With more than 20,000 coffeehouses spread over 60 countries, Starbucks (SBUX 0.62%) has built a very profitable coffee empire. Impressive marketing efforts, continuous menu innovation, and strategic geographical expansion helped Starbucks grow its revenue quickly; in fact, revenue reached $13.3 billion last year. Furthermore, Starbucks enjoys one of the highest operating margins in the industry thanks to its strong branding.
The attractive combination of high margins and aggressive revenue expansion has caused Starbucks' value to increase enormously. How did Starbucks manage to create a strong coffee empire despite increasing competition from traditional players such as Dunkin' Brands (DNKN +0.00%), and the emergence of challengers like Panera Bread (PNRA +0.00%)? More importantly, how long will Starbucks' dominance in the coffee world last?
Source: Starbucks Investor Relations
The Coffee empire
A business needs to have plenty of competitive advantages to become an empire. First, Starbucks directly controls every important step of its business, from buying high-quality coffee beans to designing its franchise decor. This allows Starbucks to minimize its operating risks. For example, by being one of the most important buyers of coffee arabica in the world, the company has enormous influence over its suppliers and it can ensure competitive prices, superior quality, and the necessary quantities at the right time.
Second, Starbucks creates a unique atmosphere surrounding its products based on four key factors: quality, service, ambiance, and culture.
The company maximizes quality not only by buying high-quality coffee beans, but also by equipping its coffee houses with excellent coffee machines.
To ensure perfect service, the company trains its baristas for over 30 hours. Baristas become very professional, not only at making coffee, but also at handling as many as 200 customers per hour.
In terms of ambiance, Starbucks has carefully chosen its color combination, couches, and lights to create a great place for coffee-lovers. The company keeps its customer loyalty high by promoting a genuine passion for coffee that goes beyond a cup of cappuccino. Starbucks promotes coffee rituals, love for organic ingredients, environmental friendship, and millennial values.
Finally, Starbucks is constantly innovating its menu and starting new businesses, such as selling energy drinks or coffee machines. The company has recently focused on strengthening its sandwiches and bakery business. That's why last year the company shelled out $100 million to acquire La Boulange Bakery, which specializes in traditional pastries. More recently, the company launched a £2 breakfast offer in the U.K. to capture price-sensitive customers.
Final Foolish takeaway
Few companies are more innovative than Starbucks. From offering unique decor to controlling every step of its supply chain, the company has plenty of competitive advantages in motion to protect its business. Furthermore, although Starbucks has thousands of locations all over the world, the market does not seem saturated. Previous success in China and Japan, where the company recently opened its 1,000th store, suggests that the company can raise its penetration ratios in those countries as high as its penetration ratio in the U.S. market.
