To what extent have the impacts in Starbucks' recent brand image affected its profitability and does it leave potential for future recovery?

Ethical implications are crucial for a company's brand image, as consumers today are more socially conscious and expect businesses to align with their values and make a positive impact on society. Starbucks, the market leader in the US coffee industry, used to be praised for its ethical consideration to the point where it got attributed the title of "one of the World's Most Ethical Companies" for the 14th consecutive year by the Ethisphere Institute, an organization which recognizes ethical behavior in businesses worldwide. Starbucks can be considered ethical in various ways due to its environmental leadership, social responsibility, and economic transparency.

However, a political controversy emerged, which contradicts its ethical values, when Starbucks Workers United expressed solidarity with Palestine through a social media post titled "Solidarity with Palestine!". Starbucks reacted by filing a lawsuit, asserting that the post damaged its reputation by suggesting support for violence. Consequently, customers initiated boycotts, interpreting Starbucks' actions as endorsing violent activities. As a result, the business's profitability and brand image have been heavily impacted ever since.

This report comprises both quantitative and qualitative tools as well as secondary sources in aims to appropriately answer the research question: To what extent have the impacts in Starbucks's recent brand image affected its profitability and does it leave potential for future recovery?

The profitability ratio analysis is a method utilized to determine a company's percentage of its sales revenue that it keeps for profit following the deduction of all expenses. The employment of this analytical tool is going to evaluate the performance of Starbucks in terms of its profit-generating ability. It can be expressed as the following formula:

\[ \text{Profit margin} = \frac{\text{profit before interest and tax}}{\text{sales revenue}} \times 100 \]

Figure one initially presents a slight decline of 0.09% from Q1 of 2023 to Q2 of 2023. This could most likely be the result of the new CEO Laxman Narasimhan in March 2023. As the firm adapts to a new CEO, it also adapts to a new leadership style, which could explain the minuscule decrease of 0.09%. Subsequently, his leadership approach turns out to be quite successful looking at the significant increase in the profit margin over the next quarter of 2.9% and the slow growth in the last quarter of the year. Overall, from Q1 2023 to Q4 2023, a depiction of improvement in profitability can be noticed as profit margins grew gradually from 13.78% to 17.18%. This implies that Starbucks adopted successful tactics and encountered advantageous circumstances such as the release of new drinks and their famous seasonal beverages that increased profitability throughout the year.

However, Starbucks' profitability clearly decreased between Q4 of 2023 and Q1 of 2024. The profit margin for the fourth quarter of 2023 was 17.18%, which suggests a reasonably good performance. However, the profit margin fell to 15.17% in the first quarter of 2024, a drop of roughly 2.01%. Although there may not have been a significant difference in profitability between these two quarters, it does indicate a notable shift in Starbucks' financial performance. This mere shift is a result of the boycotts that arose due to the ethical issue faced by the company in early October. Hence, to answer the research question, the impacts on Starbucks' recent brand image have affected its profitability to a moderate extent as it is still capable of recovering.

The SWOT analysis is a tool that examines both internal (strengths and weaknesses) and external (opportunities and threats) factors affecting the brand. This analytic tool will help the business develop and determine strategic goals and future projects in order to recover from its ethical scandal.

With a market share of 41.51% within the restaurant industry, Starbucks evidently has numerous strengths internal to its business. A major strength is their high brand recognition.

Starbucks typically ranks as the initial or second thing that comes to mind when one talks about coffee due to its global and highly present recognition. Additionally, the success of the company derives from the thousands of farmers and suppliers who grow and cultivate their high-quality products which Starbucks ensures are produced responsibly and acquired ethically. Furthermore, they have a wide variety of options that include beverages such as coffee, tea selection, hot chocolate, all the way to pastries, sandwiches, and salads. Seasonal beverages from their menu are generally well-liked and looked forward to by many customers. They additionally have vegan alternatives in their menu such as plant-based milk alternatives and vegan-friendly foods in order to be in line with the values of its customers. Finally, the services they provide such as WI-FI, the aesthetic and cozy appeal of the store, and the nice staff create an overall sense of belonging.

While Starbucks has solid strengths, it also has its weaknesses. One of its major weaknesses is its expensive products. Although Starbucks is generally known for its premium products, not everyone can afford them, which results in a less diverse customer base. Additionally, their current boycotts which arose from the ethical issue heavily affected their profitability. Due to the difficult working environment owing to the boycotts, the Starbucks franchise in the Middle East was forced to fire 2,000 employees, which was detrimental to the company's already declining brand image. Additionally, another factor that could increase its labor turnover is due to employees feeling demotivated or as if they are going against their morals while being associated with an unethical business. To conclude, with 16,346 stores located in the U.S. out of a total of 38,027 stores globally, Starbucks heavily relies on the U.S. market. Due to 38% (16,346/38,027 × 100 = 38%) of its establishments being situated in the U.S., the company would be extremely vulnerable to any changes in the growth and economy of the country.

From its weaknesses, it has been noticed that Starbucks is heavily concentrated in the North American region with a total of 17,804 stores (total U.S. stores + total Canada stores). Hence, expanding into emerging markets would be beneficial for the company in case there are any drastic changes in the U.S. economy. Additionally, Starbucks is expanding and enhancing its digital presence in order to develop profound relationships and quicken its growth. With over 38,000 locations and 22% of worldwide sales through digital platforms, Starbucks is constantly utilizing and expanding its technological capabilities, such as its Deep Brew AI and machine learning. Subsequently, while they continue to innovate around their core products, they are also investing heavily in the equipment and operations of their U.S. stores, which helps elevate the brand. Hence, the company has an opportunity to gain back its profits by reintroducing the products that have attracted the most attention in terms of sales percentage. Therefore, the old and famous products would create a potential for the lost customer base to rebound.

The restaurant industry which the company comprises is highly competitive. Although Starbucks is the current market leader, the weaknesses currently faced by the business jeopardize its position. Additionally, due to cheaper business options in the same industry, potential customers who are not able to afford goods from Starbucks would procure them from its competitors such as McDonald's, Yum Brands, or even Wendy's. This could contribute to a decrease in Starbucks's market share while increasing its competitors. Finally, the profitability ratio previously shown depicts how the recent boycotts managed to decrease the company's profit margin in the mere amount of three months. Hence, if the boycotts continue, the business's profitability will continue to decrease to a significant extent to the point where it may not be able to rebound from the substantial effect.

In conclusion, the SWOT analysis conducted on the business has shown an extensive scope varying from their strong points all the way to their weak ones. From this analytic tool, it can be deduced that Starbucks should benefit from its opportunities and strengths in order to alter its weaknesses and annihilate the threats. More specifically, in order to distract its customers from its tarnishing brand image, bringing back goods that have garnered the greatest attention, in terms of sales percentage, would be the action needed. Hence, the company can still recover from its ethical dilemma by integrating a market-orientated approach. This means understanding customers' wants and needs and meeting those needs with goods.

The BCG matrix is utilized to evaluate a company's product portfolio by assessing relative market share and growth. This tool categorizes products into four groups: question marks, stars, cash cows, and dogs, aiding in long-term strategic planning. By applying the BCG matrix as a market research tool, Starbucks can identify which discontinued products would be most beneficial to reintroduce.

The category of stars covers Stabucks's high-growth food offerings such as sandwiches, pastries, and snacks which tend to have a big market share of 22% and are growing increasingly. These products are currently leading Starbucks' development as people desire more convenient, quality food alongside their drinks.

Cash cows are business units with high market share but low market growth. Starbucks drinks including their coffee and specialty beverages are considered as cash cows. While market growth for beverages may not be as high as the stars, Starbucks has a dominant position in this market with 77%.

Business units with high market growth but low market share are known as question marks. Starbucks's merchandise, such as mugs and tumblers, seem to have a big potential for growth with a market share of 4%. However, Starbucks merchandise has not yet taken over the market and requires further investment and strategic focus on its growth potential.

Dogs are business units with low market share and low market growth. Starbucks's packaged coffee beans and single-use tea bags are considered to be in the dog category. They may not be a significant drive of revenue as the food and beverages but tend to sell in stores.

Lastly, the BCG matrix analysis reveals essential insights into Strabucks's diverse product portfolio and effectively depicts which products the company should focus on reintroducing. In this case, the Starbucks drinks referred to as the cash cows are the main focus with a market share of 77%. The company should most likely consider reintroducing nostalgic discontinued beverages such as the unicorn frappuccino, the chantico, the birthday cake frappuccino, or even the berry sangria tea, to divert consumers' attention away from its damaged reputation. While the BCG matrix assesses a company's product portfolio, it has its limitations. It mainly looks at current market positions, lacking guidance for long-term planning. Additionally, a large market share does not always mean large profits due to potential profit loss from promotional pricing. Hence, while useful, it may not fully inform long-term strategic decisions.

In conclusion, the profitability ratio analysis revealed a moderate extent of impact on Starbucks' profitability due to recent brand image issues. The SWOT analysis highlighted opportunities for Starbucks to recover by leveraging its strengths and addressing its weaknesses and threats.

Lastly, the BCG matrix provided insights into which discontinued products Starbucks should focus on reintroducing in order to divert attention from its damaged reputation. Moreover, the easiest course of action is to refrain from engaging in any political or ethical issues, especially as a coffee company.

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