Starbucks: Managing a High Growth Brand

Arpitaa KharbandaGirish MittalKishlay SethSeemant PrakashVikas Malhotra

To inspire and nurture the human spirit— one person, one cup, and one neighbourhood at a time

An Overview Starbucks Corporation is an international coffee and  coffeehouse

chain based in Seattle

Starbucks is the largest coffeehouse company in the world with 16,120 stores in 49 countries, including around 11,000 in the United States, followed by nearly 1,000 in Canada and more than 800 in Japan

35million customers a week

Joint ventures with Pepsi, Kraft, Dryer’s and Capitol Records – went into consumer products division to complement café business

Licensing partnerships with ITT Sheraton, Host Marriot – added to the Starbucks brand

Most impressive high growth brands of 1990s and early 21st century

The Starbucks growth story can be divided in three phases:

Stage 1-Development of a strong brand , foundation for future growth.

Stage 2- 1990’s-2000 : Rapid growth ; loosing focus; short term decisions

Stage 3- 2000 Onwards : Feeling ripples of past decisions ; coming back on track

AnalysisStage 1-Development of a strong brand ,

foundation for future growth.

• Entered market when coffee consumption was on decline.

• 1971 -Jerry Baldwin, Zev Siegel, and Gordon Bowker opened a store called “Starbucks Coffee, Tea, and Spice” in Seattle

• They concept of store dedicated to selling only finest quality bean was unique which was earlier obtained only through catalogs of European companies.

• Core attribute– Quality . Provide best ingredient and brewing equipment.

• 1982- Howard Schultz comes to company.

Developing the brand identity – “ The Starbuck Experience”:

Name: Starbucks

• Keep this name familiar to Seattleites

• Easily memorable• Required developing and

associating the “Experience “with name

Logo

• Added image of mermaid in wood cutting style to reflect name.

• Updated to appear more contemporary.

• Color changed from brown to green.

Pre 1987 logo Giornale logo 1987 – 1992 1992 till date

Evolution of the logo..

Store ambience

• Redesigned to echo romantic atmosphere of Italian bars – Elegance of European coffeehouses.

• Wooden fixtures, vibrant greens – bold, mysterious, romantic –with casual American warmth.

Highest quality of everything

• See, touch, hear, smell• “Personal treat”• “Third Place” –social gathering

spot between home and workplace

Developing the core valueHigh quality - Sourcing from best. Innovation to maintain product quality . This was further developed to flexibility

in quality i.e. taking customer feedback - customizationInnovation – Product and support

functions , infrastructure and process. E.g. Roasting and packaging plant,

advanced computer information system, Flavor lock bags, vacuum packaging

system Employee focus – Training program, treatment as ‘partners’, compensation

and benefit packages

Customer “experience”

The core of the firm was developed on the following frame:

First phase of expansion in key markets- Chicago, Los Angeles, New York, Washington D.C.

All stores to be owned and operated by company instead of franchising.

Focus on word of mouth publicity campaigns to generate buzz before the brand arrived in new market.

Marketing strategy of “hub” and spread to “spoke” markets.

• Filled the gap between family and work – “Third place”

• The employee training enabled them to educate customers about “quality” in coffee products

• Defined the Starbucks experience.

Affordability

• Redefined affordability.• Convinced customer to pay premium

prices by educating about experience, quality and service.

• Developing brand loyalty by quality and innovation enabled consumer price sensitivity for this commoditized product

Availability

•Cluttering in prime locations to maximize market share and highest serving potential. No space for competitors to enter.

Awareness

•Leverages their size and location strategy by word of mouth promotion

Stage 2- 1990’s-2000 : Rapid growth ; loosing focus; short term decisions

Joint Ventures and Partnership: Enter into partnership with firms having same commitment to equality and people.

Host Marriot Partnership,

1991

• Concession stands in airports• Larger group of potential customers - air

travelers• Difficult to maintain quality of service• Did not reflect “starbuck experience” the

theme on which the brand was build

United Airlines Partnership,

1996

• Advantage of generating awareness• Installed more effective filtering device in

aircraft brewing equipment• Helped develop future loyal customer since

people had more time to leisure the coffee

Retail and Service

Partnership

• Nordstrom, ITT/Sherton, Westin, Holland America Cruiseline, Barnes & Noble and Albertson’s to build brand awareness.

• This excessive presence and visibility of brand across varied stores only meant that Starbuck was loosing its reputation of premium exclusive lifestyle brand .

Launched Frappuccino in 1997.

Dryer’s joint venture with Starbuck – 6 coffee ice cream flavors marketed under Starbuck name.

Introducing Starbuck packaged whole coffee bean to be marketed and distributed by Kraft to reach mass market.

Environmental Concern:› Starbucks partnership with Environmental agencies like Alliance for

Environmental Innovation to develop less wasteful carryout coffee cup in 1996

› 1999, with Conservation International offered shade grown Mexican coffee.

› 2000, agreed to offer Fair trade certified coffee

› Starbuck Foundation charity efforts

Acquisitions:› 1998, London based Seattle coffee Company to establish

foothold in the growing British coffee market.

› 1999, Acquired Pasqua Coffee Company to saturate California markets, similar to their previous strategy.

1999, Launch of Joe magazine. Creating a original , warm and conversational lifestyle magazine.

1999, Tries to catch up with internet boom. Obsolete investment in Living.com, chat site, cooking.com etc.

Stage 3- 2000 Onwards : Feeling ripples of past decisions ; coming back on track

• Previous decisions were not sustainable:

• Loss of focus (need was flexible quality- Customization) gave opportunity to competitors to develop.

• Competitors broadened their experience. Starbuck remained as a extension of city life.

Sales 1999 sales slow down significantly. Same store revenue growth flattened

Starbucks Ice cream Initial high growth tapered considerably

Frappuccino Fails to meet sales expectation.

Joe Magazine 2000, sales falter and project is axed

• Competitors:

• Rapid expansion of Starbucks in multiple countries simultaneously. 1998, Japan-26, Singapore- 6, Taiwan- 6 etc.

• Europe was not a market to enter. Their setting was taken from Italian coffee house which was existing in those countries at lower cost. Thus problems faced in London, Germany etc.

Caribou Coffee : New experience – stores designed to resemble ski lodges and rustic mountain cabins.Dunkin Donuts: Introduced cappuccino and latte in many stores, combination of speed, consistency and lower pricesMcDonald’s and Burger King: Food chain heavyweights developed bean blends. Driven by low cost and speed.

Starbuck goes back to basics. Strengthen the core product, coffee.

New Frappuccino flavors, introduction of chilled espresso drink DoubleShot. New products were success and enabled them to maintain market share.

Offering lunch items , sandwiches etc transition from coffee only joint to a coffee with snacks joint.

Innovation in support function: The value cards

Purchase of retail Hear Music in 1999. Unrelated diversification into a industry in which they had no experience.

However developing music suitable for their ambience added to the brand and its exclusivity.

Entering into coffee liqueur was against their mission itself. It gave them a wrong image in front of social conscious customers.

The idea to promote film could have helped develop brand if the film had been selected properly.

Promoting a children film “Akeelah” does not fit its image and although it lead to immediate sales this further adds to brand confusion.

The coffee Master certification program brings back focus on employee and developing their competency to serve customer.

Summary and recommendation

What was the brand built on ?

Quality of products and service which induced word-of-mouth “advertising” .

The rapid growth strategy had itself created the fundamental problem –Store no longer reflect the soul as in past and “third place” concept.

Today Starbuck stands as mass brand attempting to command premium price for an experience it no more delivers.

How it lost focus

Early target customers who valued the relaxing atmosphere over a quality cup of coffee felt disenchanted• To grow, Starbuck went for customer who valued speed-mass

market.• The target group was lost in these attempts.

Starbucks introduced too many new products to broaden its appeal.• These new products undercut the integrity of the Starbucks

brand for coffee purists• The brand experience declined • price premium for a Starbucks coffee seemed less justifiable for

grab and go customers as McDonald's and Dunkin Donuts improved their coffee offerings at much lower prices

Opening new stores and launching a blizzard of new unrelated products create only superficial growth• Focus on improving same store sales lost. The core values

of service, customer knowledge through trained employee could not be maintained.

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There are two options with the firm- Either they cut price and become a mass market product or they reduce stores to restore the exclusivity of the brand.

They can stay small, exclusive and premium-priced by limiting their distribution to selected stores in the major international cities.

At the same time Starbuck needs to understand that it cannot continue charging premium prices when competitors like McDonalds, Dunkin etc are offering much cheaper option specially in current time of recession.

Q1. What were the keys for success for Starbucks in building the brand? What were its brand value ? What were its source of equity?

• The brand was built to fulfill existing gap in U.S market: Lack of high quality coffee store.

• The name, logo and the ambience of Starbucks were all developed to represent bold, mysterious and romantic.

• They employee were developed to communicate the quality they offered to the customer:

• Brand Value –a “home” feeling and rich sensory experience, a comfortable social gathering spot , a “Third place” between home and workplace.

Customer Experience

Delivery Mode

See Romantic atmosphere of Italian coffee bars, rich brown wooden fixtures

Hear The music being played, The help ,knowledge provided by “Barista”

Taste Best quality coffee and coffee maker to maintain the taste

Smell The aroma of coffee as a non-verbal signal

The source of equity was the best quality of coffee and most importantly the personalized experience given by the highly trained employee at a Starbuck store.

Q2. How do you evaluate Starbucks growth strategy? Are there things you would have done differently? How would you evaluate its partnership? How do you know whether its good or bad?

Starbucks uncontrolled growth was short term and led to brand dilution.

Starbuck at airport, airlines, stores, drive through etc could bring immediate sales but could not deliver the store experience on which the brand was developed.

Need was to focus on support functions- The music, aroma, visual etc and concentrate on individual store sales.

Q3. What does it take to make a world class global brand? Can Starbucks become one? What hurdles must it overcome? In terms of American market what do you see as Starbucks’ biggest challenges?

Characteristics of a global brand: Quality signal

The same positioning worldwide. This provides a combination of functional product quality and innovation with emotional appeal. Think Coca-Cola and Disney.

A focus on a single product category. Think Nokia and Intel.

The company name is the brand name. All marketing dollars are concentrated on that one brand. Think GE and IBM.

Access to the global village. Consuming the brand equals membership in a global club. Think IBM's "solutions for a small planet.“

Social responsibility. Consumers expect global brands to lead on corporate social responsibility, leveraging their technology to solve the world's problems. Think Nestlé and clean water.

Global Myth. Consumers look to global brands as symbols of cultural ideals. They use brands to create an imagined global identity that they share with like-minded people. 

Starbucks can definitely be a global brand› It must continue to maintain its distinctive identity

even as it expands worldwide

› Obvious hurdles to Starbucks growth are:

Lack of focus on quality and innovation in its core offering Same positioning worldwide An attempt to capture other consumers: those who seek

convenience and speed As they expand to new locations across the world they

must

Creating a strong presence and a distinctive identity Solving the local value equation through product and pricing

strategies Adapting products and services to meet local needs and tastes

In American market: Starbucks challengers are:

Chains that are diversifying to quality coffee eg McDonalds

› Starbucks will have to resist the brunt of Loss of certain consumers to chains like McCafes and Dunkin Donuts

› These consumers are likely to be more interested in a transactional experience even at Starbucks (i.e. the quick morning coffee vs. the drawn-out coffee date or after-work snack).

Q4. Evaluate Starbucks move into non-coffee areas like credit card , music and film. Are these natural extension of the Starbucks brand or the company gone too far in creating a “lifestyle” brand? Where should Starbucks go next?

Store value cards could attract more customers to Starbuck stores where the actual experience was delivered.

Not only did it provide convenience but also attracted more customers to its stores.

The decision of secondary leverage via promoting film would have been appropriate if the films were selected. The film “Akeelah” did not reflect the brand image.

Music ,books etc could have been outsourced instead of wasting resources on two industries having completely different set of competitors and resource requirement.

Producing music on theme of love, romance etc however would enable it to strengthen its brand association.

Q5. Do you agree with Starbuck’s international expansion? Should the company continue its aggressive expansion plan? Are there markets Starbucks cannot expand?

Starbucks entered different markets simultaneously de to which made maintaining the same standards across all stores difficult.

Europe market did not offer scope for Starbuck to expand since their offering was already available in form of well established European brands at much lower prices.

Asian markets have majority of emerging markets . Disposable income is increasing and people are more open to Western lifestyle compared to Europe.

This gives Starbucks a better opportunity to grow in selective Asian metropolitans by cluttering of stores.

Q6. Who represents the biggest threat to Starbucks? Direct competitors in the coffee market, such as Dunkin’ Donuts? Chains like McDonald’s that are expanding their coffee quality? Panera Bread and other locations that might be the new “third place”?

A Comparison

S. No Competitors POPs PODs

1 Supermarkets Value, Image Convenience, high quality, taste

2 Fast food chains, convenience stores

Taste Service, Quality, Product quality, experience

3 Local Café’s Taste Service, Quality, Product quality

The biggest threat to Starbucks is from those who are able to compete against them on ‘coffee’, ‘third place’ experience

• Different demographic profile: Starbucks: 18- to 29-year-olds,35-44 yr olds, college grads, people with annual incomes of $75,000 or more a year.

Dunkin Donuts:  • Dunkin' Donuts serves, millions of blue-collar workers with

scrumptious, made-that-morning donuts in several varieties. Not many options of coffee.

• No hurry-up and move on sentiment at Starbucks like in DD

• Competitors serving the same coffee market- largely different propositions

McDonalds: Chains› Moving from coffee as an accompaniment to beverage

destination: president, Mc Donalds USA

› Speed, Convenience, the value that customers get without quality comprise -- a formidable player.

› Mc Café will not replace Starbucks Different consumer base: The consumers who are

seeking the ambience and the customization that Starbucks offers will not go to McCafes

Starbucks, on the other hand, focuses on the “experiential”. 

› Mc Café: cannot bring either that amount of customerization ( speed and convenience ) nor can they get that experience

› They might be able to pull few transactional consumers though

Panera bread: third place› Offers free WiFi compared to Starbucks› Experience is not the same› Ambience and coffee - not comparable to Starbucks

As long as Starbucks is able to retain its core of quality coffee and ‘third place’ experience.› Difficult for competitors to break in› Some overlapping clientele, they each present

a different qualitative experience with a strong and loyal following and that is unlikely to significantly change.

Dunkin donuts snipe at starbucks Decaf decision with a creative print ad that includes this brilliant line, "We don't work around our schedule, we work around yours."

Q7. How much are customers willing to pay for the Starbucks Experience? Can the company continue to raise prices on its coffees and drinks? Is there a market for $400+ coffee makers?

Due to its poor growth strategy Starbucks today stands as a mass brand attempting to charge premium price for experience which is no longer special.

It is highly unlikely that it would be able to bring back customers from Dunkin donuts and McDonald’s just on basis of experience while still maintaining the premium price.

› Has to work on its core offering of coffee and flexibility towards customer demands and its overall experience

These firms are also maintaining good quality at much lower prices(apx 1/3 of Starbucks) which is more appropriate for current needs of U.S customer.

Thank you