starbucks marketing

“We aren’t in the coffee business, serving people. We are in the people business, serving coffee”

Howard Schultz, Starbucks Chairman and Chief Global StrategistFortune Magazine, Vol. 149 No. 2

Title: Starbucks: “The Non-Coffee Treat”

Submit To: P.V. Sundar Balakrishnan

Completed By:

Matthew CarmeanPartner

Julie AnstettPartner

Julia ToochettePartner

Joel EnnisPartner

Joey EatonPartner

Trang P. HuynhPartner

Table of Contents

TABLE OF CONTENTS......................................................................................................................................................2

EXECUTIVE SUMMARY...................................................................................................................................................3

MANAGERIAL PROBLEM................................................................................................................................................4

SITUATION ANALYSIS.....................................................................................................................................................4

Company.............................................................................................................................................................................4Customer.............................................................................................................................................................................4Competitor..........................................................................................................................................................................5Complementors...................................................................................................................................................................5

STRATEGY (STP)................................................................................................................................................................5

Segmentation......................................................................................................................................................................5Target..................................................................................................................................................................................5

PRODUCT LIFE CYCLE....................................................................................................................................................6

Introductory Stage..............................................................................................................................................................6Growth Stage......................................................................................................................................................................6Maturity Stage....................................................................................................................................................................7Decline Stage......................................................................................................................................................................7

IMPLEMENTATION PLAN AND RECOMMENDATION............................................................................................7

Product................................................................................................................................................................................7Price....................................................................................................................................................................................7Place (Distribution).............................................................................................................................................................8Promotion...........................................................................................................................................................................8

Appendix.................................................................................................................................................................................9

Starbucks: “The Non-Coffee Treat” 2

Executive Summary

Starbucks is the leading retailer and roaster for brand specialty coffee in the world. It has over

7,500 stores located worldwide. As Starbucks continues to expand, it will encounter all sorts of new

product markets, with new and demanding customers for unique and appealing products. Starbucks has

begun by introducing an extension of the Frappuccino line targeted to the non-coffee drinker. Entering

this new market, Starbucks faces many challenges from having to compete to retain brand recognition of

its primary products, yet increase awareness of its new product line. Our analysis and research of the

market have resulted in keys findings as follows:

The new Frappuccino blended beverages, also known as the Summer Drink flavors will help

Starbucks reposition itself in the developing non-coffee iced-beverage market; Starbucks will also

need to enhance the product perception to maintain the perceived high quality. Customers of this

segment are sensitive to taste and quality of food product and nutritional data.

With this new line extension, Starbucks will be facing many new competitors such as Jamba Juice,

Orange Julius and other local non-coffee iced-beverage providers. Special care must be

implemented to maintain Brand equity for it’s primary product, and not become to diversified the

current customers seek alternatives.

Based on our research, we found that the married couples age 25-54 with children to be the

primary potential target market.

Additionally, we have concluded generating awareness about the product via a Web Campaign

would be highly advisable. A Secondary approach would be Network TV or Print Media such as

magazines, journals, and newspapers.


Managerial Problem

Starbucks strategic goal is to increase market share of the non-coffee drinker; they have begun by

introducing an extension of a product line targeted to this segment. To ensure market growth, Starbucks

has repositioned one of its current products, the Frappuccino line, this product has been extended to

include 3 new flavors; Double Chocolate Chip Crème, Vanilla Bean Crème, and Strawberries & Crème,

introduced throughout the summer months. Faced with the challenge of entering a new competitive

market Starbucks must compete to retain brand recognition of its primary products, yet increase

awareness of its new product line.

Situation Analysis

Company

Starbucks is the leading retailer for roaster and brand specialty coffee in the world (See Figure 1).

It has over 7,500 stores, which are located in the United States, Canada, Europe, Asia and the Middle

East1. Besides high quality coffee drinks, Starbucks sells bottled coffee drinks, such as Frappuccino® and

Starbucks DoubleShot™.

Starbucks revenue is growing by 20% a year and is opening approximately three stores every day.

Starbucks is capable of managing its successful operations by having steady market growth. It achieved

this by financing through their cash flow instead of franchising, selling stock or increasing their financial

leverage2. Its strategy to success is “blanket an area completely.” This approach is to “cuts down on

delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for

all the stores in an area,” that gives Starbucks a competitive advantage.3

Customer

At first only yuppies went to Starbucks, but now it attracts a much wider demographic of customers

including people of different ethnic backgrounds and ages. Today, Starbucks has the striking number of 25

million people visitors in its stores each week3. This success is due to the combination of high quality drinks

and friendly environment with good music, comfortable chairs, and good services. This creates the

“Starbucks experience” which customers can relate to that lead to brand loyalty. In addition, Starbucks

needs to deal with customers’ cultural preferences in all its worldwide locations to maintain customers’

loyalty. (See Figure 2) Also see Figure 3 for influences on the consumer purchase decision process.

1 Sewer, Andy, “Hot Starbucks to Go” Fortune Magazine” January 26, 2004 p.742 Sewer, Andy, “Hot Starbucks to Go” Fortune Magazine” January 26, 2004 p.703 Source: “Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2004.”and “Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2003.” Robert S. Lazich, Editor. Thomson Gale, 2003


Competitor

To ensure further market growth and be competitive, Starbucks is developing new products for

non-coffee drinkers. Starbucks provides its current customers and attracts new customers not only with

quality products but also with varieties flavors that customers’ desire (See Figure 3).

Starbucks’ two largest competitors are Dunkin’ Donuts and Krispy Kreme, both are national chains.

These companies use aggressive price-cutting, up to 20%, for their drinks.5 Other competitors are small

local coffeehouses, and other coffee brands like Tully’s and Pete’s Coffee. Their direct competitors for the

new product line are Orange Julius, Jamba Juice, fast food chains such as McDonald’s and Burger King,

and other small coffee alternative providers.

Complementors

Starbucks recently teamed up with Bank One to offer the Starbucks Card Duetto Visa.7 This is a

stored-value card and traditional credit card. Starbucks has also introduced a T-Mobile Hotspot service

which allows the Starbucks customer to have access to wireless internet for a fee.8 Offering more services

like the Visa card, wireless internet and customized CD will add more value to the Starbucks experience

and help draw more customers to Starbucks which will lead to higher revenues.

Strategy (STP)

Segmentation

One dimension of segmentation will be demographics (age and household status). We have

selected married couples age 25 – 54 with children to be our primary target market. According to our data

in figure 5, we found that these households spend more than other households on non-alcoholic beverages

away from home. We also like this segment because the children can consume the coffee-free

Frappuccino as well. We expect such events as parents buying the child a Frappuccino as a treat for a

soccer game victory, or on a family trip to the beach. We anticipate the exciting summertime experience,

will remain in the child’s mind and will influence their purchase decisions as they mature. (See Figure 10)

Target

Points of Difference:Starbucks cannot expect to grow by offering the same products as its competitors. Starbucks must

offer “points of difference” that will make customers want to come to Starbucks rather than competitors.

The “points of difference” that make Starbucks new Frappuccinos distinctive relative to competitors fall

into four important areas:


Brand Experience: At Starbucks you aren’t just drinking a beverage, but are undertaking in an

emotional experience by the surroundings.

Brand Quality: Starbucks has been recognized for exceeding expectations by the quality of their

products and their service. This is what will create their loyal customers.

Perceived Health: People that are active are perceived to be healthier then those not active. According

to our survey, Figure 6, aside from the coffee, Starbucks is perceived as a healthy establishment,

which makes the new coffee-free Frappuccinos appear healthy as well.

Convenient Access: Starbucks is everywhere and easily accessible. In many locations Starbucks offers

drive-thru windows, which are more convenient then its competitors.

Positioning

Starbucks products always have been perceived with a prestigious image. With their high quality

products, unique tastes, friendly environment, conveniences, customers are willing to pay a premium

price for its products. As Starbucks extends their product line with the new Frappuccino flavors, it faced

against competitors like Jamba Juice. Therefore, to retain a position in the customers’ minds as high

quality, Starbucks needs to enhance its position by making it appear as nutritional. This can be achieved

by lowering the calories or by adding real fruit to the product. As the product’s nutritional and taste

increase, their perceive quality will also increase. Offering a more quality product for the same price will

help increase sales and enable them to be more competitive in the customers mind.

Product Life Cycle

The summer drinks are currently in the introductory stage of the product life cycle. Refer to

Figure 4. The summer drinks are currently in the life cycle in reference to where we hope it will be in

seasons/years to come.

Introductory Stage

During this stage we expect to have slow sales growth and low profits but are optimistic for the

growth stage to increase both. The introductory stage is simply being used as an introduction to these new

flavors of the Frappaccino drink.

Growth Stage

As the summer draws near we expect sales to rapidly increase. Due to the timing of the hot

weather and the promotion effectiveness we expect to see an increase in sales. With the new-segmented

market hearing about the new “non-coffee” beverages sales are bound to grow due to curious consumers

and their wants to be in some way affiliated with the Starbucks brand.


Maturity Stage

The maturity stage will be reached near the end of summer and beginning of fall of the first year.

As the product is consumed and referred to as the “Summer Drink” sales will eventually slow and reach

maturity. We recommend selling these flavors year round making them available to those who still desire

to consume them. We do not see sales increasing from summer through winter.

Decline Stage

This stage is expected to come every year in late fall and proceed through winter and mid spring.

Due to the environmental change, the weather, and the promotional aspect of the “summer drink” sales

will surely decline during this period. As shown in Figure 4 we expect throughout the coming years to see

sales progress and gain more market share every year.

Implementation Plan and Recommendation

Product

Starbucks is known for providing superior products and services. Consumers have enjoyed the

experience they encounter at Starbucks, and now for those who seek a high quality non-coffee drink can

enjoy the same experience. By introducing these new summer drinks, Starbucks will enjoy an entirely

new segment to market its products to. When looking at the sales revenues for the summer drinks it is

important to consider that some of the existing customers will inevitably cross over and begin consuming

the new drinks. In the end, the expansion of the product line is a wise decision because of the ease of

adoption to Starbucks reputation for quality as well as the low cost of implementation.

Price

The main competitor to the new summer drinks is Jamba Juice with its smoothies. Comparatively,

Starbucks summer drinks are priced significantly lower. In addition to low comparative price, the

perceived benefits for consuming a Starbucks drink are quite high for most consumers. Therefore, when a

customer does a value analysis and divides perceived benefits by the price, the resulting value for the

customer is quite high. With the price of the summer drinks being lower than it competitors, its price

sensitivity is low. However, over time as consumers adopt the product they may become aware of other

products and therefore the price sensitivity will increase overtime. The delicate balancing act is to manage

the price of the drink low enough to gain market share while still preserving Starbucks’ prestigious image.

Place (Distribution)

Starbucks distributes its New Frappuccino Blended Beverages directly to customers through its

own retail stores. Currently these new Frappuccino flavors are only available in North American Stores. Starbucks: “The Non-Coffee Treat” 7

With numerous locations, it will be convenient for customers to buy these new Frappuccino products.

These new Frappuccino flavors are available year round. Due to the demand and appeal of the products,

revenue from this product will fluctuate as the seasons change.

Promotion

The easiest methods for promoting the latest summer drinks are by internal advertisements within

its retail stores, such as posters, new product signage, and other internal means. However, this type of

promotion will have the least amount of effect on gaining more market share of non-coffee drinkers.

Therefore we have done analysis of other mediums for promotion; the top 3 mediums of advertising,

according to figures from 2000, include Newspaper, Network TV, and Spot TV4. After reviewing the goal

of increasing awareness of the product to attract people to the retail locations we recommend using a

medium that today is in direct competition to the TV, website marketing. Starbucks has historically

avoided advertisements on TV, due to attempts that had reduced the brand image, furthermore the cost to

do TV spots is far greater then by websites, this is not to say they should not do TV spots, but we

recommend they avoid head-to-head marketing with competitors such as McDonalds, and other Fast-food

chains.

Starbucks has determined that most of its targeted customers consider themselves relatively

technology savvy via the computer. An increasing number of companies are using the World Wide Web

to communicate and after considerable review, we highly recommend a web campaign aimed to increase

awareness of the Summer Drinks. Websites that are highly reputable or that can be partnered with will be

the most successful in generating awareness. See Figure 9.

TV Commercials may also be done, however we do not recommend during the introduction stage.

During Growth would be far more effective. See Figure 11.

Appendix

Figure 1 TOP GROUND DECAFFEINATED COFFEE BRANDS, 2002

4 Krishnamurthy, Sandeep, E-Commerce Management: Text and Cases P. 169 source: Advertising Age, http://AdAge.com


Based on sales for the year ending November 3, 2002 Starbucks is in third place among top ground decaffeinated coffee brands with a 7.8 percent market share. This is an increase of 2.6 percent compared to its market share in 2001.

TOP GROUND COFFEE BRANDS, 2002

Based on sales for the year ending November 3, 2002 Starbucks is in fifth place among top ground coffee brands with a market share of 6.66% and $109.2 millions in sales.

TOP WHOLE BEAN COFFEE BRANDS, 2002

Starbucks falls among four top whole bean coffee brands and has a 21.7% market share of the whole bean category this places the company in second place after Eight O’clock. In 2001 Starbucks had only 19.1%5

Figure 2

CULTURAL INFLUENCE ON THE CONSUMERS BEHAVIOR DIFFERENCE

5 Source: “Starbucks Steaming Ahead with Aggressive Expansion plans” by Jake Batsell. The Seattle Times. March 28,2004. Retrieved on April 25, 2004 From http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document


By increasing its market share worldwide Starbucks needs to deal with cultural issues. For instance, in Europe 85% of coffee customers like to spend time in coffeehouses, in the USA this number is only 14%, the remaining 86% prefer to have their coffee to go. Starbucks needs to consider new ways to increase foreign markets. One way is by adopting its menu and service to segment markets.6

Figure 3

FLAVOR PREFERENCE SURVEY

To create its 2004 summer drinks Starbucks sponsored a survey during which it was revealed the degree of flavor preferences. This survey shows that Americans most enjoy the taste of chocolate (41%), strawberry (29%), and vanilla (28%). As a result, Starbucks for 2004 developed new drinks: Java Chip Frappuccino, Double Chocolate Chip Frappuccino, Strawberries & Crème Frappuccino, and Café Vanilla Frappuccino. 7

Figure 4Summer Drink Frappuccino Life Cycle

6 Source: “Starbucks Steaming Ahead with Aggressive Expansion plans” by Jake Batsell. The Seattle Times. March 28,2004. Retrieved on April 25, 2004 From <http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document>

7 “Business Wire. “On April 23, Starbucks introduces five new Frappuccino(R) blended beverage flavor, including Strawberries &Cream Frappuccino(R) blended cream.” Retrieved on April 22, 2004 at< http://aolsvc.news.aol.com/business/article.adp?id=2004022 >


http://aolsvc.news.aol.com/business/article.adp?id=2004022

Sal

es

Spring Summer Fall Winter 2004

Spring Summer Fall Winter2005

Spring Summer Fall Winter2006

= Current Progress in Product life Cycle

Figure 5 8

Percentage of total annual spending on non-alcoholic beverages away from home, by household typeNon-Alcoholic Total married Married couples, Married couples, Single parent at Single person

beverages away couples no children with children least one child

from home 62.20% 17.90% 38.60% 5.20% 18.90%

Average annual spending of consumer units on non-alcoholic beverages away from home, by household type, in thousandsNon-Alcoholic total married Married couples, Married couples, single parent at single person

beverages away couples no children with children least one child

from home 191.77 135.83 232.66 147.84 101.41

Percentage of total annual spending on non-alcoholic beverages away from home, by ageNon-Alcoholic total under 25 25 - 34 35 - 44 45 -54 55 - 64 65 - 74 75+

beverages away consumer units

from home 100.00% 6.50% 20.90% 28.50% 23.80% 11.80% 5.60% 2.40%

Average annual spending on non-alcoholic beverages away from home, by age, in thousandsNon-Alcoholic total under 25 25 - 34 35 - 44 45 -54 55 - 64 65 - 74 75+

beverages away consumer units

from home 158.55 136.7 192.3 206.39 188.28 144.14 83.94 38.76

This information is based on unpublished data collected by the Bureau of Labor Statistics’ Consumer Expenditure Survey, an ongoing, nationwide survey of household spending. From this data we have found that when going out for non-alcoholic beverages householders spanning the ages of 25 – 54 spend the most overall. We also conclude married couples with children at home spend more than other household types when going out for non-alcoholic beverages. With this data we have decided to target the segment of married couples ages 25 – 54 with children at home.

Figure 6

Small Random Survey

8 Household Spending. 8th Edition. Nov. 2003. Ed. New Strategist Publications.


Besides the coffee aspect, do you view Starbucks as a healthy establishment?

Yes: 12No: 4

This survey was taken on the streets of Seattle around Pike Place Market. Sixteen random individuals were asked, “Besides the coffee aspect do you view Starbucks as a healthy establishment,” twelve answered yes, and four answered no. According to this survey we conclude that America’s view Starbucks as a healthy establishment.

Figure 7

Average Customer Expense & Visits per Week

Customer Expenditure Purchase Cycle

Customer 1 $3.50 4

Customer 2 $8.50 3

Customer 3 $5.00 5

Customer 4 $6.50 6

Customer 5 $6.00 3

$5.90 4.2

Average Expenditure Average visits per customer per week

Starbucks Customer Lifetime Value

Average expenditure per visit $5.90

Purchase cycle in weeks 4.2

Gross Margin 21.3%*

Annual contribution from exchange (53) $279.74

Forecasted customer life (years) 20

Lifetime profit $5594.80

Net present value of future cash flows using 10.0% discount rate

$2381.58

*Gross Margin figured using most recent 13 weeks ended March 28th 2004. Cost of goods sold was figured by adding Cost of sales, Store operating expenses, and other operating expenses. That number was then subtracted from total net


revenues and the answer was then divided by total net revenues9.

Figure 8 Repositioning of New Frappuccino Product Perceptual Map

Perceptual map reflects how the new Frappuccino products perceived quality relative to its price, and how customers perceives the Frappuccino compared with other non-coffee competitors. To increase it perceived quality and increase sale, Starbuck should move to a more desirable position by enhance the nutritional side of the product while attempting to maintain the same price level. Figure 9 Ad Marketing Campaign Purpose: Brand-Building device that improves product awareness

9 Retrieved on May 10, 2004 from: http://ir.10kwizard.com/filing.php?repo=tenk&ipage=2775907&doc=1&num=3&total=35&count=0&source=518


Jamba Juice

Starbucks

Orange Julius

Milk Shake

Slurpees

Soda

Italian SodaBubble Tea

Perceived Quality

High

Perceived Quality

Low

PriceHigh

PriceLow

Figure 2 Example of Summer Drink Banner Ad

http://www.carmean.net/starbucks

Figure 10 – Influences on Consumer Purchase Decision Process


Consumer purchase decision processProblem recognition:

Feeling thirsty, need of energy caffeine

Information search:Friend’s relatives, advertising and display of posters

Alternative evaluation:

Other acceptable brands of coffee drinks

Purchase decision:Assessment of receiving value for given price

Postpurchase behavior:

Satisfaction from product and experience

Psychological influences:MotivationPhysiological needPersonalityCompliant - prefer known brand namesPerceptionSelective exposure, notice Starbucks when tired or thirsty.AttitudeFavorable attitude toward Starbucks experience.BeliefYou will always receive good coffee and serviceLifestyleBusy, fast-paced

Marketing mix influencesProduct

Coffee products and Starbucks experience.Price

More expensive than average coffeehouses.Promotion

In-store advertisements, interviews and articles in newspapers and magazines.

PlaceEverywhere, you don’t have to go far to find a

Sociocultural influencesPersonal influenceOpinion leaders – Important associates drink Starbucks coffee you want to too.Word of mouth – A friend mentions how great the new Frappuccino flavors are.Reference groupsMembership group such as college students or business associates. FamilyParents go to Starbucks when child matures will remember the experience.Social classMiddle to upper class business associates and college students.

Situational influencesPurchase task

Want an energizer boost and a good experience.Social surroundings

People reading, doing homework, just sitting drinking coffee, relaxed surrounding.

Physical surroundingJazzy and relaxing music, funky décor, plush velvet chairs, unique

light fixture and comfortable atmosphere.Temporal effects

In a hurry, drive-thru and quick ready to eat pastry.Antecedent states

Tired? Get coffee. Short on cash? Use Starbucks card.

Behavioral Targeting:Delivering ads based on how and when a visitor uses the web. For example, Starbucks can request more advertisements be placed on websites during the hotter days of the year.

Content Targeting:Involves delivering ads based on the content of a website or interest category chosen by a consumer. This would include marketing on websites where more non-coffee drinkers surf then coffee drinkers surf.

http://www.carmean.net/starbucks

Figure 11 - Starbucks Commercial

Table 1 Starbucks Commercial Layout– Simulates an individual walking through the Pikes Place market and observing other people carrying Starbucks drinks and enthusiastically enjoying them. Titles appear briefly over the people suggesting the “self image” of the drinker. Chocolate – Romantic, Vanilla – Stylish, and Strawberry – Bold. The observer then ends finding the Starbucks and the scene ends with a zoom in on the logo. The Starbucks old logo then fades out into the new one and an image of a new summer product comes in. The wording is simple yet clear. Summer, Starbucks, Enjoy. The consumer clearly understands this summer you can enjoy yourself at Starbucks. This could be a very strong but clean prestige image commercial. The audio has a nice fresh beat that can easily be found in the “Experience” at a Starbucks location.


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