1) Demographics- The information about the population sizes, incomes the age structure, geographical distribution etc and future trends is easily available in official government population reports. In order to obtain this information, a survey of the existent secondary information/reports was conducted by the marketing staff at every Starbucks store to determine the nature of the demographics in every market (Andreasen & Kotler, 2003).
2) Psychographics- It is important to determine the values, beliefs, personality, lifestyles and interests etc, of the market, especially since this service is largely a lifestyle product. In order to determine these, personal interviews and questionnaires were administered on randomly selected sample of the general public. In addition, customer satisfaction ratings and comments on the Starbucks website were analyzed to establish the market’s psychographics.
3) Behaviors- Similar market research approaches as in psychographics were conducted, during the same exercise, with the analysis stage separating between consumer behavior and psychographics (Thompson & Shah, 2011).
4) Geographical considerations- Field trials, interviews and questionnaires were used to test the willingness of the customers to purchase from certain stores in different distances, given the available substitutes in the same proximity.
5) Competitor Analysis- Information about the competing products is crucial in the determination of the Starbucks Direct marketing mix (Egan, 2008). In order to obtain this information, a two-pronged market research approach was adopted. The first approach involved a research of the major competitors offerings, and then the send approach involved a primary research study of the varied markets conducted by the Starbucks staff in randomly selected stores across the world. The study sought to determine the nature, and customer perceptions of the competitor’s offerings and the potential of a new entrant.
Starbucks’ Company Overview
Operating in the Speciality Eateries industry, Starbucks Corporation is a high-end speciality coffee company, engaged in roasting, marketing and distribution of coffee, tea and other beverages. With operations in more than 57 nations and regions across North America, Europe, Asia Pacific, the Middle East and Latin America, Starbucks is easily one of the biggest multinationals in the world, employing more than 149,000 people (manning upwards of 18,000 stores) and posting more than $11,700.5 million in 2011 annual revenues (Yahoo Finance, 2011). Starbucks posted revenues of more than $1,246,7 million in the same year, representing a 30.8% increase over the year 2010, coupled by a 21,4% increase in its net revenues. Other than coffee, it also sells and licenses coffee and tea products, including Tazo Tea, Seattle’s Best Coffee, Starbucks and Starbucks VIA Ready Brew. Its stores are conventionally located in highly visible streets, high-end suburbs, office blocks, colleges, airline companies and other institutions (MarketLine, 2011).
The company’s market falls under four administrative segments, including the United States Market, which is the biggest; the Global Consumer Products; the International Segment and Others. Having been founded in the 1970s, Starbucks mainly catered for the baby boomers, but has recently faced increasing competition in its US and other developed nation’s markets from companies such as McDonald’s, KFC and Dunkin Donuts (Yahoo Finance, 2011). With the increased competition, and market saturation in the developed economies, the company is facing equally rapidly contracting profit margins and sales, worsened by the rising costs of coffee beans and labour (Yahoo Finance, 2011). In order to counter the strategic and practical difficulties facing it, the company has massively invested in research and development, operational efficiency and expansion into the lucrative emerging economies, including India, China, Brazil and South Africa (MarketLine, 2011).
Starbucks thrives on excellent quality products. The company was created with the sole purpose of bringing the Italian coffee drinking culture back to the United States, and since then, the company has concentrated on differentiating its products from its competitors. Product differentiation has been achieved using multiple strategies. To begin with, Starbucks tightly controls its supply chain, making certain that it only procures the best possible raw materials for its products. The company employs Arabica coffee from the best coffee growing regions in the world i.e. Ethiopia, Venezuela and Bolivia (Thompson & Shah, 2011). The company has gone to the extent of obtaining exclusive contracts from farmers’ unions in order to secure coffee supplies. Having access to the best possible quality of coffee beans gives Starbucks a guarantee that its output will be of high quality. This is further emphasize by the heavy investment in human resources development through employee training and education investment because it believes the staff are central to the creation of competitive advantages that are crucial for its ultimate survival.
In addition, Starbucks heavily invests in research and development in order to ensure that not only more new products are invented, but perhaps most crucially in order to ensure that its other products are improved. The industry is extremely competitive, and in order for the company to maintain its competitive advantages. Over the years, its million dollar R&D investments have ensured that the company introduces new products to meet the growing competition as well as the market (Andreasen & Kotler, 2003). Further, the company realized that it was struggling to appeal to the youthful population, and to attract them, the company has introduced new products including automatic vending machines, Frappuccino coffee and drive-in stores to accommodate the tests of more clients.
In addition, the company ensures the maximum possible value addition, in addition to make for the company to charge premium prices. With high value addition makes certain that the company can charge high prices without losing its market share to the competition, because the products are highly differentiated. Starbucks sales branded coffee cups, coffee making machines and merchandize because of its high product value (Thorsten & Ursula, 2000). However, Starbucks has been affected by product quality related issues. The company has been hit by frequent product recalls, which have served to reduce its sales. Over the past two years, the company recalled millions of dollars worth of products, and serviced products for its clients at its own costs.
Starbucks lays a considerable emphasis on the promotion of its products as a way of maintaining its high brand awareness and value. Whenever the company launches new stores, it also uses massive advertising and promotion campaigns. Advertising includes in-store adverts, product discounts, News Paper and Magazine advertising among others. The company usually offers promotionary merchandize to its customers as a way of advertising. In order to counter the negative reputation resulting from the large product recalls and charges by regulatory authorities in the United States, Starbucks has launched media campaigns to assure its clients of its commitment to absolute quality. It has also been accepting the returned products and repairing them at its expenses in order to make sure that it recovers the lost brand value due to the negative brand resulting from the recalls. The company lays an emphasis in relationship marketing, through which it seeks to attract and retain customers for a long time, by careful management of the customer’s needs and the creation of long-term relationships and value.
Relationship marketing is markedly more effective as a marketing tool, not least because it reduces the marketing costs over the long-term, while at once increasing the brand equity. With the brand equity, the company can extract long-term value from the customers, with the brand loyalty serving to insulate the company from rising competition. This strategy has worked over the long term, when the company almost exclusively targeted the baby boomer generation, but this population group has been fast contracting, and with, the falling profitability of some of its stores (Prentice, 2011). The company has been forced to close down upwards of 1500 stores in the United States alone. To help bolster its prospects, the company has launched campaigns to promote its products among the younger generations through the introduction of technology, include the internet and automatic coffee vending machines in its stores across the world (Egan, 2008).
Starbucks stores provide a unique experience for its clients, an experience that cannot be easily replicated by its competition. The company is fastidious about its store locations, design and other aspects. Starbucks stores are traditionally located in high visibility and high-end streets and locations in cities and towns across the world (Thorsten & Ursula, 2000). The company fiercely guards its image, which is projected through the location of its stores, keen to ensure that they are associated with class, quality and good value. This is the reason why the company controversial set up a store at Beijing’s Old Temple premises, in order to capitalize on the premium value, tradition and history that the venue provided. In addition to the choice of locations, Starbucks’ premises are traditionally kept in the best state of repair possible. Aspects of the stores; from the staff uniforms, the furnishing and other aspects of the stores are closely controlled by the company to ensure that its image is well projected to the customers across the world.
The introduction of Wi-Fi, broadband internet, drive-in services and other innovations at the Starbucks’ stores is yet another strategy by the company to make the “Starbucks Experience” even more appealing. The introduction of technology is mainly geared at attracting the youthful populations to the company’s stores (Yahoo Finance, 2011). It seeks to make Starbucks’ store more youth friendly, besides building stores that youths can feel classy, besides creating a social experience that youths and other population groups can identify with.
In addition, in order to reach even more customers, the company has diversified its locations to as many places as possible. It has licensed airlines, trains, university cafeterias and office blocks among other establishments (Thorsten & Ursula, 2000). While it makes certain the class is maintained, the company has also made certain that it meets as many areas of the market as is possible to maintain its extensive market reach and market share.
The return that the company gets from its extensive investment in its product development, production, exquisite location and promotion is the premium pricing that it receives. The company seeks to provide absolute quality in return for higher prices. Its strategy is to make certain that it differentiates its products adequately from its competition, and once this is achieved, it then charges high prices and profit margins. Differentiation shields the company from a loss in the market share due to the high prices. However, the company has over the recent years, the company is facing increasing competition not just from other giants in the industry, but also from other hotels and restaurants that offer the same value as Starbucks. Its sternest competitors have included McDonald’s, Dunkin Donuts and luxury hotels/restaurants. In order to remain competitive in these environments, the company has opted to keep its prices in check, even in the face of mounting cost-push inflation.
The prices of Arabica coffee beans have seen a global spike in prices, especially those from Venezuela and the Ethiopian highlands. In addition to the rising coffee prices, the company is facing increasing costs of labour especially in the developed markets. Some of the countries into which it has expanded, including France, the United Kingdom and China have powerful trade unions and workers-centric governments, which have in turn made labour costs completely inflexible downwards (Prentice, 2011). Since Starbucks is heavily reliant on employees’ competence, the company has seen increasing costs of employee training and other development activities. However, instead of passing on these costs, the company has opted to reduce its profit margins and crucially the introduction of technology to counteract the increasing production costs.
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Egan, J. (2008). Relationship Marketing: Exploring Relational Strategies in Marketing. London: Financial Times Prentice Hall.
MarketLine. (2011). Starbucks Corporation: Company Profile. New York: Marketline .
Prentice, C. (2011, Feb 18). Coffee Jumps to Highest Since 1997 as Demand Boosts Starbucks. Retrieved October 25, 2011, from http://www.businessweek.com/news/2011-02-18/coffee-jumps-to-highest-since-1997-as-demand-boosts-starbucks.html
Thompson, A., & Shah, A. (2011). Starbucks’ Strategy and Internal Initiatives to Return to Profitable Growth. Case 23.
Thorsten, H.-T., & Ursula, H. (2000). Relationship marketing: gaining competitive advantage through customer satisfaction and customer retention. London: Springer.
Yahoo Finance. (2011, October 12). Starbucks Corporation: Company Profile. Retrieved November 29, 2011, from Yahoo Finance: http://finance.yahoo.com/q?s=SBUX