Starbucks in the Coffeehouse Market Since its founding in 1985 as a modest nine store operation in Seattle, Washington, Starbucks had become the premier roaster and retailer of specialty coffees in the world, with over 32,000 store locations in 78 countries as of April 2020. Its annual sales were expected to exceed $26 billion by year-end 2019. Store Locations and Experience: Starbucks operated coffee houses in high-traffic, high-visibility locations in the United States and abroad. Starting in 1991, Starbucks created its own in-house team of architects and designers to ensure that each store would convey the right image and character. Stores had to be custom designed because the company didn't buy real estate or build its own freestanding structures. Instead, each space was leased in an existing infrastructure which resulted in stores differing in size and shape. Most stores ranged in size from 1,000 to 1,500 square feet and were located in office buildings, downtown and suburban retail centers, airport terminals, university campus areas, and busy neighborhood shopping areas convenient for pedestrian foot traffic and/or drivers. A few were located in suburban malls. Starbucks’ stores were designed to emphasize ambience and elevation of the customer experience, including having employees go above and beyond in providing service to the customer. Each detail was scrutinized to enhance the mood and ambience of the store to make sure everything signaled "best of class” and reflected the personality of the community and the neighborhood. The thesis was "everything mattered.” The company went to great lengths to make sure the store fixtures, the merchandise displays, the artwork, the music, and the aromas all blended to create an inviting environment that evoked the romance of coffee and signaled the company’s passion for coffee. Ever since offering free Wi-Fi to the public, the company’s on-the-go audience has seen Starbucks as not just a coffee shop but a mini office where they can set up their laptops and attend to business while sipping their favorite beverages. Four store templates, each with its own color combinations, lighting scheme, and component materials, were introduced in 1996. All four were adaptable to different store sizes and settings. Some stores were equipped with special seating areas to help make Starbucks a desirable gathering place where customers could meet and chat or simply enjoy a peaceful Interlude in their day. Flagship stores in high-traffic, high-visibility locations had fireplaces, leather chairs, newspapers, couches, and lots of ambience. Increasingly, the company began installing drive-through windows at locations where speed and convenience were important to customers and locating kiosks in high-traffic supermarkets, building lobbies, shopping malls, and other public places where passersby could quickly and conveniently pick up a Starbucks beverage and/or something to eat. In 1992 and 1993, Starbucks began concentrating its store expansion efforts in the United States on locations with favorable demographic profiles that also could be serviced and supported by the company’s operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a “hub.” Many stores were opened in a “hub,” and, then, additional stores were opened in smaller surrounding “spoke” areas in the region. Despite the mistake of over-saturating portions of some large metropolitan areas with stores, Starbucks was regarded as having the best real estate team in the coffee bar industry and a core competency in identifying good retailing sites for its new stores. The company’s sophisticated methodology enabled it to identify not only the most attractive individual city blocks but also the exact store location that was best. It also worked hard at building good relationships with local real estate representatives in areas where it was opening multiple store locations. Baristas: Starbucks staffed its stores with trained “baristas” (a person whose job involves preparing and serving different types of coffee). The company’s baristas were an important component of the overall customer experience, serving a wide variety of specialty coffee drinks that allowed customers to satisfy their individual preferences in a customized way and trained to go out of their way to, and to take heroic measures, if necessary, to make sure customers were fully satisfied. Starbucks essentially brought specialty coffees, such as cappuccinos, lattes, and macchiatos to the mass market in the United States, encouraging customers to personalize their coffee drinking habits. Baristas were trained to take requests for such items as an “Iced Grande Hazelnut Macchiato with soy milk and No Hazelnut Drizzle” and to served them up quickly with consistent quality. Purchasing and Roasting: The company purchased only the highest quality Arabica beans and carefully roasted coffee to exacting standards of quality and flavor. Commodity-grade coffee was traded in a highly competitive market as an undifferentiated product. However, high-altitude Arabica coffee beans of the quality purchased by Starbucks were bought on a negotiated basis at a premium above the commodity price. Starbucks bought coffee using fixed price and price-to-be fixed purchase commitments. Starbucks coffee purchasing group traveled regularly to coffeeproducing countries, building relationships with growers and exporters, checking on agricultural conditions and crop yields, and searching out varieties and sources that would meet Starbucks exacting standards of quality and flavor. Starbucks fostered commitment to corporate responsibility by promoting sustainable coffee growing, creating farmer support centers, and engaging in fair-trade practices, including paying above-average market prices for coffee beans to provide its growers and suppliers with sufficient funding to sustain their operations and provide for their families. The coffee purchasing group, working with Starbucks’ personnel in roasting operations, tested new varieties and blends of green coffee beans from different sources. Starbucks considered the roasting of its coffee beans to be something of an art form, entailing trial and error testing of different combinations of time and temperature to get the most out of each type a bean and blend. Recipes were put together by the coffee department once all the components had been tested. Computerized roasters guaranteed consistency. Highly trained and experienced roasting personnel monitored the process using both smell and hearing to help check when the beans were perfectly done – coffee beans make a popping sound when ready. Starbucks did not use chemicals or artificial flavors when preparing its roasted coffees. Customers: Initially, Starbucks’ targeted a very-specific type of customer to its coffeehouses. Though overtime, it has expanded its targets to grow the business. Starbucks’ target market is often described as affluent or high income. That's why every affluent neighborhood has a Starbucks not far away. Initially, Starbucks’ target audience was solely urban, but no longer. Numerous Starbucks cafés are surrounded by middle income neighborhoods where people don't have such high incomes, because these people also have discretionary income and are willing to spend it on premium coffee drinks. They may not splurge on other things as often as a higherincome customers, but they enjoy treating themselves to their favorite coffee and sometimes, a breakfast sandwich, a snack or dessert to go with it. In addition, mini-Starbucks are located in outlying areas including suburbs of affluent areas and some 60 miles or more from a city. Starbucks also has regular customers who are black coffee purists; however, those individuals are not the company’s target market. Starbucks courts those who are willing to spend $10 for a snack and beverage without thinking about the cost. Starbucks’ target market tends to be very busy people. They spend a great deal of time in their cars going from place to place, such as work, to their children’s sports activities, and to the store and gym and spend a great deal of time sitting in traffic. They are driven but laid back. Most of the company’s audience consists of educated, white color professionals who read a lot and stay up on the news and trends, including those about health. Though much of Starbuck’s target audience was not born into the technology age, technology use is second nature to them now. The target age of Starbucks market is 22 to 60 years old, with a teen audience growing steadily. The company's most recent efforts to bring new customers to Starbucks involves not bringing them into the stores at all. Instead, Starbucks will bring the coffee, eats or anything else on its menu through its expanding delivery service. Starbucks has begun delivering in major US cities through a partnership with Uber eats and hopes to expand the service in the years ahead. The company is also expanding its drive-through option. The next two pages include additional demographic details regarding Starbucks’ target customer, and its competitor’s, Dunkin' Donuts. This data represents individuals who drink coffee and categorizes them by demographic characteristics and by users of Starbucks and Dunkin’ Donuts. An index of 100 indicates an average among all US coffee drinkers. Any index over 100 indicates that Starbucks (or Dunkin’ Donuts) disproportionately attracts those individuals. The higher the index the more Starbucks (or Dunkin’) is attracting individuals with that demographic profile. For class, we will assume Starbucks is targeting such individuals (excluding race characteristics). If an index is less than 100, it indicates Starbucks (or Dunkin’) does not attract as many of those individuals – less than the US average. (Qualitative evidence could help us understand if the company was attempting to attract individuals with those demographic characteristics but just hasn’t captured many of them yet.) Use this information to help you further identify Starbuck’s target customers and quantify the significance of each target to Starbucks. Compare and contrast Starbucks customer profile to Dunkin’ Donuts to identify risks and opportunities for Starbucks in competition with Dunkin’ Donuts. Who is shopping Starbucks and what are they like? Basket Size When Starbucks is purchased, how many products are purchased along with it? Demographic Comparison, 2019. Time of Day When do Dunkin Donuts shoppers make their purchases? Who is shopping for Dunkin Donuts and what are they like? Basket Size When Dunkin Donuts is purchased, how many products are purchased along with it? Time of Day When do Dunkin Donuts shoppers make their purchases? Sources: Company documents, 10-K’s, and information posted on Starbuck’s website. “Who Is Starbucks’ Target Audience?” by Barbara Bean-Mellinger. February 5, 2019; Numerator Demographic Comparison of Starbucks vs. Dunkin’ Donuts, 2019. Use the following template to help you complete an analysis of Starbucks’ strategy. Customer targets Consumers: • Age • Income • Education and Employment • Lifestyle/Psychographic Businesses: Geographic Markets Where does Starbucks do business around the world? Where does it locate its coffeehouses? Product Segments: Customer Value: (Most companies have no more than 3 to 5 key benefits. Starbucks offers customers benefits that fall into about 5 primary categories. Those categories revolve around its coffee, its atmosphere and service, and one other aspect of its business.) Coffee Benefits: Service/Atmosphere Benefits: Other benefits: (Sustainable) Competitive Advantage: Assets: Capabilities (leveraging assets): Sourcing (at least 1) Operations (at least 1) Distribution to Customer (3-4) Culture (at least 1) HR (at least 1) Time Permitting, we may also review some of Starbucks historical financial data to assess how well its strategy is working.
