December 2009 Executive MBA

Person ID 433138 Marketing Management

Camill Felix Marciniak Second Assignment

Faculty of Business and Law

Joe McGrath

Lecturer for the Executive MBA programme

Liverpool John Moores University

Lecture
Marketing Management
MGTMEM004

Winter 2009/10

2nd. Assignment

Presented by: Camill Felix Marciniak

Person ID 433138
October 2009

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December 2009 Executive MBA
Person ID 433138 Marketing Management
Camill Felix Marciniak Second Assignment

Table of Content

1. Introduction 4
1.1 Luxury Brands 4
1.2 Challenges of Luxury Brands 9
2. Brand mitigation 12
2.1 Decisions 12
2.2 Effects 13
3. Brand leveraging 17
3.1 Turnaround 17
3.2 Conclusion 19
4. References 20
5. Appendix 22
4.1 Wordcount 22

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December 2009 Executive MBA
Person ID 433138 Marketing Management
Camill Felix Marciniak Second Assignment

Table of Figures

Figure 1 - Five product model 5

Figure 2 - A Hierarchy of Luxury Goods Products 6
Figure 3 - Proposed Framework of Brand Luxury Index 7
Figure 4 - Components of a Luxury Brand 8
Figure 5 - BMW 3 Series 10
Figure 6 - BMW 7 Series 10
Figure 7 - Burberry Brand Damage in exclusivity and identity 11
Figure 8 - Luxury brands: The premium adjacency grid 11
Figure 9 - Store Growth 12
Figure 10 - Factors Driving “Valued Customer “ Perceptions 13
Figure 11 - Strategic Clock 14
Figure 12 - Starbucks Regular Customer 15
Figure 13 - Starbucks/McDonalds world map 16

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December 2009 Executive MBA
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Camill Felix Marciniak Second Assignment

Faculty of Business and Law

1. Introduction

What are the challenges in marketing luxury brands? According to industry

observers, luxury brands tend fare better than mass market brands during times of
economic hardship. How do you explain the plight of Starbucks in 2008?
Evaluate the actions taken to re-invigorate the Starbucks brand.

1.1 Luxury Brands

What is the definition for a luxury brand? What is the difference between a “luxury” and a
“high quality” product? Even literature is struggling to find a clear definition for the term
“luxury” product in a marketing sense (Vickers and Renand, 2003; Beverland, 2004).
Commanding a higher price for a product does not show evidence for a luxury brand
(Beverland, 2004). In this case it emerges, that the perception of the product at the
underlying context has the capability to provide a definition. From the perspective of a
socio-economic context a luxury product offers features beyond the ordinary functions of
daily needs. In order to find a definition, researcher also identified a close relation of
individual identity to a luxury product. In this respect psychology must be taken into
account to define the term (Vickers and Renand, 2003).
It is agreed, that in general luxury products are based on basic products and exceed the
customer´s satisfaction applying additional attributes (ibid.).
The five product levels model, adapted from Levitt, offers a simple understanding of the
product classification (Kotler et al., 2009).

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It starts in the core with the core benefit, satisfying the customer´s basic requirement, and
ends up at the exterior belt with the potential product. The augmented product intends to
exceed customer expecations, offering a special product or service at the fourth level. The
fifth level´s function is to keep the customer on a long run, making him loyal to the brand.

Figure 1
Five product model (including starbucks)

Expanding on the approach of a socio-economic class context Alleres (1990 cited in

Vickers and Renand, 2003) developed a hierarchical model of luxury products. The degree
of accessibility is linked to the socio-economic class and defines the level of luxury.
Highest product distinctiveness is reached at the top and underpins the aspect offering a
social prestige. A high pricing strategy can be considered as a gatekeeper for the access
to present exclusivity (Vickers and Renand, 2003). Exclusivity in turn reflects a customer-
perceived value and keeps in with the position of a potential product according to Figure 1.
Therefore a recent study (ibid.) shows, that “...luxury goods products can be usefully
defined in terms of a mix of components of functionalism, experientalism and symbolic
interactionism.” Particularly the influence of symbols on the choice of products needs high
attention of marketers.

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Figure 2
A Hierarchy of Luxury Goods Products

With regard to the definition of luxury products, brand means in terms of Kotler
“...encouraging customers to Buy Regularly And Never Desert in favour of a competitor´s
brand.” (2009, p.421) This expression presents the focus of brands to match the customer
needs regularly and be distinguished from other brands by the means of applying a unique
added value. Furthermore a brand helps to identify position of a demanded product or
service on the market (Kotler et al., 2009).
The role of brands can be functional, rational, symbolic, emotional or intangible, depending
on whether the performance of the service or product suits the required demand, or the
representation of the brand to express the customers themselves through the brand
choice. For this purpose convincing the customers about product or service related
benefits and advantages to remain in their minds is important for a successful brand
strategy (ibid.).

Both luxury and brands have the exclusive value-adding symbolic character in common.
Therefore a comprehensive definition for the synthesis luxury brands according to Phau
and Prendergast (2000 cited in Beverland 2004; Husic and Cicic, 2009) is explained by
four identifies factors, that “luxury brands evoke exclusivity, [have] a well known brand
identity, [enjoy high] brand awareness and perceived quality, and retain sales levels and
customer loyalty.”

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A rarity value in this is case is neither mentioned in the definition nor noticed in the luxury
industry to play an essential role (Beverland, 2004). More important is the social
connotation and influence of the brand to the place in society. Due to the fact, that
individuals look for social integrity, they use the brands as status symbols to express
themselves and communicate to their reference groups (Vigneron and Johnson, 2004;
Husic and Cicic, 2009).

Similar to the luxury product in terms of marketing the degree of luxury brands vary
because of the customer perception to them. Two similar luxury brands, such as Rolls-
Royce and Cadillac that call themselves luxurious, may be perceived more or less
luxurious to each other (Vigneron and Johnson, 2004). A proposed framework is illustrated
in Figure 3.

Figure 3
Proposed Framework of Brand Luxury Index (adapted from Vigneron and Johnson)

A recent study (Beverland, 2004) proposes a interrelated components model, that

identifies how to build a luxury brand and maintain position. A proposed framework is
illustrated in Figure 4. The advantage of this framework is to discover the main driver to
build a luxury brand, look for improvement and maintenance which goes beyond the four
components identified by Phau and Pendergrast (2000).

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Figure 4
Components of a Luxury Brand

Nevertheless literature (cited in Husic and Cicic, 2009) has a critical point of view towards
this framework, and it is argued that because of international market entries a focus on
“...the cross-cultural comparison of attitudes toward the luxury concept” need to be
considered.

Therefore Vigneron and Johnson (1999 cited in Husic and Cicic, 2009) use in their
approach five values of prestige behaviour in combination with five relevant motivations.
The resulting five categories are:

• The veblen effect - perceived conspicuous value

• The snob effect - perceived unique value
• The bandwagon effect - perceived social value
• The hedonic effect - perceived emotional value
• The perfectionism effect - perceived quality value

Hedonic effects are usually find at consumers of luxury wines, that value the wine more on
emotional pleasure than on price. A high price therefore is from their perspective an
indicator for quality (Beverland, 2004).

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1.2 Challenge of Luxury Brands

Luxury Brands struggle to balance between creating brand awareness, increasing sales,
retail growth, maintaining market position, keeping core customers and extend the product
mix (Beverland, 2004; Moore and Birtwistle, 2004; Reddy et al., 2008).
According to several studies (cited in Husic and Cicic, 2009) the luxury market and the
demand for luxury products is since the last few years increases constantly (Reddy et al.,
2008). To saturate this growing market and stay competitive, brands have to grow with it
and extend their product mix. On the other hand they have to sustain their exclusivity and
their market positioning (Reddy et al., 2008). As already described in section 1.1 luxury
brands attract costumer and brand awareness with the socio-economic context to
accessibility illustrated in Figure 2 and customer perceived added value according to
Figure 1. This exclusivity presents the social position of the individual and its personal
appeal in contrast to the mass customization.
Additionally to the product these brands sell a lifestyle (Husic and Cicic, 2009).
With regard to a growing market, brands react with a expending product range and
increasing market distribution to reach the potential customers (Moore and Birtwistle,
2004). In other words it makes the accessibility to the luxury product easier. Therefore in
return the risk to loose exclusivity and regular customers due to the changed brand
perception is at a high stake. In the worst case the luxury product switches into a
commodity.

A common technique attracting new customers is to offer an affordable product from the
same brand. For this purpose the hierarchy of luxury goods products is also applicable for
different products under a company umbrella.
The famous car manufacturer BMW is proud to build all automobiles in Germany, labelled
with made in Germany, apart from the 3 Series and the Mini. The relocation of the 3 Series
does not wear the label made in Germany but incorporates the association to it due to the
history and the perception of the company.
In this respect the 3 Series offers the customer access into the brand.
(http://www.brandingstrategyinsider.com).

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Figure 5
BMW 3 Series (access product)

Figure 6
BMW 7 Series

To retain brand reputation this technique must be well controlled.

The Burberry case presents how brand extension and access products may destroy brand
value. After the acquisition by the Great Universal Stores (GUS) in 1955 the expansion
performed rapid. To increase the product range and the distribution channel a lot of
licenses were granted to third parties (Moore and Birtwistle, 2004). Accessibility was made
easy for everybody, even for the a social group within the UK called `chav´ associated with
anti-social behaviour and a low taste for quality.
The unintended alliance of Burberry with this social group generated the biggest damage.
In 1998 Burberry´s annual profits dropped from £62m to £25m (ibid.).

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Figure 7
Burberry Brand Damage in exclusivity and identity

Brand extension, such as the story of Burberry, does not necessary implicit a brand
damage. A recent study discovered (Reddy et al.,2008), that luxury brand´s profitability is
linked to the customer´s perceived premium degree and a logical mixture of the offered
product range. The author´s call this phenomenon `brand adjacency´. Successful brands
with gross margins of 70% and a high brand adjacency are Luis Vuitton and Cartier.
Product extension and customer perceived value are not a contradiction if the the product
extensions are closely linked to the core products. They developed a matrix to help
managers understanding the position of their brand.

Figure 8
Luxury brands: The premium adjacency grid

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2. Brand mitigation
2.1 Decisions

According to the mitigation of the brand value Starbucks attempted the following decisions.
Expansion in distribution
Starbucks was still following the expansion strategy and opened year on year new stores
in high frequented and famous locations, illustrated in Figure 9 below.

Figure 9
Store Growth

On the other hand of the distribution channel granted licenses were also still increasing.
Figures show, that coffee consumption intended to switch outside the store, so in addition
to that Starbucks introduced drive-through windows for customers with less time but a
desire to grab a quick cup of Starbucks coffee (Buchanan and Simmons, 2009).
Extension in Product mix
In order to enrich the daily cup of coffee in the morning and attract new costumers, in-store
food items were add to the coffee menu. The whole product range included non-coffee
drinks, food items, music, books, movies, T shirts and teddy bears (Helm, 2007;Buchanan
and Simmons, 2009; Govind and George, 2009).
Operations improvement
An internal customer survey revealed a few key driving factors how a customer would like
to be treated. Friendlier, more attentive staff, and faster, more efficient service were valued
as the most important factors, illustrated in Figure 10 (Moon and Quelch, 2006).

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Figure 10
Factors Driving “Valued Customer” Perceptions

For this purpose Starbucks kept focus on the operational efficiencies in stores. To improve
operations and reduce waiting times on the benefit for customers, Starbucks introduced
automated espresso machines to speed time with one touch of a button to make a hot
espresso (Helm, 2007; Buchanan and Simmons, 2009; Govind and George, 2009)
Furthermore to save time and serve more customer with the same amount of store staff,
stores were delivered with pre-grounded coffee bags to eliminate the time consuming step
of grinding (Helm, 2007; Buchanan and Simmons, 2009). But additional rising costs for
raw material and energy forced Starbucks to operate more efficient (Govind and George,
2009).

2.2 Effects.

To explain the plight of Starbucks in 2008 a number of models will be applied.

At first Starbucks Strategic position in comparison with the competitors using the Strategic
Clock in Figure 11 will be analysed. Figure 1 presents the customer perceived product
value of Starbucks.

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Figure 8 shows the brands adjacency grid.

Figure 11
Strategic clock

The consequence of the expansion of the Starbucks distribution presented a much higher
degree of brand accessibility. At the first glance it sounds that this should be a benefit for
the company in order to reach more customers and increases sales, but in terms of a
luxury brand the opposite is achieved. This quick expansion changed the customer
perception towards the Starbucks brand and reduced the exclusivity of it. Since the
number of stores rose very fast, it was no longer personal or individual to have a cup of
coffee at “the” Starbucks. The aim was to create brand awareness and increase sales, but
in the end it causes a changed brand perception (Buchanan and Simmons, 2009; Govind
and George, 2009).
Consequently the expansion enabled to extend the customer base, but with regard to this
extension the profile for the average Starbucks customer changed too (Buchanan and
Simmons, 2009). Starbucks experience of the third place was not just build up on the
service and the products Starbucks offered but also on the people that went in the store to
have a cup of a fresh brewed bean coffee and enjoy the atmosphere.
Exactly this kind of club and status feeling attracted new customers to enter the store.

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Figure 12
Starbucks Regular Customer
Figures show, that in 2000 78 per cent of the average customers “...had college degrees,
and the average annual income of $81,000.”, by 2005 “...56 per cent were college
graduates, and the average income was $55,000.” (Buchanan and Simmons, 2009).

The extension of the product mix strengthened this change of perception. Even customers
complained, that “ ( cited in Buchanan and Simmons, 2009). Especially the aroma of
coffee was value-adding to the Starbucks experience. The mix of all these other flavours
damaged experience.

The undertaken attempts to operate more efficient had also fatal effects on the Starbucks
experience. Starbucks claimed to facilitate social interactions and communication between
customers themselves and customer and the barista. But due to the size of the new
introduced automated espresso machines the contact between the barista and the
customer was broken (Buchanan and Simmons, 2009; Govind and George, 2009).
The appeal of the drive-through windows looked rather like a fast-food restaurant than a
coffee house (Buchanan and Simmons, 2009).

In the end all the principles, Starbucks was famous and exclusive for, were vanished.
There was not anymore experience existing and therefore customers were not willing to
pay a premium price for a cup of ordinary coffee. New market entrants like McDonalds or
Dunkin´Donuts stepped in competition with Starbucks. Due to the changes and decisions
at Starbucks the brand was not perceived as a luxury brand so price competition in a
recessive economy became more visible. McDonald´s and Dunkin´ Donuts attacked

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Starbucks with coffee prices lower than 20-80 cents in comparison with Starbucks
(Buchanan and Simmons, 2009; Govind and George, 2009). Although these chains
offered a cheaper coffee than Starbucks reports presented that the customer perception of
the quality of the coffee increased (Goving and George, 2009). The former Starbucks
customer switched to Peets or Caribou and other more exclusive brands (See Figure 11)
(Quelch, 2008).

Another factor for the plight of Starbucks is the high concentration of Starbucks on the U.S.
Market (see figure 13). The hard hit on the U.S. Economy influenced the consumption
behaviour of the customers, that intend rather to save the money for unpredictable events
than spend it on a coffee for a premium price (Buchanan and Simmons, 2009).

Figure 13
Starbucks/ McDonalds World Map

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3. Brand leveraging
3.1 Turnaround

The task of Howard Schultz in 2008 as new CEO of Starbucks was to realign the brand to
its core principles. The first visible step of change and realignment was a temporary
closure of 7.100 stores for three hours in the U.S in order to arrange a training programme
for baristas to improve the quality of the service. Starbucks recognized, that the motivation
level of these key figures decreased, which had an impact on the perceived service quality
(Govind and George, 2009). Furthermore the wide product range, including warm
breakfast sandwiches was contradictory to the coffee atmosphere and the unique
Starbucks experience. To reestablish this experience the warm food items would be
removed. According to Figure 8 this is a crucial strategic step in terms of marketing the
luxury brand.

According to the damaged brand and its reconstruction the “transformational agenda” with
the goal to realign the brand towards its core principles includes five steps.

1. Realign the customer relationship

With regard to the operation improvements by introducing full automated espresso
machines in the past its appeared that these machines broke the relation between the
barista and the customers. Especially this relation was something that distinguishes
Starbucks from an ordinary coffee chain. Therefore Schultz announces to replace this
machines with semi-automatic espresso machines in order to rebuild this relationship.
The design of these new machines allows baristas to keep in fact-to-face contact with the
customers ,while performing on a high level of quality and speed (Govind and George,
2009; Starbucks, 2009).

2. Reinvention of brewed in-store coffee

Referring to its historical background Starbucks is to introduce new blends of whole beans
and other coffee products such as the new Instant-coffee “VIA” (Starbucks, 2009).

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3. Reward Loyality
Customers will be asked to register for a card, that will reward loyal customers by the
means of different free offers such as free selected syrup and soymilk with a beverage
purchase, free brewed coffee refills, free beverage with whole bean purchase, etc.
(https://www.starbucks.com/card/). The aim of this programme is to monitor the
consumption behaviour and keep the customer loyal to the brand. This is in line with the
corporate social responsibility of Starbucks to “give the environment something back”
(http://www.starbucks.com/sharedplanet/).

4. Integrate customers
According to five product model illustrated in Figure 1, Starbucks is going to integrate the
customer in the Starbucks development in order to show the importance of the individual´s
contribution to the brand. In particular this is demonstrated by the launch of
mystarbucksidea.com (Govind and George, 2009; Starbucks, 2009).
Other companies like Microsoft use the same technique to show their respect for the
customer. This is represented in the promotion of the new Windows 7 programme.

5. Strengthen relationships
In the past Starbucks was confronted with the message of making profits at the expense of
the coffee farmers. This news had an fatal effect on the brand reputation and credibility
(Govind and George, 2009). In this case customers perceived Starbucks similar to other
global growing brands like McDonalds.

All these steps are necessary to differentiate and reposition the brand.

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3.2 Conclusion

In order to rediscover the success factors of the Starbucks past history the initial steps to
change the perception of the brand are important and urgent. The brand extension of
Starbucks got in the similar struggling challenges like Burberry. Unfortunately it is as a
matter of fact that the position of the brand and the customer group changed in the same
way like at Burberry.
Starbucks is going to discover its roots and is adding environment responsible attributes.
It will be a long way to attract the regular customer of the past back.
The balance to grow and provide a luxury brand is possible if Starbucks takes care of its
product mix according to the premium adjacency matrix and keeps reinventing itself.

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4. References

BEVERLAND, M. (2004), Uncovering “theories- in-use”: building luxury winde brands,

European Journal of Marketing, Vol. 38, No. 3/4, pp.446-466

BUCHANAN, L.; SIMMONS, C.J. (2009), Trouble brews at Starbucks, Richard Ivey School
of Business

GOVIND, S.; GEORGE S.S. (2009), Starbucks: Back to basics?, ICMR Center for
Management Research

HELM ,B. (2007), Saving Starbucks Soul, Businessweek [online] 9th April
Available at: http://www.businessweek.com/magazine/content/07_15/b4029070.htm
[Accessed 10th November 2009]

HUSIC, M.; CICIC, M. (2009) Luxury consumption factors, Journal of Fashion Marketing
and Management, Vol. 13, No. 2, pp.231-245

KOTLER, P.; BRADY, M.; GOODMAN, M.; HANSEN, T.; KELLER, K.L. (2009), Marketing
Management, Prentice Hall, Harlow

MOON, Y.; QUELCH, J. (2006), Starbucks: Delivering Customer Service. Harvard

Business School [online], 10th April
Available at: http://themainbullypulpit.files.wordpress.com/2009/08/harvard-case-
study_starbucks_delivering-customer-service1.pdf
[Accessed 22nd October 2009]

MOORE, C.M.; BIRTWISTLE, G. (2004), The Burberry business model: creating an

international luxury fashion brand, International Journal of Retail & Distribution
Management, Vol. 32, No. 8, pp.412-422

REDDY M.; TERBLANCHE, N.; PITT, L.; PARENT, M. (2008), How far can luxury brands
travel? Avoiding the pitfalls of luxury brand extension, Business Horizons, No. 52,
pp.187-197

STARBUCKS CORPORATION (2009), Fiscal 2008 Annual Report [online]

Available at: http://www.starbucks.com/aboutus/
[Accessed 20th November 2009]

VICKERS, J.S.; RENAND, F. (2003), The Marketing of Luxury Goods: An exploratory

study – three conceptual dimensions, The marketing review, No.3, pp.459-478

VIGNERON, F.; JOHNSON, L.W. (2004) Measuring perceptions of brand luxury, Brand
Management, Vol. 11, No. 6, pp.484-506

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QUELCH, J. (2008) Starbucks: How Growth Destroyed Brand Value, BusinessWeek,

[online] 2nd. July
Available at:
http://www.businessweek.com/managing/content/jul2008/ca2008079_888377.htm
[Accessed 10th November 2009]

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5. Appendix

5.1 Wordcount

Chapter Words including quotations

Introduction 1544
Brand mitigation 985
Brand leveraging 652
3181

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