Marketing Strategies Used Starbucks Corporation - Case Study Example

Marketing Strategies Used Starbucks Corp. Introduction Starbucks, is the world’s eighth largest consumer foodservice brand, and the leading specialist coffee shop, with a market share of over 38% in 2006. While the company does sell its Starbucks brand coffee through retail outlets, the brand operates solely as a coffee specialist in consumer foodservice. Starbucks truly dominates the specialist coffee shops sector, with the next largest brand, Doutor Coffee Shop, having a value share of less than 4%. Starbucks has two operating segments: company-operated retail and speciality. During 2006, company-operated retail sales accounted for 85% of total net revenue, with 6,566 US and 1,613 international company owned outlets as of 1 July 2007. The company’s speciality operation includes royalties and licensed fees from licensed locations, revenue from the sales of branded products through retail and foodservice revenue from the sale of coffee to institutions. Marketing Strategies While the sale of branded products through retail and foodservice accounts for only a small proportion of the company’s total revenue, it is instrumental in developing and building brand loyalty. The bulk of the revenue from this segment stems from the US division, where Starbucks has a licensing relationship with Kraft Foods Inc to sell branded products, including Starbucks coffee. Through the Kraft partnership, distribution has also been expanded into Canada and the UK. The company also operates two joint ventures in which it has a 50% equity interest: North American Coffee Partnership, a joint venture with Pepsi-Cola Co to develop and distribute bottled Frappuccino and Starbucks DoubleShot coffee drinks, and Starbucks Ice Cream Partnership, a joint venture with Dreyer’s Grand Ice Cream to develop and distribute ice cream products. (Spulber, 2007) Starbucks also has a partnership with Jim Beam Co, a unit of Fortune Brands Inc, to manufacture and market Starbucks branded premium coffee liqueur products in the US and Canada. Market performance for the third quarter 2007 continued to be positive for Starbucks in the US, with strong single digit growth for the brand in the premium coffee segment. Financial Performance Financial performance has been strong, with total revenue increasing by over 22% in the fiscal year ending September 2006. Both operating segments saw strong levels of growth, with the company-operated segment increasing by over 21% and the speciality segment up by over 23%. (Michelli, 2006) Within the company-operated segment, sales growth has been driven by outlet expansion, but comparable store sales has also been positive, with global comparable store sales for company-operated outlets increasing by 7% in 2006, marking the 15th consecutive year with comparable store sales growth of 5% or greater. 2007 has proven to be slightly more challenging particularly in the US, where transaction counts in the second and third quarters of 2007 remained flat, although value per transaction results were more positive. Combined domestic and international results for the first three quarters of fiscal 2007 look favourable, as strong transaction growth and an increase in average value per transaction have helped to offset the weaker growth in the US.( www.datamonitor.com) The company continues to see favourable profit margins, with 2006 profit levels increasing by 15%. While the current operating environment continues to see rising commodity costs, including an increase in dairy and supply chain costs, the company has successfully managed to control its overall cost structure. (Moore, 2006) With this, Starbucks has had to pass on some of the additional costs to its customers, but so far this has not deterred consumers. Profit levels are expected to improve as the company expands and becomes more efficient, and fixed supply chain costs are allocated across a larger number of outlets. Brand Strategy Starbucks’ strategy to create a “third place” for customers to relax and drink premium coffee has been widely accepted, helping to create a “coffee culture” in some markets where it did not previously exist. Consumers worldwide have responded positively to the contemporary Starbucks atmosphere, which encourages consumers to lounge and relax by providing Internet access, comfortable seating and calming background music. This emphasis on atmosphere has been Starbucks driving competitive advantage. Starbucks outlets are typically located in high-traffic and readily visible locations. The brand benefits from flexibility in size and format, and thus its stores are located in a variety of settings. Typical locations include downtown and suburban retail centres, office buildings and university campuses. While Starbucks selectively locates stores in suburban areas and shopping malls, it focuses on stores that have convenient access for pedestrians and drivers. (http://goliath.ecnext.com) The Starbucks brand dominates the coffee specialist category globally, with a 38% value share in 2006. Underpinned by both domestic and international expansion, Starbucks consistently gained market share over the review period, by over 12 percentage points since 2001. (Moore, 2006) Looking at just chained coffee specialists shops, Starbucks holds an even greater value share, with over 51% of the market in 2006. Competitors tend to have a much more limited, if any, presence internationally and are much smaller in scale, with the next largest chained coffee specialist being Doutor Coffee Shop, with a 5% market share in 2006. (Michelli, 2006) Starbucks has established a number of non-traditional marketing and promotional partnerships that have helped differentiate the company and add additional revenue from the sale of non-food products. In the US, Starbucks has become a destination for music, selling millions of CDs yearly in addition to opening up a line of Hear Music Coffeehouses, which include a wide assortment of CDs and media bars where customers can customise their own music. The company has also used its stores to promote movies, beginning with the 2006 release of Akeelah and the Bee and the most recent 2007 launch of Arctic Tale. (Foerster, 2007) In 2007, Starbucks partnered with Apple in an exclusive partnership that lets customers wirelessly browse, buy and download music from iTunes. The iTunes partnership will also encourage customers to spend more time in Starbucks, and this is likely to lead to consumers spending more on food and beverages. Strategic Objectives And Future Prospects As the leading player, Starbucks strong performance has underpinned growth for the coffee specialist sector. Starbucks has a strong corporate identify and it has proved to be successful in creating the “third place” for its customers by offering relaxed and comfortable surroundings and premium coffee. (www.starbucks.com) The company’s marketing initiatives are non-traditional. It does not invest in costly advertising campaigns but rather focuses on bringing the Starbucks experience to each new market it enters. Future performance dependent on global expansion Starbucks’ future position as the leading coffee specialist depends greatly on its global expansion efforts. International expansion for the company is still in the early stages of development and is believed to offer a strong opportunity for future growth. As of 1 July 2007, Starbucks had just 4,101 international locations, and plans to reach 20,000. The current goal is to increase the international store count by 20% per year over the next several years. (Foerster, 2007) The company has had great success in existing international markets, including Canada, the UK, Ireland and Japan, where growth in value per unit has been strong. Starbucks hopes to use best practices learned in these markets to grow its business in new locations. Global development focused on emerging markets Starbucks is also looking to strengthen its position in other emerging markets, including Latin America, Eastern Europe and India. The company opened its first outlet in Russia in 2007, following a trademark dispute which had stalled expansion plans for years. Other key markets for expansion in Eastern Europe include Czech Republic, Poland and Hungary, which the company plans to enter in the next year. Starbucks has already positioned itself as the leading coffee specialist chain in Mexico, and further expansion in Brazil and entry into Colombia and Argentina is on the company’s radar. India, expansion into which was stalled in 2007, but is expected to take place over the next couple of years, should be an important market for the company as the coffee specialist sector has seen tremendous growth. (Spulber, 2007) More consumers are also drinking coffee at home. Starbucks, which can appeal to the large young adult Indian population of 20 to 30 year-olds with its comfortable environment and premium beverages, is likely to perform well. Besides the potential risk of general economic conditions that could affect consumer spending, Starbucks must successfully gain consumer acceptance and create a loyal customer base. The company has managed to achieve this in other developed markets, including the UK, by creating a “third place”, outside of the office and the home, for customers to relax and enjoy premium coffee. However, in other markets, where a different coffee tradition already exists, such as in Brazil, this might prove to be more difficult. Starbucks has proven to be successful in creating a coffee culture, as it did in the US; however, other markets might prove to be more challenging, particularly in countries such as India, where the vast majority of the population cannot afford to purchase premium coffee beverages. Starbucks hopes that by expanding internationally with joint ventures or licensed stores it has a stronger chance. As the coffee culture in most of its target markets is undeveloped, direct competition from coffee specialists is limited, offering Starbucks the ability to continue to take advantage of its first mover advantage across the globe. (Foerster, 2007) As the chain increases its market penetration there is the fear that the company will lose its true brand essence and become a sterile fast food chain. As Starbucks relies on its store experience as a point of differentiation, avoiding this possibility must be a key focus for the brand. Despite having over 70% of its total outlets in the US, the company continues to focus on improving its presence domestically. Room is still thought to exist for more Starbucks outlets in the US, with 1,700 new outlets planned to open by fiscal year end 2007, and the same number expected for fiscal 2008. However, given the company’s strong presence, growth plans have stabilised in comparison to historic levels. Growth opportunities are believed to be outside of the state of Washington and the west coast, which has the greatest concentration of Starbucks outlets, with one store for every 10,000 people in Washington. The company plans to base new locations in areas where current outlets are achieving strong annual sales growth. Starbucks’ domestic growth expectations might be overly ambitious. If transaction growth continues to weaken in the US, as it has in 2007, Starbucks might be forced to slow down expansion plans to avoid excessive store cannibalisation. The chain did begin to see its value per outlet growth level off in the first three quarters of the company’s fiscal 2007, indicating the possibility of store cannibalisation or increasing competitive pressure. (Spulber, 2007) Through partnerships with third parties, Starbucks hopes to reach consumers where they work, travel, shop and dine. Although it does not account for a substantial proportion of total company revenue, the company’s Global Consumer Products Group has performed well, with third quarter fiscal 2007 growth in sales of 24%, reaching US$87 million. (http://finance.yahoo.com) Growth for this business segment has been driven by US packaged coffee and tea sales, and increased product sales and royalties from the international ready-to-drink business. The international growth is considered to be promising as strong market potential exists in this area, particularly as ready-to-drink coffee beverages continue to be popular. The introduction of Starbucks Discoveries in Tokyo has been performing well, and has also improved awareness and trial of Starbucks locations. With strong growth from the specialist coffee shop sector and increased consumer demand for premium coffee, driven by Starbucks, other fast food chains, including McDonald’s and Dunkin’ Donuts, have improved their beverage offerings. Fast food chains, including Wendy’s, Burger King and Subway, realising the potential growth opportunity in the breakfast daypart have also expanded their menu offerings. These chains, all looking to profit from the breakfast daypart, are likely to put pressure on value growth for Starbucks in the US, which sees 50% of its total sales generated in the morning. While the company has not seen a decline in transactions, stronger competition is likely to be one of the factors causing slower growth for Starbucks in the US in comparison to previous years. Starbucks could look to benefit from its food emphasis internationally. For the most part, international competition stems from independent and small local chain operators, but if other multinational fast food chains see positive results from their efforts in the US its likely they will increase their breakfast emphasis internationally. If the company can implement a similar expanded food menu internationally, this should help it remain more competitive. The challenge for Starbucks will be to ensure that the menu is in line with consumer tastes. The company has already started to experiment with more customised offerings. (Spulber, 2007) In September 2007, Starbucks introduced the first localised beverage for stores in the Middle East, with the launch of a Date Frappuccino, rolled out for the holy month of Ramadan. It has also introduced pastries that pair with the beverage, including a Pistachio Date Cake. In the US and Canada, the company introduced the first hot beverage cups containing 10% post-consumer recycled material, eliminating the use of more than 2,000 tonnes of virgin tree fibre. Starbucks has also purchased renewable energy certificates to offset 20% of the energy used in the US and Canada. As the company continues its global expansion, the importance of remaining socially responsible will intensify, as the company’s rapid growth attracts further scrutiny. Already, Starbucks is positioning itself favourably in China. The company pledged US$5 million through The Starbucks Foundation to establish the Starbucks China Education Project at Give2Asia, an organisation dedicated to promoting philanthropy in Asia. (Joachimsthaler, 2007) Nutritionally, Starbucks has also been proactive in improving its position. In 2007, Starbucks announced the adoption of a new dairy standard for all espresso-based drinks. By the end of 2007, the company plans to switch from whole milk to reduced fat (2%) milk in the US and Canada. Internationally, the company is still assessing the plan, but does anticipate making a similar conversion in markets where an appropriate supply of reduced fat milk exits. Starbucks is also looking to have a completely trans fat-free menu in the US by the end of 2007. (Lincoln, 2007) With increased media scrutiny, as well as pending US legislation looking to ban trans fats, reformulating the menu to be trans fat-free is a necessary move for the company. Conclusion and Recommendations Starbucks already has a strict, precise and successful policy on the way that they go about opening new stores so this mean that they already have the resources in place to implement the action plan. The major barrier to this option is the fact that if they continue to grow at the rate that they are growing at the moment then they may have to look at the legislation involved with having a monopoly share of the market. Smaller problems that Starbucks may face when attempting international expansion are; local negative preconceptions about American multinational companies, mass culture infecting traditional values, large scale service meaning poor quality, people growing to despise U.S. commercialism and the notion of being “invaded”. On the basis of all the research and evidence consulted for these three strategic decisions, I am inclined to suggest Expansion would be the most profitable and successful venture to undertake. It also seems this decision has the most undiscovered potential for Starbucks to exploit. The prospects for this plan look good and, at the end of the day, Starbucks are a strong brand, and strength of brand is often the key factor in whether a growth strategy is a success or failure. Bibliography Spulber Daniel F. (2007) Global Competitive Strategy. Cambridge University Press Michelli Joseph. (2006) The Starbucks Experience: 5 Principles for Turning Ordinary Into Extraordinary. Publisher: McGraw-Hill. Moore John. (2006) Tribal Knowledge: Business Wisdom Brewed from the Grounds of Starbucks Corporate Culture. Publisher: Kaplan Business Foerster Anja. (2007) Different Thinking: Creative Strategies for Developing the Innovative Business. Publisher: Kogan Page Lincoln Keith. (2007) How to Succeed at Retail: Winning Case Studies and Strategies for Retailers and Brands. Publisher: Kogan Page Joachimsthaler Erich. (2007) Hidden in Plain Sight: How to Find and Execute Your Company's Next Big Growth Strategy. Publisher: Harvard Business School Press. Starbucks Corp. Retrived from http://finance.yahoo.com/q/pr?s=SBUX on December 3, 2007 Company Profile. Retrieved from www.starbucks.com/aboutus/Company_Profile.pdf on December 3, 2007. Starbucks Corp. Retrieved from http://goliath.ecnext.com/coms2/product-compint-0000239921-page.html on December 3, 2007. Starbucks Corporation. Retrieved from http://www.datamonitor.com/companies/company/?pid=E86AFA79-07E1-4115-AA0C-0016416541FE on December 3, 2007. Appendix SWOT Analysis Strengths Strong brand – The well recognisable Starbucks brand helps to support both global expansion and retail brand growth. Having pioneered the coffee house concept in the 1980s, the company has first mover advantage. As competition intensifies, brand recognition will remain crucial to maintaining customer loyalty. Global presence – Starbucks is a global brand that resonates with consumers worldwide. As of July 2007, the company had over 14,000 outlets in 40 countries. Socially responsible reputation – Starbucks Corp is committed to socially responsible coffee buying practices, and Starbucks Fair Trade coffee is available in 23 countries. The company’s commitment to social and environmental issues will become even more important as consumers become increasingly aware of the Fair Trade movement and the ethical treatment of coffee farmers. Conversely, some see Starbucks as a corporate giant, stealing business from independent cafés. Employee satisfaction – The company focuses on maintaining employee happiness by offering health benefits, contributing to retirement accounts and providing training in coffee and customer service, thus reducing staff turnover, creating hard-working employees and ultimately benefiting customers’ experience. Efficient operating model – Starbucks’ efficient operating model is evident globally and helps to attract demanding consumers looking for consistency and convenience. Weaknesses Reliance on US market – The US comprises 75% of Starbucks system-wide sales, as 72% of Starbucks outlets are in the US. Secondly, the company’s retail business segment also has a strong US focus, as the company’s products are widely distributed in the country through a licensing agreement with Kraft Foods. Licensed international operations – Over 60% of international outlets operate as licensed stores. While partnering up with local players does reduce risks and enabled the company to enter some markets more quickly, it ultimately diminishes Starbucks’ control. Additionally, these partners may have different agendas and long-term goals. Aware of this weakness, the company is looking to continue to increase equity ownership in key markets. Strong coffee focus – The company’s appeal remains highly dependent on the appeal of coffee. While steps have been taken in the US to improve and expand on the food selection, having a limited focus may deter some customers. Conversely, a wider range of food products does carry the risk of detracting from the brand identity. Opportunities Expansion in Asia – There is great potential for further expansion in international markets, specifically in Asia-Pacific, where over half of all Starbucks outlets outside of North America are situated. China presents a unique opportunity for Starbucks as the country’s coffee drinking culture is undeveloped. Increasing focus on food – Starbucks has placed a greater emphasis on its food offerings, with a more diverse lunch selection and the addition of warm breakfast sandwiches. A larger food menu has the potential to increase average transaction values and attract new customers. Popularity of gourmet coffee in developed coffee-drinking nations – As consumers’ tastes become increasingly sophisticated they are turning away from instant coffee to premium fresh products, as they attempt to recreate the café experience at home. This represents a great opportunity to leverage the equity of the Starbucks brand and increase retail sales of Starbucks coffee through foodservice outlets. Room for further expansion of retail presence – The company has the opportunity to extend further its distribution and product range through retail in the US and internationally, boosting sales of ice cream, beverages, and ground and whole bean coffee in supermarkets/hypermarkets and convenience stores. A stronger retail presence helps to boost brand recognition and drive consumer loyalty. Threats Competition – Starbucks faces intense competition from local coffee specialists, as well as other fast food operators, specifically McDonald’s and Dunkin’ Donuts, which have increased their focus on premium coffee. Independents in Western Europe also tend to have a different coffee style that is more accepted by local consumers. Volatility of coffee prices – One common denominator that has the potential to affect all retail and foodservice coffee companies is the cost of beans. As the company does not maintain coffee plantations it purchases green coffee beans from regions throughout the world, which are then processed at its US-based roasting plant. The company sources green coffee beans from external trading companies and is thus subject to the volatility of coffee prices. However, as the company has secured sources and long-lasting relationships, it is expected to be somewhat more protected than others from the effects of a shortage of Arabica beans due to rising world demand. Global expansion could dilute the authenticity of the brand – With expansion moving quickly there is a concern that the unique Starbucks brand and what made it so popular could be lost. Consumers may come to prefer smaller independent operations that offer a more personal atmosphere. Read More