Starbucks coffee company

CHAPTER 1: INTRODUCTION

BACKGROUND OF STARBUCKS

Starbucks Coffee Company was founded in 1971, opening its first store in Seattle's Pike Place Market. Starbucks, named after the first mate in Herman Melville's Moby Dick, is the world's leading retailer, roaster and brand of specialty coffee. With almost 17,000 stores in 43 countries in North America, Europe, Middle East, Latin America and the Pacific Rim, and over 172,000 employees worldwide, Starbucks is becoming one of the most respected brands in the world.

The company started as a respected local roaster and retailer of whole bean and ground coffee, but has diversified into other areas of market growth over the years.

This report analyses the growth strategies as well as the positioning strategies that has been used to develop the Starbucks brand. The analysis and evaluations are based upon knowledge gathered during lectures and tutorial sessions, books and journals, research databases and internet research.

AIM

The aim of this report is to critically evaluate the growth strategies adopted by Starbucks, the positioning strategies used to develop the brand and major challenges now faced by the company.

OBJECTIVES

CHAPTER 2: GROWTH STRATEGY OF STARBUCKS

Question: Critically evaluate the growth strategy adopted by Starbucks.

The Starbucks brand which began as a roaster and distributor of high quality whole beans and did not sell coffee by the cup has grown and developed rapidly over the years. Nowadays, in addition to coffee sold, Starbucks also sells other products such as sandwiches and pastries in its coffee stores. To evaluate the growth strategies adopted by the company, the Ansoff Growth matrix will be implemented in the report.

Jobber (2001) defines the Ansoff Growth matrix as a tool that helps businesses decide their product and market growth strategy. Ansoff's product/market growth matrix suggests that a business' attempts to grow depend on whether it markets new or existing products in new or existing markets. By applying Ansoff's matrix,

Market penetration seeks to achieve four main objectives:

Starbucks has managed to gain a high market share by having nearly 17,000 stores in 49 countries. Starbucks geographic strategy for expanding its retail business is to target areas with favourable demographic profiles.

Starbucks retail stores are typically located in high-traffic, high-visibility locations, to serve as a' hub' for the area. It then opens many other outlets stores in the same area. Because the Company can vary the size and format, its stores are located in or near a variety of settings, including downtown and suburban retail centres, office buildings and university campuses. To provide a greater degree of access and convenience for non pedestrian customers, the Company has continued to expand development of drive-thru retail stores.

By pursuing this clustering strategy, they were able to achieve market dominance quickly. Even though this strategy resulted in oversaturation of their stores, it also made it cheaper to deliver supplies and manage each store effectively, and at the same time kept competition at bay (Starbucks Annual report, 2008). The size of the company has enabled it to absorb any losses that would result from the cannibalising of store sales when a new one opens up nearby.

To increase the usage of the brand and enhance customer service, Starbucks introduced incentives to increase consumption frequency. The Starbucks reward card was introduced to enable customers to prepay for their coffee and snacks or give the gift of Starbucks to family and friends. This strategic move enabled customers to move through the stores faster and return more often. (Starbucks.com)

By applying Ansoff's model above, Product development can be defined as a strategy for market growth where new products are offered to existing market segments (Johnson et al 2005). To develop the products, Starbucks has introduced more than 30 blends and single-origin coffees as well as other handcrafted beverages such as hot and iced espresso beverages, coffee and non-coffee blended beverages and Tazo teas.

Starbucks also introduced new product developments in order to compete with companies aiming to offer consumers more health conscience drink options.

In addition, Starbucks also introduced automatic espresso machines with the objective to reduce waiting time at its stores (Starbucks.com). Even though this was convenient for the baristas as it improved productivity, it also created a physical barrier between them and their customers. Also, the coffees from the machine did not have the traditional tastes as compared the ones created by the baristas.

Starbucks over the years has diversified into other areas of market growth to extend the brand. According to Kotler et al. (2008), by applying Ansoff's model above, diversification is a strategy for market growth where new products are offered to new markets. This is an inherently more risky strategy because the business is moving into markets in which it has little or no experience.

By diversifying into unrelated products, Starbucks adopted a conglomerate diversification strategy to market its brand. Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line of business.(Johnson et al, 2005) Products such as CDs, Oprah Book Club selections etc. were all introduced to consumers. In addition to them, Starbucks opened separate food-and-drink outlets. All these were introduced to improve the profitability and increase the growth rate of the company.

By diversifying into unrelated areas, Starbucks managed to increase awareness of their brand, improve their brand image and also enhanced the parent brand. On the other hand, by diversifying into other areas, the brand identity and core values were lost hence resulting in the closure of several ventures such as the sit-down restaurants and computer friendly bar.

CHAPTER 3: POSITIONING STRATEGIES OF STARBUCKS BRAND

Mercer (1996) defines segmentation as a process used by companies to target a specific group of customers with different needs, wants and characteristics. For a segment to be viable, it must meet several requirements such as size, identity, relevance and accessibility. In order to have an effective market segment, companies must have a target market, tailored marketing mix and differential marketing strategies. (Jobber, 2001)

Starbucks' marketing strategy involved positioning its Starbucks outlets as a place where consumers can spend time other than their home or work. This was done by making each of its stores as comfortable and relaxing as possible by using comfortable furniture and relaxing music in their stores. (John, 2008) Starbucks chose to focus on the geographic, demographics and psychographics of their customers. It is with the information gathered regarding these segments that Starbucks can better serve its customers.

Demographics are concerned with the structure of the population in terms of ages, lifestyles and economic factors (Blythe, 2008). Starbucks targets connoisseurs, highly educated relatively affluent, well travelled and technologically savvy with an interest in arts and other cultural events. In addition, by introducing other non-coffee products, they aimed to have wider target market i.e. non-coffee drinkers.

Psychographic segmentation involves dividing a market into different groups based on social class, lifestyle or personality characteristics. (Blythe, 2008) Starbucks focuses heavily on charity and the arts, and is making significant efforts to be a socially and environmentally responsible company. To help ensure sustainability and future supply of high-quality green coffees in Central America and to reinforce the Company's leadership role in the coffee industry, Starbucks operates the Starbucks Coffee Agronomy Company, S.R.L, a wholly owned subsidiary located in Costa Rica. Staffed with agronomists and sustainability experts, this first-of-its-kind Farmer Support Centre is designed to proactively respond to changes in coffee producing countries that impact farmers and the supply of green coffee. During fiscal 2008, the Company expanded this sustainability program to Africa by establishing a Farmer Support Centre in Rwanda (Starbucks annual report, 2008). Starbucks also actively participates in AIDS benefits, and for every city that has a store, Starbucks sets up at least one shelter for the underprivileged children and donates money as well (Starbucks.com). By participating in various different positive causes and events, Starbucks gains a lot of favourable exposure and publicity for its brand.

Geographically, Starbucks targets areas located in high-traffic, high-visibility locations, to serve as a' hub' for the area. It then opens many other outlets stores in the same area. While the Company selectively locates stores in shopping malls, it focuses on locations that provide convenient access for both pedestrians and drivers.

According to Blythe (2005), branding is defined as a process of adding value to the product by use of its packaging, brand name, promotion and position in the minds of consumers. The Starbucks brand has been positioned as upscale and good quality and promoted as such to its consumers. To compete successfully in a target market involves providing the customer with a differential advantage. This involves giving customers something better than competitors (Jobber, 2001). The Company's goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products and by providing each customer a unique Starbucks Experience. (Annual Report, 2008)

By positioning itself as a specialty premium coffee retailer which sells a wide variety of coffees and other beverages, both hot and cold, together with snacks and sandwiches and a network of over 17,000 stores in 49 countries, gives the company a strong and well known brand image and differential advantage over its competitors. This scale and strong brand give Starbucks a high degree of bargaining power with suppliers and also differentiates its offerings.

Starbucks implemented a well integrated market mix to maximize their brand awareness and establish themselves as the best coffee brand to the world and target markets. The 7 elements of the marketing mix implemented by Starbucks can be found in table 3.1 in the appendix.

Starbucks were able to achieve market dominance by positioning its price, products, place, promotion, process, people and physical environment in a way which differentiated them from competitors. Starbucks has managed to convince its customers its products are associated with quality, and as a result, the company has been able to differentiate itself from competitors with this perception whilst also charging a premium price for its product.

CHAPTER 4: MAJOR CHALLENGES FACED BY STARBUCKS

Question: What are the major challenges Starbucks now face and how could consumer trend insights help? Recommend and justify what actions Starbucks need to take to revitalise the brand.

Starbucks has managed to achieve market share and dominance over the years through store growth, retail chain growth, new products growth and International market growth. However, in September 2007, the Company experienced a decline in their brand from the failure of their sit down restaurants and other ventures. (John, 2008) To determine major challenges the company now faces, the company's microenvironment will be evaluated.

According to Kotler et al., (2008), to be successful, a company must provide greater customer value and satisfaction than its competitors do. Starbucks faces competition from quick service restaurants and specialty coffee shops. The Company believes that its customers choose among specialty coffee retailers primarily on the basis of product quality, service and convenience, as well as price. Starbucks also faces well-established competitors in many International markets and increased competition in the US ready-to-drink coffee beverage market. Starbucks also faces intense competition from both restaurants and other specialty retailers for prime retail locations (Starbucks annual report, 2008)

In order to revitalise the brand image and reputation, Starbucks must implement several measures.

Firstly, can franchise some of the Company's stores. Franchising shifts the financial risk from the corporation to an individual. So an advantage of Starbucks franchising would be to open hundreds of new stores with less risk to the company, and make profits in doing so. In addition Starbucks would have less research and development costs because the franchisee would have greater knowledge of the local market in terms of demographics, psychographics, geographic, and local/state/country regulations. The disadvantages of franchising are that Starbucks would give up a certain amount of control over the store, and the way it operates (Business Link.com)

Secondly, Starbucks may want to develop strategies for downsizing some of their stores. According to Kotler et al., (2008) firms must downsize if a change in market environment makes the product less profitable. Starbucks has identified and has committed to closing approximately 600 underperforming company-operated stores in the U.S. and 61 stores in Australia. (Starbucks annual report, 2008)

Lastly, in order to stay ahead of its competitors, Starbucks can adopt acquisition strategies in order to gain a high market share and reduce the threat of competitors in the coffee industry.

CHAPTER 5: CONCLUSION

Starbucks operates in a business environment which requires excellent brand identity and reputation to create trust with its internal and external stakeholders. This reputation has been built by the company over the years through its provision of the 'Starbucks Experience'.

Starbucks must slow down its expansion of new retail stores and international stores as it is very saturated, it should focus more on marketing products in the stores that have already opened.

The report concludes that even though the company has got an excellent brand name identity and reputation in the coffee industry, it needs to be aware of unavoidable factors in both the micro and macro environments which if not monitored closely, can have severe implications on the business.

In order for the Company to stay at the top, it has to maintain its innovative skills and continue offering new differentiated products, invest in its partners and in its ethical values towards the environment. Also, the company can downsize and franchise some of its stores to increase profitability and market share.

BIBLIOGRAPHY

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