Starbucks Experience

Marketing 2.1

Starbucks Coffee:

Where Growth Is Hot—But Boiling Over?

More than 25 years ago, Howard Schultz hit on the idea of bringing a European-style coffeehouse to the rest of the world. He believed that people needed to slow down, to "smell the coffee," and enjoy life a little more. The result is Starbucks. This coffeehouse doesn't sell just coffee, it sells The Starbucks Experience—one that "provides an uplifting experience that enriches people's lives one moment, one human being, one extraordinary cup of coffee at a time." Starbucks gives customers what it calls a "third place"—a place away from home and away from work.

Starbucks is now a powerhouse premium brand in a category in which only cheaper commodity products once existed. Some 40 million customers a week flock to its more than 15,000 shops in over 40 countries. Growth has been the engine that has kept Starbucks perking, and over the past two decades, the company's sales and profits have risen like steam off a mug of hot java. Starbucks targets (and regularly achieves) amazing revenue growth exceeding 20 percent each year. During the past decade, Starbucks has delivered a nearly 26 percent average annual return to investors.

Starbucks's success, however, has drawn a host of competitors. These days it seems that everyone is peddling their own brand of premium coffee. To maintain its phenomenal growth in an increasingly overcaffeinated marketplace, Starbucks brewed up an ambitious, multipronged growth strategy. Let's examine the key elements of this strategy:

More store growth: Starbucks has opened new stores at a breakneck pace. A dozen years ago, Starbucks had just 1,015 stores, total—that's about 1,550 fewer than opened last year alone. Starbucks's strategy has been to put stores everywhere. One three-block stretch in Chicago contains six of the trendy coffee bars. In New York City, there are two Starbucks in one Macy's store. In fact, cramming so many stores close together caused one satirical publication to run this headline: "A New Starbucks Opens in the Restroom of Existing Starbucks."

To maintain its phenomenal growth, Starbucks brewed up an ambitious growth strategy. But it must be careful to manage growth in a way that enhances the warm and rich Starbucks Experience: "Life happens over coffee."

Enhanced Starbucks Experience: Beyond opening new shops, Starbucks has added In-store products and features that get customers to stop in more often, stay longer, and buy more. Over the years, the retailer has beefed up its menu to include hot breakfast sandwiches plus lunch and dinner items, Increasing the average customer purchase. To get customers to hang around longer, Starbucks offers wireless Internet access in most of its stores. The chain also offers in-store music downloads, letting customers burn their own CDs while sipping their lattes. Out of cash? No problem—just swipe your prepaid Starbucks Card, "a Starbucks store in your wallet," which now accounts for 15 percent of Starbucks's transactions.

New retail channels: The vast majority of coffee in America is bought in retail stores and brewed at home. To capture this demand, Starbucks has also pushed into America's supermarket aisles. It has a co-branding deal with the food company Kraft, under which Starbucks roasts and packages its coffee and Kraft markets and distributes it. Beyond supermarkets, Starbucks kiosks have popped up everywhere, and service businesses from airlines to car dealerships, now proudly announce "We serve Starbucks coffee." Starbucks has installed coffee shops in bookstores and retail stores as well as coffee stands in many supermarkets. It also sells gourmet coffee, tea, gifts, and related goods through business and consumer catalogs. And its Web site, www.StarbucksStore.com, has become a kind of "lifestyle portal" on which it sells coffee, tea, coffee-making equipment, compact discs, gifts, and collectibles.

New products and store concepts:

Starbucks has partnered over the years with several firms to extend its brand into new categories. Eor example, it joined with PepsiCo to stamp the Starbucks brand on bottled Frappuccino and its DoubleShot espresso drink. Starbucks ice cream, marketed in a joint venture with Dreyer's, is now the leading brand of coffee ice cream; and Starbucks recently teamed with Hershey to develop a line of coffee-flavored chocolates. Starbucks has also diversified into the entertainment business. Starbucks Entertainment offers customers "the best in music, books, and film" as a part of their daily coffee experience. The entertainment initiative includes Hear Music, which produces and sells music CDs under its own label and also runs its own XM Satellite Radio station.

International growth: Finally, Starbucks has taken its American-brewed concept global. In 1996, the company had only 11 coffeehouses outside North America. By last year, the number had grown to more than 5,000 stores in 42 international markets, from Paris to Osaka, to Oman and Beijing.

Although Starbucks's growth strategy so far has met with amazing success, many analysts have long worried that the company's almost obsessive focus on growth for growth's sake might take a toll on the Starbucks experience. According to one critic, far from its roots

Continued on next page neai Marketing 2.1 Continued as a warm and intimate coffeehouse, the Starbucks chain "has evolved into more of a filling station. It is now battling fast-food outlets for some of the same customers in real dollars. The average income and education levels of Starbucks customers have gone down."

Additions such as drive-through windows and breakfast sandwiches may spur growth, critics contend, but they have com-moditized the brand and diluted the customer experience. More and more, Starbucks now finds itself competing with the likes of— gasp!—McDonald's, which recently began installing coffee bars of its own with baristas serving cappuccinos, lattes, mochas, and the Frappe, similar to the Starbucks ice-blended Frappuccino. In the words of one barista, "the more and more business they get in the store, the more it seems like another fast-food job."

Even Schultz, who stepped down as CEO in 2000, grew worried. In a 2007 memo to Starbucks management, Schultz lamented that "in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 15,000 stores and beyond, [Starbucks had made decisions that may] have led to the watering down of the Starbucks experience"—that Starbucks may be "losing its soul." Something needed to be done, he noted, to shift Starbucks's focus away from its big-business "bureaucracy" and back to customers—to "reignite the emotional attachment with customers."

Sure enough, Starbucks may already be showing signs of overheating. For the first time ever, in the fourth quarter of 2007, the average number of transactions per U.S. store, for example, fell off and same-store sales growth slowed. As a result, the company's high-flying share price tumbled. Although suggesting that concerns of overexpansion are exaggerated, Starbucks reacted quickly. In early 2008, Schultz reassumed his role as Starbucks president and CEO. "As we grew rapidly and had phenomenal success," Shultz confirmed, "we started to lose sight of our focus on the customer and our commitment to continually and creatively enhance the Starbucks Experience."

Schultz quickly promised to cool down the pace of U.S. store growth, close under-performing locations, and initiate store enhancements in all areas that "touch the customer" and advance the customer experience. In spring 2008, Starbucks dramatically closed all of its U.S. locations for three hours to conduct nationwide employee training in the interests of producing more satisfied consumers.

Thus, growth is still perking at Starbucks, but the company must be careful that it doesn't boil over. Growth is important, but Starbucks must manage growth in a way that enhances its core competitive strengths. "At the core, we are a coffee company," says Shultz. "At our core, we celebrate the interaction between us and our customers through the coffee experience. Life happens over coffee."

Sources: Quotes and other information from Janet Adamy, "McDonald's Takes on a Weakened Starbucks," Wall Street Journal, January 7, 2008, p. A1; Janet Adamy, "Schultz Takes over to Try to Perk Up Starbucks," Wall Street Journal, January 8, 2008, p. B1; "It's Not You, It's Us: Communicating to Employees during Transitions," PRNews, March 10, 2008, www.PRnewsonline.com; Emily Bryson York, "Starbucks Plots New Course, Charges Full Steam Ahead," Advertising Age, March 19, 2008, http://adage.com/article?article_id=125829; and Starbucks annual reports and other information accessed at www.starbucks.com, November 2008.

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