Starbucks Case Study

By Elizabeth Kulin www.KulinMarketing.com 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 cafs, 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 supply 100% control on brand, sales and growth and management. staffing. Franchised retail growth Less overall control in 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/nonStarbucks cafes, grocery stores). Alternatives Con Pro Enter &/or Grow Little control over brand Pacific rim sales in Asia locations image forecasted to increase 156 % (page 24, Growth to rapid for supply exhibit 4). International growth could Brand awareness growth through include international placement and associations environmental factors of Revenue growth challenge and risk. Grocery stores account for ~75% of consumer coffee purchasing. 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.

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