Starbucks Porter's Five Forces

by the-motley-fool





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Taking a look at Starbucks through the lens of Porter's Five Forces.
Download Starbucks Porter's Five Forces


  • Starbucks NASDAQ: SBUX Porter’s Five Forces 1
  •  Porter’s Five Forces is a model named after Michael E. Porter that takes into consideration five market forces that play out on any given company or industry. The five forces are: power of buyers; power of suppliers; threat of substitutes; threat of new entrants; and industry jockeying.  This model examines these forces thereby helping to determine a given company’s strengths and weaknesses.  Porter’s Five Forces is also a way to view the potential risks to which any given company may be exposed.  Porter’s is a valuable yet somewhat subjective tool. It is a starting point meant to encourage further discussion. 2 What is Porter’s Five Forces?
  •  Please note there is no official method to score the model. This method is simply a way to further categorize companies.  Each market force is scored on a scale of 1 – 5 with 1 representing the lowest threat and 5 representing the highest threat.  All five forces are totaled for a final score. The lowest possible score is 5 and the highest possible score is 25. implies a lower threat rating. implies a medium threat rating. implies a higher threat rating. 3 Scoring
  • Power of Buyers  The buyers are consumers like you and me.  There are zero switching costs when it comes to SBUX and restaurants in general.  SBUX does have a modicum of pricing power; they’ve demonstrated this many times.  SBUX’s specialty is on the beverage side, this is where consumers are more likely to remain loyal. Food not so much.  Throughput and the in-store experience are crucial. More drive-thrus are a good example.  Coffee’s addictive nature can at times result in “less than rational” consumer decisions.  Score – 4 4
  • Power of Suppliers  Suppliers provide the commodities and materials for what SBUX sells.  Coffee is the primary input cost, “high altitude arabica” runs at a premium.  Fixed-price and price-to-be-fixed contracts; SBUX operates farmer support centers in 6 countries to aid best practices, etc.  Dairy, paper, plastic are major inputs; relationships with providers are strong, diverse. From the 10-K: “the risk of non- delivery of these items is remote.”  Given SBUX’s scale and status diversity with suppliers is strong; suppliers benefit from the relationship too.  Score – 2 5
  • Threat of Substitutes  There are substitutes for all of these. Let’s break down this threat into three main categories: coffee; tea; and food.  Tea: Tazo and Teavana are powerful indeed, but there are plenty of substitutes. – 5  Food (including juice): Think about how far Starbucks has made it without ever really nailing the food part. I’m skeptical it will ever be truly known for its food. – 5  Coffee: This is its bread and butter. As a coffee-lover & SBUX loyalist. I don’t think the threat here is as great, but it certainly still exists. Particularly in channel dev. – 3  Score – 4 6
  • Threat of New Entrants  Does this industry offer up attractive market dynamics?  Restaurant concepts come and go and there is always someone claiming to do it better.  Would the company fare as well without Schultz and Alstead at the helm?  There are tremendous economic barriers to reach the scale SBUX has reached.  Today I would also argue the tech barrier exists given the success of SBUX’s mobile presence.  How does a competitor come in today and unseat SBUX?  Score – 2 7
  • Industry Jockeying  Market leading position for SBUX a huge advantage at this stage.  SBUX’s focus on coffee a plus, however still opportunities in food and tea.  Café cultures, single serve market are examples of opportunities in the market.  Starbucks has led the way in ecommerce, mobile and social media presence.  Sales growing faster than SG&A; SG&A as a % of sales down 440 bps since 2009.  SBUX must continue to innovate, try new things. LA store offering burgers is an example.  Score – 3 8
  •  Power of Buyers – 4  Power of Suppliers – 2  Threat of Substitutes – 4  Threat of New Entrants – 2  Industry Jockeying – 3 9 Score
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