Starbucks SWOT Analysis

In this Starbucks SWOT analysis we evaluate the strengths, weaknesses, opportunities, and threats facing the worldwide coffee leader. With over 28,000 stores spread across the United States, Europe, Middle East, Asia Pacific, and Africa, Starbucks (ticker symbol: SBUX) is the undisputed industry leader with a market capitalization that looks destined to one day hit $100 billion+.

So, how did Starbucks become so successful and what are the headwinds it faces now? We highlight competitive threats, strengths, risks, and weaknesses in this Starbucks SWOT analysis.

SWOT Analysis: Starbucks Strengths

Starbucks is a highly efficient company operationally. One measure of operational efficiency is return on invested capital, or ROIC. Starbucks ROIC measures the percentage amount the company is making over and above its weighted cost of capital (WACC).

That’s a lofty way of saying that return on capital is the percentage return Starbucks makes over its invested capital. A company that can generate an ROIC of double-digits is doing a good job. Starbucks ROIC is almost 30%!

The high ROIC translates to a high operating margin of around 18%, which explains why Starbucks is producing significant cash flows and profits. And despite strong revenues and profits, Starbucks trades at a low price/earnings multiple, suggesting there is room for margin expansion.

Starbucks MOAT

Strong financials are more the symptom than the cause of Starbucks’ strengths. What gives the company a competitive advantage is its network of retail store locations, which have increased from around 17,000 in 2011 to 27,000+ in 2017.

As its store locations increase, the Starbucks brand value and premium increases by reaching ever more customers. It has also standardized its processes so its brand name products have quality consistency no matter where you purchase them.

Whether you buy Frauppuccinos, Starbucks Doubleshots, Starbucks Refreshers, or any of its other brand name products, including Teavana, Tazo, Seattle’s Best Coffee, Ethos, or La Boulange, you can expect the same taste every time.

Any competitor looking to emulate the success of Starbucks is starting from a long way behind which is why Starbucks continues to impress with stellar financials, like a return on equity that is off the charts for a brick-and-mortar store.

Starbucks Supply Chain

To deliver on customer expectations every day with a consistent coffee taste globally, Starbucks has built stringent processes that start with its supply chain. Coffee beans, milk, flavorings, and food are delivered to 27,000+ locations through a network of suppliers on multiple continents.

Starbucks Culture

Another notch in favor of Starbucks is its staff training. Employees are taught around the world how to create a variety of coffee drinks and, in aggregate, do an extraordinarily good job meeting customer expectations. Beyond great training, Starbucks rewards employees with generous benefits including ownership of shares in the company.

Starbucks Weaknesses

Arguably Starbucks’ greatest strengths are its weaknesses too. Some customers shun big-name brands like Starbucks in favor of supporting local coffee shops.

Brand saturation and brand fatigue cause consumers to become disenchanted. The more they see Starbucks on every street corner, the more likely early adopters will seek out Starbucks alternatives, such as Philz coffee.

The high price points charged by Starbucks make its products less affordable to a broader audience. However, Starbucks has purposely cultivated an image of luxury and arguably does not want to make its products accessible to everyone.

Starbucks Opportunities

Transaction volume is so high at Starbucks that small pricing changes can significantly and positive affect its bottom line.

Opportunities for Starbucks including raising prices to boost revenues and margins. Unlike many companies who don’t have the luxury to increase prices significantly, Starbucks has a loyal and caffeinated customer base who are less sensitive to price.

Should Starbucks look to twist the lever of pricing power, you can expect revenues and profits to grow too. With its defined processes and extensive supply chain, Starbucks grows revenues fastest through store expansion which is why it has accelerated store growth. From 1971 to 2011, it grew store locations to approximately 17,000 and since then grew by an additional 10,000+ stores.

With its ever larger presence, Starbucks has built out its online offerings and is increasingly getting into the data business. Its valuable customer data has led to partnerships with companies like Google who support its WiFi infrastructure in many locations.

Further Starbucks opportunities include building out more products and launching additional brands, as well as purchasing smaller companies that appeal to other audiences.

SWOT Analysis: Starbucks Threats

Perhaps the largest competitive threats to Starbucks come from brand-name behemoths like McDonald’s and Dunkin Donuts who can arguably produce similar quality coffee at lower prices.

The reality is Starbucks has cultivated an image of luxury and coffee tastes that appeal to customers so it’s not easy for competitors to win over customers unless they are price sensitive.

Coffee houses like Philz that have been venture-funded and turn coffee shops into the look and feel of bars where drinks are poured according to the preferences of customers versus standardized processes have also gained traction though remain a long way behind in terms of store count.

The reality is it’s hard to see any competitor significantly impacting the freight train that is Starbucks any time soon.

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