Starbucks, as we see today was not there from the very beginning. Starbucks has the very humble start when three coffee fanatics, Gerald Baldwin, Gordon bowker , and Ziev siegl, – opened a small coffee shop in Seattle’s pike place market. Starbucks Corporation is an American global coffee company and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 20,366 stores in 61 countries, including 13,123 in the United States, 1,299 in Canada, 977 in Japan, 793 in the United Kingdom, 732 in China, 473 in South Korea, 363 in Mexico, 282 in Taiwan, 204 in the Philippines, and 164 in Thailand.
Starbucks locations serve hot and cold beverages, whole-bean coffee, micro ground instant coffee, full-leaf teas, pastries, and snacks. Most stores also sell packaged food items, hot and cold sandwiches, and items such as mugs and tumblers.
Starbucks Evenings locations also offer a variety of beers, wines, and small bites after 4pm. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film.
Many of the company’s products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. From Starbucks’ founding in 1971 in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-1990s, and overseas stores now constitute almost one third of Starbucks’ stores. The company planned to open a net of 900 new stores outside of the United States in 2009, but has announced 300 store closures in the United States since 2008. 8
1.2 – History of Starbucks
Starbucks has always been a place where one can find the world‟s best coffees. From 1971–1976, the first Starbucks was at 1912 Pike Place Market; it then was never relocated. The company only sold roasted coffee and did not yet brew coffee to sell. During their first year of operation, they purchased green coffee beans from Peet’s and then began buying directly from growers.
The first Starbucks opens. The name comes from Herman Melville‟s Moby Dick, a classic American novel about the 19th century whaling industry. The seafaring name seems appropriate for a store that imports the world‟s finest coffees to the cold, thirsty people of Seattle.
Howard Schultz joins Starbucks in 1982. While on a business trip in Italy, he visits Milan‟s famous espresso bars. Impressed with their popularity and culture, he sees their potential in Seattle. He‟s right – after trying lattes and mochas, Seattle quickly becomes coffee-crazy.
Starbucks expands beyond Seattle, first to the rest of the United States, then the entire world. After becoming one of the first companies to offer stock options to its part-time employees, Starbucks becomes a publicly traded company.
The Starbucks phenomenon continues. As of this writing, Starbucks has more than 15,000 locations in over 40 countries. In addition to our excellent coffees and espresso drinks, people now enjoy for Tazo tea and Frappuccino blended beverages. 9
1.3 – Starbucks Mission Statement
Today, Starbucks Coffee Company has outlined two mission statements; one for the company and one that defines their commitment to the environment: “To inspire and nurture the human spirit – one person, one cup, and one neighbourhood at a time” – Starbucks Coffee “Starbucks is committed to a role of environmental leadership in all facets of our business.” – Starbucks Environmental Mission Statement Along with its inspiring mission statements, principles have also been outlined to expound further on what Starbucks Coffee Company is all about. These principles were divided to highlight the entities that matter most to the company and are listed as follows, with a brief description. Our Coffee – High quality has always been the passion of Starbucks coffee, and hard work has been done to maintain and improve that.
Our Partners – Everyone who works for Starbucks are partners because they all share a passion to create a place where everyone is treated to a standard that includes respect and dignity. Our Customers – Although Starbucks holds customer satisfaction through quality-made beverages as important, they also focus on the significance of human connection. Our Stores – The Starbucks mission statement also focuses on making their stores a “haven” for people to go to whenever necessary. Our Neighbourhood – Starbucks considers their stores as part of the community it is in, and are very passionate about doing their part and being responsible about it. Our Shareholders – Starbucks believes that actions towards success rewards everyone involved in the company. Therefore, Starbucks is fully accountable to uphold its principles to the benefit of everyone connected with Starbucks. 10
Onward – The Starbucks Mission Statement page leaves this without an explanation – but for good reason. The future may be unknown, but Starbucks regards it as important, and all decisions and actions have to contribute to making a better future for Starbucks and all its partners.
1.4 – Industry Structure
In India, the specialty coffee industry has the potential for high barriers to entry but lacks them due to the industries immature state and the presence of no established firms. An ideal strategy would involve a firm establishing themselves in a rapid manner through an aggressive growth strategy. As defined by Michael Porter there are three potentially successful generic strategies: Overall cost leadership, Differentiation and Focus
For Starbucks India seems to fit into the generic strategy of focus with an emphasis on differentiation within the particular target consumer segment, since they would be opening up their stores in Taj group of Hotels, one of the premium hotels in India. A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment. Starbucks India can also but combines this broad scope with a differentiation strategy based on design, branding and user experience that enables it to charge a price premium due to the perceived unavailability of close substitutes. However the industry structure in India for retail coffee stores is bit different. Café coffee day and Barista have their stores open in the public areas where the masses as well as the elites have the access. So in terms of accessibility of the stores the current Indian industry structure differs from that of Starbucks. 11
1.5 – Opportunities and Challenges faced by Starbucks in India Opportunities:
Coffee stores are becoming quite popular in India. These stores have become a hotspot for the quite popular among youths in India as hangout places. More than 1,500 cafes have sprung up across India in the past decade, mostly from six organized chains, clocking an average annual growth of around 40 percent. Valued at around US$185 million, the organized café market in India is estimated to be growing at a compound annual rate of 25%. Stirring up the market is India’s growing youth segment: around 50% of India’s 1.2 billion people are 25 or younger.
By 2015, this is expected to increase to 55%. For this segment, particularly those with steady, disposable incomes, coffee shops serve as a social hub. According to industry estimates, there is scope for another 5,000 or so outlets strategically located close to offices, colleges and shopping malls. That„s the space the foreign chains want to tap. Stirring up the market is India’s growing youth segment: around 50% of India’s 1.2 billion people are 25 or younger. By 2015, this is expected to increase to 55%. For this segment, particularly those with steady, disposable incomes, coffee shops serve as a social hub.
Increasing Coffee Consumption
India’s coffee consumption pattern gives a clue to the potential that the market holds. The nation’s per capita consumption of coffee is just 85 grams, compared to 4.5 kilograms in France, 4.6 kilograms in Japan and 6 kilograms in the U.S. The Indian Coffee Board’s numbers reveal that while India is the sixth largest coffee producer in the world, with an annual output of 300,000 tons, domestic consumption is only a third, or 100,000 tons. That’s because like most of Asia, India is predominantly a tea drinking nation. Coffee is a staple only in the southern part of the country. Starbucks Corp., the world„s largest coffee retailer, was also eyeing the Indian market, after having dropped the plan a few years ago following some regulatory hurdles. Now it has made announcement to enter India to exploit the vast potential of Indian market as mentioned above. 12
Even as the market gets more competitive, there are strong roadblocks ahead. The price of roasted coffee is currently at an all-time high of US$7 to US$8 per kilogram, up 60% since last year. Then there is the huge real estate cost. For most foreign players, the rent-to-sales ratio in India is one of the highest across their global markets. With all players targeting a similar profile of consumers, zeroing in on the right location is crucial. Gloria Jean’s White points out that the mix of high rent costs and low menu prices puts tremendous pressure on the business.
Manpower is yet another challenge. Much of the success of a café depends not just on the quality of the products it serves, but on the overall ambience and guest experience. This requires trained staff. But vending coffee is not a highly skilled job and is low paying, which often results in high turnover. With every player on expansion track, there is a scramble for putting together the best team. Some brands like CCD and Gloria Jeans„have set up their own training schools, but for others it’s a tough task. With more players entering the arena, the challenges around managing costs, even as one strives to deliver the best international standard of cafe experience, will only intensify. Indian consumers, however affluent, have always put a premium on value-for-money offerings. 13
CHAPTER 2 – PRODUCT STRATEGIES
2.1 – Product Variety
Starbucks Coffee shops sells a variety of coffee and tea beverages along with different types of pastries, confections, and baked goods, coffee-related accessories and equipment. The coffee shops provide customers with a pleasant place to come and relax, study, work, or have business meetings. The Starbucks Coffee Company must customize their menu to fit the tastes of the Indians. A new menu can be formulated to match up tastes preferences of the Indians known already. The inventory policy is to keep the stores stocked but not overstocked to ensure freshness of products. Better gauges of the numerical figures in the inventory policies can be made after observing consumer trends. Starbucks’ is a rapidly growing chain of premium coffee shops. Rising to national prominence in the 1990s, Starbucks’ now dominates the market niche it occupies. Starbucks’ Target Market: Starbucks’ target market is any person and any age.
The store offers juices and cocoa for children, creamy blended drinks for those who don’t particularly like coffee, and a number of different types of brewed coffee. Starbucks continues to refine and target their product offerings to the changing tastes of consumers. The stores now sell specialty breakfast foods such as scones and muffins as well as a variety of beverages and coffee. The chain’s specialty flavours of coffee are popular among American consumers. Starbucks Corp. is expanding the products and places it sells to customers and adding extras – like free online access to Marvel Comics in its cafes and single-serve coffee machines in other stores.
The company has been working for some time to move its business beyond its cafes, which took a hit during the recession but have since rebounded. CEO Howard Schultz said one of Starbucks’ critical steps is expanding its consumer packaged-goods business, which he said could one day rival its retail business in revenue. A key component of that will be increasing single-serve coffee sales in the U.S., an estimated $1.6 billion market. Starbucks says two-thirds of the growth in the U.S. coffee market during the past year has come from the single-serve market. 14
Starbucks entered the market with its Via Ready Brew instant coffee in 2009 and expanded its presence when it announced a deal with Courtesy Products to provide its coffee in premium hotel rooms. Starbucks then announced that it will provide coffee and Tazo tea for Green Mountain Coffee’s Keurig single-cup machines. The company also announced plans to enhance the free Wi-Fi network it provides in nearly 7,000 company-operated cafes, adding access to subscription and Web services including The Economist, ESPN Insider Rumor Center, Marvel Digital Comics and Mediabistro. Customers log in using their own computers, tablets or smart phones. Providing the service is intended to increase sales of Starbucks’ drinks and other products.
2.2 – Product Positioning
Starbucks products always have been perceived with a prestigious image. With their high quality products, unique tastes, friendly environment, conveniences, customers are willing to pay a premium price for its products. As Starbucks extends their product line with the new Frappuccino flavours, it faced against competitors like Jamba Juice. Therefore, to retain a position in the customers‟ minds as high quality, Starbucks needs to enhance its position by making it appear as nutritional. This can be achieved by lowering the calories or by adding real fruit to the product. As the product‟s nutritional and taste increase, their perceive quality will also increase. Offering a more quality product for the same price will help increase sales and enable them to be more competitive in the customers mind. Starbucks strategic goal is to increase market share of the non-coffee drinker; they have begun by introducing an extension of a product line targeted to this segment.
To ensure market growth, Starbucks has repositioned one of its current products, the Frappuccino line, this product has been extended to include 3 new flavours; Double Chocolate Chip Crème, Vanilla Bean Crème, and Strawberries & Crème, introduced throughout the summer months. Faced with the challenge of entering a new competitive market Starbucks must compete to retain brand recognition of its primary products, yet increase awareness of its new product line. Starbucks has begun by introducing an extension of the Frappuccino line targeted to the non-coffee drinker. Entering this new market, Starbucks faces many challenges from having to compete to retain brand recognition of its primary products, yet increase awareness of its new product line. 15
2.3 – Product Life Cycle
The summer drinks are currently in the introductory stage of the product life cycle. The summer drinks are currently in the life cycle in reference to where we hope it will be in seasons/years to come.
During this stage we expect to have slow sales growth and low profits but are optimistic for the growth stage to increase both. The introductory stage is simply being used as an introduction to these new flavours of the Frappaccino drink.
As the summer draws near we expect sales to rapidly increase. Due to the timing of the hot weather and the promotion effectiveness we expect to see an increase in sales. With the new-segmented market hearing about the new “non-coffee” beverages sales are bound to grow due to curious consumers and their wants to be in some way affiliated with the Starbucks brand.
The maturity stage will be reached near the end of summer and beginning of fall of the first year. As the product is consumed and referred to as the “Summer Drink” sales will eventually slow and reach maturity. We recommend selling these flavours year round making them available to those who still desire to consume them. We do not see sales increasing from summer through winter.
This stage is expected to come every year in late fall and proceed through winter and mid spring. Due to the environmental change, the weather, and the promotional aspect of the “summer drink” sales will surely decline during this period. As shown in Figure 4 we expect throughout the coming years to see sales progress and gain more market share every year. 16
CHAPTER 3 – BRAND BUILDING
3.1 Starbucks Branding Strategy
Buying coffee at Starbucks has been characterized by Starbucks themselves as being an Experience – the Starbucks Experience. The experience at Starbucks is argued to be the reason why Starbucks has been able to differentiate from the competitors and to gain their, until now, extensive success. The narratives have intentionally been communicated by Starbucks on their homepage and in books such as Pour Your Heart into It and not through advertising, hence, indicating that storytelling plays a decisive role in their marketing. In fact Starbucks has followed a marketing strategy not built on traditional advertising and with a considerably lower marketing budget than other restaurant chains of that size. Most marketing has been done through word of mouth where consumers have been spreading the word of the coffee chain and in this way creating an emotional relation to Starbucks. This has been a very unusual way of going about branding and given Schultz‟s own statements we argue that the strategy chosen is deliberately done to maintain a feeling of Starbucks being a small neighbouring coffee shop and in general attach the brand with a feeling of being small and familiar.
3.2 – Emotional Branding
Emotional branding is about creating a personal dialogue with consumers and to know them individually and intimately. The emotional branding strategy at Starbucks has manifested itself via extensive focus on customer loyalty obtained through customer connection between partner and consumer – creating a special connection between the two parties. An emotional branding strategy‟s core is about this connection to the consumer which will result in a deep and lasting loyal connection. A connection could consist of the shop assistant knowing the name of the consumer thereby interacting with the consumer in a personal way. Another way in which Starbucks has carried out their emotional strategy is through the smells in the stores. Smells are a very powerful tool to create emotions towards a brand. The way Starbucks has emphasized the smell of freshly ground coffee is a way to make the consumers connect with the brand. Moreover, Starbucks has expressed that using word of mouth communication supports their emotional branding strategy and help sustain the emotional connection between brand and consumer. The tool for spreading the word of mouth has been the event-like initiatives such as for instance “Surprise and Delight”. These events are, as the name implies, about delighting and surprising people
. A “Surprise and Delight” event worth mentioning is when Starbucks rented whole cinemas and surprised cinemagoers with free tickets from Starbucks. These unexpected delights are also identified as being a typical way of conducting an emotional branding strategy. However, as Starbucks has grown and changed so has the way of branding and hence also the marketing of the brand. Howard Schultz has stated that national advertising by its very nature fuels fear about ubiquity and he underlined in his book in 1997 that a strong brand is not built on advertising campaigns. At that time Starbucks possessed fewer stores than today where they in fact are ubiquitous. Therefore starting to advertise Starbucks on national television, billboards and in radio spots as they started to do last year may not be contradicting with what Starbucks in reality is.
However the advertising strategy is a whole new way of branding Starbucks which it could be argued contradicts the emotional branding strategy evolving around the idea of the small neighbouring coffee shop. Connecting with the customers like they used to may be difficult on such a large scale and moreover the emotional feeling towards a brand which expresses their ubiquity through national advertising may be very difficult to sustain. Nevertheless, one should also keep in mind that having an emotional branding strategy trying to connect with the customer on an emotional level may become more and more difficult for Starbucks as they grow – it might even be argued that the emotional branding strategy which Starbucks has used until now is by its very nature in contradiction to a corporation as Starbucks; this because knowing consumers on an individual basis will be practically impossible taking into account the size and omnipresence of Starbucks.
Therefore, the emotional branding strategy which Starbucks is conducting, or tries to conduct, may not only be insufficient as branding strategy for Starbucks‟ sustained competitive advantage but it may also be very difficult to carry out with the current expansion pace –at least the part of their strategy which is about the close connection with the customers. From the above it is evident that Starbucks has been focusing on an emotional branding strategy in order to succeed. However, as indicated in the beginning of the thesis, the underlying reasons for Starbucks‟ success may be another.
According to Holt‟s (2004) theory 18 it can be argued that the initial success can be explained by Starbucks applying cultural branding. This is a result of Starbucks‟ ability to target a subculture in the American Society getting the bobos attracted to the messages in the brand and thus initially legitimizing the brand. It does not seem as though Starbucks was aware of the fact that they targeted this subculture and that this was the reason for success and the brand achieving iconic status. Thus it can be argued that Starbucks‟ cultural branding was not done deliberately. Thereby the cultural branding approach has not been followed through during the years and hence the emotional branding strategy has been perceived by Starbucks as the key to their success.
3.3 – Competitive Advantage
Their competitive advantage – Its strategy of “first to the market”, the brand has been able to emerge as a leader in quality products and services. Having adopted this strategy has allowed Starbucks to take an advantage over its competitors, especially in terms of advances in technology, advance the development of alliances with suppliers in advance and then on savings related to production quantities. 1) Quality – The quality is indeed a key factor in its success, communication turns around a lot of this criterion. The products which they know mostly calls for coffee and therefore the coffee beans are mainly from traditional crops and quality controls on these products are extremely common.
2) Prices – Another criterion differentiating Starbucks from its competitors is prices. In fact, coffee sales at the “Coffee Shop” are more expensive than their competitors; the quality of products offered by the group is a reason for higher prices. 3) Suppliers – One of the key factors leading position occupied by Starbucks result of the relationship with the company weaves its suppliers. Thus, the company has retained its leadership through numerous alliances particularly in the development of new products and sales of its coffee. The purpose of the brand by building such relationships with its suppliers as to promote the single outside the coffee shop to reach consumers on different levels, and thus in new places such as libraries, hotels, or the supermarkets. 19
4) Customer service – The most important key success factors when looking at Starbucks is their customer service excellence and other activities that enhance or maintain the value of the product, e.g. installation, repair and training. This area is concerned with the members of staff that deal with the customers, it focuses on the need to ensure the customer experience’ of visiting a Starbucks store is all the more enjoyable due to the friendliness and efficiency of staff and consistently high quality product. 20
CHAPTER 4 – PRICING AND DISTRIBUTION STRATEGIES
4.1 –Pricing Strategy of Starbucks
Starbucks is the leader of the coffee market. As an individual company, it controls several times more market share than any of its competitors. More than just a high-priced coffee shop, Starbucks offers a combination of quality, authority and relative value.
Starbucks sets its prices on a simple idea: high value at moderate cost. When people feel like they are getting a good deal for their money, they are more likely to pay a higher cost. Quality is key. Starbucks has to maintain strict quality controls in its coffee sourcing as well as in its customer service and peripheral products to justify its costs.
Starbucks also spends a lot of time and energy differentiating itself from the competition. You can see this in the design of its coffee shops, the music played there and the types of products it sells, such as coffee-brewing equipment and jazz CDs. Starbucks makes sure to keep current on the latest technology, often times being the first to introduce the newest advancements to its customers. For example, Starbucks was one of the first companies to adopt location-based promotions and mobile payments.
The Value of Authority
Starbucks’ pricing strategy has a lot to do with how it positions itself as an authority on coffee, allowing the company to charge premium prices. Thus, when Starbucks introduces new products at higher prices, consumers are willing to pay extra without even having tried the products because they associate the Starbucks name with high quality.
Starbucks also uses relative pricing. It offers premium items, like its espresso drinks or its Starbucks brand whole-bean coffees sold in grocery stores, alongside lower-cost items, like its drip coffees or its Seattle‟s Best line. While the risk exists that more customers will choose 21 the lower-priced items, by offering higher-priced items alongside lower-cost alternatives, Starbucks is justifying the higher price through comparison.
4.2 – Distribution Strategy of Starbucks
Starbucks is the largest coffeehouse company in the world. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and panini, pastries, snacks, and items such as mugs and tumblers. Starbucks Corporation purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, a selection of premium teas and a line of compact discs, primarily through Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of distribution including its Business Alliances business unit and other specialty operations (collectively, Specialty Operations). Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino coffee drink and a line of premium ice creams.
Starbucks’ strategy for expanding its retail business is to increase its market share in existing markets and to open stores in new markets where the opportunity exists to become the leading specialty coffee retailer. In support of this strategy, the Company opened 647 new stores during the fiscal year ended September 30, 2001 (fiscal 2001). At fiscal year end, Starbucks had 2,971 Company-operated stores in 38 states, the District of Columbia and five Canadian provinces (which comprise the Company-operated North American retail operations), as well as 252 stores in the United Kingdom, 25 stores in Thailand and 18 stores in Australia (which comprise the Company-operated international retail operations).
Company-operated retail stores accounted for approximately 84% of net revenues during fiscal 2001. Starbucks retail stores are typically located in high-traffic, high-visibility locations. All Starbucks stores offer a choice of regular and decaffeinated coffee beverages, including at least one “coffee of the day,” a broad selection of Italian-style espresso beverages, cold blended beverages, a selection of teas and distinctively packaged roasted whole bean coffees. Starbucks stores also offer a selection of fresh pastries and other food items, sodas, juices, coffee-making equipment and accessories and a selection of compact discs. Each Starbucks store varies its product mix depending upon the size of the store and its location. Starbucks Specialty Operations strive to develop the Starbucks brand outside the Company-operated retail store environment through a number of channels.
Starbucks strategy is to reach customers where they work, travel, shop and dine, by establishing relationships with prominent third parties that share Starbucks’ values and commitment to quality. These relationships take various forms, including arrangements with foodservice companies and retail store licensing agreements for North American locations (which together comprise the Business Alliances business unit), grocery channel licensing agreements, warehouse club accounts, international retail store licensing agreements, direct-to-consumer market channels, joint ventures and other initiatives related to the Company’s core businesses.
The Company sells whole bean and ground coffees to office coffee distributors, institutional foodservice companies that service business, industry, education and healthcare accounts, and to hotels, airlines, retailers and restaurants. As of September 30, 2001 , the Company had approximately 5,500 foodservice accounts, and revenues from these accounts comprised approximately 31% of specialty revenues in fiscal 2001. Although Starbucks does not generally relinquish operational control of its retail stores in North America, in situations in which a master concessionaire or another company controls or can provide improved access to desirable retail space, the Company licenses its operations. As of September 30, 2001 , the Company had 809 licensed stores in continental North America , and revenues from these stores accounted for approximately 15% of specialty revenues in fiscal 2001. Starbucks has a long-term licensing agreement with Kraft Foods, Inc. (Kraft) to market and distribute Starbucks whole bean and ground coffees in the grocery channel in the United States . Pursuant to that agreement, Kraft manages all distribution, marketing, advertising and promotions for Starbucks whole bean and ground coffee in grocery and mass merchandise stores.