Analysis of Starbucks and the coffee industry

Analysis of Starbucks and the coffee industry Starbucks is the worlds largest and most popular coffee company. Since the beginning, this premier cafà © aimed to deliver the worlds finest fresh-roasted coffee (Starbucks Heritage, 2010). Today the company dominates the industry and has created a brand that is tantamount with loyalty, integrity and proven longevity. Starbucks is not just a name, but a culture. Extensive research has provided keen insight as to why the entity has become the multibillion dollar empire that it is. The company has received many high accolades also, for their quality products as well as their commitment to the community, their partners, and the environment. BACKGROUND Starbucks was founded in 1971 by teachers Jerry Baldwin and Zev Siegl, along with writer Gordon Bowker. Coffee first originated in the Moslem population before making its way to Europe in the 1600s. It eventually became the beverage of choice at meeting places where intellectuals would converge, and was recognized for both its sociability and taste then, just as it is now. (Starbucks and the lifecycle of specialty coffee: An industry evolving, 2010). The foundation of this commerce is one Starbucks strives to keep although the business has come a long way from the modest storefront it began as. For over 15 years the company was based solely in Seattle, Washington but has since evolved into an international giant with over 16,000 locations in more than 50 countries. The growth of the company has been simply phenomenal, with approximately 1,000 stores being added to its chain each year for the last decade. Howard Schultz, who is now the current chairman, president and CEO of the compan y, was indispensible to this expansion and has been instrumental in establishing the development of the coffeehouse as we know it today (Starbucks Timeline and Heritage, 2010). One of the most critical components a business should have is a vision and mission statement. According to an online article, these pieces of information are defined as the inspiring words chosen by successful leaders to clearly and concisely convey the direction of the organization (Unleashing the Power of Purpose, 2010). Starbucks has adopted a mission statement that aims to inspire and nurture the human spirit one person, one cup, and one neighborhood at a time (Starbucks Mission Statement, 2010). Further, there are six governing principles the company adheres to in an effort to fulfill their purpose and intentions. They are: To provide quality coffee. To treat partners with respect and dignity and to embrace diversity. To create a relationship that is satisfying and uplifting for customers. To produce a store ambiance that is comfortable and enjoyable. To nurture, protect and invest in the community. To provide accountability and favorable rewards to shareholders. The application of these values has helped Starbucks launch to its current status as being one of the best 100 places to work, according to Forbes magazine, with an astonishing 140,000 employees. Outside of the local neighborhood, Starbucks can be found in airports, malls, supermarkets, and even bookstores all around the globe. Like most other companies, Starbucks relies heavily on its investors to help fund business operations, generally through the stock market, and can be found on NASDAQ under the symbol SBUX. Until 2008, profitability was on the rise but has since decreased due to downfalls in the economy and impeding competitors such as Dunkin Donuts, BIGGBY, and Caribou Coffee. Cost reductions and improved operating efficiencies alone would not be enough to boost sales in this economy. Improved customer service and the ability to aggressively differentiate and innovate have kept Starbucks ahead of their competition. Starbucks saw customer satisfaction scores increase by 10 percent as a result of their efforts to improve customer service. Some changes include more focus toward in-store offerings, simplifying the demands on the partners, raising the already-high standards for beverage and food offerings, and an overall in-store experience (Starbucks Investor Relations, 2010). Despite tough economic times, the company had an impressive finish in 2009 with approximately 21,600 shareholders, $562 billion in operating income, and net revenues totaling $9.8 billion. As of October 8, 2010, the current stock price was $26.07 a share with a 52 week high of $28.50 and a low of $18.69 (Market Watch). Starbucks is expected to continually recover from their losses and is estimated to grow even more over the next few years as illustrated below (Bloomberg Business Week, 2010). Quarterly Earnings Estimates STARBUCKS CORP (SBUX) EPS Earnings Per Share Pre Exceptional Q1 2011 Starbucks Corp. reported 3rd quarter 2010 earnings of $0.29 per share on 07/21/2010. Quarterly Revenues STARBUCKS CORP (SBUX) Q1 2011 Starbucks Corp. had 3rd quarter 2010 revenues of $2.6B. This bettered the $2.5B consensus of the 16 analysts covering the company. This was 3.0% above the prior years 3rd quarter results. Reproduced from Bloomberg Business Week. One of the reasons Starbucks is dominating the coffee industry is due to their willingness to take risks and try out new ideas. An example of just how popular Starbucks has become is evident after a quick Google search produced well over 5 million hits, with products ranging from the handcrafted beverages many have grown to love, to merchandise and gift cards. The company continues to offer new products, such as whole grains and the use of other wholesome ingredients in their brands. They have also changed portions of their food offerings to simplify recipes and remove artificial trans-fat, high-fructose corn syrup, artificial flavors and dyes (Starbucks Nutrition, 2010). In-store products include fresh food, music, and the very popular Tazo Tea which is a label purchased by Starbucks in 1998. Starbucks has also increased its trademark and now promotes ice cream, ready-made mixed drinks, and VIA, an instant coffee that is manufactured through the companys own roasting facility (Starb ucks Profile, 2010). ORGANIZATIONAL STRUCTURE AND CULTURE After conducting eight interviews, there was a general consensus that the Starbucks hierarchy ranged from immediate supervisors to higher management officials. Some employees interpreted organizational structure to be a form of the way management divides duties and responsibilities amongst employees, while others considered it to be teamwork, meaning, when everyone comes together to meet the same goals; the unique way business is conducted; and the flow/channels of the company and management impact. These definitions go hand-in-hand with organizational culture. In the book Organizational Behavior, authors describe such a climate as the shared knowledge within an organization regarding the rules, norms, and values that shape the attitudes and behaviors of its employees (Colquitt, Lepine, Wesson, p. 557). Some of the components involved in the culture of an organization are observable artifacts, espoused values, and basic underlying assumptions (Colquitt, et al., p. 558). Together these three elements makeup what can be related to as being the body of an organization. For example, what a person sees through images and logos helps to distinguish one brand from another. Further, the physical setup of an establishment often sets the atmosphere or tone which tends to decipher a company from being an office, department store, mechanics shop, or in the case of this study, a coffeehouse. Some Starbucks are more casual such as in medical establishment or movie theater, whereas other places require a little more sophistication such as in a courthouse. Additionally there are usually bulletins, replicas or other signs on the walls of the business that speaks the unique language of the respective location. There might also be organizational charts displayed, which is a drawing that represents eve ry job in the organization and the formal reporting relationships between those jobs (Colquitt, et al., p. 527). When a person walks into a Starbucks it is clear that you have just entered into a cafà © that is designed to be a tranquil meeting place for family, friends, students or even business partners. LEADERSHIP ROLES RESPONSIBILITIES At Starbucks, employees feel the atmosphere is relaxed, upbeat and/or energetic and most thought working together as a group was encouraged. They also appear to have a clear understanding of leadership and what it entails, although not everyone agreed management styles were the best. Several interviewees thought management appeared arrogant and demanding at times, while others thought the complete opposite of their managers defining them as being friendly, caring and considerate. While most interviews had distinct and varying responses, it can be said that every person believed they were valued and appreciated. Many also felt they were a part of the decision-making process at times, where their thoughts and opinions on a particular issue were gathered, although the final decision still lay with management. One type of occurrence that displays this level of commitment to employees was the implementation of Optimal Scheduling which is the result of an employee request. The initiative of the program was to enhance the existing flexible work schedules to allow opportunities for a more regular arrangement, complete with a consistent timetable and increased hours to those who were available. It also allowed customers the opportunity to develop relationships with staff which is a part of the Starbucks vision, to connect with its customers beyond making a perfectly blended drink (Starbucks Newsroom). STRESS FACTORS COPING MECHANISMS An overall satisfaction with ones current position was the general consensus obtained from the dialogue as well. Most considered their rate of pay to be less than desired and unable to meet long term goals. A lot of the discussions were with college students who favored upward mobility whether through Starbucks or elsewhere. Aside from pay, stress seemed to be high on the list of reasons for being dissatisfied also. Stress is defined as a psychological response to demands that possess certain stakes and that tax or exceed a persons capacity or resource. Such demands are referred to as stressors while the negative consequences are considered the strains (Colquitt, et al., p. 144). Most of the stressors at Starbucks was caused by issues with partners, budgets, or performance. Role overload was another factor that seemed to affect many of the managers interviewed due to pressure to get daily tasks done in a timely manner, such as paperwork and conference calls. There were also a lot of unforeseen assignments like equipment malfunctions and call-ins. While some stress is an everyday part of life, excessive stress interferes with ones productivity and reduces a persons physical and emotional health; therefore, it is vitally important to find ways to help keep it under control. Some steps to help reduce stress and avoid pitfalls while at work include taking responsibility for improving your physiological and psychological well-being, identifying negative attitudes that add to the stress at work, and learning better communication skills to ease and improve the relationships with management and coworkers (Stress at Work, n.a.). ORGANIZATIONAL STRENGTHS Customer Loyalty Service Customer service at Starbucks is actually a culture type focused on service and quality (Colquitt, et al., p. 562). In addition to the vast presence in the United States, the company has 9,000 international coffeehouses in almost 40 countries. It seems that no matter where they serve, their reputation for fine products and services remains intact, as well as their brand preference and strong customer base. By extensively training employees for at least twenty hours prior to full employment, Starbucks maximizes employee responsibility and attentiveness in an effort to decrease wait time for its customers. Furthermore, by closely tracking consumer needs and wants, Starbucks is able to introduce more popular products with less time between presenting new items. By decreasing wait time and increasing choices for customers, Starbucks increases loyalty among current regulars while simultaneously attracting more consumers. Another cornerstone for Starbucks success is the opening of additional stores in various communities. By adding more locations, the frequency of visits by supporters is usually also maximized, especially since the Starbucks label is already so popular. In addition, many of these new stores are being developed with a drive-thru for double the convenience. With this, Starbucks is targeting a particular segment of its customer base that is comprised of professionals and on-the-go parents. To measure the effectiveness of these strategies, Starbucks continuously compares data between newly opened stores and existing stores, trying to increase the profitability of both units while maintaining a steady growth rate. This pattern can be outlined by the Service Culture Process which starts out with service-oriented leadership behavior that impacts both customer and employee attitudes. If favorable, sales would likely increase as a result of high performance (Colquitt, et al., pp. 562-564). Employee Retention Job Satisfaction As the old saying goes, you are as strong as your weakest link. This belief seems to be highly recognized by Starbucks as they remain adamant about investing in their staff providing them with training, benefit packages, and other opportunities to advance. Since most of the advertising stems from inter-relation between staff and consumers, Starbucks is able to expend more of their budget on educating their staff which in turn influences both quality and quantity. Such a plan also strengthens the work environment, creating an atmosphere where workers are confident about their knowledge, skills and abilities regarding the products they serve. It is also a reason why their employees continue to feel valued and appreciated which is one of the two top reasons people work for the company. The other reason is that employees feel the teams at Starbucks are very enthusiastic (Hammers, 2003), and a happy employee typically makes a happy customer. Another explanation as to why Starbucks employees remain with the company is their great compensation and competitive benefits packages which are available to both full-time and part-time workers. In fact, the corporate staff is very forward thinking and believes offering healthcare benefits would attract a higher quality of employees which, consequently, would cause the turnover rate to decrease. Time has proven this strategy to be true. For example, at the time of inception, the turnover rate for retail or fast food ranged between 150% and up to as high as 400% a year but for Starbucks it was only 60% at the barista level and 25% at the managerial level which is the lowest in their industry (Schultz, p. 128). Starbucks employees also benefit from the Bean Stock incentive which is the offering of stock ownership to all workers. It is a really good way to get employees involved in the equity of the business, and even more reason for each individual to strive for success and treat cus tomers with exceptional service (Colquitt et al., p. 135). Strong Financial Foundation With its strong financial base, Starbucks is able to undertake new business ventures much more frequently than other companies. This is largely due to its investors who have been able to buy company shares since 1992. At the time, shares were $17 each, today the rate of exchange has increased by more than half which is a great benefit to shareholders. Stock can be purchased through a broker or via a direct buy. Additionally, over 20 analysts cover Starbucks earnings and an estimated 10,000 shareholders attended the companys annual meeting in 2008 (Investor Relations, 2010). Today, the company has well over 20,000 shareholders with little signs of slowing down. The company is also very committed to corporate social responsibility, to include their economic, legal, ethical, and citizenship expectations of society (Colquitt, et al., p.244, p. 524). They were the only restaurant and cafà © named as being one of the most ethical companies in the world (Ethisphere, n.a.), and has been on the list for many years. There are governing principles and charters specifically designed for these efforts which are to be strictly upheld by a team of 11 members that makeup the board of directors (Starbucks Corporate Governance, 2010). ORGANIZATIONAL WEAKNESSES Store Closures The mission to nurture one neighborhood at a time started to dwindle when over 600 Starbucks stores closed, causing the company to lose revenue and layoff thousands of workers. Undoubtedly, employee morale is not as high as it once was due to the fear of losing ones job. It has been said that The economic crisis is eating in to high-end coffee consumption, as Starbucks found out in its fiscal first quarter (Ahrens, 2009). At the time, reports revealed the coffeemaker would lay off up to 6,000 employees at its stores and let go another 700 non-store employees, half of which would come at the companys Seattle headquarters. First-quarter revenue at the coffee giant was also down 6 percent and earnings were down a venting-sized 69 percent. Additionally, the plan to open 140 new stores in the U.S. and 170 new stores internationally went down from its earlier goal of 200 and 270, respectively. Capital expenditures were expected to face at least a $100 million cut (Ahrens, 2009). Fierce Competition Since the economic downfall, customers are moving away from paying gourmet prices and are purchasing from other chains to include gas stations. Many consumers state they experience the same taste they crave without the steep prices. Starbucks competitors in the coffee beverage sales include Dunkin Donuts, BIGGBY Coffee and Caribou Coffee, as mentioned previously, as well as 7-Eleven, McDonalds, Panera Bread, and Einstein Bagels. Competitors such as McDonalds and Dunkin Donuts not only have extensive menus, but also the financial resources and position to leverage their strengths to threaten Starbucks profitability. In terms of perception, 7-Eleven and Dunkin Donuts provide coffee in a no-nonsense fashion, which attracts customers who are extremely price sensitive. Caribou Coffees environment is similar to that of Starbucks because of furniture, free internet, and cozy surroundings, but their lack of market expansion has prohibited them from gaining the notoriety Starbucks has achieve d. Finally, BIGGBY Coffee is in the middle ground where the likes of Dunkin Donuts and Caribou Coffee separate themselves (Bhaskar, 2009). Lack of Advertising In times past, Starbucks did very little advertising but relied on the infamous word-of-mouth approach to getting news out about their company. Most information came through the use of relation theory, mainly the relationship with staff. For example, no matter which market it entered, Starbucks did not advertise. Instead, broadcasts came via the reports of employees, and consumers quickly followed suit. Ads can now be seen on billboards and through social media, such as Facebook and Twitter, allegedly due to the drop in sales the coffeehouse experienced (Advertising Age, 2010). Financial Uncertainty As mentioned in the interviews, a lot of employees felt their salary was less than desired. At this time, there may not be much that can be done in this area, but the issue is still a factor nonetheless. The average barista salary is $8.64 per hour and shift supervisors earn about $10.68 per hour. The average salary for store managers is $42,698 per year (Starbucks Salaries, 2010). IMPLEMENTION PLAN RECOMMENDED CHANGES Starbucks is an organization that is on the move. However, no organization is exempt from implementing critical changes that can impact the growth of the organization. When organizations become as large as Starbucks, sometimes the focus and mission statement can be pushed to the side due to trying to keep up with the demand. Other times, there are situations beyond ones control, such as the financial woes the company experienced at the start of the recession a few years ago. One of the things Starbucks did to help revamp the business was create a website that encouraged public comments about changes they would like to see in the company. The page is located at www.MyStarbucksIdea.com and has been instrumental to developing innovative differences at the company. For the purposes of this assignment, other avenues the company may utilize are suggested below. More Programs In an effort to build upon an already exciting environment, Starbucks can liven the atmosphere even more with offering Band Performances and Poetry reading nights. This would be a bonus for the company since a lot of its competitors do not have such a setting available to them. They could utilize local musicians which would add to the companys desire to invest in the community. In addition, the implementation of Awareness Month is an option where a special drink is developed each month and every time someone orders the beverage, proceeds go to awareness charities such as a breast cancer, diabetes, or sickle cell foundation. In an effort to boost sales and promote the existing Going Green Goals of the company, daily discounts could be provided to customers who bring in their own coffee mug. The initiation of these options would give Starbucks an edge on their competitors without decreasing the product eminence Starbucks is known for. More Advertising Instead of relying on partners to do most of the advertising for the company, perhaps its time for Starbucks to spend more dollars in this arena to inform the public of their good will, as well as the great programs that are available to them. The business is very committed to the environment, and recognizes both the economic and societal need to invest in products that can bring about changes to the ecosystem. Starbucks strives to lead this effort and aims to produce cups that are purely ecological by 2015 in addition to conserving water and energy use, building greener stores, and making recycling a mandatory part of daily transactions. Other specialized efforts include RED which helps to fund medical supplies needed for HIV patients in Africa; Starbucks Foundation, a literacy program in the US and Canada; and Ethos Water created to fund clean water in countries that are less fortunate (Starbucks Shared Planet, 2010). Training Incentives An implementation plan should not be limited to the products that make up the coffee franchise conversely; the coffee franchise must ponder on innovate ways to keep up employee morale too. For example, there was an incident with an employee who felt lack of routine training created a very tense situation when a drink that should have only taken five minutes to make took 20 minutes. It was stated If you dont use it, you will lose it, and that is exactly what happened when the need to make a drink on a machine that hadnt been used in six months arose. Perhaps things would not have taken as long if other teammates were available, but several of them called in sick, leaving the interviewee to fend for himself. This is a classic example of role ambiguity and also the result of time pressure, a work challenge stressor that occurs when there is a sense that the moments available is not enough to perform the task at hand (Colquitt, et al., p. 146). Some of the ways Starbucks can alleviate this type of event from occurring again is by offering more training sessions at each store weekly, bi-weekly, or at least monthly, so that ones thoughts on how to make beverages are kept fresh. Additionally, the development of incentive programs where employees are rewarded for their ability to make drinks faster than their co-workers; their ability to master items found on the menu; and/or their ability to decrease customer wait time may prove to be beneficial. Rewards would include cash and gift-cards outside the Starbucks chain such as for the movie theater or gas station. More Management Accountability When the CEOs of Chrysler, Ford, and GM flew private jets to plead their case for more taxpayer dollars, the public was livid! Since then the executives have agreed to give up this luxury as well as take pay cuts to help balance the needs of their company (Big Three CEOs, 2008). In response to the financial distress of some of its employees, Starbucks can help fund some of the salaries of those at risk of losing their jobs by following such a plan, which may even keep more stores open. The company could even play around with the idea of offering lower stock prices to boost shareholder interests even more. It was also mentioned that managers get bonuses, so one thing Starbucks could is restructure the bonus program for top managers, at least until profits are steady, and to only award them based on how well the store is performing. Such a plan would work in reverse order too, if a store is not functioning properly, the bonus should be lowered or unavailable all together. By basing bon uses on this strategy, it might encourage the manager to devote their attention on increasing sales by being involved on the floor more, and assimilating with customers versus just doing office work. SUMMARY CONCLUSION Starbucks is known across the world as being a well-built global brand of coffee. As with any company, their main and goal is to increase profits. They achieve this by training their partners to provide coffee lovers with a great experience. Over the years, the company has been recognized for valuing their employees and consumers so profoundly, that it helped to shape them into one of the largest coffee entrepreneurs in the world. They are continuously chosen for being a great place to work. Competitors seem to only fuel Starbucks expansion, strengthening their ability to stand out from all the rest. Employees receive innovative training to ensure they are working at their full potential, and to be passionate people who take pleasure in serving great tasting coffee. In order for Starbucks to remain successful, they must focus on a variety of strategies to maintain their competitive edge, and constantly reinvent products to stay on top of the coffee business. One of the secret to Star bucks success is the opening of new stores in neighborhoods, malls, grocery stores, making it convenient to partake of the Starbucks experience. Management also takes pride in work specialization, and strives to create an atmosphere filled with individuals who are masters at brewing the perfect cup of coffee. Extensive training is provided for all managers in an effort to pursue and achieve the ultimate goal of being the premier brand of coffee that is respected all around the globe. Starbucks is adaptable and knowledgeable when it comes to furthering their profits and market share, and they have a number of capabilities which separates them from other specialty coffee retailers. Howard Schultz, the chairman, president and chief executive of Starbucks, says that a great leader knows how to demonstrate vulnerability, because that will bring people closer to you and show people the human side of you. (Bryant, 2010)