Reports on

Technology and the competition of coffee ratailers

ratailers-aa case study
of starbucks
Submitted to:
Md. Shahidal Islam Fakir
Associate Professor
Department of Management
Jagannath University

Submitted by:
Name ID NO
Sumon Ghosh M18150202704
Apurba Kumar Roy M18150202709
Biddut Chandra Das M18150202714
Sonia Begum M18150202725
Most. Nasima Parvin M18150202732
Nabila Naz M18150202721
Md. Ibrahim Sardar M18150202740

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 ACKNOWLEDGMENT
_________________________________________________________
At first, we would like to convey our deepest sense of gratitude; all sorts of praises to the
“Almighty Allah”, whose blessing have enabled us to complete this report and our
honorable Teacher, who have supported us throughout this work.
It is our honored pleasure to acknowledge the sincere and deepest sense of gratitude to my
Teacher, Md. Shahidul Islam Fakir, Associate Professor, Department of Management,
Faculty of Business Studies, Jagannath University, who played the important role and
providing us with all the supervision to successfully complete this report. He has enriched
us with necessary ideas and for his valuable advice that helped improvement of the report.

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 Table of Contents


Description Page
Introduction 4

Impact of competitive forces used by Sturbucks 5

Value chain model used by Sturbucks 10

Technology and Business strategy of Sturbucks 14

Positive and Negative impact of technology on Sturbucks 16

Conclusion 18

Reference 20

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 Technology and the competition of coffee
retailers-a case study of starbucks
Introduction
The economy in trouble, the stock market tanking it is important to start your day with a good
cup of coffee to take on these challenges. Can Starbuck’s sustain it business model and place in
the market? The paper examines Starbucks business and it respective practices.
In 1971, the original Starbucks opened in Pike Place Market in Seattle, Washington by three
partners named Jerry Baldwin, Zev Siegal, and Gordon Bowker. Their focus was to sell coffee
beans and equipment. They purchased green coffee beans from Peet’s, a specialty coffee roaster
and retailer, during their first year of operation. Later, they began buying coffee beans directly
from the growers. In 1983, an entrepreneur by the name of Howard Schultz joined the company;
Schultz felt that the company should sell coffee and espresso drinks as well as coffee beans. The
partners felt that selling coffee and espresso drinks would take away from their primary focus of
selling coffee beans. Since the idea did not work, Schultz started his own company called II
Giornale coffee bar chain in 1985. In 1987, the original owners of Starbucks sold their chain to
Schultz’s II Giornale. Schultz changed II Giornale outlets to Starbucks chains and quickly began
to expand.
Starbucks coffee has grown into the largest coffeehouse company in the world with 16,120 stores
in 94 countries such as in Australia, Canada, China, Puerto Rico, etc. Starbucks has thirty blends
and single origin coffee. Starbucks brand coffee can also be purchased in local stores to brew at
home. Starbucks employs over 140,000 employees worldwide with over five million customers
a week. At one point they had typical customers coming in on an average of six times a month
while loyal customers come in on an average of eighteen times a month spending averaging
$50. Starbucks is one of Fortune magazine’s 100 Best Companies to work for in 2008 and is
Business Ethics 100 Best Corporate Citizens for the fourth year.

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Impacts of competitive forces used by starbucks

Starbucks Corporation (Starbucks Coffee Company) successfully grows through management

effectiveness in addressing the impacts of the five forces in the global coffee industry and
coffeehouse industry environments.The company deals with external factors, such as the ones
outlined in this Five Forces analysis of the business. Michael E. Porter’s Five Forces analysis
model evaluates the industry environment through relevant external factors that define the
competitive landscape. The analysis model provides information for strategic management to
address the five forces, namely, competitive rivalry, the bargaining power of customers or
buyers, the bargaining power of suppliers, the threat of substitution, and the threat of new
entrants. In this external analysis case, Starbucks operates in a business environment that
involves strong competition with other coffeehouse companies, as well as food and beverage
businesses like Dunkin’ Donuts, McDonald’s, Wendy’s, Burger King, and Subway. The SWOT
analysis of Starbucks Corporation shows sufficient strengths to counter the force of such
competitors, although the company needs to continue strengthening its competencies to continue
growing despite the competition.
Summary: The strong force of competition is the combined effect of the external factors
identified in this Five Forces analysis. In this regard, the most significant forces for Starbucks
Coffee Company’s strategic consideration are competitive rivalry, the bargaining power of

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customers, and the threat of substitutes. Still, the other forces also influence the company’s
business performance. In summary, the following are the intensities of the Five Forces in
Starbucks Corporation’s industry environment:
 Competitive rivalry or competition – Strong Force
 Bargaining power of buyers or customers – Strong Force
 Bargaining power of suppliers – Weak Force
 Threat of substitutes or substitution – Strong Force
 Threat of new entrants or new entry – Moderate Force

Recommendations: In general, addressing the external business environment based on the

results of this Porter’s Five Forces analysis, Starbucks’s strategic goal must focus on maximizing
the strengths and related competencies of the coffeehouse business. For example, the company
can implement strategies to make its brand even stronger. This recommendation is intended to
address the strong force of competitive rivalry, the strong bargaining power of buyers, and the
strong threat of substitution. Specific to the force of competition, a recommendation is to boost
Starbucks Corporation’s competitive advantages. For instance, the company can improve the
diversity of its supply chain as a way of increasing resource access and production stability. It is
also recommended that Starbucks increase its marketing aggressiveness to attract and retain more
customers.
Competitive Rivalry or Competition with Starbucks Coffee Company (Strong
Force)
Starbucks faces the strong force of competitive rivalry or competition in the food service and
coffeehouse industries. In the Five Forces analysis model, this force pertains to the influence of
competitors on each other and the industry environment. In this case of Starbucks Coffee
Company, the following external factors contribute to the strong force of competition:
 Large number of firms (strong force)
 Moderate variety of firms (moderate force)
 Low switching costs (strong force)
The large number of firms is an external factor that intensifies competitive rivalry. Starbucks
Corporation has many competitors of different sizes. In relation, the population of competitors is

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moderate varied in terms of specialty and strategy. In this Five Forces analysis of Starbucks,
such moderate variety further strengthens the level of competition in the industry. In addition,
competition is strengthened because of the low switching costs, which are the disadvantages to
consumers when shifting from one provider to another. For example, this case involves minimal
disadvantages to consumers who transfer from the company to other coffeehouses. Based on this
component of the Five Forces analysis, competition is among the company’s top-priority
challenges. Starbucks Corporation’s generic strategy and intensive growth strategies are a
reflection of strategic responses to competition.
Bargaining Power of Starbucks’s Customers/Buyers (Strong Force)
Starbucks Coffee Company experiences the strong force or bargaining power of buyers or
customers. In Porter’s Five Forces analysis model, this force is based on the influence of
individual customers and groups of customers on the international business environment. In
Starbucks Corporation’s case, the following external factors contribute to the strong bargaining
power of customers:
 Low switching costs (strong force)
 High substitute availability (strong force)
 Small size of individual buyers (weak force)
In this component of the Five Forces analysis model of the business, the bargaining power of
buyers is among the most significant forces affecting the company. Based on the low switching
costs, customers can easily shift from Starbucks to other brands. In addition, the high substitute
availability means that customers can stay away from Starbucks if they want to, because there
are many substitutes like instant beverages from vending machines. These strong factors
overshadow the fact that individual purchases are small compared to the company’s total
revenues. The small size of individual purchases equate to the weak influence of individual
buyers on the business. Despite such weakness, the other two external factors strengthen the
bargaining power of customers. Thus, this component of the Five Forces analysis shows that the
bargaining power of customers is a top-priority strategic issue. Starbucks Corporation’s
marketing mix or 4Ps provide support for brand strengthening to partially address the bargaining
power of consumers.

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 Bargaining Power of Starbucks Coffee’s Suppliers (Weak Force)
Starbucks Coffee faces the weak force or bargaining power of suppliers. Porter’s Five Forces
analysis model considers this force as the influence that suppliers have on the company and its
industry environment. The following external factors contribute to the weak bargaining power of
suppliers on Starbucks Corporation:
 Moderate size of individual suppliers (moderate force)
 High variety of suppliers (weak force)
 Large overall supply (weak force)
The moderate size of individual suppliers is an external factor that imposes a moderate force on
Starbucks. However, the high variety of suppliers weakens their bargaining power. For example,
suppliers have various strategies and competencies that they use to compete against each other,
with the aim of gaining more revenues by supplying more materials, such as coffee beans, to
Starbucks Corporation. The bargaining power of suppliers is further weakened because of the
large overall supply. For instance, there are many suppliers of coffee and tea around the world.
This external factor limits the influence of individual suppliers. The overall effect of the external
factors in this component of the Five Forces analysis is the weak force or bargaining power of
suppliers on the company. Another consideration is the company’s policy of diversifying its
supply chain as a way of addressing the trends identified in the PESTEL/PESTLE analysis of
Starbucks Coffee Company. Such policy weakens suppliers’ power. As a result, suppliers’
bargaining power is a minor strategic issue in managing the business.
Threat of Substitution or Substitutes to Starbucks Products (Strong Force)
Starbucks Corporation experiences the strong force or threat of substitution. In the Five Forces
analysis model, this force pertains to the impact of substitute goods or services on the business
and its external environment. The following external factors contribute to the strong threat of
substitution against Starbucks:
 High substitute availability (strong force)
 Low switching costs (strong force)
 High affordability of substitute products (strong force)
This component of the Five Forces analysis indicates that substitutes have strong potential to
negatively impact Starbucks Coffee’s business. The high availability of substitutes makes it easy
for consumers to buy these substitutes instead of Starbucks products. For example, substitutes
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like ready-to-drink beverages, instant beverage powders and purees, and food and other
beverages are readily available from various outlets, such as fast food and fine-dining
restaurants, vending machines, supermarkets and grocery stores, and small convenience stores.
In addition, the low switching costs further strengthen the threat of substitutes, as it is easy for
consumers to buy substitutes instead of Starbucks products. Moreover, many of these substitutes
are affordable and cost less than the company’s products. Thus, this Porter’s Five Forces analysis
of Starbucks Coffee Company determines that the threat of substitutes is a high-priority strategic
management concern.
Threat of New Entrants or New Entry (Moderate Force)
Starbucks Corporation faces the moderate force or threat of new entry. In Porter’s Five Forces
analysis model, this force refers to the effect of new players or new entrants in the industry. In
this business case, the following external factors contribute to the moderate threat of new
entrants against Starbucks:
 Moderate cost of doing business (moderate force)
 Moderate supply chain cost (moderate force)
 High cost of brand development (weak force)
The moderate cost of doing business is associated with the variability of the actual cost of
establishing and maintaining operations in the coffeehouse industry. For example, the cost of
operating a small coffeehouse is lower compared to the cost of operating a coffeehouse chain. In
relation, smaller cafés have lower supply needs and corresponding supply chain costs. These
external factors enable smaller firms to do business and compete against Starbucks Corporation.
On the other hand, brand development is costly. In the context of the Five Forces analysis model,
this condition reduces the threat of substitution. For example, small coffeehouses do not have
enough resources to develop their brands. Also, brand development typically requires years to
reach the level of strength of the Starbucks brand. The combination of these external factors
imposes the moderate force or threat of substitutes against the company. Thus, this Five Forces
analysis shows that the threat of substitution is a significant but limited issue in Starbucks
Corporation’s strategic management.

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 Value Chain Model used by Starbucks
Starbucks value-chain
chain analysis is an analytical framework that assists in identifying business
activities that can create value and competitive advantage to the business. Figure below
illustrates the essence of value chain analysis.

Starbucks Value chain analysis

Starbucks Primary Activities
Starbucks Inbound logistics
Starbucks inbound logistics and supply chain was subjected to a dramatic restructuring in 2010
after Howard Schultz returned to the role of CEO. The restructuring initiative of Starbucks
inbound logistics involved simplification of supply
supply-chain
chain management and the creation of a
single, global logistics system.
Unroasted Arabica coffee beans are brought from Asia, Africa and Latin America to the US and
Europe in containers via sea. Also, the coffee chain purchases green coffee beans from multiple
coffee-producing
producing regions around the 200,000 to 300,000 square feet in size. Coffees are roasted
and packaged and taken to dozens of central distribution centres around the globe. Along with
coffees from
rom regional distribution centres, central distribution centres also receive deliveries
from vendors for a wide range of products starting from coffee machines to napkins. Central

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distribution centres make more than 70,000 deliveries per week to Starbucks 25085 stores
located in 75 countries.
Starting form recently, Starbucks is exploring the opportunities to grow its own coffee.
Specifically, since 2013 Starbucks has its first own 240-hectar coffee farm in PoasVolacno,
Costa Rica. Such a shift in the sourcing of products can increase the effectiveness of new product
development initiatives for the business as the company will have a chance of experimenting
with developing new sorts of coffee.
Strategic relationships with suppliers is one of the main sources of value for Starbucks inbound
logistics. The company operates eight farmer support centres staffed with agronomists and
sustainability experts who work with coffee farming communities to promote best practices in
coffee production designed to improve both coffee quality and yields.
world and custom roasts them. These are delivered to six regional distribution centres ranging
from .
Starbucks Operations
Starbucks operates in 75 countries and there are two store formats:
1. Company-operated stores. Company operated-stores are important for the business
because they enable the management to observe shifts in consumer tastes and preferences
and collect information about market tendencies in general in a direct manner. By the end
of fiscal year 2016 Starbucks had 12,711 company-operated stores, which accounts for
about 51% of total numbers of stores. Company-operated stores generated 79% of
Starbucks revenues during fiscal 2016.
2. Licensed stores. There were 12,374 licensed Starbucks stores by the end of fiscal year
2016, representing about 49% of total numbers of stores. Revenues from licensed stores
accounted for 10% of total net revenues in fiscal 2016.
The company has divided its operating segments into five groups and the table below illustrates
the share of revenue from each segment.

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Segment Share of revenue in 2015 Share of revenue in 2016
Americas (US, Canada and Latin
73% 69%
America)
Europe, Middle East and Africa
8% 5%
(EMEA)
China/Asia Pacific (CAP) 7% 14%
Channel Development 9% 9%
All other segments 3% 3%
Starbucks operating segments and shares of revenue
Main sources of value in Starbucks operations include positioning of stores in high-traffic, high-
visibility locations. Moreover, the company is able to vary the size and format of its stores to
locate them in or near a variety of settings, including downtown and suburban retail centres,
office buildings, university campuses and in select rural and off-highway locations.
‘Starbucks experience’, i.e. ‘third place’ experience where customers can spend quality time
alone or in the company is an additional point, where the company adds value to its operations.
The world’s largest coffee retailer also adds value in operations via proving free WiFi internet
access in its stores.
Starbucks Outbound logistics
Customers can purchase Starbucks products from company-operated and licensed stores. Online
sales channel is also utilized by Starbucks for certain range of products such as packaged coffee,
tea, drinkware and drink-related equipment. In addition, a very limited range of Starbucks
products such as 3-in-1 coffees in sachets can be purchased from a set of leading supermarket
chains such as Wal-Mart, Tesco and Sainsbury’s.
Apart from supermarket chains that sell limited range of company’s products, the absence of
intermediaries such as resellers or wholesalers is the main source of value for Starbucks
outbound logistics. The company roasts its products in-house and sells on its own company-
operated and licensed stores, thus keeping the margin that otherwise would have gone to
wholesalers and resellers.

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Starbucks Marketing and Sales
Traditionally, Starbucks was not keen at investing on marketing. Word-of mouth cost-effective
form of marketing based on high quality of products and high level of customer services was the
main channel promoting the brand for years. However, rapidly intensifying level of competition
motivated the senior management to reassess the marketing strategy and Starbucks marketing
budget has been consistently increasing during the last five years to reach USD 351.5 million for
the fiscal year 2016. This budget is invested into various elements of print and media advertising,
sales promotions, events and experiences, public relations and direct marketing.
High level of integration of social media and technology into sales processes represents one of
the solid sources of value for Starbucks Coffee. The company has successfully implemented
mobile order and pay system for its products and currently, about 8% of all orders are placed via
mobile phones. Moreover, Starbucks has “enabled orders via Amazon’s Alexa last year,
announced that the feature would also be integrated into Ford vehicles later this year.”
Starbucks Service
Superior customer services are the core source of Starbuck competitive advantage and this
particular primary activity adds an enormous value to the brand image. Starbucks baristas are
always genially polite and greet regular customers by their names. Occasionally, regular
customer may get their regular coffee free of charge at the discretion of baristas as good gesture
and such acts increase the perception of the service quality to a considerable extent.
Furthermore, amid ever-intensifying hectic nature of lifestyle and increasing speed of the
provision of customer services, service at Starbucks is never rushed. It has been rightly noted
that “Starbucks spends a lot of time measuring and improving how well they match their
customers’ speed expectations—delivering a custom (truly from scratch) beverage in a matter of
minutes—they don’t let the need for speed suck the life out of the Starbucks experience.”

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Technology and Business Strategy of Starbucks
Starbucks & Its Use of Technology:
From the Midwest to the Middle East, Starbucks is one of the most widely recognized names in
coffee. The company began as a single store in Seattle's Pike Place Market in 1971 before going
global in the 1990s. As of the time of publication, you can find a Starbucks in more than 16,000
locations across the world. While well-known for its caffeinated concoctions, Starbucks has also
been recognized for its innovative use of technology.
Social Media
In June 2010, Starbucks was named the most popular social media brand, according to a snapshot taken of
its fans, followers and subscribers by Famecount, an online statistics and analytics provider. Starbucks
social media space includes technology like its website and social media platforms, including Facebook,
Twitter and Foursquare. According to a February 2010 article in "AdAge," Starbucks was able to use
social technology to its advantage and bring customers back to its stores by giving them an online space
to submit ideas and provide feedback on the brand and their experience with it.
Mobile App
After a two-year pilot period, Starbucks launched a nationwide mobile payment app in early
2011. The app is available for iPhone, Android and Blackberry, and, according to a June 2011
article on "Mashable," it can be used at 9,000 Starbucks locations. To use the free app, you
simply add your Starbucks card number. From there, you can use the app to make purchases,
track your rewards and check your balance. You can also find which Starbucks stores will accept
mobile payments.
Brewing
In 2008, the "Seattle Times" reported Starbucks' recent purchase of the Coffee Equipment Co., a
small company known for its single-cup coffee maker known as the "Clover." The Clover uses
precise technology and a calculated algorithm to brew coffee within one degree Fahrenheit of its
ideal temperature and produce the ideal flavor. It also controls how long the grounds and water
interact and the flow of water brewing. Clover units are connected via Ethernet port so that the
Starbucks network can manage the diagnostics and details of each unit.

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Starbucks Digital Network
Starbucks can serve as makeshift office and meeting place thanks to the free, unlimited Wi-Fi
available in its stores. In October 2010, the company made a move to expand its online offerings
to customers with the Starbucks Digital Network. According to Starbucks, the news,
entertainment and lifestyle channel was available in 6,800 locations as of March 2011. The
digital network is a partnership of Starbucks and Yahoo, and delivers premium content from sites
like "USA Today," "Wall Street Journal," ESPN, Nick Jr. and more to laptops, tablets and
smartphones. When you connect to Starbucks' free Wi-Fi, you're greeted with the landing page
for the digital network that allows you to check in with Foursquare, log in to your Starbucks card
and more.

Starbucks Business Strategy:

Starbucks business strategy is based on the following four pillars:
1. Offering ‘third-place’ experience. Starbucks stores are effectively positioned as a ‘third
place’ away from home and work, where people can spend time in a relaxed and
comfortable environment with their friends or alone. Customers are even welcome to get
their work done in a Starbucks store. All company-owned stores in the US and most
company-owned stores abroad offer free wi-fi. “Starbucks stores are meticulously
designed to make customers stay longer, buy more, and return for another visit.”
2. Selling coffee of the highest quality. Starbucks business strategy can be classified as
product differentiation. Accordingly, the coffee chain giant focuses on the quality of its
products and customers pay premium prices for high quality. Excellent customer services
as one of the solid sources of Starbucks competitive advantage further increases the
attractiveness of the coffee retailer.
3. International market expansion with the focus on emerging economies is one of the
key elements of Starbucks business strategy on long-term perspective. The share of
company’s revenues from China/Asia Pacific (CAP) global market segment increased to
14% in 2016 from 7% in the previous year.In total, 2719 new Starbucks stores opened
during the last two years.
4. Integrating technology into various business processes. “Starbucks is adamant when it
says that the purpose of new technology is not just to improve its website or to process
payments quicker for people who are waiting in line”.The coffee chain achieves

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 technology-related value addition via integrating technology into a wide range of
business processes and procedures such as new product development, communication of
the marketing message, completing sales and monitoring the level of customer
satisfaction. The most notable examples for value creation via technological integration
by Starbucks include the launch of Mobile Order & Pay feature, which allows customers
to buy without getting in line, the launch of voice ordering app and “sending text message
notifications to customers in the Seattle area when their mobile orders are ready”.

Positive and Negative impact of Technology on Starbucks

It has been an explosive year for Action Alerts PLUS Starbucks' (SBUX) stock, and now the
company must deliver in a big way with its fiscal fourth-quarter earnings report to keep the bulls
intrigued.
Shares of Starbucks have surged about 55% this year, tacking on 10% or so in the past three
months alone. The relative outperformance of the stock during the summer's bout of volatility is
simply impressive. It's as if investors forgot that Starbucks is still exposed to global macro
headwinds and instead focused on all of the positives to the story, which include:
1. R&D team continuing to whip up new, pricier drinks that easily get marketed for free
across social media. Talk about a high return on investment. Search online "Frappula" to
see what I mean.
2. People are not even realizing they are paying more for the luxury of consuming Starbucks
right now compared to a year ago. Pricing power amid a slowing macro climate is quite
impressive.
3. Starbucks is now viewed as a viable place to consume breakfast and lunch. Personally, I
think Starbucks is at risk of losing its new breakfast and lunch customers soon if it
doesn't step up its food quality. The company's bistro boxes are woefully lacking in flavor
and thought, while the portion sizes continue to get smaller at the same time the prices
stay high. We are experiencing a period of great breakfast/lunch innovation in fast food --
Starbucks has to pick up its game.
4. Starbucks continues to disprove the view there are not enough opportunities to open up
more locations in the U.S. Not only is the company opening up more U.S. spots, but is
doing so rather profitably compared to years gone by.

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 5. Starbucks is crushing its competitors in the packaged coffee and Keurig pods businesses.
6. Starbucks mobile is laughably ahead of every single competitor in the fast food business
in terms of integration with physical store assets. Want a beneficiary of the next high-
powered iPhone from Apple (APPLE) in 2016? It's Starbucks.
7. Starbucks founder Howard Schultz is still very much engaged with the company on a
day-to-day basis. Although Schultz has built up a rock-solid management team, the
market still loves Howard Schultz, and remains willing to hitch its ride to a great orator
on earnings calls and a visionary in the world of business.
8. Keep an eye on these large stores with huge roasteries inside being opened by Starbucks.
I would compare them to retail flagship stores, which serve the purpose of luring in
tourists in key destinations, strongly marketing the brand to passersby, and ultimately
racking up huge sales.
Having said that, now may be an appropriate time to pare back a bit on Starbucks, or avoid it
going into earnings. On a relative basis, Starbucks will show one of the best quarters from a
competitive set, duking it out with product discounts beamed over their mobile apps. However, I
don't think mighty Starbucks is completely immune to several things we have seen from the
restaurant sector in recent months. The problem with that is that the market expects Starbucks to
be immune from the issues tripping up profits at Dunkin Brands (DNKN), Buffalo Wild Wings
(BWLD) and countless others.
Three areas of concern:
China: the country is without question Starbucks future. It's a region where people are still
discovering Starbucks' full assortment of products -- when they do find them, they love them and
want to pay whatever it takes to consume them. But, based on results and comments from
companies such as Coach (COH) and others in the luxury goods industry, Chinese demand for
"stuff" took a hit during the summer. Whether it was locals paring back due to a volatile stock
market or tourists reducing their visits due to currency, the reality is that a slowing Chinese
economy likely weighed on Starbucks. There could be a touch of disappointment in Starbucks
China results, but importantly, watch the commentary on trends on the ground currently.
The king of cheap food, McDonald's (MCD), had a strong third quarter in China....that says a
good deal about the mindset of the Chinese amid their slowing economic backdrop.

17
United States: I have studied this in the past. Starbucks store traffic usually goes on to track
U.S. job gains/losses (with a bit of a lag). We all know what has occurred recently, a cooling in
the job market. And that has weighed on the restaurant sector in the form of slower traffic and
some resistance to price increases. Investors have subsequently been surprised by weak profits.
Starbucks is not immune to these macro factors, and I think some of that will appear in the
results about to be reported. The market will be more closely scrutinizing how breakfast sales
grew vs. the third quarter, for example -- the market wants to see stellar results from Starbucks
U.S..
Costs: luckily for Starbucks, the price of its key ingredient -- coffee -- has been tame. But,
similar to other restaurants, I think the Street is underestimating the impact to profits from
investments Starbucks has made in its people this year. Higher hourly wages, free college and
higher healthcare costs are a problem for Starbucks, who prides itself on taking care of its
employees. I don't think the company has taken the type of price increase needed to fairly
compensate for its people investments. And that keeps the risk of letting down Wall Street high -
- especially if traffic has moderated as I suspect.

Conclusion
Starbucks has had much market power in the gourmet coffee industry. They have attracted
customers by an experience of an upscale French coffee shop with a neighborhood feel. All are
welcome to join the bandwagon as long as they are willing to pay the price for premium. In the
current economic state, their prices have caught up to them causing their demand to
decrease. People do not want to spend their limited income on premium coffees that they can get
from any of their competitors, like Dunkin’ Donuts, McDonalds and Panera Bread
Starbucks has been forced with the changing times and the economy to drive down their prices to
compete in the industry. The closing of stores and the reduction of staff proves that their pricing
model only projected a short term profit, as in the case of any firm operating in a monopolistic
competition. Whatever forecasting models Starbucks has projected does not hold true as the
income effect and added popularity of their competitors began monopolizing the premium coffee
market. This proves that the price of coffee is elastic and if prices are high than the demand for
the good will decrease.
Many outside factors also contribute to Starbucks losing its brand appeal. People have begun to
realize that they have alternatives to purchasing Starbucks coffee and still sample the luxurious

18
blend by brewing it at home themselves. Customers no longer follow the hype supported by the
Starbucks name and are becoming more price/value oriented. To remain a major player in the
coffee shop market, Starbucks must reinvent themselves with the changing lifestyles, tastes and
react to the alternatives within the market.

19
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