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Marketing_-_Starbucks_Case_Study

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Marketing_-_Starbucks_Case_Study

Strategic Marketing Management 2008/2009 MA Programmes

    SUMMATIVE ASSIGNMENT

    Starbucks

    Adapted with permission of Pearson Prentice-Hall, 2008

„Sex & Drugs & Rock & Roll is all my body needs,‟ sang Ian Dury and the Blockheads, but

    the real roots of rock‟n‟roll were in the 1950‟s coffee bars. It was in a coffee bar next to the diminutive Sun Studios in Memphis, Tennessee, that Sam Philips negotiated the deals with Elvis Presley, Jerry Lee Lewis, Johnny Cash and Howlin‟ Wolf that gave African-American

    music to the world. It was also in the 2 I‟s coffee bar in Soho, London, that white Europeans,

    including Cliff Richard, Hank Marvin, Tommy Steele and Mickey Most, aped white Americans‟ aping of the music of America‟s Deep South.

    Time moved on and the coffee bar culture declined- except in Italy, where it began. After the excitement of the British invasion, started in Liverpool, and punk with its roots in New York, rock music was in need of one of its periodic revolutions. This time Seattle would raise the torch.

    In Seattle and elsewhere, the alienated teenagers of Generation X did not relate to the studio-enhanced, beautifully preened purveyors of corporate rock that dominated the airwaves. The fast food joints where they could eat or the downtown bars were not for them. In mid-1980s Seattle, something was brewing. While travelling in Italy, the popularity of Milan‟s espresso coffee bars impressed Howard Schultz. At the time, he was director of retail operations and marketing of Starbucks, then a provider of coffee to fine restaurants. He concluded that Generation X needed the coffee bar culture slow down, „smell the coffee‟

    and enjoy life a little more. From little beans big things grew. The result was Starbucks, the coffee house chain, that started the trend of once again enjoying coffee to its fullest. Starbuck‟s doesn‟t sell just coffee, it sells The Starbucks Experience. As one Starbucks

    executive puts it, „We‟re not in the business of filling bellies, we‟re in the business of filling

    souls.‟

    Meanwhile, in a trailer park just outside Seattle, Kurt Cobain teamed up with Chris Noveselic to form Nirvana. Kurt Cobain‟s answer was not to slow down. With a psyche and passion too big for one body, he expressed the pain of a generation. While Howard Schultz wanted to calm things down, Kurt Cobain‟s grunge filled a musical gulf that captured the emptiness felt by Generation X.

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From little beans big things grew

    Kurt Cobain fulfilled his rock‟n‟roll destiny and ended his pain by dying young. Generation X

    continued refilling their souls at Starbucks. Starbucks is now a powerhouse premium brand in a category in which only cheaper commodity products once existed. As the brand has perked, Starbucks‟ sales and profits have risen like steam off a mug of hot java. Some 44

    million customers visit the company‟s 13,000 coffee shops in 39 countries each week. Guided by their mission Starbucks‟ sales and earnings have more than tripled over the past five years alone.

Starbuck‟s success, however, has drawn a full litter of copycats, including direct competitors

    such as Caribou Coffee, Costa Coffee and Coffee Republic. These days it seems that everyone is peddling their own brand of premium coffee. To maintain its phenomenal growth in an increasingly overcaffeinated marketplace, Starbucks has brewed up an ambitious, multipronged growth strategy:

    ; More store growth. Almost 85 per cent of Starbucks‟ sales comes from its stores. So,

    not surprisingly, Starbucks is opening new stores at a breakneck pace. Ten years

    ago, Starbucks had just 1,000 stores in total- fewer than it built in 2006 alone.

    Although in some countries it seems that there are not many places left without a

    Starbucks, there is still plenty of room to expand. In 2006, Germany had only 67

    branches in 21 cities. By the end of 2007 Starbucks had 100. In Hamburg alone it

    aims to have 30 within the next five years. By then it will be like London where no-

    one in the city centre is more than 5 minutes from a Starbucks.

    ; Beyond opening new shops, Starbucks is expanding each store‟s food offerings,

    testing everything from Krispy Kreme donuts and Fresh Fields gourmet sandwiches

    to Greek pasta salads and assorted snacks. By offering a beefed-up menu, the

    company hopes to increase the average customer sales ticket while also boosting

    lunch and dinner traffic. To counter reduced sales in warm weather, Starbucks sells

    Frappuccinos and other iced products.

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    ; New retail channels. The vast majority of coffee is bought in stores and sipped at home. To capture this demand, Starbucks is also pushing into supermarket aisles. However, rather than going head-to-head with giants such as Nestlé [Nescafé] and Kraft [Maxwell House, Sanka], Starbucks struck a co-branding deal with Kraft. Under this deal, Starbucks will continue to roast and package its coffee while Kraft will market and distribute it. Both companies benefit: Starbucks gains quick entry into 25,000 supermarkets, supported by the marketing muscle of 3,500 Kraft salespeople, while Kraft tops off its coffee line with the best-known premium brand and gains quick entry into the fast-growing premium coffee segment.

    Beyond supermarkets, Starbucks has forged an impressive set of new ways of bringing its brand to market. Some examples: Marriott operates Starbucks kiosks in more than 60 airports, and several airlines serve Starbucks coffee to their passengers. Westin and Sheraton hotels offer packets of coffee in their rooms. And Starbucks has a deal to operate coffee shops within Waterstones‟ bookshops.

    Starbucks also sells gourmet coffee, tea, gifts and related goods through business and consumer catalogues. And its website, Starbucks.com has become a kind of „lifestyle portal‟ on which it sells coffee, tea, coffeemaking equipment, compact discs, gifts and collectibles.

    ; New products and store concepts. Starbucks has partnered with several firms to

    extend its brand into new categories. For example, it joined with PepsiCo to stamp the Starbucks brand on bottled Frappuccino drinks and a new DoubleShoot espresso drink. Starbucks ice cream, marketed in a joint venture with Breyer‟s, is now a leading brand of coffee ice cream. Starbucks is also examining new store concepts. It‟s testing Café Starbucks, a European-style family bistro with a menu featuring

    everything from huckleberry pancakes to oven-roasted seared sirloin and Mediterranean chicken breast on focaccia. The company is also testing Circadia a

    kind of bohemian coffeehouse with tattered rugs, high-speed internet access, and live music as well as coffee specialities.

    Bringing music and coffee together once again, Starbucks now sells the music it plays in its stores. It is not cutting-edge music but the Ray Charles compilation, Genius Loves Company, sold 5.5m copies through the coffee shops. Seeing

    Starbucks as a glimmer of hope for a troubled recording industry, several artists have approached the company to get access to their 4.4m weekly visitors. In response Starbucks Entertainment has started its own record label and has signed ex-Beatle Sir Paul McCartney. Starbucks Entertainment aims to grow even faster than its parent company, releasing three albums, including Sir Paul‟s, in 2007 and eight in

    2008.

    Integrating the company‟s increased concern for the environment with its lust for new business, Starbucks Entertainment is promoting Arctic Tale, a film co-scripted by Al

    Gore‟s daughter Kristin. Narrated by hip-hop‟s Queen Latifah, the tale is about Nunu,

    a polar bear cub, and Seela, a baby walrus. The film has tracks by Shins and Ben Harper that will be played in the store. „This is not about trying to draw more coffee School of Economics, Finance and Business

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    business. We want to build awareness about the issue of climate change‟, claimed a

    Starbucks spokesperson.

    International growth. Starbucks wants to go even more global. In 1996, the company

    had only 11 coffeehouses outside North America. By 2007, the number had grown in

    39 international markets, including more than 1,000 in Asia and 500 in the UK alone.

    Starbucks aims to open thousands of stores in the fast-growth BRIC (Brazil, Russia,

    India and China) and is already firmly established in South America. With the BRIC

    countries in mind, in 2006 Starbucks increased the number of stores it aims to have

    worldwide from 30,000 to 40,000.

Too much caffeine?

    Although Starbucks‟ growth strategy so far has met with great success, some analysts express strong concerns. The company‟s share price has dropped from 45 (just over $2 earnings for each $100 of shares owned) to 35 times earnings (just under $3 earnings on $100 stock owned). This means that shareholders are still viewing the company as a growth stock but not as much as they were they expect to make their money from the company

    and share price growing rather than the profits. What‟s wrong with Starbucks rapid expansion? Some critics worry that the company may be overextending the Starbucks brand name and 16.5 per cent profit margin: „People pay up to $3.15 for a caffe latte because it‟s

    supposed to be a premium product,‟ asserts one such critic. „When you see the Starbucks on what an airline is pouring, you wonder.‟ Others fear that, by pursuing such a broad-based

    growth strategy, Starbucks will stretch its resources too thin or lose its focus. Some even see similarities between Starbucks and a young McDonald‟s, which rode the humble hamburger to such incredible success. „The similar focus on one product, the overseas opportunities, the rapid emergence as the dominant player in a new niche,‟ says

    Goldman Sachs analyst Steve Kent, „this all applies to Starbucks, too.‟ Starbucks is certainly picking up some of McDonald‟s problems.

    ; Activists have Starbucks in their sights. In China Starbucks could be banished from

    Beijing‟s fabled Forbidden City amid complaints that the presence of the coffee shop

    in the former imperial palace constitutes an „affront to Chinese culture‟. The outlet

    near the rear of the Palace Museum might be removed following online protests

    sparked by a patriotic polemic published by a popular television anchor man, Rui

    Chenggang, on his personal blog. Many of China‟s 123m „netizens‟ are sensitive to

    any perceived insult to their nation.

    ; In Ireland, where Starbucks is still in the early stages of product development, the

    company has been attacked by anti-globalisation activists for „cluster bombing‟ where

    the chain opens several stores to establish its market dominance and squeeze out

    smaller players.

    ; In 2006 Oxfam entered the fray, working to raise awareness of Ethiopians‟ efforts to

    gain control over their fine coffee brands. According to Oxfam „In a modern economy,

    School of Economics, Finance and Business companies must bring their business models in line with the demands of good

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    corporate citizenship, which goes beyond traditional philanthropic approaches to

    dealing with poverty.‟ After a lengthy public wrangle, Starbucks honoured its

    commitments to Ethiopian coffee farmers by becoming one of the first in the industry

    to join the innovative Ethiopian trademarking initiative.

    ; On the health front, Starbucks‟ big doses of coffee are also under attack. Taken in

    large amounts, caffeine can lead to „caffeinism‟: a „caffeine dependency‟ with a wide

    range of physical and mental conditions including nervousness, irritability, anxiety,

    tremulousness, muscle twitching, insomnia, headaches, respiratory alkalosis and

    heart palpitations. Furthermore, high usage over time can lead to peptic ulcers,

    erosive oesophagitis, and gastro-oesophageal reflux disease.

    ; Starbucks is facing increasing competition from rival coffee chains and fast-food

    companies. Other fast-food chains are expanding into the breakfast market that

    Starbucks dominates and offering similar but less expensive food. The Scottish-

    owned chain Costa Coffee is fighting Starbucks store by store in Ireland and has

    already overtaken Starbucks‟ coverage in the UK.

    ; Even worse, influential US Consumer Report magazine recently rated Dunkin‟

    Donuts and McDonald‟s premium coffee better than Starbucks in terms of both taste

    and value a piece of news picked up gleefully by the media across the world.

    ; To cap it all, a leaked memo to senior executives from Starbucks founder and

    Chairman Howard Schultz warned that the world‟s largest coffee chain is „watering

    down‟ its brand by opening too many „sterile, cookie cutter‟ stores, [i.e. identical,

    standardised] stores that lack soul and authenticity. Entitled „the commoditization of

    the Starbucks experience,‟ Mr Schultz said „We have had to make a series of

    decisions that, in retrospect, have led to the watering down of the Starbucks

    experience, and what some might call the commoditization of our brand,‟ He said

    steps to make the company more efficient, such as the introduction of automatic

    espresso machines, had robbed stores of character. He continued, „We desperately

    need to look into the mirror and realize that it is time to get back to the core and

    make the changes necessary to evoke the heritage, the tradition, and the passion

    that we all have for the true Starbucks experience………one of the results has been

    stores that no longer have the soul of the past and reflect a chain of stores versus the

    warm feeling of a neighbourhood store. Some people even call our stores sterile (and)

    cookie cutter.‟

SOURCES: Jonathan Brown, „Sex and drugs and rock‟n‟roll. Out of the darkness‟, The Independent

    (12 October 2006); Nelson D. Schwartz,‟ Still perking after all these years‟, Fortune (24 May 1999) :

    203-10; Janice Matsumoto,‟ More than mocha – Café Starbucks‟, Restaurants and Institutions (1

    October 1998): 21; Kelly Baron, The cappuccino conundrum‟, Forbes (22 February 1999: 54-5;

    Stephane Fitch,‟ Latte grande, extra froth‟, Forbes (19 March 2001):58; Lauren Foster, Companies

    international, „Starbucks plans 40,000 stores around the world‟, Financial Times (16 October 2006);

    Gerhard Hegmann in Munich and Birgit Dengel: companies international: „Starbucks look to step up School of Economics, Finance and Business openings in Germany‟, Financial Times (5 September 2006); Business Wire, „Oxfam celebrates win-

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win outcome for Ethiopian coffee farmers and Starbucks‟ (20 June 2007); The Guardian, „ Celebrities

    take on global war in Dublin „ (4 July 2007); Irish Times, „Coffee titans square up for turf war in Dublin

    (4 July 2007); Andrew Ward, „Sir Paul signs Starbucks record deal‟, FT.com (21 March 2007); Mure

    Dickie, World News: ‟Starbucks faces banishment from the Forbidden City‟, Financial Times (19

    January 2007); Andrew Ward, „Starbucks chairman warns of “watering down” brand , FT.com (23

    February 2007); http//www.rockabillyhall.com/SunStudios1.htm#History.

    Questions

    Imagine that you have been appointed as a consultant to Mr Schultz and tasked to carry out a structured strategic marketing review of Starbucks. Your report should contain: 1. Comprehensive external and internal audits (15 marks)

    2. Provide advice as to how Starbucks‟ strategic marketing management can develop its

    original vision and mission. Does Starbucks need to change its mission and its strategy

    in the light of the 2007/2008 financial crisis? (40 marks)

    3. How should Starbucks‟ strategic marketing management build its brand equity and

    connect with its customers to create a sustainable competitive advantage? (20 marks) 4. Provide guidance as to how Starbucks can evaluate both growth opportunities and the

    challenges presented by declining and hostile markets. (25 marks)

    Draw on additional credible sources, as well as this case, and support your argument with reference to theory.

    *** ***

    Overall word limit 3000 words maximum.

    The word count should include all the text (plus endnotes and footnotes,) but exclude diagrams, tables, bibliography and appendices.

YOUR COMPLETED ASSIGNMENT MUST BE SUBMITTED TO THE MA OFFICE NO thLATER THAN 4pm ON THE 11 February 2009

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     MARKING GUIDELINES

    Performance in the summative assessment for this module is judged against the following criteria:

    ; Relevance to question

    ; Structure/presentation & clarity of writing

    ; Scope & relevance of literature review

    ; Rigour of argument

    ; Evidence of understanding

    ; Conclusions/Recommendations

PLAGIARISM and COLLUSION

    Students suspected of plagiarism, either of published work or work from unpublished sources, including the work of other students, or of collusion will be dealt with according to Business School and University guidelines.

    *** ***

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