Executive Summary Since its foundation in 1971, Starbucks has been working uncompromisingly to achieve the company objective

of becoming the world s leading coffee brand. Having gone through various stages of growing pain, today the Company is operating with over 10,000 stores in 37 countries. Starbucks success was mostly a direct result of its aggressive expansion plan, that consequently turned the Starbucks coffee beverages into a most familiar and popular world-leading brand. Although Starbucks has been successful over the past 34 years, there are some potential drawbacks as identified on this Marketing Audit that might warrant some careful considerations. The first finding is Starbucks rather higher pricing strategy compared to its direct competitors such as DunkinDonuts. Although it may be good to maintain product prestige with a higher price tag, however, the reality is that not every average consumer can afford to spend over $50 in coffee drinks per month. Therefore the high prices may discourage customers from returning. The first impression may be the last impression. It may be easy in discovering new markets and new customers, but maintaining customer loyalty is not as easy. Thus the

Marketing Audit recommends that Starbucks should consider price reduction strategies in lowering the prices to a more appropriate level for all consumers. A second noticeable finding is Starbucks market concentration of mostly active young adults. This may not be the Company s primary focus, but the perception seems to be the case. This Marketing Audit believes that the older adults such as those retirees, can be developed into a bigger market segment with appropriate offering of products and services. Thus the Marketing Audit recommends Starbucks to look into the potential of developing this market segment, perhaps with a different coffee shop environment that is tailored to older folks. A third potential drawback is Starbucks only focus on coffee specialty drinks. As today s consumers are being more health-conscientious, tea beverages have been gaining high popularity because of their high perceived value of healthy benefits. Hence this Marketing Audit recommends Starbucks to look into developing more varieties of tea specialty drinks. The Fourth finding concerns Starbucks company policy regarding to consumer relations. In the past few years, there have been controversies concerning

Starbucks coffee cup quotations and the Company s inability to donate to the U.S. military. Since the start of these controversies, the Company was a little slow in reacting to clearing up the conflicts. Some controversies may continue to damage the brand name if they are not settled in a timely manner. Because of this, the Marketing Audit recommends Starbucks to review its company policies to see if any updates are warranted to accommodate different consumer relation issues. The last finding deals with worker relations. Evidently Starbucks was accused by the Workers Union for unfair labor practices and unfair pay scales as noted on the Union s official website. Starbucks inability to settle the accusations in a timely manner seems to be a direct contradiction to one of its guiding principles of providing a great work environment and treat each other with respect and dignity (Starbucks, 2006). The labor force is the Company s most important asset. Therefore, the Marketing Audit recommends Starbucks to completely settle all worker conflicts as quickly as possible. In addition, Starbucks should survey the costs of living in different Starbucks areas, to see if locality pay is necessary to compensate some employees in those high costs of living towns.

Overall Starbucks has been very consistent in achieving its goal of becoming the world-leading brand in coffee specialties. Perhaps this is the time the top management should take a hard look into its overall operations domestically and internationally, as there are potential issues that the Company needs to review and take actions as appropriate. Table of Contents I. Environmental Aspects A. Markets B. Culture C. Customers D. Competition II. Marketing A. Objectives B. Strategies C. Tactics D. 4 Ps 1. Product 2. Price 3. Place 4. Promotion E. Sales III. Conclusion and Recommendations

Environmental Aspects Markets The general coffee beverages market is rather mature and stable because of its long history. To continue to be the most popularly recognized coffee specialty beverages brand and to expand its market, Starbucks continues to develop different blends of coffee beverages to fit consumers tastes and to attract more customers. According to the Company s Fact Sheets dated February 2006, Starbucks stores currently offers more than 30 blends and single origin coffees, Tazo teas, and Ethos Water. Starbucks also tailors coffee beverages to fit the demand of local people worldwide. Since its first overseas coffee shop opened in Tokyo, Japan, Starbucks has been aggressively expanding internationally (Starbucks, 2006). Clearly Starbucks is developing markets within a mature market. Therefore the greatest opportunities for future profits probably lie on Starbucks ability to meet consumer demand with different varieties at all times. Starbucks coffee shops are most popular among students and young urban professionals (Wikipedia, 2006). In addition, based on a recent national survey conducted by

Starbucks, of the 318 males and females surveyed, 52% preferred a familiar coffeehouse like Starbucks as their ideal first date place. They would feel more comfortable and relaxed in a Starbucks environment (Yahoo Business, 2006). Consequently, this group of consumers possesses the greatest growth potential. In connection with this growth potential, Starbucks also started Hear Music Coffeehouse stores that offer in-store music CD burning services. Starbucks further started to open Media Bars where customers can create their own mix of CDs. This is Starbucks first phase of a multi-phased national rollout (Starbucks, 2006). Most likely these creative efforts will boost growth from the younger patorns and music lovers. On the other hand, the older generations may be reluctant to be attracted to Starbucks. Rather, they may just visit a local coffee shop instead. Therefore this market segment may not grow as fast as the younger generations. Furthermore, a market segment that has declining potential is the busy working professionals. Because of their busy schedule, these working professionals, males and females alike, may just brew their own coffees in the office space. Another discouraging factor is the much higher price of Starbucks coffee products. As a general rule, Starbucks does not offer promotional prices on its products, which tend to

be higher than those of competitors (Wikipedia, 2006). As people grow older, they may be more conscientious to their spending. Regardless of continued future growth potentials, Starbucks faces some drawbacks. In an effort to increase sales, Starbucks started to print quotations on its paper coffee cups in 2005. Although Starbucks marketing materials and promotional campaigns must undergo a formal sensitivity review before their approval for distribution (Starbucks, 2006), some quotations have received negative comments. One of the quotations drew nationwide criticism is as follow: The Way I see It #43: My only regret about being gay was that I repressed it for so long. I surrendered my youth to the people that I feared when I could have been out there loving someone. Don t make that mistake yourself. Life s too damn short. Armistead Maupin, author of the Tales of the City series and the novel The Night Listener (Wikipedia, 2006). Starbucks coffee cup quotations covered a wide range of ideas; however, the above quotation has been singled out for allegedly promoting homosexuality (BP News,

2005). Despite the controversy, Starbucks did not take immediate action. Another incident that is worth mentioning was about Starbucks refusal to donate coffee to troops serving in Iraq. The controversy began as a Marine started circulating an email in May 2004 accusing Starbucks of not supporting the war and anyone in it (About.com, 2006). Starbucks later explained that its company policy authorizes donations to only certain organizations, and the military does not qualify for donations. The incident was put to rest after the same email author sent out another email to clear up the misunderstanding. However, this incident has drawn nationwide attention because it concerned about the troops at war fighting in Iraq, and Starbucks refused to send coffee to troops in Iraq just because of company policy. Starbucks finally took actions six months later working with Red Cross in donating coffee to troops in Iraq in November 2004 (americasupportsyou.mil, 2004). Starbucks might have been a little too late in completely putting the criticism to rest. Culture

There are different attitudes towards the coffee beverages business. Some coffee selling places may be viewed as come and go stores, such as the deli shops; some others may be viewed as eat and go places, such as the restaurants. Starbucks goal is to create a unique third place between home and work , where customers can gather, share ideas, and enjoy delicious beverages (Starbucks, 2006). As it is noticeable in today s market, Starbucks has been very successful in creating a comfortable and relaxed meeting place for it customers. Starbucks has been active in building good community relations and addressing environmental protection issues. Since the establishment of the Starbucks Foundation in 1997, the Foundation has provided more than $11 million to over 700 youth focused organizations in the United States and Canada. In addition, recently in September 2005, Starbucks started the Starbucks China Education Project in China. The Project will provide $5 million to support China s educational programs over a one-year period (Starbucks, 2006). This commitment will ensure Starbucks future business with China, a great coffee market yet to be fully realized. Traditionally, tea is a common drink in the Chinese culture. As the Chinese people continue to accept

Starbucks coffee and tea beverages, the future growth potential is enormous. Starbucks also has been actively contributing positively to the environment, from working with coffee farmers to preserving the natural environment in places where coffee is grown, to recycling coffee grounds into nutrient-rich soil amendment (Starbucks, 2006). Furthermore, as seen in the market today, Starbucks has started using recycled content in food packaging for Starbucks hot-beverage cups. Despite Starbucks success in building community relations and addressing environmental protection issues, the Company seems to have trouble in resolving labor disputes. Since the attempt of the Starbucks workers to organize a barista union in May 2004, Starbucks has been accused of discouraging the organization by purportedly making threats of pay cuts, giving bribes, and selectively enforcing no-distribution policies to alter the results of the barista s union vote. Just recently on March 8, 2006, Starbucks lost its battle on the first National Labor Relation Board over the conflict with the Starbucks Workers Union, and that it must rehire the union activists who were fired previously, and end all antiunion activities (starbucksunion.com, 2006). Starbucks

addresses its employees as partners. However, it seems that Starbucks needs some improvement on worker relations to build loyalty among employees. Customers Since its foundation in 1971, Starbucks has become a familiar coffee brand all over the United States and inevitably worldwide. Some consumers generally prefer Starbucks coffee because of its quality, varieties, and familiar environment; others will buy Starbucks coffee because of its commitment to the community and environment (reviewjournal.com, 2004). Nonetheless, Starbucks maintains a clear understanding of customer wants and needs, and continues to seek improvement to meet overall consumer demand (Starbucks, 2006). As seen in today s coffee market, the Starbucks coffee beverages are a bit higher than other competitors. Based on Review-Journal s interview with some Starbucks usual customers when Starbucks increased its prices by an average of 11 cents in October 2004, some customers replied that the price increase would not have any impact, while others said that they would either decrease their weekly Starbucks visits, or go to another local coffee shop. As the interview revealed, some

customers may stop or reduce the consumption of Starbucks coffee beverages because of higher prices. Starbucks need to work to reduce prices while maintaining profits and perceived customer value in Starbucks coffee brand.

Competition Hoover.com reported that Starbucks Company has 21 directed competitors, but none of them has as many operations as Starbucks. The most comparable ones include Caribou Coffee Company, who is the second largest non-franchised coffee chain in the United States right behind Starbucks; Diedrich Coffee, who is the second largest coffeehouse company behind Starbucks; and Dunkin Brands, Inc., who also operates worldwide in 30 countries. As the following Direct Competitor Comparison chart (Yahoo Finance, 2006) indicates, Starbucks is moving way ahead of its closest competitors: DIRECT COMPETITOR COMPARISON SBUX CBOU

DDRX Pvt1 Industry Market Cap: 27.02B 176.12M 24.15M N/A 176.12M Employees: 115,000 N/A 509 9531 4.75K Qtrly Rev Growth (yoy): 21.70% 28.20% 11.20% N/A 20.30% Revenue (ttm): 6.71B 197.99M 55.00M 517.00M1 197.99M Gross Margin (ttm): 59.26% 19.05% 13.83% N/A 36.49% EBITDA (ttm): 1.21B 13.02M -4.72M N/A 13.02M Oper Margins (ttm): 11.17% -1.76% -12.93% N/A 5.00% Net Income (ttm): 523.95M -4.46M -5.28M N/A 11.58M EPS (ttm): 0.650 -0.322 2.189 N/A 0.65 P/E (ttm): 54.45 N/A 2.08 N/A 42.78 PEG (5 yr expected): 2.17 N/A N/A N/A 2.17 P/S (ttm): 3.97 0.89 0.41 N/A 0.89 CBOU = Caribou Coffee Company, Inc. DDRX = Diedrich Coffee Inc. Pvt1 = Dunkin' Brands, Inc. (privately held) Industry = Specialty Eateries 1 = As of 2005

As Starbucks has increased its retail operations through grocery stores with 12 varieties (Starbucks, 2006), the company also faces competition from nationwide coffee brands such as Maxwell and Folger s. Again, as seen in the supermarkets, the Starbucks brand coffee products are priced a bit higher than the national brands. These national brands are also adding different varieties to their coffee products. Price-conscientious consumers may stick to buying the usual national brands. Starbucks may need to adjust its pricing strategies while still maintains quality and perceived value to customers. Marketing Objectives As stated on its company website, Starbucks objective is to establish Starbucks as the most recognized and respected brand in the world . The Company s objective has been consistent with its mission statement, which states to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow (Starbucks, 2006). Starbucks objective is long term in nature, but it is measurable and attainable. Over the past 34 years,

Starbucks has grown from a single shop to more than 10,000 stores in over 30 countries (Starbucks, 2006). Starbucks should focus on its objective and continue the growth internationally. Strategies To achieve its objective, Starbucks plans to continue to rapidly expand its retail operations, grow its specialty sales and other operations, and selectively pursue opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels (Starbucks, 2006). These strategies are clearly defined in achieving the Company s objective. Tactics Starbucks expansion tactics include expansion through a network of stores by region. First, the management would choose an area that has favorable demographic profiles and could be serviced and supported by the Company s operations infrastructure. Once the targeted region is identified, Starbucks would select a large city in that region to serve as the region headquarters, where teams of professionals will be located to facilitate the expansion of at least 20 stores in that region.

Another tactic is to continue to build goodwill and good community relations as the Company expands. The management understands that community recognition is a powerful driving force in building the Starbucks brand. Starbucks also developed an intensive and thorough training program for store managers and employees in support of the Company s expansion strategy. In addition, Starbucks has been endeavoring with other notable companies to distribute Starbucks brand products through mail orders, online orders, and grocery retail stores to increase brand recognition (Thompson & Gamble 1997). Starbucks tactics have been proven successful over the years, however, the Company has been viewed as monopolizing the market by placing too many stores in one region (Rubin, 2003). 4 Ps 1. Product Starbucks current product line seems to be appropriate with over 30 varieties to suit consumer demand. However, most of the products are a blend of coffee and chocolates. As today s consumers become more heathconscientious, the demand in healthy tea products may increase accordingly. Therefore Starbucks

should consider develop more tea products for its product line. 2. Price On average, Starbucks prices are higher than its competitors and the industry norm. This is one way for consumers to perceive Starbuck coffee as a high class specialty blend. However, not every average consumer can afford to spend $50 a month for coffee. Therefore, Starbucks should consider other pricing strategies such as rebate programs to drop the price a little bit.

3. Place Besides delivering products to consumers through coffee shops, Starbucks also distributes its products through other venues such as airlines, airports, hotels, bookstores, and college campuses. To facilitate its retail operations, Starbucks teamed up with blue chip companies such as Pepsi-Cola, Kraft Foods, and Dreyer s Grand Ice Cream in distributing its retail product line (Starbucks, 2006). Starbucks domestic distribution channel is rather stable. The Company should focus on international distribution channels to reach out to more international markets.

4. Promotion Over the years, Starbucks has not spent too much money on advertising. Instead, the Company has been working to build the brand cup by cup with individual customers, by word-of-mouth, and by the appeal of its storefronts. On the other hand, Starbucks has been aggressively engaged in a growing effort to expand the Starbucks brand and penetrate new markets. The Company s mindset is to offer quality products that would sell themselves. Evidently this strategy has been quietly successful over the years.

Sales All of Starbucks employees have to go through extensive training in the first two to four weeks. The training includes classes on coffee history, drink preparation, coffee knowledge, customer services, retail skills, and a four-hour workshop called Brewing the Perfect Cup (Thompson & Gamble, 1997). For management trainees, they would have to attend further classes covering store operations, company policies, information systems, and the basic skills of people

management (Thompson & Gamble, 1997). Starbucks employee training program has contributed directly to the success of the business. As a general rule, a skillful workforce would have a direct impact on a company s sales increase. Nonetheless, Starbucks employee compensation program may not be as attractive since many former Starbucks employees have left the Company and opened coffee shops themselves with the skills they learned from Starbucks (Wikipedia, 2006). Conclusion and Recommendations From a single privately-owned coffee shop to becoming a publicly-owned corporation with over 10,000 stores in 37 countries worldwide, Starbucks has been through some growing pain to where the Company stands now, all because of the vision of its founder Howard Schultz. The Company has been very successful in achieving its goal to become the world s leading coffee brand. Nevertheless, after a thorough marketing audit, the following summaries some areas of Starbucks weakness: Because the Company s full efforts has been focused on store expansion and new market discovery,

Starbucks may have neglected some consumers concern of the Starbucks brand is too pricy. It appears that Starbucks main marketing segment is the young adults with its coffee shop setting and music service additions. There does not seem to be any special services being offered to older adult retirees. Since the Company has been concentrating on developing more blends of coffee drinks, Starbucks may have over looked the potential market of different healthy tea drinks. Although Starbucks maintains a top-notch management team, the Company does not seem to have a well-organized consumer relations department. As it was evidenced on the viewed as offensive cup quotation case and the issues with the Marine s email from Iraq accusing the Company of refusing to support the troops, Starbucks was a little too slow on clearing up the conflicts. One of Starbucks guiding principles is to create a pleasant work environment for its employees. However, as it is noticed in recent conflicts between the Company and the Starbucks Workers Union, Starbucks does

not seem to be able to maintain a good workers relation.

Recommendations: While it is good to maintain brand prestige with a higher pricing strategy, Starbucks should consider the general demand and work a price reduction strategy into the Company s overall pricing strategies. Price reduction strategies may include a rebate or coupon promotion program. The increase in sales will offset the costs of these price reduction programs. While active young adults are more likely to be coffee shop patrons, the older generation retirees may also want to have a hang out place. Starbucks should consider tailoring some of its coffee shops to accommodate these older adults, perhaps another line of special drink products and services. Besides concentrating on coffee specialties, Starbucks should also consider researching into the tea specialty drinks market. Tea drinks will increase popularity because their perceived value of healthy benefits.

 Starbucks may need to review its company policies to see if updates are needed to address different consumer relation situations. Sometimes managers may not be able to act immediately and appropriately to settle consumer issues because they are abided by rather strict company policies. For some situations these policies need to be more flexible to ensure problems are being resolved in a timely manner to minimize further damages. Employees are the backbone of a company. Recent Starbucks Workers Union conflicts indicate that the Company is lacking in maintaining a good workers relation. Starbucks may consider locality pay to compensate employees who are working in Starbucks store where the local living cost is much higher compared to other towns. This compensation my help build a better worker relation since the primary concern of the Union was the claim that Starbucks does not have a fair pay system.