Starbucks

Market size, growth rate and overall profitability are three economic indicators that can be used to evaluate the coffee industry. However, analyzing Starbucks is a measure all its own. This once primary cafй for coffee lovers has exploded far beyond its Italian cafй theme expanding into areas such as the soft drink industry, retail coffee bean sales, ice-cream and music.

Soft drink consumption has a market share of 46.8% (within the nonalcoholic drink industry) with the tea and coffee sector maintaining an 11.8% market share. However, within the specialty coffee industry Starbucks bolsters a market share of 16%. Since 1998 sales through U.S. coffeehouses have increase approximately 77% reaching $6.9 billion in 2003. Starbucks re-creation of an authentic Italian coffee bar culture, its focus on top quality, fresh-roasted, whole bean coffee and educating its customers in appreciating the quality of specialty coffees are just a few of its differentiating factors.

Starbucks’ competitive forces were and remain strong. Howard Schultz was strategic and persistent in his mission to establish Starbucks as the most recognized and respected brand in the world. In doing so, he pursued a unique purchasing strategy. He established Starbucks as a major contributor to the sustainability of coffee growers while helping to conserve the environment. He also established three to five year contracts with his suppliers at predictable prices.

In 2004 the number of coffeehouses exceeded 17,000 with 40% being chains of more then ten units. Primary factors driving this growth included the perception that coffeehouses served superior coffee, an interest in the wide variety of flavors, blends and drinks offered, as well as the increase in demographic groups that favor coffeehouses and coffee.

Unlike his competition, Howard Shultz was pillar in his convictions and adamantly refused to sell artificially flavored coffee beans believing this would pollute his high quality coffee beans. Yet, when proven incorrect, he was willing to meet the demands of the consumer, as was the case with using non-fat milk in lattes and cappuccinos.

The Starbucks team was also known for its good retailing sites and believed that the “Starbucks everywhere” approach would increase traffic and reduce competition. In 2004 Starbucks had almost 9000 cafes in almost 40 countries. With a majority of their cafes in the United States, Starbucks may need to look expand their portfolio of countries to expand their business risk. However, this saturation by Starbucks left little room for growth by the mom and pop coffeehouses, even preventing such fierce competition for new rivals.

Many businesses had tried to expand their markets to benefit from the highly popular coffee craze. From 1999 to 2003, food service sales of packaged ready-to-drink coffee experienced a compound annual growth rate of 34%. This segment has experienced phenomenal growth thanks to Starbucks, which uses soft drink giant PepsiCo to manage distribution and market the number-one Starbucks Frappuccino and number-two Starbucks DoubleShot brands. Combined, the two category leaders control more than three-fourths of the segment. However, with just about two years under its belt, Folgers Jakada managed to climb to the number-three spot, with 4.3% share.

The coffee bean industry is highly volatile due to weather conditions, economic and political conditions, and agreements on export quotas. With such a large purchasing power, Starbucks established fixed price purchase commitments to limit their exposure to such cost fluctuations. Such commitments helped to reduce unexpected jumps in coffee prices and aid in maintaining their margins, a tactic the smaller shops were unable to afford. .

Howard Schultz’s persistence and drive has led Starbucks into new markets and arenas. In an ever changing industry it is imperative to stay abreast of the driving factors and their impacts. Starbucks innovation in joint ventures has opened new markets and opportunities increasing product use among different demographics. This has led to both great successes as well as some failures. Its Dot-Com investments were all busts however, joint ventures with PepsCo, Dreyers and its acquisition of Hear Music have brought Starbucks great success.

To meet growing concerns of an environmentally friendly world, Starbucks has been a major contributor and advocate of CARE, a worldwide relief and development