StarBucks (Case 7)
StarBucks (Case 7)
WHAT GOES UP . . .
It wasnt long before Starbucks became a household worda powerhouse premium brand in a category that previously consisted of only cheaper commodity products. In 20 years time, Schultz grew the company to almost 17,000 stores in dozens of countries. From 1995 to 2005, Starbucks added U.S. stores at an annual rate of 27 percent, far faster than the 17 percent annual growth of McDonalds in its heyday. At one point, Starbucks opened over 3,300 locations in a single yearan average of 9 per day. In one stretch of crowded Manhattan, a person could get their caffeine fix at any of five Starbucks outlets in less than a block and a half. In fact, cramming so many stores so close together caused one satirical publication to run this headline: A New Starbucks Opens in the Restroom of Existing Starbucks. For many years, new store growth was what kept Starbucks percolating. As it grew, company sales and profits rose like steam from a mug of hot java. Growth routinely averaged 20 percent or more each year. And Starbucks made investors happy with a 25 percent annual increase in the value of its stock for more than a decade. Schultz confidently predicted that there was no end in sight for the Starbucks boom. Just a few years ago, he announced his intentions to open 10,000 new stores in just four years and then push Starbucks to 40,000 stores. But not long after Schultz shocked Wall Street and the industry with his projections, Starbucks steam engine of growth started to slow. Then it started running in reverse. By the end of 2008, the 20 percent annual growth had dropped to 10 percent, with existingstore sales decreasing by 3 percent. Total company profits dropped by a scalding 53 percent for the year. And for a second year in a row, Starbucks stock value dropped by 50 percent to around $10 a share. The weakened economy certainly played a role. But for years, many industry observers had worried that the company was growing too fast. Revenue and traffic at Starbucks began slowing more than a year before anyone uttered the word recession. In a sign of recognizing a problem, Schultz cut back on the number of new store openings. Then he did what had previously seemed unthinkable. In 2008, he announced store closuresfirst 600, then 300 more. In fact, as Starbucks trimmed its 2009 forecast for new store openings to 310, it projected a decrease in its number of outlets for the first time ever.
SOUL SEARCHING
When Starbucks growth first started tapering off, the executives took notice. In a now famous memo to management, Schultz lamented that in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 15,000 stores and beyond, [Starbucks had made decisions that may] have led to the watering down of the Starbucks experience. Stores no longer have the soul of the past and reflect a chain of stores versus the warm feeling of a neighborhood store. Starbucks management believed that efforts to recapture that soul would get the company back on track. At first, however, Starbucks was caught between the conflicting goals of reestablishing its image as the provider of a holistic experience and offering better value to the cash-strapped consumer.
Starbucks set out to put some water on the fire and get some of its customers back. It added labor hours and time-saving automated machines to stores. It focused on the quality of its coffee with a Coffee Master training program for its baristas and a new line of ultrapremium whole-bean coffees. It even tried free Wi-Fi service and sold its own music. But none of these actions seemed to address the core problem: Although Starbucks still charged a premium price, it was no longer a special place. As the recession tightened its grip and more people cut back on discretionary purchases, the problem grew worse. Compounding the problem was an increase in competition. For years, if you wanted a latte, Starbucks was about the only option. Not only were Dunkin Donuts and McDonalds selling premium coffee drinks to the masses, but just about every mini-mart in the country boasted about the quality of its coffee. All of these competitors had prices considerably lower than those of Starbucks, which made the most well-known coffee bar much less justifiable to the grab and go crowd. As much as Schultz denied being in direct competition with the lower-status coffee pourers, many critics seemed to be thinking the same thing: Starbucks had shifted from a warm and intimate coffeehouse to little more than a filling station, battling fast-food outlets for some of the same customer dollars.
percent are in the office, and 25 percent are on the go. Many Via customers arent just out for a cheap coffee fix. (You can mix up a cup of Folgers for about 25 cents.) They are people who want premium coffee but are in situations where they dont have access to a store or brewing their own. An ad campaign supporting Via is the first concerted advertising push aimed at grocery customers, who are now accessible through 37,000 retail locations. The second prong of Starbucks strategy also focuses on the grocery business but through ground-flavored coffees. According to NPD Group, four out of five cups of coffee are consumed at home. Starbucks has a very small share of that market. Via will certainly help. But aiming more directly at the brew it at home customer, Starbucks is partnering with Kraft to launch flavored coffees you can brew yourself. Sixty percent of bagged coffee buyers are either drinking flavored coffee or adding flavored creamer. Seventy-five percent of those customers said they would buy a flavored product at the grocery store if Starbucks made one. So after more than two years of testing, this substantial segment of grocery-store buying customers can now get Starbucks Natural Fusions in vanilla, caramel, and cinnamon. The third prong of Starbucks strategy is its ace in the hole Seattles Best Coffee. Starbucks purchased the brand back in 2003 but is just now doing something with it. Rebranding efforts have given Seattles Best a new look and tagline, Great Coffee Everywhere. As with Via and Natural Fusions, and now with Seattles Best, Starbucks is going after customers who dont normally buy Starbucks coffee. It is placing Seattles Best where Starbucks customers arentin vending machines, coffee carts, fast-food restaurants (Burger King and Subway, among others), theatres, and convenience stores. These are places that Starbucks has avoided for fear of eroding its upscale image. With prices ranging from $1 to just over $2, Seattles Best also reaches customers who perceive Starbucks as too expensive. Gap has Old Navy. BMW has Mini. Now, Seattles Best allows Starbucks to go head-to-head with competitors like McDonalds without putting the Starbucks name in the same sentence as downscale competitors. Michelle Gass, Seattles Best president, clearly defines the difference versus Starbucks: Starbucks is a destination coffee experience and an active choice made by the customer. Seattles Best will instead be brought to the consumer when they make other retail choices. Gass is going to make sure that she has as many of those other retail choices covered as possible. She is taking the brand from 3,000 points of distribution in 2009 to more than 30,000 by the end of 2010. The three-pronged strategy provides three good reasons to believe that Starbucks growth story will return, even without opening nine stores per day. As icing on the coffee cake, only one-fifth of Starbucks sales come from outside the United States. The company sees huge potential growth abroad. But perhaps the greatest strength in Starbucks new strategy is that it will allow the company to go after new customer segments while also restoring the essence of the Starbucks Experience.
2. What changed firstthe Starbucks customer or the Starbucks Experience? Explain your response by discussing the principles of market targeting. 3. Based on the segmentation variables, how is Starbucks now segmenting and targeting the coffee market? 4. Will Starbucks ever return to the revenue and profit growth that it once enjoyed? Why or why not? Sources: Beth Kowitt, Can Starbucks Still Be Seattles Best If It Grows By Hyping Seattles Best? Fortune, May 25, 2010, accessed at http://money.cnn.com/2010/05/25/news/companies/starbucks_seattles_best.fortune/index.htm; Emily Bryson York, Why You Are Not Drinking Nearly Enough Starbucks, Advertising Age, May 17, 2010, p. 1; Dan Mitchell, Starbucks Faces Existential Crisis In Downturn, Washington Post, March 22, 2009, p. G01; Bruce Horovitz, Starbucks Perks Up with First Dividend, USA Today, March 25, 2010, p. 1B.