Starbucks Corporation is the largest chain of international coffeehouses in the world based in Seattle, Washington, United Stated. It has its presence in over 40 countries in the world with over 16,700 outlets.

Starbucks was started by three partners, Jerry Baldwin, Zev Siegl and Gordon Bowker in the year 1971 at the Pike place market in Seattle, United States. In the year 1982, Howard Schultz, an entrepreneur, joined the company as a Director of retail and marketing. After a trip to Milan, Italy, Howard was intrigued with the idea of having a chain of coffeehouses which would not just provide its customers a place to buy coffee beans but also give them a place to come together and share the experience of drinking great coffee, but the concept did not bring about the same enthusiasm in the company partners. They were of the belief that coffee was supposed to be prepared at home and that launching themselves into the beverage business would divert the company from its primary focus. This forced Howard Schultz to leave the company and start his own Italian coffee enterprise – Il Giornale in 1986.

After a year in 1987, Howard Schultz bought Starbucks Company and its six stores from its original owners, Jerry Baldwin, Gordon Bowker and Zev Siegl. He re-branded three of his own coffee bars Il Giornale, hence started the journey of the brand “STARBUCKS”

After the formation of the company, within a year, Starbucks started three new coffeehouses, two outside the US and one at Chicago Illinois, which clearly stated its intention to expand its base. In the year 1992, Starbucks was floated on to the stock market and already had 165 outlets all over North America. It started its expansion by acquisitions of various competitors and made their presence in many different countries (See Appendix-1 & 2).

Growth approach, since 1992….

The five key elements that made a small coffee shop into a Fortune-500 brand establishment:

Coffee Beans – Quality:

Starbucks has always prided itself on the quality of the coffee it offered. It outsources its coffee beans from North and South America, Africa and Asia. Starbucks has built a strong relationship with the coffee farmers by directly working with them and controlling the supply chain. They ensured the economic viability of the coffee growers by making a long-term arrangement with them. This gave Starbucks the liberty of cutting down costs of middle-men and also gave them the control of maintaining the quality by monitoring the coffee-roasting process.

Baristas -Employees:

Starbucks caters to around 230 million customers every week; an average customer would visit Starbucks at least 6 times a month, whereas a loyal customer would visit it at least 18 times a month [1]. This could only be achieved by employing a staff which believes in the beliefs of Starbucks. Starbuck employees are referred to as “partners” and not just employees. The selection process for new employees was careful and rigorous, so as to recruit members with high adaptability, dependability and their ability to coagulate with team members. Each new employee is trained in the art of making coffee and also on how to meet, greet and serve customers. Starbucks also provided their employees with the personal security by providing their regular staff members with Health Insurance cover and stock options. Starbucks is ranked 7th in Fortune – 100 best companies to work for [2].

For a Cause- Corporate social responsibility:

The strongest feature of Starbucks is its brand name. It was very important for them to maintain and enhance their brand name. Starbucks took initiative in introducing recyclable beverage cups to lower carbon foot print; it took steps to improve the communities were Starbucks outlets are located and also funded various literacy programs. Starbucks contributed to the access of clean water to drink for people in water-stressed countries by introducing Ethos Water fund, it is a bottled mineral water which for every bottle sold donates 5 cents to this cause [3]. During its annual leadership meeting in October 2008, Starbucks used the occasion to repaint and clean the neighbourhood houses and performed variety of other community projects, in “Hurricane Katrina” hit New Orleans by using around 10000 volunteers [4].

Starbucks “third place”- Physical Environment:

The main objective of Starbucks was to take people’s everyday activity of drinking coffee and turn it into an “Experience”. They wanted their outlets to be considered as a “third place” for their customers, apart from their homes and their offices. It knew that the ambiance of the outlet plays a major role in attracting the attention of the consumers. Therefore, the layout design was meticulously planned and built. The design was customised to each outlet, embalming the uniqueness of the neighbourhood, but also keeping the theme of Starbucks in mind. It would give its users a warm, cosy environment to meet new people over a cup of coffee, but also, if required, it would give them the privacy of having coffee on a single couch.

Starbu’X’ marks the spot – Location:

Starbucks has around 11570 outlets in United States alone. They believe in capturing the market by making it convenient for the customers to reach a Starbucks outlet in a walk-able distance at every urban hub. It opened its outlets very close to each other so that convenience of customer is achieved, but not so close that cannibalisation of sales between their outlets occur.

SWOT Analysis:

Strengths:

Brand Name: Starbucks has established a potent brand name and logo, which has also enhanced their Global presence. The strong brand name of Starbucks attracts loyal customers who repeatedly use Starbucks products; it increases the perceived value of the product itself to the customer and thereby increases the effectiveness of their marketing strategy and further increases their sales.

Market Share: Starbucks are the leaders in speciality coffeehouse markets with around 16700 outlets, the next closest being Tim Horton’s from Canada with 3200 stores in US and Canada [5].

Atmosphere: Differentiated atmosphere provides them with the competitive edge against their competitors. Starbucks outlets are designed to exhibit a “Third Place” ambiance, the third place being after home and work.

Starbucks is one of the Fortune 500 companies (261st rank in 2008) with Total net revenue of $10,383 million and profits of $315.5 million. It was also one of the Fortune – 100 best companies to work (7th rank in 2008) [6].

Weakness:

Expansion: The high rate of expansion (before 2008) in the long run may cause self-cannibalisation of the company; the increase in number of outlets per unit urban area would lead to internal disputes and decrease of sales in less favourable areas.

Market risk: Starbucks has a major concentration of their outlets in United States; almost three quarters of their outlets are based in the US market. Starbucks has to look into other new markets, so as to reduce business risk.

Diversification: They need to understand the importance of the market they are serving and diversify their product. They are more focussed on the retail of coffee. They need to give equal importance to their Foods, Music, books and videos business.

Opportunities:

Market reach: since most of their operations are concentrated in the US, any unforeseen change in conditions may cause fallout, hence it could be decrease their market risk by entering into emerging International markets.

Distribution: Starbucks has already utilized retail and drive-through as a means of distribution; they can also look at new distribution methods like home-delivery.

Expansion of their retail operations: Starbucks can diversify in launch of new products like fair-price products and food chain restaurants. Starbucks can form an alliance with other major food and drink companies to come out with new products.

Market segmentation: Starbucks should introduce products which attract the younger market, like introducing Health drinks, energy drinks and kids drinks.

Threats:

Competition: Even though Starbucks are the market leaders in the coffeehouse business, they have stiff competition from the food and beverage industry leaders like McDonalds and Dunkin Donuts, and also supermarkets which sell whole coffee beans to their consumers.

Power of suppliers: The power of suppliers is extremely high because the worldwide production of speciality coffee products is limited to selected regions and also Starbucks gets the Coffee beans from the farmers but it does not own coffee plantations of its own. They can also be affected by the rise in the price of coffee products.

Market Saturation: Starbucks has majority of their outlets in the United States. There is a chance that there would be no room for expansion in their own home market.

Lifestyle Changes: Change in the consumer’s life style and health habits may affect the company. If more number of consumers change their lifestyles against caffeine addiction, Starbucks will face decreased sales.

Present Status – 2009

It is a great achievement by the forefront leaders and the members of this company as to how they turned a meagre coffee shop from the 70’s into a multi-billion dollar company, and it is even more outstanding as to how they maintained their integrity in the core beliefs of their company, even while going through massive expansions. But due to recession in the year 2008, Starbucks saw an unexpected change in market conditions. After reaching the peak market price of $39.63 in May 2006, its prices dropped for the next two years.

Starbucks Share price Graph-2006-2008

This caused many changes to take place in the company. In January 2008, Howard Schultz returned as the CEO of the company, replacing Jim Donald, who after two years was asked to step down due to decrease of sales in 2007. The changes he incorporated in the company’s revival can be analysed using the 3C’s model:

Company:

The foundation of Starbucks relied majorly on massive expansions globally, which was at the rate of 2-3 new stores every working day, but on Schultz’s return in 2008, Starbucks decreased the number of United States new store openings apart from shutting down around 300 outlets. Starbucks’s prime motive, like any other company, was to increase profits and decrease costs. The reduction in new outlets was done mainly to reduce costs. The average consumer in the US had become much more cost conscious, due to increase in US home foreclosures and unemployment during the recession, he preferred low cost alternatives from competitors like McCafe, Dunkin Donuts and many other local coffee shops. Hence the extra investment into starting new outlets was considered as an added waste to the already fading economy and financial position of the company. It can be seen that Starbucks closed down 616 outlets globally (mainly US and Australia), but at the same time entered newer low risk markets such as Czech Republic, Portugal, Netherlands, Poland and Sweden. This ensured growth of the company in terms of Global market reach.

The second change that Starbucks inculcated to reduce costs was to cut down around 6700 job positions globally in 2008, which included 700 corporate and support position staff. The major reason for these lay-offs was the closure of the 616 outlets.

Starbucks also bought down costs by not giving bonuses to its senior executives, including Howard Schultz, who reduced his own salary from $1.2 million to $10,000 in the year 2008. It also sold two of its three Gulfstream Corporate jets to raise funds.

Customer:

After the market crash in 2008, Starbucks had to adopt various strategies to attract back its consumers. There was an increase in consumers who were opting for a low-cost alternative to Starbucks, hence Starbucks came up with $1 filter coffee, with which the customer could get 8oz of filter coffee and could get as many refills as he wants [9], this way Starbucks was able to stabilize their brand by targeting a new segment.

To improvise their marketing strategy, they focussed back on the quality of their coffee. They stopped the use of Pre-ground coffee beans, which would ensure that consumers would get freshly ground, aroma filled coffee every time they ordered. They retracted the warm break-fast sandwiches from their menus, because the smell of the sandwich was said to mask the aroma of coffee itself.

They introduced a new menu with products which represent a healthier lifestyle, like excluding items from the menu which contained high-fructose corn syrup and artificial ingredients. They also stopped the use of milk from rBGH (Bovine growth hormone) treated cows, which were under a lot of criticism for their concern over its effects on human health. This was to attract the health conscious consumers.

Starbucks also introduced “Starbucks VIA” an instant coffee mix, which the customer would be able to enjoy anywhere they want, in their home or work. Some would criticize that this would be a deviation from their prime objective of providing their customers with an experience, but instant coffee market is a different market altogether. Starbucks tried to increase their market penetration by introducing a product which is focussed at people who would like to enjoy their coffee at their home rather than coming to the coffee place.

Starbucks closed all of their stores on Feb 23rd 2008, so as to train their barista’s, so they could cater to the needs of their consumers efficiently. This was publicly announced and it was part of the marketing strategy to make consumers aware of the changes taking place at their local Starbucks outlet. They even compelled their consumers to ask for a replacement, in case the first cup was not the same as what he/she had asked for.

Starbucks started a reward and loyalty program so as to target their frequent costumers. They attracted them with offers such as free Wi-Fi, free refills on brewed drip coffee and no charge for soy milk, flavoured syrups and other additions.

Starbucks introduced “My Starbucks Idea” [10]. It is a community website, in which the consumers can offer their suggestions and advice to the company’s top management.

Competitor:

Starbucks faces competition from numerous directions. In the United States, It has small corner place coffee shops to thwart off their low cost consumers from Starbucks; it has many competitors who offer coffee at their establishment as a part of a broader menu, like McDonald’s and Dunkin Donuts; there are super markets which offer their customers, whole coffee beans, which the consumers use to prepare coffee at home. Starbucks has come up with strategies to stand up against all these growing competitions.

To increase sales against the small coffee shops, Starbucks introduced the release of $1 “short” bottomless brewed coffee, which was able to target the low-cost competitors as well as competitors like McDonalds and Dunkin Donuts, till some extent, but this was not enough to face the competition of McDonalds and Dunkin donuts. So as to beat the competition Starbucks had to first understand the perception of the consumers and why were these establishments a threat.

Starbucks came up with new packaged products through a licensing relationship with KRAFT foods Inc., Pepsi-Cola Company and Unilever Company with products like VIA instant coffee mix, Tazo Tea and Frappuccino, so as to target the companies which offered whole coffee beans and other coffee based products to the customers at supermarkets.

When McDonalds came up with introducing coffee in their menu, they highlighted that the consumer get the same quality of coffee as the Starbucks, for just a dollar. Consumers always banked on the fact that Starbucks coffee was worth their high pricing, but when McDonalds introduced their coffee with the same taste as Starbucks but only cheaper, the consumers had to reconsider. Any consumer would not want to be charged more for what the product is worth, the consumers perceived that the coffee was worth less than it is actually charged at Starbucks. Starbucks lost some of its consumers for a brief period, but Starbucks where quick enough to change their strategy. Starbucks took over Clover Coffee Brewing Equipment Company, so that they can use the innovation of the new Clover Brewing system as a competitive advantage against their competitors. Starbucks with Clover coffee Brewing Equipment Company introduced a new “state of the art” espresso system at all their outlets. It replaced their previous Super Auto Thermoplan Verismo 801 with Thermoplan Mastrena. Starbucks then claimed that the coffee at starbucks would be the best compared to any other coffee in the world. This put them on a different level as that of their competitors.

Future recommendations.

We have seen in this report so far, the past strategies that Starbucks has taken and its effects on the present, the present strategies that it has placed so as to ensure their position as the brand leaders. Now we will discuss the strategies that Starbucks can opt, for a better future.

Reaching the community:

Starbucks has worked its way to maintain a good brand name and it need to uphold and improve that for the betterment of the company. They need to improve their corporate image by portraying their corporate social responsibility in the areas that their outlets are located as well as the areas they are planning to venture. It can be seen that a large percentage of the community is still unaware of their outreach programs. It needs to make an appearance not only as corporate conglomerate but also as a socially responsible company. Starbucks has to use national and international events which may be promoted as community oriented events, and sponsor them and also advertise the support for their cause.

Employee branding:

Due to the recent reduction in workforce at Starbucks, it has lost some of its sheen as a credible employer. It needs to revert back to its old standards. It has to constantly motivate its employees by increasing their incentives and by offering them bonuses. It has to reduce employee turnover rate so as to keep its employees focussed.

Store placements:

The Starbucks outlets need to be placed strategically at appropriate positions such that it does not affect the sales of another outlet in the same vicinity. If the outlets are placed too close to each other they can cannibalise the sales.

Pricing barrier:

Starbucks has positioned itself as a high quality, high price brand. It needs to divert its focus on either reducing its pricing or coming up with alternative products. It can also introduce discount coupons and special offers to its consumers so that they can attract the low cost consumers.

The changes that the company can undergo can be shown by an Ansoff’s Matrix:

Existing Products

New Products

Existing Markets

MARKET

PENETERATION

PRODUCT

DEVELOPMENT

New Markets

MARKET

DEVELOPMENT

DIVERSIFICATION

Market Penetration:

Supply methods:

Starbucks displays the importance of physical environment in their organization to the maximum, so that their customers can have an experience rather than just a cup of coffee. It has also ventured into establishing drive-thru retail outlets which are aimed at working professional who are off to work and want to have their cup of coffee on the go, but Starbucks needs to expand their supply services to home and office deliveries, such that their customers can reach them wherever they are and whenever they want. It can also take contracts to delivering coffee to various business establishments directly without any ques. This would give them a new platform to increase their sales.

They can include set meals with their menu for breakfast lunch and dinner, such that customers in hurry can select a set meal from the menu and continue. It will reduce the length of their Q’s and increase productivity.

Health conscious lifestyle

Starbucks should venture into selling products which are organic and healthy in nature. The number of people turning towards a health conscious lifestyle is increasing every day. Therefore Starbucks has to cease this opportunity and introduce new organic food items and new health drinks in their menu such as low calorie baked products, salads, fresh fruit juices, etc.

This concept can work for the betterment of Starbucks in two ways. The first one being that they’ll be able to target a new market segment of health conscious population and the second is that they can discredit their competitors like McDonalds and Dunkin Donuts, who sell products which cause obesity and heart problems.

Market Development:

Starbucks is already on more than 55 countries, but as highlighted in the SWOT analysis it can be seen that more than three quarters of their outlets are based in United States of America. They need to diversify and divulge themselves into newer low risk markets such as Africa and India (Low risk because of the difference in exchange rates), such that their market risk is spread through various markets and is not concentrated at only one location.

Product Development

They can also venture into energy drinks and fizz drinks market. The sale of energy drinks is mainly focussed at teens and young adults. They can also foray into the children’s drinks which is an open market, since many companies have not made their appearance in this niche’ market.

They can shift their focus from coffee and give some importance to other products which they own like foods, music, books and video business.

Diversification:

Starbucks can improvise their products to suit their customers globally. For example: Starbucks can introduce more locally originating tea variants, if it is located in China, because the Chinese prefer tea rather than coffee, but at the same time keep their brand product (Coffee) alive amongst other choices in the menu.

Conclusion

Starbucks is a multi-national conglomerate that has the capability to cross sales of all their competitors, the only thing they have to do is, stick to basics. They initiated their focus in this industry with the thought of making the best quality of coffee accessible to everyone in the world and to give everyone an environment that can be considered as a good gathering place for friends or can be everyone’s own “fortress of solitude”, this environment they called as “third place” environment. In today’s situation where the rapid pace of time has made everyone long for that third place environment, Starbucks will be there to serve.

Appendix – 1

Major acquisitions carried out by Starbucks Corporation.

Year

Company

Franchise

Location

1998

Seattle Coffee Company

Seattle Coffee Company

United Kingdom

2003

AFC Enterprises

Seattle’s Best Coffee

Georgia – United States

2003

AFC Enterprises

Torrefazione Italia

Georgia – United States

2006

Diedrich Coffee

Diedrich Coffee

Oregon – United States

2006

Diedrich Coffee

Coffee People

Oregon – United States

Appendix – 2

Major International outlets started.

Year

Country

1987

Vancouver, Canada

1996

Tokyo, Japan

1998

London, UK

1998

Bangkok, Thailand

2006

Sao Paolo, Brazil

2007

Moscow, Russia

2008

Argentina

2009

Bulgaria

2008

Czech Republic

2008

Portugal

2009

Poland

2009

Utrecht, Netherland

2009

Stockholm, Sweden