Risks Associated with Starbucks

Starbucks is one of the publicly traded companies in the United States of America who has had succeeded in the business particularly after the reinstatement of Howard Schultz as the firm’s CEO for the past nine years. During the nine-year period, Starbucks has registered an outstanding increase in revenues, quadrupling of operating income, and a total return with the surplus of 600% in stock trade. Although the company has had a steady growth and financial stability, making investors more optimistic, it is still not immune to risks associated with the business. The objective of this paper is to analyze five key risks that are the most important to the company.

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One of the most significant risks the company should consider is its growth plan. Starbucks’ growth plan for the next five years is risky, considering that due to the saturation of Starbucks’ core American market, the company has been faced with the challenge of locating sources of its future growth. Starbucks generates its profits and other gains through company-operated stores, licensed stores, foodservice operations, and consumer packaged goods (Starbucks Corporation 3). In its five-year strategy plan, Starbucks aims to expand its profits with a margin of 10% annually, while at the same time increasing investors’ earnings to 15-20% compound interest annually. For Starbucks to accomplish its strategic plans, the company intends to add the product value in its stores by 50% in the coming five years, adding roughly 12,000 new spaces. Among the 12,000 new stores, 70% of the stores will be out of America. It implies that more growth is to come from Europe, the Middle East, and Africa five years to come. Starbucks has often struggled to have a foothold in the European market, making the growth too much risky for the firm. Starbucks’ focuses on an ambitious plan in China as it plans to double its stores in the Republic of China to 5000 by 2021. Although Starbucks has been successful in China, there is no guarantee of the same over the next coming years. There exist significant risk between the America-China relations and that threat will continue to deteriorate. It is clear that the new President’s policies do not favor the previous trades done with the Chinese government. Therefore, this shaky relationship endangers American consumer brand, which results in negative criticism from Chinese consumers and heavy taxation from the Chinese state. Therefore, my advice is for the company to restrategize its expansion plans, especially in China. The Middle East also poses a major risk, due to insecurity and the recent increase in terrorism in places like Syria. The company should instead invest heavily in Africa, now considered by many economic analysts as the new frontier in financial prosperity (Barry 4). The last five years has seen consumer companies like Macdonald and other companies venture heavily in Africa, and Starbucks should follow suite. The recent rise in technological advancement in many African countries and the creation of favorable business atmosphere by these countries has opened doors to many international and multinational companies in the world (Barry 4). By putting focus mainly in Africa, not only will Starbucks minimize risks, but also increase its growth going forward.

Starbucks Reserve Brand is the second risk associated with Starbucks. Starbucks has identified Starbucks Reserve stores as one of the key ingredients to help drive a meaningful portion of its growth going forward, particularly in the United States. The Reserve brand will be under the stewardship of Howard Schultz after he retires from his position April and the company aims at operating the 1000 stores. The reserve stores are to specialize in serving premium coffee, and upgrading the food menus (Janvier-James 190). Also, the reserve stores gain support from twenty to thirty Roasteries, which intend to roast coffee as the customer waits, plus serving the beverage with baked food. The major drawback is that Starbucks has not tested the brand, which is not a good business expansion strategy. Although excellent coffee options readily available today at some Starbucks location, they do not make up the first sales within these Starbucks stores. The management should not read much into the success of the original Starbucks Reserve roaster in Seattle, as this is a single store in Starbucks’ hometown. There is no guarantee that other towns and states will readily welcome this concept (Roby 2). It is also vital to note that premium products and services depend on some variables, like the economic class and preferred culture and trends. Therefore such ventures will require well thought out plans and ideas, to minimize risk (Roby 2). A good example is the Teavana tea brand, which over the past two years was Starbucks’ future growth driver. Eventually, the company had to close all but one of its first spaces since customers disliked the idea. Starbucks should test the concept of Reserve brand to the fullest, to ensure that there are solutions for any loopholes that might lead to losses. The failure of the Reserve stores can ultimately result in mistrust among consumers, which will eventually affect other Starbucks stores. Hence the need for proven and full proof plans. The company should fully understand and project all logistics while taking into account other variables, such as trend to be able to predict any form of a setback in the years to come.

The third pure risk associated with Starbucks is the fluctuation of the world price of coffee. Fluctuation of prices exists when the demand and supply of the product vary. The driving product behind Starbucks is coffee, and its rise in price is likely to affect Starbucks’ profit margin. The changes market price of coffee is mainly due to the growing demand by other countries, which results in a shortage of the coffee beans. The result will be an inflation in the company’s production budget. World leading coffee producers, mainly African nations are undergoing culture changes. What this means is that vast tract of land are now being developed into real estates, leaving small areas of food production. The reduced production will, result in prices rising above average.

The fourth pure risk that Starbucks faces is the potential supply chain interruptions or delays that can be due to suppliers’ social, environmental, or governance challenges (Janvier and Assey 194). Social problems here might include dangerous working conditions and a low number of workers. Environmental issues include unfavorable weather conditions, bad roads, and the outbreak of diseases. Governance challenges are mainly due to political policies that may not be favorable to the company’s business plans. With the company’s intention to expand into the Middle East and Africa, there might be challenges faced by suppliers. In Africa for example, there is inefficient infrastructure and technology to sustain a robust and stable supply chain. My advice will therefore for the company to ensure that Starbucks suppliers have dynamic management systems and regulatory compliance programs. Also, the company should make sure that they do not rely on a single or limited source for the primary inputs, which will make sure that there is no disruption of the supply chain entirely.

The fifth but a speculative risk associated with Starbucks is the stock market risk. There exist periods when investors look into the possibility of making losses in the financial aspect, which people refer to as market risk. The past five years has seen the American stock market rise steadily, mainly due to the Federal Reserve’s low-interest-rate policy. Stocks in almost every sector performed extremely well, well enough to make up for all of the losses incurred during the Great Recession. The Starbucks investors should, however, understand that the Federal Funds rate will not always remain at zero (Seaford, Culp, and Brooks 39). There are no fundamental economic assurances that the stock prices will continue to go up. Some companies will become more vulnerable while others will lose value over time. Ideally, the only time the broader market is confident of a rise is when public companies get more value than in the past. Investors should understand that, according to many people in different economies, brand name coffee is a luxury item, and luxury items do depend on economic settings of individuals. People purchase luxury items when they have plenty of disposable income (Seaford, Culp, and Brooks 39). Therefore, should the economy go through a prolonged period of economic recession or downturn, there is a possibility that Starbucks will struggle, just like any other company in the market, if not more. Consequently, to ensure the company does not suffer much loss in the stock market price, Starbucks should continue diversifying its services and products to ensure there are a variety of goods and services to choose from. Products such as freshly baked foods, fruit juices, and other products will make sure that brand name coffee is not the only sales driver in the stores. By not only relying on brand name coffee, considered by some as a luxury, but the company will also continue to register growth.

 

Works Cited

Barry, Hadiatou. “Globalization and Economic Growth in Sub-Saharan Africa.” Gettysburg Economic Review vol. 4, no. 1, 2010, pp. 4.

Janvier-James, Assey Mbang. “A New Introduction To Supply Chains And Supply Chain Management: Definitions And Theories Perspective.” International Business Research vol. 5, no. 1, 2012, pp. 194.

Roby, R. Lauren. “An Analysis of Starbucks as a Company and an International Business.” 2011, pp. 1-6.

Seaford, Bryan, Robert Culp, and Bradley, Brooks. “Starbucks: Maintaining a Clear Position.” Journal of the International Academy for Case Studies vol. 18.no. 3, 2012, pp. 39.

Starbucks Corporation. United States Securities and Exchange Commission, Washington, 2016, https://www.sec.gov/Archives/edgar/data/829224/000082922416000083/sbux-1022016x10xk.htm#s4C8B77A4F87E20C20B0E326576172376. Accessed 22 Feb. 2016.