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Introduction

The first Starbucks store was set up in 1971 by three individuals who had a common liking for coffee and exotic teas- Jerry Baldwin, History teacher Zev Seigel and writer Gordon Bowker. The store was named Starbucks Coffee, Tea and Spice in the tourist‟s Pikes Place Market in Seattle. However, later the name was changed to Starbucks Coffee Company. The logo was designed to be a two tailed mermaid encircled by the store‟s name. The name was inspired from the coffee loving character in Herman Melville‟s Moby Dick

The store was a success with excellent sales records and thus several Starbucks stores mushroomed in several parts of the US. Howard Schultz later joined the company as a marketing executive and then acquired it in 1987.In 1992 Starbucks went public and was successful in marketing a regular everyday product as something premium.

As of now Starbucks with over 20000 stores has a worldwide presence in over 50 countries which is an enviable global presence. It has presence in Europe, Asia, South America, Oceania, North America and Central America. The strategic expansion to China and now its emphasis on other emerging nations like India are all well thought out plans. China has in fact been a success story despite being a traditional tea drinking nation. Expansion to Australia on the other hand was not as profitable a venture.

The strategy adopted by the company to open up several stores in a very small area has also been critically examined by analysts before. In 2007 it was estimated that Starbucks was self-cannibalizing at the rate of 30%. But at that time the coffee market in the US was still growing so it continued to open up new stores. This study thus analyses the decision making process that goes into the expansion strategy of a premium brand. [1]

Objective of the study

The study aims to understand how companies like Starbucks which specialize in a very typical kind of product deals with the uncertainty of expanding to new countries which have different cultures and preferences. There is a lot that rides on how well the product is accepted by the local people depending on how much it suits their palette. The study enumerates the challenges faced by the company, the various alternatives it has and what factors it takes into consideration before making a final decision so as to minimize its risk and maximize profit.

Some premium brands also may do well in certain developed nations where people have higher purchasing power and may not do as well in emerging countries. Starbucks has been able to be very successful in China just like in the US despite the vast cultural difference. A similar model can be adopted in India which just like China is a tea loving country. The potential of growth is a lot in these emerging countries and it is important to formulate effective strategies to be successful here because the local market in the US is slowly getting saturated.

Starbucks has always followed very stringent measures to ensure the highest quality be it the coffee beans it uses or the layout of its stores. As a result the organizational structure is vertically integrated and all

processes like sourcing roasting and distributing is done through the company owned stores. The coffee producing locations are very carefully chosen and the processes used for roasting them are very exact. The beans which do not meet standards or those that remain in the bin for more than one week are donated to charity. This is another decision making criterion which needs to be considered during expansion since the choice of not sourcing locally producing beans adds to the operating costs.

Scope of Study

This case tries to focus majorly on how moderate or drastic changes in the business model, product ranges and marketing strategies affect the organization and whether no changes in certain cases be a valid option. Each alternative can be analyzed as to if successful how it can improve the current situation. We are mainly focusing on the strategy Starbucks has adopted in India taking a cue from its success in China and failure in Australia.

The balance between „localization‟ that Starbucks tested in China to suit the life style of the locals and the

aspirational brand that one associates with it is something that can be studied and adapted to fit the Indian context. This customization to reflect the local culture of the neighborhood is a very appealing idea but needs to be analyzed as far as its long term sustainability is concerned. We have also tried to understand what kind of competition do other coffee store outlets like Café Coffee Day and Barista that have been here longer pose to Starbucks. The hiked prices is something Starbucks can pull off because of the ambience it offers to its customers but whether it will be enough to keep them interested for long is questionable.

Methodology

The methodology that can be adopted is that of decision trees with listing the various alternatives, their payoffs and then making a decision on the basis of the choice with the best payoff.

Drivers of Growth and rationale behind Expansionist Strategy

1. Retail Expansion

The ambitious growth strategy was adopted by Starbucks in 2002 which was a time when the coffee drinking culture in the US was gaining popularity. The people drinking specialty coffee was identified to be a profitable segment to focus attention on. It was also identified that majority of people drank coffee not at home but outside, in offices, restaurants and coffee shops. There were several states in the US which were without a single store at that time. The immediate aim at that time was thus to expand to these

places and increase the market share by opening more stores. After the US, Starbucks also expanded to Europe, China, Middle East and Africa. At present this can be seen by the opening of stores in emerging countries. An important factor that was considered was that whether the demographics of the area matched the kind of the typical Starbucks customer. There is always a chance of self-cannibalization due to geographical clustering and here the payoff needs to be considered as to whether the increase in sales offset the rapid increase in number of stores.

  • 2. Product Expansion

Product expansion was considered to be one of the major success factors of sales growth for the company. There were several factors and decisions that needed to be considered before getting a new product in to the market. These could be:

-the amount of research and development that went into a new beverage -how well the product would be accepted by the consumer -the amount of time that would go into formulating a beverage

Coffee and non-coffee based beverages , one new hot beverage every holiday season , products customized to the country it set up shop in are some examples to depict the amount of importance was given to increasing the product line.

  • 3. Service Expansion

Apart from the product innovation Starbucks also tried to bring about revolution in the services it had to offer to its customers. One of the ways was the introduction of service valued card in 2001. This was a prepaid card that could be swiped at any store in North America. These cards were very well accepted and it was observed that card users were twice as likely to come to stores as cash users. This was because the reduced transaction times appealed to the customers. Another way these cards served to be very useful was that it gave access to customer data for the first time. Another service that Starbucks was able to provide unlike its competitors was internet service. [2]

Strategy in Japan (expansion in Japan)

On October 25 th 1995 Starbucks signed a joint venture agreement with SAZBY Inc a Japanese retailer and restaurateur to set up retail stores in Japan. The joint venture was called Starbucks Coffee Japan Ltd. The location for the flagship store was also chosen in the upscale Ginza shopping district.

Japan was chosen for the expansion strategy majorly because of the following reasons:

  • a) it is the third largest coffee consuming nation in the world after the USA and Germany. Thus there was

a lot of scope of success for Starbucks.

  • b) Japan was the largest economy in the Pacific rim and thus the market conditions seemed favorable for

expansion.

  • c) During that period the demand for coffee had doubled over a period of five years. Specialty blends was

the fastest growing segment of the coffee industry. This provide Starbucks with a good opportunity since

it specialized in gourmet coffee.

Initially operating costs were high because:

  • a) The rent and labor costs in Japan were much higher as compared to cities like Seattle

  • b) The coffee needed to be shipped from its roasting facility in Kent to Japan. [4]

Strategy in China

The concept of „localization‟ is what made Starbucks such a success in China. The company did not try to copy the business model it used in the US exactly in China because it realized that there are major cultural differences between the two nations. Thus it made several changes so that it could make its mark in a primarily drinking nation and appeal to the locals. One of the measures in this direction was realizing that the kiosk sized stores from where office goers grabbed that were acceptable in the US would have to be adapted to suit the tastes of the Chinese who valued space and couches for relaxation. By hiring local graffiti artists Starbucks continues to lay emphasis on creating an ambience that the locals enjoy and make visiting the store an enjoyable experience. A lot of research and development has gone into introducing the green tea flavored coffee drinks and sandwiches like the Hainan chicken and rice wrap or Thai style prawn wrap to suit the palette. The importance paid to culture as far as cuisine is concerned is something that Starbucks has tried to address through these strategic moves. While there surely is an elitist group of consumers who are interested in Westernization the bulk of the population is more entrenched in tradition. There are also concerns that excessive adaptation to local tastes may lead to brand dilution thus this maintenance of balance has been given utmost importance. Employee turnover rate in Starbucks as far as China was concerned was also lower than the average rate since the importance given to training, recruiting and retaining inspired employees. [4]

Strategy in Australia - Too much too soon?

Starbucks made a decision to move into Australia in July 2000 as a part of its aggressive expansion model. This was a month and a half before the Summer Olympics was hosted there. The move of coinciding their entry during the hosting of such a large sporting event turned out to be profitable for the company. However what Starbucks failed to realize was that Australia already had a very strong coffee culture. The locals preferred the ambience provided by the coffee stores that had become a part of the Australian culture. The boutique like experience provided by these was something that Starbucks was not able to match and thus did not appeal to the consumers. The business model thus adapted in Australia was identical to what it followed in America but what proved to be successful there could not be identically implemented, and this was not realized by the company.

There was hardly any time given to the local customers to adapt to the new coffee experience culture Starbucks tried to introduce. As a result the overall impression the people began to form of it was that of a corporate giant and not a friendly place to drop by between their home and workplace. Even after a few stores were opened the management did not try to gauge as to how well Starbucks was accepted by the people. Not much emphasis was given to understanding the local and cultural preferences which led to its downfall in the market. The local competitors on the other hand the advantage of being an intrinsic part of the population who understood the nuances which made them successful. No proper methods of measuring performance of the stores were decided on and thus old business models were blindly followed with no customization. [5]

Economic downturn and its impact

The downturn of the American economy due to the subprime mortgage crisis also had impact on the growth story of Starbucks. The Americans had got very discretionary about spending their income and the entire market sentiment had got very pessimistic. With the rising prices of basic necessities like gas the consumers had got very choosy as far as specialty products were concerned and preferred not to splurge.

This was a time when low cost coffee shops also began springing up at various places and were aiming at the same customers. McDonalds had at this time recently launched it McCafé‟s successfully. It was said to taste even better than the coffee offered by Starbucks and was priced at a reasonable price also. Up till this time Starbucks had met with success as far as selling coffee as an „experience‟ but now things had begun to change again. Coffee was now seen as a commodity again. The decision of the consumers was based on the following attributes:

-Quality

-Variety

-Convenience

-Price

Major problems faced by the company

The various problems that Starbucks has had to face are as follows

1. The market in the US had started to get saturated with the rapid mushrooming of stores in several parts of North as well as South America. Moreover there were several competitors that were now playing for the same consumer base. The company soon began to find it increasingly difficult to keep the consumers interested and thus began looking to further expansion in other countries which were relatively new to the concept.

2. Starbucks has a lot of dependence on suppliers since it is very particular about where it gets the coffee beans from. There are very specific regions that are considered favorable for coffee production in terms of

climatic conditions is concerned. For every country the decision needs to be very carefully made as ti whether the coffee beans can be locally sourced or not.

  • 3. Any increase in prices of coffee beans puts a lot of pressure on the company since it forces further price

hikes in the prices which are already more than market averages.

  • 4. Initially the ambience and experience Starbucks provided was unique to Starbucks however over the

years several competitors also entered the market space and were vying for the same set of consumers. Starbucks had tried to add value by innovation and offered Wi-Fi service. It also tried selling its own music. Then it turned its focus on coffee again. 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. "The rapidly emerging stiff competition urged Starbucks to make changes in the business model, product ranges and marketing strategies to remain a market leader. The reliance on only beverages won‟t do in India as well since just like China we are primarily a tea

consuming nation and thus a similar strategy needs to be adapted here as well.

  • 5. Limited product ranges

Beverages have a majority share of the sales and a previous venture to expand its product share to the Joe Magazine in 1999 was very unsuccessful. Its internet venture to sell kitchen products also resulted in a 28% fall in the stock. One systematic process used by the company „Geography is a flavor‟ which aims at creating new flavors for the products to suit different cultures and countries of the world. This is what worked in its favor in Asian countries where people preferred their drinks sweeter than in the US. It takes around a year to a year and a half to research for a new beverage. Depending on how well the beverage is accepted along with the market conditions determines the success of the beverage. In Japan Starbucks decided to move into convenience stores with a line of chilled coffee in plastic cups. Another initiative taken by Howard Schultz was the US$30 million acquisition of the Evolution Fresh brand of high-quality, delicious and apparently nutritious cold-pressed juices .These juices would be marketed at all Starbucks stores along with the health snacks that Evolution Fresh also dealt in. Another strategic alliance was with the French dairy company Danone to jointly create healthy specialty Yogurt products which would be sold in participating Starbucks stores and other distribution channels. This would help improve the company‟s image as far as providing health products were concerned. [11]

  • 6. Employee dis satisfaction

There had been cases of employee dissatisfaction in several parts around the world because of odd long hours and low pay. The workers in the company felt overworked and not respected which caused a lot of labor unrest. Their major cause of dis satisfaction was that as the company expanded to different countries the employees felt that working in Starbucks was no longer a special experience.

Another decision that needs to be considered while opening stores worldwide is whether they will get into a partnership with local partners or open company owned stores. The partnership option gives the company less control. Starbucks has also always relied on „word-of-mouth‟ marketing and therefore saves on marketing activities. Only around 1% of its revenue is spent on marketing activities which is very less compared to its competitors. This is a double edged sword since any negative publicity by word of mouth may affect the company more since there are no other major means of marketing.

These problems identified can be worked upon to formulate a strategy that will work in new countries that Starbucks wants to shift its attention to just like India recently. A customized approach for each country is very important because each region the company decides to set up a store in has different set of consumers, very different market conditions and cultures.

7. Customer Dis-satisfaction

The espresso machines which had got installed in order to improve efficiency made employees lose eye contact with the customers which made them feel alienated. Starbucks began to be known as „Charbucks‟ because according to them the coffee tasted burnt. The company was now trying to expand in an already mature market which led to self-destruction and the inability to give customers the experience they wanted. The standardization of stores also took away the warm feeling of the neighborhood store from the ambience. The cozy „third place‟ experience also got lost along the way. In order to increase the product offering the wide dispersion of products which began to be sols also gave consumers the impression that the company had lost its focus on coffee. The CDs, DVDs books and teddy bears caused more of a distraction to the customers.

Solutions

Changes in Business Model

  • a. No Changes

The no change option is one where the old business model is continued with when expanding to newer countries. The original model included the opening of new stores very close to the older ones. Rapid expansion to international markets was also a part of the old business model and the strategic decisions to implement the same would continue as before.

  • b. Moderate Changes

In order to support the expansionist strategy of Starbucks without bringing out major changes in the original business model there is an option of partnership with other companies which also belong to the related industry. Starbucks adopted this technique when it bought coffee shops located in the Borders Coffee Shops in 2002. It also gave licenses to college campuses, hotels and military bases. There can be other avenues of such partnerships like airlines or cinema halls. These opportunities if invested in well can prove to be very profitable for the company. In order to deal with competition in the form of other major food chains it can partner with these. The moderate changes will aim to make slight modifications to the existing culture of the company. Moreover, moderate change will have to concentrate on how to enhance the corporate culture of the business. The labor unrest which was a major problem since the company was growing too fast can also be addressed by moderate changes to the culture of the company. Involving them in major decisions can be an option. In China the attrition rate was below the market average which shows they had made suitable changes in the model. Importance given to recruiting, training and retaining employees also was a major reason for employee satisfaction.

  • c. Drastic Changes

Since Starbucks is trying to aim at the emerging markets which are more price sensitive in comparison to the developed nations a new brand can be launched under Starbucks aimed at these markets. This will also prevent any brand dilution if Starbucks rolls out cheaply priced products under its name. Buying its competitors can also be an option. This would be a good option for countries like India where the knowledge gained by the competitors over time can be used to the advantage of Starbucks.

Changes in Product Range

  • a. No Changes

If Starbucks decides not to change its product range its consumers remains the same. Starbucks was founded in 1971 its main source of revenue was selling a store based coffee experience. The product range consists of coffee-related products such as pastries, confections or non-food items like espresso machines and mugs. With discovering the opportunities in the arising US$ 40 billion breakfast market, Starbucks nowadays also serves upscale breakfast sandwiches with its coffee, adding estimated revenue of US$ 35,000 per store

  • b. Moderate Changes

The growing demand for healthy food by consumers has let several food chains to bring about changes in their menus. There has been a conscious decision to depict that there are several healthy options on the menu to appeal to the health driven customer. Subway heavily banks on this portrayal of healthy fast food. The pastries that Starbucks offers are considered to be an unhealthy option and thus slight changes in its present product range can be made to adapt to the changing needs of the customers. The deal with Danone to sell yogurt was a step in this direction. The company can consider introduction of more of such products. The location of these stores in the busy office centers can also be used to the advantage of the company with a larger range of items on the menu. Slightly altered menus for every culture like what it did in China and India are an example of this option.

  • c. Drastic Changes

A drastic change can be if the company moves away from its core product and introduces other offerings which add to the Starbucks experience. A similar approach was what the German company Tchibo adopted when it decided not to market its coffee beans but decided to focus on the „coffee experience‟. Tchibo had created an altogether new label for the products like kitchenware and books. If a product map is drawn for the company Starbucks provides high quality products at high prices according to 52% and consumers may buy more products if they are slightly less priced according to 33.33% students of Macquarie University.

Changes in Marketing Strategies

  • a. No Change

The no change option is applicable if the same traditional distribution channels are used. Starbucks has always used the „word of mouth‟ medium of marketing. This is a very cost effective medium of

marketing. To build its image in the eyes of the customer it relies on methods like advertising through billboards, newspaper ads and giving out free samples.

b. Moderate Change

Partnerships can help create more brand awareness for the company. Refurbishing the stores is an alternative that can help attract the younger segment of the customers. While keeping the traditional methods of marketing, newer methods can also be used like running television advertisements which promote special offers. These methods are used by competitive brands and thus in order to not lose out on advantage Starbucks should also invest more in other mediums. With the advent of social networking, another avenue which can be experimented with is social media marketing. McDonalds does very effective marketing in terms of television advertisements to promote not only its new offers but also its long existing offers. Its decision to be sponsor for two major sporting events like the FIFA World Cup and the Olympics and its accompanying a blockbuster movie like Shrek III with product offerings were major marketing decisions. Also it very actively promotes the fact that it offers healthy options in its menu as well. The good corporate image is maintained by its Ronald McDonald foundation. Starbucks if not on such a big scale can also consider building its image by increasing its marketing activities.

c. Drastic Change

Lower end market brand of Starbucks can be marketed again to appeal to the younger generation. Sponsoring events can also help increase the reach to new customers by increasing visibility. It needs to be made sure that the two brands be marketed very differently so there is no confusion in the minds of the consumer and there is no chance of brand dilution. Each brand needs to be communicated in a well- defined manner to gain different positions in the market. Thus the original model can be used to depict the affluence associated with the brand and the lower end model can be used to generate mass appeal as far as emerging markets are considered. Some of the already opened stores can be refurbished to be used for these relatively cheaper brands so that it is more cost efficient and the exclusivity of the original brand is maintained by artificial methods.

Another decision that Starbucks needs to take is whether it should grow its own coffee plantations. The

continuous increase in coffee prices plays a major role in the pricing decision. More so in Starbucks‟s

case since the prices are already considered to be higher than average market prices or competitors. The move to buy plantations for the company in coffee producing regions can serve two major purposes:

Direct control of the quality of the coffee beans can be a major advantage and serve to be a valuable product offering to the consumers.

Also any market fluctuations in coffee prices will not affect the company. This will be a major competitive advantage in case of steep increases in prices of coffee. [1]

Key Learning from venture in Australia

The following are the key learnings from the strategy of Starbucks to venture into Australia

1. Extensive Client Research

The expansionist theory of Starbucks made it imperative for the company to study very closely and research the market of the country it was getting into. This market research was lacking and as a result Starbucks could not estimate how much stiff competition it would face from the local coffee stores in the country.

  • 2. When Starbucks entered Australia it relied too much on its reputation and did not realize the

importance of advertising its brand and what it stood for. The coffee market in Australia was one which

was very mature and thus there was need to effectively communicate to the customers about the company. The presence of the café culture and world class baristas made the locals skeptical about the overpriced market entrant. The differential advantage was not properly conveyed to the customers and hence the premium charges were not justified in the eyes of the locals. With the advent of technology one method was marketing that has become very prevalent is social media marketing. This method is successful because it keeps the consumer engaged and makes him/her feel a a part of the managerial decision making process. This increases customer satisfaction. The online community mystarbucksidea.com was a move to enable customers from exchanging ideas and comment

on other‟s contributions. The best ideas of the lot were taken up and put on a separate blog called „Ideas

in Action. There were instances where some of these ideas were actually implemented. An example included the reduction of paper wastage for bills of very small values.

  • 3. Bridging the user experience gap

The user experience in America and in Australia is very different and any model cannot be replicated in any other country as such. This gap needs to be bridged by analysis of the customer sentiments and their needs from a product or service.

  • 4. Testing

There should be methods to test the market conditions in place and this should be done prior to a venture. The results of the study should be carefully analyzed and an informed decision should be taken. If the test / market survey result is positive or negative the management should try understanding the rationale behind the result and make a strategic decision accordingly. If it‟s positive, the reason contributing to the success must be identified and further advertised. In case the result is negative, the reason for the same also must be analyzed so apt changes can be made before making a heavy investment which may turn into an irrecoverable loss.

  • 5. Leadership should be involved

Leadership must be actively involved in all decisions regarding introduction of new product offerings, focusing on new countries or increasing number of stores in a small region.

  • 6. More people from the country should be involved as top management

The people of country will know the customers of that place the best and thus can be a vital source of insight as to what changes must be made to existing models so it is best suited to the customers, is well accepted by most people and hence most profitable.

  • 7. Market response should be given a lot of importance

After a few stores are opened the company should not blindly continue opening more stores since it won‟t serve any purpose unless a feedback is received from the customers themselves about the experience.

Customer surveys are very important and can also provide valuable suggestions about the changes needed in the business model.

  • 8. Success measures should be in place

Metrics to measure how successful need to be in place .These may be quantitative or qualitative but very important since they help design future course of action. [8]

Payoffs for various alternatives considered

  • 1. Decision to expand product range and include different items on the menu

This decision may not work as planned because the coffee lovers may not accept the diversification of the brand they associate with coffee. Other competitors who focus on coffee may turn out to be more successful since they cater to the specific need of coffee and offer greater variety for the same. People may not find the proposition to try out different items on the menu and overpriced coffee as interesting an idea when they are getting so much choice of coffee itself elsewhere.

The association of the brand with coffee may also weaken which will not be at all good for the company

which aims at being the best as delivering the „coffee experience‟

  • 2. Decision to open more stores

The extensive and aggressive strategy of opening more stores may be counter- productive as it takes away

the „premium‟ image of the company. The market saturation and ultimately cannibalization of existing

stores ruins the brand image of the company also. An option that could be to open stores in select locations so as to keep the image of a „premium brand. In order to undo the after effects of the massive growth strategy the step taken was to close all the

unproductive stores. By 2009, around 900 stores were shut down and there were several layoffs. This helped to ultimately cut costs by $580 million. These were very harsh steps since they did not present a very good picture to the customers but it was imperative at that time so in order to revive the brand. [7]

  • 3. Decision to include lower priced products

Unless the low priced products aimed at attracting the emerging economies population are introduced under a different name it may result in brand dilution.

Factors affecting decisions and their alternatives

The governments of emerging countries and their policies need to be understood carefully before moving to a new country. Steps may be taken by these countries to make the entry barriers to big corporates very high in order to protect the interests of the local businesses.

The refurbishing of stores may not be a very economical step with the economic situation being very uncertain. Cost benefit analysis needs to be very carefully done since the economic returns by revamping stores may not be as expected with people not willing to spend as much after the recession.

For the decision of buying coffee plantations environmental conditions and possibility of droughts in the region need to be considered. For example,. in Africa this is a major problem. Once the investment is made it will be difficult and very expensive if the environmental conditions pose a threat to the decision.

Renting out a large shop space may not always be a sustainable and feasible decision since customers come and sit or relax in the lounge and may not even buy anything. People did enjoy the ambience but did not always buy stuff. In such cases franchises may put lesser financial burden on the company.

The decision to source coffee beans or grow them locally is also an important point to consider since people may prefer coffee brewed in certain specific places or their country itself

The balance between the „standardization‟ which Starbucks tried to bring in as far as its policies and practices were concerned and „customization‟ to meet the variations in tastes needs to be maintained very carefully.

Decisions to improve Customer Service

Though Starbucks always tried to be at the top of its customer service be it prompt delivery or adapting to local culture during times of expansion it did not always score very high in the eyes of the consumer. At Starbucks every employee was called a partner and the ideal that every employee was expected to follow was that partner satisfaction led to customer satisfaction. Not only was the partner satisfaction in the 80- 90% range but the employee turnover rate was 70 % compared to the high 300% which was the market average. This rate was even lower in case of senior management. The logic was that stability was key to identify regular customers and improve customer satisfaction. This was despite the high number if working hours. There was a lot of emphasis on hard skills and soft skills. Hard skills included steps involved in mixing drinks and handling the cash register etc. Soft skills include dealing with the customers. The employees are made to accept the demands of the customers even if it meant going beyond company policy. This is called the „just say yes‟ policy. Another aspect that added to the complexity of the job was the option to customize drinks. It was difficult to balance the pre-established quality standards that the employees were supposed to meet and the specific needs of customers. This difficulty was got under control to a certain extent by the usage of Verismo machines which decreased the number of steps required to make an espresso beverage. This had two positive effects which included increased customer and barista response. Mastrena was also one such machine which was brought in to replace the automatic one so as to allow the employees to interact with the customer while making the drink. The machine was a success because it neither compromised on customer satisfaction nor speed or efficiency. It also helped employees who could practice their coffee making skill by way of a manually operated machine. The acquisition of the Coffee equipment company in 2008 also was a very good strategic decision because it made it possible to brew one cup of coffee at a time instead of a pot. The ability to control temperatures, amount of water and brewing period for each bean resulted in some very good coffee in under two minutes. Customers had no qualms in paying $6 for a cup in this case. What made these steps so successful was that it had „coffee; at its very core. The confidence that the company was able to instill in the customer was that the coffee would be so good that even people who were habituated to drinking t with milk and sugar would want it black. [7]

The price sensitive customer was also a large segment which the company had yet not catered to. In order to not lose out on this chunk of the consumers VIA was introduced in February 2009.

In order to measure the customer satisfaction the company used several metrics. One of these were the “Customer Snapshot.” In this method every store was visited by a mystery shopper who rated the store on the basis of the following criterion:

Service Cleanliness Product Quality Speed of Service Apart from these basic services stores were also rated on the basis of legendary service which was behavior that created a memorable experience for the customer who would then return to the store often and also tell a friend.

However with the expansionist strategy and the opening of stores all over the world the employees no longer felt that working at the company was a special experience. The reduced employee satisfaction also resulted in a lot of labor unrest. Over time the customers, particularly the younger generation also started drawing away from the company. A majority felt that the brand was very hip but they were not accepted. There was a lot of hostile reception from many future customers who were in their twenties because they were turned off by the power and image of the company. With the setting up stores all over the world the customer perception of the brand and the ease with which it was accepted became more integral to the chances of success of Starbucks.

Though when it first began there was not much competition to pose threat to its growth, as time passed the companies which earlier did not seem as much of a problem also turned fiercely competitive. The reason is the ambience and experience which earlier was a competitive advantage that Starbucks could leverage on, now was not limited to the Starbucks alone. Its competitors also had caught up with it and offering a similar kind of experience at competitive prices. McDonalds also proved to be a stiff competitor.

It was realized that over time the connection between the growth strategy and ultimate objective to satisfy customers was lost. Somewhere along the way the company had lost sight of the customer while still believing that it was in fact servicing them well. Service time was one area which was identified that could be an area of improvement. It was analyzed that initiatives like these needed to be taken up to increase customer throughput which would prove to be profitable. [2]

Customer Value and Premium Brands

The customer‟s perception of a brand and its utility varies from person to person. Judging how useful a

consumer finds a product will determine how its price is fixed. Unless the consumer feels that he s getting a good deal and the value proposition is attractive, fixing a high price may not turn out to be profitable. Starbucks and other premium brands need to be very convincing about the benefits they offer let it be the

quality or brand value associated with it. The fact that consumers can associate Starbucks with a
quality or brand value associated with it. The fact that consumers can associate Starbucks with a status
symbol and there is an aspirational value that can be attached to the brand makes it possible for the
company to charge more.
Thus the price is set not only for the coffee but for the entire experience the customers get to enjoy in a
Starbucks store. This perception needs to be gauged very carefully since it varies from country to country
according to the culture which is deeply rooted in people and drive most of their purchasing decisions.
Thus in case of Starbucks when it decided to move to the emerging nations where the purchasing power
of the locals is lower than that of the people of the developed nations the pricing strategy needs to be
given more emphasis. Processes also need to be made more efficient by using better technology so the
lower prices do not hurt profitability. Starbucks saw a free-fall in stock prices from June 2006 to March
2009. Howard Schultz then took over the control of the company in 2008 to reinvent the Starbucks
experience and he was successful in modernizing and reinventing the company. Over time it was able to
increase the value to the customer by understanding the changing needs, improving marketing strategies
which ultimately stimulated demand. [6]
Exhibit 1: Growth of Starbucks Stores worldwide since its inception
18000
16000
14000
12000
10000
8000
Number of stores
6000
4000
2000
0
1987
1990
1993
1996
1999
2002
2005
2008
2011
[9]
Exhibit 2: Consumers Survey to gauge coffee drinking habit
[10]

[10]

References

[1] Case study report- How Starbucks should improve its business

[2] Starbucks: Delivering Customer Service, Young Me Moon John Quelch, (Harvard Business Review July 10 2006)

[3] Case : Starbucks coffee Expansion in Asia [4] Starbucks Plays to Local Chinese Tastes, The Wall Street Journal, Laurie Burkitt [5] Marketing Lessons: Whatever Happened To Starbucks, Knowledge at Australian School Of Business, September 07, 2010 [6] Effects of the 2007 Financial Crisis on Starbucks, International Journal Of Business Strategy , Volume 12,Number 1, 2012 [7] Starbucks The Growth Trap, Joana Isabel Vaz [8] Starbucks Failed Strategy to enter Australia,By Diego Mendes Strategy,May 2009Shanghai, China [9] Starbucks Company Timeline, Copyright of Starbucks Coffee Company,.2012

[10]

Survey: Americans Are Cutting Back on Fancy Coffee Because of the Economy

[11]

Jewish Business News : Howard Schultz Starbucks Growth Strategy in Action