Starbucks and the Coffee Retail Industry: Business Strategy

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Video and sound editing: Jocel Angie Ulaye

Music: Jayson Litrio – The Legend of Zelda: A Link to the Past ‘The Goddess Appears (Trinity)’ http://ocremix.org/remix/OCR00454

Script:

Cafés, coffee, cafes, coffee. They’re everywhere, so I thought it’d be interesting to a lot of people if I took a look into the business strategy and industry dynamics of coffee retailers, including the most ubiquitous of them all, Starbucks.

In fact, why don’t we start with Starbucks. In my view, Starbucks’ success is largely attributable to its longtime CEO and now executive chairman, Howard Schultz, who grew Starbucks into what it is today. As an analyst, I took away three key reasons for Starbucks’ success from Schultz’s first book, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time:

  1. DIFFERENTIATION.When Starbucks opened in Seattle in the 1970’s, it offered a relatively new product to the US market: dark roasted coffee. Schultz also emphasized an “Italian” coffee experience in stores as a further differentiator from other cafes.
  2. UNDERSTANDING CONSUMERS. In my opinion, the history of Starbucks is a history of successful pivots to meet consumers expressed and unexpressed needs. One famous example, among many, was Schultz’ idea to position Starbucks as a “third place” between work and home. Think about it, if you want to have a quick coffee with a friend or business associate, what’s the first place you think of?
  3. EQUITY FUNDING. This is a big factor that literally financed Starbucks’ growth and eventual success, that doesn’t get a lot of press. Schultz courted venture capitalists, and eventually public markets, to fund Starbucks’ growth. Basically, the upside to equity funding versus debt is that you don’t have to pay an interest. On the other hand, you give up some of your ownership of the company. So equity funding is a double-edged sword, as we shall soon see.

Now, despite coffee’s popularity, in recent quarters, Starbucks and the rest of the coffee retail industry have seen US sales slow. One major reason is that consumers are spoiled for choices. Given how popular coffee and café culture has become, all sorts of coffee shops have opened in the last few years, and there now exists an overabundance of cafes and coffee on the high end, and low-end options as well. So overall the market is crowded and retailers are getting squeezed, including Starbucks.

In fact, why don’t we actually take a look around and see just a sample of high-end alternatives to Starbucks, to have an idea of what Starbucks is competing against. This is a vlog, after all.

First, you have high-end cafes serving high quality coffee. For coffee purists. As for me, I don’t pretend to be a purist at all, I only started drinking coffee recently when I became an entrepreneur since I’m working nearly every waking hour. Anyway, you have these places for discerning purveyors of fine coffee.

Perhaps in response to this, Starbucks launched its own higher-end brand of cafes, Starbucks Reserve. I visited one in Manila with my friend Art.

As you can see, I am truly a coffee philistine ordering blended iced coffee. Regardless, it remains to be seen if Starbucks can meaningfully court the coffee connossieur crowd, since Starbucks is probably the antithesis of what this demographic wants.

Now let’s take a look at some cafes which I would say attract more of the Frappuccino crowd, where I shamefully belong. These cafes may be popular not necessarily for its coffee, but for other reasons.

New York’s Chacha Matcha blends its matcha offerings with Cuban sensibilities.

Bibble and Sip, also in New York, is famous for its cream puffs and panna cotta.

In Manila, Satchmi combines a café with vinyl record retailing – definitely for the hipster crowd.

Korean café chains are also gaining traction in Asia. Kiss the Tiramisu is famous for it’s ice cream, while Zoo Coffee – well, check out its design.

And for people on the go, you can get quality coffee in convenience stores and supermarkets. Cold coffee is a popular item in this category.

And let’s not forget traditional cafes. I wonder if these cafes have seen a resurgence in interest as Millenials spend more of their money on experiences, including travel.

You have the cafés in Europe, which draw on their countries’ unique history, food, and culture.

Here’s an example of one in Madrid.

Have coffee with a Spanish tortilla, or omelette. An authentic Spanish experience.

Meanwhile, in Japan you can go to kissatens, or traditional Japanese coffee shops.

This is A-License, a Tokyo kissaten in Nakano Broadway, which, by the way, if you’re into Japanese geek culture, is apparently the hipster alternative to Akihabara.

This is the tiniest creamer I have ever seen. Look at it. It’s barely bigger than my thumb!

And this is truly a Japanese café meal.

Here’s another kissaten in Ginza, Café de L’Ambre. Fantastic place, and I have to say these guys take their coffee seriously. Only coffee is served here!

This is their Blanc et Noir “Queen Amber”, sweet and iced coffee with floating milk. The server told me not to mix it and drink it as is.

As you can see, travelling to other countries and steeping yourself in their café cultures is a unique experience that can’t be replicated by a multinational corporation like Starbucks. And here we face the downside of equity funding, which I talked about earlier. Again, equity funding is capital for your business that you don’t have to pay interest on. Rather, you give up a stake of ownership in the business. And, in general, equity investors want their investments to grow fast. So if you’re in a traditional sector like coffee retail, to grow fast, you have to keep opening and opening more and more stores.

Hence Starbucks’ ubiquity, which helps makes it profitable, but this ubiquity is also a major challenge. After all, as consumers have more and more choices, why keep going to the same old place? Why not step out of your comfort zone and try something new? That’s what the experience economy is all about, in my view. Tell me, what was more interesting in this vlog, the footage on Starbucks or the Japanese kitassens?

There’s a lot more I want to say that I couldn’t fit into this video, so stay tuned next week when I launch a live recording digging further into Starbucks’ business. If you have any comments or questions, please leave them below and I’ll see if I can get to them next week. See you then!

And if you enjoyed this video, please do subscribe to Art and Finance’s YouTube channel and/or social media accounts. Links in the description below. If you subscribe on YouTube, you can click on the bell icon to get alerts when I publish a new video. Thank you for your support!

Ramon Rodrigo Cuenca, CFA
Founder and Director,
Art and Finance

“Starbucks Hipster Siren” (Wacom Cintiq tablet and Clip Studio Paint, 2480×3508 px)

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