Porter’s Five Forces Analysis of Starbucks
|March 30, 1971
|Seattle, Washington, USA
|USD 26.58 billion (FY22)
|USD 3.28 billion (FY22)
Starbucks is the world’s largest coffee chain. The company specializes in premium coffee roastery. As at November 2022, the company operates around 35,711 stores globally (6% more than last year)and expects to increase global revenues by 10-12% in 2023. The company owns 18,253 (51% of total) stores and licenses 17,458 (rest 49%) stores. The company ranks at 114thposition in Forbes 500 and 288 on Forbes Global 2000 lists.
Starbucks is believed to be the initiator of “Coffee-culture” because of the dynamic experience this company provides. The product line mostly ranges from instant coffee, expresso, hot and cold beverages, juices and other snacks. To further improve the experience, if not all, most also provide access to free Wifi. Customers buy Starbucks products on and from their work, while shopping or casually.
The business strategy of Starbucks is to operate stores on high-traffic, visible locations like downtown, suburban areas, office buildings, university campuses, malls and other similar locations. The company also relies heavily from online sales like China’s Starbucks Now application or Starbucks Delivers can conveniently offers pickup and delivery services.
Source: Company Financial Statements
Source: Q4FY22 Company Presentation
Starbucks Rivalry among Existing Competitors
- Aggressive Competition
Since Starbucks operates in Food and Retail sector,the company is rivaled by local tea and coffee sellers, malls, street hawkers, premium food chains and restaurants.Starbucks intends to create a “Second home” for customers by providing a premium, quick, hassle-free coffee experience as compared to McDonalds and Dunkin Donuts which offers more cost-effective product lines.
- Dunkin Donuts (DD)
Dunkin Donuts is also one oflargest quick-service chain of coffee houses that operates approximately 13,000 stores in more than 40 countries. DD offers products like donuts, tea, coffee, bagels, sandwiches and like. The reported revenues of USD 1.37 billion and Net Profit of USD 242 million in FY19. The company intends to invest more than USD 100 million for e-commerce which involves making apps, fast delivery, pickup orders and drive-thru easy for customers. According to Ezequiel Minaya, the company does not own any store and focuses on franchising.
- McDonald’s (M)
McDonalds is another multi-national American food chain company and is the world’s largest restaurant by revenue which serves more than 70 million customers daily. The company offers highly standardized experience with quality products. The main product line includes Chicken and Beef burgers, fries but their menu also includes and exclusive range of roastery like coffees, teas, croissants.The company reported revenues of USD 23.22 billion and profit of USD 7.55 billion in CY21
The company competes with Starbucks specially on Ice-coffee product line in its McCafe product line which has more than 20 drinks.
- Maxwell House
Maxwell house is a Kraft Heinz owned American Coffee brand and was also rates highest coffee-selling brand in America once. Maxwell and Starbucks both compete in retail space where they sell packaged coffee beans in retail outlets. The company focuses on environmental impact of its activities, like the company launched a 100% compostable coffee pod or reducing some components in New Zealand to save 28 tons of materials a year. The company is also facing some financial troubles. For example, in 2020, Kraft realized a USD 140 million impairment loss on Maxwell House brand forecasted decline in mainstream coffee category and distribution losses.
Folgers is an instant single use Coffee pod by J.M Smucker Company. The company offers products like Colombian, Brazilian, Silk and other types of Ground Coffees. The posted revenues of USD 1.1 billion in 2021 and has 3000 employees. Folders is one of the smaller competitors to Starbucks as compared to others.
- Key differentiating factors
Starbucks competes local coffee and tea sellers offering products in all price ranges from low to high. Being a premium coffee-brand and operating in a high-price product, Starbucks believes that customers chose Starbucks on the basis of product quality, strong branding, premium service and convenience. The company relies on intense spending on marketing and budgeting as to differentiate itself from local competition in all countries.Starbucks is constantly reinventing itself, like the company offered drive-thru services during the Covid-19 pandemic and the company is heavily investing in reusable go-to cups and planning to invest in Electric vehicle charging stations till 2030.
Starbucks Threat of New Entrants
- Low Working Capital Requirements
There is extremely low capital required in the food business. However, heavy reliance is on taste and ambiance. The cost of space per outlet in US can cost around USD 3500 every month and is also on an increasing trend owing to high inflation. The brands also have to battle the ever-increasing cost of coffee beans, milk, expresso machines, grinders, containers, cups, napkins, straws, cocoa powder and other essential items which have almost doubled in prices. Due to low working capital requirements, there are almost hundreds of new entrants in single country every single month but a small fraction only manage to survive.
- Intense Expenditure on Branding activities
Large brands like McDonalds, Dunkin, Expresso are investing heavily on branding activities as with the increase in prices, cost effective brands are becoming more expensive and hence now being a problem for premium brands to further raise prices. Starbucks is facing demand compression post pandemic and the company also faces cost-push inflation after the Russia-Ukraine conflict. The global economy is going through a rough patch because the once feared recession is now in picture.
- Research and Development Costs
Although the research and development costs are lower than most manufacturing concerns, it is still high with the Market Research side of things. Food Analysts prepares various questionnaires, collect and analyze big data and oversee global trends and changes in consumer spending patterns to develop, integrate and re-innovate their products and services to increase overall market share.
- Moderately Regulated
The Food business is regulated with local laws and international standards. The companies have to go through periodic audits. Also, those who run franchises have to follow standardized rules when it comes to coffee brewing from time A registration license in the US can range somewhere around from USD 25 to 500. Then, food service license (between USD 100 to 1000) and Food Handler’s Permit (USD 100 to 500) also have to be obtained in the US. For other countries, similar local licenses have to be obtained. This decreases the barrier to entry as anyone can enter in food ventures.
Starbucks Bargaining Power of Suppliers
- High number of Suppliers and goods perishability
The pandemic and what happened after reshaped the world in many ways. As people are getting more accustomed to inflation and changing their lifestyles, coffee lovers have a lot to worry about this year. There has been insane increase in prices for coffee beans because of the demand shortages. Coffee brewers are now facing the option of either increasing the prices or decreasing the coffee slightly (which goes against their premium motto). There have been various “Out of Stock” issues with because of Supply outages. However, having that set aside, the bargaining power of supplier is extremely low with large number of suppliers supplying to a big brand like Starbucks or Dunkin Donuts. Also, suppliers have to ensure raw material quality to be on Starbucks approved supplier list.
- Reliance on Suppliers
Starbucks relies heavily on their supplier’s ability to implement their e-commerce facilities and maintenance of standards. One of their major suppliers is Nestle which is for some reason fails to deliver, there is a significant impact on Starbucks business.
- Increase in cost of high-quality Arabica
The availability and prices of coffee beans are facing extreme volatility and as Starbucks is engaged in premium quality arabicas. These coffee beans are traded on negotiation basis at premium above the cost price. However, the amount of premium may vary on demand supply factors. Increase in commodity prices hinders successful payment of fixed income commitments.
- Risk of Supply Chain disruptions
The supply chain disruptions were caused by the aftermath of the Russia-Ukraine war when commodity prices (especially energy) soared which affected all industries across the globe. Countries faced immense inflationary pressures and resorted to monetary tightening (including major powers like US and UK). The impact of this high cost of leverage is accurately reflected in the high cost of parts manufactured for airline and defense business which majorly affected supplier margins.
- Supplier Audits
Starbucks carry regular audits on franchises and own stores to assess quality, review data and suggest improvements.
Starbucks Bargaining Power of Buyers
- Continuous Brand Development
Coffee-makers spend dollars on advertising, branding and creating the right perception in the minds of customers. Starbucks outlets presents customers with a relaxing and enjoyable experience. Starbucks chose informal chats as a source to collect research data and gather feedback. According to 2013 study, Starbucks customers were willing to pay more for the “Starbucks experience” if the brand decided to raise prices. The company is very high on its brand reputation for example in February 2018, the company shut more than 7000 stores nationwide in the US for Expresso Excellence Training where the staff were trained to pour a perfect espresso shot and steamed milk.
- Ability to pass on Cost-push inflation
The company is able to pass on the impact of cost-push inflation because of its premium nature of product (like Apple iPhone), however, being a daily driver for people’s coffee needs and ever-increasing inflation, large masses are diverting away from Starbucks contrary to expectations and routing towards more cost-effective coffee solutions like local joints.
- Diversified client base
Starbucks has a diversified client base that ranges from office workers, to gymnastics, to students, to avid book readers, to basically anyone! In US alone, 57% of all café sales came from Starbucks (making a 2/3 market share). Categorizing anyone as a target market could be problematic as far as where advertising and marketing efforts are channeled. The main target market basically comprises of gender-neutral individuals between ages 20 to 60 from urban and suburban areas.
Starbucks Threat of Substitute Products or Services
- Availability of Substitutes
Since Starbucks operates in food retail business, the company faces competition from restaurants, fine-dining, multinational food chains, small food joints, to practically anything. With the increase in prices globally, consumers are left with less discretionary spending budget is what poses the greatest risks of demand compression and what sways consumers towards these other cost-effective substitutes.
- Low Switching Cost
There is immense threat of substitute for Starbucks because of high availability of food and beverages and consumers focus towards change in taste and trying something new. Also, there are vast number of coffee houses that are striving to provide premium experience at exceptionally low rates.
- Effective Marketing Strategy
The company diverts major budgets annual towards impactful advertising. In CY21, the company spent USD 305 million globally on advertising as compared to USD 258 million preceding year. Although the company operates globally, the company intends to create a consistent and premium look and feel anywhere. For example, getting the customer’s name printed on the cup is a feature insanely unique to Starbucks.
- Loss of Confidence post Covid-19 Pandemic
According to a survey conducted by Sinha, 60% of respondents went to Starbucks once in a month before the Covid-19 outbreak. However, it decreased to 27% after the outbreak. This suggests how much sensitive the food business is to external shocks and how easily can consumers divert away from premium products despite all health standards are ensured. Put another way, the threat of substitute is intensely high in food business.
- Annual Financial Statements, Quarterly and Annual Results (2022-21), Company website [online], Available at:Financial Statements
- Vijay Vishwanath and David Harding, (2000), The Starbucks Effect [Online], Available at: Harvard Business Review
- Forbes, (2022), Starbucks [online], Available at: Forbes
- The Wall Street Journal, Topic: Starbucks [online], Available at: Wall Street Journal
- Julia Hawley, (2022), Who Are Starbucks’ Main Competitors? [Online], Available at: Investopedia
- Ezequiel Minaya, (2018), Dunkin’ Donuts Invests $100 Million in Brand Refresh [Online], Available at: The Wall Street Journal
- Bloomberg, (2021), Coffee Supply Crisis Means More Expensive, Bitter Tasting Brews [Online], Available at: Supply Chain Brain
- Daniel Kline, (2021), Why Is My Starbucks Out Of…CEO, President Explain Product Shortages, Available at: The Street
- Martin Roll, (2021), The Secret to Starbucks’ Brand Success [Online], Available at: Martin Roll
- Start IO, (2022), Who is Starbucks’ Target Market? Customer Characteristics & Marketing Strategy Analysis [Online], Available at: Start IO
- Statista, (2022), Starbucks Corporation’s advertising spending worldwide in the fiscal years 2011 to 2022 [Online], Available at: Statista
- Rupesh Kumar Sinha, (2021), Impact of Covid-19 on Business Performance: A Case Study of Starbucks, Available at: Research Gate