Starbucks Marketing Strategy Review
|Author: Chris Miceli|
This report reviews the Starbucks Coffee Company from a marketing perspective, outlining how the company mission statement, values, aims and objectives affect the planning of their marketing strategy. Stakeholder influences are considered, and the current & future market positions are analysed. The marketing mix is then incorporated into the company’s revised strategy, using market and company analysis tools to determine beneficial points of focus.
Starbucks is globally recognised as a premium coffee retailer, with over 25,000 physical points of sale in over 75 countries, either owned or franchised. Marketing is an important aspect of the company’s success, with investments being focused towards expansion and customer retention. The approach used by Starbucks is unique to the industry, as the company spent only 1.7% of its yearly revenue on marketing in 2016 (Starbucks, 2016), a fraction of the industry average of between 10 and 13 percent (Tim Brown, 2017). However, this does not put the company at a disadvantage, since Starbucks is seen to be “on the cutting edge of using social media and technology as part of its marketing and customer services efforts” (Vault, 2018).
Marketing Strategy Review
A marketing-oriented company must adapt itself to market changes on the basis of ongoing market research. The Starbucks marketing team is responsible for conducting appropriate market research, and maintaining “a strategy for all customer touch-points in a Starbucks store and in the digital space”. These touch-points include product campaigns and digital marketing ventures (Starbucks, 2018).
Starbucks’ purpose and values are encompassed by the statement “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time” (Ethics & Compliance Initiative, 2014). This was the objective of former CEO of Starbucks Howard Schultz, who returned from Italy with a vision of creating an ambiance which would serve as a place for conversation and sense of community - a ‘Third Place’ between Work and Home (Colin White, 2004). A company needs to project its original vision effectively and innovatively throughout its marketing activities.
Aims & Objectives
Ethical sourcing, environmental stewardship, and community involvement are at the core of Starbucks’ objectives (Janice Ho, 2011). Starbucks is expecting a 20% increase in sales due to the introduction of stores in untapped and expanding markets, with large revenue expected from its Asian locations, such as at the entrance of Shanghai Disneyland (J-Yin, 2017). In addition, Starbucks aims to decrease service time by adding drive-throughs to 80% of its new locations (Rachel Brill, 2018).
Starbucks has long believed that if focus is given to improving the lives of persons in communities and employment, then the company would benefit on all fronts in the long-term. Altruism and profitability are not seen to be mutually exclusive, demonstrated by the recent investment towards rust resistant coffee trees, for distribution to Central and South America, areas where the fungus is prevalent. Starbucks firmly believes that staff empowerment programs are beneficial to business since they promote wellbeing by reducing attrition in stores (Kevin J. Ryan, 2017).
Starbucks is proud to uphold community standards, humanitarian values and environmental sustainability, despite pressure from shareholders against some of the company’s practices. In this regard, Howard Schultz responded to a shareholder during an annual meeting, explaining that “not every decision is an economic decision. The lens in which we are making that decision is through the lens of our people. We employ over 200,000 people in this company, and we want to embrace diversity. Of all kinds.” (Frederick E. Allen, 2013).
A vision statement is a declaration of primary business focuses, enabling the brand to navigate market conditions with a clear objective. As of 2018, the company’s corporate vision is “to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow” (Lawrence Gregory, 2018). With more than 27,250 global locations, the Starbucks brand is expanding rapidly and continues to strengthen its brand recognition as the premium dealer of coffee (Knoema, 2018). In order to uphold the vision statement, the company needs to ensure the finest coffee is sourced whilst maintaining company principles.
Starbucks makes use of a wide variety of market research strategies to effectively craft marketing messages and stay informed on current consumer behaviours (Gigi Devault, 2018). Besides traditional focus group studies and the implementation of customer relationship management techniques, Starbucks researches loyalty cards and has adopted direct feedback loops designed to improve mobile experiences (Katerina Haskova, 2015).
Despite the astronomical increases in coffee bean prices at the start of the decade, the coffee industry continues to see yearly growth (Lauren Roby, 2011). The largest target demographic segment for Starbucks consists of urban persons between 25 and 40 years of age with high incomes, followed by 18 to 24 year old’s, typically belonging to higher-income families (Kosti, 2012). In the United Kingdom, main competitors include Costa Coffee, Caffé Nero and Pret a Manger (Alison Lynch, 2015), whilst in the United States, Dunkin’ Donuts, McDonalds and more recently, McCafe (Associated Press, 2007).
The BRIC countries, Brazil, Russia, India and China, are crucial emerging economies, which Starbucks is capitalising on. This is demonstrated by the recent legal victory following a three-year case against OOO Starbucks over a name dispute in Russia (Latham & Watkins, 2012). Nigel Green, the chief executive of the deVere Group explained that “because diversification is crucial in the current economic climate, it would be crazy for investors not to consider following Starbuck’s strategy and include BRIC-based investments in their balanced portfolios” (Investment International, 2012).
Current & Future Positions
Starbucks aims to provide a superior product by maintaining high standards, providing quality services and introducing innovative products (Sabrena Khan; Yusyafizal Yusop; Fasihah Baharudin, 2018). Following a surge in growth, Starbucks needs to re-evaluate its value proposition, and examine how its expansion strategy might lead to brand image deterioration. A “Third Place”, where one might experience a well-made coffee in a relaxing environment, now appeals to a much larger target market; It has become the store for everybody. Starbucks experienced an almost 150% increase in geographically clustered retail stores between 1998 - 2002, compromising the “atmosphere” aspect of its value proposition (Alkis Marangos, 2009). Previously, Starbucks used promotional offerings to achieve short term goals, and had not prioritised customer-building relationships. The company now uses targeted offers personalised to individual customers, and has annually made 30% reductions to the number of time-limited offerings (Molly Fleming, 2018).
In 2009, following the financial crisis, Schultz implemented a plan to slow growth of Starbucks stores and close a number of slow performing locations across the United States (Bruce Horovitz, 2009). In the same year, Schultz brought on current CEO Kevin Johnson as a board director, who later became president and chief operating officer in 2015 (Starbucks, 2017). The company is now focusing on expanding three innovation growth drivers: digital productions, investment in China, and Starbucks Reserve; a highly positioned coffee brand (Starbucks, 2018). Investment towards sustainability remains at the forefront of the Starbucks mission, with a ten million dollar investment being made towards coffee traceability programs and the “NextGen Cup Challenge”; an initiative towards sustainable design through material and chemical innovation (OpenIDEO, 2018).
Starbucks has recently invested heavily in digital and technological initiatives such as its rewards program, order-ahead features and mobile payments. Technology driven sales now accounts for over 45% of the company’s revenue (Taylor Soper, 2017). Starbucks CEO commented on technological advancement within the company, stating “our digital flywheel is a powerful proprietary asset that is driving deep customer engagement, revenue, and profit growth around the world” (Hoang Nam Le, 2018). Starbucks has even implemented data-driven artificial intelligence algorithms into its marketing mix, using learned preference and behaviours to suggest products which are likely to appeal to the customer (Dan Richman, 2016). Through systematic management of customer assets, “a firm can identify the most appropriate marketing actions to acquire, maintain, and enhance customer assets and thereby maximise financial returns” (Paul D. Berger; Ruth N. Bolton; Douglas Bowman; Elten Briggs; V. Kumar; A. Parasuraman; CreedTerry, 2002).
The marketing plan or mix comprises a combination of techniques used to satisfy customers and achieve company objectives through the analysis of market conditions. Such techniques include conducting a SWOT (Strengths, Weaknesses, Opportunities and Threats) and PESTEL (Political, Environmental, Social, Technological, Economic and Legal) analysis, which assist in assessing the micro and macro operating environments respectively (Katerina Haskova, 2015). As a result, the 7 elements in relation to a company offerings can be determined: Price, Product, Promotion, Place, Process, People and Physical Environment. See Appendix A and C for a SWOT and PESTEL analysis on Starbucks, published by Nithin Geereddy (2013) and Nathaniel Smithson (2017) respectively. This assists in identifying points of interest for consideration in the mix. The high quality and premium service associated with Starbucks’ offerings, along with many stores being placed in high-visibility & high-traffic locations attest to the emphasis given to product and place elements with the company’s mix (John Dudovskiy, 2017).
Starbucks sells a variety of tangible products, including hot&cold drinks, food items, and at-home coffee packs; evening locations also serve wine, beer and appetisers. Starbucks’ intangible offerings include high-quality customer services provided from the first to last point of contact, as well as membership and loyalty programs (Alexander Chernev, 2018).
Starbucks is investing in digital platforms and services: it is leveraging consumer data and behaviour patterns to suggest uniquely personalised products to the customer. This strategy should remain unchanged for the foreseeable future, as “personalisation has the potential to deliver five to eight times the ROI on marketing spend, and can lift sales by 10% or more” (Samuel Shepherd, 2017).
As evaluated in the SWOT analysis, Starbucks’ uses a premium pricing strategy, which may be seen as a weakness in developing countries or during sluggish economic growth. However, Starbucks also benefits from the normal consumer perception that quality products come with a high price (M Rahman, 2018).
During the rapid expansion of stores leading to market dominance, Starbucks made use of the cluster strategy, aiming at saturating the market (Caterina Aresu, 2013). Although this was effective at increasing initial brand awareness and foot-traffic to stores, SWOT analysis indicates that the cluster technique would not work given the company’s current maturity. Foreseeing the company’s expansion into BRIC countries, Starbucks has invested in locations and distribution-channels allowing for a desired level of cultural and social integration. This strategy helps reinforce personalisation tactics.
The supply chain for Starbucks coffee is substantial: for a single cup to be produced, the company may rely on materials from as many as nineteen different countries (Olivia Brink, 2013). This is illustrated through the infographic in Appendix D. When sourcing items in an organised, efficient and timely manner becomes such a complex task, it is important that locations are strategically determined to account for both customer convenience and logistical practicality.
The promotional mix involves the company’s strategies for communicating with target audiences, achievable through Advertising, Sales Promotion, Direct Marketing, Public Relations and Personal Selling (Edward Lowe, 2018). Starbucks limits its use of traditional advertising, investing most heavily in sales promotion strategies such as their Rewards Cards program, allowing customers to collect stars which can be exchanged for in store products. (Kate Taylor, 2016). The use of sales promotion can motivate customers to make a purchase, and compensates for the limited use of traditional advertising. Word-of-mouth drives the business: communication with the customer via multiple touch-points cements the brand image, often triggering a sale (Paul Williams, 2015).
Starbucks is aware that it’s employees both represent the business, and also form an important role in upholding the service expectations of the customer. Investment in recruitment, training & knowledge, image and upholding the company’s mission statement all contribute towards Starbucks delivering their renowned customer experience and maintaining a consistent brand image (Panopto, 2018).
Unlike other food chains, Starbucks owns all of its US stores, and refuses to franchise. As a result, the company has a tight grip on its process-mix, ensuring a consistent experience at all its locations (Kate Taylor, 2016). Starbucks considers factors such as quality, sustainability, logistics, convenience and speed of service in its process-mix. The company ensures globally licensed or franchised stores uphold the company’s high standards.
Starbucks is slowing down its expansion plans, with aims to bring back the “Third Place” atmosphere. The company is focusing on enhancing the ambience, mood or physical presentation of new locations, with special regard to the introduction of the brand in BRIC countries and among new cultures (Liz Alderman, 2012).
Starbucks will likely hold its industry leadership in the foreseeable future. The company is boosting customer satisfaction through constant innovation and investment in environmentally and socially considerate methods of conducting business. Plans for growth and expansions into new countries are likely to succeed as long as the company pursues its newly adopted personalisation strategy; by adapting the Starbucks’ experience to regional cultures, whilst remaining loyal to Starbuck’s core values – the reliable ‘Third Place’ between Work and Home (Jack Flanagan, 2014).
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Appendix A: Starbucks SWOT Analysis
- Strong Market Position and Global Brand Recognition: Starbucks has a significant geographical presence across the globe and maintain a 36.7% market share in the United States (Appendix B) and has operations in over 60 countries. Starbucks is also the most recognised brand in the coffeehouse segment and is ranked 91st in the best global brands of 2013. Starbucks effectively leverages its rich brand equity by merchandising products, licensing its brand logo out. Such strong market position and brand recognition allows the company to gain significant competitive advantage in further expanding into international markets and also help register higher growth in both domestic and international markets. Over the years, they have achieved significant economies of scale with superior distribution channels and supplier relationships.
- Products of the Highest Quality: They give the highest importance to the quality of their products and avoid standardisation of their quality
- Location and Aesthetic appeal of its Stores: Starbucks has stores in some of the most prime and strategic location across the globe. They target premium, high-traffic, high-visibility locations near a variety of settings, including downtown and suburban retail centres, office buildings, university campuses, and in select rural and off-highway locations across the world. This has earned them a significant competence and advantage to be able to penetrate prime markets and tap into customers convince factor. Their stores are visually appealing and have a ‘cool’ factor attached to it with being designed to reflect the unique character of the neighbourhood they serve in and environmentally friendly. They provide free wifi, great music, great service, warm atmosphere and provide an environment of community meeting spot, which forms a wider part of the ‘Starbucks Experience’. The main aim for the firm is to make their stores a ‘third place’ besides home and work.
- Human Resource Management: Starbucks is know for its highly knowledge base employees. They are the main assets of the company and they are provided with great benefits like stock option, retirement accounts and a healthy culture. This effective human capital management translates into great customer services. It was rated 91st in the 100 best places to work for by Fortune Magazine.
- Goodwill among consumers due to Social Responsibly Initiatives: Their stores are community friendly, focused on recycling and reducing waste. They build goodwill among communities where they operate.
- Diverse Product Mix: Starbuck portfolio of products given in Appendix 8, that caters to all age groups demographic factors.
- Use of Technology and Mobile Outlets: Starbucks efficiently leverages technology with its mobile application “Starbucks App’ in both apple and android software’s. They make significant investments in technology to support their growth every year.
- Customer base loyalty: Starbucks has cult following status among consumers and they have also implemented loyalty-based programs to drive loyalty with the Starbucks Rewards programs and Starbucks Card. The Starbucks Card is a value card program that provides convenience, support gifting, and increase the frequency of store visits by cardholders and integrated with their mobile application.
- Expensive Products: While Starbucks does differentiate their products with being highly quality couple with the whole ‘Starbucks Experience’, in times of economic sluggishness, consumers to have so switching costs to competitor’s products with lower prices and forgo paying a premium. These premium prices could also pose some weakness for it to succeed in developing countries.
- Self-Cannibalisation through overcrowding: By aggressive expansion and high saturation due to overcrowding in the market leads to self cannibalisation and diminishes long term growth targets of Starbucks. This is happening especially in the United States where Starbucks operates 8078 stores.
- Over-dependence in the United States market: In line with self-cannibalisation of the US market with 8078 stores, Starbucks generates a huge percentage of their total revenue from the US and this makes it very sensitive to prospects of the US economy and growth.
- Negative large corporation image: Like any large corporation, Starbucks does come under increased scrutiny and have to invest in corporate social responsibility activates and maintain tight control over labor practices.
- American/European coffee culture clash with that of other countries: Starbucks coffee culture may not widely accepted in some countries as part of their international expansion strategy.
- Expansion into Emerging Markets: The increase saturation and self cannibalisation of the US market makes its international strategy even more important. Starbucks has made good inroad into many countries, with India recently joining the list with a joint venture entry. Starbucks has a great growth potential in further expanding into the emerging and developing markets. They can leverage their size, experience, financial prowess and efficiencies to make new market share.
- Expanding Product mix and offerings: Starbucks recently started to expand their product mix by venturing into the Tea and fresh juice product offerings with a smart acquisition strategy. This provides significant opportunities for Starbucks. Strategic Analysis Of Starbucks Corporation
- Expansion of retail operations: Starbucks currently sell its packed coffee products, iced beverages and merchandises through large box retailers. This market’s potential is yet to be fully realised and this provides Starbucks great opportunities for the future to future monetises their brand.
- Technological advances: Starbucks has leveraged the use of mobile applications and has an investment partnership with Square, a mobile payments app that is integrated with its Starbucks app. This creates an ease of use process for customers, aligns customer loyalty through reward programs. Starbucks has already set the bar in the industry with this advancement and about 10% of its transactions in the US have been made using mobile applications. This is a growing field and would drive more business to their stores as technology advances.
- New distribution channels: Starbucks introduced a beta version of a delivery system called Mobile Pour. This presents a great opportunity for the future by expanding their end product distribution systems and could drive more revenue if the implementation is successful.
- Brand extension: Starbucks carries a powerful brand image and it can leverage it to extend into horizontal lines of its business and also venture into product diversification with keeping brand dilution risk in check.
- Increased Competition: This is by far the biggest threat that Starbucks faces with the market being at a mature stage, there is increased pressure on Starbucks from its competitors like Dunkin Brands, McDonalds, Costa Coffee, Pete’s Coffee, mom and pop specialty coffee stores. Dunkin Brands had at its main threat in the US market by trailing Starbucks with a 24.6% share. (Appendix B)
- Price Volatility in the Global Coffee Market: There has be significant fluctuations in the market prices of high quality coffee beans, which Starbucks can’t control.
- Developed Countries Market Saturation: Starbucks derives a significant amount of its revenue from the development markets and there is increased market saturation currently.
- Developed Countries Economy: In an increasingly economically integrated world, an economic crisis like the one in 2008 could have a trickle down effect from the developed markets to the developing markets. This threat would hurt revenues for Starbucks as consumers shift away from premium product mix to stay in limited budgets during economic hardships.
- Changing Consumer tastes and lifestyle choices: The shift of consumers toward more healthy products and the risk of coffee culture being just a fad represent a threat for Starbucks going into the future.
(Nithin Geereddy, 2013)
Appendix B: US Coffee & Snacks Market Share
(IBIS World, 2015)
Appendix C: Starbucks PESTEL Analysis
This part of the PESTEL analysis framework identifies the impact of governments on business. Starbucks experiences the following political external factors in its remote/macro-environment:
- Regional integration of markets (opportunity)
- Improving governmental support for infrastructure (opportunity)
- Bureaucratic red tape in developing countries (threat)
Regional integration is a current trend and external factor that presents an opportunity for Starbucks to globally expand. Also, most governments around the world are improving infrastructure, which creates the opportunity for Starbucks to access more markets or suppliers. However, bureaucratic red tape persists in most countries. This external factor is a threat because it makes business expansion more difficult for Starbucks, especially in developing countries.
This component of the PESTEL analysis model refers to the economic conditions and changes significant to business. Starbucks faces the following economic external factors in its remote or macro-environment:
- High growth of developing countries (opportunity)
- Declining unemployment rates (opportunity)
- Rising labor cost in suppliers’ countries (threat)
The high economic growth of developing countries and the declining unemployment rates create opportunities for Starbucks to gain more revenues from various markets around the world. However, the rising labor cost in developing countries is an external factor that threatens Starbucks because it increases the company’s spending for ingredients. The firm sources much of its coffee beans from developing countries.
This aspect of the PESTEL analysis framework shows the social conditions and trends influencing consumers and business. Starbucks must address the following social/sociocultural external factors in its remote/macro-environment:
- Growing coffee culture (opportunity)
- Increasing health consciousness (opportunity)
- Growing middle class (opportunity)
Starbucks has opportunity to increase its revenues based on increasing demand for specialty coffee, which is due to a growing coffee culture and a growing middle class around the world. Also, the company has the opportunity to widen its array of more healthful products to attract health-conscious consumers to Starbucks cafés.
In this part of the PESTEL analysis model, technologies and related trends are identified. Starbucks experiences the following technological external factors in its remote/macro-environment:
- Rising mobile purchases (opportunity)
- Technology transfers to coffee farmers (opportunity)
- Rising availability of specialty coffee machines for home use (threat)
Starbucks has the opportunity to improve its mobile apps and linked services to gain more revenues through mobile purchases. The company also has the opportunity to improve its supply chain efficiency based on new technologies coffee farmers use. However, the rising availability of home-use specialty coffee machines is a threat to Starbucks because it increases the availability of substitutes to Starbucks products.
This component of the PESTEL analysis model identifies the effects of ecological or environmental conditions and changes on business. Starbucks faces the following ecological/environmental external factors in its remote or macro-environment:
- Business sustainability trend (opportunity)
- Growing popular support for responsible sourcing (opportunity)
- Growing popular support for environmentally friendly products (opportunity)
The business sustainability trend focuses on business processes that ensure minimal environmental impact. In relation, responsible sourcing emphasises corporate social responsibility in the supply chain. Starbucks has opportunities to enhance its performance in these areas. Note that the company already has responsible sourcing policies. Starbucks also has the opportunity to offer more of its products in recyclable packaging.
The legal factors in the PESTEL analysis model are the laws and regulations on business. Starbucks must address the following legal external factors in its remote/macro-environment:
- Product safety regulations (opportunity)
- GMO regulations outside the United States (opportunity)
- Increasing employment regulation (threat)
Starbucks has opportunities to improve its performance by satisfying product safety regulations and regulations on ingredients from genetically modified organisms (GMOs). Starbucks is already performing well in these aspects. However, increasing employment regulation, especially in developing countries, threatens Starbucks Coffee’s access to the labor market. This external factor also impacts Starbucks through increased spending for human resources.
(Nathaniel Smithson, 2017)
Appendix D: Starbucks Supply Chain Infographic
(Olivia Brink, 2013)