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Starbucks is experienced sudden decline in its sales, profitability and earnings after twenty years of phenomenal growth. At the moment the management is pondering whether the cause of the decline is caused by internal factors or external factors and what the best way to respond to these challenges is.
Growth has been slowing as indicated by the following.
- In the past profits had increased rapidly between 1996 and 2000 for instance profits had increased by between 30-50% (Herriman, Wanikawa, Ichinose, Darak and Chaivan, 2008).
- In 2001 profits grew by 20%, in 2006 it grew by 11.5% and grew by 11.3% in 2007; profits for the first quarter of 2007 rose only by 2% (Herriman et al, 2008).
- Total assets grew steadily as a result of physical expansion but the company faced working capital flow difficulties that led it to borrow. As a result short term credit had increased from$277m in 2006 to $700m (Herriman et al, 2008). This negatively affected the Company’s share price and the company’s stock decreased from $20 to $18.
- The company has 15700 outlets in 37 countries and planned to have 40000 in the future. The target of stores to open in 2007 was 2400 out of which the company managed only 1342; in January 2007 it closed 100 outlets and later in July closed 600 more.
- The target for new stores opened in 2008 had been reduced by 500.
- The company was operating in almost all major countries in the world but it had heaviest presence in North America; overall it had 4588 outlets overseas.
- There has been change of leadership where the founder and former CEO decided to come back to manage the organization and the board has been reconstituted and new managers hired which could have negatively affected the Company.
- The company had recently increased the price of its coffee by $ 0.09 and a recent product survey indicated that customers felt that McDonalds, a competitor offered better coffee than Starbucks. Meanwhile, market capitalization has decreased from $25B to $13.6B (Herriman et al, 2008).
The following are possible actions that could be done to improve the current challenges being faced by Starback.
- Refocusing on the Customer again.
- Better Management of the Organization; the company needs to institute better methods of control, guidance, and operations to ensure efficient use of resources and to control costs which were rapidly increasing and thereby reducing profits despite physical growth.
- Focus on new markets and products; there is need to develop new products that match the needs of these new markets as opposed to offering the standard American menu.
Starbuck should refocus on their customers again; It seems that the top management had focused in the expansionist strategy more than the core needs of providing quality service to their customer. This possibly led to the loss of connection with their customers resulting in reduced sales and consequently profits.
This would be achieved through training of partners in the organization to continue upholding high quality of service as well as identifying and instituting new ways to enhance the “Starbuck’s experience” (Herriman et al, 2008).
The company needs to improve on its product quality, especially its coffee and offer more food variety to its customers. There is also need for continued innovation, design and redesigning of Starbucks shops. Finally the company needs to continue strengthening its brand image in order to maintain the sense of exclusivity associated with affluent high end of the market that will keep attracting more customers.
Herriman, M. Wanikawa, M. Ichinose, R. Darak, S. & Chaivan, Y. (2008). A Crack in the Mug: Can Starbucks Mend it? Richard Ivey School of Business