Basics of Marketing

Starbucks

We are not in the coffee business serving people. We are in the people business serving coffee Howard Schultz, CEO, Starbucks. Starbucks do not consider that they are in the coffee business but they believe that they are an organisation where customers and prospective customers are their primary focus on every single thing that they do. Their formula to success is that they sell and promote the Starbucks Experience, which is not based on the good quality of their products but its main foundations are dedicated on how their products are served. Starbucks management is intrinsically motivated to deliver their products in ways that have an impact on people's hearts and in the process create more positive and compelling customer experiences. Having good customer experience is essential to creating brand value and brand strength and these are the sum of experiences that customers have with Starbucks and all its products and services. Satisfied customers are the foundation of the continuing success of organisations (Bryan Gladstone, 2000).

Over the years the coffeehouse adopted new store concepts where they introduced a new selection of food offerings such as sandwiches, hot lunches, cakes and cookies, muffins, pastries and doughnuts, music entertainment, high-speed internet as well as free wireless internet. The stores were also individually designed to look distinctively local thus maintaining the local people's culture, status and beliefs. A simple reason why people are still derived to choose to pay more for a cup of coffee and visit Starbucks, is that they will experience much more than a taste of just a premium cup of coffee. This is for the same reason that people choose to dine out at a high-priced restaurants where food is presented rather than served, when alternatively they can simply prepare a low-priced meal in the comfort of their home. Conversely, having low prices for premium coffee and ancillary goods may possibly be perceived that the products are not that premium after all. This is a

psychological factor on consumer behaviour since customers sometimes perceive the value of the goods by the price and not quality and value for money.

People visiting the coffeehouse might do so because they like the taste of their coffee, also they like the aroma and they feel comfortable and prestigious.

People might also attend to satisfy their own curiosity and just tryout what the store has to offer. In most countries Starbucks coffeehouses are found to be more convenient since the stores are well distributed in every town and village. Delivering a good service and having all these well positioned stores create a competitive advantage, since customers can easily visit Starbucks on a daily. In commenting on this, Tschohl (1991) cites William Band of the consulting arm of Coopers & Lybrand: Customer service is not just a competitive edge. In many industries it is the competitive edge. Service is the new standard by which customers judge an organisations performance.

Similarities exist between how these two companies face challenging matters and opportunities arising from new markets. The way that these companies dealt with these difficulties and opportunities made them two of the most successful brands in their respective sector. Similarities: Focus on one product: In the early days both McDonalds and Starbucks focused their efforts only on one product. This had to change over time given the new opportunities arising. Overseas opportunities: Once the market has been saturated both companies opted to seek overseas opportunities, resulting in McDonalds having more than 17,000 outlets located outside the US, whilst Starbucks is present in over 39 countries around the world. New Markets: The reason why Mc Donalds penetrated the coffee

sector was to try and distance itself from other fast food competitors such as Burger King and Subway. Starbucks co branding deal with Kraft has opened new opportunities by pushing its products into supermarkets making their products more accessible to their customers. Cultural Problems: Starbucks is facing cultural problems in China as activists are doing pressure to banish its outlets from Beijings Forbidden City. On the other hand McDonalds have the same problem in India, where outlets cannot offer burgers which are made from cows meat due to religious believes. Economical: With the economical turmoil both companies faced challenging periods, where people have less disposable income thus people would opt to buy cheaper alternatives products. Environmental Factors: Different pressure groups are making several attempts to put pressure on these companies in order to reduce their carbon footprint, such as reducing the amount of packaging materials.

Social Factors: Increasing concerns regarding health issues facing both companies. Starbucks is being scrutinised for problems caused by high dosage of caffeine consumed, whilst McDonalds is under continues bombardment related to junk food meals which can be a major influence on increased obesity in children.

Threats: Threats of increasing new entrants and existing competition such as Costa cafe for Starbucks and Burger King for McDonalds.

Strengths of dominating brands: Both companies have a strong brand. Standardised experience of the brand makes the brand recognisable worldwide such as McDonalds jingle Im loving it which is recognised in all countries McDonalds operate in.

Differences:

Technological Aspects: Starbucks has the facility to buy online items from their website, starting from electrical kettles to music CDs. This will make it more easily for customers to purchase their products rather than McDonalds.

Brand Experience: The experience that a customer has when eating at McDonalds is different from the one received at Starbucks. As one of Starbucks executive said we are not in the business of filling bellies, were in the business of filling souls. On the other hand Mc Donalds does not offer the same experience, as their main focus is on fast food dining rather than enjoying the whole experience of dining.

Target Markets: The two companies have different target markets. More effort is done by McDonalds to target children example the creation of Ronald McDonald and specified meals example the Happy Meal. Starbucks cliental is more towards attracting youths and business

people. The introduction of Wi-Fi in McDonalds restaurants is a sign that McDonalds are trying to attract this type of cliental.

Both companies have similar attributes to each other but both have to be careful and acknowledge the risk of losing business focus. The more new markets that companies decide to enter the more risks are involved for example competitors responsiveness.

It is crucial to look at future possibilities for the organisation through a systematic approach and taking into consideration both positive and negative concerns. This can be addressed by applying the SWOT analysis tool. The following are some of the Strengths, Weaknesses, Opportunities and Threats of Starbucks.

Strengths:

A global organisation that operates over 13,000 stores in 39 different countries. Has a strong brand image which is associated with high quality coffee and excellent customer service also known as the: The Starbucks Experience. Cost advantages can be obtained with economies of scale when sourcing the raw materials for their products since very large quantities is consumed on a daily basis.

Has a committed workforce and on several occasions has been awarded the Fortunes Magazine one of The 100 Best Companies to Work For award.

Weaknesses:

Starbucks is a premium brand so therefore its products are more expensive than those of its direct competitors. This can lead to lower sales levels in the event of an economic downturn.

Core business is related to coffee and coffee related products, which finally might be limited to the amount of different products it can offer. Extreme size of the organization scattered through-out the globe. Seem to have a lack of internal focus and clearly give a much greater focus towards the expansion of the organisation and this is why it might have lead to the watering down of the Starbucks experience.

Opportunities:

Increase the number of stores to be more reachable. Increase product diversification that is not only related to coffee but to food and non-food products.

New retail channels to sell its products for example in supermarkets or else by co-branding with other manufacturers.

Continuous improvements towards the efficiency and effectiveness within the organisation.

Continuous technological advances to provide better quality and efficient service.

Continued expansion and domination of the market.

Threats:

Possible saturation of the coffee bar market in certain places. Increased direct competition from other high profile brands which enter the coffee bar market for example McDonalds caf.

Negative publicity from activists during anti-globalization demonstrations. Another recession or a downturn in the economy might affect consumer spending thus having less disposable income, resulting in consumers might resort to cheaper substitute brands.

The rise in cost of raw material and labour may affect the profit margins and growth margins.

Consumer trends towards a more healthy way of living, away from caffeine. Political and cultural issues in foreign countries. Environmental disputes

During the last two and a half decades, Starbucks has witnessed a substantial organisational growth. Thousands of more stores have been opened throughout the globe which caters for over 40 million customers each week. Resulting to this, sales and earnings have more than tripled over the last five years. However to achieve such growth, most companies might experience problems and challenges, and if not carefully tackled, then all the success achieved, can end up in a disaster.

For the past couple of years, most major fast-food brands have been under fire from health organistaions due to the fact that most of their products are contributing to health complications that are affecting an increasingly amount of people. People suffering from obesity, heart disease and diabetes are always on the rise and statistically the main contributor is the lack of exercise and the consumption of an unhealthy diet. Many health organistaions and governments are doing their utmost to promote ways of a healthy lifestyle, by making people aware of the risks involved when such foods are consumed on a frequent basis. New legislations have been introduced in the last few years mainly to help the consumer better understand what is being consumed. For example all food items have to be labeled with all ingredients and have to include clearly all the nutritional information.

Starbucks has already been criticized for their big doses of coffee, which when consumed in large amounts, might result in harming ones health. The number of people becoming aware of the possibility of harming themselves and trying to live a healthier lifestyle is on the increase. Therefore Starbucks can be faced with challenging situations if such trends are practiced by the majority. The ageing population may also have a negative impact on the companys growth. Since Starbucks is a premium brand offering products at premium prices, senior citizens, especially the retired are likely to have less income at hand, therefore finding substitute brands which are less costly might be their best option. Another point is that people with health issues related to age will not be able to consume most of Starbucks products since they contain the ingredients that one should keep as low as possible due to their circumstances.

Anti globalization protests against Starbucks, not only may have affected the companys image, but also has in some cases prevented its expansion. For example, several activists had complained about a store located near Chinas former imperial palace as an insult to their nation. Another instance in Ireland happened during the initial stages of the product development. Starbucks was attacked by activists and accused for cluster-bombing or for blanketing an

area by opening several chains of stores in a restricted area and consequently overpowering the small players in the same market within that region.

Starbucks is a premier roaster and retailer of specialty coffee in the world which operates in more than 39 counties. The companys core business activity involves the purchasing and roasting of high quality whole beans which are sold along with tea beverages and a variety of fresh food products though company operated retail coffee house chain of stores. Starbucks offers its customers coffee, tea and other products through other channels such as supermarkets and various licensed retail stores. Coffee products are sold in multiple forms and through other diverse channels including airlines, hotels, bookshops and online stores. Through joint ventures with licensed market leaders in the beverage industry, Starbucks produces ready-to-drink products such as the bottled Frappucino. This wide range of product offerings is a result of product development and diversification strategies to counter effect the competition and threats that the company is experiencing from its rival coffee chains Costa Coffee, Caribou Coffee, Coffee Republic and fast-food companies such as McDonalds. Identification of the key products and examination of the relative market share position and growth rate of each SBU provides an indication of Starbucks overall position on the BCG Growth matrix and henceforth its relative positioning in the coffee industry. It is important to note that classification of each SBU into one of the four quadrants is rather subjective due to the absence of statistical data.

Product name

Channel

BCG Quadrant

Comments
/

Premium coffee

Store

Star Cashcow

Heavy competition from rival coffee chains

Core product Most of the coffee is bought in stores

Frappucino and iced Store products

Cashcow

Customers usually attracted

are highly to

seasonal products Product development Krispy doughnuts Fresh Fields Store Kreme Store Question mark Question mark Store Question mark Assorted snacks Store Question mark Packaged coffee Supermarket Cashcow High Share Forward integration strategy Question mark Market Product diversification

gourmet sandwiches Greek pasta salads

Gourmet coffee Tea Gifts CDs Coffee equipment

Internet Internet Internet Internet

Low Market Share High Growth These products Market

making Internet

generate a small fraction of the total

sales Product diversification

Bottled Frappucino

Supermarket/Store

Question mark

Product development Product development Leading brand of ice-cream

Doubleshot espresso drink Ice-cream

Store

Question mark

Store

Star

Pancakes Sirloin Mediterranean chicken breast

Store Store Store Question mark

Product diversification Introduced as part of the new store concept strategy

Starbucks Entertainment

Various

Star

High Share High

Market

Market

attractiveness May grow faster than the parent

company

Table 1.1 Starbucks product line

Starbucks Entertainment Premium coffee Ice-cream

Krispy Kreme doughnuts Fresh sandwiches Greek pasta salads Assorted snacks Gourmet coffee Tea Gifts CDs Coffee marking equipment Bottled Frappucino Doubleshot espresso drink Pancakes Sirloin Mediterranean chicken breast Fields gourmet

Relative Market Growth Share

High

Stars (A)

Question Marks (B)

Frappucino products Premium coffee

and

iced

Packaged coffee Cash Cows (C) Low Dogs (D)

High

Low

Relative Market Share

Fig 1.2 BCG Growth Matrix

What are the implications of its position?

Quadrant A. Starbucks heavily invested in its entertainment division as it has identified and addressed the needs of troubled music artists. It has acknowledged the long-term opportunities and profitability of this SBU within a relatively high-growth market. In 2006 Starbucks partnered with Apple on selling music online, complimenting to the Starbucks music store concept. As market leaders in premium coffee retailing industry and other divisions, the company heavily invests in these high-share SBUs to maintain its dominant market position.

Quadrant B. Expansion of new food offerings and diverse products to its product portfolio leads to a number of Question Marks. Revenue generated from these products is relatively low henceforth the company should take strategic action to invest and turn these low-share SBUs having a high growth market potential into Stars.

Quadrant C. Starbucks enjoys a positive cash flow from its well-established and successful products. The company should harvest these high market share products requiring little need for investment.

From little beans big things grew Founder Howard Schultz, met the Generation Xs requirements by introducing Starbucks, Giving the generation a different perspective to coffee, in the fast life. The visionary Strategic Business Unit commenced the business venture intended for the Generation X To slow down, smell the coffee and enjoy the life a little more. Starbucks wanted to create not only a coffee shop, but evolve an experience out of Starbucks! In fact this has resulted in its rapid growth expanding from only 11 shops in 1996 to approximately 40,000 shops worldwide in just 10 years. Although competition has formulated many treats for the chain, the success has retained its Star position within the BCG Growth Matrix within the company growth, as the different strategic business units are diversified in a vision focusing on gathering an experience out of Starbucks, enforcing a strong brand name which reveals through its successful growth rate. The Diversification of the SBU such as Starbucks Entertainment, Co-branding, Dining experience , introducing new products and store concepts gives Starbucks a conceptual perception which the Generation X are always for the look- out. In the future this may need to be adjusted accordingly to the coming generations to suit their concept of relaxation and lifestyle, as the company might then risk a shift from a Star high share position, declining to a lower growth rate resulting to a low market share due to the product life cycle decline by time and rising competition within the markets. Cultural factors together with environmental awareness also needs to be deemed indispensible for investment as investing in the wrong country might decline profits and also be perceived negatively by potential customers which might be a repercussion to a decline in market growth.

In a measure of future investment, although as competition rises Starbucks has met a point where it has started to decline its position as a star to a cash cow harvesting investment to a more precautious strategy rather than focusing on the commodity will aid the chain to deliver a strong approach within the Growth

matrix. This may be obtained by carefully examining the strengths, weaknesses, opportunities and treats of each SBU carefully. Conducting a SWOT analysis, Starbucks will invest in its strength which is offering the Starbucks Experience as the initial concept of the formulation of the chain which had set foot to, also viewing opportunities that might benefit the company such identifying a Strategic Business Unit such evolving a new concept to collaborate with the current Starbucks Experience. Although the focus of Strengths and Opportunities might have a positive indication a clearer vision needs to be focused when the company indicates its weaknesses and treats. Starbucks has been criticized for affronting the Chinese culture, which may lead to closure of Starbucks shops in China where it is densely populated and a potential market. Although the firms strategy focuses on the customers commodity, Starbucks needs to evaluate each and every market individually since cluster bombing is approached negatively such as indicated in Ireland, where smaller business are effected with lower business sales. Since the chains visionary is to offer the Starbucks experience, products are relatively high-priced in comparison with other chains such as Mc Donalds or Dunkin Doughnuts Starbucks needs to retain its focus on the quality of the service enlightening the experience unique! Although the Starbucks chain has a positive prospective through its rapid growth, international expansion and diversity, It is fundamental that each SBU is examined carefully and adequately adjusted to the customer / environments optimal satisfaction, leaving Starbucks a true Star in the BCG Growth Matrix.

Strategies that companies would opt to choose are normally based on the companys mission-vision-values principles. These attributes helped Starbucks to outline their strategy. Keeping in mind why the business exists, the vision where Starbucks want to be in the future and the values that the company believes in will help in outlining the strategy.

Starbucks mission statement our mission: to inspire and nurture the human spirit- one person, one cup and one neighbourhood at a time Some of the values that Starbucks uses to pursue its mission are: Quality: The importance of quality coffee beans, applying the highest standards of excellence in purchasing, roasting and fresh delivery of the coffee, improving the quality of lives for those people who are growing these coffee beans. Starbucks has done this by implementing Coffee and Farmers Equity practices. This has resulted in helping Ethiopian farmers and their communities providing adequate working and living conditions. Customers: The emotional aspect that Starbucks tries to delivery through its products. Every cup of coffee is given the same attention and dedication so that the experience is a constant one, continues customer satisfaction resulting in customer retention. Stores: Achieving customers sense of belonging to the company, a place where the client can slow down from his hectic day and enjoying a cup of coffee to its fullest, providing a great working environment to its employees. Neighbourhood: Starbucks see the importance to be part of the communities in every location that they are operating in. On the big scale Starbucks is promoting the film Arctic Tale to raise awareness on concerning environmental issues. Shareholders: Recognising the importance of future profitability success. As any other company Starbucks has its obligations towards its share holders by maximising its share values.

Issues to raise concern regarding strategies that may affect Starbucks Mission:

In trying to achieve more growth Starbucks has to be careful not to go against its mission. As recommended by Mr.Schultz Starbucks is watering down its brand by opening too many outlets which lack the soul and authenticity. The introduction of automatic express machine is losing all the experience that Starbucks tries to pass to all clients which visit their stores. Mr.Schults suggests that the company should look at its core and to take decisions that would give back the values and the tradition that the company originally had. An option would be in eliminating those activities that would not support the companys mission and they are not creating any additional value, for example the elimination of the automatic coffee machines. Any Activity that Starbucks takes will have to be focused in creating additional value. Creation of additional value in aspects such as learning and growth, internal perspective, customer Perspective and The financial perspective will be of high leverage for Starbucks to succeed in its strategy.

References

Starbucks,

Starbucks

Mission

Statement.[online]

Available

at:

<http://www.starbucks.com/about-us/company-information/missionstatement> [Accessed 20 November 2011 ]. Starbucks, Starbucks. [online] Available at: < http://en.wikipedia.org/wiki/Starbucks> [Accessed 20 November 2011 ]. Starbucks, Wikipedia, http://en.wikipedia.org/wiki/Starbucks Financial Annual Report 2010, Starbucks http://www.starbucks.com/about-us/company-information 20.11.11] Gladstone, B., 2000. From Know-How to Knowledge. London: The Industrial Society. Tschohl, J., 1991. Achieving Excellence through Customer Service, United Kingdom: Prentice Hall. How Howard Schultz Managed To Enhance Starbucks Soul. [online] Available at : < http://janabudikova.blogspot.com/2011/04/how-howardschultz-managed-to-enhance.html > [Accessed 20 November 2011] [accessed