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Starbucks Coffee Chain Company

Essay by   •  May 16, 2011  •  Case Study  •  4,950 Words (20 Pages)  •  1,836 Views

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1. Introduction:

Starbucks is an international specialty coffee chain company. Operating more than 16,000 stores in over 50 countries worldwide to date, it is the largest coffeehouse company in the world (Starbucks Corporation 2010). Set back in year 1971, Starbucks specialized in coffee and other related beverages such as Italian-style espresso beverages, cold blended beverages, and a selection of premium teas, also with certain related businesses like complementary food items, coffee-related accessories and equipments (DataMonitor 2010). Starbucks' business operation can be breaks down into three segments - the United States, international, and global consumer products group (CPG). The United States and international segments, which is Starbucks' core businesses, comprise the company-operated retail store and its domestic and overseas licensing businesses; the global consumer product groups segment focus on the sales of packaged coffee and tea through other intermediaries like grocery stores and convenient stores (DataMonitor 2010).

1.1 Objectives of report:

The objectives of this report are as follow:

1.1.1. Investigating the business situation of Starbucks Corporation in 2009.

1.1.2. Conducting necessary analysis to indentify the company's problems and means to solve these problems.

1.1.3. Developing three alternative solutions to address the identified problems.

1.1.4. Developinga functional level action plan for one of the above said solutions.

1. Problem Statements:

1.1. Worldwide economic crisis

1.1.1. Symptoms:

The sales of Starbuck has decline on a significant proportion. Analyzing from its financial statement, Starbucks achieved an increase of 20.86 percent of sales in year 2007. In year 2008, such increase has been reduced to 10.32%. It got worse in year 2009 where the sales have a negative growth of 5.83 percent (Microsoft 2011). Such unfavorable growth includes decreases in number of transactions and average value per transaction. The decreases in these two elements indicate that fewer customers buy Starbucks products and customers that still purchase its products buy less than they used to.

On the other hand, Starbucks' cost of goods sold also increase due to the continuous rising price of dairy products and other inputs and more expensive storefront space add weight on the earnings of Starbucks (Cable News Network 2011).

1.1.2. Problem:

The major cause of these symptoms is the global financial crisis started in the middle of year 2007 with possible remaining risks until today. Due to such a global financial meltdown, inflation drove up the operating cost of Starbucks and took away a big chunk of its profit (Cable News Network 2011).

Under better economic situations, consumers have higher levels of willingness to pay for what they perceived as good or premium products. However during and after such crisis, people are cutting back their purchases on nonessential products, like premium coffee since they have lesser disposable income. Therefore, it causes the drop in total sales of Starbucks.

1.2. Mismanagement of expansion plan

1.2.1. Symptoms:

Right after Starbucks posted its first quarterly loss in its history as a public company midst of year 2008 (2Q), it came out with cost-cutting and restructuring plan. The plan was to close down 600 underperforming stores in the United States and lay off as much as 12,000 workers (The New York Times Company 2008). Such loss of USD$6.7 million, or 1 cent per share, is rather obnoxious while comparing to the same quarter one year earlier - where the company earned a profit of USD$158.3 million, or 21 cents per share (Msnbc.com 2011).

Also, we can notice the difference between year 2007 and 2008 if we were to look at the yearly financial statement. The total revenue and gross profit for both year (USD$9,411.5 million and $2,196.48 million for 2007, USD$10,383 million and $1,992.6 million for 2008) are about the same scale. Yet the operating income suffered a dratiscal drop from USD$1,053.95 million to $503.9 million, thus contributing to the massive fall of said yearly net income (Microsoft 2011).

1.2.2. Problem:

Despite just putting the blame on the sluggish economy, Starbucks' own expansion plan and strategy should also be reviewed and trialed if were to be fair. Ever since Starbucks went public in year 1992, its strategy was to blanket the entire targeted region with stores on a fast and steady pace (The McGraw-Hill Companies 1999). For years, Starbucks was known for its aggressive expansion of opening stores only a few city blocks away from one another (The New York Times Company 2008).

After the current Starbucks CEO, Howard Schultz bought over the company back then and opened its first store; he opened another outlet just 15 metres away (Clark 2008). The idea was to serve two different crowds and the concern over the two stores might eat away each other's sales due to the distance became irrelevant. Given the history of Starbucks, the current expansion strategy definitely matches the philosophy of the company. But the same strategy is hardly practicable twice, especially when the situation is no longer the same. Schultz's decision on applying the same expansion strategy on a global scale suffered drawbacks like not being able offset the expenses of operating cost.

Coffee is one of the world top commodities and considered as a necessity by majority of American. Even though Starbucks is the dominant player in United States coffee industry, there are still a lot of coffeehouses operating on a smaller business scale throughout the whole region. While the market share of Starbucks did not increase in align with its number of stores, serving the same market with excessive stores suffered Starbucks of unnecessary operating costs and ultimately, its profit.

Such problem is classified as short term problem. The manager in charge has to come out with strategic planning and restructuring plan to overcome the problem.

1.3. The rise of new competitors:

1.3.1. Decrease number of transactions:

Over the years, McDonald's, Dunkin' brands, KKD and many others trying to lure away Starbucks customer to cheaper cup of coffee. They constantly state that no one should pay that much for a cup of coffee



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