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Starbucks Marketing Plan Katie Tewell Bethany Odom Kelly Snider December 12, 2006 Executive Summary What was once a small coffee shop opened by Gerald Baldwin, Gordon Bowker, and Ziev Siegl in 1971, Starbucks Coffee Company has grown into the number one specialty coffee retailer. With over 10,000 co...

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Starbucks Marketing Plan

Katie Tewell Bethany Odom Kelly Snider

December 12, 2006

Executive Summary What was once a small coffee shop opened by Gerald Baldwin, Gordon Bowker, and Ziev Siegl in 1971, Starbucks Coffee Company has grown into the number one specialty coffee retailer. With over 10,000 coffee shops in more than 30 countries, of which 4,200 are licensed and franchised and 6,000 are owned, the company’s main objective is to establish Starbucks as the “most recognized and respected brand in the world,” (Moon). Currently, Starbucks is relying on retail expansion, product innovation, and service innovation to achieve a long-term goal once set by current chairman Howard Schultz: “The idea was to create a chain of coffeehouses that would become America’s “third place.” At the time, most Americans had two places in their lives – home and work. But I believed that people needed another place, a place where they could go to relax and enjoy others, or just be by themselves. I envisioned a place that would be separate from home or work, a place that would mean different things to different people,” (Moon). By working toward this goal, Starbucks wants to open new stores in both new and existing markets, expand their product development process, and cater to customers’ needs to eventually improve their financial position and dominate market share.

Market Summary •

Target Markets o In the early stages of development for Starbucks, Schultz identified their target market as “affluent, well-educated, white-collar patrons (skewed female) between the ages of 25 and 44,” (Moon). o Over time, market research teams have recognized the new target market as “younger, less well-educated, and in a lower income bracket than their more established customers,” (Moon). o Nonetheless, the original target market has not disappeared, but has expanded into the demographic of the store location. For example, southern California stores cater to a growing number of Hispanic customers.

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Market Demographics o Geographics (Moon)

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Data from 2002 showed that in the Southeast there was only one store for every 110,000 people. Whereas in the Pacific Northwest, there was one store for every 20,000 people. Hence, the company was far from reaching existing markets. International plans showed Starbucks was operating in over 300 company-owned stores in the United Kingdom, Australia, and Thailand. Also, 900 licensed stores were operating in Asia, Europe, the Middle East, Africa, and Latin America.

o Demographics ƒ ƒ

A 1999 estimate showed that 70% of customers were internet users, and today the estimate has exceeded 90% (Hoovers).

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Moms with strollers (Hoovers)

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People combining work and a coffee break (Hoovers)

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Young, affluent, tech-savvy customers (Hoovers)

The most frequent customers average 18 visits per month, whereas the typical customer visits five times per month (Moon). Average age for an established customer was 40, new customers was 36 (Moon). Customers that started visiting Starbucks in 2002 were 45% female, 55% male (Moon).

Market Needs o Starbucks wants to create an experience for their customers that combine their on-the-go schedule, as well as a place to relax. Senior vice president of administration in North America Christine Day explains that, “people come here for the coffee, but ambience is what makes them want to stay,” (Moon). o Selection ƒ

Starbucks menu contains brewed coffee, espresso traditions and favorites, cold beverages, coffee alternatives, frappuccinos, and the sale of whole beans.

o Accessibility

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Starbucks operates over 10,000 retail stores. Most of the 4,200 franchised stores are located in shopping malls and airports. Starbucks coffee brands are also marketed through grocery stores in the form of beans and even ice cream flavors.

o Customer Service ƒ

Starbucks employees are referred to as “partners.” As of 2002, Starbucks employed 60,000 partners worldwide, 50,000 of those in the United States. From the beginning when Howard Schultz took over Starbucks, he believed, “Partner satisfaction leads to customer satisfaction,” (Moon).

o Competitive Pricing ƒ

ƒ •

For North American stores in the 2002 fiscal year, the average price of an order was $3.85. The drinks come in three sizes: tall, grande, and venti (Italian for small, medium, and large). The least expensive price for a tall drink is $1.40 for brewed Coffee of the Day. The most expensive price for a venti is $4.15 for frappuccino. Whole beans are sold in half and whole pound bags ranging from $5.20 to $15.95 (Moon). Starbucks brand coffee sold in grocery stores are similar to these prices found in the cafes.

Market Trends (Moon) o Total U.S. Retail Coffee Market (both in-home and out-of-home consumption): 2002E - $21.5 billion Starbucks Share of Specialty Coffee Market 42% (estimate)

2005E - $22 billion Starbucks Share of Specialty Coffee Market 50% (estimate)

Specialt y Coffee 31%

Specialty Coffee 27% Tradition al Coffee 73%

Traditio nal Coffee 69%

o Estimates for the U.S. retail coffee market in 2002 include: ƒ ƒ •

In-the-home consumption was an estimated $3.2 billion business. Starbucks was estimated to have a 4% share. Specialty coffee was an estimated $5 billion business in the foodservice channel. Starbucks was estimated to have a 5% share.

Market Forecast (Moon) o Over the next few years, an estimate for the U.S. retail coffee market expects specialty coffee to have a compound annual growth rate (CAGR) between 9%-10%. o Starbucks was also estimated in 2002 to grow at a CAGR of about 20% top-line revenue growth. o As of 2002, coffee consumption had risen with more than half of the population (about 109 million people) drinking coffee everyday, and an additional 52 million drinking coffee on occasion.

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Market Growth o Reports show in 2002, the number of specialty coffee drinkers has become the market’s biggest growth. o An estimated one-third of all U.S. coffee consumption takes place outside of the home and in places such as offices, restaurants, and coffee shops (Moon).

SWOT Analysis •

Strengths o The company is good at taking advantage of opportunities. o Starbucks is very profitable and has a strong financial base, therefore allowing the company to undertake new business ventures. ƒ

Revenue increased to $5294.2 million in 2004, a 29.9% increase from 2003 (DataMonitor)

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Profits increased to $610 million in 2004, a 43.7% increase from 2003.

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Net earnings increased 46% (SWOT).

o The company is internationally recognized and has a global presence. ƒ

Their reputation is one of fine products and services.

Almost 9,000 cafes in almost 40 countries (SWOT) ƒ ƒ

Widespread brand recognition, which in turn becomes brand preference, and ideally eventually brand loyalty Strong customer base

o Respected employer ƒ

Values its workforce

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Voted onto Fortune’s “Top 100 Companies to Work For” (2005)

o Strong ethical values and mission statement o Disciplined innovator ƒ ƒ

Understands the Adapt-or-Die theory of marketing Has the ability to roll out new products relatively quickly, which translates into a considerable competitive advantage

o Clusters company units ƒ ƒ ƒ

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Expands business with the continuing growth of the coffee market, especially in areas where the company is already well established, and groups stores in an area, therefore able to dominate the region Leads to considerable financial reward without suffering from cannibalism (DataMonitor) Focus on opening stores that have convenient access for pedestrians and drivers Helps the company capture an increasing share of the coffee market

Weaknesses o Reliance on beverage innovation ƒ

Vulnerable to the possibility that their innovation may falter over time

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Company growth is mostly driven by beverage innovation.

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If U.S. store growth decreases, stock is lowered in value.

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Diminishing return from beverage innovation would have an adverse effect (DataMonitor).

o More than 75% of the company’s stores are in the USA (DataMonitor). ƒ ƒ

May need to look for an assortment of countries in which to open more shops in order to spread business risk 85% of revenue is from its domestic US market (DataMonitor). • •

Has high international brand recognition and should look to generate a greater proportion of revenue from outside the USA Would suffer greatly if U.S. stores underperformed because of economic conditions or increased levels of competition

o Dependent on the retail of coffee, which could make them slow to diversify into other divisions if the need should arise o Employee efficiency is poor. ƒ ƒ

Lower revenue per employee ($71,544—fiscal 2004) compared to the industry average ($110,841) (DataMonitor) Lower income per employee ($5,294) compared to the industry average ($9,500) (DataMonitor)

o Lower Return on Equity than peers ƒ ƒ

Company’s 5 year average ROE (13.65%) have been lower than the industry average (15.09%) (DataMonitor). Need to effectively manage its finances to ensure that returns are at par of higher than industry average

o Problems in some international operations ƒ ƒ

Problems of expansion: A number of openings are failing to be successful. Japanese operations: The company has experienced some same-store sluggishness.

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Closures of stores in Israel and Tel Aviv: Hurts growth prospects in the region

Opportunities o In 2004, created a CD-burning service where customers can create their own music CD o Opportunities for revenue growth by expanding its global operations ƒ ƒ

New markets for coffee are beginning to emerge; for example, in India and the Pacific Rim (SWOT). Targeting 15,000 international stores in the next few years •

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Expansion potential questionable in Brazil, India, and Russia China could be one of the largest markets, and therefore the company will focus on Beijing and Shanghai. o Large urban population o Rising economy o Increase in coffee consumption

o Co-branding with other manufacturers of food and drinks and brandfranchising to manufacturers of other goods and services ƒ ƒ

Creates loyalty for Starbucks brand Recently signed agreement with Jim Beam Brands to develop and market a Starbucks-branded coffee liqueur drink (DataMonitor), which has strong revenue potential because: •

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Liqueurs represent $4-5 billion opportunity (DataMonitor). Liqueurs with coffee represent a considerable segment of the liqueur market. There is a significant overlap between consumers of liqueurs and consumers loyal to the Starbucks brand (DataMonitor).

o Growth in coffee markets: Starbucks has a market share of over 40% of the special coffee market (DataMonitor). Therefore growth in this category would

result in considerable opportunities for further growth and expansion in the near future. •

Threats o Coffee may not stay in favor with customers, and another type of beverage or leisure activity could replace it. o Rises in the costs of dairy products could affect the company’s margins. o Competition ƒ

Competitive coffee shops

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Copy cat brands

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Restaurants

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Street carts

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Competition could enter the market at any time. • •

The U.S. specialty coffee market continues to grow, and an increasing number of firms are looking to enter. At any time, a company with greater financial, marketing, and operating resources could enter the market and compete directly with Starbucks.

o Volatile nature of the coffee market ƒ ƒ

Multiple factors, including weather, political, and economic conditions for example, can potentially negatively affect the company’s business. Green coffee prices may be affected due to agreements establishing export quotas or restricting global coffee supplies.

o Slowing U.S. retail sales ƒ ƒ

Domestic retail accounts for about 75% of the company’s revenue growth and an even greater proportion of profit growth (DataMonitor). If current U.S. store growth continues, saturation levels within the North American division may be reached within five years. Before reaching this point, US retail sales growth will slow significantly (DataMonitor).

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Competition o Competition comes in several forms: ƒ

Independent/Local coffee shops

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Social and inclusive

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Diverse and intellectual

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Artsy and funky, typically cozy and very welcoming

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Liberal and free-spirited

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Lingering encouraged

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Particularly appealing to younger coffee house customers

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Wide variety of beverages/food

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Appeals to the non-traditional crowd

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Franchise/Large Companies o Generally well-recognized names (McDonald’s, Krispy Kreme, Dunkin’ Donuts, etc.) o More convenient and accessible o Easy access in and out o Appeals to the more mainstream coffee drinkers

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Services (Company) o Starbucks purchases roasts of the highest quality of whole bean coffees. o Fresh and rich brewed Italian espresso o Offers pastries and other appetizing confections o Sells coffee-related accessories (mugs, coffee makers, cups, espresso, etc.) o Expanded sales into supermarkets of whole bean coffee

o Introduction the widely popular drink, Frappuccino, to the public o Strives for satisfied customers and a welcoming environment o Works to have highest standards of excellence in way of business o Offers newspapers and other reading material, popular music, and Internet access (provided by T-Mobile) •

Keys to Success (Company) o Rapidly expand retail operations o Growth in its specialty sales and other operations o Selectively pursue opportunities to leverage the Starbucks brand through the introduction of new products o Continue to be widely available and welcoming o Maintain reputation for having specialty and gourmet coffee o Make customers feel welcome with friendly service

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Critical Issues (Moon) o Must increase customer satisfaction through improvements to service o Friendlier and more attentive staff o Faster and more efficient service o Increase in personal treatment (remember customer’s name and order) o More knowledgeable staff o Better overall service o Offer better prices/incentive programs ƒ

Free cups after “x” number of visits

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Reduction of price

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Offer promotions, sales to increase customer satisfaction

o OTHER ƒ

Offer better quality and variety of products

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Improve atmosphere (friendly, welcoming)

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Reaching out to community through involvement and awareness

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More stores and convenient locations

o Other critical issues Starbucks is criticized for and must be aware of are: ƒ

Clustering

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Driving out independents

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Loss of diversity

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Its policy toward farming communities in developing countries

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Fair trade

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Many of these issues are vital for Starbucks to improve their customers’ satisfaction (Simmons).

Critical Issues

28%

34%

Increase Customer Satisfaction through Improvements to Service Offer Better Prices/Incentive Programs OTHER

21% 31%

Undecided/Already Satisfied

Slice 5

Marketing Strategy

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Starbucks Mission Statement (Company) “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. The following six guiding principles will help us measure the appropriateness of our decisions: o Provide a great work environment and treat each other with respect and dignity. o Embrace diversity as an essential component in the way we do business. o Apply the highest standards of excellence to the purchasing, roasting, and delivery of our fresh coffee o Develop enthusiastically satisfied customers all of the time. o Contribute positively to our communities and our environment. o Recognize that profitability is essential to our future success.”

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Environmental Mission Statement (Company) “Starbucks is committed to a role of environmental leadership in all facets of our business. We fulfill this mission by a commitment to: o Understanding of environmental issues and sharing information with our partners. o Developing innovative and flexible solutions to bring about change. o Striving to buy, sell, and use environmentally friendly products. o Recognizing that fiscal responsibility is essential to our environmental future. o Instilling environmental responsibility as a corporate value. o Measuring and monitoring our progress for each project. o Encouraging all partners to share in our mission.”

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Other points of importance to Starbucks: o “Building customer loyalty around cappuccinos, lattes, and other fancy beverages,” (Overholt). o Want to create a sense of community o Want to create a memorable experience for a customer that inspires the customer to return often, as well as to tell a friend o Striving to become the most recognized and respected brand in the world o Putting people before products (Company) o What a Starbucks store should be: “An authentic coffee experience that conveyed the artistry of espresso making, a place to think and imagine, a spot where people could gather and talk over a great cup of coffee, a comforting refuge that provided a sense of community, a third place for people to congregate beyond work or the home, a place that welcomed people and rewarded them for coming, and a layout that could accommodate both fast service and quiet moments” (Thompson).

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Marketing Objectives (Moon) o To create a Starbucks experience that makes people come for the coffee, stay for the ambience and environment, and return for the connection o To build an image separate from smaller coffee chains o To clearly communicate the values and commitments of the Starbucks business to their customers, instead of only growth plans publicized in the media •

Financial Objectives (Moon) o Have each store reach a $20,000 weekly sales level o Open new stores with lower store-opening costs (about $315,000 per store on average).

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Target Marketing (Moon)

o Based on a sample of Starbucks’ 2002 customer base, the attitudes toward the brand were: NEW CUSTOMERS (FIRST VISIT THIS YEAR) 34% 30% 15% 8%

EXISTING CUSTOMERS (FIRST VISIT 5+ YEARS AGO) 51% 50% 40% 32%

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