The international division remains a key source for growth at Starbucks, in particular the Chinese market, where Starbucks has enjoyed considerable success and now sits at over 500 stores.
The company struggled in the mid-2000s due to two main factors. The first was the entry of new competitors into its space. Both Dunkin Donuts and McDonalds upgraded their coffee offerings in an attempt to win business from Starbucks. These moves were in response to Starbucks use of snack foods to win breakfast business away from fast food chains. These events reframed Starbucks' competitive positioning. The view that Starbucks was strictly a coffee company competing against other caffeine marketers became obsolete -- Starbucks was now in the quick service food industry, using coffee as its point of differentiation (Marketplace.org, 2011). This understanding of the Starbucks industry is critical to understanding its business model and its prospects for the future.
The other challenge for Starbucks during that period was the decline in the state of the U.S. economy. The United States remains by far the company's largest market, and Starbucks has long competed on a differentiated platform, meaning that it charges premium prices for products that it markets as superior. The decline in the economy forced some consumers to "trade down" to other coffee outlets or to drinking coffee at home. This reduced income and in response Starbucks was forced to close some underperforming stores. Compounding the issue was that the company had been focused so intently on maintaining a rapid pace of growth that it had made poor real-estate decisions; strong real estate decision had been critical to the company's early success (Allison, 2008).
Today, Starbucks has maintained its focus on its core quick service business. The featured product remains coffee, in particular high margin espresso preparations and dessert-like beverages. The company markets ancillary goods, snacks, and has a license with Pepsi to sell Starbucks coffee drinks in grocery stores. The company also markets coffee beans and equipment. Food service continues to form the bulk of the company's revenues.
This points to Starbucks operating with essentially two sets of competitors. On one hand, the core product of Starbucks has traditionally been viewed as coffee, or more accurately caffeine. Caffeine is a popular, addictive and widely-available drug. There are innumerable mechanisms for caffeine deliver, any of which could theoretically be viewed as competition for Starbucks. Starbucks competes for the caffeine market with value-added coffee products. These products add flavors, sugars and other benefits, in addition to a premium taste. These attributes differentiate Starbucks from most competitors in caffeine delivery, and for that the company charges a premium price.
As a quick service restaurant, Starbucks uses the coffee as a means to bring customers into its restaurants, where it also sells food and snack items. This industry is a combination product/service industry that typically emphasizes speed of service and a high-volume/low-margin business model. When the competition is framed this way, Starbucks competes not only against other coffeeshop businesses, but against other quick-service restaurants that sell a combination of food and coffee. For years, many of these did not sell premium coffee, but recently some have begun to have a premium coffee offering, specifically to cut into Starbucks' business.
Within the first set of competitors would be any caffeine company with coffee companies as the closest competitors -- Sara Lee, Green Mountain, Peet's, Coffee Holding Co and others. Within any given region there are likely to be multiple regional or local competitors with a business model similar to Starbucks. The company still must compete with drinking coffee at home, or in younger demographics with highly-caffeinated "energy" drinks. Some competitors, such as Sara Lee, are only tangential competitors and compete in many segments unrelated to Starbucks. Of the competitor group analyzed, Starbucks is the largest firm and has the best gross margin. The company has the highest EBITDA and market cap as well. With a share price of $44.19, Starbucks has a P/E ratio that is in the middle of the competitor group.
The other set of competitors in food service typically features larger firms -- McDonalds is larger than Starbucks for example. Some other major firms in the industry do not have strong coffee programs and therefore are only tangentially related. This includes the company's quick service competitors in the Chinese market, Pizza Hut and KFC, which have very little overlap with Starbucks.
Corporate social responsibility sometimes has an impact on profitability, particularly when it impacts on the customers' purchase decisions. Starbucks is committed...
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