Starbucks PESTLE and SWOT Analysis

Overview

Originating from a single shop in 1971, Starbucks has expanded into a publicly traded company that is now recognised as a leading and international “premier roaster, marketer and retailer of speciality coffee” (Starbucks Corporation, 2016, p.3). Despite the plummet in growth during 2008, Starbucks’ business revival strategy has proved successful, turning over $2.8 billion in 2016, a 2.1% increase from 2015 (Jurevicius, 2017). Starbucks has reinvigorated the packaged coffee business, explored unventured markets, innovated new products and accelerated retail growth. Starbucks continues to thrive towards their mission: “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time” (Starbucks Coffee Australia, 2017), with stores operating in 75 countries around the world. Starbucks’ vision aims to maintain its core principles of: ethically sourcing products, engaging in human connections, committing to supporting the community and suppliers, and lastly, becoming leaders in producing and encouraging sustainable environmentally friendly products. Their product mix includes premium quality coffee, tea, fresh foods and other beverages.

External Environment

External forces affect the businesses internal operations. Examining the macro PESTLE factors as shown below, identifies the drivers of change for Starbucks.

Social

Changing consumer preferences and tastes, for example, an increase in per capita coffee consumption contribute to an increase in the company’s revenue. Attitudes towards health and wellbeing have dictated actions from the food and beverage industry, with companies tailoring their menus to incorporate a more organic and healthy product mix. Starbucks has capitalised on this trend with additional growth platforms like the Refreshers brand of natural energy drinks and the Evolution Fresh brand of super-premium bottled juices to target health-conscious customers.

Further, changing demographics, such as the rising middle-class population have increased coffee consumption significantly. Demographic trends have seen a preference towards premium coffee from younger generations, with gourmet coffee consumption expected to grow by 2.4% (Bernstein, 2013, p.5). It has also triggered a shift in favour of away-from-home coffee consumption.

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Technology

In the Digital Age, rapid growth in technology innovations and advancements have opened new spaces for businesses to expand and exploit. In addition to Starbucks’ traditional distribution channels, “the company has been utilising digital channels such as internet and mobile applications to reach customers” (Starbucks Corporation, 2016, p.5). In 2010, Starbucks’ digital network provided unlimited Wi-Fi for customers (Lemus, Orta, Rivero, & von Feigenblatt, 2015, p.25). Leveraging this technology has offered new and existing customers convenient and accessible products and services. E-Commerce such as their online website and advertising has helped expand their customer base.

The widespread use of mobile phones i.e. M-Commerce has induced Starbucks to create a mobile payment app meaning customers can now make purchases easily and are rewarded loyalty points. This growing technological field has driven business for Starbucks and they should look to further capitalise on this.

Further, new food storage technologies have been made available. The unique ‘Flavorlock’ technology using a one-way valve system allows coffee beans to stay fresh for several months (Starbucks, 2017).

Environmental

Growing awareness surrounding environment degradation have sparked change in businesses to become environmentally friendly and move towards a sustainable business plan. In particular, Starbucks has used its sustainable and responsible sourcing policies to differentiate its products from competitors.

Since 2004, Starbucks has implemented strategies to combat climate change by investing in clean and renewable energy such as wind-mills, reducing wastes, conserving energy and water by 25%, undergoing coffee renovation and replanting, and adopting climate smart agricultural practices for farmers (Starbucks, 2017).

Starbucks has promoted recycling in stores through using recyclable cups, BioPak’s Bagasse bio-degradable plates and biocutlery in stores, eliminating over 90,000kg of plastic (Starbucks, 2017). Importantly, Starbucks’ ‘Open-source’ approach engages with competitors to share tools, knowledge and practices that contribute to creating sustainable products and saving the planet.

Economic/Political/Legal

Other factors can also drive change. The food and beverage industry is sensitive to macro-economic factors that affects a household’s disposable income (Geereddy, 2014, p.2). Changes in disposable incomes may affect consumer purchasing decisions. Globalisation, the integration of markets and suppliers on a global spectrum, has led to overseas investment for Starbucks. Labelling food regulations and laws have resulted in the modification of Starbucks’ labelling processes which could affect product sales. (Starbucks Corporation, 2016, p.12).

SWOT Analysis

Starbucks operates in a highly intensive and competitive food and beverage service retail industry. A SWOT analysis as shown below, examines and evaluates Starbucks’ internal performance. Starbucks’ strong community connections and ethicality creates new opportunities. However, Starbucks faces numerous internal weaknesses that expose them to potential threats.

(S)trengths

Starbucks’ competitive advantage over competitors is their goal to provide customers with the Starbucks Experience. This includes high quality products, high-standard customer service, well-maintained stores, free wireless internet access, and a warm atmosphere and friendly ambience. These factors all contribute to Starbuck’s strong customer connection. Starbucks Australia CEO Chris Garlick describes Starbucks stores as having a “significant and loyal customer base” (Brook, 2016).

Furthermore, the company established a Starbucks Rewards Program on the Starbucks Australia Mobile App. This advancement in technology has led to the “new optimised and fully-integrated mobile app [that] lets you enjoy convenient, wallet-free payment, track Stars and redeem rewards, add funds to your balance” (Starbucks, 2017).

Starbucks’ ethical sourcing of sustainable products has positively shaped the brand’s recognition and reputation. Starbucks source ‘responsibly grown and ethically traded’ coffee, tea and cocoa (Starbucks, 2017). Starbucks introduced Coffee and Farmer Equity (C.A.F.E.) Practices, which aim to achieve long-term supply, reach sustainable standards and positively impact farmers and their communities. Further, Starbucks’ Farmer Support Centres for ‘agronomy research and development’ have assisted farmers’ development of ‘sustainable farming practices’ and provided appropriate support and training (Starbucks, 2017).

(W)eaknesses

Starbucks offers premium quality coffee at high prices. However, during slumps in growth, this may deter consumers, as they look for cheaper alternatives. Starbucks may also have a harder time establishing in developing countries.

Strong focus on the US Starbucks market has diminished attention on the Australian market. In Australia, Starbucks has seen the closure of 60 shops, with only 22 remaining (Brook, 2016). Over 69% of total Starbucks’ revenue is generated from the US and this in turn makes the company highly sensitive to and reliant on US economic growth (Bernstein, 2013, p.9).

Further, Starbucks has invested large sums of capital and finance towards market penetration, product development, building infrastructure and seeking new distribution channels, that could eventually cause fragility in the market and slow growth.

(O)pportunities

Starbucks has utilised and implemented an expansion phase across the globe to strengthen their relative market position. Starbucks has had an explosive presence in Asia, Middle East and Africa. In 2015, Starbucks established over 1,000 stores in China, and rapid economic growth and rising middle-class disposable incomes have encouraged continued expansion to over 3,000 stores by 2019 (Starbucks Corporation, 2016, p.9). China’s coffee market has grown at 42% from 2003 to 2013 (Bernstein, 2013, p.1). Starbucks has further increased their distribution capabilities by entering manufacturing agreements with Tingyi Holding in China to introduce a ‘ready-to-drink’ Starbucks beverage and partnerships with Tata Global Beverages Limited in India.

New opportunities in diversifying the product mix and innovating will help Starbucks outpace competitors. In light of overseas expansion, producing locally relevant flavours and products are necessary for international growth. Starbucks has diversified and opened new channels through the consumer packaged goods business which includes instant coffee packs that are sold in supermarkets (Bernstein, 2013, p.2). The customised beverage innovation scheme allows customers to create their own inventions. Further, partnering with vending machine companies has strengthened Starbucks’ presence in the office marketplace.

(T)hreats

In such a vast retail space, Starbucks faces competition. Despite other competitors entering the market such as quick service restaurants and convenience stores, specialists like Starbucks have still seen strong growth. Bernstein (2013, p. 5) suggests that these new entrants have expanded the market for coffee, rather than invaded shares from existing players. However, a shift towards cheaper coffee alternatives such as 7-Eleven or McDonalds, poses as a potential threat to Starbucks.

Starbucks’ core raw material are whole Arabica coffee beans, which are subject to price fluctuations. Starbucks cannot “enter into fixed-price purchase commitments” (Starbucks Corporation, 2016, p.12). Dependent upon the supply and demand of beans, suppliers hold high bargaining power. Other factors including weather, natural disasters or crop diseases may affect the availability and price of coffee beans, which in turn affect market costs and profitability margins. Starbucks can eliminate this volatility through future contracts that lock in quantity inputs at fixed low prices so that costs may be managed (Geereddy, 2014, p.7).

Recommendation

Creating Shared Value (CSV) involves placing societal issues at the core, not the periphery. Businesses should create economic value that simultaneously creates societal value through addressing societal needs and challenges (Porter & Kramer, 2011, p.66). In alignment with Starbucks’ mission statement and vision, and in the pursuit of strategy specialising and sustainable business growth, a recommended CSV initiative is by building clusters locally and globally through utilising technology.

The CSV initiative involves four progressive stages:

1. Starbucks should work and create relationships with a diverse range of sustainable companies and suppliers who share similar social and environmental values. Cross-sector partnerships can help Starbucks implement social value strategies that benefit both parties. International joint ventures are another additional channel for Starbucks to explore. In addition to Australia and local companies, Starbucks should seek to generate a strong cluster internationally.
2. The second stage is for Starbucks to work concurrently with contemporary technology trends to promote their Starbucks Card. Increasing mobile phone usage allows Starbucks to reach more customers through their Starbucks Australia Mobile App. Social media becomes a crucial tool and channel for branding and marketing of products (Chua & Banerjee, 2013, p.239). Instead of completely redesigning, they should utilise and develop a resource they already possess. The Starbucks Card allows customers to purchase Starbucks goods in participating countries.
3. With the first and second stage complete, Starbucks should work towards allowing the newly promoted Starbucks Card to make purchases with these other new companies. Thus, making Starbucks the bridge between customers and other sustainable companies.
4. In connecting companies and suppliers with passionate customers, Starbucks should hold events like Global Summits and conferences surrounding key societal issues that need addressing i.e. combating climate change. Together, they will be able to collaborate and work together towards other CSV initiatives.

This four stage CSV initiative creates shared benefits across all three sectors as shown below:

“CSV will give Starbucks Corporation a new position in the market by demonstrating a balance among economic prosperity, social integrity, and environmental responsibility.” (Lemus et al, p.27). The CSV will utilise Starbucks’ strengths to strategise on new opportunities like branching out to other companies through technology. And by differentiating themselves, this will help eradicate internal weaknesses and eliminate external threats. Though this CSV may have short-term implications that may threaten the budget or transform the company, the long-term benefits will be abundant.

Conclusion

As the world’s largest coffeehouse company, Starbucks remain leaders in the industry of sustainable business and innovation. Starbucks has continued to achieve its vision of leadership, ethical and environmental stewardship, innovation and change (Lemus et al., p.29) despite the challenges. The recommended CSV initiative transforms Starbucks into ‘connectors’ who will assist with the creation of larger clusters – that will ultimately drive beneficial change. There are still various untapped potential growth areas that need exploration, and Starbucks needs to forge ahead, setting an example for others to follow, so that an environment and attitude of creating shared value is formed.

Reference list

• Bernstein, C. S. (2013). Bernstein black book – Starbucks: from corner café to global consumer brand. Retrieved from website: http://www.bernstein.com
• Brook, B. (2016, Sep 30). Starbucks coffee is quietly expanding in Australia after humiliating retreat eight years ago. The Business News. Retrieved April 1, 2017, from website: http://www.news.com.au/finance/business/retail/starbucks-coffee-is-quietly-expanding-in-australia-after-humiliating-retreat-eight-years-ago/news-story/
• Chua, Y.K. A., & Banerjee, S. (2013). Customer knowledge management via social media: the case of Starbucks, Journal of Knowledge Management, 17 (2), 237-249. doi: 10.1108/13673271311315196
• Geereddy, N. (2014). Strategic analysis of Starbucks corporation. Retrieved April 1, 2017 from website: http://scholar.harvard.edu/files/nithingeereddy/files/starbucks_case_analysis.pdf
• Jurevicius, O. (2017). Starbucks SWOT analysis 2017. Retrieved April 1, 2017, from Strategic Management Insight website: https://www.strategicmanagementinsight.com/swot-analyses/starbucks-swot-analysis.html
• Lemus, E., Orta, M., Rivero, O., & von Feigenblatt, F. O. (2015). Starbucks corporation: leading innovation in the 21^st century. Journal of Alternative Perspectives in the Social Sciences, 7(1), 23-38. Retrieved from website: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2638468
• Matzler, K., Bailom, F., von den Eichen, F. S., & Kohler, T. (2013). Business model innovation: coffee triumphs for Nespresso. Journal of Business Strategy, 34(2), 30-37. doi: 10.1108/02756661311310431
• Porter, M. E., & Kramer, M. (2011). Creating shared value: Redefining capitalism and the role of the corporation in society. Harvard Business Review, 89(1/2), Retrieved from website: http://ereserve.library.sydney.edu.au.ezproxy1.library.usyd.edu.au/fisher/Po rterCreating2011.pdf
• Starbucks Coffee Australia. (2017). Global Responsibility. Retrieved April 1, 2017, from Starbucks Coffee Australia website: https://www.starbucks.com.au/
• Starbucks Corporation SWOT Analysis. (2016). Starbucks Corporation. Retrieved April 1, 2017, from website: http://www.marketlineinfo.com