Critical Analysis of Starbucks Coffee Marketing Strategy - Case Study Example

Critical Analysis of Starbucks Coffee Marketing Strategy with specific focus on 4Ps – Name: ---------------------------- Class: ---------------------------- Date: ---------------------------- Prof: ---------------------------- Table of Contents Critical Analysis of Starbucks Coffee Marketing Strategy 1 Table of Contents 2 Introduction 3 Competitive position analysis 4 Findings 6 Conclusion 9 Recommendations 9 References 9 Introduction Starbucks Corporation is a name to reckon with. Founded in Seattle, WA, in 1971, the company has emerged as a premier marketer, roaster and retailer in the speciality coffee segment throughout the world. The extent of its operations can be gauged by its impressive presence in over 60 countries through its 17,009 licensed and company-operated stores servicing its clients through its 2 million workforce (The Telegraph, 2011). When it comes to Starbucks, it is not only premium priced coffee that is talked about but a variety of other products like tea, some beverages and a variety of fresh foods marketed through several channels including national foodservice accounts, grocery and licensed stores. In all it has an impressive product list that it markets either on a standalone basis or co-branded with other names falling within its company portfolios that include Tazo, Teavana, Seattle Best Coffee, Starbucks Refreshers, Starbucks VIA, La Boulange, Evolution Fesh and Verismo. By the end of September 2013 the company had total revenues to the tune of $14.89 billion (Schultz, 2013). Much of the success that Starbucks has garnered over the decades, particularly in its coffee segment, can be attributed to its matchless retail strategy that hits at a specific target market and is adept at developing a competitive advantage over its competition. The target market is upscale coffee drinkers and the company's focus is on maintaining repeat business and customer loyalty. To accomplish this it hires and trains knowledgeable baristas or counter servers who do not only serve premium coffee to the discerning clients but also educate them about Starbucks' coffee drinks from the speciality segment. That is not to discount the impact its coffee business has had on account of its recent creative tie-ups with Barnes & Noble stores and Nordstorm, which help it serve its coffee aboard United Airlines. It has also been able to increase its brand equity by lending its brand name to many other soft drinks and ice creams. In scaling up its coffee business, Starbucks has made ample use of 4Ps of marketing, which is Product, Place, Promotion and Price. The Starbucks retail mix has focused on location, pricing, merchandise assortment, advertising and promotion, visual merchandising, store design, personal selling and customer service. Starbucks is very particular about its locations and the benchmark is that the site where it intends to have its outlet should be remarkably visible. Starting from centralised cities, it gradually branches out to regional centres or hubs so as to be able to move further out into nearby markets. The pricing, of course, being premium is justified by the sheer magnificent quality of its products and enviable customer service. The company uses the simple logic of spending less on advertising but more on these commitments. Behind all these attributes, Starbucks feels that its employees are the ones to whom it owes its success (Starbucks, 2010). They are treated more as partners than employees and in order to provide them benefits, empowerment and growth opportunities, the company pins itself up to only 60 percent turnover as against 150 to 200 percent that its competitors in the food service business do. The difference is felt by its discerning clientele and that helps it gain more word-of-mouth popularity. Arguably Starbucks has been able to retain with consistency its core image of being a premium coffee seller; an image that seems to spill over to all its product line and as remarked above 4Ps of marketing that it has been using as part of its well-developed retail strategy are supposed to be the catalytic factors behind the Starbucks coffee. This report intends to analyse this unique marketing mix in detail, draw conclusions and make recommendations. Competitive position analysis In recent times Starbucks coffee has experienced direct, and often stiff, competition from large US or non-US quick-service restaurants across the world. Speciality coffee shops have been another competition to face with in the coffee beverages industry, which includes ready-to-drink coffee beverage market. Another point of competition has been whole bean coffee as sold in supermarkets, competing speciality coffee stores and speciality retailers, not to speak of mail order and wholesale suppliers, some of whom greater access through advertising and marketing resources than what Starbucks invests into. The level of competition increases as these competitors improve upon their services and products. The stiffness in the competition can be said to have emerged suddenly with McDonald's and Dunkin' Donuts, who broke into Starbucks' territories with almost a bang, selling equally good coffee but at cheaper prices. It cannot be said whether or not the life, as coffee drinkers knew it was, had changed for good or bad, but the coffee drinkers' landscape did definitely change as the war between Starbucks coffee and its competitors continues till date. While Starbucks is known for being a premium player in the coffee segment, Dunkin' Donuts and McDonald's fall within the convenience segment of fast food, which means greater footfalls, if not all, but some of which translate into coffee customers. That s one aspect of the competition; another is that both these companies have been making drastic strides in improving their image, service and product quality. For example, McDonald's, in 2008, remodelled its stores by making the same more aesthetically appealing using softer colours and lighting and oversized chairs for better customer comfort (Halpern, 2008). On price, they still beat Starbucks. There is another advantage that McDonald’s attempts to derive and that is through its franchise model, which Starbucks does not encourage. All Starbucks stores are company-owned. It does not come down on prize to beat McDonald’s. If competitive analysis is conducted specifically with US, where Starbucks was born, as a reference point, then Dunkin' Donuts stands statistically higher in competition in the nation as a nonflavoured coffee seller. As per 2006 statistics it owned 4,100 stores and had 17 percent market share, McDonald's was a little lesser at 15 percent and Starbucks at a striking low of 6 percent (Brizek, nd). The main reason for this difference was the cost. Dunkin' Donut coffee cost nearly 20 percent less than what Starbucks sold it for. A year before this, in 2005, McDonald's coffee was rated as the "best and the cheapest" (Reiley, 2009). Starbucks, seemingly unfazed by the threat, preferred to lower the price of its iced coffees than anything else. The recession that preceded, however, compelled it to offer its premium coffee at the discounted prices, a move that was countered by McDonald's by offering espresso line of drinks to its customers across 14, 000 locations in the United States (Associated Press, 2009). This was followed by an ad war in which McDonald’s seemed to be emerging as a winner (James, 2008). Starbucks responded by saying that to whatever extremes McDonald's might go, it had its customers base that was unlike that of McDonald's. In other words, both McDoanld's and Dunkin' Donuts had a common target – Starbucks and what McDonald's did in 2006 was repeated by Dunkin' in 2010 when it offered free iced coffee between a specific time slot at some select locations for a week. This unnerved Starbuck and they were compelled to reduce price of their Frappuccinos by half during the same period (Noorbaloochi, 2010; Johnston, 2010). Findings 4Ps of Starbucks coffee One of the core concepts of the marketing theory is the marketing mix concept. The 4Ps concept was first developed by McCarthy (1964), but over the years, and after some of its inherent limitations were identified, it was generally thought that people, process and physical evidence must be added to it. But these are beyond the allotted scope of discussion in this paper. If considered as inclusive, then primary elements of a marketing mix would include product, price, place, promotion, people, processes and physical evidence. Product This is the basic component of any saleable entity and companies decide which products, either in the form of goods or services, should be sold to the customers. Brassington and Pettitt (2003) have stated that “it is about not only what to make, but when to make it, how to make it, and how to ensure that it has a long and profitable life”. One company can have only one or more than one products, but the product that develops the image of a company or around which company focuses the most, is called core product. Each product has a process revolving around it and product characteristics like benefits, features, packing, branding and further development coming later. Each product is governed by a marketing strategy, and Starbucks uses two of them -- product development and market development. Jobber (2004) has stated that product development is a continual process of development through which a product is taken. Starbucks, for example, offers non-durable and convenience products; in this case in the form of coffee. And they take care of the development part by creating differentiating qualities in the product. In coffee, for instance, they differentiate one from another by brewing them as smooth, mild and bold, thus giving bracketing one product, which is coffee, into three different categories. Place The saleability quotient of a product, according to Jobber (2004), depends on which locations the product is made available, in what quantities and at what times. Proper production, correct pricing and reliable availability of a product go a long way n deciding how good or bad the product would fair in a competitive marketplace. This is further determined by what is the channel strategy that the company uses to make its products available in the market. Starbucks sells its coffee through its own distribution channels. While this offers a number of advantages, one of them being cutting down costs on external distribution channels, its greatest pitfall is that where competitors can boost their sales by opening franchise models to public, companies like Starbucks, which handle all operations on their own, can be limited by adequate expansion resources. In current economic climate, this is not considered as a good strategy. McDonald's can be quoted as a ideal example of growth since it has been encouraging the franchisee model. The difference can be ascertained from the statistical point of view. While Starbucks has around 15, 000 retail locations in Latin America, North America, the Middle East, Europe and the Pacific Rim; McDonald's has presence in 118 countries through 35,000 restaurants, serving 68 million customers each day. The difference, of course, is stark. Promotion Promotion of a product takes place through various channels, which includes advertising, sales promotions, personal selling, direct marketing, public relations, online media and through internet. Earlier on, Starbucks has been wary of using any advertising but ever since it came under a stiff attack from its competitors, it has begun to change its strategy, though still not aggressively adveertising. Of late, the company has been using social aggressively and some of the recent developments on its promotional front have been the development of My Starbucks Idea, a community website that invites feedback and suggestions. My Starbucks reward program makes a customer earn a free drink post every 15 purchases. In 2001, came another surprise from Starbucks and that was a Starbucks Card, a card that can be loaded and used at Starbucks outlets for making purchases (Fresner, 2014). Critics, however, are still of the opinion that sales could have been higher at Starbucks had it been using conventional methods of advertising like billboards etc as its competitor McDonald’s does. Price Borden, Neil and Marshall (1959) have defined price as the amount of money paid by the customer in lieu of the service or goods bought. Pricing a product often seems to be an easy task but in reality it must be the really well-thought about one. The fact is price of a product plays a great role in purchase decision of a customer. The price has been so dynamic that it is able to withstand changes over time. Being adamant on high price can, sometimes, prove to be counterproductive. Starbucks pricing has been on the premium side, which has both been its advantage and disadvantage. The former because it has helped develop a brand equity around Starbucks coffee, which is supposed to be of extremely high quality. The latter because Starbucks competitors have used its high priced products as a pitching element against it by keeping low prices of their products, which are as good as Starbucks coffee. Conclusion Starbucks coffee is popular in nations where the company operates its outlets through its own channels. The company has been using 4Ps of marketing mix, basing this same widely on two theories mentioned above. However, with the recent competition from such giants as McDonald’s and Dunkin' Donuts and the marketing strategies that they have been employing, Starbucks has gradually begun to remodel its strategies. Recommendations Based on the findings of this report, three recommendations can be made: 1. The competition to Starbucks coffee is growing and it will be in the interest of the company if it revamps its marketing strategy; keeping it more in tune with its competitors 2. Keeping its alignment with the high-end customers, it can come up with innovative schemes if not reduce its prices. 3. Opening up franchisee option to interested partners will make its entry into markets dominated by its competitors possible. References Associated Press (2009). Coffee Wars Heat Up As McDonald’s, Starbucks Pump Big Bucks Into Marketing. Fox News. Available at http://www.foxnews.com/story/0,2933,519078,00.html. [Accessed 12 Nov. 2014]. Brizek, M.G. (nd). 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