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Starbucks is an American company established in 1971in Seattle’s Pike Place Market, Washington. Starbucks is marketer, premier roaster, and retailer of specialty coffee around the globe. Currently, Starbucks is the largest coffee retailer with 27, 339 stores operating in more than 75 countries. It is ranked among 500 world’s largest public companies by Forbes based on sustained positive results. Costa Coffee, McDonalds Mc Café,Dunkin Donuts, Café Coffee Day, and Tim Hortons are the key competitors of Starbucks. In 2015, the company reported revenue of $19.2 billion and $2.5 billion profit. The market capitalization of the company was $85.1 billion as at December 2017. The mission of the company is to nurture and inspire the human spirit, “one person, one cup and one neighborhood at a time.”
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Challenges Facing Starbucks
Starbucks has been taking advantage of lack of elasticity among its customers and consumer loyalty to continuously pass increases in cost to its customers. Increase in coffee prices and wages has increased Starbucks cost of production. As a result, the company opts to transfer this cost to its loyal consumers. Between 2014 and 2016, the company has hiked the price of its products four times whereby two of which were reported in 2016 (Taylor, 2017). In September 2017, approximately 8,000 stores located in the United States raised their prices (Maynard, 2017). The products that were affected by the price hike include some espresso drinks, cookies, Bacon Gouda breakfast sandwiches, and brewed coffee. The price increase ranged between 10 and 30 % per item. Some of the customers are annoyed by this move (Maynard, 2017). According to Maynard (2017), the company increases the price of its products depending on market and demand.
As result, the company has been struggling to increase the number of customers. The number of consumers in the United States has stayed roughly the same or keeps on dropping. Although the company reported 3% increase in sales in the second quarter of 2017, the number of placed orders or transactions fell by 2%. Also, in January 2017, the number of transactions dropped by 2% (Taylor, 2017). The lack of growth is not a good indicator of the company. The company indicates that the decline is caused by the new reward program (Taylor, 2017). But the system ties rewards points according to the money spent. That is to say, the decline in the number of customers is attributable to increase in product prices. The second quarter of 2017, the company reported total sales of $5.29 billion which was 6 percent increase compared to the same period in 2016. But the outcomes did not meet the analyst targets and shares declined by 4%. Increase in sales is attributable to price increase or consumers paying more per order. Besides that, in the first quarter of 2017, more United States stores closed compared to all closed in 2016. It is expected that more stores will be closed in 2018 than retail stores closed in any given year since 2008 (Roderick, Woollen, Fleming, Ritson, Smith& Joy, 2017).
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Starbucks in the UK experienced a major decline in sales in 2017. The pre-tax profit declined by 60% to $18.8 million from $47.68 million. Also, the company reported a decline in turnover from $565.61 to $529.68 (Wood, 2017). Despite this huge decline, research studies indicate that UK’s demand for coffee is increasing with approximately 23,000 coffee stores contributing to $12.41 billion to the country’s economy.
The price of coffee beans have been declining starting from 2015, for instance, the price of Arabica beans declined with 42% in 2015 compared to the highest prices in 2014. From this point of views, it does not appear that the company is making the decision to control its cost structure. Its competitors such as Dunkin Donuts opted to reduce its prices by 6% in 2015 (Wood, 2017). Most of the Starbucks competitors are cost effective premium coffee retailers. Starbucks increases in prices are forcing the customers to shift its competitors. In this regard, the company is supposed to formulate measures that will lower or cut the cost structure. This is because if the company continues to hike its prices, in the long-run, its customers will be compelled to look for alternatives. The company needs to make adjustment if it wants to increase sales and maintain its progressive, positive reputation.
Apart from the price increase, mobile order and pay has been big challenge to the company. The approach enable to customers to place their orders remotely then come and pick their order. This technique has been successful in such a way that it has caused other problems such long queues. The long lines discourage consumers who sometimes leave without placing their order. As result, these customers are forced to look for alternatives from the Starbucks competitors. The program was implemented in 2015 and it now accounts for 7% of the United States transactions. Crowds of consumers have discouraged walk-in customers especially during the busy hours. Many customers are disappointed in regard to number of hours they spend at coffee store. The mobile order & pay app was implemented to increase customer traffic through effective services and avoid situation whereby consumers will leave without ordering. But is seem that the mobile app is creating the same issue it was supposed to avoid. Effective implementation of mobile order & pay app would also help the company to cut the cost structure. As result, this would prevent the company to hike products prices despite cost increase of raw materials and wages.
The company should consider using tablet-based systems and digital order managers that manage and track all incoming orders. This will help the company to provide the relevant details to the consumers concerning their orders. The technologies will enable the company to send notification when the order is ready. This would avoid overcrowding and saves baristas time from dealing with consumers who are confused wondering whether their orders are ready yet. Also, digital order managers will help to estimate how long it will take for the order to be ready. This is possible depending with workload. As result, customers would visit the stores when they know their orders are ready. In such a case, they would skip the lines by simply walk in and take their orders. Thus, making sure that mobile ordering process increase sales rather than driving consumers away.
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Effective implementation of mobile pay app will eliminate waiting queues and minimize credit card costs. As result of shorter queues, revenue will increase through increase in traffic and increase profits margins via operational efficiency. The app frees up workers and focuses towards production process and enables quick execution of orders. Less congested stores and shorter queues will attract more customers. As result of customer experience and efficiency, there is a high possibility that regular consumers will increase their orders. This is a win-win situation for both new and regular consumers. In 2015, the company estimated that effective implementation of the mobile app would increase the number of daily consumers by 40% and cut the operational cost by 5%. That is to say, the company would not require increasing products prices even if the cost of raw materials and wages increase. This will be a competitive advantage of the company.
Starbucks is the leading coffee retail shop around the globe. But in the recent past, the company has been hiking prices of its products. Also, the mobile order & pay app that was implemented in 2015 seems like it is creating the problem it was meant to solve. The app was implemented to increase customer traffic through effective services and avoid situation whereby consumers will leave without ordering. These two challenges have led to decline in the number of customers, although the company revenue has been increasing. Increase in revenue in mainly attributable to consumers paying more due to increase in product prices. The company should adopt tablet-based systems and digital order managers that manage and track all incoming orders. That is to say, effective implementation of mobile order & pay app will help the company increase the speed of services and minimize mistakes. As a result, this will win back its customers and attract new customers. In this case, 5% decrease in cost implies that the profit margin will increase by 5% and 40% increase in the number of customers means that the company revenue will also by 40%.
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- Bowman, J. (2017, April 05). 3 Challenges Facing Starbucks’ New CEO.
- Maynard, M. (2017, September 07). Starbucks Sneaks In A Price Hike, Under Cover From Pumpkin Spice Latte.
- Roderick, L., Woollen, P., Fleming, M., Ritson, M., Smith, J., & Joy, S. (2017, September 20). Starbucks on battling the ‘devastating’ impact of changing consumer behaviour.
- Taylor, K. (2017, September 05). Some Starbucks locations quietly raised prices on brewed coffee and cookies on Pumpkin Spice Latte launch day.
- Wood, Z. (2017, April 13). Starbucks blames UK profits plunge on Brexit and slowing growth.