Product, Branding and Promotion CASE STUDY ANALYSIS

Situation: slagging sales Overturn plan: There areas

1. Improve the current state of US business 1.1 Slow the pace of US store opening and close underperforming stores + Optimize the resource and potentially reduce cannibalization of existing stores 1.2 Discontinue warmed breakfast sandwiches in North American stores, offer the healthy breakfast alternative and - Short-term revenue impacted + Protect the aroma of coffee in store; which is the key connection with customer about coffee experiences + Opportunity and gap in the market + Complement coffee and espresso beverages 1.3 Test a $1 shot brew and offer free refills of some offerings in its hometown + Find way to enhance costumer experience, build on premium experience and coffee + Opportunity to create segmentation, new entry point generate trial - Maintain value of core brand proposition 2. Reignite the emotional attachment with people and costumers 2.1 Reaffirming the strength of employees + focus and commitment of partners help company to achieve long-term growth and enhance shareholder value + 100 best company to work in 2008 + Reinstating the leadership conference for store manager and above (US, Canada) 2.2 Provide superior training to the retail partners - energy, knowledge and renewed pride to deliver the Starbucks experience - established the automated espresso machine, serve faster - famous memorandum about love, passion, commitment - discuss new technique to improve taste and texture of drinks - customer responses: no differences, moneys worth - open forum to engage employees in companys strategy

2.3 increase the sale of coffee bean at company-operated stores - free ipod - email to company employees 2.4 Annual meeting with shareholders with five-point plan - install new espresso machine: low enough to visually connect with costumer and keep the high-quality consistent - acquire Clover (favorite brewed coffee machine), charge $7/cup 2.5 Launch of Mystarbucksideas.com 2.6 Loyalty benefits - time consuming and more expensive 2.7 Introduce new blend - promotion by new cup - conversation international endorsement 2.8 Contribute more toward conversation (sustainable practices) 2.9 Offer beverages in the health and wellness platform - Use Starbuck double shot platform using natural products - Leverage partnership with Pepsi Cola to expand Double Shot platform across multi channels and Pepsi consumer advertisement - Launch new products in health and wellness platform: Vivanno and Sorbetto to replace for Frappuccino with affordable luxury products - Continue new products launching with price consideration - replace food with a range of healthy breakfast offerings - stop using flavor blocked bag No room for competitor to say their coffee is better than Starbuck/ when it would materialize 3. Make fundamental change for the long-term 3.1 Examine all aspects of biz that are not directly to the core: music, book - Retract the movie production - Continue relationship with William Morris Agency to identify book project - Apple and AT&T strategic relationship enhance customer experience via Wifi and instore technology 3.2 Redesign the store inferiors

Actions
1. Close 700 US stores: improve the direct profit contribution and opportunity to grow for neighborhood, international, keep profitable and a strong brand presence. + pre-tax benefit 2. Change how to evaluate performance: not use the same store sales 3. Prudent in not dilute the integrity of the experience - relicense or refranchising - discounting/ promotion that dilute the brand premium image - not go down the fast food lane 4. More emphasis on international market: - long-term growth, cautious optimism, economic environment - spend more money on international owned store 5. Packaged division: - expand partnership with Kraft NOTE: New organizational structure and leadership team Earlier: rapid expansion - High demand, wider scope, larger customer base and make stores convenient - Now: close 100 underperforming stores Situation analysis 1. Companys internal position - weakness: large amount of capital is for building the stores and grow the size of company - Majority of store is company owned, licensed stores 44%, operating income/ revenue vs. margin - 2/3 of international store is licensed store to take advantage of presence and expertise - Differentiate the experience: the highest quality coffee served by passionate and knowledgeable people in the industry - Comparable store sales declined, decrease in transaction 2. Market analysis: Market structure: Customers: 3. External environment - US economic slow down to continue following three years - decrease the frequency of customer visits to the stores 4. Competition - Not consider low cost coffee in MD and Dunkins Donuts are threats

TEXTBOOK
Company overview Starbucks Corporation (Starbucks) is a retailer of specialty coffee. It retails a variety of hot and cold beverages, complementary food items, coffee-related accessories and equipment, teas and other non-food products through retail stores in approximately 39 countries worldwide. Starbucks Corporation (Starbucks) is a specialty coffee retailer, retailing a wide variety of hot and cold beverages, pastries and confections through more than 13,000 locations across 39 countries. The company purchases and roasts high-quality whole bean coffees and sells them, along with fresh coffees and other products. Starbucks is a global brand. The company leverages its strong brand image to boost its revenue growth. However, intense competition in the retail beverage segment could adversely affect the company's profit margins.
Starbucks Corporation (Starbucks) is primarily a retailer of specialty coffee. Starbucks has built a strong reputation globally for the quality of its products and consistently superior consumer experience. The Starbucks brand gives the company a distinct competitive advantage over lesser known coffee brands. However, Starbucks s business is highly sensitive to changes in customer traffic, and the current economic downturn would put downward pressure on the company s margins

1. Product: service - Innovation: why innovate? The Ansofts growth strategies - New product development - Product life cycle - Boston Consulting Group matrix

- PEST The PESTLE analysis will be used to identify and understand the important factors Starbucks must consider in all areas of the business. Political: * Taxation policy - high taxation imposed on farmers in those countries producing the coffee bean will usually mean Starbucks pay a higher price for the coffee they purchase. Any fluctuations in taxation levels in the industry are almost certainly ultimately passed on to the consumer. Recently (June 13, 2003) Tanzania's Minister of Finance harmonized and rationalized local government taxation to boost rural productivity of the coffee bean. Tax was lowered for these 'small holder' farmers and this saving will have been passed on to purchasers of coffee like Starbucks. * Deregulation - A decade ago, the USA pulled out of the ICA (international Coffee Agreement) that set export quotas for producing nations and kept the price of coffee fairly stable. Coffee quotas and price controls ended. Since the deregulation farmers have suffered and their earnings have dropped. Many have struggled to make a living so have given up. * International trade regulations/tariffs - Trade issues will affect Starbucks predominantly when exporting and importing goods. When another country's government imposes a tariff it not only results in an efficiency loss for Starbucks but large income transfers can become inconsistent with equity. This extra charge can turn a bargain into a rip-off. Also, since 9/11, trade relations have been adversely affected between the USA and some other countries. * Government stability - Starbucks should thoroughly investigate the political stability of any country they plan to expand to. Changes in government can lead to changes in taxation and legislation. The forthcoming American elections may have an effect on Starbucks as new legislation or new or existing government may bring in taxes. Also, those countries in political turmoil or civil war (e.g. Zimbabwe at present) should be approached with great caution when considering new ventures. * International stability - The international economy must be brought into consideration as it can affect Starbucks' sales and markets. The aftermath of 9/11 was an example of an economic downturn that affected the world market. If the world market is in a slump it is not usually the ideal time for a business to look at grand expansion. * Employment law - A reduction in licensing and permit costs in those countries producing the coffee bean for Starbucks would lower production costs for farmers. This saving would in turn be passed on to the purchaser. Economic: * Interest rates - A rise in interest rates means investment and expansion plans are put off resulting in falling sales for Starbucks and their suppliers. Also mortgage repayments rise so consumers have less disposable income to spend on luxury products such as coffee. Low interest rates should have the opposite effect.

* Economic Growth - If growth is low in the nation of location of Starbucks then sales may also fall. Consumer incomes tend to fall in periods of negative growth leaving less disposable income. Consumer confidence in products can also fall if the economic 'mood' is low * Inflation rates - Inflation is a condition of increasing prices. It is measured using the Retail Price Index (RPI) in the UK. Business costs will rise for Starbucks through inflation, as will shoe-leather costs as they shop around for new 'best prices' of materials, menu costs will rise as Starbucks have to create new price lists. Also, uncertainty is created when making decisions not least because inflation redistributes money from lenders to borrowers. A firm that borrows L1000 during an inflation period will pay back less in 'real terms' as the value of this money will decline over the period. * Competitors pricing - Competitive pricing from competitors can start a price war for Starbucks that can drive down profits and profit margins as they attempt to increase, or at least maintain, their share of the market. * Globalisation - Globalisation of the coffee market has meant farmers of the bean now earn less money than they used to. This can result in a decrease of people willing to do it for a living, which will mean a decrease in coffee produced, resulting in a drop in Starbucks supply levels and probably profits. * Exchange rates - Starbucks are affected by exchange rates when dealing with international trade. If the value of the currency falls in the country of a coffee supplier this enables Starbucks to get more for their $ or L when importing the goods to their country. This saving can be passed along to the customer. Exchange rates are forever changing throughout the world in today's market. Social: * Population demographics - Population demographics are a very important factor for Starbucks as they identify what parts of the population they need to aim their products at or which parts of the population they need to encourage to visit their stores more than they presently do. Looking at the table in the case study demonstrating the percentage of the age groups that drink coffee or speciality coffee it can be seen that the age groups that Starbucks should be aiming their marketing at are the people between 35 and 54. They should consider targeting the 18-24 age group as they drink the least amount comparatively and by encouraging this segment to choose Starbucks coffee now, there is a chance they may continue to drink it long into the future. * Income distribution - Where income is distributed is another factor that Starbucks should look at as this also demonstrates the ideal place to aim their marketing or to locate their stores. Coffee is more of a luxury product so it is those people/places with the most amount of disposable income to spend that should be targeted the most intensely. * Attitude to work - Starbucks would not want to locate to an area where the local population have a poor attitude to work. Recruitment would be difficult, training arduous, and staff turnover would be high. Attitudes to work are important in other ways. A large number of workers in large cities now go out for their lunch rather than use an internal canteen. Starbucks can use this to their advantage and promote the

shop as a place where people can meet up and so it will mean that they will get a larger amount of people in their stores at this time of the day. * Standard of education/skills - When Starbucks are deciding upon new premises they must look at the standards of education and skills locally. They must be sure there are people who live there with sufficient skills to ensure successful operation of the business, or at least the potential to learn that comes with a good education. * Working conditions/safety - Those people with the most disposable income, e.g. young single professionals etc, will be accustomed to high standards. Starbucks must ensure it's shops are clean and comfortable, service is of the highest order and health and safety issues are fully addressed * Location - Transport needs to the premises must be considered for both staff and customers. Easy access is vital to ensure there is no excuse for staff to arrive late or for customers not to visit. * Age distribution - Research shows the average age of the population is getting older and birth rates are stagnating. Starbucks is presently aiming it's product at young people but maybe these views will change in the long-term as the market proportion for young people diminishes. The most profitable way forward may be to widen their target market despite the risk of alienating present customers. * Health consciousness - Good health and foodstuffs associated with healthy living are important I today's market place, as this is a trend that is occurring at the moment in western societies. Starbucks can use this information when deciding the additional products to sell, as well as coffee, as a large number of their customers are looking for healthy alternatives to cakes and biscuits, which have been associated with coffee in the past. Technological: * IT development - Starbucks is always looking to develop and improve its Internet facilities. Starbucks launched its first-generation e-commerce Web site in 1998. In late 1999, Starbucks decided the site needed a major upgrade to enable new functionality and prepare for long-term growth. To achieve these goals, Starbucks upgraded to Microsoft Commerce Server 2000, one of the key Microsoft .NET Enterprise Servers. As a result, scalability and performance have improved, and the company now has the tools it needs to profile and target customers, analyse site data, and deliver new features to the market in the shortest time possible. * New materials and processes - Developments in the technology of coffee making machines and the computers that Starbucks use to run their cash registers will enable their staff to work more quickly and efficiently. This will result in customers being served quicker and create the potential to serve more customers in a day. This will prevent customers from having to wait around for long periods thus improving customer relations along with increasing the customer base. * Software upgrades - In the short-term, Starbucks must identify the most efficient software upgrades to use to keep up with the competition. This applies to the improving the accessibility of their website (www.starbucks.com) and also improving the speed and quality of the service provided on the shop floor.

* Research and Development activity - As a multi-national business empire, Starbucks has the budget and the resources to have a cutting-edge R+D department. The website is very accessible, the facilities are state of the art but more importantly new ideas are consistently being tried in terms of a constantly updating menu. * Rate of technological change - The rate of technological change in the current world market is high, much higher than, say, thirty years ago. Much of this is down to the Internet and the speed with which information can be communicated around the globe. Starbucks will need to invest heavily just to stand still in their ever expanding and developing market, and even more so to try to stay ahead of competitors. Legal: * Trade and product restrictions - Starbucks need to be aware of the trade laws in the various countries they occupy and do business with. They need to ensure they are not in violation of e.g., religious laws. Also, certain countries impose a tariff that has to be paid when goods are imported/exported so this must be taken into account. * Employment law - Each country has varying employment laws. Some may have a Sabbath day, some may have a limit on the number of hours an employee may work per week, all will have varying levels of minimum wage. Starbucks should consider these factors when deciding on relocation. * Health and Safety regulations - Starbucks may find these regulations are not as stringent or well enforced in certain countries. It would be wise though to enforce a universally high standard of health and safety throughout all it's shops to maintain a good global image and ensure all laws are abided by. Also, by not maintaining high standards they will be liable for a large amount of civil cases as it is a legal requirement for them to enable that their staff and customers are safe when they are in their stores. * Monopolies commission - If Starbucks consider expanding their operations further to control an even larger percentage of the market than they already have they will have to consider the possibility of breaking monopolies legislation as they may have a share of the market that is too large. This would mean that they would have unfair advantage over other companies in the same market. This would mean that they could benefit from economies of scale and would also be able to charge prices that were not competitive in the market and get away with it due to the lack of competition. The Competition Commission are in place to try and prevent these situations occurring [e.g. CC (back then the MMC) block BskyB attempted takeover of Manchester United in 1999]. * Land use - Starbucks may have to abide by local planning regulations when building shops or altering purchased sites, as certain areas of land may be protected or unsuitable. All matters would be addressed by the local government. Environmental: * Pollution problems - Starbucks customers create a lot of waste as they often leave the shop with their cup of coffee and then dispose of it in the street. The packaging for this cup must be carefully considered to make it as biologically degradable as possible. Certain other materials can be very harmful to the natural environment.

* Planning permissions - Planning permission may not be granted if Starbucks wish to build in an area that could be harmful to the environment. The land may be protected. * Work disposal - Starbucks need to carefully consider the methods in which they dispose of their waste as there are strict laws in most countries to ensure a firm trading in their country disposes of the waste that is created in their business in a specific and efficient way. If they do not follow these laws they may find themselves being sanctioned, which not only affects them financially but also tarnishes the reputation of the brand name, as most of the waste created will bear the logo of Starbucks. * Environmental pressure groups - Starbucks should be aware of the physical and influential power of groups such as Greenpeace and Friends of the Earth. Any violation of animal or environmental rights by a company is usually followed by a swift and attention-drawing protest from one of the groups. Brand image and customer bases are often irreconcilably tarnished due to the actions of these groups.

- SWOT
Strengths Strong brand image Starbucks is a global brand. High quality products and a consistently-positive consumer experience have helped the company build a strong brand image. Starbucks uses innovative and cost effective marketing strategies to build its image including billboards, freestanding inserts in newspapers products and samplings, as well as innovative schemes such as paying for a day of free parking in a downtown area. Strong brand image helps the company attract new customers to its stores, which leads to additional revenues. Strong brand equity lends a competitive edge The Starbucks brand is the company s core strength. Starbucks has built a reputation globally for the quality of its products and consistently superior consumer experience. Since 1971, Starbucks has been committed to ethically sourcing and roasting high quality arabica coffee in the world. The company was ranked 85th amongst the 100 Top Brands 2008 by Business Week. Owing to its premium brand, Starbucks enjoys a high degree of customer loyalty and gains a significant competitive advantage over lesser known coffee brands Large scale of operations Starbucks has over 13,000 locations in 39 countries, which witness more than 44 million customer visits per week.The company employs over 146,000 people. Its competitors such as Diedrich Coffee, Green Mountain Coffee Roasters (GMCR) have a lower scale. Starbucks generated revenues of $7,787 million in 2006 against Diedrich Coffee s $59.5 million and GMCR s $225.3 million in the same period. Greater economies of scale provide a cost advantage to Starbucks in the marketplace. Wide geographic presence Starbucks has large scale of operations in the US and international (non-US) markets. The company operates company operated stores joint venture and licensed stores. Wide geographic presence provides access to new markets and reduces the company s business risks In line with its long term strategy, Starbucks continues to expand its presence globally through licensing partnerships. For instance, in March 2009, the company, in partnership with Kraft Foods, planned to launch packaged Starbucks coffee in France and Germany. A strong geographic presence reduces the business risk associated with specific markets, and also expands the company s revenue generating capacity. Strong research and development capabilities ensure product quality The core strength behind Starbucks s brand is the quality of its products. The company has a strong

research and development team which is responsible for the technical development of food and beverage products and new equipment. The company recently launched Starbucks VIA Ready Brew instant coffee developed using its proprietary technology to preserve the coffee s freshness. Starbucks invests substantial amount of resources on technical research and development activities which includes customary product testing and product and process improvements. In FY2008, Starbucks spent approximately $7.2 million on technical research and development activities, an increase of 10.7% from two years back. Starbucks s focus on quality and product innovation helps sustain the brand value of the company. Thus, by leveraging its R&D capabilities, Starbucks has been able to regularly revitalize its product portfolio and increase its market share in the premium single-cup coffee and ready-to-drink beverages markets. The introduction of new products at regular intervals helps Starbucks to maintain its competitiveness in the industry. Building strong customer connect through value-added services Starbucks operates in the highly competitive foodservice retail space that demands consistent delivery of quality service to either retain existing customers or to attract new ones. Apart from selling its world-renowned coffee blends in a variety of flavors, the company is focused on providing a coffee-drinking experience to its in-store customers. In the past several years, the company has been focusing on meeting its customers unstated demands by offering various value-added services such as, entertainment on premises. Starbucks offers free, instant and unlimited Wi-Fi connectivity at all its company-owned stores across the US and Canada. Customers, who come for a drink or a snack, are encouraged to spend more time inside the store through free access to internet and the Starbucks Digital Network a news and entertainment web portal offered in association with Yahoo.com. The Starbucks Digital Network also offers free access to subscription editions of various premium news resources, such as The Wall Street Journal, New York Times, USA Today, The Economist, and ESPN Insider. It also offers exclusive iTunes downloads and e-book downloads for its in-store customers. Apart from these in-store experiences, the company also targets customers by up-selling merchandise including music, movies, apparel, books and accessories. While the companys strategy is to build stronger customer connect, through these initiatives it is also able to gain a higher footfall with customers walking in for the exclusive in-store experiences. Additionally, Starbucks is able to create a unique selling proposition by combining its customized coffee blends with in-store experiences that customers look forward to. All these strategies are aiding the company in building its competitive advantage. Weaknesses Narrow product mix The company's retail sales mix by product is approximately 77% beverages, 15% food items, 3% whole bean coffees, and 5% coffee making equipment and other merchandise. The company s sales growth has been largely driven by innovative beverages. If consumers were to reduce their consumption of coffee for some reason or the other, then the company s performance would be negatively impacted. High dependence upon a single product, however, increases the business risk of the company. High reliance on the US Any substantial decline in these operations could materially adversely affect the company s business and financial results. Heavy restructuring and store operating expenses impact profits Starbuckss profitability took a hit in 2008 because of restructuring expenses. In spite of more than 10% increase in revenue in FY2008, Starbuckss operating profit took a hit. The company recorded an operating profit of $503.9 million during FY2008; this represented a 52.2% decline over 2007. The drastic decline was mainly the result of restructuring charges, primarily related to the significant US store closures; higher cost of sales including occupancy costs and store operating expenses. Consequently, the net profit declined annually by 53% in FY2008. If Starbucks is unable to successfully implement its transformation initiatives and continues to suffer declining profits, it would affect the

companys growth plans and also hamper investor confidence. Opportunities New markets Launch of Starbucks VIA Ready Brew instant coffee Strategic transformation initiatives in FY2009 Although Starbucks anticipates declining comparable store sales for FY2009 due to the ongoing global downturn, the company has put in place certain significant actions to streamline its business including underperforming store closure plans, restructuring of the Australia store base, new store openings in key international markets and certain new food and beverage offering. Starbucks intends to align the company s cost structure to its current business strategy with a planned $500 million structural expense reduction in FY2009. The company plans to close approximately 395 underperforming company-operated stores in the US by FY2009. Starbucks also planned to restructure its Australian business by closing 61 company-operated stores, focusing on the remaining 23 stores in three key metro areas. In addition, the company also plans to reduce approximately 1,000 open and filled positions to rationalize its infrastructure for the reduced number of stores. As per company estimates, the combination of the US and Australia store closures and head count reductions will result in a pre-tax benefit to operating income of approximately $200 210 million in FY2009. Starbucks plans to be cautious in its approach to new store openings, as it factors in the current global economic climate. Internationally, Starbucks is planning to open approximately 700 net new stores in FY2009, two-thirds of which are expected to be licensed. Starbucks is looking for new ways to meet customers needs for value as well as quality, in the current difficult economic times. For example, in March 2009, Starbucks introduced a selection of popular coffee and breakfast pairings for $3.95; this offer provides customers with an average savings of as much as $1.20, and with ethically traded coffee and quality ingredients. These strategic initiatives are expected to help the company contain costs and earn considerable revenues even in a difficult economic environment. Closure of underperforming stores Starbucks planned to close some of its store operations in the US as part of its transformation strategy. The company decided to close approximately 600 underperforming stores in the US market. The stores identified for closure are spread across the US markets with approximately 70% of them opened since the beginning of FY2006. These stores are identified as unprofitable at the store level and are also not projected to provide acceptable returns in the foreseeable future. Store closures would strengthen the US store portfolio and enable Starbucks to focus on enhancing the value for its partners and customers. Possible acquisition of The Coffee Equipment Company Starbucks entered an agreement to acquire The Coffee Equipment Company and its proprietary Clover brewing system in March 2008. The deal would help Starbucks to become the exclusive provider of the revolutionary Clover brewing system. Some of the Starbucks stores in Seattle and Boston are currently using Clover brewing systems and through this agreement Starbucks would further accelerate the rollout of the machines in selected US and international markets.The acquisition would provide Starbucks an opportunity to expand its customer traffic and accelerate its revenue growth. Investment in new stores Starbucks plans to open significantly new stores in the US during 2009-11. The company plans to open approximately 250 company-operated stores in each of the three years. Also, the company plans to continue to accelerate its international unit expansion by new store openings which include: approximately 1,050 in 2009; 1,150 in 2010; and 1,300 in 2011. The total store count in the US would be approximately 21,500 stores by the end of FY2011. Consequently, the company's international store would grow from approximately 30% to over 40% of the global store portfolio. The new store openings would help the company to expand its geographic presence. Increasing online sales

Online retail spending is increasing extensively. Retail e-commerce revenue (excluding travel) is expected to record $146 billion in 2008, an increase of 14.3% over 2007. Further, from 2007-2012, sales are expected to increase at an 11.3% average annual growth rate. StarbucksStore.com offers the lineup of Starbucks whole bean and ground coffees, including seasonal, promotional and the very special Starbucks Black Apron Exclusives coffees. Through an easy-to-shop and efficient website, StarbucksStore.com offers premium coffee with affordable delivery. Licensing partnerships Starbucks licenses the rights to produce and market its branded products through partnerships, both domestically and internationally. In August 2008, Starbucks, in partnership with PepsiCo and Unilever entered a licensing agreement for the manufacturing, marketing and distribution of Starbucks super-premium Tazo Tea ready-to-drink (RTD) beverages including iced teas, juiced teas and herbal infusions in the US and Canada. The company entered a similar agreement with Unilever to distribute Starbucks ice cream in September 2008. Starbucks has also licensed the rights to produce and distribute Starbucks branded products to two partnerships in which the company holds 50% equity interests: The North American Coffee Partnership with the Pepsi-Cola Company develops and distributes bottled Frappuccino beverages and Starbucks DoubleShot espresso drinks, and Starbucks Ice Cream Partnership with Dreyers Grand Ice Cream develops and distributes superpremium ice creams. Through these licensing partnerships, Starbucks would leverage the partners capabilities to enhance its presence in existing markets. Investments to improve customer interface Starbucks has been investing substantial amount of its resources towards enhancing its customer experience. For instance, in January 2011, Starbucks launched its mobile payment application at all of its 6,800 company owned stores and 1000 stores operated by Target in the US market. This application allows customers to pay for their in-store purchases through select smartphones. The Starbucks Card Mobile App displays a barcode that can be used just like a Starbucks Card to make a purchase. To pay, customers need to hold the mobile device in front of a scanner on the countertop and scan the Starbucks Card Mobile Apps on-screen barcode to make a purchase. The application also allows customers to track rewards and reload balance using PayPal. The program was tested at select stores in 2009. After extensive testing, it was found to be an efficient and quick way to process payments at the companys stores. More than 3 million customers have used Starbucks mobile payment application since its launch. According to Starbucks, there is a demand for such a type of payment service. Over one third of its customers use a smartphone and one in five use a Starbucks card at checkout. Further in October 2010, Starbucks in partnership with Yahoo launched Starbucks Digital Network (SDN) at its stores in the US. Through SDN, the company offers a package of free web content at its stores. Initially, the web content offered included six channels: news and sports, entertainment, wellness, business and careers, My Neighborhood, and Starbucks. Other content partners included are Bookish Reading Club, Foursquare, Good, LinkedIn, New Word City, and The Weather Channel. Customers at the companys stores can access SDN on their smartphones, laptops and tablets. SDN received an overwhelming response with nearly 8 million visitors in the first two months of its launch. Thus, by investing in such applications, Starbucks can boost loyalty among customers who seek speed, ease and convenience. Entry into the health and wellness space According to the latest consumer survey conducted by Datamonitor in 2010, nearly 40% of Americans indicated a high preference for natural ingredients in their choice of soft drinks, including juices, carbonated beverages, nectars etc. The survey findings also revealed that nearly 38% of the respondents preferred food and beverages with no artificial additives, including colors, flavorings and preservatives. This high preference for healthier options is driven by a growing health consciousness among Americans.The US health food market is estimated to be worth approximately $50 billion. Several food and beverage companies like PepsiCo, Coca-Cola and McDonalds have already entered the health and wellness space to leverage this new and fast expanding market. In March 2012, Starbucks also entered the US health food market with the opening of its first Evolution

Fresh store in Washington. Since acquiring the Evolution Fresh brand in November 2011, Starbucks expanded the brands distribution to additional grocery channels and plans to expand it further in its company-owned retail stores in 2012. The new juice bar would also sell bottled Evolution Fresh fruit and vegetable juices, smoothies and food, such as oatmeal, wraps, salads and soups. The menu will also include vegan and vegetarian options and much-in-demand super foods like kale and quinoa. In order to create a truly captivating experience, the company has designed the store to reflect a new look and feel that resonates the pure, natural ingredients in each beverage. The store also has a unique, patent-pending interactive juice wall that displays educational and entertaining digital illustrations of juices and smoothies being handcrafted. The company claims that each beverage is prepared using a Heat-free, High-pressure Pasteurization (HHP) process that retains more of the nutrients in the juice, compared with the conventional heat pasteurization used by some rivals in the refrigerated juice category. Despite being the latest entrant into this high-growth health and nutrition space, the companys unique selling propositions like the HHP process and unique store experiences can help it achieve an edge over its competitors. Additionally, the new portfolio of healthy beverages will complement the existing revenue channels of the company and provide it additional income sources in future. Threats Intense competition Starbucks faces intense competition in coffee beverage segment from other specialty coffee shops, restaurants, and doughnut shops. In almost all markets in which the company operates, it faces intense competition. The company's whole bean coffees compete directly with specialty coffees sold through supermarkets, specialty retailers and a growing number of boutique specialty coffee stores. In addition, regional specialty coffee companies also sell whole bean coffees in supermarkets. Increasing competition adversely affects the company's top line revenues. Economic slowdown in the US and UK The US and Europe are the two key markets for the company. According to IMF, the real GDP growth rate for the US would decline from 2.02% in 2007 to 0.05% in 2009. Against the background of recent turmoil in financial markets, very weak housing market indicators and consumer sentiments, IMF has recently lowered its projections for the US growth in 2008. Further, the growth in the UK is also expected to fall from 3.0% in 2007 to 1% in 2008. Economic downturn in the US and UK would cause reduction in the spending by the clients. A weak economic outlook for the US and UK would impact the performance of the company. Consumer spending adversely impacted by global economic downturn As a retailer that is dependent upon consumer discretionary spending, Starbucks will face an extremely challenging FY2009. All major western including the US, the UK, Germany, France, Italy, Spain, Japan and Australia are in the grip of recession and are forecast to remain so through 2009. Even the key emerging market economies are currently experiencing downturns, including China, Middle East and Brazil. The global economic downturn has led to a severe decline in consumer confidence. Consumers also have less money for discretionary purchases as a result of job losses, foreclosures, bankruptcies and reduced access to credit. A decrease in consumer confidence and the resultant curbed consumer spending would result in decreases in customer traffic and average value per transaction. Starbuckss business is highly sensitive to changes in customer traffic, and the current economic downturn would put downward pressure on the companys margins. Introduction of Verismo machines could impact the companys in-store traffic and additional food sales Starbucks introduced the first at-home premium single cup machine, Verismo system by Starbucks, to its US consumers in March 2012. Through the new Verismo system, Starbucks intends to offer Starbucks-quality espresso beverages, such as espresso, cappuccino and latte beverages at home. The company views this as a lucrative opportunity considering very low penetration volumes of an at-home single serve brewer in the US, compared to that in other developed European markets. However, the success of this new product could be counter-productive to the company in terms of

lowering its store footfalls. Once consumers realize that they can brew the same quality coffees and other Starbucks-exclusive blends at home, they may prefer not to visit a store and thus, avoid the wait-time. If customers find the Verismo quality to be equivalent to that of the in-store brewed coffee, they could as well avoid paying a premium for the companys in-store coffees. Additionally, the company might also lose out on the additional sales from accompanying snacks/ meals it would make out of an in-store customer compared to a Verismo customer, who would only purchase refills from the store.

2. Branding (*) - the role of brand how it adds value - mkting mix TARGETING Coffee consumption in the U.S. has been trending down since 1960s (refer case study). So Starbucks was extremely cautious in selecting its target markets. A target market, according to Kotler and Armstrong (2004), consists of a set of buyers who share common needs or characteristics that the company decides to serve. The decision of selecting target segments can be assessed by looking at market factors, competitive factors, and political, social, and environmental factors (Jobber, 1995). Price, bargaining power of customers and suppliers and barriers to entry all comes under the market factors, and in the case of Starbucks, their coffee was expensive and they were trying to re-create a new coffee culture in America. Hence, they have low barriers for entry. Since they were extremely careful in each step of coffee making, they tried to maintain a longstanding relationship with their suppliers (Stanley, 2002) and similarly they did not have any real competition threats. Starbucks targeted office workers, with middle to high incomes, who had a desire to purchase premium products. Schultz wanted Starbucks to become the Third Place, the place between home and work where people could gather, relax and interact with one another (refer case study). So they were vigilant about their quality control to meet the high expectations. Also they paid a great deal of attention to the details of the store everything from the layout, to the furniture, to the music (ibid.). Moreover, they were in the introduction stage in the product lifecycle. Target marketing can be done in three different ways; undifferentiated, differentiated and concentrated. Concentrated (or niche) marketing directs its efforts towards a single market segment and creating and maintaining an exclusive strategy for each segments (Dibb et al., 1994). Another approach to the market, known as differentiated (or segmented) marketing, approach the mass market by designing separate products and marketing programs for the different segments (Boyd & Walker, 1990). In undifferentiated (or mass) marketing, the firm ignore market segment differences and target the whole market with one strategy (Kotler & Armstrong, 2004). When Starbucks launched, they used this undifferentiated marketing strategy and they created and maintained the marketing mix considering the market as a single segment. A major difficulty in using this targeting strategy is developing the brand to satisfy all consumers (ibid.). Starbucks used their services without compromise in quality for attaining this.

Moreover, they were aggressive in the market by opening 15 new stores in 1988; 20 in 1989; 30 in 1990; 31 in 1991; and 53 in 1992 (refer case study). POSITIONING AND MARKETING MIX After deciding its target markets, the company must decide what position it wants to occupy in their target market. A products position is the way the product is defined by consumers on important attributes such as price, quality, competitor, product class, application and so on(Kotler & Armstrong, 2004). Companies tried to position their products in such a way as to distinguish themselves from the competitors and give them the greatest strategic advantage in the target market. By the time Schultz acquired Starbucks in 1987; transactional marketing was being replaced by relationship marketing. Profit from retained long term customer relationship became the key of marketing and business. Relationship marketing aims at delight rather than satisfaction of customers. And Starbucks realised public opinion, even though it takes longer to cultivate, when energised can help pull the company into the market (Kotler, 1986). Fig. 1 shows the position of Starbucks on the perceptual map. High Starbuck s High

Low Price Quality Low

Fig. 1: Perceptual map (Adapted from Czinkota et al. (1997)) 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 products 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. 3.1. Product

Starbucks tried to position themselves as a premium product in the coffee industry by creating a high standard, introducing innovative products and providing excellent service. Schultz knew how perishable coffee was and they were so fanatical about quality control, and hence they carefully monitored each and every step of coffee production. They bought dark-roast, whole bean coffee from places like Sumatra, Kenya, Ethiopia and Costa Rica; roasted them in their own plants; and sold only through company-owned stores (refer case study). They used total quality management (TQM) in which all companys people are constantly involved in improving the quality of products (Kanji, 1996). Usage of nonfat milk and introduction of Frappuccino made a significant presence in the balance sheet of Starbucks. Moreover, they provided seasonal offerings, such as strawberry and cream Frappuccino in the summer and gingerbread latte in Christmas, were introduced. Gradually food items such as cookies, pastries, sandwiches and salads made their way into the stores (ibid.). Later they went on to develop new products with other companies. This shows how cautious Starbucks was to keep their standard high and maintain their premium quality image. 3.2. Price The amount of money a buyer must give to the seller for a specific quantity of the product is the price of that product and usually consumers use this as an indicator of quality (Dalrymple & Parsons, 1986). Price and quality determines the value of the product. When launched, Starbucks was expensive and was positioned in accordance with that. They always tried to deliver the high value promised to the consumers. They bought the quality beans, gave effective and efficient training to staffs, and moreover, made an atmosphere to enjoy coffee, meet fellow people and take a break from the busy life. These all justify their pricing and show how price supported their positioning. 3.3. Distribution & Service Distribution channels links the organisations product or service to its consumers; and in a producer-consumer (direct supply) channel, as in the case of Starbucks, maintaining a personnel relationship with the customers is significant (Brassington & Pettitt, 2000). However, from a distribution point of view Starbucks got an advantage by sticking on to its winning store location formula for its new stores (refer case study). They always selected highly visible locations and opened stores as clusters. As demand grew, these store clusters made them able to manage the increased traffic and to keep their competitive position. In the same way, they took care about the services provided in the stores. Howard Schultz aimed to unlock the romance and mystery of coffee in coffee bars, and he knew how important the role of baristas in achieving that. Baristas ability to engage the customers was the heart of Starbucks experience. Starbucks invested heavily in training their staffs and did innovative tactics to manage their human capital. Thus they differentiated themselves in the market by constantly providing higher quality services. 3.4. Promotion All marketing activities that attempt to stimulate buyer action or sales of a product can be considered as promotion (Shimp, 1997). Starbucks used to organise a big community event prior to the opening of its stores (refer case study). Artworks were designed to

boast each citys personality, and it was used on commuter mugs and T-shirts. They also recruited local ambassadors from new partners and from customers to promote their brand (ibid.). They didnt use advertising but they used those funds for acquiring key locations. Starbucks tried to establish a national dominance before other speciality coffee bars comes into the picture. - competitors/ substitute (5 Porter) Porter's Five Forces analysis: Porter's five forces analysis is an important tool for analyzing an organizations industry structure in strategic processes. It helps the marketer to contrast a competitive environment. It tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. Porter has identified five competitive forces that shape every industry and every market. These are: The threat of entry, The power of buyers, The power of suppliers, The threat of substitutes and Competitive rivalry. The threat of entry: The threat of entry covers: Economies of scale, The high or low cost of entry, Ease of access to distribution channels, Cost advantages not related to the size of the company, Whether competitors will retaliate? Government action and How important differentiation is. There will always be a continuous pressure for Starbucks to react and adjust to these new entrants. The easier it is for new entrants to enter the market the more competition there is within the market. Although this really should not pose too much of a problem for Starbucks as they have a very large share of the market that will be relatively immune to the threat of new entrants. Starbucks is a company that have years of experience in roasting specialised coffee, if a company was to enter the coffee industry it would be extremely difficult for them to offer the same quality of coffee at a competitive price. As a company's volume increases, so does its experience and knowledge which tends to decrease the cost of their products The power of buyers: Buyer power is likely to be high if a number of conditions are in place. There is a concentration of buyers, particularly if the volumes of purchases of the buyers are high, the supplying industry comprises a large number of small operators, there are alternative sources of supply, the component or material cost is a high percentage of total cost, the cost of switching a supplier is low or involves little risk, there is a threat of backward integration by the buyer. This is high where there a few, large players in a

market If there are a large number of undifferentiated, small suppliers The cost of switching between suppliers is low for Starbucks. The power of suppliers: If the market is dominated by few large suppliers rather than numerous fragmented sources, a suppliers bargaining power is likely to be high. Although suppliers do have certain amounts of power, it is limited. With Starbucks being 'the most famous specialty coffee shop chain in the world' reaching sales of $3.28 billion in 2002 and still expanding they should still be requiring coffee beans for some time. It is safe to say that the Suppliers need Starbucks, just as much, if not more so than Starbucks need their supplies. Fortunately for Starbucks they buy their coffee beans directly from producing countries: Latin America (50%), Pacific Rim (35%) and East Africa (15%). The threat of substitutes: This occurs where there is product-for-product substitution, where there is a substitution of need e.g. a bald head reduces the need for hair gel, where there is generic substitution and finally the attitude 'we could always do without ...'. An example for Starbucks would be if an alternative to coffee was offered e.g. a customer switching from coffee to tea. Competitive rivalry: Numerous factors contribute to intense rivalry between existing competitors in an industry. This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is found in the centre of the diagram. The extent to which competitors are in balance, this is where competitors are of an equal size which creates intense competition as one of the competitors tries to gain dominance over the other, high fixed costs in an industry may result in price wars, differentiation is important as in a commodity market where products or services are undifferentiated there is little to stop customers switching between competitors. Starbucks do not really have any competitive rivals that are of similar size to them so there are not any rivals in the market that would be considered in balance with them. However, they must maintain their excellent standards and always be on the lookout for new innovations in order to stay as the market leader. Competitor Analysis: Competition is steadily growing against Starbucks each year as the industry grows. Competitors look to gain an advantage by price cuts, launching a rival product, aggressive expansion of production to increase market share or inclusion of significant modifications to a product that other competitors must also undertake to keep up. The following are the current figures showing the market share of companies in the coffee industry. 35% Starbucks 20% Local Coffee Outlets 14% Internet Cyber Cafes 13% Caffe Nero 10% Costa Coffee 8% Coffee

- generic brand strategy: premium - brand essence and brand meaning - brand portfolio management 3. Service and experience marketing (*) - implication for service marketing - 7Ps -critical important of delivering brand experience 4. International Product 5. Pricing (*)

KEY QUESTIONS
1. 2. 3. 4. 5. Where are they now? What are the main issues and problems? Where do they want to be? Are there any stated or implicit goals? Where can they go from here? - Strategic Options? Recommendations if required with justifications Growth strategy Concentration strategy: focus on core biz and expand on core biz as globalization Diversification: related diversification: coffee beans to food items, flavored coffee ice cream, ready to drink beverage. Unrelated: music, book,

Core Competences: Core competences help to provide firms with a 'competitive advantage'. They are used to achieve a strategic advantage through activities, skills or know-how, and basically a general expertise in the development of the product. This advantage will provide value to customers. 'In the 1990s managers will be judged on their ability to identify, cultivate, and exploit the core competences that make growth possible - indeed, they'll have to rethink the concept of the corporation it self.' C K Prahalad and G Hamel (1990) The aim is for Starbucks to focus attention on competences that really affect competitive advantage. For Starbucks, these competences include the knowledge of where the finest coffee beans are grown, the knowledge of how best to prepare them in order to make the best cup of coffee and also the knowledge of how best to approach a foreign market as, of all their industry competitors, they are the most successfully globalised. Core competences can provide potential access to a wide variety of markets so can be of immeasurable use to Starbucks and their varied attempts of product diversification. Starbucks have established such a strong leadership in the coffee market due to core competences such as clear distinctive brand proposition that focuses solely on a closely-defined customer group and leading direct marketing skills in the Starbucks Research and Development department. Stakeholders: A stakeholder is an individual or a group, which has an effect on, and is affected by, an organisation. The stakeholder approach believes all groups associated with the firm can benefit at the same time without one party, e.g. shareholders, suffering. By working with its stakeholder groups the firm can generate more profit. Main stakeholders in Starbucks are the employees, owners, suppliers and, of course, the customers. Individual stakeholders may not have too much influence on the way that Starbucks perform due to lack of sufficient power. Influence has more chance of occurring if stakeholders share their expectations and grievances with others, uniting them as a stakeholder group.

How Starbucks' Growth Destroyed Brand Value

Starbucks announcement that it will close 600 stores in the US is a long-overdue admission that there are limits to growth. In February 2007, a leaked internal memo written by founder Howard Schultz showed that he recognized the problem that his own growth strategy had created: "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." Starbucks tried to add value through innovation, offering wi-fi service, creating and selling its own music. More recently, Starbucks attempted to put the focus back on coffee, revitalizing the quality of its standard beverages. But none of these moves addressed the fundamental problem: Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special. Either you have to cut price (and that implies a commensurate cut in the cost structure) or you have to cut distribution to restore the exclusivity of the brand. Expect the 600 store closings to be the first of a series of downsizing announcements. Sometimes, in the world of marketing, less is more. Schultz sought, admirably, to bring good coffee and the Italian coffee house experience to the American mass market. Wall Street bought into the vision of Starbucks as the "third place" after home and work. New store openings and new product launches fueled the stock price. But sooner or later chasing quarterly earnings growth targets undermined the Starbucks brand in three ways. First, the early adopters who valued the club-like atmosphere of relaxing over a quality cup of coffee found themselves in a minority. To grow, Starbucks increasingly appealed to grab and go customers for whom service meant speed of order delivery rather than recognition by and conversation with a barista. Starbucks introduced new store formats like Express to try to cater to this second segment without undermining the first. But many Starbucks veterans have now switched to Peets, Caribou and other more exclusive brands. Second, Starbucks introduced many new products to broaden its appeal. These new products undercut the integrity of the Starbucks brand for coffee purists. They also challenged the baristas who had to wrestle with an ever-more-complicated menu of drinks. With over half of customers customizing their drinks, baristas hired for their social skills and passion for coffee, no longer had time to dialogue with customers. The brand experience declined as waiting times increased. Moreover, the price premium for a Starbucks coffee seemed less justifiable for grab and go customers as McDonald's and Dunkin Donuts improved their coffee offerings at much lower prices. Third, opening new stores and launching a blizzard of new products create only superficial growth. Such strategies take top management's eye off of improving same store sales year-on-year. This is the heavy lifting of retailing, where a local store

manager has to earn brand loyalty and increase purchase frequency in his neighborhood one customer at a time. That store manager's efforts are undercut when additional stores are opened nearby. Eventually, the point of saturation is reached and cannibalization of existing store sales undermines not just brand health but also manager morale. None of this need have happened if Starbucks had stayed private and grown at a more controlled pace. To continue to be a premium-priced brand while trading as a public company is very challenging. Tiffany faces a similar problem. That's why many luxury brands like Prada remain family businesses or are controlled by private investors. They can stay small, exclusive and premium-priced by limiting their distribution to selected stores in the major international cities.

External Environment: Opportunities and Threats

Starbucks international operation was one of the major aspects of their success. , in the mid 1990s, with the market reaching saturation, Starbucks could no longer depend on the U.S. market for growth. To maintain its growth rates and to boost revenues, Starbucks had to venture abroad. Starbucks international presence is now in more than 25 countries and the United States of America. This presence is formed in three modes in entry that are Joint venture, licensing and wholly owned subsidiaries. This became a burden on the mother company in a later stage. That those types of entry moods need a lot of training, supervising, management assistance and technology transfer for the partner. This is along with inability to engage in global strategic coordination. However, the success of Starbucks is not only to its aggressive expansion but also to its product innovation. Starbucks came out with new products to attract customers on different periods. Also diversification was one of the factors that Starbucks started to apply even on a small initiated base. That along with serving coffee, Starbucks also sold merchandise. In 1995, it started selling CDs of its famous in-house music program. It also entered into alliances with various players such as Canadian Airlines, United Air Lines, Starwood Hotels, and Barnes & Noble, Inc., to serve Starbucks coffee.

Michael Porters five forces

Michael Porter defines five forces impacting a firm's competitiveness threat of substitutes, threat of new entrants in the industry, bargaining power of suppliers, bargaining power of customers, and the intensity

of competition within the industry. A firm's strategic decisions to respond to these five forces are a source of risk also. The company is facing a real threat of substitution from many other companies that producing the same product that is satisfying the same need. This is in its domestic market and even in the international market specially Europe and Middle East. Also Starbucks is facing a real problem of rival competition due to its uncompetitive price all over the world and even in its domestic market. Also the taste of Coffee had been judged by customers as an artificial taste especially in Japan. Suppliers bargaining power is really represent a threat for Starbucks. That they decided to deal with a 51% women or minority owned suppliers. Also they are not dealing with suppliers who dont follow the same environmental ethics that are for Starbucks. This may lead them to lose a good opportunity or deal with a supplier that they will not deal with him. Also dealing with small suppliers instead of dealing with limited number of big power full suppliers is not giving them real good deals for facilities and prices.