Term Paper on "Starbucks Strategic Issue in 2008, Starbucks Closed"

Term Paper 7 pages (1814 words) Sources: 3

[EXCERPT] . . . .

Starbucks

Strategic Issue

In 2008, Starbucks closed 600 underperforming stores.

Most of these stores had been opened within the past couple of years, and had failed to gain business the way that most older Starbucks stores had. With the move, the company essentially ended a strong growth phase and moved towards a more mature position in the market.

The significance of this move should not be lost on Starbucks management. For the past twenty years, the company has been on a very aggressive growth trajectory. They were able to build their brand successfully in many nations, some of which did not even have a coffee drinking tradition. In becoming an icon, Starbucks was able to carve out a unique position in the market and defend that position against a wide range of potential rivals.

The store closings are symptomatic, however, of a new paradigm emerging, both in terms of the external environment and in terms of the ways in which Starbucks runs its business. Company management now needs to realize that there are a number of changes that culminated in the store closings. Management needs to craft a new strategy for Starbucks, given the new environment they are facing. Such a strategy will not only avoid the need to close more stores, but will allow the company to continue to grow.

Analysis: Long and Short-Term Effects, the Economy and New Competitors

For the short-term, the store closings were damage control. As a result of Starbucks management to meet their aggressive expansion targets, they began to set aside previous criteria for determining locations (Linn, 2008). That criteria had meant that in the past it was very rare for a Starbucks to close. The great locations guaranteed a high degree of visibility and a sufficient amount of traffic into the store to maintain profitability. Many of the new locations, however, did not have the same degree of high traffic and visibility.

Thus, one of the key short-term effects of the store closings has been that Starbucks has scaled back its expansion plans dramatically. The company now realizes that it must choose its locations wisely if it is to succeed. You cannot open a Starbuck just anywhere and expect it to draw traffic.

Another short-term implication is with respect to the product offering. Starbucks had, for a time, tried to expand into non-core product lines, be it selling CDs or hot breakfasts (Ibid.). With sales down and stores closing, Starbucks management needs to evaluate its own decisions and came to the conclusion that they had lost sight of their core mission. The company had grown through a successful differentiation strategy and this had been replaced with distractions such as breakfast. The company has in recent months reverted back to its roots as a high-end coffee shop in recognition of its most significant value proposition.

In the long run, the move is symptomatic of two major changes in the company's operating environment. One is the declining economy. This has resulted in decreasing same store sales as consumers give up their expensive coffee habits for more affordable ones at low-cost competitors.

Those competitors represent the second major change in the company's operating environment. Prior to the past couple of years, Starbucks faced competition mainly from coffee shops that operated a similar model. Those shops ultimately had difficulty competing head to head with Starbucks. In recent years, however, Starbucks has come under increasing competition from other large food chains such as McDonald's and Dunkin Donuts. These competitors have strong assets bases and already generate traffic to their stores. They have made coffee a priority component of their operations, which has both undercut Starbucks in terms of price but also taken away some of the mystique of the coffeeshop. As a result, Starbucks has been forced to compete more on the basis of price, and against stronger competitors than in the past.

The long-term implications of this are that Starbucks will likely struggle to maintain its previously high margins. This will impact profitability. The new profitability equation will hurt more Starbucks stores. Indeed, in January 2009 the company announced that it would close a further 300 stores in the U.S. Competition and the economy have been cited as the reasons for these additional closures (McCall, 2009).

The problems in the economy are more than simply the economic downturn. Fuel prices are expected to climb back towards the levels of early 2008, which should also have a negative impact on Starbucks. The company relies heavily on ground and sea shipping within its logistics chain. The increased cost of getting supplies, be they beans or napkins, to its stores will squeeze margins from below at the same time as low-end competitors force Starbucks to lower its prices.

Thus, the competitive and economic environment has become increasingly unfavorable for Starbucks in recent years. Starbucks may be running out of profitable growth opportunities. Moreover, it is being forced to evaluate the long-term viability of its competitive offering. Starbucks sells the "Starbucks Experience" as much as it sells coffee (McCall, 2009). Thus, the company needs to evaluate the elasticity of demand for that experience, if other firms are able to sell the same coffee at lower prices.

Alternatives

Starbucks has a few different alternatives to address the issues surrounding the economy and competition. The first is to restore the differentiation of their product. It is understood that the Starbucks offering is not just coffee but the entire Starbucks Experience. With respect to that Experience, Starbucks does not face any strong new competitive threat. They have faced competition from the same chains for years and have demonstrated superiority. It is with respect to product that Starbucks has lost its differentiation.

The first alternative therefore is to restore the quality of their product offerings. When Starbucks moved to push-button espresso machines and pastries trucked in from across the country, they lost their distinctiveness. By continuing to charge a premium price for these mass-market products, they opened the door for the mass market specialists to undercut them, which is what has happened with McDonald's in particular. This first alternative would involve returning proper espresso machines to their stores, and sourcing pastries locally. This would help restore product differentiation, thus providing justification for the high prices.

The second alternative is to intensify expansion outside of the core markets in North America. Starbucks has partnered with local companies in China, Japan and the United Arab Emirates to expand into those countries (Asia Times, 2006). In these countries, Starbucks has met with the same success as when they first launched in North America. This success has been largely attributed to the appeal of the Starbucks Experience, providing a comfortable, stylish "third place" for Asians whose cramped apartments make for poor socializing.

Starbucks has tremendous room for growth in Asia. They have expanded incrementally in these countries thus far. This has opened the door for local competitors to become established before Starbucks has fully saturated the market. However, in many cases there is still the opportunity for Starbucks to saturate these wealthy, highly populated markets. This option could give Starbucks strong growth for years to come, offsetting any negative consequences of competition in the domestic market.

A third alternative for Starbucks is to continue to consolidate stores. Not only is the economy expected to be sluggish for years, but the slumping economy is beneficial to Starbucks' key competitors. As a result, the firm may wish to retrench, cutting costs and rendering itself lean and mean. This alternative would involve closing hundreds more Starbucks stores, some that may even be making small profits. But it would also allow the firm to concentrate on only the best locations - those that can remain profitable under any economic or competitive circumstance.

Recommendation

It is recommended that Starbucks continue with Asian expansion. The impact of the global economic slowdown is likely to be less pronounced and less prolonged in Asian markets, since they are far removed from the epicenter. Growth opportunities remain strong as market penetration is as yet at levels far below that in North America. Furthermore, the appeal of Starbucks in Asia lies in the Starbucks Experience, not the coffee (JETRO, 2009). This gives Starbucks a stronger competitive advantage in Asia than they enjoy in North America.

This recommendation addresses a number of key strategic issues for Starbucks. First, it promotes growth at a time when the company is faced with contraction in the domestic market. Continuing growth overseas can offset the impact of the contraction, enabling Starbucks to continue to grow revenues and increase profits for the shareholders. The Asian markets have limited competition. If McDonald's, et. al are reducing margins domestically, the company should turn to overseas markets where they can enjoy the same high margins as always. Again, this will offset some of the impacts of competition in North America. Moreover, the faster Starbucks gets bigger the less likely it is to face competition in Asian markets. Those nations do not have strong chains the likes of McDonald's… READ MORE

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