Marketing strategy of 'Starbucks Coffe'

Table of Contents

Executive Summary

List of Abbreviations

List of Tables and Figures

1 Introduction

2 Main Part
2.1 The effect of Starbucks’ entry into the grocery market
2.2 The “Starbucks’ experience” and new retail channels
2.3 Key factors for Starbucks’ success
2.3.1 New definition of coffee store
2.3.2 Strategy for store expansion
2.3.3 Innovation in products and store concepts
2.4 Problems of the rapid expansion and their solutions

3 Conclusion

4 ITM Checklist

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1 – Store expansion of Starbucks in the last 20 years. (Self created from data of Starbucks Corporation)

Executive Summary

Starbucks is the world leader in the premium coffee market and has an amazing success story. In this study the key factors for the successes of Starbucks are analyzed. The distribution strategy of Starbucks, e.g. through coffee stores, grocery markets, and new retail channels, is investigated. Additionally, problems of the rapid expansion of Starbucks in national and international markets and their solutions are discussed.

Starbucks sells not only its coffee; it sells the “Starbucks’ experience”. The company is successful to convey its vision to the customers. It can convince customers paying more for high-quality products and a new life style. Starbucks reached its goal to establish and leverage its powerhouse premium brand through rapid expansion of retail operations, introduction of new products and store concepts, as well as development of new distribution channels.

Starbucks has revolutionized the coffee business. The main marketing strategy is to represent Starbucks’ store as a “third place” between work and home. The company could increase the market share in existing markets and open stores in new markets rapidly. Additionally, Starbucks always tries to expand its products portfolio. The company cooperates and takes alliances with other companies to develop and distribute new products. As the result, Starbucks has developed from a local coffee bean roaster and retailer in the US to a multinational coffee and coffeehouse chain with more than 14,000 stores in 42 countries.

The rapid expansion of Starbucks leads unfortunately to some serious problems. The company has to fight with the commoditization of Starbucks’ brand because of a series of decisions which are necessary for the rapid business growth. Getting back to the score, being smarter in efforts of time, money, and resources, pushing innovation, and doing things necessary to once again differentiate Starbucks from all others are the keys for business success in the future.

1 Introduction

In a sunny day in May 2002, people lined up on the Pariser Plaza in Berlin and waited for the opening of the first Starbucks coffeehouse in Germany. Howard Schultz, the founder and chairman of Starbucks Corporation, told customers about his wonderful vision and success story.^[1] In 1983 he visited Italy and drank his first espresso in a coffee bar in Milan. He was immediately impressed and deeply inspired with the Italian coffee culture. He lauded: “There was nothing like this in America. It was an extension of people’s front porch. It was an emotional experience”.^[2] He applied successfully the concept of Italian espresso bar to the United States. He built Starbucks from a local coffee bean roaster and retailer in Seattle to a famous international corporation with 7.8 billion USD sales and 894 million USD earning. The “Espresso bar idea” combined with the “American way of business” brought Howard Schultz a private property of 700 million USD, and Starbucks became a strong brand worldwide.^[3]

The fact, that not every coffee bar gets success automatically, could be shown in a counter-example of Jacobs’s coffeehouse “J-Cups” at rail station Zoo in Berlin. In a bar with modern design, coffee with milk and sugar comes in a flash from the coffee maker by pushing a button and can be served quickly to the customer. However, the most customers want to enjoy the moment, as their coffee is brewed. They love relaxing by drinking a cup of coffee in a convenient atmosphere. The Jacobs’s coffee bar with its modern silver metallic cyber look should be closed because of a low number of customers.^[4]

These examples demonstrate the reality in the hard-fought coffee market and the changing needs of customers. Coffee drinking is not only a demand and a habit; it is also a part of quality of life and a life style nowadays. Only companies, which can satisfy it, will survive and those, who can set early a business trend, will earn profits and grow.

The object of this study is to analyze the key factors for the successes of Starbucks. The strategies of Starbucks to distribute coffee, such as through coffee stores, grocery markets, and new retail channels, as well as their benefits and consequences are studied. Furthermore, problems of the rapid expansion of Starbucks in national and international markets and their solutions are discussed.

2 Main Part

2.1 The effect of Starbucks’ entry into the grocery market

The Seattle-based Starbucks Corporation is nowadays a multinational coffee and coffeehouse chain with 14,400 stores in 42 countries. The company is world leader in the premium specialty coffee market. Starbucks purchases and roasts high-quality whole bean coffees and distributes them predominantly through its own retail stores. In its coffee stores, Starbucks offers a variety of hot and cold beverages with different flavors and customized modifications e.g. fresh-brewed coffee, Italian style espresso, cappuccino, macchiato, Frappuccino, non-coffee blended beverages, and teas. Customers can also buy pastries, sandwiches, snacks, coffee beans and other items like mugs, tumblers, books, music and films.^[5] The company receives 77 % of the sales with beverages and 13 % with goodies like sandwiches and cakes.^[6]

Beside the distribution in company-operated or licensed retail stores, Starbucks sells coffee and tea products through other channels including a specialty sales group and supermarkets. In the US, the company distributes its products in grocery markets, where 80 % of America’s groceries are sold. Starbucks started in 1998 a partnership with the grocery-product giant Kraft Foods Inc., the largest branded food and beverage Company in the US and the second largest worldwide. This allows Starbucks to supplies its coffee products, while Kraft Foods is responsible for distribution, accounting, in-store merchandising, promotion and marketing.^[7] Using this way, Starbucks can get entry into 25,000 U.S. supermarkets quickly. The company fills a super premium coffee niche where Kraft Foods was not presented. Furthermore, both companies get benefits from the co-branding and can leverage their strong brands.^[8] In this study, it should be discussed, how the entry into the grocery market affects the Starbucks’ customer relationship.

According to the trade group Specialty Coffee Association of America, there is a big market for selling coffee beans to home users. About 75 % of 300 million cups of coffee, which Americans drink a day, are made at home. For Starbucks, distribution of its coffee in grocery markets is a good possibility to attract new customers to its brand. New customers can test Starbucks coffee at home. Its high-quality and various blends would encourage them to visit Starbucks stores and enjoy coffee there. A similar trend could be observed in Japan. The launching of a cold coffee drink led to increasing sales at Starbucks stores in Japan. Hence, Starbucks is not concerned about the possibly negative influence of the distribution in grocery market on the sales at coffee stores.^[9]

The Starbucks’ main marketing strategy is to represent its store as a “third place” between work and home. People can take a refreshing break and relax by drinking a cup of fresh-brewed coffee in a homelike and socialized environment. They enjoy the life in a coffee store with warm wall colors, soft and cuddly armchair, coffee flavor, convenient music in the background and friendly baristas. Each week, 44 million customers visit a Starbucks coffeehouse, 10 % of them twice a day. A typical Starbucks customer comes to favorite store 18 times a month.^[10],^[11] But how can Starbucks reach these loyal customers outside the stores, namely in their “first place” (home) or “second place” (work)? The solution is that regular customers would continue enjoying their favorite Starbucks coffee if they could buy and brew it self. Thus, the sale of coffee beans in grocery market for home brewing can continue building the relationship with the customer outside the stores. That helps Starbucks being within the sphere of customers whenever they have a need for a cup of coffee, said Lopez, the Starbucks’ senior vice president and head of global consumer products. 9

Owens, the analyst of Morningstar responsible for analysis of Starbucks business, stated that no sign of negative impact of increasing mass-market reach on the Starbucks’ brand could be observed. The company seems to be managing its growth in grocery market without devaluing the brand. However, the quality of products, which are sold outside the stores, should be considered. For example, a pre-made, bottled Frappucino from supermarket will never taste as good as a fresh Frappuccino made by a barista in a coffee store. Starbucks takes this problem seriously and distributes its coffee in grocery market only when a flavor-lock bag technology is available. Using this technology coffee can be kept fresh for a long time in retail stores. In addition, Starbucks does not offer its coffee in open dispensing kiosks, where exposure to light and air can lead to a degradation of the coffee’s flavor. With ensuring the quality of products sold at grocery markets, Starbucks can continue expanding its reach to new and existing customers without diluting the premium brand.^[12],^[13]

2.2 The “Starbucks’ experience” and new retail channels

Starbucks sells not only its coffee; it sells the “Starbucks’ experience”. The company is successful to convey its vision to the customers. It can convince customers paying more for high-quality products and a new life style. The goal of Starbucks is to establish and leverage its powerhouse premium brand through rapid expansion of retail operations, introduction of new products and store concepts, as well as development of new distribution channels.^[14]

Starbucks uses different channels to distribute its products outside the company-operated stores. These include arrangements with foodservice companies, licensed partners, grocery channel, warehouse club accounts, direct-to-customer market channels, joint ventures and other specialty operations. The deal with Kraft Foods allows that Starbucks’ products are available on grocery shelves. Both companies accomplished marketing and promotion activities, e.g. radio advertising campaign or launching touch-screen marketing tools in supermarkets with info about specific bean types and blends. That helps customers to understand about Starbucks experience and shows them how they can bring that experience home.^[15],^[16] Beside the cooperation with Kraft Foods to sell its coffee products in supermarkets, Starbucks delivers whole bean and ground coffees to office coffee distributors, institutional foodservice companies, hotels, airlines, retailers and restaurants. In 2001, the company had already 5,500 foodservice accounts which brought Starbucks 31 % of its specialty revenues. Additionally, the distribution to warehouse club chains ensured the company 13 % of specialty revenues.^[17]

[...]

^[1] Steinborn, D. (2003). Der Kaffe-König. Available from http://www.zeit.de/2003/17/Starbucks?page=all (accessed on 08.01.2008).

^[2] Kotler et. al (2006), p. 691.

^[3] Dowideit, M. (2007). Starbucks trauert Kaffehaus-Romantik nach. Available from http://www.welt.de/wirtschaft/article736978/Starbucks_trauert_Kaffeehaus-Romantik_nach.html (accessed on 08.01.2008).

^[4] Huhn (2001). Expansion mit Espresso. Available from http://www.zeit.de/2001/47/200147_coffeeshop.xml?page=all (accessed on 08.01.2008).

^[5] Available from http://www.starbucks.com/aboutus/overview.asp (accessed on 08.01.2008).

^[6] Siedenburg, B. (2007). Der Blueberry-Herkules. Available from http://www.focus.de/finanzen/news/starbucks_aid_57627.html (accessed on 08.01.2008).

^[7] Tice, C. (2001). Grocery sales steamin’ at Starbucks. Available from http://www.bizjournals.com/seattle/stories/2001/01/29/story2.html (accessed on 08.01.2008).

^[8] Kotler et. al (2004), p. 49.

^[9] Linn, A. (2007). Starbucks aims to increase its reach. Available from http://www.msnbc.msn.com/id/17263863/ (accessed on 08.01.2008).

^[10] Kotler et. al (2004), p. 49 & 310.

^[11] Schüller, T. (2007). Der Kaffee ist fertig (EuramS). Available from http://www.finanzen.net/nachricht/Der_Kaffee_ist_fertig_EuramS__640464 (accessed on 08.01.2008).

^[12] Linn, A. (2007). Starbucks aims to increase its reach. Available from http://www.msnbc.msn.com/id/17263863/ (accessed on 08.01.2008).

^[13] Tice, C. (2001). Grocery sales steamin’ at Starbucks. Available from http://www.bizjournals.com/seattle/stories/2001/01/29/story2.html (accessed on 08.01.2008).

^[14] Kotler et. al (2004), p. 49 & 277.

^[15] Company press release (2003). Netkey retail solution for Kraft and Starbucks featured in BRANDWEEK. Available from http://www.netkey.com/company/news_detail.aspx? count=4&ctid=12&ntkid=303 (accessed on 08.01.2008).

^[16] Tice, C. (2001). Grocery sales steamin’ at Starbucks. Available from http://www.bizjournals.com/seattle/stories/2001/01/29/story2.html (accessed on 08.01.2008).

^[17] International guild of hospitality and restaurant managers. Available from http://www.hospitalityguild.com/Financial/Restaurants/Starbucks%20Corporation.htm (accessed on 08.01.2008).