quality beverages is
rising.34
It is another industry that Starbucks could enter and in a short period of time become one of the
leader in U.S.A.
Coffee beans farm
The acquisition of a Coffee Beans farm in Costa Rica is an example of partial vertical integration of
special coffee beans. The company will continue to outsource, at least in USA and EMEA region,
coffee beans for most of its stores, but the acquisition of the farm is intended for research and
development of new coffee beans with different flavours. The internal control of the farm may
lead to better working condition for the farmers in Costa rica35 and also, with the help of
researchers, find a cure to a particular disease that is affecting coffee beans plants.36
The key assets acquired through this acquisition are the internal creation of special arabica coffee
beans, in order to mantain hidden the research, and also to be able to cure a particular disease

33

https://news.starbucks.com/news/starbucks-announces-agreement-to-acquire-teavana-to-globally-transform-teahttp://fortune.com/2016/03/11/starbucks-new-juices-evolution/
35
http://www.seattletimes.com/business/starbucks-changing-the-way-costa-rican-farmers-grow-coffee-8212-andlive/
36
http://www.bloomberg.com/news/articles/2014-02-13/to-stop-the-coffee-apocalypse-starbucks-buys-a-farm
34

22

that could led to an increase of coffe beans price if the bad fungus is not treated in a short
period of time.
Examples of Quasi Vertical integration
Starbucks created a join venture in 2011 along with Ai Ni, a chinese
company, for the purchasing of coffee beans in Yuuman, a china
region.
The acquisition is the solution to the growth of the chinese market
demand for coffee and the increasing price of coffee beans in the CAP
(China-asia pacific) region. 37
As seen in Chapter 1.4, Starbucks revenues comes mainly through
company owned Retail stores, and the creation of new shops all over
the world in an incredible pace is one of the most important point of
the starbucks way to do business. As it was observed, the opening of
new stores could be intended as a way to forward vertical integrate
the company.

2.2 Horizontal Integration

Starbucks stores are positioned to be seen as a middle-upper class shops. The way in which
Starbucks promotes the premium quality of its goods, the central location of the stores and the
atmosphere in them are remarkable, but costly.
In order to attract more customers for the same business area, the selling of coffee and coffee
based beverages, Starbucks Corporation decided in 2012 to acquire Seattle Best Company, a chain
of cafs in USA that offer coffee and related products at a lower price but for good quality.
The purchase of such a chain was made to exploit scope economies:

Torrefazione Italia is the same blender and roaster of both Starbucks Coffee stores and
Seattle Best Company stores.

The logistics behind the stores is very similar and utilizes the same know how.

In conclusion the startegy of the acquisition was finalized to attract more customers for the same
business area in which Starbucks stores operate.
2.3 Diversification
The main aim to diverify the area of business is to reduce the risk associated to failure of the main
business and it is important when the main industry begin to show signs of maturity. Of course the
coffee and snack industry has an semi-infinite expansive life cycle38 and in the Starbucks case the
importance to expand to other businesses is a way to increase profits, in previously analyzed
industry, where competition is probably not very high.
37
38

http://www.seattletimes.com/business/starbucks-enters-joint-venture-in-china/
http://www.ibisworld.com/industry/default.aspx?indid=1973

23

In fact, Starbucks Corporation acquired evolution Fresh, Tazo and Teavana companies, not only to
produce and distribute internally the products that the acquired firms generate, but it seemed
that Starbucks was also planning to open more stores labelled Evolution Fresh and Teavana (Tazo
goods will be included in the Teavana stores). 39
To support the thesis described above just at the beginning of 2016, Evolution Fresh stores, for the
first time, were opened in Canada and perspectives are really positive.40
The Ready to Drink tea market is the most profitable one in U.S, and in recent years, Teavana
stores aligned with American preferences in order to offer a great variety of great quality ready to
drink iced tea beverages instead of offering only specialty hot teas infusions. According to PR
Newswire Starbucks is one of the global leading company in the Tea market, which increased last
year about of 5%. The only downside of this increase is the emerging possibility that some coffee consumers could change its preference and begin to drink tea. But Starbucks thinks that coffee
customers will continue to drink coffee and there is little chance to change the attitude of its own
consumers. 41

42

On a different level Starbucks Corporation is offering in its stores Starbucks Merchandising of

different variety. From Tumbler to Hats and umbrellas43 , every gadget report the logo of the
company and it is a symbol of loyalty to the coffee Brand. It is a a case of related diversification,
where a variety of different goods are sold exploiting the same valuable network, in this case the
well-known brand used in a different business.

39

http://www.forbes.com/sites/greatspeculations/2013/09/05/starbucks-has-big-plans-to-diversify-beyondcoffee/#55f5b5a031fd
40

http://www.streetinsider.com/Corporate+News/Starbucks+Coffee+(SBUX)+Brings+Evolution+Fresh+Juices+to+Canada
/11190535.html
41
http://www.prnewswire.com/news-releases/global-rtd-tea-and-coffee-market-2015-2019---starbucks-costa-coffeeand-barista-are-expanding-in-the-emerging-economies-300207223.html
42
http://marketrealist.com/2015/06/growing-demand-tea-us/
43
http://starbucksmelody.com/2015/08/08/the-starbucks-umbrella/

24

3. Business Analysis and Competitive positioning

3.1 Industry Analysis (Concentration rate, Market penetration rate)
In the following Chapter, the project will present the industry within Starbucks operates, that is
the coffeshop industry.
The study ,initially, will present the Market shares and number of stores of the main firms
operating in the sector in the U.S.A, and then in UK, as an indicator of International trends outside
the main operating segment of Starbucks (North america). Data acquired are complete as far as
U.S is regarded, but there are some lack of data regarding worldwide sales or Europe sales, so the
study will focus on the situation of the industry in the U.S, where the data gathered are complete.
The market shares that will be presented are calculated in excel on the basis of information
gathered about total turnover of firms in 2015 .44 45 46
Company in U.S.

Market share in 2015 in U.S.

Number of Stores in U.S.

Starbucks Corp.

42,40%

12500

Dunkin Donuts

25,50%

7000

McCaf

15,50%

11000

Other (10 firms)

16,60%

Tab 4.1

In the data gathered in the Table 4.1 it is possible to note that the Concentration Ratio Index of
the main 3 firms in U.S. is CR3: 83,40% . And moreover the Herfindahl index, if we make an
assumption of 10 other firm each with 1,66% market share for each is equal to: 0,271582.
According to the theory if the Herfindahl index is greater than 0,18 The market is highly
concentrated, so in other words the U.S industry of coffeeshops is very concentrated, in fact 3
firms possess 83,40% of the total market share.
As far as Uk is regarded, it was really difficult to find reliable data regarding the turnover of the
specific country, but it was more difficult to find data regarding sales in the whole Europe, so the
report will present data regarding the country in which more coffeeshops are present, with the
assumption that Market shares are calculated using the variable of n of stores instead of sales
(because data were missing).
Company in Uk

Market shares in 2015 in UK

Number of stores in UK

Starbucks Corp.

16,17%

900

McCaf

21,56%

1200

44

http://www.statista.com/statistics/250166/market-share-of-major-us-coffee-shops/
http://www.forbes.com/sites/greatspeculations/2015/03/26/how-can-mccafes-aggressive-expansion-impactmcdonalds-stock-price/#370b51241bd0
46
http://www.statista.com/statistics/297863/leading-coffee-shop-chains-in-the-united-kingdom-uk-store-number/
45

25

Dunkin Donuts

0,63%

35

Caff nero

9,52%

530

Costa Coffee

27,89%

1552

SSP group

7,71%

429

Wild bean caf

5,66%

315

M&S Caf

5,46%

304

Other (5 firms)

5,39%

300

Tab 4.2

At a first glance it is possible to note that the number of firms with relevant market share is higher
and the Concenctration Index ratio for the first 3 firms is CR3: 65,62%. About 20% less than in U.S..
The herfindahl index, using the assumption that Other is referring to 5 firms each with 1,078%
market share, the index is equal to: 0,172252. The result is lower than 0,18, so we can conclude
that in Uk the concentration in the industry is moderate.
It is possible only to take into consideration the U.S. coffeeshop industry results, because the data
are correct and complete.
The analysis of the concentration ratio is useful to understand that, for example, in the U.S.
industry, the main firms operating are Starbucks Corp, Mcdonalds with its Mccafs and Dunkin
Donuts.
Aknowledged that the concentration is High, and in the given industry the Differentiation ratio is
High, as far as design, brand equity, distribution(like prime locations) and Quality are taken into
consideration, it is possible to affirm that the Market type in U.S ,regarding coffeeshops, is a
Differentiated Oligopoly.

High

Concentration

Low

High

Differentiated
Oligopoly

Monopolistic
Competition

Low

Pure Oligopoly

Pure Competition

Differentiation

26

Operating in a Differentiated oligopoly means that within the industry, firms produce similar
products, but they attempt to differentiated them, branding them or for example varying the
quality and charge different prices.47
In a Differentiated oligopoly, moreover, firms can influence each other prices and output, in this
strict sense they are interdependent. Additionally there are high barriers to entry, which prevent
firms of entering without huge amount of capital or secured supply of raw materials. 48
The report will present the worldwide market penetration tool to understand more about
competition within the industry, and how much Starbucks Corp. Is growing , in terms of turnover,
compared to the aggregate industry level of growth.

Milioni

Starbucks turnover and Growth Rate

25.000,00
20.000,00
15.000,00
10.000,00
5.000,00
0,00

35,00%
30,00%
25,00%
20,00%
15,00%
10,00%
5,00%
0,00%
-5,00%
-10,00%

Turnover
Sales growth

Tab 4.3

To plot the graph 4.3 in Excel, the latest 15 financial reports of Starbucks have been used. The
industry annual level of growth is equal to 4,3% for the last 5 years, from 2011 to 2015. 49
From the graph we can measure that the level of growth of Starbucks Corp sales has been equal to
12,37% in the last 5 years.
Therefore it is possible to affirm that Starbucks Corp. Is gaining market share in the industry,
because the Growth rate of the firm is greater than the growth rate of the coffeshop industry.
3.2. Coffeehouse key success factors
1. Offer high quality coffee
Speaking of coffee, quality matters. Coffee lovers will pretend a good coffee and quality in
this kind of beverage with such a big culture is essential.
In order to reach this objective its important to buy top quality Arabica or Arabica
90%/Robusta 10% freshly roasted beans. The selection of the supply is foundamental to

47

http://www.businessdictionary.com/definition/differentiated-oligopoly.html
http://www.yourarticlelibrary.com/oligopoly-market/the-oligopoly-market-example-types-and-features-microeconomics/9140/
49
http://www.ibisworld.com/industry/default.aspx?indid=1973&partnerid=ValuationResources
48

27

obtain the finest coffee. Moreover, its also important to invest in the best espresso coffee
machine and to train baristas so that the final result is the best 50.
2. Offer a pleasant environment
A pleasant and comfortable environment is very important in a coffeehouse because
drinking coffee is since ages a moment of relax and a break from our everyday run. So,
coffee means taking some time for yourself, chilling, reading the news and listening to
good music. It also means social life because people often meet in bars to drink a cup of
coffee with a friend. For these reasons its fundamental to offer a pleasant environment
where people is comfortable with and spends its time there with pleasure. The music in the
background, free Wi-Fi, comfortable leather sofas or lounge chairs around a coffee table
are all elements that create the right ambience and that attract people 51.
3. Offer food
Many people may be interested in eating while having thier coffee in the morning, having a
proper breakfast with a wide choice. It can also be convenient to offer lunches so that the
coffeehouse can attract many people at different hours of the day. Moreover, desserts
and cakes are delicious food very attractive for a break in the afternoon and they are the
perfectly suitable for a cup of coffee52.
4. Train employees to be helpful and kind
Baristas and waiters must contribute to create a pleasant atmophere where customers can
chill and relax. The moment of coffee has to be the most pleasant experience as possible
and the interaction with the employees of the coffeehouse cant be a source of stress.
5. Be speedy and efficient
In this kind of business there are rush hours of intense traffic of customers, especially
during the breakfast hours. In these occasions speedy and efficiency are fundamental not
to causes any bottlenecks in processes and in service. People usually are in a hurry and
need to have their orders quickly otherwise they will become agitated and potentially even
leave.
6. Convenient location
The position where the coffeeshop is located is an important variable for its success. The
area should have a quite large number of people and should be highly accessible.
For example it should have a big park nearby or it should be in a high traffic location, where
many people pass through all day long on their way to their offices or during their
shopping53.
3.3. Competitive positioning
As far as the competitive positioning is concerned, Starbucks has positioned itself in a way that it
can distinguish its products from competition, which gives them competitive advantage.
50

http://www.forbes.com/sites/quora/2012/12/20/whats-the-secret-to-a-successful-coffee-shop/#1a5b5cda46d3
http://www.foodservicewarehouse.com/blog/10-tips-for-running-a-successful-coffee-shop/
52
http://www.foodservicewarehouse.com/blog/10-tips-for-running-a-successful-coffee-shop/
53
http://revelsystems.com/blog/2014/09/02/secrets-successful-coffee-shop/
51

28

As we can see from the image below Starbucks choices are different from its main competitors
choices and this distinguishes the company from its competitors and gives it strategic advantage.

Source: http://www.slideshare.net/angeloestrada10/starbucks-report-38955273
Starbucks chose to position itself since 1971 as a provider of high-end caf beverages, giving much
importance to the quality, controlling directly the sources, introducing innovative products and
providing excellent service.
In order to mirror this high quality and careful service, Starbucks prices are high, exploiting the
customers willingness to pay for a good product.
Howard Schultz said: We arent in the coffee business, serving people. We are in the people
business, serving coffee. This sentence is descriptive of Starbucks positioning towards an
emotional service instead of a purely functional service.
In fact, as already mentioned, the atmosphere in store is carefully studied to induce relax and
enjoy a cup of coffee.
In sum, we can say that Starbucks competes on comfort rather than convenience, which is the
case with its closest competitors: McDonalds and Dunkin Donuts.
These two companies in fact target a different market segment with a different value proposition.
McDonalds most famous campaign was the fast and convenient campaign 54: functional benefits
prevail on the emotianal ones and the low prices are one of the most important factors
charaterizing the company and influencing its positioning.

54

http://www.forbes.com/sites/panosmourdoukoutas/2013/04/25/starbucks-and-mcdonalds-winningstrategy/#2e6b5f2e2160

29

Also Dunkin Donuts main goala are the cost leadership in the coffee and snack shop industry and
the time-saving that is valuable during breakfast hours, confirming its positioning towards
functional benefits55.
Competitors growth rates and short analysis
McDonalds
McDonalds is the leading global foodservice retailer, founded in 1940 in California. Nowadays the
company has over 36000 restaurants in more than 100 countries around the world.
McDonalds is a fastfood that offers a much wider range of products compared to Starbucks but in
2001 the fastfood chain launched its subsidiary Mccaf in the USA which offered gourmet coffees,
teas, pastries, desserts and in addiction also an ambiance designed for comfort: a menu and a
service quite similar to the Starbucks one.
This entry in the market increased the competition for Starbucks.
The bar chart below shows the worldwide McDonalds revenues of the last 10 years, since the
data regarding only the Mccaf segment were not avaiable.
As the graph shows, the company reached its peak in 2013 with 28.11 billion dollars56.
In the last two years, revenues fell, going from the peak of 28.11 billion dollars in 2013 to 25.41
billion dollars in 2015, lower than the results of 2011.
In 2015, the largest contribution to the McDonalds total revenue has been given by the U.S.
market with 8.56 billion U.S. dollars57.

Source: statista.com
55

http://time.com/money/3028578/dunkin-donuts-mcdonalds-starbucks-coffee-wars/
http://www.statista.com/statistics/208917/revenue-of-the-mcdonalds-corporation-since-2005/
57
http://www.statista.com/statistics/208917/revenue-of-the-mcdonalds-corporation-since-2005/
56

30

The following graph underlines the trend of McDonalds revenue growth from 1999 to 2015: it is
evident that the trend was quite fluctuating during these 16 years time. It reached the peak in
March 2004 and in September 2011 with a +15% growth in revenues.
But then, in March 2009 hit a low of -10%. It recovered but then the same situation occurred again
dropping back between September 2014 and March 2015.
The last data avaiable tell us a decrease in revenue growth of -9.5%.

Source: http://www.scoopnest.com/user/MktOutperform/624212007185616896

Dunkin Donuts
Dunkin Donuts is an American global donut company and coffeehouse chain with more than
11,300 restaurants in 36 countries and its the the other main competitor for Starbucks.
Dunkin Donuts is only one segment of Dunkin Brands which in fact earns its revenue from five
different channels: Dunkin Donuts US, Dunkin Donuts International, Baskin-Robbins US, BaskinRobbins International, and others.
In 4Q15, the company recorded $203.8 million revenues.

31

Focusing on the results of Dunkin Dounuts we can say that:

58

The revenue from US division increased from $144.1 million in 4Q14 to $154.4 million, an
increase of 6.2%.
The revenue from Dunkin Donuts international division dropped from $6.7 million to $6.3
million, a decrease of 5.9%.
The overall sales in 4Q15 rose by 2% compared to 1Q1558.

http://marketrealist.com/2016/02/unit-growth-dunkin-k-cup-sales-drove-4q15-revenue-growth/

32

4. Competitive Advantage
According to the Investopedias definition : Competitive advantage is an advantage that a firm
has over its competitors, allowing it to generate greater sales or margins and/or retain more
customers than its competition.59
The competitive advantage is the final output of a succesful business strategy and according to the
gathered materials about Starbucks Corp. and the way its vertical development grew during the
last decade, and according to the recent positioning on the market, it is clear that the company is
pursuing a differentiation business strategy.

Source image: slideshare.net

Moreover, it is possible to go more into detail noting that the target market of Starbucks are
generally coffee drinkers, and the market counts a very large pool of such consumers, in this
particular case we can assume that Starbucks is adopting a Broad differentiation business
strategy, instead of a Focusing differentiation strategy. 60
The aim of the acquisition of Torrefazione Italia, roaster facilities, and coffee beans farms was to
achieve control of the value chain where the real value of coffee is created in order to respect the
expectation of quality pretended by Starbucks customers. The prices for consuming a beverage in
a starbucks store is fairly high compared to the main competitors, like Mcdonalds and Dunkin
donut, that historically are pursuing a low cost strategy, but the value perceived consuming such
goods is higher.

59
60

http://www.investopedia.com/terms/c/competitive_advantage.asp
http://amandahaleonline.com/2013/10/12/starbucks-focused-differentiation-strateg/

33

The quality offered in every step of the chain is tangible and the premium service and atmosphere
in the coffeehouses are incredibly attractive for customers, so Starbucks can mantain its strategy
of differentiation satisfying more and more customers through high quality coffees and premium
beverages and foods, and in this way gaining brand awareness and better positioning in the
market.
It is possible to divide Starbucks differentiation strategy in:

Quality and Variety of Coffee Beans offered.

Wide range of fresh based coffee Beverages .
Fast and high quality service in every coffeehouse, derived from the high formation that
employees have undergone.
Premium Location of stores and cafs.
Comfrotable and relaxing atmosphere obtained through market reaserches.
Additional services in coffeehouses such as free Wi-Fi and free recharge stations for
appliances.61

A name has been invented to describe the whole

Starbucks strategy that is the Starbucks Experience
strategy, and the concept is about the quality of coffee,
prime location and exclusive ambience, which creates a
third place between work and home. "You get more
than the finest coffee when you visit a Starbucks- you
get great people, first-rate music and a comfortable and
upbeat meeting place" says Howard Schultz
(starbucks.com, 2008).

The main focus of the Starbucks differentiation strategy is to increase the willingness to pay of the
customer in response to an increased value perceived in the service and goods purchased. Brand
awareness and positioning is another important asset that Starbucks developed through the
years.62
However in order to assess how the firm is securing a competitive advantage, and therefore is
adopting a successfull business strategy, over its main competitors, it is essential to identify which
are the superior resources and competencies that the company has to exploit.
Certainly, part of the competitive advantage gained by the implementation of the Starbucks
experience is temporary, such as the prime location and design of the stores can be easily
imitated by competitors.63 But Starbucks main strenght is the continous innovation process that it
is undergoing, that is creating new flavours of coffee, mix coffee with other beverages, improve
the concept of stores and increase the offering of services.

61

http://www.businessinsider.com/starbucks-does-better-2011-7?IR=T
http://www.fool.com/investing/general/2015/01/28/starbucks-earnings-show-us-the-amazing-benefits-of.aspx
63
https://www.ukessays.com/essays/marketing/the-world-leading-retailer-in-coffee-business-marketing-essay.php
62

34

4.1 Resources and Compentencies

As can be noted from the previous studies Starbucks Corp. Is generating profits and therefore
competitive advantage through the succesful combinations of the following resources and
competencies.

Strategy: Broad Differentiation : "Starbucks Experience"

ORGANIZATIONAL CAPABILITIES:
Organized and valued Supply Chain
Diverse and wide selection of products created every year
High ranking employer
Relationships with suppliers and huge companies

Continuous Innovation

TANGIBLE
Corporate owned stores,
situated in prime locations
and differentiated concept
Blending and roastery
plants
Farms

Resources
sadandand
competenc
INTANGIBLE
ies
Starbuck's Patents and

HUMAN

trademarks of new products

High benefits for

employees

Roasting bean process

quality

High degree of training

Brand recognition and

awareness
Organizational values
disseminated throughout
the organization

They value their

employees by calling
them partners and
treating them as such

Net Profit of 4.31 B $ in

2015

Graph references : 64 65 66 67
It is possible to grab from the graph and from the following VRIO analysis that the company is truly
involved into: Quality of its products, Continuos Innovation, Brand recognition by customers,
Human resource management and Organized Supply chain.
64

http://www.marketwatch.com/investing/stock/sbux/financials
https://prezi.com/4hhoufadtrr6/starbucks-internal-analysis/
66
http://www.wikinvest.com/stock/Starbucks_(SBUX)/Patents_Trademarks_Copyrights_Domain_Names
67
https://prezi.com/4hhoufadtrr6/starbucks-internal-analysis/
65

35

It is possible to affirm that the resources and competencies listed above are the core
competencies and resources of the firm. In other words through the VRIO Analysis that will follow,
the above mentioned competencies and resources are the ones that are earning durable
competitive advantage for Starbucks. The other capabilities and resources, despite being
succesfully exploited by the firm, are not unique to Starbucks, but are used within the organization
of the main competitors.
Vrio analysis, main points comparing Starbucks Resources and Competencies with Main Firms in
its sector.
Resource and Capabilities of
Starbucks Corp.

Valuable

Rarity

Costly to Exploited?
imitate

Competitive
implication

Organized Supply Chain68:

Tapping resources from all around the

world.
Integrated make-to-stock supply model.
Excellent relationship with beans
suppliers.
Same logistic system across all
continents.
C.A.F.E practice sustanable standards.

Prime Location of stores:

Starbucks locates its stores in highly

trafficated streets.
It exploits also visibility and impulse
acquisition of products by occasional
customers.

Brand recognition
loyalty69:

and

Sustained
Competitive
Advantage

Competitive
parity

customer

Position #45 in Worlds most valuable

brands by Forbes in 201670
Starbucks has become more than a
brand in many customers minds
Helps against high level of competition
in the industry.
Loyalty-based programs like Starbucks
Rewards and Starbucks Card can retain
customers.

Sustained
Competitive
Advantage

68

http://www.usanfranonline.com/resources/supply-chain-management/starbucks-supply-chain-balances-efficiencywith-sustainability/#.V1AL0JGLQuU
69
http://www.huffingtonpost.com/2013/03/07/starbucks-brand-loyalty_n_2830372.html
70
http://www.forbes.com/powerful-brands/#/tab:rank

36

CSR image :

Ethical initiatives undertaken .

Recycling and other community friendly
programs ongoing.
Ethos water initiative.
Fair-Trade coffee beans purchased

Temporary
competitive
advantage

Quality of products offered

Supply of best quality beans.

Acquisition in order to mantain high level
of quality standards under control.
Specialits quality testers at Sbux71.

Sustained
competitive
advantage

Technology and websites :

Starbucks App on ios And android

Investments in innovation of technology
applications

Temporary
competitive
advantage

Continuos Innovations

Product innovation new flavours.

User-innovations by using the web tool
My starbucks Idea.
Improving the concept of stores and
aesthetic appeal of them.
Acquisition and building of R&D centres
all around the world.
Men innovation in stores.

Sustained
Competitive
Advantage

71

https://www.bostonglobe.com/lifestyle/food-dining/2014/10/08/amanda-juris-coffee-quality-specialiststarbucks/tg3xVgvx8W2SG2hSwliLVK/story.html

37

Human resource management :

Employees are provided with great

benefits like stock option, retirement
accounts and are treated like partners
Ranked 91st in the 100 best places to
work for by Fortune Magazine and 39th
on Glassdoor.
Visions and organizational culture are
shared by the management to all
employees
Training programs to mantain worker
motivated and efficent.

Sustained
Competitive
Advantage

Global presence72

Economies of scale to exploit

It operates in more than 60 countires

Competitive
Parity

4.2 Value Chain Analysis

In order to evaluate the Starbucks value proposition it is useful to use the business concept of
known as Value Chain, that was introduced and described by Michael Porter in 1985.
A value chain is a series of activities or processes which aims at creating and adding value to a final
output at every step during the production process.
The firm activities are divided into primary activities and secondary activities. The primary
activities are directly related to the creation of a good or service while the support activities help
in improving the efficiency and work among the primary activities.

72

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38

Primary Activities

Inbound Logistics

The inbound logistics for Starbucks main business refers to selecting the best quality of coffee
beans, which are procured directly from selected farms situated in Asia, Latin America and Africa
by the Starbucks specialists. The Firm does not outsource its procurement activity to manatain a
reliable high quality standard since the first activity. In 2010, when the CEO Howard Schultz
returned in the company it restructured the Starbucks supply chain and created a single, but
global system of logistic: that is that beans are transported in containers via sea and then to six
different regional distribution centres, which are also roasting plants. 73 Afterward the beans are
roasted, packaged and delivered to Starbucks stores.

Operations

The company operates through 23043 stores located in 68 different countries74.They are both
licensed store and company owned stores. In Chapter 1.4 of the report was possible to note that
the company gains major revenue from company operated stores. The company has divided its

73
74

http://www.supplychainquarterly.com/topics/Procurement/scq201004starbucks/
Fiscal 2015 Annual Report (2016) Starbucks Corporation

39

operating segments into five groups and the figure below illustrates the share of revenue from
each segment.75

Segment

Share of revenue

Americas (US, Canada and Latin America)

69%

Europe, Middle East and Africa (EMEA)

6%

China/Asia Pacific (CAP)

13%

Channel Development

9%

All other segments

3%

Starbucks operating segments and shares of revenue from Chapter 1.4 in this report.

Starbucks adds value to its operations via the aesthetic appeal and services provided in its stores
and the succesful creation of the Third place that in the former report has appeared several
times.

Outbound Logistics

The main points in which Starbucks adds value to the Outbound logistics activity is the almost
absence of intermediaries in the selling of the final products. The activity is performed by the
company and following strict efficent procedures and sharing a common IT and knowledge among
all the stores located worldwide. Products that are not sold by stores are purchased by customers
utilizing the Online channel. However, a very limited range of Starbucks products can be
purchased from a set of intermediaries such as Walmart76

75
76

Fiscal 2015 Annual Report (2016) Starbucks Corporation

http://www.walmart.com/c/brand/starbucks

40

Marketing and Sales

Starbucks prefer investing in Quality of its product instead of doing aggressive marketing
promotion strategy. It considers that word-of-mouth type of marketing is much more effective
than any other type of strategy. The main way to promote sales is undergone by assorting a
tasting area in the stores in which the consumers can try the product and rate it.
However in the latest years of intense competition, the management is increasing the budget in
spending for promotion (Fig. 4.1).77

Fig 4.1

In addition, commitment into corporate social respoinsability initiatives by Starbucks is a useful

marketing tool in order to boost sales.78

Service

Starbucks aims at building customer loyalty and brand awareness through high level of customer
service at its stores. As previously stated, the objective of Starbucks is to provide to all customers a
new Starbucks experience, which offer a series of high quality services to the people in stores,
from free Wi-Fi to friendly and warm employees or better called partners.

77
78

http://www.statista.com/statistics/289357/starbucks-marketing-spending-worldwide/
http://www.starbucks.com/responsibility

41

In doing so the company is able to succesfully retain most of its customers. It seems that this
activity is one of the core activity performed by Starbucks in its Value chain proposition.

Support Activities

Infrastructure

The Infrastructure support activity is composed by regional departments like management,

finance, legal, etc which are required to keep the companys stores active and effective. For
example Starbucks well designed stores are ideated and improved by adedicated team of
employees in regional headquarters.

Human Resource Management

The companys workforce is one of the core resources of the company. Employees are provided
with great benefits and are treated like partners.
Starbucks puts enormous efforts to mantain its workforce motivated and efficient and from the
website it is possible to note the package of benefits and training programs that enlisted
employees could benefit of. In fact one of the ingredient in order to offer to customers a true
Starbucks Experience is the committed approach of the companys employees.
This support activity provide a great amount of value to the general proposition of value.

Technology Development

Starbucks is very well known for use of technology not only for coffee-roasting and R&D related,
but to connect to its customers. Many customers use Starbucks stores as meeting place because of
the free and unlimited wifi availability. In addition Starbucks launched in 2008 the
mystarbucksidea program. And in recent years a new Starbucks app in order to order and pay a
beverage in only one minute. Technology supports the primary activities in the value chain
differentiating them from the ones of competitors.

Procurement

This support activity is about researching and acquiring raw materials in order to start the chain.
The company specialists travel in all the world to search for the finest beans available. The agents
establish a long relationship and partnership with the suppliers that meet the quality standard and
procedures requested by Starbucks. High quality standards are maintained because the activity of
research and procurement is not outsourced.

42

5. Innovation and competitive advantage

As stated by Grant, innovation forms the key link between technology and competitive
advantage (Grant, 2013: 247), since the quest for competitive advantage leads firms to invest in
innovation and innovation itself allows some companies to emerge or to dominate their industries
(Grant, 2013).
In a highly competitive environment such as the one in which Starbucks is involved, innovation is
essential for the company profitability in order to stand out among the multitude of competitors,
differentiate and increase its own value proposition.
Starbucks is a master in keeping customer attention through special initiatives, product
innovations, marketing strategies and web collaborations with customers.
5.1. Product technology-based innovation
Starbucks has used innovation in its products and services in order to differentiate and gain
competitive advantage in the market79.
Starbucks in fact is always looking for a new product to offer to its customers, following the trends
of the moment and the customers demand. Over the years the company has always updated and
extended its product line. Here some examples:

Starbucks historically most famous product innovation was

the Frappuccino which is a frozen coffee beverage
blended with milk and topped with whipped cream.
The birth of this product dates back to 1994 when during a
hot californian summer, customers demanded an iced
blended beverage. So the first adoption of the early
version of frappuccino happened thanks to lead users
customers who bought a similar product from other
californian coffee bars. Then, when Starbucks acquired
The Coffee Connection in Boston, which had a similar
product called Frappuccino, Starbucks applied that name to its new blended beverage.
The next summer, in 1995, Starbucks brought Frappuccino across all of its stores in the
United States and Canada and it was a big success.
An incremental innovation of Frappuccino is the bottled version of this famous beverage.
Available since 1996, it was the result of a collaboration with Pepsi. So in this case we can
speak of inbound innovation, a form of open innovation result of a partnership, a
collaboration where the technological knowledge comes inside the company from an
outside source, Pepsi which has the skills and the expertise for this kind of packaging and
for the retail sector in grocery stores.

Fizzio Handcrafted Sodas are beverages individually handcrafted for each customer,
featuring three flavors: Spiced Root Beer; Golden Ginger Ale; Lemon Ale.
Starbucks follows its basic principle of extending the product line instead of creating new

79

https://www.ukessays.com/essays/marketing/the-marketing-strategy-of-starbucks-and-its-effectiveness-marketingessay.php

43

products; in fact, with Fizzio Starbucks expands its cold beverage portfolio on the basis of a
specific trend: We have heard from our customers that theyre looking for more
refreshing, cold beverages, especially during the warm summer months, said Cliff
Burrows, group resident, U.S., Americas and Teavana80.
The Fizzio machine is a brand new
technology for carbonation and it
creates a soda different from any other.
In existing sodas or at-home
carbonation options, the machine
carbonates the water and flavors are
added afterwards. Fizzio carbonated
drinks are different: theyre finished
beverages, with every ingredient
receiving same amount of carbonation.
In addiction, the machine also has the
capability to adjust the amount of fizz in each beverage.
Any beverage not included in the hot beverage segment of the Starbucks menu can be
ordered as carbonated through the companys Fizzios machine for an extra 50 cents.

In 2009 Starbucks launches Starbucks VIA Instant: Made with the the 100% arabica
beans served at Starbucks, Starbucks VIA Instant
offers the same great tastein an instant81.
This is how Starbucks introduces this product on
its website.
It is clear that Starbucks wants to propose
formats and versions of coffee largely choosen
by people because of their practicality without
forgetting the quality: Via isn't freeze dried
coffee, but very finely ground coffee beans.
It took a long time before they obtained a satifying result. Its an all-natural process that
they spent years perfecting in order to obtain the flavor of a fresh brewed coffee.

In 2012 Starbuck launches Starbucks refreshers, entering into the

energy category and revolutionizing the coffee market because this
beverage is made with real fruit juice and are lightly caffeinated with
Green Coffee Extract82.
The biggest innovation is green coffee extract: all coffee starts as a green
bean but then coffee is roasted to bring out the dark colors and bold
flavors.
Green coffee extract is the result of an innovative process that pulls the

80

https://news.starbucks.com/news/starbucks-expands-cold-beverage-line-up-with-new-fizzio-handcrafted-sodas-a
http://athome.starbucks.com/coffees-by-format/starbucks-via-instant/
82
http://www.vendingmarketwatch.com/news/10682491/starbucks-announces-beverage-innovation-using-greencoffee-extract-with-starbucks-refresherstm-beverage-platform
81

44

natural caffeine from coffee beans before theyre roasted.

What they obtain is an extract with the caffeine from coffee but without roasty coffee
flavor.
It extists in three versions: handcrafted with real fruit in store, as sparkling drinks available
groceries, or as Starbucks VIA Refreshers instant beverages.
This product has the intent to satisfy everybodys preferences, even those who dont like
the taste of coffee but look for something energizing, tasty and with low calories. At the
same time Starbucks is remaining true to its heritage high quality coffee-linked extracting
from100% arabica beans.
Summing up, we can say that every product innovation is the result of the intent to satisfy the
needs and preferences of as many customers as possible, remaining at the same time true to the
heritage.

5.2. Process technology-based innovation

Process innovation is a new or significantly improved production or delivery method. This includes
significant changes in techniques, equipment and/or software.
One of the biggest change in technology for Starbucks was the introduction of the Clover brewing
system.

For decades, the technology of coffee brewing had been well established. But in 2007, a new
technology made its debut that totally changed the game.
That development was the Clover brewing system: an innovative design that lets you discover
new layers and dimensions within a coffees familiar aroma, flavour, body and acidity. The result is
a deeper experience one thats carefully prepared and made to order, one cup at a time83.
83

http://www.starbucks.ca/coffee/learn/clover

45

Thats how the Starbucks website describes their innovative coffee machine, a machine that
produces brewed coffee one cup at a time
This machine wants to obtain the flavor of brewed coffee with the one-cup focus typical of
espresso. To do that the machine uses a brewing method similar to that of a French Press
combined with a vacuum system to split up the liquid from the coffee grounds 84.
However, Clover machine has not been installed in many coffee shops; the greatest number are in
the US. The UK, for instance, has just one Clover in all of its Starbucks stores.

Another form of process innovation is the digitalization of the payment and order process
through the Starbucks app for iPhone and Android: with Mobile Order & Pay Starbucks
customers can order in advance via an app and pick up their order from their chosen location.

The payment through the mobile app generates barcode to that allows ordering and paying in
targeted stores.
This payment option is considered as the most flexible and convenient for customers because its
processing is fast and its possible to reduce the queues in store.
Starbucks in fact refers to the App as the fastest way to pay85.

84
85

http://electronics.howstuffworks.com/gadgets/kitchen/clover-coffee-maker1.htm
https://news.starbucks.com/news/starbucks-accelerates-mobile-payment-leadership-with-release-of-enhanced-io

46

5.3. Strategic and marketing innovation

Marketing innovation allows to keep continuously aligned the firms new offering with customers
evolving needs and improves the information exchange across the firms functions and between
firm and the external environment (M. Dodgson).
Starbucks pays always careful attention to fashion and to the trends of the moment and
recognizes the importance of a testimonial with an influence power in promoting new products.
Teavana Oprah Cinnamon Chai Tea Latte is an example of this strategy: Oprah Winfrey was
called "arguably the most influential woman in the world" by The American Spectator and,
considered her passion for chai tea, Mr. Schultz decided to deliver Teavana Maharaja Chai Oolong
to the famous TV presenter so she could taste his product. She was so enthusiastic that after some
time Mr. Schultz and Oprah started a partnership that led to the launch in 2014 of Oprah Chai Tea,
"a bold infusion of cinnamon, ginger, cardamom, and cloves, blended with loose-leaf black tea
and rooibos"86.

Associating a testimonial to a beverage of a coffee chain is an innovative strategy and Starbucks is

one of the first companies in the coffeshop industry to use this technique for the launch of a new
drink.

Starbucks is also famous for its leisure space in its coffee shops, where customers can chill, relax
and take their time while drinking a cup of coffee. Starbucks pays very much attention in keeping
the time spent at Starbucks the best time as possible, enhancing the customer's in-store
experience. For example in 2010 Starbucks offers free unlimited Wi-Fi, creating the Starbucks
Digital Network.
86

http://www.starbucks.com/menu/drinks/tea/teavana-oprah-cinnamon-chai-tea-latte

47

The digital network is a partnership of Starbucks and Yahoo. When you connect to Starbucks free
Wi-Fi, appears the landing page of the digital network which gives you immediate access to
contents on news, entertainment and lifestyle from sites like USA Today, Wall Street Journal,
ESPN, and Nick Jr. 87.
Source: Mashable.com
Another example of Starbucks
commitment for enhancing the
Starbucks in-store experience is its
attention for the music played in
store. Music is today a
characterizing feature of Starbucks
retail environment and this year in
January Starbucks has updated and
digitalized its music experience
launching the Streaming Music
service Spotify, through which customers have more control on playlists: Starbucks Mobile App
customers can immediately discover music playing overhead in Starbucks stores, save Starbuckscurated songs to a playlist on Spotify and listen to Starbucks music anywhere they go on Spotify88.
In 2014 Starbucks opened its first Starbucks Reserve Roastery and Tasting Room in Seattle Just
nine blocks away from its original store in Pike Place Market. Mr. Schultz said: "This is the moment
of the next generation of Starbucks" and in fact this first Starbucks Reserve is something never
seen before and very different from any other coffeeshop. The in-store experience is evolving to a
show as Liz Muller, vice president, creative and global design said. Here it is possible to drink
your coffee with views into the whole process of coffee roasting and brewing, from the minute it
comes off the truck as green coffee beans to the cup.

87
88

http://practicenext.com/thinknext/taking-the-starbucks-experience-digital-3/
https://news.starbucks.com/news/new-era-of-music-debuts-at-starbucks-with-spotify

48

Howard Shcultz said: This Roastery is the fulfillment of a decade-long dream an homage to our
relentless pursuit of coffee innovation that will create for our customers the most immersive,
sensory demonstration of how we source, roast and craft the finest coffee from around the
world89.
This first store is a new formula for a possible further development of Starbucks coffee-shops. In
fact, Starbucks will open its first international Starbucks Roastery and Reserve Tasting Room next
year in Shanghai and plans to open another such roastery in New York in 2018.
This project allows Starbucks to combine Starbucks historical attention for high quality, pleasant
atmosphere and devotion to coffee with Starbucks tendency towards innovation, offering a
unique experience. At the same time this new concept of store allows Starbucks to have a
feedback from its customers about new flavors and tastes to introduce in its coffee shops.

Another very important point to underline is Starbucks retail loyalty program, which is one of the
best currently in existence. They have created a loyal following of customers not only with their
customer experience but also with revolutionary rewards program.
Introduced in 2009, My starbucks rewards loyalty program helped increase revenue by 11% to
$3.6 billion90. This loyalty program is so successful because of some revolutionary and
innovative features:

It is not a classic coffee shop punch card which gives away free coffee in return for a set
number of cups, but its far more detailed: every time a customer purchases coffee at
Starbucks, they earn one star. The more stars they earn, the bigger the rewards are. The
highest level is the Gold Level where their best customers can earn extra benefits91;
This program is part of the Starbucks App functions and this makes it clearer and easier to
use than a normal card, allowing the customers to control their position in the loyalty path,
paying and ordering through the same device 92;
The structure with the different levels to reach in order to obtain better rewards and
benefits is an incentive for customers to go to Starbucks instead of another coffeehouse.

Moreover, we have also to remark Starbucks innovation in delivery.

In 2011 Starbucks lauched a Delivery System: the Starbucks Mobile Pour involved two baristas
stationed on scooters per every square mile in seven large cities to deliver customers their order
directly to them where they are.
In the second half of 2015 Starbucks launched two new types of food and beverage delivery
systems in two cities:

89

https://news.starbucks.com/news/starbucks-reserve-roastery-and-tasting-room
https://www.sweettoothrewards.com/blog/loyalty-case-study-starbucks-rewards/
91
http://www.loyalmark.com/631/why-starbucks-loyalty-program-is-so-successful
92
https://www.sweettoothrewards.com/blog/loyalty-case-study-starbucks-rewards/
90

49

Green apron delivery in New York City's Empire State Building: Starbucks will offer "green apron"
delivery. Food and drink are delivered by apron-wearing baristas who work in the Starbucks inside
the building. Green Apron customers place their orders through a dedicated website 93.
Delivery app in Seattle: collaborating with delivery app service Postmates, Starbucks delivers food
or beverages to its customers within select parts of Seattle. Customers order through Starbucks
app, using the Mobile Order and Pay option and the service cost will be 5.99$, for every kind of
order94.
These are tests Starbucks is running to begin understanding how to manage in short time the
logistcs involved in the delivery of hot beverages and food, protecting the product quality without
increasing too much the prices.
The basic intent of Starbuck also in this case is to be the first coffee house to serve the customer in
the most efficient way, being as near to the customer as possible, making it easy for him to enjoy
Starbucks products.

5.4. Web-based innovation

My starbucks idea is a corporate blog where customers can contribute to the idea generation of
new products or services, connecting consumers to the company.

Source: smbp.uwaterloo.ca

93

http://techcrunch.com/2015/10/13/starbucks-launches-pilot-test-of-its-own-green-apron-delivery-service-startingin-new-yorks-empire-state-building/
94
http://uk.businessinsider.com/starbucks-offers-delivery-in-seattle-2015-12?r=US&IR=T

50

This platform was developed in March 2008 and today over 190,000 ideas have been submitted,
approximately 300 of which have been implemented by Starbucks95.
On this platform the engaged customers can interact among them, vote for ideas, and comment
and this fermentaion gives birth to good and sharable solutions.
After an idea is submitted, the company has a team of Idea Partners who read all the ideas. The
team then take into consideration the most innovative and popular ideas (based on public votes
on the website) and presents them to key decision makers in the company to figure out how to
implement them.
The website has a section dedicated to ideas that have been recommended to key decision makers
and this transparency gives even more incentive to customers who partecipate passionately
because they feel they are heard96.
We can finally say that this crowdsourcing website has two main kind of advantages:

95
96

Its helping the company stay receptive to its customers needs, proving Starbucks
customer-oriented nature;
Its helping boosting the innovation process within the company.

http://smbp.uwaterloo.ca/2015/02/my-starbucks-idea-the-starbucks-crowdsourcing-success-story/
https://digit.hbs.org/submission/my-starbucks-idea-crowdsourcing-for-customer-satisfaction-and-innovation/

51

6. The companys financial performance: profitability ratios

Our analysis of Starbucks Corp.s financial

performance consists in a comparative analysis
based on the examination of the companys
profitability ratios identified in Return of Sales
(RoS) and Return on Investments (RoI) from
2010 to 2015 according to the balance sheet
values registered by Starbucks Corp. (inserire
reference).
Looking at Starbucks' return on equity (ROE) is
another important step, as it reveals how much
income the company has generated with funds provided by its equity shareholders. 97
But RoE could be misleading , because an high amount of debt leverage may cause RoE to be high,
for this purpose we can take into consideration the RoIC (return on invested capital) and compare
it to the WACC (weighted average cost of capital). If the RoiC is higher than the WACC then
Starbucks is generating higher returns on investment than it costs the company to raise the capital
needed for that investment. 98
Also the Debt /Equity ratio is important as indicator in order to depict the financial health
situation of the Company.
Every ratio will be analyzed comparing it to main competitors ratio, in order to underline, when
possible, the evidence of the competitive advantage obtained by Starbucks. In conformity with the
comparative analysis taken into account in the previous chapters, the main competitors data used
are the ones regarding Mcdonalds and Dunkin Donut.
At the end of the financial analysis chapter it will be presented also a Market Stock comparison
between Starbucks and its main competitors.

Starbucks main indicators

Profitability ratios measure The companys ability to generate profitable sales from its resources
(assets) (reference investopedia).
The Return on sales is computed by obtaining information on the Total Sales of Starbucks and then
subtracting to it the cost of goods, which are direct costs, obtaining the Gross Margin and then
subtracting the indirect cost, in this way it is possible to compute the Operating Margin that is
97

http://www.investopedia.com/articles/markets/111015/starbucks-6-key-financial-ratios.asp
http://www.gurufocus.com/term/wacc/SBUX/Weighted%2BAverage%2BCost%2BOf%2BCapital%2B%2528WACC%2
529/Starbucks%2BCorp
98

52

equal to the RoS. In the following figure (nome figura) the total sales are already set equal to 100
and the other parameters are set in % in respect to real datas obtained by the annual financial
report of starbucks.
It will be analyzed the Return on Investments Capital ratio that is equal to RoA, an indicator of
how profitable a company is relative to its total assets. ROA gives an idea as to how efficient
management is at using its assets to generate earnings 99.
For the research it is useful also to obtain datas about Return on Equity (RoE) that is the amount
of net income returned as a percentage of shareholders equity. Return on equity measures a
corporation's profitability by revealing how much profit a company generates with the money
shareholders have invested.100.

Starbucks Financial Indicators.

Source: www.Morning Star.com

99

http://www.investopedia.com/terms/r/returnonassets.asp
http://www.investopedia.com/terms/r/returnonequity.asp

100

53

It appears that for Starbucks, RoS has increased from 2012 to 2015 by 3.77% and now it appears
to be 18,79%, but it reached a bottom in 2013 when on november 12,2013 a Legal litigation
ended between Kraft Foods Group Inc and Starbucks and the latest had to pay Kraft $2,784,1
million in damages including prejudgmenet interest and attorneys fees. This huge amount of
money is recorded in the voice Other under the sheet regarding Margins % of Sales of the fig
().
As far as RoA is regarded it is possible to note a similar trend of the Ros, where from 2012 the
indicator increased about 6% and in 2013 it was registered a dramatical decrease due to the
litigation that occurred. Actually, RoA in 2015 indicates that for every dollar spent in Assets,
Starbucks Corp. is earning a net of 0,238 cents (23,77%).
Then Roe has increased in the last 4 years and now is set to 49,73%, but it isnt reliable as the RoiC
which is 35,86% and measures total equity,too, but also debt and capital lease obligation.
The WACC of Starbucks is 7,71% according the
website www.gurufocus.com101, and with a fast
computation based on: ROIC - WACC = 28,15%, that
means that the companys investors are generating
0,28 $ per dollar invested of additional earnings,
having repayed the cost of the capital used.

As far as Financial health is concerned, it is possible to note that the current debt to equity
leverage ratio is 0,393. The situation has deteriorated in respect to the leverage ratio of 2012 and
2013. An high ratio means that the company has financed its growth with debt. But, apparently,
this is not the case of Starbucks in fact compared to the main competitors leverage ratiothat will
be presented afterwards it seems that starbucks has a very low D/E ratio.

101

http://www.gurufocus.com/term/wacc/SBUX/Weighted%2BAverage%2BCost%2BOf%2BCapital%2B%2528WACC%2
529/Starbucks%2BCorp

54

During our research it emerged that Starbucks Corp. uses a very special form of lease that could
not appear on the balance sheet. These operating leases, called operating leases are a method
of financing that doesnt appear on the balance sheet and therefore reported assets and debts are
understated, but the companys returns on assets are higher compared to companies that report
correctly on balance sheet capital leases.
For example according to Investopedia: As of Sept. 28, 2014, Starbucks' D/E ratio without
operating leases stands at 38.8%, while the company's D/E ratio with operating leases is 133%. 102

Competitors Main Indicators

As shown in the following figure Mcdonalds main key ratios are:

Source: www.morningstar.com

RoS: It slightly decreased over 4 years from 31.21% to 28,12%

102

http://www.investopedia.com/articles/markets/111015/starbucks-6-key-financial-ratios.asp

55

RoA: similarly to RoS it decreased over the years from 15.98% to 12.54%
RoE: it jumped from an average of 36% to 45.43% in the last year.
RoiC and Wacc: Roic deteriorated over the years and in 2015 is equal to 16.83% and Wacc
according to gurufocus.com is 5.63% so MCDonaldss investors are generating 0,11 $ per dollar
invested in Capital, having repayed the cost of it.
D/E: McDonald's Corp's long-term debt for the quarter that ended in Dec. 2015 was $24,122 Mil.
McDonald's Corp's total equity for the quarter that ended in Dec. 2015 was $7,088 Mil.103 So the
Debt to equity leverage is equal to 3.40. That means that the company is increasing its growth
with aggressive financial debts. So the earnings of the company as shown in the figure is very
volatile and the financial health of the company is by far worse than Starbucks Corps.
As far as Dunkin Brands Group is concerned :

Source:
www.morningstar.
com

103

http://www.gurufocus.com/term/wacc/MCD/Weighted%252BAverage%252BCost%252BOf%252BCapital%252B%252
528WACC%252529/McDonald%2527s%2BCorp

56

RoS (Operating margin): It increased from 2012 and it reached its peak in 2014 (45,26%), before
decreasing to 39,41% in 2015.
RoA: in this case RoA is very low compared to the other two competitors and it levelled off in the
previous 4 years at the level of 3.30%.
RoE: In Dunkin brands groups this indicator is very volatile and it seems not to be reliable as a
measurement of financial performance, in fact it growed from 19,83% in 2012 to 45,49% in 2014
and the it soared to 143.16%. It was caused by a massive amount of long term debt accumulated.
After a quick research we discovered that at the beginning of 2016 the company retained
earnings, that caused equity shareholder to go negative for about $ 220,951 million. These
earnings retained will cover long term debts that are causing serious issues to the company and it
led Roe to go negative for about 500%.104
RoiC and Wacc: Roic in 2015 is equal to 7.60% and WACC 2,41%105, so the companys investors
are gaining about 0,05$ for each dollar invested, having repayed the cost of capital.
D/E: as far as D/E is concerned it is no possible to analyze this datum beacuse of the mentioned
retained earnings that paid off the long-term liabilities, but in 2014 it was very high about 5%106 ,
one of the highest in the sector.

104
105

https://ycharts.com/companies/DNKN/return_on_equity

http://www.gurufocus.com/term/wacc/DNKN/Weighted%2BAverage%2BCost%2BOf%2BCapital%2B%2528WACC%25
29/Dunkin%2BBrands%2BGroup%2BInc
106
https://ycharts.com/companies/DNKN/debt_equity_ratio

57

Excel graphs comparison RoS, RoA and RoiC- WACC

RoS Comparison 2012-2015

50,00

40,00
30,00
Starbucks
20,00

Mcdonalds
Dunkin donuts

10,00
0,00
2012

2013

2014

2015

-10,00

Fig 6.1
From Figure 6.1 we can note the drop in 2012 in RoS of Starbucks, caused by the Kraft litigation,
however the level of the index in 2015 is about 20%, smaller than its main competitors, but as far
as Dunkin Donuts is concerned it is possible to note that the company is smaller compared to
Starbucks, and does not incur in the large amount of expenses in organizational management
across the world. We can denote from the financial reports that total revenues of Dunkin donuts
Group in 2015 are equal to $ 810'933'000 107, instead Starbucks revenues are $ 19'162'700'000. In
conclusion it is not indicative to compare using only the RoS index such different-in-size companies

RoA Comparison 2012-2015

25,00%
20,00%
15,00%

Starbucks
McDonalds

10,00%

Dunkin donuts
5,00%
0,00%
2012

107

2013

2014

2015

Fig 6.2

http://investor.dunkinbrands.com/financials.cfm

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As far as RoA (Fig.6.2) is concerned, after the huge drop in 2013, caused by the Kraft litigation, the
return on Assets of Starbucks Corp. is by far greater than its main competitors. It seems that
Starbucks management is leader in using its assets to generate earnings.
RoiC WACC Comparison
Starbucks
28,15%

MCDonalds
11,20%

Dunkin Donuts
5,19%

Fig 6.3
Morover, after the comparison of the RoiC-Wacc index, it is possible to note that Starbucks is
generating far more earnings for its investors than the other two companies taken into study.
Probably the effect of the profitable investment in Starbucks is reflected on the great growth in
the Stock Market in the last years.

Stock Market index growing comparison

Source: www.nasdaq.com

It is possible to note from the graph, that the SBUX (starbucks Corp.) index in the stock value has
rapidly grown ; in 5 years of about 220%, that means that the Company is gaining trust and
awareness in the stock market and the perceived performances are outstanding in respect to
those of the main competitors.
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7. Future scenarios
7.1. Starbucks S.W.O.T. analysis
On the basis of our previous analysis, we can select a series of features that more strongly
characterizes the company, as far as its strengths, weaknesses, opportunities and threats are
concerned,in order to provide a clear overview of its most relevant characteristics.

-Strong market position and global

-Brand recognition
-Business diversification and
continuous innovation
-Efficiency in supply chain
-Reputation for high quality products
-Starbucks Experience

-Expansion in new accessible

geographical markets
-Green business

-Expensive products
-Too much dependence on US
operating system

-High competition
-Market saturation in developed
countries
-Price volatitlity in the global coffee
market
-Change towards healthy lifestyles

Strenghts
Strong market position and global brand recognition:
Starbucks has a significant geographical presence across the globe with 22,519 stores
and operations in 68 countries108. Its one of the leading companies in the world in the coffee
industry with revenues growing by 16.5% in the last year109.
Starbucks then has one of the worlds strongest and most popular brands. A large part of
Starbucks loyal customers prefer Starbucks based not only on quality but also on its brand which is
today one of the most recognizable brands in the world, ranked 45th in The World's Most
Valuable Brands of 2016 by Forbes110.
Such strong market position and brand recognition allows the company to gain remarkable
competitive advantage in expanding into international markets and also help the growth in both
domestic and international markets

108

Fiscal 2015 Annual Report

https://www.strategicmanagementinsight.com/swot-analyses/starbucks-swot-analysis.html
110
http://www.rankingthebrands.com/The-Brand-Rankings.aspx?rankingID=334&year=1053
109

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Business diversification and continuous innovation

Starbucks doesnt operate only in the coffee industry but includes also other products as a result
of important acquisitions. Starbucks in fact owns Teavana and Tazo tea for the tea segment, Ethos
water and Evolution fresh for juices and it has owned La Boulange till 2015 for pastries and breads.
As a result Starbucks doesnt offer only coffee but also tea, fresh food like pastries and bread and
juices. In each of these segments Starbucks introduces innovations very frequently following the
demand of its customers and the trends of the moment. In fact Starbucks offers also a line of
energy drinks (Starbucks refreshers), cold carbonated drinks (Fizzio Handcrafted sodas),
instant coffee (Starbucks VIA instant) and bottled beverages (bottled Frappuccino) in order to
match the need of its customers.
Efficiency in supply chain
In order to serve a good coffee it is important that the whole process from coco beans in a field to
a steaming cup of coffee is well organized.
Starbucks has acquired an amazing supply chain that spans across almost nineteen countries 111.

Source:
www.supplychain247.com/article/behind_the_scenes_at_starbucks_supply_chain_operations
The vast majority of the companys coffee beans come from farmers in developing countries.
Starbucks owns a Coffee Bean farm in Costa Rica and supplies the rest. The companys strategy for
its supply chain involves diversification of suppliers to ensure stability of supply.
Starbucks has six roasting centers where the beans are prepared: its a centralized system that
allows Starbucks to control that the preparation, manufacture, and packaging is the same
everywhere.
The delivery has to be on time and low cost: for this reason Starbucks uses an automated
information system so that the company is able to monitor the global demand for coffee in realtime achieving the maximum effciency112.
111

http://www.supplychain247.com/article/behind_the_scenes_at_starbucks_supply_chain_operations

61

Reputation for high quality products

Quality for Starbucks is one of the most important feature since its early days. High quality is
pursued in every aspect of its activity, from the bean in the farm to the environment in store.
This attention for quality is recognized by customers who continue to be loyal to the company.
Starbucks experience
The main aim for the firm is to make their stores a third place besides home and work and in fact
Starbucks has created a unique environment in its stores where customers can chill, relax and take
their time while drinking a cup of coffee enjoying the free wifi and the music in background.
This kind of environment is a distinctive feature for Starbucks which attracts many customers also
because of this chilled environment..
Weaknesses
Expensive products
One of the most common critics moved to Starbucks is its expensiveness. Despite its high quality
and the uniqueness of the Starbucks Experience, sometimes Starbucks products cost too much
and some consumers cant afford Starbucks prices, especially in times of economic crisis.
In addiction to that, some products arent worth their prices and quality is not as high as our
expectations. So, consumers started to leave Starbucks and switched to Dunkin Donuts
and McCaf (which are cheaper).
For this reason, of course the expensiveness of its products is a weakness for the company.
Too much dependence on US operating segment
Starbucks is very focused on US operating segment where there are 12.500 113 stores and Americas
region generates 69% of total revenues114. The market is largly saturated and this aggressive
expansion in the USA leaves no place for long term growth targets. Moreover, the huge amount of
revenues generated in the Americas region makes the company very sensitive to changes in
conditions of the US economy and growth.
This is a weakness for the company because if any important loss happens in the large US
segment, any other segments gain cant compensate that loss.
Opportunities
Expansion in new accessible geographical markets
Asian markets such as the Indian market and the Chinese market are very populous countries
which nowadays are facing an intense growth of the GDP level and the middle class is increasing.
Middle class is in fact the typical target of a coffee house and doing business in such an
environment with so many potential customers in a growing economy is a great source of
profitability for this business.
Moreover, the governements are opening up to foreign investments in the country and its
becoming even more feasible to establish an activity there.

112

https://www.blurgroup.com/blogs/supplier-diversity/starbucks-supply-chain-management/
http://www.statista.com/statistics/218360/number-of-starbucks-stores-in-the-us/
114
Fiscal 2015 Annual Report
113

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Green business
Today people are becoming even more aware of themes such as the respect for nature and for the
environment. Acting responsively i4n this sense can be a smart strategy to catch the attention of
that growing slice of consumers particularly careful to the nature.
For example a coffee house could use photovoltaic panels to provide the energy in store or it
could use only recycled paper.
Threats
High competition
The speciality coffee market is highly competitive and the players around the world are hundreds,
both at a global level as well as at a local level. The huge number of coffee houses is due to quite
low entry barriers and low switching costs that dont discourage any new potential entrant and
make this business highly avaiable.
Market saturation in developed countries
Many coffee houses obtain an important amount of their revenue from the developed markets
(USA and Europe primarly) where this kind of activity was born. Unfortunately these countries
have a high market saturation currently. There is no more space for further growth and this is a
threat for coffee houses that want to keep high their market share in their most valuable areas.
Price volatility in the global coffee market
The vast mojority of coffee houses use higher quality and more expensive Arabica beans for its
coffees.
The prices of these high quality beans are typically very volatile and the companies cant control
this fluctuation of prices.
For instance, if a company bets coffee prices will rise next year, in the supply contracts they lock
in that year's supply at current prices. But if coffee prices fall below the companys locked-in
price, they lose money.
In this contest, any unfavorable change, even small, in coffee prices can have a big negative impact
on outcomes115.
Change towards healthy lifestyles
Consumers might be no more interested in the offer of delicious and sugary beverges and snacks
typical of the majority of the coffee houses. Consumers might become more conscious on their
diet and they might shift toward more healthy, vegan and organic products and the coffee culture
might vanish.
This scenario represents a possible future threat.

115

http://www.valueline.com/Stocks/Highlights/SWOT_Analysis__Starbucks_Corp_.aspx#.V01rq5GLTcs

63

7.2. Starbucks
future
perspective

Starbucks plans for the coming years concern 3 different areas:

1. Internationalization
2. Technology
3. Relaunching US segment
1. As concerns Starbucks international expansion in Asia, the company plans to open 500 new
stores in China in 2016 and bringing its specialty tea brand Teavana to India.
The company appears to be on target to reach 3,400 stores in China by 2019, confirming
the key role that China is playing in the company's growth. As Starbucks' second-largest
and fastest-growing market globally, China represents the most important and exciting
opportunity ahead of us. Over time, its conceivable that China could become our largest
market''116. Thats what Howard Schultz said about Starbucks plans in China.
Starbucks focuses on Indian market as well: the Indian economy is growing fast and the
middle class is increasing; so, Starbucks sees a huge opportunity in this country. Starbucks
is already present in India with 75 stores in partnership with a local player, Tata Global
Beverages but for the furure the company plans to bring its consumer packaged goods,
along with its specialty tea brand, Teavana, to India. Given that India is predominantly a
tea-drinking nation, the launch of Teavana in the country could help Starbucks gain
customers in the region.
Another project for India is to bring its mobile and digital technology to India so that mobile
order and pay can reduce long queues in the densely populated cities of the country, thus
giving Starbucks a competitive advantage117.
Recently, under license by South Africa's Taste Holdings, Starbucks opened its first store in
South Africa. This store was a success and Starbucks plans to open up to 150 stores 118.
Moreover, at the end of february 2016 Starbucks has announced a partnership with
Percassi to open the first Starbucks store in Italy, in Milan in early 2017 119. This plan is
particularly important because thirty-three years ago, during a business trip in Milan,
Schultz got inspired by the italian bars and atmosphere and had the vision to build up the
famous coffeehouse chain that we know today. Mr Schultz said: Starbucks history is
directly linked to the way the Italians created and executed the perfect shot of espresso.
Everything that weve done sits on the foundation of those wonderful experiences that
116

http://www.usatoday.com/story/money/2016/01/12/china-may-eventually-become-starbucks-largest-marketgoal-operating-least-3400-locations-there-2019/78675248/
117
http://www.forbes.com/sites/greatspeculations/2016/01/18/how-starbucks-plans-to-grow-its-internationaloperations/#f77da3a5fc70
118
http://ewn.co.za/2016/04/29/Starbucks-plans-150-stores-in-SA
119
https://news.starbucks.com/news/starbucks-announces-it-will-open-stores-in-Italy-in-2017

64

many of us have had in Italy, and weve aspired to be a respectful steward of that legacy for
45 years. Now were going to try, with great humility and respect, to share what weve
been doing and what weve learned through our first retail presence in Italy. Our first store
will be designed with painstaking detail and great respect for the Italian people and coffee
culture.120 This is a big challenge for Starbucks, considered Italys culture of coffee, but
Schultz is confident that the market is ready for its entrance.
2. Technology is very important for Starbucks and the company's digital initiatives for the
future include the effort to bring its digital order-ahead service (Mobile Order & Pay) to
all company-owned stores by the end of the year.
Mobile Order & Pay allows the coffee chain to solve the problem related to long lines in
stores and eliminates any backup at the cash registers. Customers can use their phones to
order in advance, pay for it, then simply pick it up in the store. This can impact positively
the sales and the operating results121.
3. Starbucks is still focused on its primal segment, the US segment. Despite its a mature
market, the company is finding new ways to exploit the whole potential of this market. In
fact Starbucks plans to open the second and the biggest Reserve Roastery and Tasting
Room in New York in 2018 and this will be a great opportunity to encourage the various
kind of customers of New York City to interact with Starbucks roasters and baristas in order
to deepen their understanding of the art behind sourcing, roasting and brewing rare
coffees. Mr Shultz said: In New York, we want to take elements from what we originally
created and build something even bigger and bolder, celebrating coffee and craft in a
completely unique and differentiated way. We want this experience to tell our customers
that were coming to Broadway 122.
Moreover, Stabucks matches its goal to exploit all the potential of the Us market with its
commitment for social causes with its project to open 15 new stores in low-income and
minority-heavy neighborhoods in the US where there will be an onsite training space so
youth in those communities can gain customer-service skills, boosting their future
employability. With this idea the company can create jobs, helping communities in
difficulties and at the same time expand further into urban areas123.

120

https://news.starbucks.com/news/starbucks-announces-it-will-open-stores-in-Italy-in-2017
http://www.fool.com/investing/general/2015/08/04/starbucks-ceo-believes-its-future-is-digital.aspx
122
https://news.starbucks.com/news/starbucks-new-york-roastery-announcement
123
http://qz.com/456347/starbucks-plans-to-fight-inequality-by-selling-poor-people-starbucks-coffee/
121

65

References:
Grant, Robert M. 2013: Contemporary strategy analysis , U.K.: Wiley.
Jones, Gareth R. 2013: Organizational Theory, Design, and Change.
Dodgson M., Gann D.M., Phillips N., 2014, The Oxford Handbook of Innovation
Management, Oxford University Press.
Hitt M.A., Ireland R.D., Hoskisson R.E. 2015, Strategic Management: Competitiveness and
Globalization, 11th Edition, Cengage Learning.

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