Case Study. STARBUCKS

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 lattes, 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. From 1995 to 2005, Starbucks added U.S. stores at an annual rate of 27 percent, far faster than the 17 percent annual growth of McDonald's in its heyday. At one point, Starbucks opened over 3,300 locations in a single yearan 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 percent or more each year. And Starbucks made investors happy with a 25 percent 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 percent annual growth had dropped to 10 percent, with existing store sales decreasing by 3 percent. Total company profits dropped by a scalding 53 percent for the year. And for a second year in a row, Starbucks' stock value dropped by 50 percent to 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 recognizing 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 closuresfirst 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 percent 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 warm feeling of a neighbourhood store." Starbucks management believed that efforts to recapture that 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. It added labour hours and time-saving automated machines to stores. It focused on the quality of its coffee with a Coffee Master training program for its baristas and a new line of ultra-premium whole-bean coffees. It even tried free Wi-Fi service and sold its own music. 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 had 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 coffeehouse 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 pairings"coffee cake, oatmeal, and an egg sandwichsoon followed. All these tactics helped. By the end of 2009, Starbucks was regaining ground. With same-store sales up 4 percent and profits up 24 percent for the year, Starbucks' 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' roots and re-creating the Starbucks store experience, Schultz also aimed to reach customers outside the store. The first prong of the new strategy centers on Via, an instant coffee that Starbucks introduced last year. It is available in single serve packets at all Starbucks stores and in grocery stores at $1 each or $9.95 for 12 packs. Via lets Starbucks promote a 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 upscale. At a New York taste testing, Schultz told a group of analysts, journalists, and retailers that he was ready for the critics who say, "This is desperate, this is a Hail Mary pass, 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 expectations. In fact, Via accounted for more than half of the 4 percent 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 fix. (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 focuses 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 of bagged coffee buyers are either drinking flavoured coffee or adding flavoured creamer. Seventy-five percent of those customers said they would buy a flavoured product at the 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 Starbuck's customers aren'tin vending machines, coffee carts, fast-food restaurants (Burger King and Subway, among others), theatres, and convenience stores. These are placing 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 points 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 Starbucks' sales come from outside the United States. The company sees huge potential growth abroad. But perhaps the greatest strength in Starbucks' 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 for Discussion

1.Using the full spectrum of segmentation variables, describe how Starbucks initially segmented and targeted the coffee market.

2.What changed firstthe Starbucks customer or the Starbucks Experience? Explain your response by discussing the philosophies of targeting market.

3.Based on the segmentation variables, how is Starbucks now segmenting and targeting the coffee market?

4.Will Starbucks ever return to the revenue and profit growth that it once enjoyed? Why or why not?