Frappuccino dominating selfies on Instagram, vlogs about pumpkin spiced latte and weblog posts as “Review of Starbuck’s Orange/Mango Blend” – Starbucks is great on as well as in social media. The maritime logo of the mermaid appears to have become an identity marker of coolness for teenage and twenty-something girls. Lifestyle journalists starting as early as at the age of twelve contribute a lot to Starbucks’s brand publishing (also known as content marketing). Currently, I am writing a book chapter that explores how and why Starbucks engages these so-called “influencers” to popularize their products. To get an idea of the company behind the green Siren and its place is in the current world, in this blog post I analyse Starbucks with the Swot and Pestle models.
Starbucks hardly needs any introduction. The leading American coffee company was founded in Seattle, in 1971, аn еffоrt frоm сhаirmаn аnd CEO Hоwаrd Sсhultz tо bring а pleasant рlасе fоr соnvеrѕаtiоn аnd a ѕеnѕе оf соmmunitу tо thе dоmеѕtiс mаrkеt, by replacing the American “mall culture”. Today, Starbucks operates in 75 countries through four different segments which include Americas, China Asia Pacific, Middle East and Africa and Channel development (Reuters 2018). Starbucks sells a range of coffee and tea products and is licensed through trademarks like grocery, licensed stores and food service accounts. The company as well sells goods and services under several brands like Teavana, Seattle’s Best Coffee, Ethos and Revolution Fresh among others (Reuters 2018). The company’s turnover increased from $21 billion in 2016 to $22 billion in 2017 while its margin reduced from 19.70% to 19.29% in 2017 (Orbis 2017).
To get an idea of the company behind the green Siren and its place is in the current world, this blog post will analyse Starbucks within the framework of the business model as an abstract representation of a business, to show how the firm creates and captures value (Aspara et al. 2013; Zott et al. 2011), following the line of thought of Teece (2010), who argues that a business model “articulates the logic and provides data and other evidence that demonstrates how a business creates and deliver values to customers” (Saxena et al. 2017, 13). The two most used models describing businesses are called Swot and pestle. Both being acronyms, the pestle is an analytical tool that stands for Political, Economic, Social, Technological, Legal and Environmental analysis, while the swot is a strategic planning technique used to help identify the Strengths, Weaknesses, Opportunities, and Threats of a business. Thus, the context from which Starbucks operates will be explored by analysing the company with the help of these two models. I will start with a PESTLE analysis, to identify how Starbucks is affected by pre-defined factors.
The first category in the pestle analysis is the political environment. Two factors stand out for Starbucks. Firstly, a state’s safe drinking water and toxic act which requires businesses to provide warning labels when exposing consumers to chemicals like acrylamide which are considered to cause reproductive harm and cancer is a threat to coffee sellers like Starbucks. This will negatively affect the coffee sellers, mostly with the recent ruling from California judge which requires coffee beverages to be branded with cancer warning labels (HSU 2018). Secondly, the U.S. corporate tax cuts are a big opportunity for coffee sellers like Starbucks. The republican tax law has cut the federal corporate tax rate to 21% from 35% (The New York Times 2018). This is likely to be a great opportunity for North-American businesses like Starbucks as they will be able to boost their sales and margins. However, this could be an invitation for more investments in the US which could make the already competition in the market worse and that would negatively impact on companies like Starbucks.
The second item in the pestle analysis is the economic environment. A strong economy means a great opportunity for U.S. businesses like Starbucks, as it will encourage more consumer spending which will boost sales of companies like Starbucks. The U.S. economy expanded at a 2.9 rate in the fourth quarter of 2017 up from 2.5 a growth beyond expectation (Long 2018). Another opportunity for companies like Starbucks is China’s strong economy, which is forecast to overtake the Eurozone, as Starbucks already operates in the country. China’s GDP is forecast to reach approximately $13.2 trillion in 2018 beating the $12.8 trillion combined 19 countries that use the Euro (Jamrisko 2018). The rapid GDP is fueling massive growth of China’s middle class which is forecast to reach 600 million by 2021(Xinhua 2018). This will increase the buying power of consumers and boost the margins of companies like Starbucks, as will also be identified in the swot analysis. But on the other hand, there is a stiff competition in the market. Starbucks is facing stiff competition from coffee sellers ranging from independent cafes to fast food chains which have resulted into a fall in the company’s margins and sales in the US (Baertlein 2018). The presence of competitors like McDonalds and Dunkin Donuts among others are a threat to the company’s market shares.
The third factor in the pestle analysis is the social environment. Luckily for Starbucks, cafe culture is becoming a fashion symbol and driving global coffee consumption. Just like technology, coffee is more important to the millennials than to the older generation. Millennials behavior and attitude are shaping the coffee market (National Coffee 2017). Millennials are a highly attractive market for the coffee industry and coffee makers like Starbucks should work on attracting and retaining this demographic (NCA 2018). But the discrimination incident at Philadelphia Starbucks is a scene that will negatively affect the company (Stevens 2018). In this incident at the company’s branch of Philadelphia, two black men were denied from using the restrooms and later arrested for hanging at one of Starbucks’ cafes. This raised criticism and disappointment in the customers and citizens which resulted into a boycott Starbucks campaign (Hauser 2018). This negative publicity has damaged the company’s reputation and will likely affect the company’s margins as well.
The fourth aspect of the pestle analysis is the technological environment. With the ongoing digital revolution, Starbucks’s has made digital initiatives part of its priorities. From its reward program to mobile order-ahead feature, the company has been able to increase convenience, sales and reduce congestion at its outlets. The company’s digital platform has been able to drive profit growth and revenue (Soper 2017).
The fifth element of the pestle analysis is the legal environment, which differs from country to country, but continues to need Starbucks’ attention. Take for example the California judge ruling that requires coffee beverages to be branded with cancer warnings – that is a big threat to coffee sellers like Starbucks (HSU 2018; SBS News 2018). The ruling stems from a law suite which was filed in 2010 by council of education and research on toxics where the group charged Starbucks and other companies for not warning consumers that consuming coffee would expose them to acrylamide a chemical which is formed when coffee beans are roasted (HSU 2018).
Last item on the pestle-list are the environmental factors. Although Starbucks prides itself on environmental awareness, several reports have pointed out how the company has failed to live up to its word, for instance the company continues to use single use plastic cups despite the company’s greener cup initiative (Harper 2017). The company has also been accused of failure to establish a policy to phase out its green plastic straws despite the existence of the paper straw alternative. The Lonely Whale Foundation which has put companies on pressure to reduce plastic straw pollution has pushed Starbucks to join the straw less in Seattle initiative through which Seattle plans to enforce a ban on plastic straws and utensils by July 2018 (Harper 2017).
Now that I have discussed the external factors using the PESTLE model, I can continue to focus on the business from the inside, using a SWOT analysis. What are Starbucks’ strengths? First, The company’s diversification strategy is one of its major strengths. Starbucks has been able to compensate it’s US slow sales with strong sales from other segments like the China segment. According to Lavito (2018) China was able to outpace US in the last quarter with an 8% increase while US grew by just 3%. Secondly, as discussed above, Starbucks has as trong brand name. Apart from being one of the oldest coffee shops, Starbucks has extended its foot print in approximately 75 countries and has become a part of America’s coffee culture(Martin Roll 2017). Even with high prices, the company is still more popular than its competitors because of the power of its brandname. Thirdly, the company’s strategic distribution of its channels is one of its major strengths. Starbucks has been able to open drive throughs and express stores in almost every suburb in New York and Seattle among others areas this has increased convenience for customers and given it an advantage in the competitive market (Forbes 2016).
On the other hand, Starbucks also has its weaknesses. Starbucks prices are rather high compared to other stores. According to Baertlein (2018), where company’s like Dunkin’ Donut raise their prices by 1% a year, Starbucks has increased its prices by 3.5% . This has resulted into a fall in its sales with its affluent customers turning to cheaper options. Another weakness can be identified when considering that company sales have been reducing. With the company reporting just a 2% US same store sales gain, it fell short of expectations as they experienced less sales during the holidays (Baertlein 2018). This was due to less traffic at the stores, crash of mobile orders and the aforementioned high prices compared to competitors. A third weakness is the general decline in customer spending, which according to Duggan (2018) is a trend that could make it difficult for the company to live up to its expectations. This will result into a decline in sales and a fall in the margins. The company’s customer spending declined from 8% in 2017 (Duggan 2018).
What are the opportunities and threats for Starbucks? As explained above, the US corporate tax cut is a great opportunity for the company as it may boost the company’s sales in the US and margins (Reuters 2018). China’s strong economic growth is an opportunity for Starbucks as it will help boost the company’s margins. The strong US economy is a major opportunity as customers will be able to buy more. But there are also threats to Starbucks’ success and growht, such as the California judge ruling which requires coffee sellers to brand their coffee with cancer warnings. This is likely to create fear in the coffee buyers making them to put a limit on the coffee they drink which will affect the company’s margins. Another issue is the discrimination incident where two black men were arrested in Starbucks Philadelphia, that created a bad image for the company (Stevens 2018): criticisms and anger among public officials and a “boycott Starbucks”-campaign by angry customers (Hauser 2018). This has damaged the reputation of Starbucks and will likely affect the company margins, especially when we consider the high competition in the market. According to Baertlein(2018), the market is crowded with coffee sellers ranging from independent cafes and fast food chains which has resulted into less sales and a drop in the company’s margins.
To conclude, the above analysis have revealed a number of trends that are likely to impact Starbucks. One of the major trends is the US corporate tax cuts to 21% from 31%, this will positively impact the company. Another positive trend is the strong economic growth of China, this is likely to boost the company’s margins and sales in China and compensate the US decline sales . The strong US economy is also another opportunity for growth. However, the California judge ruling that requires coffee makers to label their coffee with a cancer warning is threat and a trend the company should watch out for as it will impact the company margins. Another trend the company should be aware of is the growing competition in the market, this will hurt the company margins considering the fact that most of the competitors are cheaper than Starbucks. The competition coupled with the recent discrimination incident are very likely to affect the company’s margins thus Starbucks should watch out for these trends. To examine how Starbucks can maintain its growth, my research will describe its target audience and the business tactics Starbucks uses to reach them, especially the engagement of the so-called social influencers.