Starbucks SWOT Analysis: Buy or Avoid?

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Recently, Starbucks (NASDAQ: SBUX) has lost roughly 27% in value since it hit its 52-week high of $62. Does that make Starbucks a buy, or a stock to avoid?

A SWOT analysis offers a simple yet effective breakdown of businesses. It allows us to look at multiple angles of any business and decide what outlook it has as an investment going forward. It involves the following;

Strengths Weaknesses Opportunities Threats

Strengths

  • Branding – In marketing, there’s something called the “Smash Test” which refers to a brand image that can be recognized out of its regular form. For instance, if you saw a pieces of a smashed glass Coca-Cola (NYSE: KO) bottle, you would still likely recognize it. That’s when you know your brand has a powerful image. While it's no Coca-Cola bottle, Starbuck's classic white cup and lid is universally recognizable even without the logo. If you were asked to fill the logo below in, I bet over 90% of you could do it. Starbucks passes the smash test and will continue to use their brand to grow market share as it enters new markets.

  • Starbucks Experience – The company's in-store experience revolves around multiple factors. First, its quality coffee has proven hard for competitors to replicate. Second, its customer service is unmatched, with friendly personalities and quickly made java! It’s standard for employees to engage you with a personal conversation. Third, Starbucks provides a warm and cozy atmosphere with free Wi-Fi for all of us working on the go.
  • Goodwill Counts – Starbucks does an excellent job expanding itsbrand in public by creating goodwill with community service, its “Create Jobs for USA” initiative, and its eco-friendly recycling practices.

Weaknesses

  • Price Increase – At $5 a cup for Starbucks, the cost of its coffee tops that of a gallon of gas! High price is a weakness when consumer confidence declines, leading to diminished sales. Many cheaper, easily available substitute products exist, which is reason for concern.
  • Store Size – This one is depends on the store and location. Some Starbucks locations have lost the warm and cozy atmosphere mentioned in the Strengths section, because they get ridiculously crowded and busy during peak hours. Management must focus to correct this or face declines in customer satisfaction.
  • Europe – Rumors are swirling around Starbucks in Europe concerning possible tax evasion. Regardless of that outcome, one thing is clear: Starbucks isn’t as profitable in Europe as it wants and needs to be. To maintain sizeable growth going forward, the company needs to grow its global brand image to equal the one it enjoys in the U.S.

Opportunities

  • Verismo – Starbucks recently introduced its single-brew machine, which has received rave reviews for the quality lattes and cappuccinos it produces. Green Mountain Coffee Roasters (NASDAQ: GMCR) has a strong grip on the single-brew coffee market right now, with many large players paying royalties to make K-Cups for its Keurig machine. This is an $8 billion market, and Starbucks is optimistic it will take market share away from industry leader GMCR. Investors have argued the Verismo creates a substitute product to Starbucks' own coffe, and will cannibalize in-store sales. I agree this might be true. But if Starbucks doesn’t control the single brew market, a competitor will. The top spot might as well belong to Starbucks then, right?
  • Promotions – While its rewards program has been successful, there’s room for improvement on specials/promotions or coupons in general. This could prove an effective way to battle the high price weakness going forward.
  • Global Expansion – While profitability in Europe has been a struggle, which is worrisome, there are many emerging markets where Starbucks could expand its footprint. China is an especially intriguing option with its growing middle class demanding western luxuries.

Threats

  • International Suppliers – Supply chain disruptions from receiving coffee beans internationally from Arabia and South America could add significant cost to its operations. Starbucks has also had negative publicity with treatment of bean farmers in Africa. These will continue to be challenges moving forward.
  • Low Barrier of Entry – If you can make a cup of coffee and have a couch to sit on, you can compete with Starbucks. In addition to local shops, other fast food chains, restaurants and even caffeine substitutes will offer cheaper products to Starbucks coffee. McDonald's (NYSE: MCD) is a prime example of how they can produce a substitute product cheaply. They have a full ranging menu of specialty coffee’s under the McCafé line. It also uses Happy Hour prices as a promotion which is a competitive advantage over rival Starbucks.
  • Direct Competitor – Dunkin’ Donuts (NASDAQ: DNKN) has its own problems to fix before competing with Starbucks on every level. However, it does offer a direct competitor in terms of food/coffee offerings as well as competing for prime locations in markets across the U.S. Dunkin’ Donuts spends more on advertising and is attempting to take back lost market share.

Final Word
When scouring the market for stocks worthy of investment, one critical factor is talented executive management. I consider it a trust factor; you give them capital in full faith and trust that they will make the right decisions. If you trust the right management, you win. If you trust the wrong management… You're stuck with losses.

Starbucks has a strong management team that has built a powerful brand image. I trust that, going forward, management will focus on maintaining a pleasant in-store experience and  will continue to expand successfully. However, it is very worrisome how quickly its weaknesses can diminish its strengths. This is definitely something you need to watch going forward as an investor.

Know What You Own

With Green Mountain as cheap as it's ever been, many investors are wondering whether this is the end of the former market darling, or the perfect entry point for an enormous rebound. You can find a recommendation for how to approach investing in the company in The Motley Fool’s new premium research report. In it you'll find everything you need to know about Green Mountain, including whether it's a buy at today's prices. Click here for instant access.


dmiller5350 has no positions in the stocks mentioned above. You can follow Daniel on Twitter @StreetSmartFool. The Motley Fool owns shares of McDonald's and Starbucks and has the following options: long DEC 2012 $16.00 puts on Green Mountain Coffee Roasters, short DEC 2012 $21.00 calls on Green Mountain Coffee Roasters, and short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, The Coca-Cola Company, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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