13 Product and pricing decisions

ON THE JOB: FACING A BUSINESS CHALLENGE AT STARBUCKS

Brewing Up Success Nationwide

Have you had your coffee yet today? If so, did you open a can of Folgers and brew it yourself, or did you hand $2 to a barista and ask for a "single tall skinny mocha no whip with extra cocoa"? More and more coffee drinkers are getting their daily dose of java from Starbucks Coffee Company. Founded in 1971, Starbucks originally sold its trademark dark-roasted coffee beans in a few Seattle stores. But everything changed when current chairman and CEO Howard Schultz took over in 1987. Schultz en­visioned selling gourmet coffee beverages in hip neigh­borhood coffee bars like the ones he saw on every corner while vacationing in Italy. He wanted Starbucks to be a meeting place where people could exchange ideas and es­cape from everyday hassles. And from day one he wanted to go national.

Schultz focused on building a competitive advantage through a loyal, well-trained labor force that deliv­ers consistently superior products and service. He also fostered a company commitment to employer responsi­bility, environmental stewardship, passion for coffee, and integrity in customer relations. His efforts paid off. In a decade, Starbucks grew to over 1,100 stores in 22 states and 3 foreign countries. In the United States, Starbucks literally changed the defi1ition of "a good cup of coffee." Loyal customers are described as "religious" about the product. In fact, Starbucks is so highly regarded that the company is leveraging its reputation with brand exten­sions. Bottled coffee beverages, ice cream, music CDs, and a coffee-laced beer now bear the Starbucks logo and are available on grocery store shelves. In addition, the company receives hundreds of joint venture proposals for new products every week.

But even though the success of Schultz's vision has led to unprecedented opportunities, it has also created new challenges. Rapid expansion has led some consumers to view Starbucks as a corporate villain that rides into town, throws down a lump of cash to get the best locations, and then drives the local cafes out of business. Locals fear that a Starbucks on the corner means the loss of a community's unique character. Brand extensions also raise new concerns; Although initial products have proven successful, they run the risk of diluting Starbucks' core identity as a premium coffee company. The company also faces the challenge of keeping quality consistent as the company continues to grow. Starbucks sets customers’ expectations high, and it must continue to meet those expectations to stay ahead of new competitors that enter the market almost daily.

These concerns weighed heavily on the minds of Schultz's marketing team as Starbucks celebrated its twenty-fifth birthday. Team members were developing a new marketing strategy that they hoped would establish Starbucks' image and assure its future success nationwide. If you were on that team, what would you do to maintain Starbucks' leadership position? How would you evaluate the potential of new products? How would you define your target markets? What image would you want consumers to have of Starbucks, and how would you maintain that image as the company continues to grow?

On the Job: Meeting Business Challenges at Starbucks

Starbucks entered its twenty-sixth year as the uncontested leader of the gourmet coffee market. The company had already expe­rienced incredible growth, with sales approaching $700 million in 1996, and Schultz had plans to continue expanding, opening almost 900 new stores over the next several years. But the com­ing years would undoubtedly prove challenging. Competitors like The Second Cup, Seattle's Best Coffee, and Barnie's had ex­pansion plans of their own. And many companies imitated Schultz's formula for success with the hope of beating Starbucks at its own game. The Starbucks marketing team had to be savvy to stay on top.

The team began by extensively researching both com­petitors' and Starbucks' stores. They brought in hidden cameras to document how well the employees knew their coffee, and they asked customers how they felt about the products, atmosphere, service, and coffee. The insights they gained became the foun­dation of their strategy.

As with all good marketing strategies, the heart of the plan was a vision of how they wanted to position Starbucks in the coffee market. In addition to remaining the quality leader, they wanted Starbucks stores to appear more like local cafes than a national chain and more like a sanctuary from daily stresses than just a take-out coffee store. Other goals included boosting stagnant sales in older stores, establishing a central fo­cus for all Starbucks products, and developing national adver­tising that would convey a consistent image. Achieving these objectives required making changes in products, distribution, and promotion.'

Over the years, Starbucks core products, coffee beans and beverages, had already undergone changes to meet cus­tomer preferences. But some merchandise, such as mugs and coffee makers, had been left untouched. Now new merchan­dise was planned for all stores. In addition, new food items were offered to attract customers throughout the day (because half the day's sales were typically made during the morning hours).

New products were targeted for grocery store distribution, including cold coffee drinks and ice cream novelties. How­ever, the company was adamant about maintaining its identity through strict product standards. If a product wasn't fun­damentally related to coffee and to Starbucks' core values, it wouldn't carry the Starbucks logo.

The retail distribution strategy had to address additional challenges. To combat the fears of certain communities about losing their uniqueness, Starbucks began designing new stores to reflect local cultures. For example, a store in Seattle's upscale Queen Anne neighborhood has a fireplace and large chairs that invite customers to linger and relax. The company also began redesigning older stores (where sales had begun to level off) in order to give them a more comfortable feel. To expand its mar­ket, Starbucks rolled out a nationwide line of specialty coffees to be sold exclusively in supermarkets. The company packaged the supermarket coffee uniquely but priced this new line of coffees to match prices at company stores, keeping the brand image high while discouraging cafe customers from purchasing Starbucks at the supermarket.

Even though product and distribution changes were important, a well-designed promotion strategy was the key to building a consistent image nationwide. Starbucks had always taken an undifferentiated approach to marketing. If a person was a coffee lover, that person was a potential Starbucks customer. And research shows that coffee lovers have an emotional tie to the beverage. It can even be a part of their self-identity. To capitalize on this, the marketing team focused on building a national campaign that didn't feel national. They wanted customers to build a personal identification with Starbucks products. So the advertisements they developed were down-to-earth and genuine, depicting Starbucks as a place to find peace in a hectic world. To counter arguments that the company is too pristine, Starbucks used ads that were somewhat unpolished, as though an art student had done them. In addition, the com­pany began to experiment with "digital marketing" through a hip Web site that attempts to re-create the coffeehouse culture on the Internet.

Finally, to ensure high standards of quality and maintain what Schultz believes is Starbucks' biggest point of differentiation, the company reaffirmed its commitment to its employees. All Starbucks employees receive extensive training before they set foot behind a counter. They also receive progressive com­pensation, including full health benefits and stock options, even for part-time employees. As Schultz says, "The only way we're going to be successful is if we have the people who are attracted to the company and who are willing to sustain the growth as owners."

Only time will tell what the gourmet coffee market will I be like when Starbucks turns 50. But by continuing to offer' the best-quality coffee products in a comfortable environment, I and by supporting the brand through innovative promotion, I Howard Schultz expects Starbucks to remain on top of the bean hill.