|
Starbucks Corporation (NASDAQ: SBUX) is an iconic brand. The company has over 23,000 locations spread across 68 countries and a logo that is practically symbolic with coffee, coffee shops and a convenient place for people of all ages to meet. On the surface, it may seem Starbucks is a well-oiled machine that could trade on its popularity alone. However, understanding the company’s profitability is a little more complicated.
In 1979, a Harvard Business School professor named Michael E. Porter developed a qualitative framework for understanding the competitive forces companies face. He listed five factors, or forces, commonly known as Porter’s Five Forces, which include the threat of substitute products, competitive rivalry, the threat of new entrants, the bargaining power of suppliers and the bargaining power of customers. This last one is especially important because, first and foremost, Starbucks provides a service to its customers and this puts a fair amount of power in customers' hands.
Small Cost per Transaction, Big Similarities in Buyers
Individually, these customers do not wield much power, as the value per transaction is relatively low, but collectively they do. Even though many purchases are small, they tend to be regular, and buyers share many important similarities. Taken as a whole, Starbucks’ customers have many of the same preferences: a more upscale, convenient food experience in a comfortable environment at a good price. In turn, Starbucks has to make sure the perception of its brand, its products and its stores meet those preferences. This means continually updating its menu, music selection and decor.
Low Costs to Switch Brands
Starbucks’ customers also have bargaining power regarding its value. If the company’s patrons do not feel they are getting a good deal or a good product and experience for the price, they will go somewhere else. The costs of switching coffee shops or brands are minimal, and because many of Starbucks' products are priced at a premium to its competitors, going to a different coffee shop or changing brands may even mean its customers save money by going somewhere else. Moreover, because Starbucks tends to cost a bit more, it has to justify its prices in the other value it provides, whether it is better coffee or chairs that are more comfortable than its contemporaries.
Availability of Substitutes
The bargaining power of Starbucks’ customers extends to their use of substitutes as well. If the cost of getting a cup “to go” becomes too high or certain trends such as roasting your own coffee are not embraced by Starbucks at a corporate level, the likelihood of its customers going somewhere else, or choosing a different product, goes up. For instance, a customer who does not see the value in a $5 latte could want a $2 large coffee. Customers could also choose to brew their own coffee at home. Also, for as many products as Starbucks sells, there are substitutes for its products, such as fresh-pressed juice or loose-leaf tea blends, that could drive customers away from Starbucks and toward other convenience restaurants.
Distribution Networks
Starbucks sells to consumers, but it also sells its products in distribution networks. You can find Starbucks' coffees and teas in supermarkets, club stores, food services, specialty retailers and licensed outlets. As a result, the end distributor, whether it is the grocery store or licensed seller, also has bargaining power. For instance, a grocery store chain may negotiate a discount on Starbucks’ coffee and teas if they are not selling well in certain locations or do not appeal to the local market. This risk can also be significant. Starbucks gets 8% of its business from consumer packaged goods and 3% of its revenues from food service.
Analyzing Starbucks' Bargaining Supplier Power
-
Investing
Analyzing Porter's 5 Forces on Starbucks (SBUX)
Examine the industry position of Starbucks Coffee Company from the perspective of the company using the Porter's Five Forces model. -
Investing
If You Had Invested Right After Starbucks' IPO (SBUX)
Learn how much you could've made if you had invested $1,000 in Starbucks stock at the time of their IPO -
Investing
Starbucks Stock Climbs Despite Valuation Concerns (SBUX)
In my view, management's aggressive growth plans is one reason Starbucks, which added 528 new stores last quarter, deserves a higher earnings multiple. -
Financial Advisor
Why Is Starbucks Expanding Its Evening Menu? (SBUX)
Discover how Starbucks aims to increase revenue growth by $1 billion over the next fiscal year with new and improved evening menus. -
Investing
Starbucks: It's Brewing Bigger Gains for Investors
Starbucks's next leg of growth will come from mobile payments and Asia, especially China -
Insights
Top 6 Companies Owned by Starbucks (SBUX)
Learn the story behind the Starbucks Corporation's most important subsidiary companies. -
Investing
Starbucks: A Brand Still as Strong as its Coffee (SBUX)
A departing CEO and being vocal on political issues has not (and will not) affect the company in the long run. -
Investing
Nestlé Paying $7.15B to Sell Starbucks Products Globally
The partnership may help the coffee empires fight off growing competition.