- Read the following case study and answer all the questions mentioned below the case
study.
Starbucks: just who is the Starbucks customer?
By now, you should be familiar with the Starbucks story. After a trip to Italy in the early
1980s, Howard Schultz was inspired to transform Starbucks — then just a handful of coffee
shops in Seattle — into a chain of European-style coffeehouses. His vision wasn't based
on selling only gourmet coffees, espressos, and latters, however. He wanted to provide
customers with what he called a 'third place' — a place away from home and work As CEO
of Starbucks, Schultz developed what became known as the Starbucks Experience, built
around great coffee, personal service, and an inviting ambiance.
WHAT GOES UP- It wasn't long before Starbucks became a household word—a
powerhouse premium brand in a category that previously consisted of only cheaper
commodity products. In 20 years’ time, Schultz grew the company to almost 17,000 stores
in dozens of countries. From1995 to 2005 Starbucks added U.S. stores at an annual rate of
27 percent, far than the 17 per cent annual growth of McDonald's in its heyday. At one point,
Starbucks opened over 3,300 locations in single year—an average of 9 per day. In one stretch
of Crowded Manhattan, a person could get their caffeine fix at any of five Starbucks outlets
in less than a block and a half. In fact, cramming so many stores so close together caused
one satirical publication to run this headline: 'A New Starbucks Opens in the Restroom of
Existing Starbucks.' For many years, new store growth was what kept Starbucks Percolating.
As it grew, company sales and profits rose like steam from a mug of hot java. Growth
routinely averaged 20 per cent or more each year. And Starbucks made investors happy
with a 25 per cent annual increase in the value of its stock for more than a decade. Schultz
confidently predicted that there was no end in sight for the Starbucks boom. Just a few years
ago, he announced his intentions to open 10,000 new stores in just four years and then push
Starbucks to 40,000 stores. But not long after Schultz shocked Wall Street and the industry
with his projections, Starbucks' steam engine of growth started to slow. Then it started
running in reverse. By the end of 2008, the 20 per cent annual growth had dropped to 10 per
cent, with existing-store sales decreasing by 3 per cent. Total company profits dropped by a
scalding by 53 per cent for the year. And for a second year in a row, Starbucks' stock value
dropped by 50 percent around $10 a share. The weakened economy certainly played a role.
But for years, many Industry observers had worried that the company was growing too fast.
Revenue and traffic at Starbucks began slowing more than a year before anyone uttered the
word recession. In a sign of recognising a problem, Schultz cut back on the number of new
store openings. Then he did what had previously seemed unthinkable. In 2008, he announced
store closures—first 600, then 300 more. In fact, as Starbucks trimmed its 2009 forecast for
new store openings to 310, it projected a decrease in its number of outlets for the first time
ever.
THE EVOLUTION OF THE STARBUCKS CUSTOMER - There was no shortage of
armchair CEOs willing to give their Opinions as to what had gone wrong that led to
Starbucks' fall from perpetual growth. One issue often mentioned was that Starbucks had
developed an identity crisis with respect to its target customer. In its early years, the
Starbucks customer profile was clearly defined. The typical customer was wealthier, better
educated, and more professional than the average American. The customer was far more
likely to be female than male, predominately Caucasian, and between the ages of 24 and 44.
It was this customer who fell in love with the Starbucks Experience. She was very loyal,
often visiting a store every day or even more than once a day. She loved the fact that the
barista greeted her by name when she came in and chatted with her while making her custom
coffee drink, not caring if it took a while. She lounged on the comfy furniture, enjoying the
perfect mix of music that always seemed to fit her mood. She met friends or just hung out by
herself reading a good book. But the more Starbucks grew, the more the Starbucks
Experience began to change. With more stores, the place wasn't quite so special. As each
location filled with more customers, baristas had more names to put with faces. As the menu
expanded with more options, the number of combinations for coffee drinks grew into the
hundreds, leaving baristas less time to chat with customers. As the atmosphere in each store
turned to 'hustle and bustle,' it became a less attractive place to hang out. With all these
changes, Starbucks progressively appealed less to the traditional customer and more to a new
customer. This customer shift was inevitable; there simply were not enough traditional
customers around to fuel the kind of growth that Schultz sought. The new breed of customer
was less affluent, less educated, and less professional. Not only was Starbucks drawing in
different customers in places where stores already existed, but it was also putting stores in
different neighbourhoods, cities, and countries. As the customer profile evolved, the
Starbucks Experience grew to mean something different. To the new breed of customer, it
meant good coffee on the run. It was a place to meet and then move on. The more accessible
Starbucks was, the better. Speed of service was more important than a barista who wanted to
talk current events. This new customer came in much less frequently than the traditional
customer, as seldom as once a month. As a sign of just how much this shift in customer was
affecting its business, by 2007, 80 per cent of all Starbucks coffee purchased was consumed
outside the store.
SOUL SEARCHING-When Starbucks growth first started tapering off, the executives took
notice .In a now famous memo to management, Schultz lamented that in order to achieve
the growth, development, and scale necessary to go from less than 1,000 stores to 15,000
stores and beyond, Starbucks had made decisions that may have led to the watering down
of the Starbucks experience. Stores no longer have the soul of the past and reflect a chain
of stores versus the feeling of a neighbourhood store. Starbucks management believed that
efforts to recapture soul would get the company back on track. At first, however, Starbucks
was caught between the conflicting goals of re-establishing its image as the provider of a
holistic experience and offering better value to the cash-strapped consumer. Starbucks set out
to put some water on the fire and get some of its customers back. But none of these actions
seemed to address the core problem: Although Starbucks still charged a premium price; it
was no longer a special place. As the recession tightened its grip and more people cut back on
discretionary purchases, the problem grew worse. Compounding the problem was an increase
in competition. For years, if you wanted a latte, Starbucks was about the only option. Not
only were Dunkin' Donuts and McDonald's selling premium coffee drinks to the masses, but
just about every mini-mart in the country boasted about the quality of its coffee. All of these
competitors has prices considerably lower than those of Starbucks, which made the most
well-known coffee bar much less justifiable to the 'grab and go' crowd. As much as Schultz
denied being in direct competition with the lower status coffee pourers, many critics seemed
to be thinking the same thing: Starbucks had shifted from a warm and intimate coffee house
to little more than a filling station, battling fast-food outlets for some of the same customer
dollars.
‘VALUE’ TO THE RESCUE?
Throughout 2009, Schultz continued to direct activities aimed at increasing growth.
Starbucks launched a campaign designed to educate consumers that Starbucks really wasn’t
as expensive as they thought it was. That was followed by something Schultz held back for
as long as possible: price reductions. ‘Breakfast pairing’ – coffee cake, Oatmeal, and an
egg sandwich- soon followed. All these tactics helped. By the end of 2009, Starbucks was
regaining ground. With the same store sales up 4 percent and profits up 24 percent for the
year, Starbuck’s stock price doubled versus the previous year. But Schultz made it clear that
he was just getting started. ‘What a difference a year makes. We’re going to radically reframe
Starbucks growth strategy’. He outlined a three-pronged growth strategy to illustrate that
Starbucks might have a grip on defining segments of coffee customers after all .In searching
for Starbucks’s roots and recreating the Starbucks store experience, Schultz also aimed to
reach customers outside the store.
The first prong of the new strategy centres on Via , an instant coffee that Starbucks
introduced last year. It is available in single-serve packets at all Starbucks' stores and
in grocery, at $1 each or $9.95 for 12 packs. Via lets Starbucks promote genuine cup of
Starbucks coffee for under a buck. Promotions for the new instant have made it clear that
Starbucks isn't moving downscale; instant coffee is moving up scale. At a New York taste
testing, Schultz told a group of analysts, journalists, and retailer that he was ready for
the critics who say, 'This is desperate, this is a Hail Mary pass, and this is off-brand for
Starbucks. We are going to reinvent the category. This is not your mother's instant coffee'.
Via is off to a good start, having surpassed company's expectations. In fact Via accounted for
more than half of the 4 per cent increase in Starbucks 2009 same-store sales. According to
Annie Young- Scrivner, global chief marketing officer for Starbucks, half of all Via serving
occasions are at home, 25 percent are in the office, and 25 percent are ‘on the go’. Many Via
customers aren’t just out for a cheap coffee. (You can mix up a cup of Folger’s for about 25
cents.) They are people who want premium coffee but are in situations where they don’t have
access to a store or brewing their own. An ad campaign supporting Via is the first concerted
advertising push aimed at grocery customers, who are now accessible through 37,000 retail
locations. The second prong of Starbucks strategy also focusses on the grocery business but
through ground –flavoured coffees. According to NPD Group, four out of five cups of coffee
are consumed at home. Starbucks has a very small share of that market. Via will certainly
help. But aiming more directly at the ‘brew it at home customer, Starbucks is partnering with
Kraft to launch flavoured coffees you can brew yourself. Sixty percent bagged coffee buyers
are either drinking flavoured coffee or adding flavoured creamer. Seventy- five percent of
those customer said they would buy a flavoured product at a grocery store if Starbucks made
one. So after more than two years of testing, this substantial segment of grocery-store buying
customers can now get Starbucks Natural Fusions in vanilla, caramel and cinnamon.
The third prong of Starbucks strategy is its ace in the hole- Seattle’s Best Coffee. Starbucks
purchased the brand back in 2003 but is just now doing something with it. Rebranding efforts
have given Seattle’s Best a new look and tagline. ‘Great Coffee Everywhere’. As with Via
and Natural Fusions, and now with Seattle’s Best, Starbucks is going after customers who
don’t normally buy Starbucks coffee. It is placing Seattle’s Best where Starbucks’s customers
aren’t – in vending machines, coffee carts, fast-food restaurants ( Burger King and Subway,
among others), theatres, and convenience stores. These are places that Starbucks has avoided
for fear of eroding its upscale image. With prices ranging from $1 to just over $2, Seattle’s
Best also reaches customers who perceive Starbucks as too expensive. Gap has Old Navy,
BMW has Mini. Now, Seattle’s Best allows Starbucks to go head-to-head with competitors
like McDonald’s without putting the Starbucks name in the same sentence as downscale
competitors. Michelle Gass, Seattle’s Best president, clearly defines the difference versus
Starbucks: ‘Starbucks is a destination coffee experience and an active choice made by the
customer. Seattle’s Best will instead be brought to the consumer when they make other retail
choices.’ Gass is going to make sure that she has as many of those other retail choices
covered as possible. She is taking the brand from 3,000 of distribution in 2009 to more than
30,000 by the end of 2010. The three pronged strategy provides three good reasons to believe
that Starbucks growth story will return, even without opening nine stores per day. As icing on
the coffee cake, only one- fifth of Starbuck’s sales come from outside the United States. The
company sees huge potential growth abroad. But perhaps the greatest strength in Starbucks’s
new strategy is that it will allow the company to go after new customer segments while also
restoring the essence of the Starbucks Experience.
QUESTIONS –
1) Undertake a complete SWOT ANALYSIS of the above mentioned case study of
Starbucks.
2) Using the full spectrum of segmentation variables, describe how Starbucks
initially segmented and targeted the coffee market?
3) What changed first- the Starbucks customer or the Starbucks Experience?
Explain your response by discussing the principles of market targeting.
4) Based on the segmentation variables, how is Starbucks now segmenting and
targeting the coffee market?
5) Will Starbucks ever return to the revenue and profit growth that it once
enjoyed? Why or why not?
