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assignment about Starbucks got a First in it....

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A report analysing the macro-environment for Starbucks Coffee.

Word count: 2280

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Executive Summary This report identifies the key environmental drivers that affect Starbucks. In this report we will focus on The PESTLE analytical framework which helps to give organisations an insight into external factors. The six key macro environmental factors are:      

Political Economic Social Technological Legal Environmental

This will help to analyse the impact these factors have on Starbucks and analysing/evaluating their responses. I will also be giving managerial recommendation to Starbucks, it will include what the organisation should continue to do and what improvements they can make to their business.

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Table of Contents

Page Number

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Introduction to Starbucks ................................................................................................. 4

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Analytical model ................................................................................................................ 4

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Key Environmental Drivers .............................................................................................. 4 3.1 Political...................................................................................................................... 4 3.1.1 Starbucks strategic responses to political factors................................................... 5 3.1.2 Evaluation of strategic responses to political factors ............................................. 5 3.2 Economic ................................................................................................................... 5 3.2.1 Starbucks strategic responses to economic factors ................................................ 5 3.2.2 Evaluation of strategic responses to economic factors .......................................... 5 3.3 Social ......................................................................................................................... 6 3.3.1 Starbucks strategic responses to social factors ...................................................... 6 3.3.2 Evaluation of strategic responses to social factors ................................................ 6 3.4 Technological ............................................................................................................ 6 3.4.1 Starbucks strategic responses to technological factors .......................................... 7 3.4.2 Evaluation of strategic responses to technological factor ...................................... 7 3.5 Legal .......................................................................................................................... 7 3.5.1 Starbucks strategic responses to legal factors ........................................................ 7 3.5.2 Evaluation of strategic responses to legal factors .................................................. 8 3.6 Environmental .......................................................................................................... 8 3.6.1 Starbucks strategic responses to environmental factors ......................................... 8 3.6.2 Evaluation of strategic responses to environmental factors ................................... 9

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Managerial recommendations .......................................................................................... 9

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References ....................................................................................................................... 10

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Appendix .......................................................................................................................... 13

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Introduction to Starbucks

Starbucks Corporation is an American company founded in 1971 in Seattle, Washington, they are a premier roaster, marketer and retailer of specialty coffee around the world. With about 254,000 employees across over 25,000 company-operated and franchised stores in 75 countries (Rothaermel, 2017). They are the largest roaster and retailer of specialty coffee in the world. Their product mix includes high-quality/premium priced coffees, tea and a variety of fresh food items, as well as other beverages. The business also markets its products mix with other brand names within its portfolio of companies, this includes Starbucks Coffee, Teavana, Tazo, Seattle’s Best Coffee, Evolution Fresh, La Boulange and Ethos (Rothaermel, 2017). As well as providing high-quality, ethically sourced coffee, Starbucks wants to create a third place by providing a warm and welcoming environment where customers can gather and connect (Dollinger, 2008).

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Analytical model

PESTLE is a strategic analysis tool that considers important elements of the operating environment that have an impact on the organisation and its operation (Worthington, Britton and Thompson, 2018). The PESTLE Analysis allows companies to get an insight about their external environment in which they operate in, this can then support their strategic planning. By analysing political, economic, social, technological, legal, and environmental aspects of the environment, Starbucks can get an idea of the status and trends of important factors that have an impact on their business which is beyond their control.

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Key Environmental Drivers 3.1 Political Coffee is a commodity that is largely exported and imported. Brazil is the world's largest exporter for coffee beans followed by Vietnam who tripled their exports between 1995-1999 and became the world's largest producer of Robusta beans (Coffee and Health, 2018), other countries include Indonesia, Ethiopia, and Colombia. Starbucks is therefore impacted by trade controls and import/export restrictions. Changes in import duty of coffee can affect the price of coffee. For instance, in China, the prices of products are higher this is because of high import duties and tax rates. Roasted coffee beans draw an import duty of 15 percent and a sales tax of an additional 17 percent (Jourdan, 2013). 4

Tax policies in different countries is another political factor that can affect business. Starbucks faced a tax scandal in the UK, it had been revealed that Starbucks had paid no corporation tax for 15 years since its launch in the country until 2015 (Neville, 2014). 3.1.1 Starbucks strategic responses to political factors Despite the higher prices in China, consumers continue to pay these higher prices because foreign brands in China are viewed as premium, therefore, Chinese consumers are willing to pay the higher prices (Zakkour, 2017). Starbucks continues to grow in China and aims to open more than 5000 stores by 2021 (Starbucks Newsroom, 2018). Furthermore, the tax scandal had been taken to court and damaging Starbucks’ reputation as the company faced protests and boycotts. As a result, the UK Government made the company to pay GBP 20 million (Neville, 2014). 3.1.2 Evaluation of strategic responses to political factors Starbucks has been successful in China and has dominated shares in the coffee chain market in China, owning a 58.6% share of the market (Zhuoqiong, 2018). They have had a 6% comparable store growth, as well as 30% revenue growth for its Chinese segment, this makes it Starbucks’ largest growing region.

3.2

Economic

The demand for premium coffee and snacks is driven by a number of factors, for example, disposable income and world pricing of coffee. The economic crisis in 2008-2009 had a significant impact on Starbucks profitability. The decline in household disposable income due to increased unemployment and stagnant wages resulted to Starbucks’ revenues to decrease by 28% by March 2008, resulting in the closure of around 900 stores and 6,700 employees being laid off (Husain, Khan and Mirza, 2014). Furthermore, as coffee beans are the primary raw material for Starbucks, the prevailing volatile prices of coffee beans determines market costs and profitability margins. Decreases in coffee bean prices mean lower market costs and higher profitability. 3.2.1 Starbucks strategic responses to economic factors As a result of the economic crisis in 2008, Schultz believed that focusing on recreating Starbucks unique experience would bring back its unique corporate culture (Rothaermel, 2017). He presented his transformational agenda which emphasised the importance of customer experience and becoming more innovative and more sustainable at the same time. 3.2.2 Evaluation of strategic responses to economic factors It is hard for businesses to maintain their financial position during an economic downturn, although Starbucks faced many difficulties Schultz plan to continue to expand Starbucks’ product range and reconnecting with their customers was successful. The business managed to

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sustain their growth and are now the market leader in the coffee industry and since Schultz return stock price had appreciated by over 400 percent (Rothaermel, 2017).

3.3

Social

Demographics are constantly changing making it difficult to keep up with trends, this affects the demand for a product of service. Societies attitudes towards health play an important role in influencing the demand for coffee. Consumers shifting towards healthier diets could be a potential threat to Starbucks as people become more aware of health issues. Changes in the age population can also affect demand. The primary target market for Starbucks are women and men aged 25-45, they account for 49% of its total business (Alam, 2017). The high pricing strategy indicates that the brand appeals to customers with higher incomes. Therefore, they are likely to be affected by changes in living standards as it affects the demand for Starbucks coffee. An improvement in the standard of living may result in an increase in demand. Whilst, a decrease in the standard of living may result in a decline in demand. Millennials are drinking more coffee and the young adults aged 18-24 account for 40% of the sales (Alam, 2017). The young adult audience is growing 4.6% each year meaning that Starbucks would need to make sure they can adapt and change their menu to provide each age group food and drinks that appeal to them or else they could lose sales. 3.3.1 Starbucks strategic responses to social factors To help meet the demand for healthier options, Starbucks has committed to help customers make informed and improved nutritional choices, as part of a foundational change to the global business. The business has made great progress in reducing sugar, simplifying ingredients, providing healthier options and improving communication with customers so they can make the right decision. For example, Starbucks has reduced sugar in many of their food items and have committed to reducing the added sugar by 25% in their indulgent beverages by 2020 (Starbucks Coffee Company, n.d.). Furthermore, as Starbucks has a wide range of customers, the company has expanded their menu and have added more food options. Starbucks has something for everyone, from kids to vegans. 3.3.2 Evaluation of strategic responses to social factors Starbucks’ plan to expand their menu has been beneficial. Food sales accounted for 20% of Starbucks’ total revenue, this had gone up from 16% in 2013. The growth had come from many corners of the menu, breakfast sandwich sales had doubled throughout the past four years and are above 30% of total food sales (Kelso, 2018).

3.4

Technological

The use of technology is growing, and Starbucks can relish the benefits derived from the growth of mobile phone usage. Many competitors are using social media and developing mobile apps to connect with their customers. Thus, Starbucks need to keep up with

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technological trends, so they are ahead of their competitors (Porter, 1985). By taking the opportunity to improve its mobile apps and linked services it could increase revenues through mobile payments. 3.4.1 Starbucks strategic responses to technological factors The launch of their app ‘Starbucks’ for iPhone and Android users allow customers to pay for their orders, earn rewards, find stores, place customized orders and pay ahead through Mobile Order and Pay (Starbucks Coffee Company, n.d.). By the time customers arrive at the store, their food and drinks are ready for collection, making it easier for people who are on the move and stretched for time. Starbucks now also uses social media platforms such as Facebook and Twitter to communicate with customers more. With 11.5 million followers on Twitter, it allows to Starbucks respond to customers online, give updates on new drinks and projects. 3.4.2 Evaluation of strategic responses to technological factor Starbucks has greatly benefitted from the use of technology to help them boost their sales and increase their revenue. By engaging with customers through social media it has allowed Starbucks to deepen their engagement with consumers and increase customer loyalty. The launch of their app has been extremely successful as mobile payments now account for 30% of Starbucks transactions (Soper, 2017). However, this means that customers now spend less time inside the store (Rothaermel, 2017)., the business is based around customer-staff interaction, therefore, this low statistic is not falling in line with Starbucks’ mission.

3.5

Legal

The way that businesses operate is controlled by legislation to stop them from acting wrongfully such as health and safety laws and employment laws to protect consumers and employees. Starbucks sells many food and drinks; therefore, they need to follow various regulations and laws regarding health and safety standards. The food and drug administration (FDA), in the USA, inspect food items to ensure that the products are safe for customers (FDA.gov, 2018). Starbucks has a reputation for providing high-quality products so failure to meet the standards can lead to a bad reputation and lead to a fall in market share. The business also hires thousands of peoples worldwide meaning that they must follow various employment laws that are set in different countries such as the American with Disabilities Act, a law that makes it illegal for employers to discriminate against applicants based on disability (Doyle, 2018). 3.5.1 Starbucks strategic responses to legal factors Product quality is one of Starbucks’ main missions, therefore, it is a requirement for them to meet the requirements of the FDA. To make sure food and drinks are up to standards, Starbucks suppliers are required to disclose any conditions that may conflict with the standards or any regulations/laws in facilities that produce, store, or handle Starbucks products or provide services to Starbucks (Starbucks Coffee Company, 2006). They must also disclose their

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identity, physical location of all factories which produce Starbucks goods. Any changes must be approved by Starbucks before production can begin (Starbucks Coffee Company, 2006). In addition to meeting health and safety regulations regarding food and drinks, Starbucks ensures the best possible workplace for their partners. In the US, they have done this through treating their employees with respect and being an equal employment opportunity employer of all qualified individuals. Starbucks and their partners treat all applicants fairly and do not discriminate against race, gender, religion and any other factors (Starbucks Coffee Company, 2017). For example, the company has hired many disabled workers and have created a disability friendly environment for their employees. 3.5.2 Evaluation of strategic responses to legal factors By following the rules and regulations, Starbucks has received a lot of recognition. Starbucks has been able to gain a good brand reputation by serving food and drinks of high standards. In 2018, Starbucks’ brand ranking was 52 (Interbrand, 2018) which had increased by 10 from the previous year. In addition, the company was awarded employer of the year in 2014 and have been recognised as a “best place to work” after receiving a 100% rating on the disability equality index (Starbucks Newsroom, 2016).

3.6

Environmental

Coffee beans are the main raw material used by Starbucks, in 2014 the company purchased 4428 million lbs. of coffee bean (Figure 1), which accounts for approximately 5% of the coffee bean demands in the world. Therefore, the impact of climate change on coffee bean production is threatening Starbucks’s supply chain and its business prospects in long term. Increases in the average temperature have deteriorated the growing condition, resulting in poorer quality coffee and lower production yield. Brazil is the world’s largest coffee producer and exporter (Rahman, 2014), in 2014 the country faced its worst drought in 50 years causing 30 percent of its coffee crops to be lost (Wile, 2014), this drop-in supply caused coffee prices to double (Solomon, 2014). If temperatures continue to rise, 80% of the land in parts of Brazil and Central America currently used to grow mostly Arabica coffee will become unsuitable for coffee production by 2050 (Byrnes, 2016). 3.6.1 Starbucks strategic responses to environmental factors Starbucks has implemented strategies to tackle climate change and encourage environmentally friendly coffee production as well as ethically sourcing 99% of their coffee beans from farms around the world. Through the Farmer Loan Programme and support centres, coffee farmers have been provided incentives to reduce the environmental impact of their coffee production (1912 Pike, 2016). This helps ensure that coffee farmers are sustainably producing high quality and high production yields for the future. Furthermore, the company has come up with various approaches to encourage recycling and reduce waste caused by non-recyclable paper cups. Customers that bring their own cup are rewarded by getting a 25p discount on their drink,

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whilst, stores in Britain are trying to reduce paper waste by charging 5p for a paper cup (Smithers, 2018). 3.6.2 Evaluation of strategic responses to environmental factors Starbucks efforts to being more environmentally friendly have enabled the company to obtain higher loyalty from their customers and a good reputation for instance, in 2017, Starbucks was ranked third on the Fortune magazine's prestigious ranking of “World’s Most Admired Companies” (Starbucks Newsroom, 2017). Moreover, by being environmentally friendly, Starbucks may be able to differentiate themselves from rival firms and gain a competitive advantage.

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Managerial recommendations

The threat of substitution for coffee is high as there are reasonable substitute beverages to coffee and also there’s competition with other specialty coffee shops, such as Dunkin’ Donuts, Caribou Coffee, and Peet’s Coffee and tea (Rothaermel, 2017). During the recession consumers had not stopped drinking coffee but had shifted to buying lower-priced alternatives, therefore this provides Starbucks an opportunity to offer lower priced products so that during a recession they are able to maintain their financial position and compete with rival firms. McDonald’s McCafé was launched in 2009 and successfully competes with Starbucks’ menu, they offer McCafé at a steep discount (Rothaermel, 2017). With the increase in demand and popularity of coffee, Starbucks should continue to grow further in emerging economies such as Mexico and China. Starbucks have been successful in both countries; the company is the market leader in Mexico with 39% of the market share (Loredo Mafud, 2017). The success of Starbucks comes from modifying their menu and store layout in order to meet local customers preferences/taste. Furthermore, I recommend Starbucks to continue to offer food and drinks that appeal more to the younger audience and diversify their menu as coffee is becoming more popular with younger adults, about 44% of the United ...