Wake up and smell the coffee – It’s Starbucks

Am important contributor to the world economy, the coffee industry involves many levels of domestic

and international strategic marketing management. Coffee is a ubiquitous beverage served in even the

remotest parts of the world. More than 400 billion cups of coffee are consumed each year – greater

than any other beverage except water

Starbucks the industry leader in gourmet (a person who knows a lot about good food and wines and

who enjoys choosing, eating and drinking them) coffees, opened its first store in Seattle’s Pike Place

Market in 1971. In 2002, 52% of American adults (107 million people) drank an average of 3.3 cups of

coffee each day. Another 28% (57 million people) drank coffee occasionally. (Europeans consume two

to three times more coffee than Americans) Since Starbucks started selling gourmet coffee by the

pound, overall demand for specialty coffees (including gourmet, flavoured, and organically grown

blends) has risen steadily. Although a coffee cult (a way of life, an attitude, an idea, etc. that has

become very popular) had existed for years in the Pacific Northwest, it was the growth of coffeehouses

such as Starbucks that increased consumer awareness and interest, leading to an increased national

demand for premium coffee.

In a world where coffee has become a commodity, Starbucks has pursued a successful strategy of

preemptive moves (first-to-market) and differentiation to become the United State’s number one

specialty coffee retailer, and has made a major impact on the international marketplace. Starbucks has

been positioned as “a part of its customers’ lives…..the ‘third place’ in their daily existence – a familiar

and welcoming refuge from work or home where they could relax in a safe public setting and enjoy a

sense of community.” The company’s differentiation strategy is based on using the highest quality

ingredients in all of its products, practicing environmental and social responsibility with each of its

stakeholders and in each of the communities that it serves, treating coffee making as a brand of cooking,

marketing a value-laden brand, and building strong relationships with employees and customers.

Starbucks considers its product to be the “coffeehouse experience,” whether the experience is in the

coffeehouse or replicated some-where else. A company executive says, “We’ll rarely talk just about the

product. Starbucks is a place that allows the customer experience to happen. Things in the store are

just props (supports / shore up) to the experience.” This underscores the importance of customer

relationships to the success of Starbuck’s business.

Howard Schultz, current chief global strategist and chairman of the board, joined Starbucks as director

of retail operations and marketing in 1982. Starbucks began providing coffee to fine restaurants and

espresso bars that year. In 1983, Mr.Schultz traveled to Italy, where the popularity of espresso bars in

Milan transformed his vision for the company. He believed that a similar coffee bar culture could be

developed in Seattle. The concept was tested successfully in a new location in downtown Seattle in

1984. However, the owners of Starbucks did not share Schultz’s vision, so he left the company and

founded his own coffee bar, II Giornale. By 1987, II Giornale had grown to three locations, and Schultz

took advantage of an opportunity to purchase Starbucks’s Seattle stores, roasting plant, and brand

name from his former employers, changing his company name to Starbucks. As the major shareholder

and CEO of Starbucks, Schultz’s early strategy and key hire facilitated the company’s early growth. His

first-to-market strategy was pursued throughout the Pacific Northwest and then in Chicago and

California, proving that the concept could succeed beyond Seattle.

Although Schultz needed a constant infusion of cash for the company’s ambitious growth plans, he did

not want to borrow from banks. Nor did he see franchising as an option- after carefully selecting and

roasting beans, he did not want the ultimate product ruined by inattention (lack of attention) to detail at

the store level. Therefore, Starbucks decided to take the company public on June 26, 1992 and returned

to the markets to raise additional capital after the IPO. Growth throughout the United States relied

primarily on a cluster strategy, moving into major urban markets and opening up stores in close

proximity to one another. A hub-and-spoke pattern evolved, with each urban market becoming the

starting point for expansion into suburbs and smaller metro areas. Starbucks used little traditional

advertising (an average of $1 million per year for the past 20 years – a fraction of the amount spent by

other leading brands). Emphasis was placed on two factors: the ability of the actual stores to increase

awareness of the brand, and the ability of customers to get Starbucks wherever they were. By 1996,

Starbucks owned over 1,000 U.S. stores, and opened its first international store in Tokyo, Japan. In

2001, Starbucks opened its 300th Japanese location and celebrated 5 years of business in Japan. The

success of a coffee shop in a country where the national drink is green tea demonstrated the potential

for the concept in other cultures.

As the end of fiscal year 2001, Starbucks profits increased 32% to 181.2 million on sales of $2.6 billion,

compared to $94.6 million on sales of $2.2 billion in year 2000. 84% of net revenues came from

company oriented retail stores. The balance came from the company’s specialty operations (business

alliances, international retail stores licensing, grocery channel licensing, warehouse club accounts,

direct-to-consumer joint ventures, and other initiatives). By early 2002, Starbucks was opening new

stores daily, with plans to open approximately 1,200 stores in fiscal 2002. The company served an

average of 18 million customers a week throughout the world, with stores in 20 countries on four

continents.

As of August 2002, Starbucks operated 5,506 stores in location such as freestanding store, office

buildings, shopping centres, airport terminals, and supermarkets. Some locations serve lunch; some

provide “hot spots” for computer connections. They also provide the Starbucks Card, a prepaid

electronic card for online or instore purchases, which can also be used as a gift card. Busisness-to-

Business services include office beverage and delivery service, business gifts and food service. In the

grocery stores, consumers can buy Starbucks coffee in gourmet flavors (alliance with Kraft Foods), ice

cream (alliance with Dreyer’s Grand Ice Cream, Inc.), bottled Frappuccino (alliance with PepsiCo), and

Double Shot (premium espresso in 6.5 ounce can)

Starbucks has expanded rapidly and with great success during both good and bad economic times since

Howard Schultz’s purchase of the company in 1987. Business Week named Starbucks the fastest-

growing global brand in 2001, and Interbrand, a New York based brand valuation firm, ranked the

company’s brand 88th in the world with an assessed brand value of $ 1.8 billion. Company executives

and industry analysts ask: “How does Starbucks continue to grow the business?” The company wishes

to “grow big and yet stay small,” and depends on Starbucks unique culture and relationships with its

customers, employees, suppliers and alliance partners as the driving force for continued growth.

Researchers at Booz Allen Hamilton and Northwestern University’s Kellogg School of Management

recently surveyed 113 executives who were a representative sample of Fortune 1000 companies. The

researchers found that top performing companies “focus extraordinary, enterprise-wide energy on

moving beyond a transactional mind-set as they develop trust based, mutually beneficial ,and long-term

association, specifically with four key constituencies: customers, suppliers, alliance partners, and their

own employees.” Starbucks fits this new model of the relationship-centric organization, constantly

accruing “relational capital,” defined by the researchers as the “value of a firm’s network of

relationships with its customers, suppliers, alliance partners, and employees.”

A key factor in Starbucks’s success has been its recognition of the importance of these relationships,

particularly with its employees. In particular, the role of the baristas (coffee brewers or partners) is

critical in creating a comfortable, stable and entertaining environment for customers. Employees are

effective communicators of the brand; and money that other companies might spend on advertising is

invested in employee training and benefits. The company environment encourages empowerment,

communication, and collaboration. All employees, regardless of position, are considered “partners” and

receive stock options. Decision-making is decentralized and regionalized, with relational capital built

through two-way communication of the company’s culture, values and best practices across all levels

and units of the organization. However, the company has experienced “growth pains” as some

managers and employees who feel overworked and underpaid sued Starbucks in 2001 for allegedly

refusing to pay legally mandated overtime. Starbucks settled the suit for $18 million, but many

employees still feel frustrated in what they consider “fast food” jobs.

A key component of Starbucks’ strategy is creating relationships with customers at the store level-

particularly relationships established between customers and the barista. Baristas receive extensive

training and are taught to anticipate customer needs. They provide feedback on a regular basis that

may lead to new products, or improved approaches to providing customer satisfaction. The “Starbucks

Card” also provides the basis for a loyalty program in the future.

Starbucks relational model emphasizes the development of long-term relationships with its vendors and

partners, rather than making decisions on the basis of lowest cost. The company looks for quality first,

then service, and finally cost. Although they negotiate very hard, they will not compromise quality or

service to obtain a lower price. Supplier selection involves employees from various functional areas, to

understand how the entire supply chain can affect Starbucks operations. They choose vendors and

partners that can grow with them. Included with suppliers are the coffee growers. As a solid supporter

of the Fair Trade movement, Starbucks pays a premium price of its coffee and is committed to social and

environmental issues in countries where their coffee is grown.

In order to develop the Starbucks brand outside its own retail stores, the company leverages its

increasingly strong brand through alliances to sell Starbucks coffee and to create new products under

the Starbucks name. To counter the risk of losing direct control over its brand, partners are carefully

chosen based on their reputation, commitment to quality, and willingness to train their employees the

Starbucks way. Close, collaborative relationships are established and nurtured within this aspect of the

relational model. Licensing agreements provide Starbucks with more control of its brand than it would

have with franchising arrangements.

The challenge facing Starbucks is how to maintain the differentiation of a brand through customer

experiences, and the internal and external relationships that make those experiences a reality. They are

facing the test of whether relationships that are built on trust – one cup of coffee, one customer, and

one store at a time – can be sustained through growth to a projected 10000 to 20000 retail locations,

and an increase in employees from 25000 to 50000.

Howard Schultz says, “There is no doubt in my mind that Starbucks can realize its financial goals. A more

fragile issue is whether our values and guiding principles will remain intact as we continue to expand.”

Another issue in the U.S. market is the shifting customer base from the Baby Boom generation to

Generation Xers – some of whom are social activists with a negative attitude toward the power and

image of the Starbucks brand, and designer coffee at high prices.

Starbucks: Are Cyber Cafes in Sync with the Coffee Purveyor’s Core Business

On August 22, 2002, Starbucks launched a nationwide campaign to roll out wireless access service with

TI speeds in 1,200 of its stores in the United States and Europe, with plans to add 800 more stores by

the end of the year. In Denver alone, 55 Starbucks coffee shops activated wireless, local area networks

(*hot spots*) for customers, with modern laptops or handheld computers. Starbucks and T-Mobile also

initiated a six-months pilot test in London and Berlin, as a forerunner to global expansion. The project

was possible through an existing three-way relationship between Starbucks, T-Mobile International

(wireless subsidiary of Deutsche Telecom), and Hewlett-Packard (through existing alliance with

Compaq), and was preceded by a 12 month beta test in five cities. This agreement made Starbucks the

largest “Wi-Fi” (802.11b) net-work supplier in the United States.

Starbucks customers can access the network with a wireless-ready notebook computer or Pocket PC. In

order to connect, the customer must have a T-Mobile HotSpot account and Wi-Fi capability for their

wireless device. They can obtain a free trial of Starbucks’ T-Mobile HotSpot service for 24 hours. After

that, the company charges ISP prices. T-Mobile also offers a number of Internet access service plans on

their Web site, at their stores, and at Starbucks.

According to each of the companies involved in this venture, technology is not the driving factor; it is the

push by customer to have wireless Internet access. H-P president Michael Capellas said, “I have always

been excited about the ability to tie in all of these devices. But, let’s keep this in perspective. What we

are doing is building the next generation of Internet access. This is about customers and how can we

make it easy for them. The more we can make the technology fade into the background the better.”

H-P, the preferred technology provider for Starbucks, contributes free, downloadable software (Wireless

Connection Manager) to make it easy for mobile users to configure their PDA or notebook computer.

At the time of the Starbucks Wi-Fi launch, T-Mobile had hotspots in airports and some Starbucks

locations in San Francisco and New York. They sold a variety of plans and subscriptions to their service.

Rapidly increasing use of this technology has created some problems, such as overcrowding among

competing 802.11 networks. Starbucks’ location in Pioneer Courthouse Square in Portland, Oregon is at

odds with the Personal Telco Project, a grassroots effort to provide free 802.11 based Internet access in

a “cloud” around downtown Portland. The park is the site of Portland’s first real schoolhouse and is

sometimes referred to as Portland’s living room, used every day by commuters, tourists, shoppers, and

students and recently competing wireless networks. There are about 70 donated access points for the

free 802.11 based project in the area. One of these is in an office over Pioneer Courthouse Square.

Potential problems arise when new users come to the park for free access, and end up connecting to the

Starbucks / T-Mobile connection. Performance is also affected adversely since both providers are using

802.11 technology, and running in the same 2.4 GHz band. Other Starbucks locations close to

neighbourhood area networks may face similar problems.

Starbucks chairman and chief global strategist Howard Schultz said, “We have evolved the brand that is

the third place people go between home and work. People see us as extension of the front porch or the

office. As a result of that, this is a rare opportunity to address our collective vision. Our customers have

been waiting for just such an offering: high-speed wireless Internet access in a familiar and widely

available location that keeps them connected while on the road, or between the home and office.”

When asked where the revenue from this venture will come from, an industry researcher said, “It will be

the ‘after the morning rush’ people providing the revenue………It could help Starbucks expand and pull in

revenue from the people who will tinker on a laptop…….and want a cappuccino.” However, he

suggested that there is only a finite number of customers available who have laptops, who will take

them to Starbucks, who have a 802.11 adapter, and who are willing to pay the price for wireless access –

particularly when free network access is available. T-Mobile’s U.S operations chairman John Stanton

explained that there is frequently no quality commitment with free networks, and customers will prefer

his company’s network due to its high speeds and ease of use.

An industry analyst suggested that Starbucks should not become too wrapped up in the technology in

this venture, and should avoid use of the words “cyber cafe.” The analyst emphasized that Starbucks

should “Keep the core business of Starbucks – coffee - and maintain those margins…..Wireless access

should not disturb the Starbucks experience.” This is consistent with the words of Howard Schultz at the

time of the original Compaq deal in 2001, who said that Starbucks would not become a cyber café at all

– but would be the antithesis (opposite of) of that. He described the new Wi-Fi service as “a natural

extension of the Starbucks coffee-house experience.”

Signs that make customers aware of the hotspots at relevant Starbucks have promoted the new service.

As customers have become aware of the hot spots and have learned how easy they are to use, their

response has been very favourable. A Starbucks customer can take his or her laptop and a wireless

modem into the store, boot up the computer and can register with T-Mobile, and surf the Internet,

download music files, or send email – while getting his or her daily dose of caffeine.

Starbucks relational model relies greatly on relationships with its customers, employees, suppliers, and

alliances. The company seeks feedback from each group about new products and services that will

expand the brand. They have found that the customer must be able to see a connection between the

core essence of the Starbucks brand and the proposed new product or service offering. The new

offering must also be consistent with the company’s mission (see exhibit 1). Likewise, the wireless

Internet service (which Starbucks calls the “world’s largest Wi-Fi network”) needs to attract the next

generation of customers. Based on a research study conducted by Starbucks, 20 something-year-olds

who are hypnotized revealed that they already feel uncomfortable in today’s Starbucks stores. They do

not relate well to the ambience, music, and price of gourmet coffee. The question is whether the

customer service experience can be enhanced by technology without jeopardizing the barista-customer

relationship, and whether the value and guiding principles that have driven Starbucks success can be

maintained as the company expands into new ventures.

Exhibit 1 – Starbucks Mission Statement

Establish Starbucks as the premier purveyor (to supply food, services or information to people) of the

finest coffee in the world while maintaining our uncompromising principles while we grow.

The following six guidelines principles will help us measure the appropriateness of our decisions:

Provide a great work environment and treat each other with respect and dignity.

Embrace diversity as an essential component in the way we do business.

Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to our communities and our environment.

Recognize that profitability is essential to our future success.

Starbucks Environmental Mission Statement

Starbucks is committed to a role of environmental leadership in all facets of our business. We fulfill this

mission by a commitment to:

Understanding of environmental issues and sharing information with our partners.

Developing innovative and flexible solutions to bring about change.

Striving to buy, sell, and use environmentally friendly products.

Recognizing that fiscal responsibility is essential to our environmental future.

Instilling environmental responsibility as a corporate value.

Measuring and monitoring our progress for each project

Encouraging all partners to share in the mission.

Case Study Questions

1) Evaluate Starbucks current growth strategy, and the ability of this same strategy to sustain

brand extension in the future. Are there other strategic approaches that should be considered?

(these should be consistent with the company’s mission statement, relational model, and core

values.)

2) Analyze Starbucks ability to maintain its focus on its core business – coffee – while expanding

into new products, new markets and new technologies.

3) Discuss the potential challenges that may be faced by Starbucks as wireless access service is

added to the menu in its stores. Include the role of store operations, baristas and other

employees, suppliers and alliance partners, technological considerations, and other important

factors that may combine to create the valued Starbucks “customer experience”

4) Identify the advantages and disadvantages of the three-way strategic alliance between

Starbucks, Hewlett-Packard, and T-Mobile in terms of Starbucks’ long-term growth and

enhancement of its value-added brand.

5) Evaluate the effect of relevant internal and external environmental forces on the success of

Starbucks’ wireless service venture in its stores. Recommend ways that marketing managers

can respond to these forces to ensure success.

6) Consider the concepts of “marketing as value exchange” and “customer satisfaction” as you

make recommendations to Chairman Howard Schultz regarding implementation of the wireless

service access in Starbucks coffee shops.