Understanding the value chain of Starbucks is important as it will aid us in discovering how the company creates value through its business operation. Starbucks is one of the companies with vertical integration, which has aided it in creating a valuable supply chain. This company which began in 1971 as a coffee bean retailer has established itself as a global coffeehouse that offers a rich variety of coffee and other beverages.
As of 2022, Starbucks was the largest coffee company in the world with a gross annual revenue of $32.25 billion and a U.S. market share of 37%. In this article, we shall analyze and see some examples of the value chain of Starbucks.
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What is a value chain?
The value chain is a business management concept that was first described in 1985 by Michael Porter in his best-selling book, Competitive Advantage: Creating and Sustaining Superior Performance. The value chain refers to the progression of activities undertaken by a company in order to deliver a valuable good or service to its customers. It encompasses the sourcing of raw materials or the creation of a service to processing, manufacturing, and all other steps leading to the purchase of the product or service by a customer.
The value chain of any business corporation such as Starbucks is divided into two:
- The primary activities comprise inbound operations, operations, outbound logistics, marketing and sales, and service.
- The secondary or supporting activities comprise procurement and purchasing, human resource management, technological development, and company infrastructure.
The value chain aids companies to identify and classify their business operations into primary and secondary activities. When companies identify and classify their business operations using the value chain concept, it is known as a value chain analysis. This analysis aids companies to better understand the interrelatedness of each activity to another. It also helps in identifying aspects of the value chain that need to be improved to obtain optimal output.
To aid us analyze the value chain of Starbucks, we shall break down the company’s business processes based on its primary and secondary activities. This will help us know how each step in Starbucks’ value chain contributes to its overall success and top position in the coffee industry.
Value Chain of Starbucks: Examples of Primary Activities
The primary activities of the value chain directly contribute to the physical creation of a product or service. They also contribute to its sale, maintenance, and support. These activities have been listed above and we shall discuss them based on the value chain of Starbucks.
The inbound operation of Starbucks is centered around the company’s handling and management of the resources coming into the company from outside sources such as suppliers. These outside resources are commonly referred to as inputs and usually include raw materials and other equipment used by the company. Apart from coffee beans, other inputs that Starbucks purchases include coffee machines, napkins, and non-dairy milk.
Aside from brokering several partnership deals with coffee growers, Starbucks vertically integrated by growing some of its coffee beans. Through these partnerships, the company aggregates some of the best coffee bean varieties from Asia, Latin America, and Africa. This is because the different coffee growing practices, soil types, and other geographical conditions give a distinct flavor to the coffee beans sourced from these different continents. The company’s involvement in growing coffee beans is an added advantage in its value chain as it affords Starbucks the opportunity to experiment on and develop other possible coffee variants.
Unlike other coffee houses that may outsource the procurement of their coffee beans to third-party procurement companies, Starbucks procure their coffee beans either directly from the farmers or through reliable coffee bean suppliers. This ensures that the company can source the best quality coffee beans for its final products.
One way Starbucks improves its inbound logistics value chain is by providing farmer support centers to farming communities that grow coffee. These centers are equipped with sustainability experts and agronomists who tend to farmer concerns and also educate them on best practices in coffee production that can improve its quality and yield.
Another way the value chain of Starbucks gets impacted is through the refinement and storage of coffee beans. Starbucks implements a proprietary roasting technique that increases the shelf life of coffee beans. The roasting is usually carried out in any of the company’s regional roasting plants and distribution centers which include:
- Augusta Roasting Plant – Augusta, Georgia
- The Carson Valley Roasting Plant and Distribution Centre – Carson Valley, Nevada
- Kent Flexible Roasting Plant – Kent, Washington.
- Sandy Run Roasting Plant – Gaston, South Carolina.
- York Roasting Plant and Distribution Center – York, Pennsylvania.
After roasting, the coffee beans are packaged and transported to Starbucks’ central distribution centers. The central distribution centers further send the coffee beans to the company’s stores scattered around the globe.
See also: McDonald’s Competitive Advantage
The operations stage entails managing the various activities carried out by Starbucks to transform the raw coffee beans (inputs) into roasted coffee beans, ground coffee, VIA ready brew, coffee capsules, and other products of the company (outputs). The outputs are usually sold for a higher price than the cost of both the inputs and the production process; thus it creates value by bringing profit to the company.
As of this year, 2023, Starbucks operates over 35,711 stores scattered around the globe in 84 countries; the United States and China account for 61% of these stores. The stores are classified into two:
- Starbucks stores that are directly operated by the company comprise the more significant percentage of Starbucks stores (51%). These stores generated $26.57 billion out of the $32.2 billion revenue the company made in 2022. These stores are also referred to as direct, owned, or company-operated stores.
- Licensed stores are not directly operated by Starbucks but the company receives a margin on supplies and branded products sold to the licensed store operator. They also receive a royalty on retail sales. The licensed stores comprise 49% of the total number of stores and generated $3.65 billion in 2022
The value chain of Starbucks in this operations aspect rests on the strategic positioning of both company-operated and licensed stores in high-visibility and high-traffic locations. This strategic positioning aids in increased patronage from individuals who frequent the route where the stores are located.
Starbucks additionally adds value by having some of its stores located in varied settings to cater to different kinds of customers. This includes having stores in University campuses, suburban and downtown retail centers, off-highway locations, office buildings, and rural locations. The variety of locations further adds value by giving customers the chance to enjoy the company’s products irrespective of where they are located.
Furthermore, the store spaces generally have sitting tables where customers can enjoy some alone time or share the time out with their family, friends, or colleagues. The provision of free WIFI in most of Starbucks’ stores is an additional value enjoyed by customers who patronize the brand by visiting its stores.
The outbound logistics of Starbucks comprise all the processes that culminate in the delivery of outputs to customers. This includes the storage, collection, and distribution of the company’s products from the end of its production line to the end users (customers). The majority of Starbucks’ products are sold to customers from its direct stores and licensed stores.
However, with the advancements occasioned by the digital revolution, the company also utilizes online sales channels to sell some of its products including packaged coffee, tea, drinkware, and drink-related equipment. Additionally, a very limited range of the company’s products such as its sachet 3-in-1 coffee can be purchased from some of the leading supermarket chains including WalMart, Sainsbury’s, and Tesco.
Starbucks also partners with Nestle for the distribution of some of its finished goods. The distribution is done through the Global Coffee Alliance. Additionally, Starbucks customers in the United States and the United Kingdom can opt for home delivery of the company’s products through Deliveroo, Just Eat, and Uber Eats.
Apart from this distribution of Starbucks products by Nestle and the sale of some of its products by certain supermarkets, the value chain of Starbucks in outbound logistics rests with the company. The company’s handling of the roasting of coffee beans, having an extensive distribution channel, and the sale of its finished products through directly owned and licensed stores, is an additional source of value to the company. This is because the absence of intermediaries such as resellers or wholesalers aids in keeping the margin that otherwise would have gone to wholesalers and resellers to the company. Hence, overseeing its outbound logistics adds value to Starbucks.
The Marketing and Sales aspect of Starbucks’ Value Chain
This aspect of the value chain of Starbucks involves employing marketing strategies, advertising, and brand-building efforts which are geared towards increasing the company’s visibility, increasing consumer confidence, and ultimately increasing the sale of its products. The marketing is targeted at communicating why people should patronize the brand. It also includes market research, sales training, and sales promotions.
Traditionally, Starbucks was not into aggressive marketing. It depended on its high level of customer service and product quality. This resulted in a robust and cost-effective form of marketing which was word-of-mouth from satisfied customers. However, Starbucks’ marketing budget has been steadily increasing in recent years with the company spending $305.1 million in the 2021 fiscal year and a whopping $416.7 million on advertising in the fiscal year 2022.
The advertising expenses are invested in varied product marketing efforts including print and media advertising, public relations, sales promotions, events, and experiences. The company’s adoption of other means of marketing asides from its initial word-of-mouth strategy is due to the competition from other coffee chains. Starbucks has also employed digital marketing using its social media pages to advertise the different product offerings of the company. It also uses digital channels to inform its customers of the establishment of new stores, partnerships, product launches, and other consumer-related events.
Starbucks has further successfully implemented mobile orders and payment for its products. Recently, the company shifted its focus from short-term consumer relations to building long-term and more personal relationships with customers. If implemented well, this could further establish Starbucks as not only the world’s leading coffeehouse but a customer-centric business. This has the potential of building customer loyalty in the long run and affording the brand a lot of comparative advantages.
The Service aspect of Starbucks’ Value Chain
The service aspect of the value chain of Starbucks comprises majorly of customer service aimed at reinforcing a long-term relationship with their customers. The company is constantly analyzing customer expectations to give them the best experience and keep the brand growing. Hence, services are an integral part of the value chain of Starbucks.
Part of the outstanding value of Starbucks at this stage is the genial and polite manner of its baristas. Most of the company’s baristas make it part of their job to recognize regular customers by name; they may even go further by occasionally offering these regulars a free coffee. This extra-mile attitude of Starbucks baristas adds positively to the customers’ perception of the brand and its products. It in turn translates to customer satisfaction and increased patronage. Also, most Starbucks stores offer free WIFI to their customers.
Furthermore, despite the increasing need for speed in the provision of customer services and the intensely hectic nature of lifestyle, service at Starbucks is never rushed. The company spends a lot of time measuring, analyzing, and improving how well they match their customers’ speed expectations while delivering a custom beverage in a matter of minutes.
Value Chain of Starbucks: Examples of Supporting Activities
- Procurement and purchasing
- Human resource management
- Technology development
- Company Infrastructure
Procurement and purchasing
The procurement and purchasing aspect of the value chain of any company involves finding new external vendors, maintaining existing vendor relationships, negotiating prices, and other activities related to bringing in the necessary materials and resources used to build a product or service. Looking at the value chain of Starbucks, the procurement and purchasing consist of purchasing goods and services for the company. It also involves managing the company’s relationships and contracts, including purchase agreements, contracts, and service agreements.
Starbucks aims to offer its customers the highest quality products that are ethically purchased and responsibly produced. Thus, the company’s agents travel to different countries where they purchase various inputs for the company. This direct involvement aids Starbucks in maintaining a high level of quality standards and control. Additionally, it aids the business in sourcing inputs at an affordable rate thereby providing better profit for the company and increased value for its customers.
Human resource management
This part of Starbucks’ value chain comprises the hiring and training of employees. It also comprises building and maintaining the company culture in an environment that fosters a good working relationship between the brand and its employees. The company refers to its employees as partners and states on its website that:
“We are committed to making our partners proud and investing in their health, well-being, and success and to creating a culture of belonging where everyone is welcome.“https://www.starbucks.com/about-us/
It is, therefore, no surprise that Starbucks has secured several awards in this aspect including 2022 Aon China Best ESG Employer, Comparably Best Company (2022), and Best Places to Work in Seattle (2022). The company has also been on various Forbes lists such as Canada’s Best Employers For Diversity (2023), Best Employers for Diversity (2023), America’s Best Large Employers (2023), and Canada’s Best Employers (2023).
Additionally, Starbucks’ value chain is obvious in its several training programs conducted for its partners to familiarize them with the brand’s core tenets, keep them motivated and promote their efficiency. One such training is Starbucks’ Barista Basics Training program; the program is designed to equip new baristas with the skills and knowledge they need to deliver excellent customer experience.
This supporting activity is part of the value chain of Starbucks. It involves research and development of new products, IT management, and cybersecurity. It also includes building and maintaining how the company uses technology. Starbucks has kept up with the ongoing technological advancements in the food and beverage industry where it operates.
Starbucks is well-known for its use of technology for taking orders, queries, and suggestions. It also makes use of big data, machine learning, Artificial intelligence, and cloud computing to develop new products and services for the company and deliver premium customer experience. The company also utilizes technology across different functions including store design, supply chain, production, and customer experience.
Starbucks uses the best technology and techniques available to make the process of selecting coffee beans and brewing drinks in different locations. This is done to ensure that there is consistency in the quality and taste of the coffee and other beverages produced by Starbucks. Besides these, the company’s provision of free WI-FI in most of its stores aids customers, especially remote workers to work from the brand’s coffee shops. Starbucks customers can order coffee through the Starbucks phone app which is available through Apple’s iBeacon System
Furthermore, Starbucks also has a unique rewards program that lets consumers place their orders from its connected stores via numerous food delivery apps. The company launched mystarbucksidea.force.com in 2008. This is a platform where customers can ask questions, give suggestions, openly express opinions, and share personal experiences with the brand. Customers are further assured of the brand’s consideration of its consumers as the company has implemented some of the suggestions given through this forum. These varied use of technology by Starbucks adds value to it.
This aspect of Starbucks’ value chain comprises all the departments that are necessary for the effective operation of the company and its stores. It includes company activities such as quality assurance, legal, finance, general management, public relations, administration, marketing, and accounting. These departments are well structured considering the long time that this company has been in existence.
Starbucks’ main corporate office is in Seattle, but the company has several other corporate offices in the different regions where they operate. The chain of command in Starbucks’ leadership comprises the chief executive officer, vice presidents, senior vice presidents, and executive vice presidents. It also includes store managers and baristas. Besides the company’s backend management, it also has a seamless customer service and employee management infrastructure.
Company infrastructure is the last part of the secondary value chain of Starbucks. The main value in this stage is the company’s well-designed and pleasing stores which are complemented by good customer service provided by the dedicated Starbucks partners in their signature green aprons.
Video on Starbucks Value Chain Analysis
Starbucks is arguably the most popular coffeehouse chain in the world, with over 35,000 stores around the globe. This popularity and success have been tied to how they transformed coffee culture in major countries around the globe. Before Starbucks’ came on the scene and began to expand to other parts of the world, coffee shops were not very common in most countries outside of Europe and Australia. This has now changed due to their company-owned stores as well as licensed stores.
Starbucks has been committed to selling the finest whole bean coffees, ground coffee, coffee beverages, and other food and beverage products of high quality. In the coffee business where it has established a stronghold, Starbucks helps to ensure compliance with its rigorous coffee standards by substantially controlling all coffee purchasing, roasting, packaging, and the global distribution of the coffee used in its operations.
The primary value chain of Starbucks is closely monitored by the company. This is because any challenge or inefficiency that may arise at this stage of the value chain is relatively easy to identify and tackle. The well-managed primary activities of Starbucks’ value chain are the major source of the company’s ability to cut down on expenditure while providing high-quality products to its customers. This means the company can produce at a lower cost than its competitors, thereby, improving their profitability.
The secondary value chain of Starbucks has also been adequately managed to ensure that the company makes the best use of its various parts to satisfy its customers and provide a conducive working environment for its teeming partners. Due to this combination of a robust value chain in both its primary and secondary activities, Starbucks has been able to maintain its position as the largest player in the food and beverage industry by a wide margin both in its presence around the globe as well as the revenue it generates annually.
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