Starbucks Risk Assesment
Contents 1. Launch of a new product/service2 1. 1 Flowchart for launch of a new product/service2 2. Reasons for a Failed Product Line2 2. 1 Adverse Environment Conditions2 2. 1. 1 Industry Competition2 2. 1. 2 Political Implications2 2. 1. 3 Economic Events2 2. 1. 4 Evolving Social Factors2 2. 2 Error in forecast of consumers’ response2 2. 2. 1 Incomprehensive Market Analysis2 2. 3 Ineffective Product Launch2 2. 3. 1 Wrong Timing2 2. 3. 2 Unprofitable Product2 2. 3. 3 Inadequate Support2 3. SWOT Analysis2 3. 1 Strengths2 3. 1. 1 Wide range of products sold through numerous locations2 3. 1. Strong Brand Equity2 3. 1. 3 Excellent Research and Development capabilities2 3. 1. 4 Relationships with established players2 3. 1. 5 The Starbucks Experience2 3. 2 Weaknesses2 3. 2. 1 Criticism and controversies dilute brand value2 3. 2. 2 Lack of Diversification2 3. 2. 3 Product recalls affect margins and brand image2 3. 3 Opportunities2 3. 3. 1 Growth through acquisitions and partnerships2 3. 3. 2 Introduction of Starbucks VIA coffee essence in Japan and China2 3. 3. 3 Rapid expansion in China and entrance into a new market – India2 3. 4 Threats2 3. 4. 1 Rising prices of raw ingredients2 3. 4. Increasing health consciousness among Americans could affect demand2 3. 4. 3 Increasingly stiff competition from other giants like McDonalds and Dunkin Donuts2 4. Emerging/Current Trends2 4. 1 Health-conscious customers2 4. 2 Brand erosion due to changes in pricing and new product offerings2 4. 3 Strategic alliance with Green Mountain Coffee Roasters2 4. 4 Implication for strategic objectives and strategy formulation:2 5. Risk prioritization for Starbucks2 5. 1 Risk of losing market share due to stiff competition2 5. 2 Commodity price risk2 5. 3 Currency risk2 5. 4 Supply chain disruption risk2 5. Risk of changing consumer preference2 5. 6 Risk of failure and breach of security of IT systems2 5. 7 Product liability2 5. 8 Risk of Non-Compliance with Laws and Regulations2 5. 9 Risk of loss of key personnel2 5. 10 natural hazard risk2 5. 11 Risk Map2 6. Risk Responses and control devices/activities2 1. Launch of a new product/service Being in a heavily competitive market, the need for lean, rapid and profitable new product development has never been more pressing. This is especially so as product life cycles are getting shorter and customers are more demanding as they are now spoilt for choice.
Starbucks introduces on average, one new product each day. It is important for Starbucks to keep this trend going and constantly innovate to keep a step ahead of its competitors. Starbucks believe that it is not just about getting new customers; it is also about keeping the old ones interested. Hence they constantly engage in efforts to develop new ideas, products, and experiences for its customers. CEO Howard Schultz and other senior executives honed in the importance of always being open to re-inventing the Starbucks experience. In fact, at Starbucks, consumer input is an important part of their development process.
A website was set up to encourage contribution of ideas, facilitate discussions and even allows consumers to see the development of their ideas. Starbucks has a dedicated Research & Development team whose job is to constantly design and develop their food and beverages. Expenditures allocated are high each year (2010: $9million, 2009: $7million and 2008: $7million) as Starbucks continues to invest in technical research and development activities, in addition to customary product testing and product and process improvements in all areas of its business. The first step to launching a new product is idea generation.
At Starbucks, brainstorming sessions are conducted and consumers’ suggestions on the company’s website are taken into account. Next, these ideas are screened and those which are perceived to be the least likely to succeed will be eliminated. The filtering is first done through discussions between both the staffs and the consumers on their website before being reviewed by Starbucks’ Idea Partners. These partners include not only food scientists from the R&D team but also the environmental impact manager. This ensures that ideas which seems feasible to the R&D team will also incorporate sustainability into all aspects of its operations.
By doing so, Starbucks would ensure that new products will sell well and at the same time fit in with the company’s image, vision and strategic objectives. The third step would be concept development and testing which will require formal evaluations of the product concept by consumers, usually through some form of marketing research. At Starbucks, in testing new products, extensive in-house taste-testing and research done via focus groups are carried out. At each focus group, participants “taste it, grade it and then tasted it again” to ensure effective and accurate results.
From here, ideas which are selected will then be analyzed for its marketability and costs. This is referred to as the business analysis stage whereby both market and product analyses would be carried out. The market demand would be determined and the feasibility of production would be assessed. However, should sales price set be unable to cover the production cost, the idea would be discarded as it would not be economically viable. For ideas approved thus far, Starbucks will first gradually launch these new products to a selected market.
This test in an actual market is a step further from the stimulated market assessed during the focus groups. However, as opposed to jumping into the water with both feet, Starbucks tends to take a more cautious approach and engage in a state by state product launch (in the US) to affirm the market analysis previously performed and then reassess the feasibility of introduction of the product in its cafes around the world. As for products which are poorly received by the market, they will be pulled back for reconceptualisation or even be discarded altogether. Lastly, commercialisation takes place.
This is the point where the product will be introduced to all markets. Starbucks generally relies on their interactive website to introduce and promote the new products to their customers since new products are consistently introduced and it may be too costly to advertise each time. Taking a step further, Starbucks will continue to improve on new products through the feedbacks it gathers from its customers in an effort to keep customers happy and satisfied. Due to the nature of the products sold by Starbucks, relatively small investments are required throughout the development of new products.
However, it was noted that some products took up to a year before being introduced to the market. In this aspect, the development process should be sped up in order for Starbucks to ensure competitiveness and have an edge over its competitors. The flowchart below (Figure 1) depicts the process for the launch of a new product/service from its initial conception to its retail sales to customers. 1. 1 Flowchart for launch of a new product/service Figure 1 2. Reasons for a Failed Product Line Starbucks has a ubiquitous presence in the international cafe scene and recent years have witnessed it introducing new concepts and products.
However, while some were embraced by its consumers, others suffered the fate of being withdrawn from the stores. Examples of failed products include: the Blackberry Green Tea Frappuccino, Organic Milk and Orange Mocha Frappuccino. A product is a failure when its introduction into the market is subsequently followed by its withdrawal; with reasons attributed to its unprofitability, the inability of it to go through its anticipated product life cycle or realise a sufficient share of the market to ensure sustainability in the market. There are various factors which can culminate in its failure and the product is not necessarily an inferior good.
Figure 2 below, presented in the form of a fault tree diagram, illustrates the circumstances in which a product may fail in the context for Starbucks. The three direct reasons identified for product failures at Starbucks are the adverse environment, error in the forecasting of consumers’ response and an ineffective product launch. These causes are further examined with respect to their causal constituents and discussed extensively. Suggestions would also be proposed to management to ensure that future product development, design, strategy and implementation will be more successful. . 1 Adverse Environment Conditions To investigate the influence the environment may have on the success of a product in the market, we take into consideration the relevant macro-environmental factors, a component of strategic management. Due consideration should also be given to the micro-environment, which is the industry analysis with reference to Porter’s five forces. 2. 1. 1 Industry Competition Industry competition has always been very real in all businesses. Starbucks as an international coffeehouse chain faces both global and domestic rivals.
In a competitive industry, a company not only has to monitor its competitors’ moves, but it also has to preempt them; failure of which would diminish its competitive advantage over its rivals, and hence dampen the success of a new product. Thus, Starbucks has to be constantly updated of its competitors’ products and their upcoming launches so as to prevent introducing a product that has a relatively lower perceived utility to the consumer. In view of globalization, the company can easily get information on its rivals, albeit more time has to be spent on such industry analysis since the rivalry scene spans globally.
Moreover, it needs to continuously innovate and maintain a sustainable competitive advantage lest its products become obsolete over time. Effort should also be spent on building the brand image and establishing customer loyalty through the use of membership cards to encourage consumers to return back to Starbucks and support the current and new range of products offered. This differentiation would also address the threat of substitute products. Starbucks prides itself on premium pricing, hence its products have to be differentiated otherwise consumers would easily choose the low priced ones over the newly introduced products.
The constant innovation, building of brand loyalty and offering of differentiated products also serve as a barrier to entry for new entrants as they cannot easily replicate the Starbucks formula and make profits from them which may dilute the potential profits Starbucks can gain. 2. 1. 2 Political Implications Political implications may culminate in the failure of a product when the government intervenes in the form of new policies passed. Events such as minimum wage laws, tax policies, trade embargoes and tariffs may affect the profitability of the product offered and hence diminish its success.
Moreover, trade restrictions may effectively impair the import or export of products such as bottled coffee to another market while regulations with respect to food can directly affect its feasibility to be offered to consumers. Losses may be sustained in terms of the sunk costs and effort put into it before the launch of the product itself. Time would be needed for accommodation to the changes and this delay could prove detrimental if competitors have a first mover advantage. Thus, Starbucks has to assess the political climate and stay updated with regard to the policies in place.
This is especially so when deciding to venture into new countries as part of its international strategy because certain countries have erratic governmental policies. 2. 1. 3 Economic Events Economic events, particularly black swan events like the recent financial crisis in 2008 may also lead to a failed product line. An unexpected economic downturn would deem the previously forecasted figures overly optimistic when demand plummets due to the fall in disposable income of consumers. The lack of demand for the product would not justify the costs of rolling out or continuation of its production.
This premature withdrawal of the product from the market in the face of an economic crisis will thus be labeled a failed product. Thus to accommodate for such events, Starbucks should mete out plans incorporating sensitivity analysis for the worst case scenarios. It should not just benchmark the scale of its launch to that of its competitors, but only to the scale which corresponds to its loss appetite. Its primary mission is to sell its products to the consumers. Hence, even if the economy is burgeoning, it should not speculate and invest heavily on the wave. The risks should still be assessed and hedged.
As discussed previously, other economic events with similar results would be the revision of economic policies. 2. 1. 4 Evolving Social Factors Evolving social factors also play a pivotal role in affecting the environment, and the forecast of consumers’ response which will be discussed later. More often than not, the cradle to the launch process of a product takes a significant time period, after factoring in the development process and time needed for research and marketing efforts. Hence, when the product is ready for launch, the demographics might have already changed.
The impetus of developing a product is to cater to the consumers; thus when demographics have evolved, the target group might have changed in composition or size. Demand for the products may not be as effective as planned and there is a necessity to divert the marketing efforts to focus on the more relevant targets. Thus, Starbucks should strive to be more efficient in its development process to keep up with the social environment. It also has to monitor its target group closely so that if there is a need to, it would be cheaper to pull out before the whole product development process is complete.
This issue is homogenous to a change in customer preferences. Market analysis is usually done before the development of the product, hence Starbucks may be subject to the whims and fancies of the fads in the society which may alter consumer preferences. A new concept or product such as a yoghurt cafe introduced by other competitors may change the trend and induce consumers to stray away from the products Starbucks is planning to offer; the promotion of a theme based lifestyle such as a focus on organic products would also increase the probability of a product failure should it not fit in line with the trend.
Thus it can be proposed to the management for them to conduct market surveys throughout, till and after the launch of the product to constantly monitor the market situation. 2. 2 Error in forecast of consumers’ response The success of a product is also contingent on the response from the target customers. The demand is usually forecasted through market analysis based on the characteristics of the consumers and trends in the market. Ineluctably, the evolving social factors may skew the market analysis conducted if there is a significant time lag between the study done and the introduction of the product into the market.
The anticipated demand failing to live up to expectations creates an oversupply that would bog down profits should they have low turnover or have to be sold at a loss. Undeniably, the forecast can also be erroneous due to great reliance on a market analysis where not all factors are fully taken into consideration in deliberation of the decision to launch a product. 2. 2. 1 Incomprehensive Market Analysis A forecast error can be attributed to an incomprehensive market analysis conducted and not merely due to the changing environment or the subjects in the analysis.
Currently, Starbucks is present in more than fifty five countries and though aligned with their international strategy, it may be tedious on Starbucks’ part to have an in depth analysis of each market. A product or even a whole concept may fail if the organization neglects “glocalization”. Glocalization is a term coined to illustrate the imperative to cater the product for each individual local market for globalized companies; seldom will there be a one-size-fits-all product that will be embraced by all global consumers.
Therefore, if a company fails to identify the distinctiveness in the local scene and capitalizes on the wrong trend and behaviors of the consumers, its product may fail to generate the expected demand and miss the target for sustainable market share. A case in point is the closure of 61 out of 84 stores in Australia because it failed to understand the Australian cafe culture and resulting in it products failing to cater to majority of the locals.
Starbucks can consider venturing into countries through joint ventures as the locals would definitely be better versed in the local markets and be able to identify the inherent culture more effectively and efficiently. Management may also be overly optimistic with the market analysis results – investing too heavily into the introduction of the product into the market, resulting in greater repercussions when sales are barely able to cover the investment made. The product would then be a failure; which could otherwise turn out to be a small success if the management had not been too ambitious over the launch.
An inadequate market analysis could also be due to an overestimated market size and this manifests itself two fold when fueled by optimism. A supposedly smaller than estimated market share may not justify the efforts to launch the product in the first place. Hence management should consider the former solution of a venture partnership to tap on local expertise. If it prefers to have full control, it should engage marketing experts in the local scene who are more experienced and more likely to generate trustworthy estimates.
That being said, Starbucks, while relying on the market analysis performed, should also consider working along together with their finance department more closely in examining the financial feasibility of the launch of a product into the market too. The finance department would also have their own set of estimates for the market share and thus provide for sensitivity analysis to measure the threshold, optimal amount and feasibility of the product launch. There is also a possibility of targeting the wrong group of consumers.
This can occur when results are misinterpreted and certain assumptions made are erroneous, resulting in an inaccurate stand on the suitable target group for the products. Consequently, advertising and marketing efforts would be directed towards the wrong consumers, and these may prove futile. The product fails to reach out to its intended customers and may fail consequently. In another scenario, the product is developed and catered erroneously to a specified group of consumers who are not suited to it. Although these possibilities are remote, we should not preclude them.
This can easily be remedied by concerted efforts to direct the marketing and advertising to the intended consumers provided there is no significant time lag, lest the consumers view the product as obsolete and a failed product to others that is now targeted at them. An incomprehensive market analysis can also occur when the price strategy set is inappropriate for the market. Starbucks prides itself on the high quality coffee beans which it uses for its coffee and this differentiating factor permits them to pursue a premium price strategy.
However, individual markets have differing standards for coffee quality and thus what Starbucks proclaims as high quality may be viewed as a normal good in some economies. In such cases, premium pricing is not suited in these environments because there is a weak price-quality relationship. Marketing surveys have also shown that many consumers found that the premium roast coffee offered at McDonald’s (which is relatively cheaper) is even better in quality as compared to Starbucks’.
Thus Starbucks should continually strive to yield higher quality brews that customers would perceive to be better relative to its competitors; otherwise, its main business – coffee, would fail. This could be implemented by selecting more premium grade suppliers to justify the price at which it is sold and also to ensure quality control in the grinding and brewing process which could be made transparent to the customers so that they would know what they are paying for. 2. 3 Ineffective Product Launch
Ultimately, the inherent nature of the product and factors surrounding its launch would have an impact on whether they would be embraced by the consumers. These factors would include the timing of the launch, the profitability of the product and also the support rendered in the launch of the product in the market. 2. 3. 1 Wrong Timing More often than not, managers would push for constant introduction of new products into the market so as to boost sales as this would reflect well on their performance should they be appraised based on this indicator.
Hence, high level executive push of products can be viewed as the main impetus for the launch of products. However, the timing of the launch of products is crucial in determining whether it can capture a sustainable market share at that point in time. If managers are driven more by profit, they may neglect the marketing aspects of the launch of the product and fail to anticipate the moves of its competitors and also neglect the market environment. Introducing a product at a bad time would jeopardise the success of the product as it may coincide with the launch of a popular product by another competitor or an adverse environment.
A slate of new products introduced may also undermine their effectiveness as a whole to capture market share. These new products may undercut the integrity of the Starbucks brand for coffee purists. There is also a challenge for the baristas who have to wrestle with an increasingly complex myriad of products offered on the menu. The baristas would also not have time to interact with the customers when they spend time customizing the drinks for the customers; this would conflict with their brand experience since the baristas are hired for their social skills.
Besides, waiting time would have increased, further diminishing the effectiveness of the new products introduced. Therefore, the launch of the new products should be timed with more consideration given to the suggestions provided by the marketing department rather than management who may be more concerned about the financial figures. The launch of products should also be paced alongside an implementation timeline so that there would be a greater overall impact brought about by each individual product and their success can be singled out and evaluated more effectively. . 3. 2 Unprofitable Product Another due concern for a product failing can be the profitability of the product itself. The development of un-complementary products that do not fit into the current basket of offerings may fail to bring about the desired sales as the customers may not be accustomed to buying an unrelated product. Using simple economics, complementary products have a higher cross elasticity of demand and thus sales of one related product will bring about the sales of another more effectively.
On the other hand, an un-complementary product would be much harder to appeal to the customer to buy as it is viewed as an isolated and new product on its own. It is unable to capitalise and ride on the sales of current products; hence the likelihood of its failure would be higher. Starbucks should avoid venturing into unrelated products under an umbrella branding strategy as consumers may not be able to relate the brand name to the product. Instead, it can practise multiple branding to launch a new un-complementary product.
A product can also be unprofitable due to self-cannibalisation, which is defined as the reduction in sales volume, sales revenue or market share of one product as a result of the introduction of a new product by the same producer. The new product may seem successful since it may generate its projected demand but effectively, from the stand of the whole organization, it could be a failed product as it merely captures the market share of another product. For the company, there is no increase in aggregate market share for all of its products.
However, Starbucks can turn the situation into its own advantage by selling similar products with different branding. In this manner, customers would be induced to look at the same product twice in different guises. This would serve as a reinforcing advertising strategy and may increase market share since consumers have an alternative to choose from (other than the current product offering) due to their perceived differences in the products. Another reason which can give rise to an unprofitable product would be an error in estimates of the costs needed to produce it.
The cost model adopted in deliberating the price setting may not have comprehensively incorporated the factors and risks that the organization may face. Such risks include commodity price risks and operational risks. Though Starbucks hedges against commodity prices, the hedge might not be effective. The risk responses to operations outage may also be unresponsive or ineffective too. Thus when such risks materialise as events, higher costs relating to the product may be incurred by the corporation which would decrease margins and result in losses incurred.
Henceforth, Starbucks can consider the proposal for a formal risk management team or committee which would implement the enterprise risk management system to manage its risks more comprehensively. 2. 3. 3 Inadequate Support Advertising and marketing are crucial avenues to launch a product and bring it to the masses. However, when there is insufficient publicity due to a small budget allocated by management, the product may not be able to reach out to all its intended targets and thus demand may not be as optimistic as projected.
In such a scenario, the management should always decide on the best method of advertising to the consumers and then subsequently allocate a reasonable sum of money for that purpose. The allocation can be based upon launches of previous comparable products for a better estimate. However, with the proliferation of the mass media and the burgeoning use of the Internet and social media platforms, viral marketing can easily achieve the objective of increasing awareness at a lower cost without jeopardizing the success of the product due to insufficient advertising and marketing support.
This will however depend on whether the target groups are technology-savvy users of social media. Starbucks should also consider the need for a communications officer to handle this aspect of the organization as the media is a double edged sword – any product disgruntles can permeate through the online community virally too. The officer would need to be trained as a spokesperson for the company to monitor and respond to feedback provided from the online social community.
The channel of distribution should also be aptly chosen so that it would facilitate the launch of the products. Starbucks previously had Kraft as a distributor and advertiser for its products. This was a strategic alliance in which Starbucks could also leverage on Kraft’s name to sell its products on the market. However, if the channel of distribution was improper, it would tarnish Starbucks’ products and also its reputation. To add on, the choice of distribution also plays a pivotal role in determining the effectiveness of the product launch.
Though retailing products through supermarkets and grocery stores may reach out to more consumers, it may also portray the image of a normal commodity good. Conversely, distributing through exclusive boutiques may render the product of higher standing but may not create much awareness in the market. Therefore, there is an imperative to strike a balance and make an optimum choice in the selection of channel of distribution. More importantly, the positioning strategy is one of the most crucial factors in ensuring a smooth product launch.
Positioning is the process whereby marketers try to create an image or identity in the minds of their target market. There can be positioning by product attributes and benefits, price or quality, use or application, product class, product user, competitor or cultural symbols. Without a strong positioning strategy, customers would not be able to distinguish the product from the myriad of other products out there; the required strong product impression needed for repeated sales would be absent and an unsustained market share may justify the failure of the product.
Hence, the marketing department should delineate a clear and strong positioning strategy so that the product can be more easily identified with and be well received by consumers. Figure 2 3. SWOT Analysis Strengths * Wide range of products sold through numerous locations * Strong Brand Equity * Excellent R&D Capabilities * Relationships with established players * The Starbucks Experience| Weaknesses * Criticisms and controversies dilute the brand * Lack of iversification * Product recalls affect margins and brand image| Opportunities * Growth through acquisitions and partnerships * Introduction of ‘VIA Coffee Essence’ in Japan and China * Expansion in China and entrance into India| Threats * Rising prices of rawIngredients * Increasing health consciousness of consumers * Increasingly stiff competition| 3. 1 Strengths 3. 1. Wide range of products sold through numerous locations Starbucks offers a wide variety of coffee and non-coffee flavoured drinks, a broad selection of ice-shaken beverages and premium teas, and distinctively packaged roasted whole coffee beans in both US and international markets. It also sells a selection of fresh food items such as cakes, scones and muffins; with such selections focusing on the use of high quality ingredients with high nutritional value and great taste. Starbucks currently operates more than 17,000 stores in over 50 countries worldwide.
Such an extensive product offering allows it to cater to the different tastes and preferences of consumers worldwide. 3. 1. 2 Strong Brand Equity Since the opening of its first store in Seattle in 1971, Starbucks has built up for itself a strong brand name with people associating the brand – ‘Starbucks’ – as a premium seller of speciality coffee. Moreover, Starbucks has had partnerships and licensing agreements with other big brand names like Kraft, and this helped strengthen its brand further. The company came in 85th amongst the 100 Top Brands in 2008 by Business Week.
Due to its premium brand, Starbucks enjoys a high degree of customer loyalty and thus has a significant competitive advantage over lesser known coffee brands. 3. 1. 3 Excellent Research and Development capabilities Starbucks is known for its premium quality of brewed coffee. The secret behind this excellent tasting coffee lies in its Research and Development (R&D) department. The company invests a lot of money in developing new tastes and flavours to ensure it stays relevant and keeps up with its competitors.
For instance, in 2009, the company launched Starbucks VIA ready brew coffee to tap into the US$21 billion global instant coffee category market. Starbucks VIA is made using a patented micro grind technology to preserve the coffee’s taste, quality and freshness. Starbucks’ investment in R&D is evident in the amounts they spent – US$9 million, US$9 million and US$7 million during FY 2010, 2009 and 2008 respectively. 3. 1. 4 Relationships with established players Starbucks had a partnership with Kraft Foods, the biggest confectionery, food and beverage corporation in the US from 1998 to early 2011.
Through licensing agreements with Kraft, it sold its ready to drink packaged coffee and beverages in supermarkets throughout the US. Kraft managed all distribution, advertising, marketing and promotion of Starbucks’ products. Though the partnership fell through, there is an inherent strength in such alliances and Starbucks employs this strategy not just in the US, but internationally too. For example, it has entered into an agreement with Arla Foods for the manufacture, distribution and marketing of Starbucks-branded premium ready-to-drink coffee beverages in Europe.
Through these licensing arrangements, Starbucks reaches out to a wider customer base as its products are prominently featured in supermarkets, a place with high daily customer volume. 3. 1. 5 The Starbucks Experience What makes Starbucks stand out from its other competitors like McDonald’s and Dunkin Donuts is its in-store ambience. The layout and atmosphere of Starbucks stores is specifically designed to be cosy and intimate, while at the same time providing people with their own personal space to use as they wish.
Plush sofas, coffee tables and chairs, and additional perks such as free Wi-Fi in its cafes lure a steady stream of customers to its cafes where they enjoy the famous ‘Starbucks Experience’. 3. 2 Weaknesses 3. 2. 1 Criticism and controversies dilute brand value Starbucks has been involved in several lawsuits. One was filed by a former employee in 2004, alleging that the company violated the California Labour Code by allowing shift supervisors to receive tips. In March 2008, Starbucks was ordered to repay California baristas more than US$100 million.
Starbucks was forced to repay tips, with interest, that the company had handed over to shift supervisors. Similar suits have been filed in Minnesota and Massachusetts. Also in 2008, Starbucks was lambasted by environmentalists who accused them of wasting more than 23 million litres of water a day for leaving taps running to ‘prevent germs from breeding in taps’. In February 2009, another lawsuit was filed against the company by an employee for laptop data breach. In connection with this lawsuit, Starbucks offered its employees one year of free credit monitoring and protection for its lapse in security.
Incidents like these dampen consumer trust and can significantly erode Starbucks’s brand value. 3. 2. 2 Lack of Diversification With just 12% of its operating income for 2010 derived from the International segment (as opposed to 73% for its US Segment), Starbucks could be too heavily reliant on the US market for its profitability. Its current 6,000 stores outside the US are almost half that of the total stores it operates in the US. It should seek to expand internationally in order to diversify and not be overly dependent on one segment alone. 3. 2. Product recalls affect margins and brand image In recent years, the company has recalled several of its products. Thousands of its coffee blade grinders were recalled in 2009 as they could fail to turn off or could turn on unexpectedly, thus posing a laceration hazard to customers. In addition, the company also announced a voluntary recall of 12,000 glass bottles due to the risk of lacerations that consumers were subjected to. Furthermore, a few of its products containing peanut butter were recalled from its stores after an outbreak of Salmonella in the US.
Products recalls such as these will hurt its brand and could possibly lead to lower consumer trust in them and hence a decline in the demand for its products. 3. 3 Opportunities 3. 3. 1 Growth through acquisitions and partnerships Starbucks has recently been in talks to acquire ‘Peet’s Coffee and Tea’ in an attempt to expand its business further. The potential benefits of such an acquisition are numerous – from increased market share to strengthened brand equity. If the acquisition is successful this year, it will enable Starbucks to capture an even larger share of the coffee market in the US.
Also, the company has been wanting to partner ‘Green Mountain Coffee Roasters’ in an attempt to break into the single-cup coffee sector in the United States, which is currently 80 percent dominated by Green Mountain. A successful partnership will lead to added opportunities for Starbucks to develop its brand further. 3. 3. 2 Introduction of Starbucks VIA coffee essence in Japan and China Following the company’s successful launch of VIA ready brew in the US, UK and Canadian markets in 2009, Starbucks launched VIA coffee essence in Japan in 2010, its first premium coffee stick product in Japan, where 63% of total coffee sold is instant.
Starbucks will sell its VIA coffee packets through their 870 retail stores in the country, and eventually expand its reach through grocery stores and other distribution channels. More importantly, Japan possesses huge potential to be a large market, as the at-home market coffee in Japan is worth $5 billion, almost a fifth of the global instant and single coffee market that is worth some US$23 billion. On April 6th 2011, the VIA Ready brew arrived in China and the company hopes to replicate the similar success it enjoyed in several other countries where it had already launched the product.
Starbucks VIA Ready Brew has already scooped several accolades for being the ‘most innovative’ and best ‘new product’ of the year and these awards further cement Starbucks VIA Ready Brew as a leader in the instant coffee market. 3. 3. 3 Rapid expansion in China and entrance into a new market – India Starbucks is recognised as one of the top 20 brands in China and its stores have outperformed its US stores in terms of average store profitability. The company has announced plans to expand rapidly in China – it aims to triple the number of stores it has in China to 1,500 by 2015.
In fact, Starbucks has discovered an area within the Yunnan province which they believe can produce excellent coffee. They believe that growing coffee in a country that is strongly nationalistic will create a significant differentiating factor in the land of China. The massive potential of China has even led CEO Howard Schultz to proclaim that “China will be the second largest market in the world for Starbucks after North America”. In 2011, Starbucks announced plans to enter India through a strategic alliance with ‘Tata Coffee’, India’s largest coffee producer and exporter.
It has been reported that Tata Coffee and Starbucks would soon convert their alliance for sourcing and roasting premium coffee beans in India into a joint venture, in which Starbucks would hold a 26% stake. Subsequently, Starbucks hopes to open outlets in all major Indian cities, and would aim to increase its stake in the new company to 51% within a year. CEO Howard Schultz acknowledges that “India is one of the most dynamic markets in the world with a diverse culture and tremendous potential…” and is thus exploring the idea of setting up shop in India.
Given that China and India are the world’s most populous nations, the potential market for coffee in these two markets is immense. Starbucks will certainly be able to reap the benefits of its expansion in these two nations should their business model work out well. 3. 4 Threats 3. 4. 1 Rising prices of raw ingredients The rising prices of Starbucks’ main raw ingredients – coffee and sugar will continue to hurt its margins. According to data compiled by the International Coffee Organization, average coffee prices have risen by 54% since the beginning of 2010.
Sugar prices also continue to rise steadily and this will have a negative impact on the company’s margins. However, Starbucks tries to mitigate rising costs of ingredients by hedging coffee, dairy and sugar prices to mitigate spot price volatility during the year. 3. 4. 2 Increasing health consciousness among Americans could affect demand The bulk of Starbucks’ products contain caffeine, dairy products and sugar, the health effects of which are the subject of increasing public scrutiny. It is a known fact that excessive consumption of caffeine and sugar can translate into a variety of adverse health related problems.
Over recent years, health organisations in the US have been stepping up in their efforts in curbing obesity by promoting a healthier lifestyle in terms of healthier choices of food and drink and the encouragement of more exercise. Increasing health consciousness of American consumers will inevitably reduce the demand for Starbucks’ heavy-laden caffeine and sugar products. This has the greatest impact on their revenue as the US accounts for the largest portion of its market. Globally, consumers are becoming more health conscious too, with Singapore offering popular drinks like bubble tea in different sugar evels. Starbucks might have to resort to adapting to the needs of locals and provide varying sugar levels for their drinks in order to cater to the increasing group of health-conscious Singaporeans. 3. 4. 3 Increasingly stiff competition from other giants like McDonalds and Dunkin Donuts Starbucks has numerous competitors, and major rivals include McDonalds who has, in recent years come up with the McCafe coffee-house-style food and beverage chain, offering similar coffee and food products as Starbucks.
Dunkin Donuts is another major competitor that offer similar food and beverage choices at lower prices than Starbucks and stiff competition between these few big-name brands in the US could lead to reduced demand for Starbucks’ products and hence lower profits. 4. Emerging/Current Trends Despite its reputation, Starbucks constantly faces new challenges on the way to meeting its strategic objective: “to maintain Starbucks standing as one of the most recognized and respected brands in the world”.
There are three current issues that may have large impacts on the future growth of Starbucks, namely (1) health-conscious customers, (2) brand inconsistency and (3) strategic alliance with Green Mountain Coffee Roasters. 4. 1 Health-conscious customers Affordable, delicious and healthy food is increasingly demanded around the world. Starbucks’ customers are not an exception to that trend. The Company reported that its customers expect “better tasting and healthier food options” on the Starbucks’ coffee and non-coffee menus.
Starbucks quickly responded to the customers’ needs by introducing a variety of healthy foods in its new menu. Apart from its well-known healthy Skinny Lattes, Starbucks revolutionized the concept of healthy snacking by integrating nutritious and natural ingredients like whole grains and fruits into its bakery products such as the Blueberry Oat Bar and Banana Walnut Bread. The Company also took initiative to reduce preservatives, artificial dyes and flavours and high-fructose corn syrup which link to 90% of its baked products.
Moreover, it also currently offers new healthy food options such as Farmer’s Market Salad with almonds, cranberries and sweet apples and Strawberry Banana Vivanno™ Smoothie with pure strawberries. The business strategy of leveraging on complementary products is not new in the industry. It seems that Starbucks has so far tapped well into its complementary food market segment through innovations in its product offerings. 4. 2 Brand erosion due to changes in pricing and new product offerings Starbucks is famous for its authentic brewed coffee and excellent services which allow the Company to charge a premium over its customers.
As its business expands, new items such as food and other non-coffee beverages have been added into the Starbucks menu. This deviates from what a traditional coffee house would offer. Recently, Starbucks introduced “Pike Place Brew”- a US$1. 50 cup of regular coffee which is a contrast to a standard $4 cup of premium coffee. Moreover, to boost the stores’ traffic, the Company also offers USA Today and free pastries to customers who purchase brewed beverages at selected stores. These offerings may be justifiable as the Company has recorded a continuous fall in customers’ visits over the past years.
However, using low-pricing as a marketing strategy is dangerous for Starbucks’ image as a premium coffee house. A significant drop in pricing is the fastest way to commoditise a product and Starbucks would face an extremely tough time in increasing the price or removing the low-price products from its menu in future. As the company lives on its innovation and high quality products, offering low-price products would hamper its differentiation strategies and destroy the unique customer experience that it promises to deliver.
In 2009, Starbucks launched Starbucks VIA® Ready Brew which is an instant coffee product with a variety of flavours. While this new line of products may contribute to Starbucks’ growing Consumer Product Group segment (CPG), it could also potentially make authentic coffee lovers desert Starbucks’ stores as sugary and milky flavours like Vanilla and Caramel are inconsistent with espresso Italian-style coffee. 4. 3 Strategic alliance with Green Mountain Coffee Roasters Starbucks Corporation and Kraft Foods Inc. Kraft Foods) had been in a strategic partnership since 1998 which allowed Starbucks’ consumer products to be distributed through Kraft Foods’ channels. Nonetheless, the alliance turned bad over time and led to a litigation war in 2011 where Kraft Foods lost its distribution right of Starbucks coffee to grocery stores. In March 2011, the Company established a new partnership with Green Mountain Coffee Roasters (Green Mountain) in which the new partner would increase sales of its Keurig machines used to brew Starbucks coffee packaged in its K-Cups coffee packets.
While Green Mountain’s competency in packaged food distribution can be comparable with Kraft Foods’ as they are direct competitors, it may take Starbucks a certain amount of time to devise appropriate deal terms and to develop a strong business relationship with Green Mountain. More importantly, since the deal was not an acquisition, there are concerns over Starbucks’ financial benefits from the deal and the commitment of Green Mountain. First, it is unclear if the cost of the coffee cups made from Starbucks’ coffee packs with Keurig machines would be less than the cost of the cups at the walk-in stores.
Furthermore, the consumption of complementary products like bakery products would decrease as customers no longer need to go to Starbucks’ stores to get a Starbucks cup of coffee along with other foods. Second, since Green Mountain can leverage on Starbucks’ reputation, its sales of the brewing machines would increase. As these machines are not exclusively designed for Starbucks coffee, Green Mountain may receive attractive deals from other coffee retailers. This would reduce Starbucks’ bargaining power in future deals with Green Mountain and thus would lower the company’s profit margins. 4. Implication for strategic objectives and strategy formulation: To maintain Starbucks as “one of the most recognized and respected brands”, the Company definitely has to take the described trends and events into consideration in formulating its strategies. The followings are some implications: Providing “a healthier Starbucks Experience” has been Starbucks’ signature for more than twenty years. As non-beverage sales become a significant component of revenue, Starbucks may have to rethink about the significance of this segment as beyond merely complementary products to its coffee and beverage lines.
Natural and nutrition-rich ingredient supplies have to be guaranteed to avoid disruption in its food business and mitigate risk of rising commodity prices. To further enhance the quality and healthiness of its food menu, the Company should source for reliable ingredient suppliers at the lowest cost and have in place rigorous quality control practices to monitor the nutritional value of the food. As the food market becomes more significant, the Company should invest more in positioning its healthy food as a strong connection to the Starbucks Experience motto through marketing and R;D in food processing.
Although the Starbucks wants to refresh its customer experience through “transformations”, a low-price strategy should not be a regular practice to preserve the Company’s premium brand. Starbucks may also explore a multi-branding strategy for sweet and milky coffee drinks by creating a new brand for this beverage line to mitigate confusion with the espresso style of its coffee. Furthermore, the Starbucks may consider developing a new concept for these drinks as opposed to the traditional one in order to emphasise on its diversity in product offerings.
Starbucks’ brand equity should be fiercely protected by ensuring the consistency of its strategies with its brand image. Finally, Starbucks should prudently structure the deal terms with Green Mountain to maintain a reasonable level of profit margin based on its financial benefits from the deal. To keep Green Mountain committed to the deal, Starbucks may want to include a non competitive agreement which prevents Green Mountain from packing and distributing its own coffee and a restrictive clause which limits the number of deals from other coffee retailers Green Mountain can have.
Apart from balancing the costs between packed coffee and in-store brewed coffee, the Company should create marketing campaigns where it reminds customers of its complementary products. 5. Risk prioritization for Starbucks Risks| Category| Likelihood*| Severity*| Score| Rank| Risk of losing market share due to stiff competition| Strategic| 5| 5| 25| 1| Commodity price risk| Financial| 5| 4| 20| 2| Currency risk| Financial| 5| 3| 15| 3|
Supply chain disruption risk| Operational| 3| 5| 15| 4| Risk of changes in consumer preference | Strategic| 3| 4| 12| 5| Risk of failure and breach of security of IT systems | Operational| 2| 5| 10| 6| Product liability risk| Operational| 4| 2| 8| 7| Risk of Non-Compliance with Laws and Regulations| Operational| 2| 3| 6| 8| Risk of loss of key personnel| Operational| 1| 6| 6| 9| Natural hazard risk| Hazard| 1| 3| 3| 10| * Scores range from 1 to 6, with 1 as least likely/severe and 6 as most likely/severe. 5. 1 Risk of LOSING MARKET share due to stiff competition
Starbucks experiences direct competition from large multi-national competitors in the quick-service restaurant sector and specialty coffee shops. Other than that, the company’s coffee beans, beverages and Starbucks VIA Ready Brew also face competition from well-established companies in the US ready-to-drink coffee beverage market. For instance, McDonald’s was voted to have the best coffee by Consumer Reports. The finding might come across as surprising since coffee is Starbucks’s main specialty. This would thus threaten the company’s market position since fast food restaurants are now capable of producing better coffees.
All these fierce competition would easily erode the competitiveness of Starbucks. However, consumers’ choice of specialty coffee retailers depend on many factors such as quality, service, convenience, price and brand loyalty. With strong marketing and word-of-mouth, Starbucks would most likely retain its foothold in the specialty market in the near future. In addition, the company consistently conducts reviews to ensure positive consumer experience and have strong corporate social responsibility programs. The Starbucks brand has been highly rated in several global brand value studies.
Diversification to capture related markets such as venturing into the instant coffee market was one approach the company has adopted in recent years. Hence a rating of likelihood 5 and severity 5 was assigned. 5. 2 Commodity price risk Starbucks purchases commodities such as coffee beans, dairy products and diesel for the company’s operations. Such commodities are highly subjected to price fluctuations due to predominantly supply forces. These price risks would substantially increase the expenses of the company and might in turn negatively impact Starbucks’s financial results.
However, Starbucks engages in hedging using financial derivatives such as coffee futures to reduce the impact of such risks. Hence, likelihood of commodity price risk was assessed to be 5 and its severity as 4. 5. 3 Currency risk Although the majority of Starbucks’ revenue, expense and purchases are transacted in US dollars, a significant portion of Starbucks’s operations are also outside the US. As a result, the company faces currency risk from mainly the Canadian dollar, British pound, Euro, and Japanese yen.
To reduce the company’s exposure on foreign exchange risk, Starbucks hedged its revenues, inventory purchases, assets, and liabilities denominated in foreign currencies. Thus likelihood of the currency risk bears a rating of 5. Severity was assessed at 3 since a weakening dollar would greatly impact earnings; there have been a few monetary policies put in place by the US Central bank in recent years which are causing the weakening dollar. However, due to Starbucks’ presence in many countries worldwide, any fluctuations in one currency will naturally be offset by the strengthening of another.
Thus its impact would not be too severe. 5. 4 Supply chain disruption risk Starbucks faces high likelihood of supply chain risk which is beyond the company’s control. For instance, there could be unexpected disruptions with regards to the company’s roasting plants or interruptions in service by shipping carriers within the company’s distribution channels. There is also the likelihood of trade restrictions such as increased tariffs or quotas, embargoes or customs restrictions. These events will significantly impact the production or distribution process and in turn, cause Starbucks to be unable to meet consumer demands.
At the same time, fair trade issues have led to much displeasure amongst the activists in the recent years and their actions might threaten the company’s supply of coffee beans. Due to the nature of the supply chain which could face various forms of disruptions, we assign a likelihood of 3. A severity rating of 5 was given since it will affect Starbucks’ key operations and have significant impact on the company’s financials. 5. 5 Risk of changing consumer preference As aforementioned, there is the risk of changing consumers’ preference, especially in the specialty coffee market where consumer choices rely on many factors.
Health concerns would be one apparent area that would impact Starbucks in the upcoming few years. Most of the company’s products contain caffeine, dairy products or other active compounds, which are increasingly coming under public scrutiny as there are adverse impacts resulting from large consumption. Also, other reasons such as obesity, as well as increased consumer litigation based on alleged negative health impacts of various food products are posing a problem to Starbucks and its coffee industry.
Consumers might switch to other alternatives such as vitamin drinks, which would slowly reduce the demand for Starbucks’s products. However, Starbucks do take the changes in trend seriously and constantly try to change their products to suit consumers’ taste. Some measures have already been introduced with the health conscious consumer in mind such as allowing the substitution of milk in their drinks with soymilk. A likelihood of 3 and severity of 4 was thus assigned. 5. 6 Risk of failure and breach of security of IT systems
There is a great amount of reliance on information technology in Starbucks’s operations for supply chain, in-store point-of-sale processing, Starbucks cards, online business and various other processes and transactions. The ability to effectively manage the company’s business and coordinate the production, distribution and sale of products depends significantly on the reliability and capacity of these systems. This is especially more so since Starbucks operates on a global basis. Any failure or security breach in the system could cause delays in product sales and reduce the efficiency of the company’s operations.
In addition, capital investments might be required to remediate the problem. Thus, a likelihood of 2 was assigned, with a severity of 5 since systems are essential to Starbucks’s core processes and any failure will affect a significant number of outlets and all the operations. 5. 7 Product liability In recent years, Starbucks has recalled few of its products. For instance in 2009, the Consumer Product Safety Commission ordered a recall of thousands of Starbucks coffee blade grinders and glass water bottles, which allegedly posed a laceration hazard to consumers.
Another incident was Starbucks’s recall of a few products containing peanut butter from its stores following an outbreak of salmonella in the US. Product recalls would generally hurt the value of the corporate brand and thus might reduce the demand for its products. Starbucks operates in the food and beverage industry, such product recalls are common and a likelihood rating of 4 was assigned. A severity rating of 2 was assigned as Starbucks has prompt voluntary recall responses as evident in the incidents mentioned above. It will thus keep the severity low as damage was kept under control. . 8 Risk of Non-Compliance with Laws and Regulations There are strict compliances with regard to applicable laws, accounting and reporting requirements, regulations and tax requirements, including those imposed by the listing exchanges and labour laws for Starbucks to adhere to in the countries that it operates in. Any breach of regulations might result in penalties that might harm Starbucks financially. In addition, there might also be damage to the company’s reputation especially if the company incur civil and criminal liability.
Compliance fees pertaining to labour law was an example that affected Starbucks. The minimum wage rate in US had remained $5. 15 per hour since 1997 but rose to $7. 25 an hour from July 2009. Starbucks employed about 142,000 people in the US as of 2009 year end and this increment in labour costs could increase overall costs and affect the company’s operating margins when complied with. However, regulatory changes generally happen gradually and with warnings. Starbucks should have risk response plans in place by the time regulations take effect.
Hence, a rating of 2 for likelihood and severity of 3 was given. 5. 9 Risk of loss of key personnel Starbucks’ future success depends on the continued service of senior management personnel and any loss of key executive management personnel can harm the company’s business. For example, Howard Schultz, one of the early founders of Starbucks left and was invited back to be the CEO when the company faced some problems in 2008. This shows how important key personnel are to the growth and survival of a company. As such, Starbucks need to ontinue recruiting, retaining and incentivising key management personnel to maintain and carry out operational initiatives, some of which involve ongoing expansion in business channels outside of the company’s traditional company-operated store model. Because of the continuous training and the incentive measures the company has put in place, the likelihood of key personnel leaving bears a rating of 1 but the severity is rated at 6 given the necessity of maintaining the talent pool at Starbucks for its continued success. 5. 10 natural hazard risk
With close to 17,000 stores currently, Starbucks has coffee outlets in more than 50 countries. Natural disasters are inevitable and black swan events might impact the operations and financials of the company. For instance, in the recent 2011 earthquake in Japan, 50 stores in Japan were destroyed. However, a severity of 3 was assigned on the overall impact of this risk since a disaster would cause a significant amount of disruptions to outlets but only in affected regions; whereas its other outlets across the world would most likely be unaffected. Thus the strain on Starbucks’ financials would not be too severe.
Also, a likelihood of 1 was assigned since natural disasters are not expected to happen on a regular basis. 5. 11 Risk Map Severity| High| 6| Risk of Loss of Key Personnel| | | | | | | | 5| | Risk of failure and breach of security of IT systems| Supply chain disruption risk| | Risk of loss of market share due to competition| | | Medium| 4| | | Risk of changing consumer preference| | Commodity price risk| | | | 3| Natural hazard risk| Risk of Non-Compliance with Laws and Regulations| Currency risk| | | | | Low| 2| | | | Product liability risk| | | | | 1| | | | | | | | | 1| 2| 3| 4| 5| 6| | | Low| Medium| High| Likelihood| Legend| Risk response| | Risk avoidance / elimination| | Risk reduction/ prevention| | Risk transfer / sharing| | Risk acceptance| 6. Risk Responses and control devices/activities Operational Risk | Risk Map | Risk Response | Control Activities | Loss of key personnel * Risk of inability to recruit, retain and motivate senior management personnel sufficiently to maintain and expand current operations | Likelihood: 1 Severity: 6 Appropriate risk response: Prevent /reduce | To reduce severity: * Cross functional management (possibly achieved through job rotation) * Ie.
Someone should be able to replace Howard Schultz as the current main force behind Starbucks * Management trainees of Starbucks have training covering all aspects of store operations including baristas’ job scopes, not to be cross functional, but rather to have a better understanding of the company’s operations. Besides store operations, the management trainees ought to rotate within other functions such as logistics and finance. * Top level performance appraisal of cross functional abilities of senior management personnel and ensure periodic function / international rotation is carried out among senior management * Annual international meetings for senior management personnel to ensure all are aware and updated of the latest activities and concerns of the company through discussions | | | To prevent / decrease likelihood: * To attract: Competitive compensation benchmarked to market rates * To recruit: Stock options granted with vesting periods and longer period employment contractual agreements with heavy penalties for walking away early * To motivate: Clear career prospects with high potential for future development made known to employees and awards for employees with best performance at store and company levels | * Compensation committee to propose and enforce competitive compensations plans with favourable terms and conditions to retain and attract talent * Human Resource Department Head to ensure maintenance of clear career progression within the company and conducting of regular employee job satisfaction surveys * Clear career progression can include communicating Key Performance Indicators (KPIs) as progression criteria to employees as well as how they are monitored * Performance indicators to pinpoint departments with greatest resignation rate / staff shortage to better narrow down employee problem areas |
Compliance with laws and regulations * Risk of failure to abide with all applicable laws and regulations of the countries the company operates in | Likelihood: 2 Severity: 3 Appropriate risk response: Transfer /share | To transfer/share risk: * Outsource compliance to external professionals – contractual transfer of risk control * Consider Joint Ventures (JVs) or partnerships with local companies when entering a new market (country) as they are more familiar with their home regulatory environment – contractual transfer of risk control | * Outsourcing mandates a need for continuous monitoring of quality of services received which will determine if company outsourced to should be changed * Top level reviews of cost benefit analysis of JVs and partnerships as well as rigorous screening of potential company candidates * Currently, Starbucks claim to be very “picky” about their international company partners | | | (Possible consideration) To prevent / decrease likelihood: * Ensure compliance and legal personnel are competent with updated knowledge of operating countries’ regulatory environment | * Top level reviews of competency of compliance and legal personnel * Management to oversee compliance and legal personnel work closely with risk officers and internal audits to build effective intern