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Market Audit - 1

Starbucks – Marketing Audit


Market Audit - 2

Table of Contents

Starbucks Marketing Audit.........................................................................................3

Executive Summary ..................................................................................................3


Environmental Aspects..............................................................................................4
Demographics. ..............................................................................................5
The growth rate of the US has been between 1.10% and .90% from 1999-
2003. The market demands are constantly increasing. Their unique
approach to expansion goes beyond the traditionally accepted methods.
Starbucks has broken the rules and set a new standard amongst its
competitors. Starbucks primarily chooses to focus on the demographics,
psychographics, and lifestyle of their customers. Starbucks targets both
males and females, ranging in age from 18-30 year olds, and middle to
upper middle class. Starbucks caters to all needs; they offer non-
caffeinated drinks, for children or non-coffee drinkers, sandwiches, sweets,
and a variety of juices and pastries. .............................................................5
COMMUNITY..................................................................7
COMMUNITY..................................................................7
Culture.......................................................................................................................8

Markets......................................................................................................................9

Market Needs..........................................................................................................10

Market Trends.........................................................................................................10

Market Forecast............................................................................................11
Competition...................................................................................................14
SWOT Analysis.......................................................................................................15
Strengths.........................................................................................................15
Opportunities........................................................15
Strengths.................................................................................................................16
Global Presence. Starbucks has a widespread global presence. The
company operates about 8500 retail store locations, the majority of which
are company owned and operated across32 countries worldwide. The
company’s widespread presence provides prevalent brand recognition and
a strong customer base. .............................................................................16
Weaknesses............................................................................................................17
Lower revenues and income per employee. The company generates lower
revenues and income per employee as compared to the industry average.
Its revenue per employee was $71,544 during fiscal 2004, as compared to
the industry average of $110,841. Furthermore its net income per employee
is $5294 as compared to the industry average of $9500. The company’s
lower returns per employee as compared to the industry average reflect
adversely upon its employee efficiency........................................................18
Market Audit - 3

Opportunities...........................................................................................................19
New products. Starbucks has expanded its beverage categories by signing
an agreement with the wine and spirits group Jim Beam Brands to develop
and market a Starbucks branded coffee liqueur drink. The partnership with
Jim Beam Brands provides Starbucks with access to a nationwide sales and
distribution network. It also offers a partner with a proven track record in
product development and marketing. In the US, cordials and liqueurs
represent a $4-5 billion opportunity and approximately 20 million cases.
Liqueurs flavored with coffee or often mixed with coffee represent a
substantial segment of the liqueur market. Additionally, US specialty coffee
consumption is on the rise. Research indicates that there is a significant
overlap between consumers of liqueurs and consumers loyal to the
Starbucks brand which provides the company a strong revenue potential..20
Threats...........................................................................................21
Marketing Strategy..................................................................................................22
Marketing Mix..........................................................................................................25
Starbucks marketing information has been consistently accurate. When it has
been wrong, sales have exceeded expectations. Based on the SWOT analysis
and industry research, Starbucks current marketing decisions have been extremely
effective and timely. They are targeting the global market, primarily in the Pacific
Rim and Europe. They have increased pricing with little affect on demand. They
have also improved their distribution and protected themselves from a slow US
market. Their products have been consistently updated based on consumer
demand. Success can be somewhat deceiving. Starbucks may have “left money
on the table” by not being more aggressive, more targeted to local segments and
not concentrating their efforts toward the global market. ..........................34

Starbucks Marketing Audit


Executive Summary

The US specialty coffee market continues to have an increasing number of

firms looking to enter the market. Starbucks must be aware of competition on all

levels and maintain its operational performance if it is to retain its status as the

world’s leading specialty coffee retailer. The company’s focus on taste, quality

and customer service is consistent with the market segment. The current product

mix is in line with the industry and market forecast. Continual product review,

particularly in non-food items, for additional sources of revenue is needed to


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increase sales. The current product line would be improved through a more

regional perspective on consumer demand. The present pricing is competitive with

other specialty coffee stores. The company has protected itself from the volatile

coffee prices and could use pricing advantage should the cost of coffee rise.

Customers view Starbucks products from a value perspective rather than a price

perspective, consequently pricing could be increased. Due to the recent price increase

adjustments are not recommended until 2006 or later. More aggressive advertising

would reduce the risk of competition and a slumping US market. Additional marketing

would expand awareness of new programs, generate interest in recent promotion efforts

such as free refills and deliveries, and lead to increased sales of Starbucks non-food

items. Taking advantage of the company’s significant social contributions would

increase global brand image. To keep competitors from entering the US market, the

use of non-traditional methods of expansion is suggested. The declining US hot drinks

market and growing global market should shift marketing focus on overseas markets.

Asia and Europe represent 73% of the hot drink market. To maintain Starbucks position

as the premier purveyor of the finest coffee in the world, a doubling of efforts toward

overseas markets in Europe is warranted.

Environmental Aspects
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Demographics.

The growth rate of the US has been between 1.10% and .90% from 1999-

2003. The market demands are constantly increasing. Their unique approach to

expansion goes beyond the traditionally accepted methods. Starbucks has broken

the rules and set a new standard amongst its competitors. Starbucks primarily

chooses to focus on the demographics, psychographics, and lifestyle of their

customers. Starbucks targets both males and females, ranging in age from 18-30

year olds, and middle to upper middle class. Starbucks caters to all needs; they

offer non-caffeinated drinks, for children or non-coffee drinkers, sandwiches,

sweets, and a variety of juices and pastries.

In 1991, as the company continued to grow, Howard Schultz formed an in-

house team of architects and designers to ensure each store would convey the

right image and character. The company didn’t buy real estate, spaces were

leased so stores had to be custom designed in order to maintain consistency of

atmosphere and appearance. Stores were predominately located in suburban

retail centers, airport terminals, university campus areas, or busy neighborhood

shopping areas convenient to pedestrian foot traffic. Similar materials and

furnishings were used to keep the look of each store consistent, no two stores

ended up being exactly alike (McGraw-Hill, 1997) .

Locations of all stores are carefully selected for convenience and Starbucks

specifically targets places that are heavy with pedestrian street traffic. Starbucks

has leased space in supermarkets, airports, and shopping centers. Starbucks has

been successful even with their non-traditional approach towards retail locations.
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Since Starbucks watchword is convenience, they have broken the rules by

saturating a small area with numerous stores. Offering numerous locations in a

small area assures that customers have choices, and that the choice remains

Starbucks.

“Not surprisingly, today's most devoted coffee shop patrons are 18- to 34-

year-olds and those with annual incomes over $75,000. Forty-two percent of

18- to 34-year-olds and 46 percent of those who earn more than $75,000

say that when they drink coffee away from home, they head straight for

Starbucks-like shops, compared with just 32 percent of all away-from-home

coffee drinkers. The younger folks are attracted to the coffee-bar

atmosphere, music selections and what tends to be a younger customer

base, according to the report, while the wealthy simply want the best”

(DAWIDOWSKA, 2002).

Starbucks is quickly becoming known as the best coffee in the world. “Cup

by cup Starbucks has changed the way people from different continents drink

coffee” (Isidro, 2004). Their expansion into numerous countries has them leading

the world in a coffee revolution. Locations include, but are not limited to; Australia,

Austria, Beijing, France, Germany, Greece, Japan, Hawaii, Hong Kong, Malaysia,

New Zealand, Shanghai, Singapore, South Korea, Spain, Switzerland, Taiwan,

Thailand, Turkey, and the United Kingdom.


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Starbucks differentiation is that the Starbucks Corporation does not change

its menu when it changes venues. The products are the same weather one is in

the US or in Hong Kong. Contrary to traditional marketing strategies, Starbucks

does not personalize their coffees or have different products to suit various

countries' tastes.

The table below is a measure of the number of Starbucks stores per 10,000

populations in cities across the U.S., as of March 2005. The cities with the highest

store-to-population ratios nationally are provided. (Analysis is limited to cities with

at least 10,000 people, using the 2000 census figures. Supermarkets and other

stores selling coffee beans were not included in the totals. Store locations were

based on the addresses cited on the Starbucks Web site.)

STARBUCKS
COMMUNITY POPULATION
PER 10,000 PEOPLE
Falls Church, VA 10,377 7.7
Katy, TX 11,775 6.8
Greenwood Village, CO 11,035 6.3
Issaquah, WA 11,212 5.4
Palm Beach, FL 10,468 4.8
Littleton, CO 40,340 4.5
Destin, FL 11,119 3.6
Lincoln, CA 11,205 3.6
Sherwood, OR 11,791 3.4
STARBUCKS
COMMUNITY POPULATION
PER 10,000 PEOPLE
Naples, FL 20,976 3.3
Williamsburg, VA 11,998 3.3
Lynnwood, WA 33,847 3.2
Spring, TX 36,385 3.0
Bel Air, MD 10,080 3.0
Alpharetta, GA 34,854 2.9
Fairfax, VA 21,498 2.8
Vienna, VA 14,453 2.8
Freehold, NJ 10,976 2.7
Duluth, GA 22,122 2.7
Grand Haven, MI 11,168 2.7
Brentwood, CA 23,302 2.6
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Lake Oswego, OR 35,278 2.6


Silverdale, WA 15,816 2.5
Auburn, CA 12,462 2.4
Tumwater, WA 12,698 2.4

March, 2005
Sources: ePodunk; Starbucks.com; U.S. Census Bureau

Culture

Starbucks ultimate goal is to provide a third place outside of work and

home. Providing a place where people can relax and enjoy top-quality coffee and

coffee-related products, while creating an atmosphere of comfort and belonging.

“David Chichester, Chief Financial Officer Starbucks Coffee Japan says: “The

culture is so important at Starbucks that all executives also go through an

orientation during which they spend several days or more actually working at the

store level to get the feel of the Starbucks experience and culture” (Coffee Culture

article). Starbucks culture has been compared to the old Japanese traditional

business style where members of the company are considered family.

A large piece of the Starbucks culture is a strong focus on environmental

awareness and preservation. Starbucks Corporation takes their role to society

very seriously. The Corporate Social Responsibility Report addresses many social

concerns and issues important to Starbucks. Concerns addressed include, but are

not limited to; coffee and farmer equity practices, investing in social programs,

building strong community ties, The Starbucks Foundation - supporting youth

education, being responsible to our customers, understanding environmental


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issues and sharing with our partners, and fostering diversity and inclusion

(Corporate Social Responsibility annual report, 2004).

Markets

The United States hot drinks market is the largest in the world, accounting

for roughly a fifth of all global sales. Despite this leading position, the market has

been performing badly for a number of years now with growth rates consistently

negative, and thus the market steadily shrinking.

The US hot drinks market reached a value of $11.9 billion in 2003, having

decreased with a compound annual growth rate (CAGR) of -1.1% in the 1999-2003

periods. This decline went against the general trend of the global hot drinks

market. The decline lead to the US’s market’s global share to decrease by 2

percentage points between 1999-2003, accounting for 19.2% of the global market

by the end of this period. The leading revenue source for the US hot drinks market

in 2003 was the coffee sector, which accounted for nearly 85% of the market’s

value. In value terms the coffee sector was worth $10.1 billion in 2003, a decrease

of 4.9% since 1999. The decline of 4.9% in 1999 made this sector the poorest

performing within the market. The sector showing the best performance was tea,

but even this declined in value by 0.4% between 1999 and 2003.

Looking ahead, the market is expected to experience consistent negative

growth rates. By 2008, the market forecast is to reach a value of $11.7 billion,

which equates to a compound annual growth rate (CAGR) of -0.4% in the 2003-

2008 periods, lower than the global market. Indeed, of all the major hot drinks

markets in the world, the United States is the only one expected to decline in
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value. The result of this analysis indicated that the US’s global market share will

have decreased dramatically from 21.2% in 1999 to 17.1% in 2008.

Market Needs

Starbucks’ immediate goal is to continue adding new stores throughout the

US and internationally. In 1992 and 1993 Starbucks developed a three-year

geographic expansion strategy that targeted areas which not only had favorable

demographic profiles but which 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"; teams of professionals were located in

hub cities to support the goal of opening 20 or more stores in the hub in the first

two years. Once stores blanketed the hub, then additional stores were opened in

smaller, surrounding "spoke" areas in the region. To oversee the expansion

process, Starbucks created zone vice presidents to direct the development of each

region and to implant the Starbucks culture in the newly opened stores. Each of

the new zone vice presidents Starbucks recruited came with extensive operating

and marketing experience in chain-store retailing.

Market Trends

In 2003, the US market accounted for 19.2% of the global hot drinks sales.

Europe remains the largest regional market in the world, accounting for 41.9% of

global hot drinks sales. The Asia-Pacific accounts for a further 31.5% of the global

hot drinks market.


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Much of this decline can be blamed on a consumer shift away from coffee towards

soft drinks, as coffee accounts for a large proportion of hot drinks sales in the US.

However, there is evidence of manufacturers trying to broaden the range of

products that they sell, possibly learning from the success enjoyed by Starbucks

and their vast range of different flavored coffees. One possible area for product

development is within the herbal and fruit tea sector, particularly considering the

recent American fascination with health and wellbeing. The American tea sector is

in comparison fairly small but still enjoys healthy sales and growth rates. Tata Tea

and Unilever lead the sector with their Tetley and Lipton ranges. Private labels

perform distinctively better in the tea sector than in coffee, managing to claim over

a third of all retail sales.

Market Forecast
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In 2008, the United States hot drinks market is forecast to reach a value of

$11,653.3 million, a decrease of 1.9% since 2003. The compound annual rate of

change of the market in the period 2003-2008 is predicted to be a fall of 0.4%.

Due to the high consumption levels within the US hot drinks market, there is little
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scope for increased volume sales.


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Competition

The global coffee market is a very competitive sector, The US specialty

coffee market continues to grow, and an increasing number of firms are looking to

enter the market. The US has the largest coffee sector in the world, and is led by a

number of global players. Procter & Gamble lead the sector with their two major

brands, Folgers and Millstone, covering a variety of whole bean, ground and

instant coffees. Kraft Foods comes in a close second in the sector with its vast

range of different coffee brands, including General Foods International, Gevalia,

Yuban and Maxwell House. Nestlé is the other large company in the sector, having

a history of success with its Tasters Choice and Hills Brothers brands. It also

introduced the Nescafe brand to the US back in 2002 with a new Frothé line of

instant coffee, and has already experienced strong and expanding sector share.

Kraft Foods owns Starbucks, which accounts for a healthy proportion of US

coffee sales through its specialist coffee shops. Starbucks' closest competitor,

Second Cup, a Canadian franchisor with stores primarily in Canada, was less than

one-third its size. Second Cup, a franchisor of specialty coffees, has stores

located primarily in malls throughout the United States. No other rival has as many

as 250 stores, but there were at least 20 small local and regional chains that

aspired to grow into rivals of Starbucks, most notably New World Coffee, Coffee

People, Coffee Station, Java Centrale, and Caribou Coffee.


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SWOT Analysis

Datamonitor’s Business Information System reports; Starbucks Corporation

Company Profile and Marketingteacher.com SWOT Analysis Starbucks provides

the following.

“Starbucks Corporation, a specialty coffee retailer, producing and selling a

wide variety of hot and cold beverages, as well as pastries and confections,

through 8500 coffee shops across 32 countries worldwide. The company

recorded an increase in revenues and profits. It faces the threat of reduction

in margins due to rising dairy costs.

Strengths Weaknesses
• Global presence
• A disciplined innovator • Reliance on US market
• Increase in revenues and profits • Reliance on beverage innovation
• Clustering of company units • Lower revenues and income per
• Starbucks Corporation is a very employee
profitable organization, earning in • Lower returns on equity than peers
excess of $600 million in 2004.The • Problems in some international
company generated revenue of more Operations
than $5000 million in the same year. • strong presence in the United States
• It is a global coffee brand built upon a of America with more than three
reputation for fine products and quarters of their cafes located in the
services. home market.
• a respected employer that values its • dependant on a main competitive
workforce. advantage, the retail of coffee. This
• committed to a role of environmental could make them slow to diversify
leadership in all facets of our into other sectors should the need
business. arise.

Opportunities Threats
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• Growth in global coffee market • Market expansion


• New product • Volatile coffee markets
• Strong record of taking • Rising dairy costs
advantage of opportunities. • Slowing US retail sales
• New products and services that • Competition
can be retailed in their cafes, • Market entry of many competitors
such as Fair Trade products. and “copy cat” brands that pose
• The company has the opportunity potential threats.
to expand its global operations.
New markets for coffee such as
India, the Pacific Rim, and
European nations
• Co-branding with other
manufacturers of food and drink,
and brand franchising to
manufacturers of other goods
and services both have potential.

Strengths

Global Presence. Starbucks has a widespread global presence. The

company operates about 8500 retail store locations, the majority of which are

company owned and operated across32 countries worldwide. The company’s

widespread presence provides prevalent brand recognition and a strong customer

base.

A Disciplined Innovator. Starbucks is a disciplined innovator. The company

effectively manages its innovation timeline generating consistency in same store

sales. In fiscal 2002, the company introduced new Frappuccino Blended

Beverages, and in 2003, the "Iced Shaken" refreshments product line was

launched. In 2004, it pioneered the new Frappuccino Light blended coffee.

Starbucks’ ability to roll out new products relatively quickly is a considerable

competitive advantage for the company.


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Increase in revenues and profits. The company recorded revenues of

$5294.2 million during the fiscal year ended September 2004, an increase of

29.9% over 2003. The company’s revenues grew at a compounded annual growth

rate of 25% from fiscal 2000 and fiscal 2004. Furthermore, the operating profit of

the company during fiscal 2004 was $610 million, an increase of 43.7% over fiscal

2003. Its’ net earnings also increased by 46% in fiscal 2004. This significant rise in

revenues and profits provides the company with a strong financial base and

enables it to undertake new business ventures.

Clustering of company units. With the continued growth of the coffee

market, the company has looked to expand its business, including those areas

where it has an established presence. Operating on the basis that a critical driver

of business is the convenience of the company’s outlet location, Starbucks has

targeted clustering its units so as to dominate particular areas. The financial

reward derived from this practice is considerable. Existing outlets are not hurt by

the new stores. A continued strategy of unit clustering, and a focus on stores that

have convenient access for pedestrians and drivers, represents further opportunity

for Starbucks to capture an increasing share of the coffee market.

Weaknesses

Reliance on US market. Starbucks’, headquartered in Seattle, derives

approximately 85% of its revenue from its domestic US market. The company is an

international brand with wide ranging operations, consequently it should be


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generating a greater proportion of revenues from outside the US. Should the

company’s US unit under-perform due to economic conditions or increased levels

of competition, Starbucks’ performance will be materially affected.

Reliance on beverage innovation. An important long-term risk to the

company’s stock is a lower valuation caused by a slowdown in US sale store

growth. Starbucks’ store sales growth has been largely driven by beverage

innovation, but there are questions over how long this can last. Diminishing return

from beverage innovation, one of the company’s competitive strengths, would have

a significant adverse effect on the company’s performance.

Lower revenues and income per employee. The company generates lower

revenues and income per employee as compared to the industry average. Its

revenue per employee was $71,544 during fiscal 2004, as compared to the

industry average of $110,841. Furthermore its net income per employee is $5294

as compared to the industry average of $9500. The company’s lower returns per

employee as compared to the industry average reflect adversely upon its

employee efficiency.

Lower return on equity than peers. The company’s five year average

returns on equity have been lower than the industry average. Its five year average

return on equity was 13.65% as compared to the industry average of 15.09%. The
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company would need to effectively manage its finances to ensure that returns are

at par or higher than industry average.

Problems in some international operations. The company has been facing

certain difficulties in some of its international operations. Starbucks’ has faced

problems of expansion, with a number of openings failing to be successful.

Starbucks has experienced continued same-store sales sluggishness in its

Japanese operations. Also, in 2003 Starbucks Coffee International ended its joint

venture with the Delek Group of Israel. Following this decision, Shalom Coffee

Company, the joint venture between Starbucks Coffee International and the

Delek Group, closed its six Starbucks stores in Tel Aviv. This adversely affects the

international operations of the company and thus the growth prospects in the

region.

Opportunities

Growth in coffee market. The specialty coffee sector accounts for roughly

15% of the US retail coffee market, which is worth $21 billion. By 2005, the retail

coffee market is expected to be worth $22 billion, and the specialty coffee sector

will grow to account for 41% of this market. Starbucks has a market share of over

40% of the specialty coffee market, and the anticipated growth in this category will

offer the company considerable opportunities for further growth and expansion in

the near future.


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New products. Starbucks has expanded its beverage categories by signing

an agreement with the wine and spirits group Jim Beam Brands to develop and

market a Starbucks branded coffee liqueur drink. The partnership with Jim Beam

Brands provides Starbucks with access to a nationwide sales and distribution

network. It also offers a partner with a proven track record in product development

and marketing. In the US, cordials and liqueurs represent a $4-5 billion opportunity

and approximately 20 million cases. Liqueurs flavored with coffee or often mixed

with coffee represent a substantial segment of the liqueur market. Additionally, US

specialty coffee consumption is on the rise. Research indicates that there is a

significant overlap between consumers of liqueurs and consumers loyal to the

Starbucks brand which provides the company a strong revenue potential.

Market expansion. The company is targeting 15,000 international stores in

the next few years. Starbucks expects major expansion potential in China. The

company is also looking towards markets such as Brazil, India, and Russia for

expansion opportunities. Starbucks envisions China as its next significant

international opportunity. Citing its large urban population, rising economy and

increase in coffee consumption, Starbucks estimates that China could ultimately be

one of its largest markets. In China, the company will continue to focus on current

markets such as Beijing and Shanghai along with rapid expansion in new cities.

These developments will provide the company with new opportunities for revenue

growth.
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Threats

Volatile coffee markets. The price and available supply of coffee experience

high volatility. Starbucks’ requirements for quality standard coffee creates

complications within the producing countries. Barriers may include; weather, and

political and economic conditions which may adversely affect the company’s

business. In the past, the actions of some organizations and associations have

affected the prices of green coffee. This has been accomplished through

agreements establishing export quotas or restricting global coffee supplies. The

actions of these associations could cause a degree of disruption to Starbuck’s

operations.

Rising dairy costs. The company faces the threat of rising dairy costs. Dairy

prices have risen considerably and this could adversely affect Starbucks’ margins.

Raw milk prices in 2004 are expected to be above the 2003 levels. Milk and other

dairy products represent between 3% and 5% of sales, and sustained increase in

prices could affect the company’s margins.

Slowing US retail sales. The company faces long-term concerns regarding

its US store growth potential. If current growth continues, saturation levels within

the North American retail division will be reached within five years. This represents

a considerable concern for Starbucks, given that over the last two years, domestic

retail has been the source of about 75% of the company’s revenue growth and an
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even greater proportion of profit growth. Before reaching saturation point, US retail

sales growth will slow considerably over the next three to five years, further

increasing the pressure on the international division to justify the company’s

investment in expansion. (MAY 2005)

Marketing Strategy

The Starbucks Mission Statement and Six Guiding Principles are foundation

of the entire organization. The mission statement reads as follows:

To establish Starbucks as the premier purveyor of the finest coffee in

the world while maintaining our uncompromising principles as we

grow.

The Six Guiding Principles are as follows;

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

and dignity.

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

business.

3. Apply the highest standards of excellence to the purchasing,

roasting, and fresh delivery of our coffee.

4. Develop enthusiastically satisfied customers all of the time.

5. Contribute positively to our communities and our environment.

6. Recognize that profitability is essential to our future success.

Marketing Objectives/Financial Objectives


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Starbucks revenue had more than doubled since 2000. For the year ended

October 1, 2000 Starbucks reported revenue of $2.17 Billion and reported

revenues of $5.29 Billion for the year ended October 3, 2004. Starbucks has taken

a very aggressive approach to opening new stores both in the United States and

around the world. Based on their track record it is difficult to disagree with their

tactics. All Starbucks coffee shops opened in the United States are owned by the

corporation, they currently do not offer franchising opportunities. Starbucks has

expanded into 35 countries outside of the United States. The following is a list of

the international store counts for each country: (SEC filing 10-k)

Asia Pacific Europe/Middle East/Africa Americas


Japan 534 Germany 35 Canada 66
China 152 Saudi Arabia 32 Hawaii 45
Taiwan 136 United Arab Emirates 31 Mexico 32
South Korea 102 Spain 27 Chile 9
Philippines 70 Kuwait 27 Puerto Rico 6
Malaysia 52 Greece 25 Peru 3
New Zealand 36 Switzerland 18
Indonesia 24 Turkey 15
Lebanon 10
Austria 8
Qatar 6
Bahrain 5
France 4
Oman 3
Cyprus 2

Starbucks focuses their efforts in three areas of development; product

enhancement, licensing relationships, and store development. Their rapid

increase in sales (and profits) is directly related to these three areas of growth.
Market Audit - 24

“In fiscal 2004, the Company expanded its licensing relationship with Kraft

Foods, Inc. (“Kraft”) to include a larger selection of Starbucks® whole bean

and ground coffees, as well as Seattle’s Best Coffee® and Torrefazione

Italia® branded coffees and a selection of premium Tazo® teas, in grocery

and warehouse club stores throughout the United States. Kraft manages all

distribution, marketing, advertising and promotion and pays a royalty to

Starbucks. By the end of fiscal 2004, the Company’s coffees and teas were

available in approximately 20,000 grocery and warehouse club stores,

19,000 in the United States and 1,000 in International markets. Revenues

from this category comprised 27% of specialty revenues in fiscal 2004. The

Company has licensed the rights to produce and distribute Starbucks

branded products to two partnerships in which the Company holds a 50%

equity interest: The North American Coffee Partnership with the Pepsi-Cola

Company develops and distributes bottled Frappuccino® and Starbucks

DoubleShot® coffee drinks; and the Starbucks Ice Cream Partnership with

Dreyer’s Grand Ice Cream, Inc., develops and distributes superpremium ice

creams. In fiscal 2004, the Company entered into an agreement with Jim

Beam Brands Co., a unit of Fortune Brands, Inc., to develop, manufacture

and market a Starbucks-branded premium coffee liqueur product in the

United States. The Company conducted tests of this product in two U.S.

markets in the fiscal fourth quarter and expects to introduce the product

nationally during the fiscal second quarter of 2005 in retail locations licensed

to sell distilled spirits, such as restaurants, bars and retail outlets where
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premium distilled spirits are sold. The Company will not sell the liqueur

product in its Company-operated or licensed retail stores. The associated

revenues from this category accounted for 1% of specialty revenues in fiscal

2004“ (www.starbucks.com/aboutus/investor).

The specialty licensing division recorded revenues of $565.8 million in 2004,

an increase of 38.1% over fiscal 2003. The specialty foodservice and other

division recorded revenues of $271.1 million in 2004, an increase of 25.3% over

fiscal 2003.

Marketing Mix

Starbucks Corporation’s marketing mix involves the product determination,

pricing considerations, channels of distribution, and promotions adapted by the

company to ensure that the desired level of sales will be achieved in Starbucks’

target markets.

The company's products and services include:

Beverages: Food: Non food items:


Brewed coffees Sandwiches Mugs
Italian-style espresso Salads Travel tumblers
beverages Pastries Coffeemakers
Cold blended beverages Ice creams Coffee grinders
Roasted whole bean Storage containers
coffees Compact discs
Tea products Games
Fruit juice Seasonal novelty items
Sodas Starbucks card
Coffee liqueur Media bar
Market Audit - 26

Product Strategy

Starbucks Corporation’s product strategy involves the generation of new

products and the enhancement of existing products. This strategy achieves both

the advantage of introducing product evolution within the company and the

retention of old and existing products that symbolizes the Starbucks tradition. The

company's retail sales mix was roughly 61 percent coffee beverages, 15 percent

whole-bean coffees, 16 percent food items, and 8 percent coffee-related products

and equipment. The product mix in each store varied, depending on the size and

location of each outlet

With coffee as its main product, Starbucks continues to introduce new

goods so that consumers spend more time and money in their stores. In addition to

coffee, Starbucks also offers coffee mugs, coffee grinders, coffee-making

equipment, filters, storage containers, and other accessories for sale. Food

products include pastries, hot and cold sandwiches, salads, breakfast sandwiches,

and tea. As of 2001 Starbucks began to offer wireless Internet to patrons and later

this year, plans to increase the stores music products by implementing CD burners

to enable customers to sample online music from its subsidiary HearMusic.

The introduction of new products in the company is demonstrated through

the promotion of the following products: the ready-to-drink Starbucks Doubleshot,

Starbucks Ice Cream, and Starbucks Coffee House Blend brand. The RTD drink

Doubleshot is a new Starbucks product aimed to satisfy the needs of consumers

who are always in a hurry. Thus, Doubleshot is a Starbucks product that is “the
Market Audit - 27

ideal way to start a busy day!” Meanwhile, Starbucks had moved to expand its

supermarket sales of ice cream (available in 6 flavors), the Doubleshot, and their

whole beans. The special signature brand House Blend Coffee of Starbucks

introduces a new way wherein home-based consumers will also enjoy the

goodness of Starbucks coffee. This product comes in different flavors (ranging

from African, Arabian, to French Roast flavors), customized to fit the coffee-lover’s

taste and need for new, yet, equally delicious taste of the traditional Starbucks

coffee.

Starbucks continuously researches and implements new products as well as

enhanced its existing products in order to create diversity and added features to

the traditional lineup of coffee beverages and services. Customers play a large

part in this; feedback has been the catalyst for many new products and services

currently available through Starbucks. An example of the company’s product

strategy with its existing products is the introduction of the Tazo Tea and Crème

Frappuccino beverages in the traditional Starbucks menu list. Adding extra

features in the beverages enhances Starbucks’ famous product, Frappuccino.

That is, new flavors and variations of the said product were introduced.

Furthermore, Frappuccino blended beverages have become accessible to

consumers with the introduction of the bottled Frappuccino. These product

strategies focused on the product’s packaging, making the product commercially

available everywhere, especially where Starbucks retail stores are not available.
Market Audit - 28

With the introduction of prepaid purchase cards and the ability to preorder

via the telephone and online, Starbucks has enhanced their ability to assist

consumers with orders and purchases. Starbucks also introduces seasonal drinks

to its menu for the holidays, the Pumpkin and Gingerbread lattes have become

staples of the holiday coffee repertoire.

Pricing Strategy

Starbucks Corporation’s pricing strategy is largely based on competition,

especially since many specialty coffee shops are emerging after Starbucks’

success in the commercial market. In 2004, prices of nine chains in eight cities,

including Seattle, were compared to see how the coffee company fared against

companies such as Tully's Coffee Corp, Peet's Coffee & Tea, and Coffee Bean &

Tea Leaf. The result: Starbucks regular coffee was 4 percent less expensive and

its iced blended drinks were as much as 30 percent less expensive when

compared with specialty competition. Increased milk and green coffee bean prices

are primarily responsible for higher overall prices.

In October of 2004, Starbucks increased retail prices for beverages by an

average of 11 cents per cup. Starbucks last price increase, during August of 2000,

was an average of about 7 cents per cup in August 2000. With whole bean prices

ranging from a minimum of $8 and a maximum of $18, Starbucks coffee are in the

average price range for the specialty coffee market. These prices are maintained

throughout the company’s retail stores in America. International prices, however,

tend to be lower or higher due to currency adjustments and variations in exchange


Market Audit - 29

rate. By marketing their products and developing a culture, it is not the price

consumers focus on but the value of the products.

Distribution Strategy

Starbucks’ wide range of business activity allows it to utilize numerous

channels of product of distribution. The company adapts the vertical channel

integration so that distribution of the company’s wide range of products and

services will be effectively distributed to the consumers. Starbucks specifically

adapts the Corporate Vertical Marketing System (or Corporate VMS) wherein a

corporation owns and operates its own production facilities, warehouses, and retail

stores.

Starbucks Corporation uses coffee beans which are directly produced for

the company. Through the company’s funding, coffee farms in Mexico and Latin

American nations are cultivated according to Starbucks’ quality standards.

Establishment of the company’s own coffee farms reduces the problem of quality

coffee beans often encountered by specialty coffee shops like Starbucks. Under

the company’s supervision, coffee beans are produced and categorized according

to their unique taste and quality: the Fair Trade blend, Organic, Farm Direct

(commonly produced in Costa Rica), and Conservation, which is cultivated

primarily in Mexico.

Another advantage in Starbucks’ distribution strategy is that the company

does not allow franchising; rather, licensed stores are only allowed, giving the
Market Audit - 30

Starbucks Corporation full control of the management and operations of the retail

store. This policy is applied in both domestic and international business operations

of Starbucks. This strategy is used in order to maintain the quality of Starbucks

coffee despite the different locations and environment in which the store is located.

The Starbucks strategy aims to introduce to consumers to the original Starbucks

coffee taste regardless of nationality. Using the Corporate VMS allows Starbucks

Corporation to have a significant degree of control over the entire distribution

system. Ensuring that the company’s products adhere to the Starbucks’ standards

beginning with the raw ingredients and concluding with the finished product.

The Starbucks Company has had notable success in identifying top retailing

sites for its stores. The company has the best real estate team in the coffee-bar

industry. It is also recognized for its’ sophisticated system which enabled it to

identify the most attractive individual city blocks and the best store location. The

company’s site location track record is so good that as of 1997 Starbucks only

closed 2 of the 1,500 sites it had opened (McGraw-Hill, 1997).

“Today the company that weaned us away from the free mud in the office

kitchen and hooked us on $3 tall double caramel macchiato (with nonfat milk,

please) has 5,945 stores in the United States and 2,392 more overseas and in

Canada” (Stone, 2005).


Market Audit - 31

Promotion Strategy

Publicity Strategy

Starbucks Corporation primarily relies upon news stories, conferences and

public service announcement to gain publicity about the company’s products and

services. Starbucks promotes new product lineups or new promotions through

press releases and conferences, and is often used when launching a print and/or

broadcast advertisement about a new or enhanced product.

Starbucks utilizes public service announcements and sponsorships as its

main publicity strategy. Through the promotion of programs and activities that aim

at the company’s sense of ‘social responsibility,’ Starbucks Corporation is able to

project to the consumers the good and quality product that the company is

producing and distributing in the commercial market. Examples of these programs

that promote Starbucks’ social responsibility to its consumers are evident through

its community building programs, Starbucks Foundation, and environmental

preservation programs. It sponsors community-building programs through its local

support programs (funded by the Starbucks Foundation) such as the establishment

of Seattle Hometown and Zion Preparatory Academy, and grants such as library

grants for the company’s literacy program and funding projects.


Market Audit - 32

Advertising Strategy

Print ads and broadcast (television) are the primary media source Starbucks

uses in its advertising campaigns. Examples of Starbucks’ advertising campaigns

are TV ads that promote the bottled Frappuccino and Starbucks Doubleshot

products. These ads are both 15 minute-ads that are strategically played ‘back-to-

back’ for greater brand and product retention. Starbucks mainly uses product

rather than institutional advertising. Because of the audiovisual appeal of TV ads,

most of the company’s advertising campaigns are through the broadcast media.

Furthermore, the accessibility and flexibility of the television medium allows

everyone to receive information about Starbucks and its products. Similarly, print

media are also used because of Starbucks’ business employees/executives target

market are primary consumers of newspapers, allowing the company’s dominant

consumers to gain access to information about Starbucks’ new products. Both

media are therefore useful in proliferating the Starbucks Coffee Company and its

wide range of products.

Personal Selling Strategy

One of Starbucks’ main business operations is the distribution and offering

of the company’s services through the Office Beverage Service and Office Delivery

Service. These personal selling strategies provide small business offices a

continuing supply of Starbucks coffee without going into the nearest Starbucks

coffee shop. The Office Coffee Provider service offers the traditional Starbucks

coffee using a special thermal brewing system that will be supplied to the office
Market Audit - 33

(consumers). Starbucks coffee in retail packs are also available and can be

delivered to establishments interested in using the company’s products through the

Office Delivery Service. These two services provide additional convenience to

consumers.

Sales Promotion Strategy

Although Starbucks introduces many short-term promotions to increase

sales, its Starbucks Card is a special sales promotion program that helps

consumers to buy Starbucks products online as well as at outlets. Purchasers of

this Starbucks Card can take advantage of the company’s special promos and

deals, which includes discounts, special gifts and rewards, and other Starbucks

freebies. Such benefits are exclusively distributed to Starbucks Cardholders.

Conclusion/Recommendations
Market Audit - 34

Starbucks marketing information has been consistently accurate. When it

has been wrong, sales have exceeded expectations. Based on the SWOT

analysis and industry research, Starbucks current marketing decisions have been

extremely effective and timely. They are targeting the global market, primarily in

the Pacific Rim and Europe. They have increased pricing with little affect on

demand. They have also improved their distribution and protected themselves

from a slow US market. Their products have been consistently updated based on

consumer demand. Success can be somewhat deceiving. Starbucks may have

“left money on the table” by not being more aggressive, more targeted to local

segments and not concentrating their efforts toward the global market.

Starbucks Corporation’s Mission Statement: “To establish Starbucks as the

premier purveyor of the finest coffee in the world while maintaining our

uncompromising principles”, and its strategic planning seem to be in line. The

objectives for sales and revenue have consistently been achieved. The critical

issue for Starbucks is the decline of the US hot drinks market. To take advantage

of the company’s strengths and considering the weaknesses, opportunities, and

threats we recommend the following marketing strategies.

• Revamp product lines to meet specific location consumer demands both

regionally and globally.

• Use aggressive advertising to reduce the risk of increased competition and

mitigate the risk from the downturn of the US hot drinks market.

• Leverage the company focus on Corporate Social Responsibility in

marketing its brand image.


Market Audit - 35

• Focus expansion on additional overseas markets (Europe)

• Increase pricing if the price of coffee rises in 2006-2008.

• Continue to expand in the US market to mitigate the threat from

competitors.

• Continue to add additional non-food/beverage products and services

to increase sales and meet higher level customer needs.

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Market Audit - 36

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