Project Submission SM II Vivek Rathi S Group

The small store initially sold just coffee beans and coffee making equipment. The name was inspired by the classic novel Mob Dick, evoked the romance of the high seas and the seafaring tradition Of the early coffee traders. In 1 982, Howard Schultz joined Struck as Director of retail operations and marketing team. He traveled to Italy in 1983 where he got impressed with the concept of coffee bars and the coffee culture. He wanted to replicate the same in United States but he couldn’t convince the owners.

So, he left Struck and opened his own coffee bar chain named ‘II Georgian’ in 1986 here he started selling drinks rather than just coffee beans and machines. In 1987, Schultz acquired Struck from its owners with the help of local investors and renamed the II Georgian coffeehouses to Struck. Schultz started expanding and the chain quickly spread across U. S. Struck became the first privately owned US Company to offer stock option program that included the part time employees. The compact/s PIP raised $25 million which allowed it to more than double the number of stores across the nation.

By 1 996, Struck had over 1000 stores and opened its first overseas store n Tokyo, Japan. After that, it launched an aggressive foray into the international markets with store openings in Singapore, Philippines, England, Malaysia, New Zealand, Taiwan, Thailand, China, Kuwait, Lebanon, South Korea etc. In the subsequent years. In 1 998, it acquired Taco Tea Company and partnered with Conservation International to promote sustainable coffee-growing practices. In 2000, it established licensing agreement with Transfix USA to sell Firetrap certified coffee in IIS and Canada.

It introduced several measures as ethical coffee sourcing guidelines, Struck card etc. ND announced a two-for-one stock split in 2001. In the subsequent years, it established Struck Coffee trading Company (ACTS) in Switzerland and acquired KICK-based Seattle Coffee Company, Cattle’s Best Coffee and Terrorizing Italian from AFC Enterprises taking the total number of stores above 7200. Today, under the leadership of Howard Schultz, Struck has over 21000 stores in more than 6000 locations across the Globe spanning around 65 countries and is the premier roaster & retailer of specialty coffee in the world. ) External Environment of the Retail Market for Coffee & Snacks: 2. ) Industry Overview: The company mainly operates in the retail coffee and snacks store industry, which includes competitors like Dunking’ Donuts, Cafe Coffee Day, Costa Coffee, Barista, etc. In 2009, this industry experienced a major slowdown due to the economic crisis and changing consumer tastes, with the industry revenue in the US declining 6. 6% to $25. 9 billion. Before the recession and economic crisis, the industry had seen a decade of consistent growth.

However, after the economic slowdown set in, consumers started spending lesser and lesser on luxuries like eating out, and instead – they chose to arches low-price items instead of high-priced coffee drinks due to shrinking budgets. From 2008 till 201 3, the industry grew at a low annulled average growth rate of 0. 9% with current industry revenues at 529 billion in the US. Today, the industry is forecasted to grow at an annulled rate of 3. 9% over the next five years, with a potential to reach $35. 1 billion revenues in the US.

The growth can be attributed to factors like a sluggish but gradually improving economy, increase in consumer buying behavior and a variety of menu offerings in the industry. Currently, Struck is a leader in the industry tit a market share of 36. 7%, followed by Dunking Brands with 24. 6% and other competitors like McDonald’s, Costa Coffee, etc. Taking the rest as shown in Table 1 (Exhibits). 2. 2) Industry Structure: The industry is currently in a mature stage with a medium level concentration of participants.

Struck and Dunking Brands make up more than 60% of the market share (Refer: Table 1), giving them considerable market power in determining industry trends. The Industry Structure is given in Table 2. 2. 3) Industry Demand and Consumer Attitudes: A number of factors which drive the demand in the premium coffee and knack products industry include disposable income, world pricing of coffee, per capita coffee consumption, attitudes towards health and demographics.

Macroeconomic factors that affect the growth in household disposable income also affect this industry. During the recession, the decline in household disposable income due to increased unemployment and stagnant wages caused a downward pressure on the revenues and profitability margins in the industry. Another crucial factor for analyzing the demand in the industry is the per capita coffee consumption where the increase in coffee institution increases the revenue of coffee & snack shops.

As the disposable income has increased over the years, it has shown to be a positive sign for the economy and consumers have begun to relax budgets and spend more on luxuries like socializing and eating out again. This in turn, has had a positive effect on market revenue. Per capita coffee consumption is expected to increase in 2015. One of the primary inputs in the value chain of this industry is coffee beans. The prevailing volatile prices of coffee beans determines market costs and profitability margins.

In the recentness, the world price of coffee has risen hardly due to their growing demand in other countries and the resulting supply shortages. However, as this gap of demand and supply is bridged, the prices Of coffee beans are projected to decrease, which will lead to lower market costs and higher profitability. Attitudes towards health also play an important role in determining the demand in the industry’. Consumers are highly conscious of their food and dietary intake and they prefer healthier and natural drinks to the caffeinated ones.

Thus, the product portfolio of companies in the industry has expanded to incorporate changing consumer sates, for example, there is a strong inclination towards herbal and green teas which act as anti-oxidants and are approved by today’s health-conscious consumer. Strategic Analysis of Struck Corporation There is an expected shift towards healthy eating and diet among the consumers in 2014, and this could be a potential threat to the industry as they become more aware of issues related to weight and obesity.

There has been a proactive shift among the industry participants to tweak their menus to incorporate a more organic and healthy products mix. 2. 4) Porters Five Forces Analysis of the Retail Coffee and Snacks Industry: Threat of New Entrants: Moderate There is a moderate threat of new entrants into the industry as the barriers to entry are not high enough to discourage new competitors to enter the market. (Table 3 shows Barriers to Entry Checklist). The industry saturation is moderately high as there is a monopolistic competition structure. The switching costs for the customers is very low, as there are other options available I.

Brands like Dunking’ Donuts and Costa Coffee which provide a similar range of product offering. Even though it is a competitive industry, the success rate of new entrants would be moderate as here are established players in the market who have already achieved economies Of scale. For new entrants, the initial investment is not significant as they can lease stores, equipment etc. At a moderate level of investment. At a localized level, small coffee shops can compete with the likes of Struck and Dunking Brands because there are no switching costs for the consumers.

Struck uses a three-pronged experiential brand strategy to differentiate itself from its competitors to provide a moderately high entry’ barrier for them: Highest quality coffee, sourced from the Africa, Central and South America, and Asia- Pacific regions. It controls as much of its supply chain as possible, in order to maintain coffee standards. Service by means of customer intimacy – this feature of Struck has become inimitable. The experience provided at a Struck store is enhanced by the way the employees, known as “baristas” interact with the customers.

Ambiance and atmosphere – The Struck lounges are designed to provide an upscale yet inviting environment that is conducive for any kind of tee-a-tee, from casual meetings to corporate interactions. Firms like Struck have a larger scale and scope, thus yielding them a earning curve advantage and favorable access to raw material with the relationship they build with their suppliers. Threat of Substitutes: High While there are many substitute beverages to coffee, like tea, fruit juices, water, sodas, energy’ drinks etc.

Struck has managed to venture into these product categories by introducing beverages like Earl Grey Tea Latte, Iced Green Tea Latte, Zen Brewed Tea, etc. Bars and Pubs with non-alcoholic beverages or mossbacks could also substitute for the social experience of Struck. However, since Struck is an established brand it would face title competition from the bars or pubs which tend to be local names. Consumers could also make their own home produced coffee with household premium coffee makers at a fraction of the cost for buying from premium coffee retailers like Struck.

There are no switching costs for the consumers for switching to substitutes, which makes the threat high. But it is important to note that mind gusty leaders like Struck are currently trying to counter this threat by selling coffee makers, premium coffee packs in grocery stores but this threat still puts pressure their the margins. Bargaining Power of Buyers: Low There are many different buyers in this industry and no single buyer can demand price concession. It offers vertically differentiated products with a diverse consumer base, which make relatively low volume purchases, which erodes the buyer’s power.

The switching costs are low, but there is high availability of substitute products. The industry leaders like Struck price their product mix in relation to rival stores with prevailing market price elasticity and competitive premium pricing. Consumers are willing to pay a premium price for higher quality products like that of Struck because of he quality and brand name. Bargaining Power of Suppliers: Low to Moderate The main inputs into the value chain of Struck is coffee beans and premium Arabica coffee grown in select regions which are standard inputs, which makes the cost of switching between substitute suppliers, moderately low.

To enforce its quality standards, Struck has tried to control as much Of the value chain as possible – it works directly with the growers of the coffee beans in the various regions and it also overlooks the custom-roasting process as well as the distribution to the various stores all over the world. Struck, with its size, brand and scale, has the power to take advantage of its suppliers but it maintains a Fair trade certified coffee under its coffee and farmer equity (C. A. F. E) program, which gives its suppliers a fair partnership status, which yields them some moderately, low power.

The suppliers in the industry also pose a low threat of competing against Struck by forward vertical integration, which lowers their power. Struck also forms a highly important part of the suppliers business, due its size and scope, which make the power of the suppliers lower. Given these factors, suppliers pose a attracted low bargaining power. Intensity of Competitive Rivalry: High to Moderate There are a lot of competitors for Struck in the industry from other established brands from the coffee as well as snacks industry.

Currently, Struck has the largest market share and its closest competitors also have a significant market share, thus creating significant pressure on Struck. Consumers do have any cost of switching to other competitors, which creates high intensity in rivalry. Despite this, Struck has managed to maintain some competitive advantage as it differentiates its products with premium reduces and services, which has caused a moderate level of intensity in competition. King at the Porters five forces analysis, we can get an aggregate industry analysis that the strength of forces and the profitability in the retail coffee and snacks industry are Moderate. 2. 5) BRIO Analysis (Refer Table 4: Brio Analysis) Choice of Store Locations: The Struck cafes are located in high-visibility locations near a variety of settings, including downtown and suburban retail centers, office buildings, university campuses, and in select rural and off- highway locations all over the world, which result in very high footfalls for the fees.

Competitive implication: Temporary Competitive Advantage Global Brand Recognition & Equity: The company’s overall objective has always been to establish Struck as the “the most recognized and recognized brand in the world. ” In the coffeehouse segment, it has successfully managed to do so and is currently ranked 91 SST in the Best Global Brands of 2013. Struck is effectively able to leverage this brand equity, as the top five attributes that customers associate with the brand are: wide availability, well-known for gourmet coffee, corporate brand, trendiest and the welcoming feeling at Struck.

Competitive implication: Competitive Advantage Universal appeal of the Stores: Struck concentrates on the ambiance of each store by making them visually appealing and designing lounges that are upscale, yet inviting. They augment the experience for the customers by providing free wife, great music, great service, conducive atmosphere and creating a “third place” which is part of the ‘Struck Experience’. The “third place” concept of the stores entails that customers should consider Struck as their favorite place to hang out after the first two places being home and office.

Competitive implication: Competitive Advantage Struck’ Partners – The Company Culture: All Struck employees were called “partners”. Most were hourly-basis wage employees called “baristas”. They believed that partner satisfaction meant customer satisfaction. Hence, the company provide many benefits like health insurance, stock options and retirement accounts to even the entry-level employees. The company was ranked 47th in the 1 00 best places to work for by Fortune Magazine. Their employee turnover rate was just 70% as compared to the fast-food industry average of 300%. Competitive implication: Competitive Advantage

Large Size and Strong Global Presence: Operation in 60 countries with efficient distribution channels and strong supplier relationships making it attain economies of scale. Relationships help in lowering input costs. Competitive implication: Temporary Competitive Advantage Leveraging Technology and Mobile Outlets: Struck APS on ISO and Android like M-Square Wallet. Investment in technologies to produce proper roasted beans and superior espresso by the Baristas Competitive implication: Temporary Competitive Advantage Customer Loyalty and Cult Status: Presently enjoying a cult following among nonusers especially in developed countries.

Loyalty-based programs Struck Rewards and Struck Card drive loyalty and increase frequency of store visits. Competitive implication: Competitive Advantage Good Corporate Social Responsibility Image: Community friendly stores with special attention on recycling and waste reduction. Collaborating with farmers for their betterment is an important step taken. Strong Social Responsibility steps initiated. Competitive implication: Temporary Competitive Advantage 3) Analyzing the Transformational Strategy 3. 1) Doing it the Struck Way According to the US News and World Report:

When venturing overseas, there is a Struck way. The company finds local business partners in most foreign markets… Lit tests each country with a handful Of stores in trendy districts, using experienced Struck managers. It sends local baristas to Seattle for 13 weeks of training. Then it starts opening stores by the dozen. Its coffee lineup doesn’t vary, but Struck does adapt its food to local tastes. In Britain, it won an award for its mince pie. In Asia, Struck offers curry puffs and meat buns.

The company also fits its interior dcore to the local architecture, especially in historic buildings. We don’t stamp these things out cookie-cutter style,” says Peter Measles, president of Struck Coffee International. While going global, Struck focuses on the mantra -? partnership first, country second. The company relies heavily on the local partnerships to get the stores up and working. They look for partners who share the same values, culture and goals. Hence, that would explain the tie-up with DATA Group for India -? which is built on a very strong value system.

Some of the primordial criteria for Struck while expanding into foreign markets includes: “(1 ) similar philosophy to Struck in terms of hared values, corporate citizenship, and commitment to be in the business for the long haul, (2) multi-unit restaurant experience, (3) financial resources to expand the Struck concept rapidly to prevent imitators, (4) strong real- estate experience with knowledge about how to pick prime real estate locations, (5) knowledge of the retail market, and (6) the availability of the people to commit to the project. One of the most quoted examples is that of China, where Struck adjusted its operation into a Chinese formula culture adjustment. It is primarily a tea-consuming country. Also, the people do not want to just have a cup of coffee in the shop, but would prefer to go with cake or some food. The busiest hours for the store is between afternoon to evening, as opposed to the Western culture where people like to pick up a cup of coffee in the morning, before work or meet up for coffee in the evening post work.

Based on these cultural changes, Struck increased the products lines according to locals’ preferences and business time was pushed to late evening. 3. 2) Standardization and Adaptation In their international experience, Struck uses a combination of two main tragedies I. E. Standardization and Adaptation. In the expansion of Struck’ global market, the generic strategy revolves around standardization whereas it has blended its products with localization.

Walk into any Struck store and you will find the same rich blend of tastes which comes through the quality of the coffee beans which are sourced from the same locales all over the world. The coffee shop chain has benefited from standardizing. By creating the same value across countries, it has managed to create a unique and specialized training process that is applicable across the world. Secondly, it does not have to adapt the look and feel of stores differently according to the country. It benefits certain cost benefits from this.

To sustain the success of coffee business, the company has had to consider the experimentation and innovation into the account. It has changed certain peripheral components to adapt to the local market and tastes. Also Struck believes in keeping the local staff and managers, as they can build a good relationship with customers. 3. 3) Diversification Strategy Though diversification strategy is the most risky compared to other strategies room the Masons matrix, Struck hasn’t shied away from following the diversification approach.

In the past, Struck had pursued the strategy of unrelated diversification by acquiring the Hear Music Company to introduce its retail music concept and venturing into the movie business in partnership with Eliminate for promoting its films through screenings at the store baristas and in-store promotions. It had also ventured into the furniture business for a short while but withdrew from it after its failure in the market. However, now Struck, known for its core offerings of different variety of averages linked primarily to coffee, has been slowly diversifying into other drinks and food products.

Struck has been very careful in its approach by diversifying into related products such as confectioneries, pastries, breakfast options such as sandwiches ; wraps etc. Which serve as complementary food to their high quality beverages. Company has meticulously planned a related diversification strategy to expand into products that are related to its existing business by staying in the limits of what it does best. Struck acquired La Boilable Bakery, Evolution Fresh and Evolution Harvest during 2012-13 to id pastries, health juices and snack bars to its product portfolio. 4) Financial Strategy: Highlights 4. ) Financial Performance Analysis Looking at a six year period ratio (from 2008 till 2013) ; growth analysis of Starboard’s financial, we can see that the revenue growth of the company has experience a drop of -5. 9% during the period of 2008-09 due to recession.

Thereafter, Struck posted a healthy revenue growth of from 201 0 to 201 3 and currently posted revenues of around $14. 9 billion for period ended 2013. The margins for operating income have increased substantially from 4. 9% in 008 to a high of 15% in 2012. Struck posted an operating loss in 201 3 and this resulted in operating margin of -2. %. The foremost reason for that is due to a litigation charge of $2. 8 billion to Kraft Foods for terminating an agreement with them. We consider treating the charges as extraordinary event and therefore should be discounted from the overall healthy operational performance of Struck. Struck’ ROE and ROAR have been impressive with 29. 2% and 17. 8% respectively for 2012. Looking at Struck efficiency ratios, Struck has gained significant operational efficiency with impressive asset and inventory turnover ratios with a low of 1. 51 and 5. 4 respectively for 2013.

At the same time it is interesting to note that the company’s cash conversion cycle has increase to high 54. 7 in PUFFY 3, which is where Struck should concentrate on to reduce to attain higher efficiency. Struck boasts good financial health with low debt/leverage with a debt/ equity ratio of 0. 29 for 201 3 and maintains decent current and quick ratios. 4. 2) Financial Parameters 4. 3) F-uncial Risk Management Commodity inputs, like coffee, dairy products, and diesel are used widely in he operations and the prices of which are subject to huge volatility.

For coffee purchases, the company has entered into commodity hedges using derivatives. The company has operations outside the United States too and therefore they undertake various hedges for the anticipated international revenue streams and inventory purchases. 4. 4) Fiscal Year 2014 -? The Way Ahead For fiscal year 2014, revenues are expected to grow further as compared to 201 3 as a result of expected comparable store sales growth. Struck had 1,500 new store openings, and continued growth in the Channel Development business. The consolidated operating margin improvement is expected, when compared to fiscal 2013.

In 201 3, operating results excluding the litigation charge associated with the Kraft arbitration, improved by 1 50 to 200 basis points and strong PEPS growth, driven primarily by leverage on revenue growth. Capital expenditures in fiscal 2014 are expected to be approximately $1. 2 billion, primarily for store renovations and new stores, as well for other investments to support our ongoing growth initiatives. 4. 5) India Strategy Till March 2013, Struck sold worth RSI 14. 6 core in the first financial year including, coffee, snacks and merchandise of its operations in India.