TROUBLE BREWS AT

STARBUCKS
-Lauranne Buchanan and Carolyn Simmons
2009

Presented by-
Group-7 : FM-02
Anushka Choudhary- 024010
Kanika Gulati - 024023
Rahul Singh Tanwar - 024038
Shubham Gera - 024048
Vasu Baghla - 024059
Shubham Sethi - 024069
Background
● The Starbucks Coffee, Tea, and Spice Company was founded in Seattle in 1971 by Jerry
Baldwin, Gordon Bowker and Zev Siegl.
● A retailer selling only dark-roast, whole-bean coffee and not ground or prepared coffee.
● Howard Schultz,joined the company in 1982 as a marketing director.
● Howard Schultz vision was to open the coffee bars and to make a powerful connection
with the customers who love coffee.
● He left Starbucks and opened Il Giornale, Italian for daily when his bosses refused to his
idea.
● In 1987, he opened 3 espresso bars and acquired six stores, the roasting plant and the
name of Starbucks.
● He then opened various new stores in consecutive years.
● In 1992, Starbucks went public with over 100 stores, a strong balance sheet, a double-
digit growth and raised $29 million via IPO.
EXPANSION OF THE BUSINESS
New Product Development:
● Introduction of non-fat milk into coffees
● Introduction of cold blended beverage as Frappuccino
● Seasonal offerings like Strawberry and Cream Frappuccino
● Food items such as: gingerbread, cookies and pastries made their way into
the stores
● Introduced sandwiches and salads to cater for breakfast and lunch
● Development of products with other companies: Bottled frappuccino with
PEPSI, Ice cream with DREYER’s and Coffee liquer with JIM BEAM
Locations:

● In each region,a large city was targeted as ‘hub’ where professionals team
could be located and can serve as support for new stores
● Goal was to open 20 or more outlets in first 2 years
● Selected highly visible locations for their flagship stores
● Model for their location was dense store placement
● Clustered stores helped manage more traffic in crucial hours
● Ubiquity also helped them to increase their sales
Enhancing Customer Experience
Starbucks added music, books and movies to its product mix

Music : It had always been a crucial element of Starbucks. Customers inquired

where they could buy what they heard at the stores. So, a key strategy was
launched “ Hear Music” in which a custom mixed CD could be created.Soon after a
popular series “Artist’s Choice” was launched too. In order to generate revenues,
99 cents per song was introduced and added in the bill. This process eventually
increased the footfall of the customers.

Books : Starbucks offered Literary Magazine JOE, but it didn’t add any value.
The store then chose Mitch’s For One More Day as its first book.
25 Starbucks stores around the country offered discussion groups of the book,
complete with free coffee.
Movies : Starbucks made promotional deal with Lions Gate Entertainment for
Akeelah and the Bee.
Starbucks promoted aggressively by putting trivia games, distributing the
soundtrack. Use for in-store Wi-fi network for running trailers.
However, the box office receipts were disappointing.

Starbucks tried again with Arctic Tale, from Paramount Classics & National
Geographic Films.
The sales were again disappointing, but both the partners were pleased with
Starbucks effort.
Global Expansion
● 1995 : Expansion outside North America, with a partnership with SAZABY
Inc. to open Starbucks coffeehouses in Japan.
● 2008 : Starbucks had 4500 locations in 43 countries outside US.

STARBUCKS OVERSEAS FORMULA : Same menu with some modification for

local tastes.
Eg. Athens : Thick Layer of fine residue at the bottom of coffee
UK : Cheese & marmite sandwich.

Challenges : Withdrawal from Forbidden city in China

Starbucks delayed it’s entry into India & Russia
Meanwhile, Real Estate prices continued to rise
Additional Decision and Unintended Consequences
● In 2001, company decided to double pace of expansion
● Company got swayed by the perks being offered by landlords-ignoring the
winning store location formula
● Consumer preferences changed-the stores were not as much of a hype as it
used to be(80% people consumed drinks outside stores)
● Increased number of drive-through windows- led to cannibalization by
locations offering the service
● Started selling in-store food items- led to cooking odors changing the
experience and ambience for customers
● To reduce wait time, automated espresso machines were installed-but they
were so tall that customers could not see their coffee being made or talk to
the barista
Additional Decisions and Unintended Consequences
● Sealed packs of pre-ground coffee usage- eliminated the aroma of freshly
ground coffee which is what the customers used to like about a coffee shop
● In order to reduce maintenance costs- the furniture was made less
comfortable-making it a less inviting space

All in all, it had lost the “romance and theatre” of coffee-making with its meteoric
expansion.
Competitors
While starbucks with it’s drive-through windows started looking like a fast-food
restaurant- competitors like Dunkin Donuts and McDonalds utilized this
opportunity to enter into high-end coffee segment

1. Dunkin Donuts
● It’s stores were found all throughout America
● They rolled out espresso in 2003 claiming it to be- cheaper, faster and simpler
than Starbucks

2. McDonalds

● Was slower to enter into high-end coffee segment

Competitors
● Coffee sales were declining continuously that also led to the decline of
breakfast sales
● Its management made efforts to refurbish its stores, adding internet facility- so
they could develop a coffee selling environment
● It launched stronger blend of coffee-calling it as “premium”
● Launched different flavors to cater to larger audience
Economic Crisis
● In 2007, the US economy was hit with increasing prices of oil and gasoline
● At that time, a cup of Starbucks cost equal to a gallon of gas, a crucial comparison
when consumer’s budget were already pinched
● The economy was further hit by the sub -prime mortgage lending crisis
● This all went against the Starbucks’ plan to expand at locations where development
was projected to happen
● Company confirmed its losses in fourth quarter of 2007. Same-store sales growth had
declined
Implementation Plan
● Company offered $1 coffee and free refills on traditional brewed coffee to attract the
price-conscious customers
● Starbucks invested in television ads
● But the crisis worsened even further. In early January of 2008, the company’s share
price was $18 , down from $35 the previous year
● Howard Schultz was brought back as CEO with a purpose to restore Starbucks’ image
as a premier brand
● Howard Schultz planned to bring focus back to the core purpose and not get caught
up in chasing revenue
THANK YOU