Starbucks New Business Model Proposal

Table of Contents

List of Tables. 3

Executive Summary. 4

Business Description. 4

Business Opportunities. 6

Marketing Strategy. 9

Costing and Pricing. 9

Sales Projections. 10

Marketing Plan. 11

Business Operations. 11

Operational Function. 11

Services Offered. 12

Personnel 12

Technology. 12

Finances. 13

Revenue. 13

Expenses. 13

Financial Projections. 13

Reference List 15

Appendix. 17

List of Tables

Table 1: Sales Projections. 10

Table 2: Projections for first year of Operations. 14

Table 3: Projections for second year 14

Table 4: Projections for Third Year 14

Table 5: Earnings and Costs Projections. 17

Executive Summary

Starbucks is an established brand name in the coffeehouse industry due to direct efforts aimed at improving its brand image and the various destinations within which it operates. This paper proposes a new model whereby Starbucks will offer delivery services to its clients to maximise on the opportunities emanating from the fast lives and deal with emerging competition. The delivery services will be in line with the company’s commitment to protecting the environments and will improve the relevance of the services offered by the company to the needs and expectations of its clients. The prices for the delivered products will be set at 10% higher than their prices at the stores for purchases less than $10 and 5% for purchases higher than $10. The difference in pricing depending on the purchases is aimed at encouraging bulk purchases thereby reducing the overall costs incurred in the delivery of the orders. The delivery services will be launched officially in a function where top politicians and celebrities will be invited. Media coverage of the event will set the tone for further marketing and promotional efforts. Starbucks will also print brochures and posters that will detail the delivery services. First, specialised vans that have compartments designed to hold and preserve food and beverages will be needed. GPS technology will be required to allow for instant tracking and positioning of the vans. Portable card readers will be required to allow for retrieval of payment information from Starbucks cardholders.

Business Description

Starbucks started its operations in 1971 in Seattle and the company has since developed into one of the leading brands in the hospitality industry (Starbucks, 2011a). From its humble beginning, Starbucks has always endeavoured to be a different kind of company that celebrates the coffee and its rich tradition. The company’s mission is to inspire and nurture the human spirit-one person, one cup and one neighbourhood at a time. Starbucks has more than 15000 stores that are distributed over 50 countries (Starbucks, 2011a). Starbucks is committed to responsible conduct of business, which has helped the company respect the customers, partners and neighbours. Ethical sourcing is concerned with the development of strong long-term relationships with farmers, suppliers and societies within which it operates (Starbucks, 2011c). The company has set the goal of ensuring that all is coffee is grown using ethical; trading and responsible growing practices by the year 2015.  Furthermore, the company shares its customers’ commitment to the environment. The company has set the goal of ensuring that by the year 2015 all its cups will be recyclable and reusable (Starbucks, 2011c). Additionally, Starbucks endeavours to reduce environmental footprints via energy and water conservation, recycling and green construction. Starbucks is committed to community involvement that it attain via bringing people together, inspiring change and changing lives as part of their responsibility of being a good neighbour. Starbucks endeavours to contribute one million volunteer hours per annum for its communities.

Starbucks is a public company that went public in 1992 (Starbucks, 2011b). Starbuck’s corporation shares are listed on NASDAQ. Starbucks suppliers are distributed all over the globe. The company has a department tasked with procurement of coffee and assurance of quality. Moreover, the company has taken steps to improve the quality and ethical standards of the coffee it acquires by the year 2015 (Starbucks, 2011b). The steps have included improving the relationship between Starbucks and its suppliers (coffee and tea farmers). Starbucks organisational structure is divisional even though overall strategy is developed by the executive management. Individual Starbucks stores are charged with carrying out the strategies that have been formulated by the executive management. As a public company, the board of directors and the shareholders must be involved in the formulation of strategies that have adverse effects on the company’s operations.

Starbucks is an established brand name in the coffeehouse industry due to direct efforts aimed at improving its brand image and the various destinations within which it operates. In recent years, the company has taken steps to improve the utilisation of technology in the provision of services to its clients. Computer and internet technology are used by Starbucks to collect ideas and feedback from their clients and the public. The introduction of My Starbucks card, which allows users to hold accounts and cards that allow them access to services from any Starbucks store are other uses of technology within Starbucks (Starbucks, 2011d).

Fast food restaurants and coffee shops are often located within central business districts due to the availability of clients that live fast lives (Alters and Schiff, 2009). In order to improve the delivery of services that meet the clients’ expectations, more businesses have opted to deliver foods to their clients. Delivery services allow customers to access the services from their favourite fast food joints from their offices or homes. This paper proposes a new model whereby Starbucks will offer delivery services to its clients to maximise on the opportunities emanating from the fast lives and deal with emerging competition. The delivery services will be in line with the company’s commitment to protecting the environment and will improve the relevance of the services offered by the company to the needs and expectations of its clients. The delivery services will be an extension of the current store-based operational model.

Business Opportunities

Strengths

Understanding the strengths, weaknesses of an organisation as well as the threats and opportunities that exist are important step in evaluating the feasibility of proposed strategic directions (Fisk, Grove and John, 2007). Analysis of Starbucks in relation to the proposed strategy is vital in determining if the company has the capabilities required to carry out the strategy. First, Starbucks is an established brand name with a defined organisational culture. Development of a strong brand name is vital in dealing with competition especially in highly competitive segments (Ryall, 2007).  A strong brand name and image allows businesses to attain greater brand loyalty, which offers them greater flexibility in designing and implementing strategies without the fear of losing clients (Clifton and Ahmad, 2009). Brand loyalty has been shown to be quite effective in stabilising sales volumes irrespective of changes in strategic direction or in the operational environment (Healey, 2008). Any uncertainties or fears by the customers that often characterise changes in strategy will be minimised by the strong brand name and image.

Delivery of orders to the clients is a complex undertaking that requires high levels of coordination between the personnel involved. Technology is required to enable the coordination of the delivery processes. Email, text messaging and tracking technologies will be needed for the proposed delivery services. Starbucks as a company displays great appreciation for technology and has a robust and active IT department. Store locators, my idea blog and Starbucks card are some of the uses of technology within Starbucks. The developed appreciation of technology will come in handy in supporting the proposed delivery services. Additionally, the existing technological infrastructure can also be used to support the proposed delivery services though extensions may be needed to support tracking technologies.

Management of quality for products on transit is a major challenge. The quality of coffee, beverages and the snacks offered by Starbucks may be affected negatively by movemenet movement. The company has a quality assurance department that is tasked with ensuring that the products and services offered by the company are designed to meet set quality goals. The existence of a quality assurance department places Starbucks in a better position to handle any quality concerns that may arise from the postposed strategy. The quality assurance department will also be tasked with monitoring the delivery services and highlighting areas that need to be improved. This will ensure that the implementation of the delivery services is continuously improved.

Opportunities

The major cities within which Starbucks operates in the 150 nations are characterised by good road networks. Most European and American cities have proper addresses and proper transport networks (Hill, 2010). Good road networks will limit the likely loss of quality and destruction of the products en route their destinations. Additionally, the good address systems used by most American and European cities will aid the delivery of services by allowing for accurate description of customers’ location.

The modern professional is largely consumed by the demands of their professions and the challenges associated with poor road infrastructure (Alters and Schiff, 2009). The highly demanding professional lives leave little time that they can use to access their favourite coffee shops or restaurants. Additionally, traffic jams are prevalent in most cities. This dissuades coffee lovers from leaving their places of work or homes to coffee shops that are located near central business districts. These opportunities can be harnessed by the proposed delivery services, which in essence will eliminate the challenges, and problems that hinder customers from accessing or spending time in coffee shops.

Threats

Coffee drinking is a culture that encompasses more than just the consumption of a beverage.  Coffee drinkers are often connected by more than just the consumption of coffee and this connection is one of the aspects that Starbucks has focussed on. The delivery services are likely to be perceived as an erosion of the coffee culture by the loyalist. Another risk is maintaining high quality levels. Security and quality management are the other risk associated with the proposed service. Since the vans will be carrying both coffee and proceed from the sales, security is a major concern. The quality of the coffee is risked by the continuous movement. These two major risks must be addressed for the proposed service to materialise.

The targeted consumers are professionals in highly demanding positions, people working from homes, home makers, school teachers, healthcare workers and people whose daily routine have been affected by unforeseen circumstances such as traffic jams. However, intense competition is expected from local coffee shops depending on their ability to organise and implement the delivery services. Every coffee shop that has an established clientele across the cities that Starbucks operates is a potential competitor. However, the challenges associated with maintain quality and coordinating the delivery services is a major hindrance to entry into this service segment. The services will be limited to cities and their metropolitan areas. Studies reveal that most coffee shops are located within city centres whereas coffee drinking has great potential outside the city areas (KeyNote, 2009). This is the main reason for setting the geographical area as city metropolitans.

Marketing Strategy

Costing and Pricing

Pricing is vital and influences the clients’ willingness to use the delivery services. High prices for the delivery of merchandise may impede and discourage potential clients. On the other hand, extremely low prices may not offset the additional cost incurred because of delivering Starbucks’ services to clients’ location. The prices for the delivered products will be set at 10% higher than their prices at the stores for purchases less than $10 and 5% for purchases higher than $10. The difference in pricing depending on the purchases is aimed at encouraging bulk purchases thereby reducing the overall costs incurred in the delivery of the orders. For purchases over $100, the customers will be charged at store rates. This implies that customers will not be charged extra for purchases over $100. This strategy aims at encouraging bulk purchases by eliminating the high charges on customers who make bulk purchases. It is worth noting that whereas the additional charges may be insignificant for small purchases the significance of the additional charges increases with bulk purchases since the additional costs are a percentage of the store prices of the purchases made. Costing strategies will be based on the approach used by Starbucks. The use of accosting strategy similar to the one used by Starbucks is aimed at minimising any misunderstanding and inconsistencies in costing across the company (Grewal, 2010; Leitner, 2007; Ryall, 2007).

Sales Projections

Table 1: Sales Projections

The sales projection for the first five years is presented in table 1. The first two years are expected to be characterised by low sales revenue. This is because the delivery service is a move away from the conventional strategies used by Starbucks. However, the third and fourth years are expected to be characterised by high sales revenue. The delivery services have high potential and if properly executed the sales are expected to increase significantly. The period after the second year and before the fifth year is expected to be characterised by high growth rates. This is because the promotional and marketing strategies are expected to have taken root by the second year.  However, due to the high levels of competition and copying in the coffeehouse segment, it is estimated that within two years other players would have developed similar services. As a result, growth in sales revenue is expected to decrease after the fifth year.

Marketing Plan

Communicating the existence of the delivery services is vital to its success. The marketing plan will involve the use of various platforms. First, the company will use local radio stations for paid advertisements and promotional efforts. The delivery services will be launched officially in a function where top politicians and celebrities will be invited. Media coverage of the event will set the tone for further marketing and promotional efforts. Starbucks will also print brochures and posters that will detail the delivery services. The trucks that will be used for the delivery services will be covered with the posters and the numbers and contacts information for the delivery services. The company’s website will alos be used to advertise the delivery services. The use of multiple approaches to marketing will help ensure that customers and the public are all aware of the service.

Business Operations

Operational Function

Each city metropolitan will have a delivery centre that will be tasked with coordinating all processes relating to home (office) delivery. Individual stores will be tasked with providing the merchandise, maintaining quality and coordinating with the delivery centre. Since the delivery centre will not have any merchandise, coordination with the stores within the city will be critical. Orders will be received via phone calls and from the company’s website. Once an order is received by the delivery centre, the location of the client is determined. After this, the nearest Starbucks store will be determined and the request sent to this store. Alternatively, the request could be sent directly to a delivery van that is nearest to the customer. In this way, the merchandise will be delivered in good time.

Services Offered

The services offered will be limited to taking orders, delivery of products, recording the sales information and collecting the sales revenue. Taking orders will be at a central station that will be tasked with coordinating all the delivery services within a city metropolitan. The delivery centre will be able to coordinate with other Starbucks stores to ensure timely delivery of merchandise. Additionally, the delivery centre will record all transaction made and the sales revenue made. Each Starbucks store will have specialised van and personnel tasked with the delivery of merchandise to the clients.

Personnel

At least five employees tasked with the coordination of activities in the delivery centre. A manager tasked with the overall operations of the delivery centre. Four employees per store that will be tasked with the delivery of customers’ orders are required. The employees will include two drivers and two assistants who will be tasked with the actual delivery of the orders made by the customers. Every store will have two employees who will be tasked with receiving and coordinating requests from the delivery centre. The quality assurance department will be required to assign an employee to the delivery segment. Each van will have a security officer responsible for enforcing security.

Technology

Technology will be required to deal with the challenges expected in coordinating the processes. Technology can be used to linear program the deliveries and allow the use of algorithms that can ensure optimisation of the resources (Young and Burgess, 2010; Binder and Dustdar, 2009). However, to support the delivery services the following technologies will be used. First, specialised vans that have compartments designed to hold and preserve food and beverages will be needed. GPS technology will be required to allow for instant tracking and positioning of the vans. Portable card readers will be required to allow for retrieval of payment information from Starbucks cardholders. A network of computers that support data verification and GPS positioning are also needed to support the coordination of the delivery processes.

Finances

Revenue

The revenue earnings will take on the traditional S-shaped curve. It is expected that the sales revenues will be low as the delivery services takes root and the marketing and promotional efforts start to take effect. However, after one year it is expected that revenue earnings will grow exponentially as clients will realise the benefits and convenience afforded by the delivery services. This success is likely to attract competitors and a reduction in the rate of growth in revenue is expected, as the market potential is approaches. After four years, it is expected that the revenue earnings will stabilise.

Expenses

It is expected that the expenses will be higher than the revenue earnings in the first year (Table 2). The expenses will be high at the initial phase of the delivery-service program initiation. This is due to the high outlay cost and payments being made to the employees. However, with the input of the quality assurance department and optimisation of the routes and resources, the overall expenses involved in the delivery services will be minimised significantly (Table 2, 3, 4). Thus, it is expected that the delivery service will record a loss in the first year and profits in the subsequent years.

Financial Projections

Item Cost ($) Earnings ($)
Sales   100000
Purchases 50000  
Salaries 25000  
Equipment 10000  
Security 20000  
Operations 50000  
Total 155000 100000

Table 2: Projections for first year of Operations

Item Cost ($) Earnings ($)
Sales   120000
Purchases 25000  
Salaries 25000  
Equipment 10000  
Security 20000  
Operations 40000  
Total 120000 120000

Table 3: Projections for second year

Item Cost ($) Earnings ($)
Sales   150000
Purchases 20000  
Salaries 25000  
Equipment 5000  
Security 20000  
Operations 35000  
Total 110000 150000

Table 4: Projections for Third Year

A dip is expected in the overall cost of the program between the first and the second year due to the high costs of the initial outlay (Table 5). Purchases are expected to dip in the second year since the equipment bought in the first year can be used for more than one year (Table 2, 3). On the other hand, the sales revenues are expected to rise between the first and second year and rise even higher between the second and the third year. Operational costs are also expected to decrease across the three years. This expectation is grounded on the fact that a better understanding of a route and the processes involved in an activity often results in reduced cost of operations.