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Since its' 1992 IPO, Starbucks has continually focused on growth. Initially, the growth was targeted to enable Starbucks to achieve their goal of becoming the leading North American retailer of specialty coffee. The early success they achieved resulted in Starbucks expanding their original goal to that of becoming the most recognized and respected coffee brand in the world.
By way of example, this case study focuses on a request by McDonalds to serve Starbucks coffee at its' restaurants in order to discuss the marketing strategy and the underlying competitive premise that Starbucks has adopted to achieve both of their goals. The study also describes the role the internet potentially can play in developing Starbucks as a global brand.
In 1994 the growth rate in US domestic specialty coffee consumption was 15 percent per year, while the growth rate of the overall US domestic coffee market was essentially stable. Although there was no precise definition on the distinction between specialty and basic coffee, it was generally argued that specialty coffee was of a higher quality. The increase in specialty coffee consumption was believed to be the result of four consumer trends :
1) the adoption of a healthier lifestyle had led North Americans to replace alcohol with coffee;
2) coffee bars offered a place where people could meet;
3) people liked affordable luxuries and specialty coffee fit the bill; and
4) consumers were becoming more knowledgeable about coffee.
As Starbucks drove to achieve their goals, they developed their marketing strategy in response to these trends. The brand they would build as a result would then be leveraged to enable them to grow on a global scale.
In their quest for growth, Starbucks initial focus was on becoming the leading retailer of specialty coffee. Howard Schultz, Chairman and CEO of Starbucks, wanted to achieve this goal by creating the "Starbucks Experience". Specifically, the vision was to create more than just the store to purchase specialty coffee, the intention was to develop "a kind of third place' where [people] can escape, reflect, read, chat or listen." The brand Starbucks was focused on building was retail based and centered on the place and the experience.
The Starbucks growth plan was centered on developing an integrated supply chain, developing a quality brand that could then be leveraged and upon entering the grocery channel.
Starbucks developed propriety roasting curves and technologies such as the one way valve on the bags used to store roasted coffee in order to ensure a consistent, quality product.
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The quality of brand was extended in the merchandising that Starbucks engaged in at its' retail outlets. Only high quality merchandise was allowed to be associated with the growing Starbucks brand.
Historically, specialty coffee companies dealt exclusively with coffee exporters and it was common for the coffee to change hands as many as five times before it reached the specialty coffee seller. Starbucks purchased their specialty coffee on a global basis as a hedge against failure of the coffee crop in any one region.
The supply chain that Starbucks developed was used to serve the retail stores, specialty and wholesale markets, the mail order business and the grocery channel. Global growth would require expansion of the network and balancing of resources. By coupling an accurate forecasting process with a fully integrated manufacturing and distribution process, Starbucks was able to achieve near just in time supply to it outlets.
The grocery chain
Although the entrance into the grocery chain was not critical to achieving their goal of becoming the leading retailer, Starbucks chose to enter the market in order to gain increased sales of specialty coffee for the home. In 1996, 86 percent of specialty coffee consumed at home was purchased from the grocery channel while specialty stores accounted for 19 percent. It was forecasted that by 1999, the model would change significantly, with 54 percent of the specialty coffee for homes being purchased from specialty stores.
The retail stores were the fundamental growth vehicle for Starbucks. Investment in the specialty stores and wholesale operations allowed for revenue growth and increased name recognition. The mail order (Encore) side of the business was used to boost sales and to widen consumer product exposure. All of these activities served to establish the brand of a quality domestic retailer of specialty coffee. To become the most recognized and respected global coffee brand would require Starbucks to leverage their size and brand.
Starbucks entered into partnerships with Dreyers' Ice cream and PepsiCo to develop and deliver brand extensions. The contribution to 1999 revenues was estimated to be $15 million on total retail revenues of $501 million. The extensions were intended to deliver a new customer base and to reinforce the premium quality image.
Starbucks intentionally chose to be first to enter the global markets in order to reduce encountering competition. The first global market targeted was the Pacific Rim. Starbucks forecast that sales would grow from $9 million US annually in 1997 to $150 million US annually by 2000.
The establishment of an integrated supply chain on the scale that Starbucks targeted ensured that suppliers of quality coffee became preferred partners. The goal of doubling their sales volume over 3 years resulted in Starbucks developing propriety blending techniques. The use of blends to achieve the same flavor profile would enable Starbucks to ensure supply even if faced with failure of specific coffee crops and would also enable Starbucks to balance costs. The ability to provide alternative mixes to achieve the same flavor characteristics provided Starbucks a distinct advantage over competitors.
The large scale of Starbucks operations also enabled them to achieve economies of scale with respect to transportation rates. Growth on a global scale would require Starbucks to leverage these advantages.
To capture a wider segment of the domestic market, Starbucks redefined the cart and applied its' use in venues such as train stations, street corners and malls. The carts, branded as Doppio, were intended to reach a new customer base. The Specialty Coffee Association of America estimated that by 1999, there would be sufficient demand for 10,000 retail outlets in North America and that carts would account for 4,500 of them.
Starbucks was faced with a number of options to assist them to attain their goal of becoming the global brand of choice. The McDonalds offer certainly would enable Starbucks to engage in sales of ready to drink beverages on a global scale. Would this in turn facilitate becoming the global band of choice?
As previously discussed, Starbucks had committed to developing a quality brand image and had done so through investing in technology and their staff. Above providing exceptional customer service, staff were expected to respond to customer questions. Consumers came to expect the "Starbucks Experience".
Twenty two percent of US consumers purchased specialty coffee. These consumers typically lived and worked in urban areas and on average had an annual income in excess of $35000. Persons with college degrees purchased 49 percent more specialty coffee than the average, single persons purchased 39 percent more than the average and persons aged 30 to 59 purchased more specialty coffee than people aged between 20 and 29.
Annual growth in the domestic specialty coffee market was static. Starbucks was pursuing alternatives that would result in them capturing a larger share of the existing market and were also developing new customer bases through their brand extensions and Doppio strategies.
The investment in the Pacific Rim was targeted as the first step in developing an international presence. Once established in that market, Starbucks would then focus on growing other areas. The slow and controlled growth would enable Starbucks to ensure that the quality of brand could be maintained.
By allowing McDonalds to sell Starbucks coffee at their restaurants, Starbucks would instantly be able to sell their specialty coffee on a global scale. However, the quality brand that they had diligently developed and nurtured would automatically be associated with the McDonalds brand. The association would be more profound in those markets that had little previous exposure to the existing Starbucks brand.
To ensure continued quality and consumer loyalty to the brand, Starbucks should decline the McDonalds offer.
As an alternative to gain global recognition instantly, Starbucks could leverage their existing Encore program. By taking the mail order program and adopting it for the internet, Starbucks would instantly gain access to consumers more characteristic of the specialty coffee profile.