Situation Analysis Report on Starbucks’ Competitive Advantage

TABLE OF CONTENTS

1.Executive Summary

2. Introduction

3. Findings

The Industry’s Demand Determinants

Starbucks’ Growth Trajectory and Innovation as a Competitive Edge

Starbucks Gains Competition Through Capitalization on Consumer Preferences

4. Conclusion

5. Recommendations

6. References

Executive Summary

Starbucks Corporation, found in Seattle, Washington in 1971, is an American coffee production company and coffeehouse chain that houses thousands of locations worldwide. It offers a wide range of products in its menu, including hot and cold drinks, coffee, tea, juices, its signature frappucinos, and many offerings of pastries. Many lines of Starbucks bottled coffee are also sold at grocery stores.

In the past few decades, Starbucks has been actively expanding its location across the world, from Japan to the UK, Peru, Russia, and Italy to name a few. As of 2018, Starbucks operates 28,218 locations worldwide (Sakal, 2018). The reason behind its great popularity is believed to be its ability to engage with customers personally. Howard Schultz, a former chairman, and chief executive officer of Starbucks has stated that the corporation is not “in the coffee business serving people” but is instead “in the people business serving coffee” (Sakal, 2018). This aspect makes Starbucks stand out among coffeehouse chains and gains the company much competitive advantage since customer service and experience is central to its business model.

Introduction

Starbucks operates in the retail coffee industry. Although this industry has experienced some downturns during the 2009 economic crisis due to decreased demand for the luxury of earring out, the industry has experienced some growth since 2013 thanks to improving economic conditions and consumer confidence. This market, however, is dominated by Starbucks (with a share of 36.7%) and has some competitors like Dunkin Brands (24.6%), McDonald’s, Costa Coffee, and Tim Horton’s (Geereddy, 2013). Dunkin Brands and Starbucks alone add up to over 60% of the market share and therefore this duo has much market power when it comes to influencing industry trends and standards. This report aims to examine how Starbucks has strategically gained market competition and maintained its position as the largest shareholder in the coffee retail industry through innovation and capitalization on consumers’ preferences.

Findings

The Industry’s Demand Determinants

Determinants of the industry’s demand for coffee and other products provided in these coffeehouses are disposable income, per capita coffee consumption, consumer’s general attitude towards health, the world’s pricing of coffee, and demographics (Geereddy, 2013). The industry is sensitive to consumer’s disposable income because as shown in the 2009 economic crisis, consumer demands for the luxury of purchasing coffee from a coffee shop decline when their economic conditions get worse. When disposable income is low, consumers would rather focus on buying necessities rather than luxuries and would purchase cheaper coffee alternatives. Per capita coffee consumption is also a determinant of the industry’s demand because only when people choose to consume more coffee would the aggregate revenue of coffeehouses increase. Alongside per capita coffee consumption, consumer’s attitude towards health is also a key driver of demand in this industry. Many people are becoming health-conscious about the effects of excessive caffeine and blood sugar; they would advocate for a healthier lifestyle where organic products are preferred and caffeinated drinks and sugary snacks are absent. If this attitude towards health becomes mainstream, chains like Starbucks and Dunkin brands, who profits mostly from their coffee and sugary snack products, can experience some turbulences in terms of revenues. World’s pricing of coffee also plays an important role, because it determines the cost of production of coffee products. Expensive coffee beans can drive up the market costs of coffee drinks. Countries that have short supplies of coffee beans yet a high demand for coffee consumption can face higher prices of coffee. Higher prices can drive down consumer demand for coffee since not all can afford expensive coffee. Determinants of demand can especially help analyze the market competition between firms since all would need to strive to increase consumer demand and maximize profits.

 

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