Vinay Bhola Case Study Starbucks(1)

Vinay Bhola
Dr. Jeff Ritter
Marketing Strategy
April 16th, 2014
Case Study: Starbucks
In the last 43 years, Starbucks has become the industry leader in the specialty coffee beverages
market (Ferrell, O. C., & Hartline, M. D, p. 517-534). Led by Howard Schultz, through
prominence on creating innovative, quality products, and strong emphasis on customer
experience, Starbucks created its own niche for itself, becoming a Wall Street darling and one of
the most recognized brands in the world (Ved, A.). However in the last several years, Starbucks
began to put more importance expansion, neglecting one of the key reasons for the company’s
financial success; the Starbucks experience which in addition to other factors would
inadvertently lead to its decline in 2007 (Ferrell, O. C., & Hartline, M. D, p. 527-528). Howard
Schultz would be reinstated as the CEO of the company to address the company woes but with
increasing costs of materials for production (i.e. coffee beans and milk), a weak economy in two
major markets that Starbucks in location in, the United States and Europe, and increasing
competition from competitors like Dunkin’ Donuts, Panera Bread, and MC Donald’s, Starbucks
reign as an industry leader is in jeopardy (Ved, A.).
Strategic Issues/ Problems:
Though Starbucks remains the industry leader in the coffeehouse beverages market, in the last
several years it has had a series of problems that has plagued the company. One major issue the
company is facing is the rise of the cost of materials needed to create the Starbucks beverages.
The Trefis Team writes in a recent article taken from Forbes.com how drought conditions in

Brazil, are diminishing the supply of Arabica Coffee Beans, the beans used in most of Starbucks
coffee. In order to maintain profit, Starbucks has had to raise its prices on its beverages (“Coffee
Prices Surge: Starbucks to Maintain Profitability but Green Mountain's Margins Can Erode”). In
addition, the rising cost of milk has also been another key issue with the company. Bill
Rigby and Lisa Baertlein state in their article that in addition to the rise in coffee bean prices,
with the increase demand in milk from Asian markets, milk prices have gone up causing
industries that are dependent on milk ingredients such as General Mills to have to raise prices on
their products or take losses. Rigby and Baerthlein states that General Mills suffered an 11%
decline in net operating income due to the rise in the cost of milk used to make their Yoplait
yogurt and Haagen-Daz ice cream. Starbucks fears it may not live up to the $100 billion
company claim it has promised its shareholders (Rigby, B., & Baertlein, L.).
Furthermore, another issue Starbucks is facing is the issues in two of its key markets; The United
States and Europe due to the economic crisis. In The United States alone, Starbucks was forced
to close 300 stores and slow down expansions in other areas due to the economic crisis that
occurred (Miller, C.C). In addition, Ariana Eunjung Cha states in her article that Starbucks 2012
annual report was below expectations something Starbucks blamed the poor economy in Europe.
Additionally, another problem Starbucks is facing is competition. Starbucks has already had
tough competitors Dunkin’ Donuts and Einstein’s Brothers Bagels, the company now faces
competition from McDonald’s, 7- Eleven, and Panera Bread which offer fast coffee at lower
prices than the average Starbuck’s coffee (Mourdoukoutas, P.). McDonald’s average medium
coffee alone is $2.89 vs. Starbuck’s average grande (Starbuck’s equivalent to a medium size
drink), is $3.65 (Patton, L.).

Finally, another problem the company is facing is the recent increase in healthy living and the
negative attitude health enthusiasts have about coffee consumption. Cindy Kuzma states in her
article from MensHeath.com that in a 20 year long observational study on coffee consumption
researchers noted “that those who drank three or more cups of [coffee] a day had a 66% greater
chance of developing exfoliation glaucoma” in addition to raising “levels of the amino acid
homocysteine.” Kuzma states that Americans need to slow down in coffee consumption and even
mentions Starbucks as a perpetrator as the study seemingly parallels with the Starbucks growth.
This study does not help the company’s image and is leading the company to have to reconfigure
methods in order to seem more healthy.
Analysis and Evaluation: S.W.O.T
Strengths:
Starbucks has an array of strengths that has led to the coffeehouse chains financial success and
substantial growth One major strength of Starbucks is the Starbuck’s experience customers
receive. Eric Levine states in his blog that Starbucks customers feel connected to their coffee.
Levine states that Howard Schultz implemented a “personality coffee initiative… that made
[y]ou feel somehow that [the Starbucks baristas] know you and the coffee was made just for
you.”
The emphasis on the “personality coffee" experience has led to very strong brand loyalty for
Starbucks and a very strong brand name. Rachel Tepper quotes research professor of marketing
at New York University's Stern School of Business Priya Raghubir, in her article as saying that
"people really have [gotten] to know Starbucks as the quintessential coffee shop, where they can
sit and be welcome over a cup of coffee.” Raghubir further employs that not just the quality of
the Starbucks beverages that has led to its success, but the emphasis on aesthetics of the

experience customers feel when entering a Starbucks; couches, free Wi-Fi, friendly baristas etc.
These attributes have led to “enduring brand loyalty” for Starbucks and has enabled it to be the
leader in its market niche (“Starbucks Brand Loyalty Keeps It Ahead of the Artisanal Coffee
Movement”).
Weaknesses:
Though Starbucks reigns supreme in its market niche, it does have some weaknesses that have
hindered the progress of the company. One major weakness has been Starbucks relatively high
prices in comparison to its competitors. Since the economic decline in The United States and
Europe, many coffee consumers have had to switch “to competitor’s products with lower prices
and forgo paying [the] premium” coffee drinks Starbucks offers (Geereddy, N.). Fabiana
Buentempo states in her article that “a medium Dunkin’ Donuts iced coffee, the price is $2.09,
while at Starbucks, the same sized drink is priced at $2.79.” For price sensitive consumers, this is
a major difference; they are willing to lose “the Starbucks experience for cheaper coffee”
(Buentempo, F.).
Furthermore, Starbucks reliance on the Arabica Coffee Bean has been a determent. As
mentioned earlier, as drought conditions worsen in Brazil, Starbucks may be forced to raise its
prices further on its products (“Coffee Prices Surge: Starbucks to Maintain Profitability but
Green Mountain's Margins Can Erode”). In addition Starbucks products have high milk content,
another industry that has had high price inflation recently which could harm Starbucks (Rigby,
B., & Baertlein, L.).
Moreover, Starbucks has had some issues with its public image in the last several years. One
such insistent that occurred in September 2013, in which CEO Howard Schultz publicly stated
that he wanted customers to “leave their guns at home” (Walker, J.). Pro-gun advocates were

outraged, believing that neither Starbucks nor any other corporations have the right to interfere in
political matters.
Opportunities:
Though it seems Starbucks has done so much to help elevate itself to the financial success, it still
has more ways in which it can improve and grow further. One such way is to expand into more
emerging markets. Starbucks is aggressively adding more countries under its nations of
operations with new ventures off in emerging nations like in Asia and South America (Bailay,
R.). It still has great opportunity to expand further into these continents as well as others.
Not only does Starbucks have opportunity to expand operations, it has the opportunity to expand
its menu options. Since its recent buyout of Teavana, Starbucks had opportunity to incorporate
more healthy beverages in its Starbucks menu options (Geereddy, N.). In addition adding more
bakery and deli items is another venture Starbucks can incorporate. This venture can help
Starbucks compete with other restaurants and eateries like Panera Bread.
Finally Starbucks has great opportunity to expand its options through merchandising. The
company already sells ground coffee, bottled drinks, and canned drinks in stores, the company
can further add more merchandise products of various flavors such as their seasonal products and
even more flavors to increase sales and customer reach (Geereddy, N.).
Threats:
Starbucks maybe the coffee powerhouse of the world, but it has a plethora of weaknesses that
threaten to derail the company from progress. One of the biggest threats Starbucks is facing is
the increase in competition. Currently, Starbucks holds 32.6% market share in the specialty
coffeehouse market however Dunkin’ Donuts trails beyond with a 24.6% share in the market
which is expected to increase again, as the company expands to increase its stores like Starbucks

(Solitro, J.). In addition, Starbucks faces very strong competition in the retail market segment.
Currently, the leading home brewed coffee brand is Folgers, with a 15.6% market share followed
by Maxwell house with a 10%, in third Green Mountain with 4.3% (“Folgers, Not Starbucks, Is
America's Favorite Coffee, Bloomberg Reports”). Starbucks in comparison, only makes up
3.3% of this market, and is fighting to claim this top spot despite the wide price differences and
history of the three leading brands (“Folgers, Not Starbucks, Is America's Favorite Coffee,
Bloomberg Reports”). Folgers for instance has been around since 1850 and averages $6.99-$8.00
retail price vs. Starbucks which averages $9.99-$11.99 a package and has been around since
1971 (Harris, J.).
Another big threat Starbucks is facing is the current trend towards living and active lifestyle. One
of Starbucks key customer base has been the Millennial generation a generation that has
increasingly become more interested in active living that is eating healthy and exercising
(Fromm, J.). Currently, Starbucks is painted as being too “sugary” and coffee has a poor
reputation as leading to health problems as mentioned by Cindy Kuzma from her
MensHeath.com article. This trend can hurt the company’s profits.
Another threat is the increase use of online shopping. Starbucks positions it metropolitan areas
that are busy and have relatively high spending so they can have a strong customer reach like in
malls and plazas (Wong, V.). However if, less customers are spending money at brick and mortar
locations, Starbucks profits suffers too (Wong, V.). Venessa, Wong stipulates in her article that
seems to be a parallel relationship between brick and mortar shopping stores and Starbucks
stores where if shopping in these stores is down, Starbucks profits decline to.
Alternative Courses of Actions:

1. Expand stores into new emerging economies locations like South Africa and add more
stores in emerging nations that Starbucks is already located in like China, and India.
Pros:
Expanding can help Starbucks earn a new customer reach and gain more revenue as well
as loyalists. According to Rasul Bailey, Starbucks is actively pushing for more expansion
in India because of the developing economic rate of the country is growing rather fast and
Starbucks is doing quite well in the Asian locations. Bailey further states in his article
that Starbucks international expansion is doing quite well something also noted in Nithin
Geereddy’s scholarly paper.
Starbucks currently does not have any locations in South Africa despite the rate of
economic growth in the country (Geereddy, N.). Starbucks should pure locations in this
as the country is growing and as it is also a large tourist attraction too. By addition
locations in this country as well as more in India and China, Starbucks can be able to
expand its customer base and further establish itself as the leading coffeehouse brand in
the world.
Cons:
While expanding locations seems like a great idea it can also be hurt Starbucks too. Back
in 2005-2007, the company was so focused on expanding its brand it forgot about the
customer experience which led to its decline (Ferrell, O. C., & Hartline, M. D, p. 527-
528). Moreover, adding brick and mortar locations can be costly. Starbucks will have to
construction, research, training, etc. In addition, with the fluctuation in the Arabica
Coffee Bean, milk, and even gas prices, it may not be the wisest decision to open more
stores and add on more costs.

2. Emphasis on grocery retail brand, adding more flavors of home brewed coffee, more
coupons, and other products.
Pros:
Starbucks currently ranks 4th when it comes to home brewed coffee (“Folgers, Not
Starbucks, Is America's Favorite Coffee, Bloomberg Reports”). The company needs to
implement measures that will help aid in its conquest to become the leader in the retail
coffee market. One way is to add more flavors of coffee beverages, including seasonal
favorites like Pumpkin Spice and Peppermint Bark when the season comes. Another
method is too add more products like more cold latte beverages in refrigerated machines
and on the shelf, Starbucks can even add some of its chilled drinks and even mass market
of its bakery items like their muffins and cookies. This will be a great way for the
company to expand its product reach in the supermarket segment, gaining more
customers and more revenue.
Not only could Starbucks incorporate its own Starbucks brand with its newly acquired
Teavana could also be used in the retail segment merchandising bottled drinks, tea
packets, and tea kettles. As Teavana has a healthier image, it can help Starbucks acquire
customers who live a more active lifestyle and eat healthy. Merchandising the Teavana
products will help Starbucks gain a new customer reach and also help enter it into an new
area in the retail segment.
The company can incorporate more coupons using Catalina coupon machines that will
track customer purchase orders and present a coupon for Starbucks coffee even if the
customer did not purchase that brand of coffee. This a great method to entice customers
that buy competitor’s coffee brands to try and buy the Starbucks brand. Starbucks can

also work with grocery chains like Publix and Winn-Dixie to create store coupons to help
customers save more money which will entice them to the Starbucks brand coffee since
the average price of the Starbucks coffee is more than the three leading retail coffee
brands (Harris, J.).
Finally the company can provide coupons to those who hold the Starbucks loyalty
rewards card, giving these customers incentive to buy the home brewed coffee brand in
retail outlets or even at the Starbucks stores itself.
Total emphasis on the retail segment of the Starbucks brand will help the company
expand its product reach and customer base and help surmise itself as the leader in the
coffee business as a whole.
Cons:
Though total emphasis on the grocery brand has its perks, it also has negative
consequences too. One such is that it can cannibalize the Starbucks brick and mortar
locations. If customers are willing to buy more products in retail stores it can hurt
Starbucks long standing store locations. In addition, merchandising more products may
seem too far of a reach for customers. They may not be willing to buy Starbucks bakery
items or even Teavana products. Furthermore, Starbucks takes a loss when they issue
coupons and even still customers may not buy the product. Coupons can draw customers
to the coffee aisle of the grocery, but, it may inadvertently, lead to customers buying a
competitor brand.
3. Expand menu options; add more bakery and deli items, making more fresh food items
and healthier selections; make Starbucks more into a casual dining outlet.
Pros:

As more and more retailers are getting into the coffee segment Starbucks has to
implement measures that will keep their customers and get new customers in the stores.
Adding more bakery and deli items will give Starbucks an edge against its competition.
Right now, the company is facing off against MC Donald’s and Panara Bread which offer
fresh baked and cooked goods for their customers along with coffee and at lower prices.
Though Starbucks has food menu options, most of them are cold food items such as
salads, sandwiches, and muffins nothing freshly round the clock made. Customers come
into Starbucks for a quick “pick me up” not to dine unlike Mc Donald’s and Panera
Bread. Starbucks needs to add more fresh round the clock made items like hot soups,
bakery items, and deli items like hot Paninis, and even pasta like Panera Bread does
(Rutter, T.). The Starbucks food menu has helped the company grow so adding more
options can only help them compete. Starbucks may want to add items from its La
Boulange chains of stores to cross promote both brands (Rutter, T.).
In addition, Starbucks should consider adding even healthier items like more fresh salads,
more smoothes, and tea drinks. As more people are catching to the active lifestyle living,
Starbucks needs to add menu items that will help the company gain these customers.
Starbucks may want to consider adding drinks from its Teavana locations inside
Starbucks stores to cross promote both brands as well (Geereddy, N.).
Cons:
There are several cons of venturing further into this type of market for Starbucks. First,
would be the costs it would take to add ovens, cooks, grills, and training etc. to all their
locations. Another problem would be that customers may see it has too far of a reach for
Starbucks to go into the casual dining market and may be turned off. Furthermore

Starbucks will gain even more competition such as Jamba Juice and Smoothe King in the
healthy smoothes area and Toojay’s and Macaroni Grill in the deli area if it fully
develops its menu options this way. Finally, Starbucks risks cannibalizing its own brands
like Teavana, and La Boulange as adding healthier and more deli/ bakery items can hurt
these brands respectively as well.
Recommendations:
Based on the alternatives choices listed above, I believe that Starbucks needs to
implement all three choices slowly in order to be successful. Choice one, expanding
operations is an obvious for the already internationally established company. Adding
more locations in rapidly growing nations like China and India is going to help Starbucks
earn more customers and revenue. Expanding operations into South Africa will also help
the company as this nation too is developing. However, Starbucks needs to slowly
expand further and take into account added costs from training, building, and shipping. It
should also take into account the milk and Arabica Coffee Bean prices. If they continue
to inflate, Starbucks may want to halt is expansion or at least put it off for a while or even
consider finding a new coffee bean to use. Choice two, emphasis on the retail
merchandise segment is a must for the company. Starbucks currently falls beyond other
home brewed brands and needs to implement measures to elevate its status, making more
flavors and giving out more coupons. It should also seriously consider merchandising its
Tevana products, making bottled teas as the active lifestyle trend continues to flourish
here in the United States and Europe (Fromm, J.). Teavana is a great asset for Starbucks
and they should utilize the brand to gain customers that are deterred by the unhealthy
image Starbucks is portrayed as. Merchandising the Tevana products will great help

Starbucks in the retail segment. Finally the third course of action choice, to add more
deli/bakery items and healthy selections is something that Starbucks should slowly
implement. Starbucks should test this concept in select stores, high income volume
metropolitan areas first. If successful, they should add it to more stores but only select
stores. As more and more casual dining and even fast food restaurants are adding healthy
options and coffee beverages to their menus, Starbucks needs to monitor this trend but
not at the risk of hurting its Teavana and La Boulange brands. Starbucks may consider
incorporating products from both brands into its Starbucks menu to help all three brands.
Starbucks has been a Wall Street favorite not just because of its high earnings; because it
is committed to being innovative and ensuring that customers as well as stakeholders are
satisfied. Starbucks has had some bumps along the road but I believe it will continue to
thrive as long as they stay committed to their goal of “bring[ing] both heritage and an
exceptional experience to life (Our Heritage.).”

References
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