Introduction
Starbucks Corporation is the largest coffeehouse company in the world, with over 24,000 stores in 70 countries and territories. Though it is most famous for its coffee and espresso drinks, Starbucks also sells other beverage and food items such as tea, smoothies, juices, pastries, snacks and sandwiches. This coffee giant also offers fresh-brewed coffee, hot and iced espresso beverages as well as a variety of merchandise.
Since its founding in 1971 by three college students in Seattle’s Pike Place Market, Starbucks has grown its brand both through organic growth and strategic acquisitions. Here we’ll take a look at how Starbucks’ business model works to explain how the company generates so much success year after year.
Overview of Starbucks
Starbucks has become one of the most successful businesses in the world. The company has grown exponentially over the years, due largely to its unique business model. In this article we will take a closer look at what the Starbucks business model is and how it works.
We will look at the various elements such as the store layout, product offerings and pricing structure that have allowed Starbucks to become so successful.
History
Starbucks Corporation, founded in 1971, is a leading global roaster and retailer of specialty coffees, with headquarters in Seattle, Washington. The company operates more than 24,777 stores around the world through its businesses segments: Americas; China/Asia Pacific; Europe Middle East and Africa (EMEA); Channel Development (CD); and Global Coffee & Tea.
In the mid-1990s, Starbucks began expanding beyond its coffeehouse roots to include food items such as pastries and sandwiches. The company also began selling products such as whole beans and ground coffee, teas, single serve capsules. As of December 31st 2019, it operated 32 stores in different locations there are 884 licensed stores nationwide that do not operate directly under the Starbucks Brand but use their product for sale.
Today, Starbucks remains one of the most recognizable brand names worldwide with customers ranging from millennials to seniors who love their branded coffee mugs and tumblers along with the convenience of ordering through their mobile app or getting delivery from third party services like Doordash or Postmates. As an industry leader among specialty coffee companies globally that strives for sustainability in all operations it undertakes- from sourcing practices to ethical business partnerships to green buildings initiatives – Starbucks is committed to adapting with the times while staying true to its core values of providing high quality beverages in a socially responsible manner.
Products and Services
Starbucks Corporation is a global coffeehouse chain and coffee company based in Seattle, Washington. It is the largest coffeehouse company in the world with over 30,000 stores around the world. Starbucks operates in many locations including retail, grocery, and convenience stores.
Its products range from classic beverages such as espresso drinks, lattes and cappuccinos to seasonal offerings like pumpkin spice latte or hot chocolate to single-serving items such as its signature Frappuccinos or bottled teas. In addition to products available in stores, Starbucks also sells merchandise and other services such as its Mobile Rewards Program that allow members to receive discounts on purchases.
Locations
Starbucks operates in 79 countries with over 30,000 locations. This includes company-operated stores, licensed stores and foodservice accounts. The majority of its locations (over 23,000) are found in the United States. Globally, Starbucks has grown from one store in Seattle to more than 30,000 locations around the world. This growth has been achieved through a combination of robust store openings and acquisitions such as Teavana and La Boulange Café & Bakery brands.
Starbucks also has an extensive presence in Latin America (over 1,400 stores), Asia Pacific (nearly 1,300 stores) and Europe Middle East & Africa (EMEA) (over 900 stores). As recently announced at the company’s 2017 Investor Day presentation, Starbucks plans to open 2,300 net new locations worldwide – primarily in China – during its next fiscal year, bringing its total store count to nearly 37K globally by 2021.
Business Model
Starbucks’ business model is based on a vertically integrated supply chain, which means that the company controls every aspect of product production and distribution from beginning to end. This model is designed to ensure that Starbucks product is of the highest quality and that the company is able to maximize profits at every step.
Starbucks’ business model also includes their focus on creating a highly engaged customer base, which helps to promote brand loyalty. Let’s examine these aspects of Starbucks’ business model in more detail:
Franchising
In addition to its owned-and-operated retail stores, Starbucks also uses franchising to expand its footprints. Franchises at duty-free locations and even branded kiosks within stores represent a tiny portion of operating income but provide important avenues for expansion.
A franchise agreement is an agreement between the parent company and an independent business owner that allows the franchisee to operate a business using the parent company’s name, product, trademarks and other intellectual property. Starbucks does not own or operate any of these franchises, but works with third parties to ensure quality control through licensee standards and contract guidelines.
Franchised locations are often located in smaller towns or at airports where the demand may be lower than in larger cities – making it difficult for a company like Starbucks to continually generate profitable returns while assuming all of the risks associated with holding large stocks of inventory and renting costly real estate. Allowing franchisees to enter into these markets enables Starbucks to establish a presence without taking on high levels of risk. It can also create brand awareness in markets that had previous low levels of exposure, thus increasing overall sales and creating more opportunities for further expansion.
Licensing
Licensing is another important part of Starbucks’ business model, and the company makes use of this strategy to expand into new markets. Through licensing agreements, Starbucks allows other companies and individuals to operate its stores or manufacture its packaged coffees. Licensing agreements require the licensee to spend time and resources learning Starbucks’ standards and procedures, helping ensure that each store location meets customer satisfaction expectations.
Starbucks also produces many items that are sold through authorized retailers. This includes ground coffee available for sale in grocery stores, as well as pre-packaged frappuccinos and a few of the other specialty drinks available in convenience stores such as 7- Eleven. For these arrangements, customers still obtain the same quality product with a familiar retail experience without having to go into one of the company’s physical locations. The licensee earns money while helping advertise and provide access to products in markets where Starbucks has yet to establish its brand presence.
Distribution
Distribution is a core part of Starbucks’ business model. The company distributes its products through three channels of distribution: direct-to-consumer channels, retail stores, and licensed partnerships.
The direct-to-consumer channels include the Starbucks website and mobile applications, where customers can purchase coffee beans, cups, mugs and other merchandise from the comfort of their own homes. Through its retail stores, such as in shopping malls or grocery stores, Starbucks sells brewed coffee beverages as well as food and other merchandise.
Licensed partnerships involve Starbucks licensing its name to partners who use it to sell brewed coffee products in various formats. For example, some supermarkets now carry packaged Starbuck’s coffee that is produced by a section of their store rather than by the actual Starbucks corporation. This allows the corporation to expand its reach while still allowing local businesses to benefit from being associated with the popular brand name.
Revenue Streams
Starbucks has a diversified business model with many revenue streams that contribute to the company’s overall profitability. This includes sales from its retail stores, food and beverage items, and merchandise. Starbucks also generates revenue from its licensing and franchising model and its loyalty program.
Let’s discuss each of these revenue streams in more detail:
Store sales
Store sales are the main component of Starbucks’ revenue streams and make up roughly two-thirds of their total global income. It is generated through the sale of premium beverages, hand crafted coffee, merchandise, food and other items to customers at Starbucks retail stores. Sales from Starbucks stores can also include loyalty rewards redemption or “pay with points” purchases charged directly to customers via their digital accounts as well as delivery orders made on partner platforms such as UberEats.
Additionally, store sales also include ready-to-drink products like bottled drinks that are sold in non-Starbucks locations, including grocery stores and convenience stores. These revenue streams involve direct partnerships between Starbucks and other companies, who package and distribute the RTD products themselves while sharing revenue with Starbuck in return.
Merchandise sales
Merchandise sales represent a growing source of revenue for Starbucks. Merchandise sales include products such as ground and whole bean coffees, tumblers, mugs, gifts cards, select apparel and beverage aides like cocoa, tea and coffee syrups. These items are available both in store and online.
In addition to Starbucks branded merchandise available from the company’s own stores and website, merchandise is also sold in outside retailers such as food stores, department stores and other non-Starbucks outlets throughout the world. This helps to expand their reach beyond the thousands of stores that they currently operate.
Merchandise items account for a small percentage of annual revenue but can help to boost overall profits due to higher profit margins associated with these items when compared to their core product offerings of ready-to-drink beverages.
Licensing fees
Licensing fees is one of the main revenue streams of Starbucks’ business model. Coffeehouses, home and office retail, supermarkets and convenience stores, Barnes & Noble cafes, and airline board contract services all contribute to Starbucks’ sales under licensing agreements.
Coffeehouses are the main market for Starbucks-produced coffee and other beverage products – these locations accounted for more than 71 percent of total revenue in 2016. Through licensing agreements with its partners, Starbucks supplies coffee beans, beverage products, cups branded equipment like machines or espresso makers to the partners with a royalty fee on their product sales generated from those locations.
At home and office retail outlets such as supermarkets or convenience stores sales are based on franchising agreements between Starbucks and its wholesale partners such as Kraft Foods Inc., Supervalu Inc., Wal-Mart Canada Corporation, etc., accruing royalty fees at the point of sale while the partner companies handle coffee production.
Through its agreement with Barnes & Noble Inc., markets its coffee beverages in Barnes & Noble cafes located inside several bookstores throughout the United States including Guam, Canada cV Puerto Rico. These cafes account for about 3 percent of total revenues for 2017 year-to date period. Alongside beverages offered at all general stores in airplanes served by Alaskan Airlines Inc. cater to customers on board (depending on aircraft type) result in additional licensing fees from that segment alone to Starbucks’ growing revenues from over 33 countries served across Americas Pacific Region (APR) globally; 95% outside US only.
Royalty fees
Royalty fees, also known as franchise fees, are income received by a franchisor when a franchisee opens a business that they own and operate under the general brand name of the franchisor. Starbucks licenses its trademarks, trade names, operating processes, system standards and business methods to licensees worldwide. Royalty payments are collected through both franchising and licensing agreements with third-party operators where Starbucks may provide ongoing consulting services or leverage their existing infrastructure to facilitate licensed store operations. Starbucks receives royalties based upon either a tiered flat-fee structure or fixed percentage of net sales model.
As the average royalty rate per store is projected to increase substantially from 2019 onward due to other revenue streams such as digital sales, there is potential for increased royalty fee income for Starbucks in the long run. Newer technologies like mobile apps have already enabled customers and tap into data analytics for targeted marketing strategies which diversify and expand existing revenue streams like royalty fees as well. Moreover, new digital initiatives such as delivery services can help increase frequency of customers visiting Starbucks locations leading to continuously increasing total revenue from royalties over time.
Advertising and promotional fees
Advertising and promotional fees are an important part of Starbucks’ revenue stream. This includes both traditional advertising, such as television, radio, print and digital campaigns as well as product placement and sponsorships. The company also provides promotional materials, such as t-shirts, travel mugs and gift cards to customers who purchase their drinks or products. Additionally, the company has a variety of partnerships with other businesses that increase their reach and helps them to promote their brand.
In addition to advertising and promotional programs, Starbucks leverages the power of word-of-mouth marketing by offering rewards programs for its customers which encourage them to share the brand’s message with their friends via social media sites like Twitter and Facebook. Finally, they offer incentives such as discounts on promotions in order to entice more people to visit their stores repeatedly.
Conclusion
Ultimately, Starbucks’ business model is dependent upon a sophisticated approach to providing a unique coffee experience and delivering high quality products. Starbucks is able to do this by taking advantage of a vast network of supply chain relationships, by leveraging its strong brand recognition to market its products and services, and by focusing on customer loyalty programs.
This strategy has enabled the company to become an industry leader, able to respond swiftly to changes in consumer preference or industry trends. Starbucks continues to look for new opportunities and markets while focusing on both innovation and efficiency when creating new products or expanding its product range. By continuing this successful business model, Starbucks can remain at the forefront of the global coffee market.