CASE STUDIES

Starbucks case study

Strategies for enhancing packaged coffee sales
Reference Code: CSCM0140
Publication Date: October 2007

DATAMONITOR VIEW
CATALYST
This case study focuses on how Starbucks has gained leadership positions in the sale of prepackaged coffee beverages,
looking at both its ground coffee sales and its ready-to-drink offerings. In particular it discusses how Starbucks has expanded
the brand outside of its coffee shops into grocery stores and vending machines, profiting from the brand's positive consumer
image.

SUMMARY

Starbucks has become a leading manufacturer of packaged coffee by successfully marketing itself as a
provider of a lifestyle experience. Packaged coffee sales have been aided by its development of the Flavorlock
bag, which is said to keep coffee fresher for longer, and the sale of a range of coffee machines which
encourage ground coffee sales. In addition, the company's image as a lifestyle brand has helped it achieve
good sales within the supermarket and office channels;

Starbucks sells a range of Fair Trade and other cause coffees which make up a small but significant portion of
its sales. The company has attempted to deflect negative publicity of its business practices by undertaking
wide ranging charitable activities;

The company's ready-to-drink beverages target both teens and adult consumers, via the low caffeine and
sweet tasting Frappuccinos, and the stronger coffee taste of DoubleShots. As well as targeting consumers
using taste and need state profiling, the company relies heavily on the Starbucks experience to gain custom,
with consumers buying its products because of its cool and premium reputation. Vending machines offer
another outlet for Starbucks' RTD distribution, one which the company hopes to grow with the sale of a line
specifically for the vending sector.

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ANALYSIS
Roast and ground coffee developing offerings that exploit the premium trend
Competing with loose beans for notions of quality
Up until the late 1990s, Starbucks scooped every bag of beans it sold, believing that the aroma of the loose beans, and
the theatrics of the process of scooping, would attract customers to its stores. It also drew attention to the fact that the
company was selling a quality take home coffee. However, the company no longer sells loose beans they are now sold
in packaged bags a time saving device on the part of Starbucks, which figured that less barista scooping time meant
more customers could be served.
The new format could have distracted consumers, who may have inferred that because the beans were no longer packed
in front of them, they were being sold a poorer quality product. This is not the case however; packaged bags have been
accepted by consumers due to the simple fact that it saves time at the checkout.
The popularity of packaged coffee is highlighted by Starbucks' sales figures: according to the Financial Times (October
2006, 'Starbucks to push its packaged coffee?'), Starbucks sold 56 million lbs of packaged coffee in the US in 2006, both
in its stores and through the supermarket channel (the latter of which will be discussed later on).

Promoting freshness with Flavorlock bag technology

One reason Starbucks packaged coffee has been so successful (apart from its time saving function) is the way the
company has promoted its freshness. The company has developed a novel feature of its pre-packed coffee bags which is
designed to retain freshness - Flavorlock technology. The Flavorlock bag utilizes a special one-way valve that allows the
carbon dioxide that is released by freshly roasted coffee beans to escape a sealed coffee bag without allowing 'flavorrobbing' oxygen to get in. The freshness of the coffee is further promoted with Starbucks' claims that the airtight
FlavorLock bags are sealed within two hours of roasting, so that they stay fresh on the shelf.
By promoting freshness, the company is responding to an aspect of coffee that is becoming increasingly important to
consumers. Moreover, the freshness claim corresponds to the additionally important trend for premiumization within the
coffee market, in that by retaining freshness, premium tastes and aromas are 'locked-in' to the product.

Encouraging sales of packaged coffee with introduction of 'premium' home brewing machines
Starbucks has encouraged sales of its packaged coffees with the creation of its own range of home brewing machines,
which can be purchased through its stores and online. These range from the $30 Starbucks Brisata Signature 8-cup
Coffee Press, to the $400 Starbucks Barista Espresso Machine, therefore providing systems for a range of budgets. The
latter can use both espresso pods and ground coffee to create lattes, cappuccinos etc., providing a versatility which many
similar coffee machines lack.
Although the company does not release sales figures for its coffee machines, in October 2006 the company recalled its
Barista Aroma Stainless Steel 8-Cup Coffee Brewer due to a defective electrical wiring, indicating that 73,000 of the $100

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machines had been sold between March 2005 and September 2006. This highlights how popular the machines are at the
lower end of the spectrum.
The company has partnered with DeLonghi to make some its coffee machines, including the Magnifica Super Automatic
Espresso Machine, which costs $1,200. By partnering with an established coffee maker, the company can take advantage
of its good reputation with consumers, who are encouraged to make a link between the high-end machines and the quality
of Starbucks' coffee, purchasing its coffee on this basis.

Figure 1:

Starbucks' Barista Espesso Machine

Source: Starbucks.com

DATAMONITOR

Starbucks' premium reputation helps it expand into the supermarket channel

Starbucks coffee has been available nationwide in the US supermarket channel since 1998 when the company formed a
distribution agreement with Kraft. This agreement has considerably aided the sale of Starbucks packaged coffees, and the
products are now available in an expanded number of retail channels, including mass merchandise/super center stores,
select drugstores, natural food stores and club stores. The distribution agreement, which was expanded in 2004 to include
the distribution of Starbucks' Tazo teas, includes the distribution rights for 12 Starbucks coffees, including those sold
under the Starbucks, Seattle's Best Coffee and Torrefazione Italia coffee brands.
The partnership helped Starbucks to become the leader for packaged coffee in the three-outlet category (grocery, mass
merchandise and club stores). Its leadership position can be attributed to the company's positive image, based on its
marketing of the Starbucks 'experience', with its coffee shop customers attracted to the Starbucks brand in the grocery
sector because of its associations with coolness and quality etc.
This premium image was highlighted by Liz Smith, the former vice president of Kraft Foods, who saw a link between the
sale of Starbucks coffee at retail, and the growth of premium coffee in the sector: "Not only has Kraft's agreement with
Starbucks created category growth, but we have elevated people's expectations of coffee in grocery," (Kraft Foods press
release, 2004)

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This is a viewpoint that Jim Donald, president of Starbucks North America, agreed with: "Starbucks and Kraft have helped
to drive the specialty coffee category in supermarkets through broad distribution of the highest quality coffee, strong brand
recognition and the availability of 12 Starbucks coffees, " (Kraft Foods press release, 2004)

Starbucks' widened distribution now includes office sales

In addition to selling roast and ground coffee in Starbucks' coffee shops and in supermarkets, the company also sells its
coffee directly to offices. Office coffee service is a growing business and is therefore of increasing importance to
Starbucks. The business journal Automatic Merchandiser states that office coffee service in the US was worth $3.39
billion in 2004, a fact which has seen Starbucks get more involved in the business. In 2006, Starbucks had three services
targeted at office sales: Office Coffee Service, A New Way to Brew, and Small Office Coffee Delivery.

For companies with less than 20 employees, the company offers the Small Office Coffee Delivery service,
whereby ground and roast coffee bags can be ordered online in bulk and delivered directly to the office.

Companies with more than 20 employees have a slightly higher level of service, provided by Starbucks in
partnership with Preferred Office Coffee Providers. The program provides the office with 2.5 ounce bags of preground Starbucks coffee along with the appropriate brewing equipment and regular service.

For companies with more than 50 employees, the company offers a high performance coffee maker, the
Starbucks Interactive Cup Brewer, which grinds and brews the beans fresh for each cup.

Starbucks has an advantage over many other brands available in offices in that the Starbucks brand has a tremendous
cachet. According to the Washington Post, many employers in the Washington region buy Starbucks coffee and pay extra
for Starbucks embossed cups and serviettes in order to please employees and impress visitors. The newspaper quotes
one business, the publisher K12 Inc, as claiming that offering free Starbucks coffee has improved productivity, as
employees no longer have to go on coffee runs to Starbucks. One employee at the firm said the Starbucks service was
like "getting a raise" as she no longer spent $6 a day buying the coffee herself, (Washington Post, July 2005).

Wide ranging ethical coffees are promoted through charitable activities

Fair Trade coffee makes up a small but significant proportion of coffee sales
In addition to promoting a lifestyle brand based in part on a premium image, Starbucks also places an emphasis on ethical
issues, which helps attract consumers to buy its packaged coffee. The company's ethical packaged coffee includes
organic shade grown coffees as well as Fair Trade certified blends.
Although making up a comparatively small percentage of total coffee sales in 2005, 3.7% of all the coffee Starbucks sold
globally was Fair Trade, up from 1.6% the previous year Deutsche Bank's brokerage report on the company states that
the company's ethical activities makes good business practice: "The company's 'CAFE' (Coffee And Farmer Equity
Practices) code for dealing ethically with suppliers leads to above-market costs paid for some raw materials, but ensures
long-term access to high-quality coffee and other inputs, and sustainability of farmers" (Deutsche Bank, July 2006).

Starbucks deflects critics with charitable activities

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Not everyone believes Starbucks is doing enough to promote an ethical business, however. The Starbucks Challenge was
set up in 2005 by a US blogger, Green LA Girl, to see if Starbucks coffee shops were willing to brew Fair Trade coffee
when asked, as the company pledged to do. The challenge was taken up by hundreds of consumers who found mixed
answers to their request for Fair Trade coffee; many baristas reportedly had not heard of Fair Trade in the US, according
to The Times (March 2006, "Eco-worrier: coffee shops: a load of old froth?"), suggesting that its baristas had not been
trained properly in how the company works with Fair Trade goods.
Nevertheless, Starbucks has attempted to enhance its image as an ethical company, and deflect from such issues as
above, by promoting its charitable activities. According to the company, Starbucks has invested in social programs to build
schools, health clinics and other projects that benefit coffee-growing communities. It also runs the Farmer Support Center
in Costa Rica, which collaborates with farmers to provide technical support and training that promotes high-quality coffee
for the future. These all help to promote a positive image of the company.

RTD coffee targeting a range of consumers with RTD cold coffee offerings
Low caffeine/no coffee RTDs attract teen crowd to drink in a 'cool' environment
Starbucks' Frappuccino range of ready to drink beverages is one of the company's most successful lines, which has been
available in the US since 1996. In the US during 2005, the company sold more than 434 million servings of the bottled
brand, through the North American Coffee Partnership, its distribution company formed in partnership with PepsiCo. The
ready-to-drink (RTD) beverage was named as one of the key drivers of volume growth in the company's 2006 third quarter
results, which saw income from equity investees increased 42% to $26 million in the quarter.
The brand is particularly popular with teens due to its high sugar, low caffeine and non-bitter formula. Starbucks has
launched a range of fruit and chocolate Frappuccino flavors to attract the teen crowd, including Strawberries and Creme
and Vanilla flavored Frappuccinos. However, what attracts teens to the company's products is not merely the sweet
Frappuccino formulas, or the attraction of the on-the-go bottled formulas, but the appeal of Starbucks as a fun place for
teens to hang out, between classes and after school.
The attractive ambience of a typical Starbucks' outlet, with calming jazz playing in the background, and comfortable seats
to relax in, encourage patrons to take their time in the store, and not rush out. Other store attractions include the internet
hot spots, ability to download music and the sale of non-food items such as CDs, books and DVDs, which all combine to
encourage teens, and other age groups, to spend a premium of Starbucks' beverages, as they know they can hang
around in-store for awhile and be entertained.
It is this image of Starbucks as an attractive "concept" rather than a place of good tasting beverages that has aided its
sales of RTD coffees like Frappuccinos. Patrons view Starbucks as a cool place to hang out, as Bruce Horovitz observed:
"Like Oprah Winfrey, Starbucks is emerging as a self-appointed culture guru. It's drawing folks who want a jolt of what's
"in" with their java", (USA Today, 2006).

Figure 2:

Starbucks range of ready-to-drink coffees includes the Vanilla flavored Coffee Frappuccino

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Source: Productscan

DATAMONITOR

Starbucks targets post-teen RTD drinkers with high caffeine, low fat and liqueur blends
As well as targeting teens with RTD Frappuccinos, Starbucks markets a range of RTD drinks to more mature consumers.
This includes the company's DoubleShot brand, launched in 2002, and the more recent 2006 introduction of the Iced
Coffee line of canned beverages, which have a stronger coffee flavor than the Frappuccinos, to appeal to more defined
coffee palates.
Other RTD products that are designed for older consumers include the company's range of Light Frappuccinos and
DoubleShot drinks which are low in sugar, therefore appealing to the growing band of consumers concerned about eating
and drinking more healthily.
A more unusual development for the company has been its introduction of coffee liqueurs. Starbucks Coffee Liqueur was
developed in partnership with the alcoholic drinks company Jim Beam and launched through the retail sector by Jim
Beam's parent company, Fortune Brands Although these are not sold in Starbucks coffee shops, the company stated the
partnership was a natural match as nearly 50% of Starbucks patrons already consume coffee liqueurs, more than nine
times the national average (Company press release, 2005). The product is therefore targeted at a large portion of
Starbucks' existing patrons.

Vending machines offer a new outlet for Starbucks coffee

Starbucks has recently expanded its RTD coffee offerings by developing a range of products specifically designed for sale
in hot vending machines. Developed in partnership with PepsiCo, through their North American Coffee Partnership
division, the coffee will come in various flavors Caffe Latte, Vanilla Latte, Caffe Mocha, Caffe Mocha Light, and Hot
Cocoa which will be packaged in recyclable steel cans with insulated labels.
The fact that the range will be offered in vending machines will enable Starbucks products to be distributed in more wide
ranging areas, away from its coffeeshops and grocery retailers. An enhanced distribution is key to Starbucks' future
growth strategy, as Gerry Lopez, president, Starbucks Global Consumer Products, explained: "Expanding Starbucks
ready-to-drink offerings both in the US and internationally helps to strengthen the Starbucks brand and reinforces our
reputation and commitment to innovation, as well as coffee quality and expertise," (PepsiCo press release, 2006).

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By marketing its products in vending machines, Starbucks is mimicking the sales strategies of coffee manufacturers in
Japan, where the hot vending category is much more established. Starbucks is therefore banking on being able to expand
the hot vending category in the US, so that it grows into an accepted outlet for coffee.

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APPENDIX
Case study series
This report forms part of Datamonitor's case studies series, which explores business practices across a variety of
disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and
insurance, pharmaceuticals and software.
Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations,
highlighting the ways in which the company has become one of the best in its field or how it deals with different problems
encountered within that sector.

Methodology
A variety of primary and secondary research was carried out for this case study. This included researching the coffee
market on Datamonitor's Interactive Consumer Database and on the Productscan Online Database of new products,
alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources

Starbucks to push its packaged coffee; Financial Times (October 2006)

Starbucks Corporation: confronting all the attendant greatness; Deutsche Bank (July 2006)

Starbucks aims beyond lattes to extend brand; USA Today (May 2006)

Eco-worrier: coffee shops: a load of old froth?; The Times (March 2006)

Further reading
Capitalizing on New Breakfast, Lunch and Dinner Consumption Patterns (Datamonitor, DMCM2404, September 2006)
Profiting from Changing Snacking and Beverage Occasions (Datamonitor, DMCM2979, August 2006)
New Opportunities In Out-of Home Food and Drinks Consumption (Datamonitor, DMCM2406, March 2006)

Ask the analyst

The Consumer Knowledge Center Writing team

askcm@datamonitor.com

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