From an original single coffee shop first opened in 1971 in Pikes Place Market, Seattle, Starbucks has become one of the most recognizable and respected global brands today with about 20,891 stores in 62 countries (March 22, 2013). Delivering great coffee, exceptional service and unique personal customer experience have all contributed to Starbucks success. Starbucks is also committed to conducting business in an environmentally, socially and economically responsible manner, which stems from Starbucks’ Mission and Guilding Principles. Starbucks’ success was partly explained by the favorable changes in the social trend such as the increased amount of coffee drinking in the out-of-home segment for all age groups, etc. Starbucks has also employed a strong differentiation strategy to stay on top of its growing industry.
In particular, Starbucks has developed market penetration by differentiating product outside of retail stores, market development by educating consumers about specialty coffee, diversification by releasing new products such as bottled coffee drinks, ice creams and liqueur products as well as value chain development by fostering human connection gained by maintaining business ecosystem among customers, employees and partners. However, the company has made some serious strategic errors and faced with increasingly strong competition in the industry in early 2008.
Firstly, seeing Starbucks’ rise as a huge success story, competitors became more focused on coffee products and new restaurants. For instance, when McDonald’s, as a giant fast food retailers, started serving coffee, the threat of rivalry for Starbucks intensified. Secondly, the large number of Starbucks’ stores at every locations has led to over-saturation of Starbucks, which made it no longer special for consumers as before. And finally, Starbucks have made a trade-off decision between efficiency and coffee quality & experience. Consequently, its stock price per share dropped by half in early 2008. Yet there are still many opportunities for Starbucks in the coffee industry. The premium coffee market will continue to grow, offering new opportunities such as the expansion of international market.
Premium food offerings can also be used to improve growth so as to compete with fast food restaurants. Moreover, joint venture or licensing agreement will keep providing more possibilities for brand leverage. Starbucks’s strengths lie in its brand image and loyalty, innovative strategies, etc. Whereas the firm’s weaknesses lie in its heavy reliance on the US market for sales.
From a humble coffee shop in Seattle, Starbuck Coffee Company has grown into a dominant multinational corporation all over the world. Starbucks is continuously striving to maintain its position in a fast-moving and changeable coffee industry.
Environment
There have been several favorable changes in the social trend including the increased amount of coffee drinking in the out-of-home segment for all age groups (ranging from 29 to over 60 years old). Second, customers were more on the go, thus, Starbucks capitalized on this and cooperated with other business partners to introduce bottled/packaged coffee drinks which were more available to consumers. Third, society has become more health conscious and caring more about the environment.
Hence, Starbucks attracted these particulars consumers by offering healthy drinks and products as well as clearly stated in one of the guiding principles that they are committed to contributing positively to the environment. Individuals preferred going to coffee shop like Starbucks to going to bars for alcohol, therefore, the firm has successfully become “the third place” between home and work, offering premium beverage in a comfortable atmosphere for people. This changes are related to Starbucks’ target market in that the company needs to be aware of the ever changing environment and economic shifts.
Industry
Competitors: Starbucks’ main competitors are quick service restaurants and specialty coffee shops, in particular, Dunkin Donuts and McDonalds. In recent years, the company has experienced drastic competition from fast food restaurant chains such as McDonald’s and Burger King whose new coffee offerings started in 2005 and 2006. These restaurants have significantly greater marketing and operating resources than they do. The intensity of rivalry increases as business tries to improve their position in the industry.
In order to gain new customers, competitors may reduce prices, introduce new products or substitutes, and increase marketing efforts. For examples, on February 2006, Starbucks closed its operations for several hours across the board to implement employee training. Dunkin Donuts took advantage of this opportunity to gain new customers by offering small coffee drinks at low price (99 cents) during Starbucks’ shutdown. In another case, McDonald’s entered the coffee business by offering McCafe menu at lower prices than Starbucks, which may lead to many advantages for the company in generating coffee sales.
Even if the quality of McDonald’s specialty drinks are not as good as those of Starbucks, customers can have a similar substitutes that are more affordable for a wide class of income levels. Also, McDonalds has a larger customer demographic than Starbucks, the latter is considered to be a luxury for the affluent, while McDonald’s caters to families with children, teenagers, adults, and senior citizens with its well-established menu offerings.
The advantage that McDonald’s has over Starbucks is that it has a considerably larger volume of traffic compared to Starbucks. While customers are stopping for a quick breakfast, lunch or dinner, they are more likely to get a specialty coffee to go too. The efficiency of drive-through services at McDonald’s make it more convenient for consumers, which is absolutely a plus. McDonalds has even begun to rent DVDs at some of its locations following in the steps of Starbucks’ expanded product lines, etc. Partly due to high competition in the coffee industry mentioned above, Starbucks’ stock price declined dramatically in early 2008.
Substitute Products: Starbucks definitely has a competitive advantage when it comes to quality, especially when compared to other generic coffee commodity. However, other beverage industries and food industries can satisfy customers’ need for a drink or eat. This is why Starbucks has to keep innovating and differentiating. Besides the main coffee products line, Starbucks has added a line of tea (Taza teas) and will be adding beer to their menu offerings. The company has created an image, and has differentiated so that many of their substitute products are part of the company itself. On dropping by Starbucks, a customer can eat ice cream, drink Pepsi while his/her companion drinks tea, eating pastry, etc.
Buyers: Starbucks’ customers are the buyers. A potential threat to Starbucks is that their customers have the ability to brew their own coffee. Starbucks has tried to offset this threat by offering The Preferred Office Coffee Provider as well as directions on how to make the perfect cup of Starbucks Coffee at home, called the “Fundamentals of Coffee”. Starbucks’ employees are also trained and given guidelines through many courses so as to better educate customers about specialty coffee.
Starbucks also employed Customer Relationship Marketing, in particular of offering a reloadable card that basically functions as a gift card for customers. This card can be used inside Starbucks coffee houses or online for Starbucks products and has benefits to the company as well as customers. The card allows service flows to be faster in stores, as no money is actually being exchanged. And bring convenience to the consumers as they don’t have to carry cash for purchasing. However, the Starbucks card has no added value for the customer, which means that it does not offer any incentives for purchasing a certain amount and no discounts are offered with the card.
Organization
Strengths Brand Image: Starbuck is among a few companies that has successfully created awareness for specialty coffee category while maintaining superior brand. Starbucks is considered to be among the strongest brand serving the second most traded commodity, which is coffee. Using cost effective and innovative marketing strategies, Starbucks has successfully created a brand that resonates with almost every segment of the population. It has been able to build this reputation based on the quality of the products, consistency of service and an overall excellence in catering to customer satisfaction. Starbucks long term success in developing brand equity can be looked into a number of ways. Starbucks seems to always look to the future and anticipate changes in their target market.
For example, in the beginning, the business was focused mainly on selling gourmet coffee. This later expanded into selling equipment to brew coffee at home. Even though some of the changes made by the company may not have been ultimately successful, they have been focused on customers ‘ needs and wants. For instance, in order to improve convenience for customers, they developed drive-through window services. The extensive staff training programs and the competitive wages and benefits offered to their employees also show that the firm is focusing on their customers and realize that happy employees will lead to happy customers, which is important for the development of Starbucks brand.
To develop brand equity and long term success, Starbucks has focused on a high quality product, various locations and excellent customer services so that customers would choose their coffee over competitors. – Innovative Business Strategy: Starbucks’ innovative business strategy resulting to better staff behind counter, ambience of the store and its fabulous products has enchanted the point of consumer interaction and spending. The essence of Starbucks is not about the coffee, it’s about coffee-drinking and the coffeehouse experience.
That sums up the unique and powerful combination of Starbucks strategy: the coffee, the customer, the employee, location, service and the ambience. More importantly, this successful recipe calls for all of these to work in harmony with each other. – Strong Financials: Starbucks after becoming a public company has grown in the two decades and has developed high trust in its investors who believe in Starbucks and give it independence to develop further. Starbucks possesses high capital and high income resulting from sales. The company has its own stores worldwide giving better capitals to sign more ventures.
Weaknesses – Reliance on U.S Market: Starbucks is a global company and has a presence in 62 countries. However, the total revenues derived from the U.S market made the lion’s sharre of its revenues at 83,7% in 2005. Given the significant presence globally and the opportunities for further expansion, the company needs to be looking at generating a greater proportion of revenues from outside the U.S.
Large corporate Image: Starbucks continually struggles with backlash despite efforts to be more connected with the community. In the U.S, its presence and acquisitions have destroyed local coffeehouses. They are perceived as Walmart of the coffee sphere by many people. This may be seen as an extreme example of capitalism. Some see its international growth as corporate colonialism, which can mean the destruction of local cultures and experiences.
Expensive price: Starbucks and other coffeehouses have caused the price for a cup of coffee to increase to $3-$4. While this price has become acceptable in the U.S, it will pose a significant barrier in emerging markets and countries where one can get a good cup of coffee for a fraction of the price and where the buying power of consumers is much less. Such high prices will make Starbucks more of a luxury good in markets such as China and India, unlike in the U.S, where its coffee is something everyone can come to enjoy and accept.
Human resource management: Starbucks’ employees are one of its most important assets and sources of sustainability. The workforce is treated with respect and dignity. The empowering corporate culture, above industry standard employee benefits and employees stock ownership program have aided in crafting an exceptional workforce that takes pride in its work. Employees are empowered by management to make decisions without management referral and are encouraged to consider themselves as a part of the business. This type of approach has not only benefited Starbucks in reducing staff turnover expenses but also attracted highly skilled and passionate staff.
Retail/Sales locations: Service in the distinguishing factor that sets Starbucks apart from its competitors. Approximately, 85% of its total revenue comes from its retail stores. Starbucks stores created a trend for hangout places and a place called the “third place”.
Marketing strategy
Starbucks has employed several marketing strategies which were fairly successful to date. – Horizontal integration: Starbucks has employed this strategy to control its competition and reach new customers. For instance: the acquisition of Seatle’s Best, Torrefazione Italia and Coffee People, etc.
Market penetration: Starbucks has focused heavily on developing the quality everyday experience and differientation of the experience as a third place to enjoy its products. Starbucks has sought to expand the method of delivering its product outside the traditional coffee shop, i.e. it has opened licensed retail locations inside grocery stores and formed alliance with SYSCO, PepsiCo., U.S. Foodservice and Kraft Foods.
Market development: Starbucks has developed the specialty coffee market in the U.S by educing the American consumer and essentially transformed a commodity into a specialty item that people are willing to pay for it. The company has developed this market from scratch and continues to as it expands into international markets.
Diversification: In order to expand its sale, Starbucks has begun releasing new, but related products, acquired companies such as Ethos water and formed alliance with Dryers Ice Cream. Starbucks has also sough out opportunities that are unrelated to its traditional product offerings, for instance, the Hear Music campaign as an alliance with iTunes, etc.
Value chain development: Starbucks has put tremendous amount of money and effort into developing the partners in its value chain. Starbucks is committed to developing the human connection with its suppliers and supporting its ecosystem, for instance, the fair trade initiative.
Marketing Plan
However, there are some strategic errors that Starbucks has made during the case analysis, including: Starbucks has made the experience of specialty coffee popular for everyone. They choose places with high traffic and high visibility to open stores everywhere including street corners, airport concourse, roadside rest stop, etc. On the other hand, this has made Starbucks coffee no longer special to consumers as it once was.
In recognition of this over-saturation problem, Starbucks has decided to close those underperforming stores to better emphasize on store growth in international markets. Also, in order to maximize efficiency, Starbucks has decided to make some trade-offs with purchase quality and use experience. So as to better compete with McDonald’s, Starbucks nowadays has become more of a fast-food restaurant than a quality coffeehouse in the minds of many consumers. Their coffee drinking experience at Starbucks declines, their products are considered commodity and their employees as normal order – takers than knowledgeable coffee experts. There are some recommended solutions for Starbucks in order to better perform in the future as the following:
- Since Starbucks has a very high profit, and the problem of over-saturation in the U.S market is recognized. With its brand equity, the firm should keep seeking chances to invest in new international markets because business seems to prosper even when domestically there is decline. However, Starbucks should consider their potential competition when entering these new markets.
- They should keep introducing new products/services such as kid friendly foods and beverages, in which they use their brand name to attract most people. It is also essential for Starbucks to continue to analyze the changing environment and needs of consumers. Continuing to offer healthy options is also a must for the future as the shift continues towards health improvement. Also, Starbucks can encourage more customization by allowing users to create new flavors and drinks besides the available options.
- Co-branding and franchising will be good opportunities for Starbucks to enlarge their globalization. Purchasing companies will help expand their global presence. With a strong financial position, the firm shall be able to acquire its competitors to prevent fierce competition and price wars.
- Even though Starbucks is a very recognized brand, the price also pays an important role. Starbucks should introduce new products with lower competitive prices than the usual process to ensure productivity and competitiveness with other rivals in the industry.
- Starbucks should also consider introducing friendlier outside areas for customers during spring or summer months or to offer delivery to home or workplace for consumer convenience. Starbucks are always available in the malls, but the firm should have some branches in the working and studying areas. There is a lack of coffee shop in universities. There shall be no waste if Starbucks try to open in some strategic locations near by these mentioned areas.
Conclusion
Starbucks has had much market power in the gourmet coffee industry. They have attracted customers by an experience of an upscale French coffee shop with a neighborhood feel. All are welcome to join as long as they are willing to pay the price for premium. In the current economic state, their prices have caught up to them causing their demand to decrease. People do not want to spend their limited income on premium coffees that they can get from any of their competitors, like Dunkin’ Donuts, McDonalds and Panera Bread. Starbucks has been forced with the changing times and the economy to drive down their prices to compete in the industry.
The closing of stores and reduction of staff proves that their pricing model only projected a short term profit. Many other outside factors also contribute to Starbucks losing its brand appeal. People have begun to realize that they have alternatives to purchase Starbucks coffee and still sample the luxurious blend by brewing it at home themselves. Customers no longer follow the hype supported by the Starbucks’ name and are becoming more price/value oriented. To remain a major player in the coffee shop market, Starbucks must reinvent themselves with the changing lifestyles, tastes and react to the alternatives within the market.
REFERENCES
- Starbucks Corporation Corporate Social Responsibility / Fiscal 2006 Annual Report (2006), from http://www.starbucks.com/assets/4dd6216d0fd0400f8689eceba0497e04.pdf
- Starbucks Coffee Strategy Analysis (http://www.sba.pdx.edu/faculty/daveg/562/Starbucks.pdf)
- Schultz, H. Creating the Preeminent Global Brand. Sense, the 95th consecutive issue in a series of periodicals devoted to strategic communications issues
affecting top management, from (http://www.lippincott.com/files/documents/sensemagazine/95/files/assets/downloads/sense95.pdf) - How will you lead differently when you get back to your store, 2008 Starbucks Corporation, from http://media.corporate-ir.net/media_files/irol/99/99518/AR2008.pdf
- Trigeorgis, L. & Baldi, F., Valuing brand strategies with real options, from http://www.iag.puc-rio.br/downloads/BrandStrategiesOct2012.pdf
- Brand Equity: What’s Price Got to Do with it?
http://www.millwardbrown.com/Libraries/MB_POV_Downloads/MillwardBrown_POV_Brand_Equity_and_Pricing.sflb.ashx - Starbucks Corporation: Competing in a Global Market, UW Business School (Revised April 7, 2003) http://faculty.bschool.washington.edu/skotha/website/cases%20pdf/starbucks_Intl%20copy.pdf
- Krause Fund Research (April 19, 2013), Starbucks Corporation http://tippie.uiowa.edu/krause/spring2013/sbux_s13.pdf
- Starbucks’ website http://www.starbucks.com/
