JohnFScott
Background
When considering the alignment of organizational capabilities with the external environment, Starbucks (NASDAQ:SBUX) has significant resources and, based on those resources, plans to build roughly 2k new US stores in the next few years as it continues to expand. Starbucks also intends to invest roughly $450 million to upgrade existing cafes with new equipment and technology. The new tech is expected to significantly help with the prep of customized cold drinks.
However, Starbucks is investing in a changed and changing external environment that transcends the Covid pandemic and must take into consideration inflation, as well as the war in Ukraine and its implications; with all three contributing to global recessionary conditions.
While we should expect that Starbucks has conducted a careful internal and external analysis upon which their investments will be based, it is important to recognize that any attempts at forecasting is complex and affected by an array of forces, such as technological innovation, cultural changes, demographic shifts, stronger competition with an introduction of new products, as well as the entry or development of new businesses within the industry – think Dutch Bros (BROS) – as well as shifts in government priorities, changing social values, unstable economic conditions, and unforeseen events like Russia’s invasion of Ukraine. As such, a sense of what the future portends should underlie every decision business management makes.
Despite these efforts and with all the best information and with well-seasoned management, forecasting and planning can be wildly inaccurate. An example I often cite International Business Machines (IBM); which conducted an analysis of personal computer sales for the decade of the 1980s and forecast 295k PC sales for the decade. As a result, they made significant strategic changes to their business: they outsourced their microprocessor to Intel (INTC), they outsourced their operating system to Microsoft (MSFT), and they focused on mainframes. With all the best information at the time and with excellent decision-makers, their forecast was off “slightly”. In the 1980s, about 25 million personal computers were sold or roughly 85 times the IBM forecast. Although today IBM is a highly profitable services and software company, one can only wonder.
In truth, analysis of business forecasting for the past decade finds that even 2-year forecasts fail to accurately capture the change that has occurred within that specific time frame (as the pandemic has made clear). In some cases this had led to business failure. The reason for the limited success of forecasting is that the competitive environment is more uncertain than at any time since before World War II.
What the strategy field is telling us about uncertainty is that innovation & adaptation are essential to success. Moreover, the global economy is knowledge based, markets are shifting more frequently and more severely than ever before, organizations have not adapted internally to meet the pace of external change, and maintaining a profitable position in the marketplace is becoming more difficult. And yet, companies still stubbornly rely on what has worked in the past while underestimating the obstacles. Why is that? Some may call it “victory disease”, a form of cognitive bias that means decisions are made on the basis of recent experiences, comparable situations, emotions and self-interest. In other words, past success.
What might be done to alleviate mistakes from past? The best answer may lie in expanding thinking beyond asking…”What do we expect?”…which is based on experience, as if all possibilities have been captured by our past. Rather, the question should be…”What might happen?” The point is to challenge one’s perspective by recognizing the limits of experience and embracing multiple choices that offer a greater chance to adapt. But that is not possible if the macroenvironment – the larger external environment – is not understood. To properly align internal capabilities with external opportunities requires that we are not over-estimating our capabilities by applying them to a weak or tepid analysis of the macroenvironment.
While we outsiders do not know what Starbucks based their growth plan on, it should be expected they know more about their internal capabilities than we outsiders know. Still, there are some aspects of the macroenvironment that we do know and are worth discussing in relationship to what Starbucks has said they are planning. With that, I offer a limited macroenvironmental analysis based on the six elements known as PESTEL – Political, Economic, Social, Technological, Environmental & Legal.
While I am not offering an exhaustive analysis – there will be no weighting of factors, nor an assessment of the immediate industry or competitive environment – in its simplest terms, this form of analysis can be used to assess the strategic relevance of six principal components of the (external) macroenvironment. However, as we sit in an inflationary and recessionary global environment, one with a shooting war inserting itself into the narrative, to provide some context, I will interject Starbucks’ past actions within the PESTEL segments, as a predicate to inform future actions. After all, even with different CEOs, Starbucks organizational culture remains a consistent force within the company and has a way of framing strategy and decisions.
Before we begin, just a point of clarity…there are elements in the analysis that had grounding in more than one segment. To avoid repetition, any points made will have found a home in a single segment. Still, because they could fall into more than one segment, it should affirm that the macroenvironment is complex.
PESTEL Analysis
Political
Pertinent political factors include tax policy, fiscal policy, tariffs, the strength of the banking system, as well as the political climate in the US and in the many countries of the world. Political factors can be industry specific or specific to the markets and countries in which a firm competes.
Starbucks opened its first store in Beijing, China in 1999. It just opened store 6,000 in Shanghai in September 2022 and its total investment in the country has been profound and can be discerned with a little history lesson.
From Starbucks university in 2012, to Starbucks Reserve, to welcoming Chairman Xi to Seattle and its corporate offices, to the 2017 acquisition of the shares of its East China joint venture that enabled them to become the sole operator in China (incidentally, an action that could only come with approval at the highest levels of the Chinese government and, interestingly, followed the 2015 visit by President Xi), to a $20 million donation from the Starbucks foundation to improve social impact in communities across China in an effort to elevate people from poverty, to a partnership with Alibaba (BABA) to advance business retail and “transform” customer experience, to receiving a “Best in China” business award, Starbucks is “all-in” on China.
With Starbucks stated desire to expand from 6,000 stores in China to 9,000 by the year 2025, China is a substantial element of the company’s projected growth. It is reasonable to say Starbucks is a “preferred” business in China; a political determination.
Still, an effective PESTEL analysis should help understand the threats that exist within each segment and, from a political perspective, the Russian-Ukraine war might help frame concerns that could lead to the less than 50% projections of store growth in China.
Following the Russian invasion of Ukraine, Starbucks ended its 15-year presence in Russia by suspending (though not terminating) its license for Russia with a Kuwait based company that also operates other Starbucks stores under the license in North Africa and the Middle East. This will end operations of the 130 stores in Russia, affecting about 2,000 employees the company says be paid for 6 months and receive assistance in finding new jobs outside the business.
As for China itself, the government has decided to transition to slower growth and is, according to a Wall Street Journal article, “Upending many assumptions about corporate spending and investment plans around the world.”
While it might be slowing growth, the bigger issue is the noise over China’s saber rattling about “absorbing” Taiwan. Based on last year’s revenues, the exposure of a Russia type closure in China would be roughly $3.7 billion in annual revenues and this does not even get into the potential of lost infrastructure costs.
Regarding the coffee industry itself, there are numerous political pressures in the macroenvironment. For example, the market players import coffee-beans from different nations and each nation possesses its own customs and tariff-regulations; so companies such as Starbucks need to observe potential political and policy decisions seen in tariffs on importation of coffee and taxation, as well as currency risks due to a strong US dollar. Curiously, in its risks section of its annual report, Starbucks does not speak to specific risks to its business in China.
Starbucks next annual report is due in November and its discussion on this point, or not, will be interesting. However, the 2021 report did note key elements of risk – specifically the imposition of additional taxes by jurisdictions on certain types of beverages or based on the number of employees; governmental regulations or other health guidelines concerning operations of stores, including closures due to the COVID-19 pandemic or other public health emergencies; as well as risks to their supply chain and labor.
Economic
Economic conditions include the general economic climate and specific factors like interest rates, exchange rates, the inflation rate, unemployment rate, savings rate, and economic growth. With various countries raising interest rates to help stem increasing inflation, general economic conditions will weaken and the consumer will become more price-conscious.
In a Wall Street Journal article (August 23, 2022), CEO Howard Schultz proudly pointed to Starbucks being unaffected by inflation, as he said US same-store-sales increased 9% YOY, while costs only increased 5%. Just so we are clear, this is not true because of how special Starbucks is. Other coffee and pastry shops are experiencing the same growth and it may be related to a return to the workplace. As was noted in the WSJ article – If you commute to work, you buy more coffee and pastries.
Given the comparatively low price for this post-Covid treat, the consumer making regular purchases may justify getting out of the house and going into an environment with people is worth the cost. However, with the average cup of coffee $4.90, up 7.6% in the first half of 2022, the inflationary pinch may cause some consumers to realize that “small luxury” may total more than $1,000 annually. While coffee is one of those things people are slow to give up, a recessionary environment may cause consumers to come to a different decision on how to provide this treat at a lower cost.
It is interesting to note that Starbucks faced serious challenges due to the inevitable and immutable law of the business cycle that was in evidence with the 2008 global “Great Recession” that changed things for Starbucks. Rather than unremitted growth, Starbucks was forced to suspend new store development and, in a shock to their system, closed over six hundred locations, which stemmed the fast growth that it had projected. Yearly profits decreased, while operating costs increased significantly. In addition, there were many other issues that adversely impacted the business such as, unfavorable general economic conditions, lack of customer acceptance of new products, lower customer base because of the recessionary impact felt by the high unemployment rate, and declining consumer demand.
Post “Great Recession”, Starbucks experienced some continued softness in same store sales and their new product development was not going as well as they would have liked. However, when we consider the macroenvironment, given the extreme competition in the global market for free trade policy and low-cost coffee providers, unstable economic conditions, instability in international markets, rise of the price of raw materials (coffee is the highest value chain cost next to G&A expenses), uncertainty about inflation and the fluctuation of currency, there is much that influenced the business of Starbucks.
It is also important to recognize that, in no small part, Starbucks growth in the past was attained by multiple price increases (even with flat raw coffee costs) and effectively targeting acquisitions of other retail shops that provided key benefits – line extensions of tea and food (Teavana, 2012, La Boulange, 2013) – as well as reducing competition and providing developed retail locations and experienced employees (Seattle’s Best, 2003, Diedrich’s 2006). Without question, future acquisitions by Starbucks remain an opportunity to engender the growth envisioned.
Socio-cultural
These forces include societal values, attitudes, cultural influences, and lifestyles that impact demand for particular goods and services. Also an influence in this area are demographic factors such as: gender, age, income levels, educational levels, family composition, geographic location of population. Clearly, these factors can change over time and will vary by geography.
Socio-cultural factors concentrate on the way in which customers stress the industry and how the company responds to this stress. Starbucks executes in ways to enable sustainability of coffee-bean cultivators that may help create quality products that consumers desire. Moreover, Starbucks also buys non-fat-milk and other non-dairy products to serve health-conscious customers.
Demographics matter, as they inform a business about its potential customer base. For, example, in the US, there are more people over the age of 30 years than under it and the birth rates are below replacement rates (the difference between birth and death). What population growth the US is getting is from immigration (legal and illegal). Since US business accounts for 70% of SBUX revenues, this is a key data point and raises the question of how to best appeal to an ever-changing US consumer base.
As it relates to company growth on the international stage, clearly China is a big part of the prospective growth. Yet, China’s population is aging faster than almost all other countries. By 2050, the percentage of the Chinese population over retirement age will be 39% of the total population. Moreover, China is rapidly aging at an earlier stage of its economic development than other countries.
The United Nations projects that China’s total population will shrink roughly 40% by the end of the century, from 1.4 billion to a mere 800 million or so. Some demographers say the decline will be steeper; either way, India will soon take over as No. 1.
China’s economic growth once appeared to be bound for global domination, but it has slowed down. The Chinese economy’s projected growth this year has slowed to about 3%, missing the government’s target of 5.5% by a wide margin. After decades of extensive expansion, they are on track to have the second-worst performance in more than 40 years. Only 2020, with its COVID-induced recession, was worse. Unemployment among young workers has ballooned to 20%. Fuel prices are rising thanks to Russia’s war in Ukraine (though it appears the US has tapped the “Strategic Oil Reserve” and sold China some oil). China’s overbuilt housing industry is teetering and President Xi’s “COVID Zero” lockdowns have wreaked havoc.
Some of those problems may be short term, driven by a slowing global economy and Xi’s refusal to import foreign COVID vaccines, despite the inferior Chinese Covid vaccines. Nonetheless, this is the environment into which Starbucks said it was going to increase the number of cafes in the country by 50%.
Technological
Tech factors include the pace of change and developments that have a far-reaching effect on society and business, including genetic engineering, nanotechnology, and renewable energy technology, all of which can be disruptive to industries and consumer purchases. These factors include institutions involved in creating new knowledge and controlling the use of technology.
In 1899, the commissioner of the US Patent Office said that everything that can be invented has been invented.
Not hardly! Technological changes over the past 20 years have had significant impacts on the way companies do business. These impacts are most obvious for technologies built on digital information (e.g., computers, the internet, cell phone). The implementation of advance technology is one of the most important factors in the coffee industry because it relates to customer interaction with the business, new product development, quality control, as well as marketing and advertisement processes.
Starbucks has effectively integrated a CRM (Customer Relationship Management) system to develop an effective communication system, as both consumers and employees are the significant concern for the future. A CRM gathers customer interactions across all channels in one place, managing centralized data and helps businesses improve customer experience, satisfaction, retention and service.
Technology also plays a vital role to compete with rivals, such as integration of information technology and new equipment like coffee-bean roasters and brewing machines, and the use of Wi-Fi internet capability services. (This is where Kevin Johnson left a positive imprint.)
Technology has had a significant impact on Starbucks ability to serve food. Most breakfast sandwiches have taken approximately 65 to 85 seconds to individually warm in the ovens. However, due to tech improvements, Starbucks can now batch cook them and place them in a heated rack, or warming wall, next to the drive-thru window; which is consistent with their goal to meaningfully reduce drive-thru and customer wait times.
In addition, a new proprietary “Siren System” features a custom ice dispenser, milk-dispensing system and new, faster blenders, all located within reach of a barista, thereby reducing bending and heavy lifting. It also eliminates the need to move back and forth behind the service bar and eases congestion in a crowded, busy space. Typically, it takes a barista about 87 seconds and 16 steps to make the blended beverage. But this new system will take only 36 seconds and 13 steps, meaning the same quality beverage can be delivered faster to a customer, while also providing a simpler work demand for the barista.
Over the past few years, Starbucks has seen the number of cold beverages ordered have surpassed the number of hot drinks on a year-round basis. Also, two in three drinks ordered requested customizations, an added complexity. In response, Starbucks is working to create a store layout that is both less stressful for employees and more effortless and digitally connected for customers.
Currently, every 30 minutes, Starbucks store partners have to grind coffee beans, batch it in paper filters and brew. They throw away anything that’s unsold each half hour to meet quality and freshness standards. Starbucks serves more than 15 million brewed cups of coffee every month in the United States. However, the new “Clover Vertica”, engineered for speed, will serve a freshly ground and brewed cup of coffee on demand in under 30 seconds. Each “Clover Vertica” machine is topped by six hoppers (bean holders), which offer a variety of coffees all day, including decaf. And the brewers don’t require paper filters. Technology translates into faster customer service, with happier customers more likely to have return purchases; all of which enables greater profit potential for Starbucks.
Finally, Starbucks advancements will include dedicated mobile order-only pickup lanes; a more personalized drive-thru experience, with some stores having double drive-thrus (a nod to the efficacy of Chick-fil-A) that recognizes Starbucks Rewards customers and offers recommendations based on order histories; improved timing algorithms to create more accurate wait times on mobile orders; and effortless payment options where customers do not have to pull out their credit card or even use the Starbucks app.
Environmental
This segment includes ecological and environmental forces such as weather, climate, and natural disasters (e.g., Hurricane Ian) that directly affect industries like insurance, farming, energy production, tourism, as well as a peripheral impact on industries like transportation and restaurants. Growing concerns about the environment are affecting many business investments, in an effort by businesses to be better stewards of the environment and more ecologically responsible.
In keeping with its environmental stewardship, by 2025 Starbucks will donate 100 million disease-resistant coffee trees to help farmers and their communities improve efficiency. They are also committed to help reduce US landfill waste 50% by 2030.
Starbucks is particularly committed to eco-friendly production processes by focusing on sustainable solutions including: recycling, reusing cups, composting of coffee-grounds, buying renewable-energy, generating a retail design and store archetypes to lessen power utilization by 25%, and concentrating on energy conservation. They have long been tied into environmentally friendly coffee growing cooperatives that the company claims pay growers a premium for delivering a high-quality coffee product (Arabica beans).
The company’s goal is to become resource-positive, storing more carbon than they emit, replenishing more freshwater than they use, and eliminating waste. They set targets to cut their carbon, water, and waste footprints in half by 2030.
As part of its water conservation strategy, Starbucks is investing in ecological wet mills that can save up to 80% of water used in coffee processing. To date, Starbucks has helped install 12,000 such new mills around the world.
Legal
This area includes the regulations and laws with which companies must comply. They can include country or geography specific consumer laws, labor laws, antitrust laws, as well as occupational safety and health regulations. For example, minimum wage legislation largely impacts low-wage industries that employ substantial numbers of low-skilled workers, like fast food restaurants and, despite how it thinks of itself, Starbucks sits squarely in the fast food/quick service restaurant category.
The coffee industry is subjected to numerous laws and regulations. As a major player in the industry, operating in 61 countries across the world, Starbucks has legal challenges. In no small part, its most significant legal challenges may well exist within the US because of its large number of cafes.
As I discussed here, there had been inconsistent unionization efforts at Starbucks beginning in the 1980s. Many of those unions folded, in part due to the company’s long history of opposing unionization efforts. However, the current push for employees to unionize in Starbucks results from factors related to the pandemic and the company’s lack of responsiveness to employee concerns.
The Starbucks union campaign, which began in Buffalo, has spread to cafes across the country and is led by many younger workers (in their early 20s). Although the total number of stores that have unionized are relatively small (~260 v. 9,000 total US stores), without protracting this discussion, upon returning as CEO, Howard Schultz has been ramping up the company’s campaign against the unionization push in Starbucks US stores, with a pledge to increase wages and benefits for non-union stores.
Whichever side of the issue one is on, it remains that Schultz has been unable to quell the unionization and, one may discern from the discussion, that his truculence is a main reason unionization has pushed forward.
Still, unionization is not the least of the legal issues. Starbucks has announced the closing of more than 29 stores due to crime and violence in and around the stores. Although Starbucks has long maintained corporate social responsibility that has been integrated into all its management systems, processes, policies, and procedures, the fact is that even for the most vigilant corporate management there are breakdowns and, ultimately, failures. Unfortunately, failures create legal liability that is inherently costly, both economically and reputationally.
As with many quick food service businesses, Starbucks has long had to deal with crimes of violence. The reality is that the history of its restaurants is rife with stories that defy the imagination and include: used drug needles left behind in a store that a child picked up, stabbed himself and becomes infected with hepatitis; a drug-addled individual leaves a handgun in the restroom and a customer finds it and foolishly pulls the trigger, wounding himself; a vagrant sexually assaults a woman in the restroom; a would-be robber donning a mask in the restroom fails to lock the door, is discovered by a customer, whom he shoots and wounds and in fleeing, shoots and wounds two others, one of whom dies; a homeless person sleeping at a table fails to leave when asked and is stabbed by a paying customer who wanted the table.
With multiple deaths on their premises in recent years, experience suggests Starbucks locations that suffer a crime of violence will have a corresponding reduction in revenues, as customers will steer clear of those locations for some period of time and the revenue impact can even be seen in stores within the vicinity, as a crime of violence leaves a stigma for some time. Moreover when there are acts of violence, employees quit and it is hard to hire replacements because of the fear that lingers.
Summation
Having money and ideas are great, but those are tied to internal capabilities. To generate growth and prove profitable, internal capabilities must be aligned with the opportunities presented by the macroenvironment. Any analysis, by any company, that would be the basis for growth strategies, must be grounded in the business realities presented in the external environment. In the past, Starbucks has taken advantage of opportunities. But the past is not prologue. Going forward management must recognize that the complexities in the macroenvironment are ever-changing and present differently. To have future business success, Starbucks must ensure it is not stuck in the past, but responsive to the ever-changing macroenvironment.
To paraphrase the great Prussian military strategist Carl von Clausewitz – No business strategy survives first contact with the macroenvironment.
Be the first to comment