How Is Starbucks Maintaining Its Competitive Edge?
A number of questions were raised, and are being raised, on Starbucks’ growth trajectory. A behemoth like it ought to slow down eventually. With the June quarter’s results coming in with lower than expected comparable sales growth, many believed it to be the start of the end for the coffee-giant. However, since then the company has convinced many otherwise. Even as the company concentrated on diversifying its business away from coffee, to its consumer product goods segment and food, it came out with new and innovative products, such as substituting dairy with soy-milk, or almond-milk. Furthermore, according to the research firm Sense360, the traffic at Starbucks stores has improved considerably in the recent months, despite a slowdown in the restaurant industry. All of this contributed towards dispelling some of the negative sentiment which had formed around the company. In this note, we talk about some of the ways by which Starbucks maintains its edge over competitors like Dunkin’ Brands and McDonald’s McCafe.
- Product Innovation
Starbucks has always maintained its competitive advantage by being the leader in product innovation. Pumpkin spice latte, one of the seasonal favorites at Starbucks, was recently relaunched. The launch followed more than 150,000 incremental visits on the first two days, as stated by Sense360. As a result, Starbucks saw a share of its national QSR market increase by roughly 30 basis points to 6.96%. On the other hand, its competitors, McDonald’s and Dunkin’, which launched the same coffee a week earlier, saw their market share recede.
Market Share Of Leading Players In The Coffee Industry
- Capitalizing on changing consumer preferences
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Starbucks has maintained its popularity through time by being flexible. It has been open to adapting to changing consumer tastes and preferences. Its flexibility is also a part of the reason that allowed it to succeed in the tough and primarily tea-drinking market of China. Thus, the introduction of almond milk in its stores, in addition to other non-dairy alternatives such as coconut milk and soy milk, comes as no surprise. The bend towards dairy-free products can be understood by the following piece of research. According to Mintel, a research firm, nearly 49% of Americans consume non-dairy milk, although not exclusively. Consequently, the sales of dairy milk are projected to drop by 11% by 2020. The move is expected to help the company boost its average spend per customer on beverages, by charging consumers an additional $0.60 to use this as a substitute in their beverages.
Size Of The Non-Dairy Market
- Opening stores in economically backward regions
Starbucks has always had a social consciousness, as opposed to other multinational companies. A proof of this can be seen in how well it treats its employees in regions all over the world, and the resultant low attrition rate.
As part of a national initiative, Starbucks last summer announced a program to support economic development in some of America’s low to medium income communities. The opening up of a new store in Englewood, IL is an initiative in line with this, aimed at creating 26 jobs, and help to solve some of the problems plaguing the region. At the opening in Englewood, the director of community investment at Starbucks said “this is not just an opportunity to grow our business, but to be part of a local solution for social change.” The company also announced plans to open five similar stores in other communities, beginning in 2017. Some of these regions include Baltimore, Birmingham, Long Beach, CA, the Miami metropolitan area, and the Greater Seattle Area.
- Focus on food
Food sales now represent 20% of Starbucks’ revenue and have been consistently contributing almost a percentage point to comps. Further, the company has found that each day part is far below its saturation level in terms of food offerings. To fully leverage the gaining popularity of its complementary coffee and food menu, the company is working towards establishing partnerships and making food one of its major future growth drivers. To this end, Starbucks announced its entry into the brunch business. It is currently testing a new weekend brunch menu in 70 locations in the western part of the U.S., which would be available on Saturdays and Sundays from 8 a.m. until 2 p.m., or until supplies run out. Another attempt at this is the partnership with the Italian bakery, Princi. The company will be serving fresh Princi food at its new premium restaurants.
Food Sales As A % Of Revenue
- Changing expansion strategy
Starbucks’ store network is much smaller in magnitude than other players in the QSR industry like KFC, McDonald’s, and Subway. Consequently, the company is working on expanding its footprint, while changing its store mix. Instead of opening more dine-in restaurants, the coffee giant is concentrating on drive-thrus in the outer edges of urban and suburban areas. In addition, Starbucks is opening up express stores which essentially function as walk-thrus in New York, Boston, and Seattle. This strategy is aimed at increasing the company’s store penetration, while avoiding cannibalization.
- No franchising in a 100% franchisee world
While most quick-service restaurants are concentrating on turning their model towards one with 100% franchisees, Starbucks refuses to franchise its stores. A franchise model, by allowing the franchisor to outsource risk on its own capital, leads to much higher margins than a company operated restaurant. Further, through increased store expansion speed, the model enables the company to stay profitable and grow. Despite the benefits, Starbucks opposes the strategy as it believes that the company’s value and culture are what continuously drive it forward, ahead of its peers. In his book, “Pour Your Heart Into It,” the CEO, Howard Schultz, says, “To me, franchisees are middlemen who would stand between us and our customer.”
Have more questions on Starbucks? See the links below.
- Why Is China The Center-Piece Of Starbucks’ Growth Story?
- Why Has Starbucks’ Stock Price Stagnated In The Year So Far?
- What Is Starbucks’ Growth Strategy?
- K-Cups, Expansion In China Drive Growth For Starbucks In The June Quarter
- Starbucks Q3 FY 2016 Earnings Preview: Continued Focus On China, Expansion Of The Single-Serve Segment To Drive Results
- Starbucks’ Expansion Plans in China & Digital Channels Drive Growth In Q2 FY 2016
- How Has Starbucks’ Revenue And EBITDA Composition Changed Over 2011-2015?
- By What Percentage Have Starbucks’ Revenues And EBITDA Grown Over The Last Five Years?
- What Is Starbucks’ Revenue & EBITDA Breakdown?
- What’s Starbucks’ Fundamental Value Based On Expected 2016 Results? (Updated After Q2 FY’16)
- Starbucks Q2 FY 2016 Earnings Preview: New Developments In China/Asia Pacific Region To Steal The Limelight
- Where Will Starbucks’ Revenue And EBITDA Growth Come From Over The Next Three Years? (Updated After Q2 FY’16)
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