SWOT analysis of Starbucks

| April 27, 2016

Starbucks SWOT analysis reveals the company's internal strengths and weaknesses as well as external opportunities and threats. Starbucks' key SWOT factors are:

  • Sound financial performance
  • Largest coffeehouse chain in the world
  • Product pricing
  • Overdependence on revenue from Americas segment
  • Further expansion to China
  • Increased competition from the largest competitors and specialized local cafés
Please find more Starbucks Corporation strengths, weaknessess, opportunities and threats below. For more information on how to do a SWOT analysis please refer to our article.

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Company Background

Key Facts
Name Starbucks Corporation
Founded March 31, 1971
Logo
Industries served Restaurants (Coffeehouses)
Geographic areas served Worldwide (23,043 coffeehouses in 68 countries)
Headquarters Seattle, Washington, United States
Current CEO Howard Schultz
Revenue (US$) 19.163 billion (2015) 16.5% increase over 16.448 billion (2014)
Profit (US$) 2.757 billion (2015) 33.3% increase over 2.068 billion (2014)
Employees 238,000 (2015)
Main Competitors Caribou Coffee Company, Costa Coffee, Dunkin' Brands Group, Inc., Green Mountain Coffee Roasters, McDonald's Corporation, Nestlé S.A. and many other restaurant chains and coffeehouses.

Starbucks Corporation is the U.S. based multinational company first opened in Seattle in 1971. It is the largest coffeehouse chain in the world with over 23,000 coffeehouses. The company’s primary activities include roasting, marketing and selling coffee in its coffeehouses. The company mainly buys and roasts only high quality and ethically sourced Arabica beans. Starbucks also sells a variety of tea, food items and other various drinks.

The U.S. is the largest and most important company’s market, where the company earns over 60% of its revenue and profits. China is the second largest and also the second fastest growing Starbucks’ market at the moment. The company added over 400 coffee stores in China in 2015 alone.

You can find more information about the business in Starbucks' official website or Wikipedia’s article.

SWOT

Starbucks SWOT analysis
Strengths Weaknesses
  1. Sound financial performance
  2. The most valuable coffeehouse brand in the world
  3. “Starbucks experience”
  4. Largest coffeehouse chain in the world
Weaknesses
  1. Coffee beans price is the major influence over the firm’s profits
  2. Product pricing
  3. Overdependence on revenue from Americas segment
Opportunities Threats
  1. Increase product offering in its menu
  2. Further expansion to China
  3. Expansion of retail operations
Threats
  1. Increased competition from the largest competitors and specialized local cafés
  2. Supply disruptions that can adversely affect the company’s operations
  3. The rising U.S. dollar exchange rate could negatively affect the company’s revenue and profits

Strengths

1. Sound financial performance

Starbucks’s financial performance was one of the best last year. The company’s revenue increased by 16.5% from US$16.448 billion in 2014 to US$19.163 billion in 2015. The company’s profits also increased by 33.3% from US$2.068 billion in 2014 to US$2.757 billion in 2015. At the same time, Starbucks continued to expand its store network, adding 1,677 new coffeehouses in 2015 alone.

Figure 1. Starbucks key financial figures (revenue and profits in US$ billions)

The company’s revenue increased by 16.5% from US$16.448 billion in 2014 to US$19.163 billion in 2015. The company’s profits also increased by 33.3% from US$2.068 billion in 2014 to US$2.757 billion in 2015. At the same time, Starbucks continued to expand its store network, adding 1,677 new coffeehouses in 2015 alone.

Source: Starbucks financial statements[1]

Starbucks sound financial performance, while growing so fast, shows an efficient company’s management. Few of the company’s rivals have this advantage.

2. The most valuable coffeehouse brand in the world

Starbucks has a strong brand reputation associated with quality coffee and excellent customer service. Its brand is the most valuable brand in a coffeehouse segment and is the second most valuable coffee brand in the world. Interbrand[2] and Forbes[3], value the brand at US$6.3 billion and US$10.5 billion, respectively, only behind Nescafé coffee brand.

Brand value is closely associated with brand awareness. The more valuable a brand is the more recognized it is worldwide. This means that Starbucks brand enjoys some of the best recognition in the world.

3. “Starbucks experience”

One of the strongest advantages Starbucks has is the experience it delivers to its customers. The company offers only the highest quality coffee, tea and food choices, with a wide range of items in its menu. Starbucks coffeehouses’ quality is also one of the highest among all of its competitors. Well-trained employees offer some of the best customer service.

The company’s ability to excel at so many things creates the experience none of the company’s competitors can offer or imitate.

4. Largest coffeehouse chain in the world

Starbucks operates 23,043 coffeehouses in 68 countries, making it the largest coffeehouse chain in the world. Starbucks store network is the second largest among its competitors, only behind McDonald’s restaurant network, which has over 36,000 locations around the world.

Figure 2. Number of stores operating in 2015 and growth over previous year
Starbucks McDonald’s Dunkin’ Donuts Costa Coffee
Stores 23,043 36,525 11,310 3,080
Growth over previous year 7.8% 0.7% 4.2% 7.7%

Source: The respective companies’ financial reports[1][4][5][6]

A huge network of coffeehouses is an advantage over competitors, mainly because Starbucks can be found almost everywhere. Starbucks customers don’t have to look far for the company’s store and can get the same quality of customer service and coffee around the world.

Weaknesses

1. Coffee beans price is the major influence over the firm’s profits

Starbucks heavily relies on coffee sales. According to our estimates, coffee sales generate about 60% of the total company sales.[1]

Operating mainly coffeehouse chains and generating most of its revenue by selling coffee isn’t a weakness on its own. The problem is that the price of coffee beans, the company’s main ingredient, is very volatile, often doubling in one year. This is a situation over which Starbucks has little control.

Rising coffee bean prices affect every Starbucks competitor, but the consequences are not as severe for them as for Starbucks, mainly because coffee sales make up just a small share of their total sales.

2. Product pricing

Starbucks offers great coffee and customer experience but that results in significantly higher price of its products. In comparison, a cup of Starbucks’ medium latte coffee cost 24% more than in McDonald’s and 14.5% more than in Dunkin’ Donuts.[7]

Figure 3. Starbucks medium latte coffee price compared to major rivals’ coffee prices (price in US$)

A cup of medium latte costs US$3.65 at Starbucks, US$3.19 at Dunkin' Donuts and US$2.89 at McDonald's.

Source: Fast Food Menu Prices[7]

High Starbucks’ coffee price is one of the major weaknesses, when compared to its rivals. Premium prices can deter some of the customers from buying their regular coffee at Starbucks and the company’s rivals can easily exploit this by strengthening their coffee offerings at the lower prices.

3. Overdependence on revenue from Americas segment

Starbucks’ Americas segment (mainly the U.S.) accounts for US$13.222 billion or 69% of its total sales.[1]

Figure 4. Starbucks’ sources of revenue by operating segment

Starbucks earned 69% of its reveneu in Americas Segment, 13% in CAP (China-Asia-Pacific) segment, 9% in Channel Development, 6% in EMEA (Europe, Middle-East and Africa) and Other segment generated another 3%.

Source: Starbucks’ financial report [1]

In comparison, McDonald’s revenue from the U.S. accounted for only 33.5% of its total sales, indicating it has much more geographically diversified sources of revenue.[4]

A high share of revenue coming from one country weakens a company as changes in consumer tastes or political, economic, environmental and legal conditions may severely impact its revenue and operating profit margins.

Opportunities

1. Increase product offering in its menu

Starbucks offers one of the largest beverage menu among all of its competitors. On its online menu, Starbucks lists over 150 beverages in its product range, but the company offers only about 50 drinks (mainly coffee and tea) in each of its coffeehouses. Therefore, Starbucks could increase its in-store beverage offerings to attract even more customers to its stores.

In addition to the beverages, Starbucks also offers some food items, such as sandwiches, yoghurt, salad and pastries for sale in its stores. Food sales at Starbucks stores account only for 19% of the total sales. Starbucks is primarily a coffeehouse chain, but could also include more food items or meals to attract diners to its stores.

By increasing beverage and food offerings at its stores, Starbucks could attract more customers, which would result higher sales.

2. Further expansion to China

China is the second fastest growing company’s market. In 2015, Starbucks opened 1,677 new stores worldwide, including 444 new stores in China. While Starbucks is growing fast in the country, it could further strengthen its position in China to capture the growing market of coffee drinkers.

Figure 5. Number of Starbucks locations in China

Starbucks had 570 stores in China in 2011, which increased to 1017 stores in 2013 and to 1811 stores in 2015.

Source: Starbucks’ financial statements [1]

China also has the largest market of tea consumers and Starbucks is already diversifying itself to offer more tea drinks to its customers. Therefore, China with its huge potential market of coffee drinkers and the largest tea market is the best country for Starbucks to expand in. Starbucks should focus all of its efforts to the growth in China’s market and strengthen its competitive position there to ensure future success.

3. Expansion of retail operations

Starbucks receives the majority of its revenue through selling beverage and food items in its stores. In addition to these sales, the company earned 8% of its revenue by selling consumer packaged goods (“CPG”), which include ready-to-drink coffee, packaged teas and coffees, and single-serve coffee and tea products. The company sells these products to grocery, warehouse clubs and specialty retail stores, using various partnerships with distributors such as PepsiCo.

Starbucks core operations are focused to growing and managing its network of coffeehouses, but the significant revenue could be earned through selling more of its CPG products, which already bring over US$1.533 billion in revenues for the company every year.

The market for ready-to-drink teas and coffees is growing fast and Starbucks could easily increase its sales in the market using its strong brand and successful partnerships with distributors.

Threats

1. Increased competition from the largest competitors and specialized local cafés

Starbucks largest competitors are Dunkin’ Donuts, McDonald’s and Costa Coffee. Dunkin’ Donuts, which generates a significant amount of its revenue by selling coffee, is a major competitor in the North America (Starbucks most important market) segment. Dunkin’ Donuts is increasing its coffee offerings throughout its network to attract more coffee drinkers to its own stores.

McDonald’s, which is the largest Starbucks’ competitor is also strengthening its coffee menu. It has an advantage of larger restaurant chain and better access to customers around the world. McDonald’s is also expanding its McCafé network, which directly competes with Starbucks chain.

In addition, Cosa Coffee is the main competitor in the European market and has a strong competitive position there. Costa Coffee’s expansion in Europe is also threatening Starbucks operations in the continent.

Moreover, small, specialized local cafés are able to better satisfy their local coffee drinkers’ needs and wishes and, in most of the cases, offer lower prices.

Increased competition from Starbucks’ rivals, both small and large, results in fewer customers for Starbucks, slower company’s expansion and lower profitability.

2. Supply disruptions that can adversely affect the company’s operations

According to Starbucks, one of the main threats affecting the company are supply disruptions:

“Any material interruption in our supply chain, such as material interruption of roasted coffee supply due to the casualty loss of any of our roasting plants, interruptions in service by our third party logistic service providers or common carriers that ship goods within our distribution channels, trade restrictions, such as increased tariffs or quotas, embargoes or customs restrictions, or natural disasters that cause a material disruption in our supply chain could negatively impact our business and our profitability.”[1]

3. The rising U.S. dollar exchange rate could negatively affect the company’s revenue and profits

Currency exchange rates affect every multinational company, including Starbucks. In 2015, the company earned US$5.039 billion, or 26.3% of its revenue, outside of the U.S.[1] This means that Starbucks currently receives a large share of its profits in currencies other than the U.S. dollar. Other currencies therefore have to be converted to the U.S. dollar in order for Starbucks to calculate its total revenue and transfer its profits back to the U.S. This is where a strong U.S. dollar, or in other words, the currently rising U.S. dollar exchange rate, is a financial threat to the company. In 2015, the company lost approximately US$200 million from international sales due to the negative impact of currency fluctuations.[1]

Current forecasts indicate that the U.S. dollar exchange rate is going to rise further against other currencies over the next few years. This therefore means that Starbucks’ revenue and profits generated outside of the U.S. are likely to decrease when converted to U.S. dollars.

Sources

  1. Starbucks Corporation (2015). Form 10-K for the Fiscal Year Ended September 27, 2015. Available at: http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-sec Accessed April 27, 2016
  2. Interbrand (2016). Best Global Brands. Rankings. Available at: http://interbrand.com/best-brands/best-global-brands/2015/ranking/ Accessed April 27, 2016
  3. Forbes (2016). The World’s Most Valuable Brands. Available at: http://www.forbes.com/powerful-brands/list/ Accessed April 27, 2016
  4. McDonald’s Corporation (2016). Form 10-K for the Fiscal Year Ended December 31, 2015. Available at http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors%202/2015%20Annual%20Report.pdf Accessed April 27, 2016
  5. Dunkin’ Donuts (2015). Dunkin’ Donuts Announces Expansion Plans in China with Signing of Largest Development Agreement in Company History. Available at: http://news.dunkindonuts.com/news/dunkin-donuts-announces-expansion-plans-in-china-with-signing-of-largest-development-agreement-in-company-history Accessed April 27, 2016
  6. Whitbread PLC (2015). Annual Report and Accounts 2014/15. Available at: https://www.whitbread.co.uk/content/dam/whitbread/download_centre/reports_and_results/2015/Interactive-Annual-Report-2015.pdf Accessed April 27, 2016
  7. Fast Food Menu Prices (2016). Starbucks Prices. Available at: http://www.fastfoodmenuprices.com/starbucks-prices/ Accessed April 27, 2016

This is an old Starbucks SWOT analysis...

SEE THE NEW STARBUCKS SWOT 2018

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About Ovidijus Jurevicius

Ovidijus is the founder of SM Insight and the lead writer since 2013. His interest and studies in strategic management turned into SM Insight project, the No.1 source on the subject online. His work is published in many publications, including two books: ‘The Art of Opportunity: How to Build Growth and Ventures Through Strategic Innovation and Visual Thinking’ and ‘Introduction to Human Resource Management’.