Question

When you say Starbucks, most people instantly think of coffee, specifically coffee prepared by a barista just the way you want it—once you get the Starbucks lingo down. Starbucks is available in over 20,000 coffeehouses in more than 60 countries. Starbucks has experienced amazing growth over the last 30 years as it moved from a small chain of coffeehouses in Seattle to the global powerhouse that it is now. However, the firm faces more limited prospects for growth in its coffee business from this point forward. The coffee market is fairly mature, and Starbucks sees a limited number of new markets in which to expand. In recent years, Starbucks has diversified into a number of new products and distribution channels to stoke up its growth potential. This has included diversifying into new products to sell through its cafes. Starbucks purchased La Boulange Bakery and now produces baked goods to sell in its cafes. Similarly, it purchased Teavana and is adding tea bars to its cafes. It also purchased Evolution Fresh Juice company and now supplies the Juices it sells in Starbucks coffeehouses. It is also test marketing additional new products in its cafes—beer and wine in Starbucks Evening concept stores and carbonated beverages in several markets. Starbucks is also making a major push in the grocery aisle. The firm has developed a '"signature aisle" which features wood shelving that reflects the appearance of a Starbucks Café. The aisle's desirable end cap (the high-traffic shelf area at the end of an aisle) attracts shoppers' attention to products such as Starbucks' bagged coffee. its single-serve K-cups, and its Via brand instant coffee. But selling coffee in grocery stores is just the first step. Starbucks aims to also distribute its La Boulange bakery products, Teavana teas, and Evolution Fresh juices in grocery stores. It has even been looking further afield as it developed Evolution Harvest snack bars for the grocery aisle and also crafted an alliance with Danone to produce and sell Evolution Fresh yogurt products in grocery stores. The grocery aisle business now accounts for about 7 percent of Starbucks' business, but CEO Howard Schultz envisions the grocery aisle business producing half of the company's sales. While the growth potential is enticing, there are some potential pitfalls associated with Starbucks' push into new arenas. The perceived differentiation of its coffee products could erode as they become a grocery aisle staple. Also, the growth of grocery sales could cannibalize the sales at cafes as people simply brew their K-cup coffee at home rather than swinging through the Starbucks drive-through on the way to work. In moving into noncoffee products, the question becomes whether or not Starbucks has the competencies to manage other businesses well. While Starbucks has mastered the management of the coffee supply chain and developed a distinctive product, it is not clear that the company has the competencies to produce bakery products, juice, tea, beer, and wine better than outside suppliers. Finally, managing all of these new businesses may distract Starbucks from Its core coffee cafe business. The challenge for Starbucks is to know what its core competencies are and to focus on markets that allow it to best exploit those competencies.

Discussion Questions  

1. What are Starbucks' core competencies? Do the new businesses allow Starbucks to leverage those competencies?

2. Do Starbucks' diversification efforts appear to be primarily about increasing growth or increasing shareholder value by sharing activities, building market power, and/or leveraging core competencies?

3. Where do you think Starbucks should draw boundaries on what businesses to compete in? Should it keep the new products in the corporate family? Should it continue to move into the grocery retailing space?

Answer 1

1. What are Starbucks' core competencies? Do the new businesses allow Starbucks to leverage those competencies?

Coffee is the core business of Starbucks. Its core competency is proper customer service, strong focus on quality, its motto to be present everywhere, caring for its employees and product advancement.

Business has become extremely competitive. New businesses are coming with newer ways of attracting customers and poses a strong threat to Starbucks. It is becoming increasingly difficult for Starbucks to leverage these competencies. Also the coffee market has matured. They are trying to enter into newer businesses to continue and maintain their stronghold on the market.

2.  Do Starbucks' diversification efforts appear to be primarily about increasing growth or increasing shareholder value by sharing activities, building market power, and/or leveraging core competencies?

It is more about finding newer avenues for growth by trying to capitalizing on areas where there is still potential for growth. Since there is not much potential for further growth in coffee segment, Starbucks is looking for newer food products to sell in its cafes. It intends to maintain dominance in other food categories as well other than coffee.

3. Where do you think Starbucks should draw boundaries on what businesses to compete in? Should it keep the new products in the corporate family? Should it continue to move into the grocery retailing space?

Starbucks should stick to Coffee or coffee related drinks or at the maximum it can move into fruit drinks , fruit beer since they can somewhat be related to the drinks category. Starbucks cafe can be known for coffee and various other associated drinks like juices, fruit beer, mocktails etc. That gives choice to consumers as well inside their Cafe.

Grocery retailing space is a completely new ball game and it is possible that their focus will shift from their traditional core business. That can prove to be fatal for Starbucks since coffee market is also experiencing lot of competition. Customers will not be able to relate to the Grocery retailing by Starbucks, The brand they have created for so long will also get diluted.