Analysis of Starbucks


Starbucks Coffee, Tea and Spices started out in 1971 as a local coffee bean roaster and retailer in Seattle, Washington by three partners, two of which were teachers and the other a writer. These three men were inspired by a mutual friend to open their first store. In 1983, Howard Schultz joined the company and saw the potential of this small coffee bean retailer. Many times he went to the owners with his visions and dreams for their company and how it could grow and many times he was met with rejection. The owners felt that there was not a need for a beverage business as “coffee was something to be prepared in the home.” Time and time again Howard approached them with his visions and then quit in 1985 to open his own coffeehouse. Opportunity knocked in 1987, and with help from investors he bought Starbucks Coffee, Tea and Spices and changed the name to Starbucks.

For the next twenty one years, Starbucks grew to become the largest coffeehouse company in the world with over 16,226 stores worldwide including 11,434 stores located in the United States. Even though the company recently closed 600 of its under-performing company-owned stores they still have plans to open 200 more stores in 2009.

Starbuck’s headquarters is stationed in Seattle, Washington.

MISSION STATEMENT2
Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow.

The following six guiding principles will help us measure the appropriateness of our decisions:

Provide a great work environment and treat each other with respect and dignity.
Embrace diversity as an essential component in the way we do business.
Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.
Contribute positively to our communities and our environment.
Recognize that profitability is essential to our future success.

Environmental mission statement

We fulfill this mission by a commitment to:

Understanding of environmental issues and sharing information with our partners.
Developing innovative and flexible solutions to bring about change.
Striving to buy, sell and use environmentally friendly products.
Recognizing that fiscal responsibility is essential to our environmental future.
Instilling environmental responsibility as a corporate value.

Measuring and monitoring our progress for each project.
Encouraging all partners to share in our mission.

PRODUCTS

1) Coffee
Offers more than 30 blends and single-origin coffees

2) Handcrafted Beverages
Fresh-brewed coffee, hot and iced espresso beverages, coffee and non-coffee blended beverages, and Tazo teas.

3) Merchandise
Assorted home espresso machines, coffee brewers and grinders, a line of premium chocolate, coffee mugs and coffee accessories, and a variety of gift items.

4) Fresh Food
Baked pastries, sandwiches and salads.

5) Starbucks Entertainment
A selection of the best in music, books and film.

6) Global Consumer Products
Bottled Starbucks Frappuccino beverages, chilled cup coffee, espresso drinks, Tazo teas and super premium ice creams.

7) Starbucks Card
Reloadable stored-value cards.

8) Brand Portfolio
Starbucks Entertainment, Tazo Tea, and Ethos Water.

COMPETITORS3
1) DUNKIN
2) MCDONALDS
3) NESTLE
4) YUM BRANDS
5) DARDEN RESTAURANTS

Starbucks is ranked #4 by sales in the restaurant sector. McDonalds is #1, but then McDonalds has a more extensive menu. Trailing behind is Yum Brands (YumYum Donuts) as #2 and Darden Restaurant in #3 spot. Another competitor of Starbucks is Nestle, who offers their own brand of premium coffee, hot chocolate and ice cream.

Starbucks believes in order to increase their sales and draw in more customers they need to make some changes as competition is fierce, especially in this economy. They feel that by closing under-producing stores, redesign the space behind the counters, using automatic espresso machines to speed up production time and transform the “Customer Experience” they can achieve this goal, among many changes. Another way they are trying to attract customers is they want the customers to feel like Starbucks is their “third home” and even provides free Wi-Fi to its customers. They want customers to experience Starbucks, not just come in and buy coffee. This is going to be quite a challenge for Starbucks as the economy is unstable, the presidential election is right around the corner, people are losing their homes and their jobs. The consumers are also tightening their spending.

While I research and learn about Starbucks and what the big deal is with this high priced coffee company, I found myself really admiring Howard Schultz and how he has guided and mentored this company. And, after researching and learning how and why people spend, I realized that I buy Starbucks out of habit, not loyalty. Until today I could not explain why I only buy Starbucks whole bean coffee, 4 bags at a time. The coffee is good but does it warrant paying $11 per bag? Then I realized that I buy out of habit. The outcome of this session long project will be interesting to me to see if, after this is all done, will I still buy Starbucks out of habit or will I become another loyal customer?

PRIMARY ATTRIBUTES

1.) Quality3- Starbucks prides itself on the quality of its products. Whether it’s their fresh roasted coffee or their premium salads and sandwiches the company stands by its commitment to quality ingredients and affordable prices. It only purchases coffees that have been grown and processed by suppliers that meet strict environmental, social, economic and quality standards.

2.) Convenience4- Starbucks stores can be found in urban and suburban areas, as well as many rural communities worldwide. An expanded number of Drive-Thru and Off-Highway stores also provide a convenient alternative for customers. Consumers can also find Starbucks kiosks in many of their favorite places such as Barnes & Noble bookstores, Hyatt Hotels and United Airlines facilities. Starbucks also strives to provide several different amenities for their consumers that aren’t found at other coffee breweries. These amenities include free electricity for consumers and many provide free wireless internet access.

POSITIONING MAP

High (Convenience)
|
Coffees Fresh Food
Handcrafted Beverages |Merchandise
__________High (Quality)______________________________Low (Quality)_____________
|
|
______________________________Low (Convenience)_________________________

PRIMARY TARGET MARKETS
1.) Yuppies- Professional, middle to upper class, working individuals. Most often in families without children.
2.) College Students- Young Adult to Middle Aged students who attend colleges and universities. Most often in need of extra energy and caffeine.
3.) Upper Class- Individuals whose income exceeds $80,000 a year. Can include families with or without children.
4.) Middle Class- Individuals whose yearly income falls between $25,000-80,000 a year. Can include families with or without children.
5.) Young Adults- Individuals between 16 and 25 years of age. Can include families with or without children.

Product Categories
1.) Premium Coffees- Freshly ground and roasted coffees in more than 30 blends and flavor combinations
2.) Handcrafted Beverages- Includes hot and iced espresso beverages, coffee and non-coffee blended beverages and Tazo teas.
3.) Merchandise- Includes home espresso machines, coffee brewers and grinders, premium chocolates, coffee mugs and accessories and various gift items.
4.) Fresh Food- Includes premium salads, sandwiches and pastry assortments.
5.) Entertainment- Includes movies, books and films sold in Starbuck stores.

Product-Market Grid
Coffees Handcrafted Bev. Merchandise Fresh Food Entertainment
Yuppies 3 1 2
College Students 2 1 3
Upper Class 1 2 3
Middle Class 1 2 3
Young Adults 1 2 3
_____________________________________________________________________________________

Strategy
The Starbucks Company seems to hold fast to their Product Development strategies. Although Starbucks is interested in expanding their target market, it feels that more focus should be placed on expanding on products currently offered. Starbucks5 often tests new products as part of its ongoing innovation and transformation. For example, Starbucks starts testing by selling an 8 oz short brewed coffee for $1 and giving free refills on all brewed coffee. The company will continue to test new products and ideas to be offered to Starbucks consumers.

Competitive Advantage
By providing its consumers with a combination of extreme convenience and quality products Starbucks definitely holds a competitive advantage over other coffee-retailers. By combining attributes that consumers find attractive, Starbucks can create brand loyalty and keep consumers from choosing other coffee retailers for their coffee needs.
Distribution

Starbucks is continually expanding their distribution outlets. In 2004, they had 20,000 outlets that sold their specialty products, including Wal-Mart, Target, a variety of other grocery stores and pharmacies. In 2005, the number of stores involved in the Starbucks’ distribution channel increased to 31,000, exhibiting almost a 50% improvement and drastically expanding their ability to reach customers (Knol.com).

Logistics
Most of the distribution of Starbucks products in the U.S. is conducted by a trucking system. The company houses several distribution centers throughout the nation and moves a majority of their products by land. They do, however, have several roasting plants outside the U.S. and must rely on other modes of transportation such as airplanes and freighters. The majority of the Company’s direct distribution accounts are through national broad line distribution networks with SYSCO Corporation and U.S. Foodservice TM. Starbucks foodservice sales, customer service and support resources are aligned with those of SYSCO Corporation and U.S. Foodservice. Starbucks and Seattle’s Best Coffee are the only super premium national-brand coffees actively promoted by SYSCO Corporation (US Securities and Exchange Commission). Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Beverage ingredients, other than coffee and milk, including leaf teas and the Company’s selection of ready-to-drink beverages, are purchased from several specialty manufacturers, usually under long-term supply contracts. Food products, such as fresh pastries, breakfast sandwiches and lunch items are generally purchased from both regional and local sources. Coffee-making equipment, such as drip and coffee press coffeemakers, espresso machines and coffee grinders are generally purchased directly from their manufacturers.

Coffee-related accessories, including items bearing the Company’s logos and trademarks are produced and distributed through contracts with a number of different suppliers. Starbucks also has special agreements with Kraft foods for distribution in local grocery stores and warehouse club stores throughout the U.S. in which Kraft manages all distribution of products for those locations.

Physical Facilities
The Starbucks website does state that they own several distribution centers throughout the U.S. and that they have even built international distribution centers. I was unable, however, to find any information regarding physical size or interior/exterior attributes. There was also no specific information regarding the locations of these distribution centers. I was able to check some state websites and locate distribution centers in California, Oregon and Nevada. But again no other details were released.

Distribution Advantage

Although there was no specific information regarding the number of distribution centers for the company Starbucks it still seems that the company does have the competitive advantage in regards to distribution of their products. Most of these advantages come from their partnerships with other companies and organizations such as Kraft foods, Barnes & Noble, and SYSCO. These companies either take over the distribution of products or help with distribution for the company. This allows Starbucks to produce more product and results in more competitive prices for their consumers.

The company is constantly expanding their distribution outlets as well. This allows consumers to find all their favorite Starbucks products at many convenient outlets (starbucks.com). If Starbucks continues to increase their product variety, distribution outlets and distribution channels, soon they will not just have the competitive advantage, they will become an unstoppable force in the coffee industry.

Promotional Mix

Starbucks generally does not use conventional advertising methods because the company as found that there is too much competition for consumers attention in TV, radio and print media. In fact the company did not begin to use conventional advertising methods such as TV advertising until 2007. The company tends to rely more on increased distribution and brand recognition as well as its charitable contributions.

The company, as mentioned before, is continually increasing their distribution outlets in order to continually improve their brand recognition and maximize accessibility of their products. By placing more products in places continually visited by consumers they are able to make their coffees more widely known to consumers then their competitors’ brands.

Another source of unconventional advertising is their use of charitable work to advertise their brand image. Starbucks usually picks one or two charity events in the community it serves to promote the company. The company feels that this will also inspire people inside and outside the company and reinforce the company’s value and image (Lorenzini, 1993). The company’s principals state that “every store is part of a community and we take our responsibility to be good neighbors seriously,” (starbucks.com).

It was in 2007 that the head of marketing at Starbucks, Anne Saunders, left the company for other opportunities. This allowed the company to head in another direction and explore new avenues in marketing and advertising of products. Today you are finally able to see commercials advertising the Starbucks brand and its products to consumers.

Marketing Mix

Until its introduction into television advertising, Starbucks had little means of advertising individual products. In fact, you actually did not know what products the company produced until you saw them in stores or at local kiosks. Even with it’s induction into the television world, Starbucks remains anything but conventional.

Starbucks does run a few standard promotional TV campaigns. Campaigns in which the goal is obvious, promotes the product and makes the consumer feel they must buy it. These products include specific lattes or their new double shot canned espressos.
If you have been watching this holiday season, however, you will notice that the ads promote something different, they promote something simpler: passing the cheer. They are promoting the season and the celebration of the holidays, there is no plug for a specific product or hint of a sales pitch. Way to go Starbucks!

Promotional Advantage

The companies’ lack of conventional advertising methods did put them at a competitive disadvantage for several years. In fact the company held no advantage in marketing at all. They relied on everything but advertising to sell their products and unfortunately in this day and age it is almost impossible to survive without more advanced marketing strategies. Competitors such as McDonalds and Dunkin Doughnuts have had an advantage in regards to promotion for several years.

The companies new found advertising methods do have the potential to give them the competitive advantage in promotion. If they continue to explore different avenues of advertising they will increase their brand recognition with consumers and eventually increase brand loyalty.

Pricing Strategies

It was extremely difficult to find any information regarding the pricing strategies of Starbucks. General information found on the internet stated that Starbucks “prices its products competitively with prevailing high-end coffee prices. Starbucks represents an attractive combination of affordable prices, high quality and convenience,” (Song-Ming Kim, 2002).

The only information I was able to find that was not a generic response to pricing was in regards to their drink size. They referred to it as Goldilocks pricing, as in the story of the three bears and finding something that was not too big or too small but finding something that is just right. “That’s why Starbucks offers their drinks in three sizes. The psychology is based on avoidance of extremes. If I offer two sizes, regular and large, most people will go for the regular. If I then add a third size, extra large, people will be drawn to the one in the middle. Even if no one ever buys a single extra large (and the extra large size in Starbucks is a pint of coffee !) just having it offered will persuade many customers to upgrade.

A quick calculation shows the power of this approach. Suppose that selling regular size makes a net profit of 5% of sales after fixed costs - i.e. it is just keeping the lights on. Persuading just one person in 4 to take the next size up doubles this,” (Drysburgh).

Pricing Advantage
It is becoming evident that Starbucks no longer has any pricing advantage in the coffee market it if it ever had one to begin with. Recent emerging competitors such as McDonalds and Dunkin Doughnuts are now becoming known for their good, inexpensive coffees.

Starbucks has taken steps to become a stronger competitor in regards to pricing. They are currently researching a campaign that would include offering a cup of coffee for just $1, a cup that would include free refills. This definitely is something that no other competitor is offering at the moment. This strategy will definitely bring in more consumers but may hurt the sales of other products that produce more revenue for the store. This new pricing strategy is still in the experimental stage.

References
Drysburgh, Alastair. Profits Leak Detective: How Are Starbucks Taking Over the World?. Retrieved on January 2nd, 2009 from http://www.profitsleakdetective.com/articles/how-are-starbucks-taking-over-the-world.html.

Kim, Seong- Min. 2002. Business Policy and Strategy: Starbucks. Retrieved on January 2nd, 2009 from http://www2.hawaii.edu/~seongmin/Starbucks.pdf.

Knol.com. Retrieved on December 26, 2007 from http://knol.google.com/k/-/analysis-of-starbucks/ow5jbvr76bz9/8#.

Lorenzini, B. 1993. Grounds for Success. Restaurants and Institutions 103(23).160.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION. 2007. TRANSITION REPORT PURSUANT TO

SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Retrieved on December 27, 2007

from media.corporate-ir.net/media_files/irol/99/99518/200710K.pdf.

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