Starbucks Case Study

Marketing 337, Fall 2009

By Elizabeth Kulin

At the time of this case study, in the early-mid 1990s, Starbucks was the
leader in the coffee retail category of the coffee industry. As the consumer want for
specialty coffee increased by 15% per year, Starbucks was there to offer the highest
quality coffee, outstanding customer service, and in convenient consumer locations.
Close relationships with exporters allowed Starbucks to control the quality of their
beans, in-house roasting allowed control over taste, supply chain operations allowed
control over the supply meeting the demand in time to sell to ready to purchase
customers, and attention to human resources allowed the creation of a happy staff
that would in turn treat customers with better service and attitudes. This level of
control, and output of high quality, had rewarded Starbucks with great financial
positioning. Investment companies labeled Starbucks as a great investments
opportunity with earnings per share forecasted to double by 1998 (page 27, exhibit
8) and net earnings of 101% increase (page 26, exhibit 7). However, the company
wanted to grow more in brand equity and revenue. There were multiple
opportunities, which looked positive, but were also inclusive of some risks and
threats that the company had to address.
For example, its brand equity was not growing as strong as hoped, its goal of
opening 20-40 stores by year 2000 was costly and difficult to manage, and although
it was among multiple opportunities of growth to choose from, many of the options
included brand and investment risks, as well as expediential growth that the supply
of coffee beans may not be able to withstand the demand and create a shortage in
the supply chain (the ability to acquire and purchases the amount of beans needed).

The goal of Starbucks was to increase brand equity and create a brand
identity in consumers minds (the customer based brand equity) that is: Coffee =
Starbucks. With this consumer brand identity, Starbucks believed it would be able to
remain the leader within the growing competitive industry, and continue to grow
revenue more than competition. Its strategy to meet this goal was to establish high
quality coffee and service through procurement, location and staffing. They were
attempting to dominate the retail sector of coffee cafe s, increase presence in the
current market, while also entering new markets with current and new products.
However, these growth opportunities did come with risks to address.

Starbucks had multiple opportunities for brand and revenue growth and was
struggling to create the best plan of action that could enable their goal to be reached.
It main alternative choices were to take all growth opportunities on, or only some of
them. Growth opportunities in detail:

1. Current products in Current market (the domestic Starbucks specialty store,

Kiosks and mail order).
Alternatives Con Pro
Internal Retail Growth to rapid for 100% control on brand, sales and
growth supply and management. staffing.
Franchised Less overall control in
retail growth staffing, management,
location, and customer
service.
An additional internal
management need, to
manage the franchises,
which would require staff
hiring by Stabucks
(costs).
Pacific rim sales in Asia locations
forecasted to increase 156 % (page
24, exhibit 4).
Cheaper investment costs per new
store
Ability to grow new store volume
quicker

2. Current products in new market (International Market, Retail partnerships/non-

Starbucks cafes, grocery stores).
Alternatives Con Pro
Enter &/or Little control over brand Pacific rim sales in Asia locations
Grow image forecasted to increase 156 % (page
Growth to rapid for 24, exhibit 4).
supply Brand awareness growth through
International growth placement and associations
could include Revenue growth
international Grocery stores account for ~75% of
environmental factors of consumer coffee purchasing.
challenge and risk. Whole bean profit forecasted $106.m
(exhibit 6)
Do not enter Loss of potential revenue No risks of financial loss and brand
&/or Grow and brand awareness damage
growth Keep 100% control of brand identity

3. New products in new market (Dreyers Ice Cream & Pepsi Bottled beverages).
Alternatives Con Pro
Develop Dilution of core brand, Brand equity growth in new markets
coffee. (grocery)
Growth to management Revenue - $765m
Cost $51.3m Profit - $713.7m
Do not develop Loss of potential revenue No risk of core product and/or brand
and brand awareness identity dilution
growth

My overall recommendation is that Starbucks should decide to grow in all 3

broad areas of opportunity; however, do so strategically and in the correct ways that
can offer the greatest return of brand equity (awareness & image), profit, and least
amount of risk against brand equity and profit. Recommendations in detail:

1. Current products in Current market

Even though real estate and management challenges arise, Starbucks should
continue to focus on growing its retail specialty coffee business internally through
shops, Kiosks, and mail order loyalty programs. Consumers want specialty coffee,
sales of specialty coffee are forecasted to increase 630% among Starbucks
customers, and industry wide specialty stores sales are forecasted to increase from
19% to 54% by 1999. Consumers will purchase coffee more often from cafes, rather
than grocery stores, because consumer social behavior trends are changing. People
want social atmospheres in healthier locations. For example, the coffee industry
target audience of singles are looking for healthy places than bars and nightclubs (a
trend that was in decline due to a raise in healthier lifestyles and beverage choices).
By maximizing presence in multiple locations that are convenient for consumers to
reach, Starbucks could become the #1 solution to this consumer social trend.
Furthermore, there is no risk over supply as Page 5 shows that there is more
opportunity for Starbucks to open stores in the locations as the population of these
locations greatly exceeds the needed population size. This growth should be done
by Starbucks 100%, and not outsourced to franchise owners. As Starbucks grows its
presence to reach more of its current market, brand awareness and revenue will also
grow. At the same time, Starbucks will be able to control all elements 100% and
create the brand identity that it desires through control over not only supply, brand,
and marketing but also staffing and management. Franchising may be a lower cost
option, as start-up costs would be passed to the franchise owners, however there
would a host of new variable costs for Starbucks in terms of creating an oversight
department to manage the franchise owners.

2. Current products in new market.

Even though grocery store coffee sales are forecasted to decline from 81% to
46% by 1999, consumers, such as stay at home moms who do the primary food
shopping for their household, want a whole bean specialty coffee available in
grocery stores. Therefore, grocery store partnership is a good growth opportunity
for Starbucks. Their presence in this market will also bring brand awareness and
revenue growth opportunities, and if priced higher than other coffees on the shelf, it
will carry the identity of quality. A second new market that Starbucks would benefit
from entering are the international markets. Consumers in Europe and Asia are
drinking more coffee, and therefore Starbucks could meet this demand before
competition. Additionally, Starbucks could leverage their supply sources close the
Pacific Rim to easily transport/ship beans to the Asia market. As for partnering with
other retailers to enter and grow in new markets (non-starbucks shops such as
restaurants, cafes, etc) I would suggest that Starbucks does not focus on, or invest,
much into. The critical issue that Starbucks looses control over many elements that
go into building its brand image when its coffee is sold through a partners business
is to critical as Starbucks attempts to establish a brand image and identity of high
quality coffee experience. The brand awareness gained from these partnerships is
not always the best kind for Strabucks and could hurt overall sales.

3. New products in new market:

If Starbucks focuses on coffee related new products, such as coffee ice cream and
coffee bottled beverages, it would not risk dilution of its core product. Furthermore,
by associating with leader of these new markets the barriers to entry will be less
challenging and there will be little risk that the quality of consumers experiences
with these new products will be less than Starbucks desires. Additionally, Starbucks
will benefit from this increase in overall brand awareness as well as the increasable
amount of potential profit from this venture.
 Therefore, the best strategy for Starbucks, in effort of reaching its goals of
obtaining quality brand equity and profit, is to focus on growth opportunities that
maximize on the potential brand awareness, sales and profit increases while also
avoiding, or at least minimizing, the potential for high risks. For example, by
responding yes to McDonalds request to become a specialty coffee retail partner,
Starbucks may increase brand awareness and revenue however; it would counteract
its core brand identity goal because the brand images of each establishment and
consumer experience at each are opposite. Starbucks is attempting to establish an
image of quality, and McDonalds is seen as a low standard, low priced, and low-level
experience in consumers mind.