Starbucks Chairman Warns of Watering Down - Case Study Example

Name Instructor Course Date Starbucks: Strategic Marketing Review Introduction Starbucks has excelled as both a popular and profitable company in the food and beverage industry. There is stiff competition in this industry but Starbucks has continued to unleash innovative strategies to enable it maintain its competitive advantage in an increasingly challenging market. Introduction of new product lines, new retail stores, globalization, and environmental awareness are just a few of Starbuck’s marketing strategies to uphold and widen its market share. As an appointed marketing consultant, my task is to carry out a strategic marketing review of Starbucks. Recommendations are provided. Coffee bars: How it all started Coffee bars have certainly contributed to the making of culture and maintaining it through harmony. It is in coffee bars that people hold meetings and give birth to ideas that will create a new wave in culture (Baron 1999). For example, the real roots of Rock ‘n’ Roll started in the 1950s in coffee bars (Brown 2006). Sam Phillips, a renowned business executive negotiated deals with budding musicians that came to give the African-American music to the world including Elvis Presley, Jerry Lee Lewis, Johnny Cash, and Howlin’ Wolf in a coffee bar next to a diminutive Sun Studios in Memphis, Tennessee (Brown 2006). Also in the 2 I’s coffee bar in Soho, London, some white Europeans including Cliff Richard, Tommy Steele, Hank Marvin, and Mickey Most imitated white American’s imitation of the music if America’s Deep South (Brown 2006). However, as time went by, the coffee bar culture began to subside except in Italy, where it all began. The music scene had experienced the British invasion started in Liverpool, and punk with foundation in New York, U.S and another rock periodic revolution was expected (Brown 2006). This brought Seattle in the picture. In the 1980s, alienated teenagers of Generation X in Seattle distasted the beautiful studio enhanced commercially produced music that flooded the airwaves (Brown 2006). Meanwhile, Howard Schultz, then the director of Starbuck’s retail operations and marketing has travelled in Italy and was impressed by the popularity of Milan’s espresso coffee bars. Schultz, also a provider of coffee to fine restaurants decided that Generation X certainly needed the coffee bar culture (Brown 2006). This thought resulted to one of the world’s major coffee house chain – Starbucks – that was dedicated not only on selling the coffee, but the coffee culture, later came to be known as the Starbuck’s Experience (Baron 1999). The aim was to enable Generation X to stay calm and take the time to smell the coffee. However, this did not work with Generation X who wanted to express their pain and lost hope with society. Grunge music was born and popularized by the band Nirvana, formed by Kurt Cobain and Chris Noveselic (Brown 2006). Kurt Cobain expressed his raw emotions in his lyrics and this Generation X related well with them. Later, ending his pain, through death, Kurt left a rock ‘n’ roll legacy and leaving behind fans that greatly missed him but still had a chance to fill their empty souls at Starbucks (Brown 2006). Starbucks Strategic Marketing: The rise and rise of Starbucks Starbucks is a hallmark premium brand in a league in which only cheaper vendible products once existed (Schwartz 1999). As the brand continues to grow, Starbucks revenue has proliferated just like steam off a hot java mug (Fitch 2001). Over forty four million customers visit the firm’s 13,000 coffee shops situated in 39 countries on a weekly basis. Starbuck’s mission has guided the company into its increased sales and earnings which have more than tripled in the past decade alone (Schwartz 1999). Even in the light of the 2007/2008 financial crisis that led to a decline of Starbucks’ revenue, the company, guided by its mission and vision adopted an extensive marketing strategy to retain its market share and establish a stronger competitive advantage (Starbucks.com). The success of Starbucks has sparked imitations even from its direct competitors including Caribou Coffee, Coffee Republic, and Costa Coffee. Everyone, it seems is trying to market their own brand of premium of coffee these days. To sustain its remarkable growth in a market flooded with stiff coffee competition, Starbucks has created an avid multidimensional growth strategy. Strategies of retaining the market share Starbuck’s has brewed a growth strategy that will ensure the brand retains its position in a market where subsidization is easy. The first prong directs to ensuring exponential store growth (Foster, 2006). Nearly eighty five percent of Starbuck’s sales are generated from its stores. Therefore, in an expected manner, Starbucks is opening new stores at a rapid rate. Over ten years ago, the company had only a thousand stores in total, already fewer than those established in 2006 alone. Even when it seems that Starbuck’s shops have already overpopulated the spaces in spaces in some countries, there is still more room for expansion as reported by Foster (2006). In 2006, Hegmann (2006) reports that Germany had only 67 branches distributed in 21 cities. However, by the end of 2007, the number had risen to 100. In Hamburg alone, Starbucks aims to have 30 stores within the next five years. By then, it will be comparable to London where anyone from whatever location is always in a five-minute or less distance from a Starbucks shop (Fitch 2001). Secondly, in addition to opening new shops, Starbucks is widening the food offerings in each store to include anything from Fresh Fields gourmet sandwiches and Krispy Kreme donuts to Greek pasta salads and assorted snacks (Matsumoto 1998). By offering a menu with more beefy snacks, Starbucks expects to increase the average customer sales permit while also growing the traffic during lunch and dinner. To come against declining sales during warm weather, Starbucks began selling iced products such as the Frappuccinos. Thirdly, Starbucks has able to retain its growth and market share through new retail channels (Schwartz 1999). The vast majority of coffee is purchased in stores and consumed at home. Therefore to meet this demand, the company is also taking the supermarket aisles. As opposed to going side-to-side with other beverage giants like Nestle, by Nescafe, and Kraft, by Maxwell House Sanka, Starbucks took a co-branding deal negotiation with Kraft (Foster 2006). Under this negotiation, Starbucks can continue to roast and package its coffee products while Kraft undertakes the functions of marketing and distributing it. Both companies benefit from this deal. Starbucks managed to gain a quicker entry to over 25,000 supermarkets at the supporting albs of about 3,500 salespeople from Kraft (Foster 2006). On the other hand Kraft gains recognition on its coffee line having the best-known premium brand, enabling it to gain fast entry into the rapid-growing premium coffee label. Other than supermarkets, Starbucks has also created an alluring set of new ways of pushing its brand to the market. For example, Marriott operates Starbucks’ shops in more than sixty airports, in addition to Starbucks coffee being served to customers in several airlines (Foster 2006). Another example is the case where Westin and Sheraton hotels offer Starbucks coffee packets in their rooms. Starbucks also has a deal to run coffee shops with Waterstones’ bookshops. In addition, the company sells gourmet coffee, tea, presents, and related commodities through business and consumer catalogues. The firm’s website, Starbucks.com has also been made as a lifestyle portal on which products like coffee and coffee making equipment, tea, compact discs, collectibles and gifts are traded (Foster 2006). Fourthly, Starbucks intends promote its market growth and sustenance through new products and new store concepts (Foster 2006). This is seen from the company’s partnering with several other companies to extend its brand into new categories including integrating with PepsiCo to stamp the Starbucks brand on their bottled Frappuccino drinks as well as their newly introduced DoubleShoot espresso drink. Furthermore, Starbucks ice cream is marketed in a joint venture with the now a leading brand of coffee ice cream – (Breyer Foster 2006). Starbucks experimentation into new store concepts led it to try the Cafe Starbucks which is basically a European-style family bistro with a menu containing everything from oven-roasted seared sirloin and Mediterranean chicken breast on focaccia to huckleberry pancakes. Starbucks also tried circadian, which is basically a bohemian coffeehouse with tattered rugs, access to high internet speed, and live music together with coffee specialities. Merging coffee and music once again, Starbucks now sells the music it plays in its stores (Foster 2006). It is not music that has shifted from the custom but a compilation of Ray Charles including Genius Loves Company which sold about 5.5 million copies through coffee shops alone (Foster 2006). Finding Starbucks as the spark of hope for a distraught recording industry, many artists have reached the company to gain access to their over 4.4 million customers on a weekly basis. Responding to this, Starbucks Entertainment expects to grow at an even faster rate than its parent company, as seen from the release of three albums in 2007, including Sir Paul’s and eight in 2008. Starbucks Entertainment is also integrating the company’s sustenance mission, which is a concern for the environment by promoting the Arctic Tale. The Arctic Tale is a film co-written by Kristin, Al Gore’s daughter. The narration is made by Queen Latifah, a renowned hip-hop artist, and the tale features Nunu, a polar bear cub, and a baby Walrus tagged Seela (Foster 2006). The film has incorporated tracks by Shins and Ben Harper that are also played in the store. Although a Starbucks person emphasized that the strategy is strictly for creating environmental awareness rather than a move to bring in more coffee customers, it is well known that such conscious thought indeed brings in the customers. Fifthly, another Starbucks strategy to retain its proliferating market share is to focus on international growth (Foster 2006). Starbucks aims to expand its global vision as seen of its having only 11 coffee houses outside North America in 1996, and penetrating 39 international markets by 2007. The firm has more than 500 shops in the UK alone and about 1,000 shops in Asia (Foster 2006). More markets are targeted for opening in fast-growing economies of Brazil, India, China, and Russia, and the company has already taken a firm hold in South America. With the rapid growing economies in mind, Starbucks increased its number of stores in 2006, to rise from 30,000, to 40,000 stores worldwide (Foster, 2006). Review Starbucks’ Strategic Marketing The Starbucks’ growth strategy has so far met with great achievement. However, some strategy analysts have pointed out strong concerns of the same. The firm’s share price has from about 45 to 35 times earnings meaning that shareholders are viewing the company less as a growth stock (Bloomberg Week 2012). The shareholders expect to earn their money from the company and share price growing as opposed to profits. Some critics see a problem with this rapid expansion by Starbucks by asserting that the firm may be over extending the Starbucks brand name and an estimate of 16.5 percent of its profit margin (Bloomberg Week 2012). Other critics fear that by pursuing such a broad-based growth strategy, Starbucks is likely to stretch its resources too thin, or even lose its focus. Moreover, some are foreseeing Starbucks being caught with similar problems as McDonald’s since the two have a similar growth strategy (Fitch 2001). Just like in the McDonald’s case, activists now have Starbucks in their glance. In China, for example, Starbucks may be put out of existence from Beijing’s fabled Forbidden City in the midst of complains that its presence constitutes an indignity to the Chinese culture (Mure 2007). The outlet next to the Palace Museum may be removed following Internet protests ignited by a patriotic bickering published on the personal blog Rui Chenggang, a renowned television anchor person, on his personal blog (Mure 2007). According to Mure (2007) many of the over 123 million Chinese citizens are sensitive to any discerned insult to their nation. Another scenario occurred in Ireland, where Starbucks is still in the early phases of product development. According to The Guardian (2007) the firm has been criticized by anti-globalization activists for populating the place as the chain opens several stores to establish its market presence and consequently displaces the small players. Another scenario happened in 2006 where in Oxfam awareness was being raised of efforts of Ethiopians to gain control of their fine coffee brands (Business Wire 2007). Oxfam held the ideology that in a modern economy, business ventures must places their models in alignment with the demands of exemplary corporate citizenship, which extends the traditional philanthropic approaches to poverty management. As reported in the Business Wire (2007) a lengthy public wrangles ensued, but later Starbucks decided to honour its commitments to Ethiopian coffee farmers by becoming pioneers in the industry to merge the innovative Ethiopian trade marking initiative. Starbucks’ coffee doses have also been under attack from the health frontiers. Health activists have warned against taking large amounts of coffee in a prolonged period of time which leads to caffeinism. Caffeinism is a caffeine dependency manifested with a wide variety of physical and mental conditions including anxiety, irritability, nervousness, muscle twitching, respiratory alkalosis, tremulousness, and heart palpitations. It is also claimed that over usage can lead to erosive oesophagitis, peptic ulcers, and gastro-oesophageal reflux disease (Foster 2006). Another reason why the Starbucks’ growth strategy is at risk is because it is facing stiff competition from rival coffee chains and fast-food companies. (Irish Times 2007). Other fast-food franchises are bolstering into the breakfast segment in which Starbucks dominates and are offering similar but less expensive food. For instance, the Costa Coffee chain from Scotland is fighting Starbucks store by store in Ireland and has been seen to already overtake Starbuck’s expansion in the UK (Irish Times 2007). The scenario worsened with an influential US Consumer Report magazine rating Dunkin’ Donuts and McDonald’s premium coffees better than that of Starbucks in regards to both value and taste. This piece of news was gleefully picked up by the media across the world (Bloomberg Week 2012). Last but not least, Ward (2007, February 23) gives account of a leaked memo from Starbucks chairman and founder Howard Schultz to its senior executives warned of the company watering down its brand by opening too many “sterile cookie cutter” stores that lack authenticity and soul. The memo was titled “the commoditization of Starbucks experience” in which Schultz urges that a series of decisions be made in order to make the firm more authentic. This is because of a series of decisions such as the introduction of the automatic espresso machines that has robbed the brand of its character (Ward 2007, February 23). Schultz pleads for a retrace of steps and identification of the changes to be made in order to get back to the core and retain Starbucks heritage, tradition, and passion that was once the true Starbucks Experience (Ward 2007, February 23). Internal and external audits: For its internal auditing functions, the Starbucks Corporate Board of Directors appoints an audit and compliance team, also known as the committee to oversee its accounting and financial fillings and processes (Starbucks.com). The committee is comprised of at least three members that meet the requirements of independence as speculated of the Nasdaq Stock Market, LLC, other applicable laws, and rules and regulations of the Securities and Exchange Commission. This committee is given the authority to investigate any Starbucks’s activities and unrestricted access to members of the management team including all relevant data. The committee meets at least six times every year. Deloitte & Touche is Starbuck’s independent auditor (Starbucks.com).The 2010 audit report by Deloitte for Starbucks reveals that the firm is able to maintain internal control over its financial reporting through that fiscal year ending October 3rd. The conclusion was based on the criteria established in Internal Control: Integrated Framework that Starbucks conducted a sufficient job of reporting facts about its financial activities, as well as reports in the fiscal year (Starbucks.com). As of October 6, 2010, NASDAQ US report, Starbucks’ current stock price was at $38.23 a share. The trading range was at $25.67-$42.00 in a fifty two week time period, while Starbucks Corp dividends per share were at $0.36 (Bloomberg Businessweek 2012). From the audits information, it is captivating for an investor to buy stock in the company, especially as the firm is expanding into new world markets and incorporating new lines of businesses. However, it is also advisable for the current investor to hold and wait to see if the new expansions will reap the predicted revenue. Nevertheless, audit reports show that Starbucks Corp saw a hiked increase in assets between 2009 and 2010, with Stockholder’s Equity being the second greatest increase at $625, 500 (Bloomberg Businessweek. 2012). The two year period (2008-2010) recorded an increase in debt to equity ratio, revealing the willingness of investors to still buy stock and invest with Starbucks. The return of CEO Schultz with the message of authenticity and heritage has also been attributed with the increased cash flow. However, during the same financial period, liabilities also continued to increase at a steady rate. Conclusion Starbucks remains one of the leading player in its industry despite the emergence of new entrants and stiff competition in its line of business. After the 2007/08 financial crisis that led to a decline in its revenue, Starbucks rebounded with an extensive marketing strategy that involved using a diversified multi-brand model that introduced other products besides coffee, establishing a digital network through their website portal, environmental awareness and expanding into new markets among other strategies. Despite the 2007/08 inflation Starbucks showed a recovery with its diversified approach model as there was increase in its price of earning per share. This shows that the investors have confidence with the model. However, with the volatile business environment, it is necessary that Starbucks adopts a marketing strategy that is not a fad and one which will keep it at the top position in the long-term. The proper implementation and execution of Starbucks’ strategic marketing is essential to the success of the company. Some of the ways in which Starbucks can evaluate both growth opportunities and challenges presented by declining and volatile markets are as follows: Recommendations: i. Starbucks should continue introducing products that uphold brand marketing. Starbucks gained popularity from word-of-mouth advertising in which the high quality coffee spoke for itself. With the introduction of new products, the focus should remain on provision of high quality commodities in order to strengthen the Starbucks brand further. Brand marketing has since the start played a huge part in making Starbucks a success and this should continue even with a diversified business model. ii. Strong focus on customer experience and satisfaction is required. Since Starbucks is venturing into global markets, it is very necessary to understand the cultural experiences of other groups in the world and tailor the marketing strategy, or even the products to suit the experience of these niches. Having a unique approach for each market may be expensive but it will sure bring long-term customers who will be happy to identify with the brand. iii. The Starbucks mission and vision don’t need to change but they must be adhered to in the practical sense, for example, in the issue of promoting the Starbuck Experience through in an authentic way that can be identified right away by Starbucks customers. This will help Starbucks establish a heritage through having followers that are happy to identify with a Starbucks culture. iv. Avoid gimmick/generic marketing strategies, that are being widely adopted by every corporate these says. Starbucks should stick to a Starbucks way of doing things and this should reflect in marketing and advertising. Unique ideas of marketing should be researched to enable long-term existence in the market. References: Baron, K. 1999, February 22. “The cappuccino conundrum”, Forbes, pp. 54-55. Bloomberg BusinessWeek. 2012. http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=S BUX:US Brown, J. 2006, October 12. “Sex and drugs and rock ‘n’ roll: Out of the darkness”, The Independent. Business Wire. 2007, June 20. “Oxfam celebrates win- win outcome for Ethiopian coffee farmers and Starbucks”. Fitch, S. 2001, March 19. “Latte grande, extra froth” Forbes, p. 58. Foster, L. 2006, October 16. “Companies International: Starbucks plans 40,000 stores around the world”, Financial Times. Hegmann, G. 2006, September 5. In Munich and Birgit Dengel Companies International: Starbucks look to step up openings in Germany”, Financial Times. Irish Times. 2007, July 4. “Coffee titans square up for turf war in Dublin. Matsumoto, J. 1998, February 22. “More than mocha – Cafe Starbucks”, Forbes, pp. 54-55. Mure, D. 2007, January 19. “World News: Starbucks faces banishment from the Forbidden City”, Financial Times. Schwartz, N., D. 1999, May 24. “Still perking after all these years”, Fortune, pp. 203-210. The Guardian. 2007, July 4. “Celebrities take on global war in Dublin”. Ward, A. 2007, February 23. “Starbucks chairman warns of “watering down” brand,” FT.com Read More