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