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SUBMITTED TO: SIR UMER FAROOQ SUBMITTED BY: HAMID KHURSHID SHUJA IQBAL USAMA AHMED
Introduction of Company KFC Corporation, based in Louisville, Kentucky, is the world’s most popular chicken restaurant chain, specializing in Original Recipe ®, Extra Crispy TM, and Colonel’s Crispy Strips® chicken with home style sides and five new freshly made sandwiches. Every day, nearly eight million customers are served around the world. KFC’s menu everywhere includes Original Recipe® chicken—made with the same great taste Colonel Harland Sanders created more than a half-century ago. Customers around the globe also enjoy more than 300 other products—from a Chunky Chicken Pot Pie in the United States to a salmon sandwich in Japan. KFC continues reaching out to customers with home delivery in more than 300 restaurants in the United States and several other countries. And in quite a few U.S. cities, KFC is teaming up with other restaurants, Taco Bell and Pizza Hut, selling nearly fifty years ago; Colonel Sanders invented what is now called “home meal replacement” – selling complete meals to harried, time-strapped families. He called it, “Sunday Dinner, Seven Days a Week.” Today, the Colonel’s spirit and heritage are reflected in KFC’s brand identity – the logo features Colonel Harland Sanders, one of the bestrecognized icons in the world
GOALS OF KFC: • Build an organization dedicated to excellence. • Consistently deliver superior quality and value in our products and services. • Maintain a commitment to innovation for continuous improvement and grow, striving always to be the leader in the market place changes. • Generate consistently superior financial returns and benefits our owner and employees. • To establish in India our position as leading WQSR (Western Quick Service Restaurant) chain, serving good value. Innovative chicken-based products. Consistently, providing a pleasant dining experience, with fast friendly, in a clean and convenient location. At all times we must be dedicated to providing excellent and delighting customers. KFC HISTORY: KFC is an internationally renowned fast food industry in the world. They have the main ambition to increase & maintain the quality in fast food industry. Their aim is to capture the fast food market. Basically they want to provide their products to anyone that is why they expanding their branches in all over the world. They want to increase their profit through giving maximum satisfaction & other better facilities to people that they want. Now after catching such a marvelous position in the International Market, KFC is introducing a new item “Boneless Fried Chicken”, with even more attractive and charming taste. Company overview: Colonel Harland sanders, born September 9, 1890, actively began franchising his chicken business at the age of 65. Now, the Kentucky fried chicken business he started has grown to be one of the largest retail food service systems in the world. And colonel sanders, a quick service restaurant pioneer, have become a symbol of entrepreneurial spirit. More than two billion of the colonel’s “finger lickin’ good” chicken dinners are served annually. And not just in America. The colonel’s cooking is available in more then 82 countries around the world. When the colonel was six, his father died. His mother was forced to go to work, and young Harland had to take care of his three year old brother and baby sister. This meant doing much of the family cooking. By the age of seven, he was a master of a score of regional dishes. Ate age 10, his first job working on a nearby farm for $2 a month. When he was 12, his mother remarried and he left his home near Henryville, Ind., for a job on a farm in Greenwood, Ind. He held a series of jobs over the next few years, first as a 15-year-old streetcar conductor in New Albany, Ind., and then as a 16-yearold private, soldiering for six months in Cuba. After that he was a railroad
fireman, studied law by correspondence, practiced in justice of the peace court, sold insurance, operated an Ohio River steamboat ferry, sold tires, and Operated service station. When he was 40, the colonel began cooking for hungry travelers who stopped at his service station in Corbin, KY. He didn’t have a restaurant then, but served folks on his own dining table in the living quarters of his service station. As more people started coming just for food, he moved across the street to a motel and restaurant that seated 142 people. Over the next nine year, he perfected his secret blend of 11 herbs and spices and the basic cooking technique that is still used today. CURRENT PRODUCTS: • • • • • • • • • • • • • • • • • • • • Zinger burger · Krushers · GameBox · Twister · Boxmaster · Chicken Bucket · Hot wings · Fries · Corn on the cob · Zing Kong · Snacker(chicken & veggie) · Veggie Feast · Soft Drink · Coleslaw · Chicken Thali · Veg Finger · Snack Box · Sundae · Soft Twirl · Brownie Sundae
COMPETITIVE ANALYSIS: You cannot enjoy the business without competitors. No organization can afford to ignore there competitors. It is very important for a marketing managers to monitor the activities of there competitors, what they are doing? KFC adopted such sort of strategy that there is no competitor for spicy chicken, which is made by KFC. KFC beats its competitors through the revising marketing strategy at every movement but the main competitor of KFC are Mc Donald MARKET SHARE:
KFC has a very long history and has the most recognize able brand in chicken with over 50% of the market share. It becomes difficult for the companies like Sub way, Mc Donald’s, Chicken planet, Dixie or those who may want to enter in the market of fast food restaurants. Due to with over 50% of the market share in fast food industry KFC has recognition around the world and has been globally positioned for many years in India and to capture the market share in India adopts champs philosophy SWOT ANALYSIS: STRENGTHS • Goodwill and reputation: The company certainly has earned a good name and reputation by its previous products and services in the market. It is even more recognised in other markets where the company is among the leading fast food giants. The brand is recognised and trusted in India for its quality products, price, and customer service. It therefore has a good head start and enjoys a good chance of becoming a leader in Indian fast food industry. • Employee Loyalty: Employee Loyalty is one of the major strengths of KFC. The turnover rate in the company is amongst the lowest in the industry. • Customer Loyalty: Despite gain by Boston Market and Chick-fill A, KFC customer base remained loyal to the KFC brand because of its unique taste. KFC has continued to dominate the dinner and take out segment of the Industry.Ranks highest among all chicken restaurant chains for its convenience and menu variety. It generates $1B revenue each year.
WEAKNESSES • KFC was losing market share as other Chicken chain increased sales at a faster rate. • KFC share of Chicken Segment sales fell from 71 percent 1999 , to less than 56 percent in 2009 , a 10 -years drop of 15 percent. • Huge competition in this segment. • KFC has not yet invested much on R&D, and innovating new OPPURTUNITIES • New Markets: Globalisation has opened doors for new markets for the company. As the developed markets are mostly saturated, the developing countries like India and China promises a good market and generation of demand in the future. With more than 70% of the markets in india being unexplored and un organised, KFC has a good scope of expanding its operations in the country. • New variety: Company can also come up with new variety in the menu like Pizzas, garlic breads to attract more customers.
THREATS • Competition: Competitor companies like McDonalds are fast catching up with the market.McDonald’s with sales of more than 19 billion in 1999, accounted for 15 percent of the sales of the nation’s top 100 restaurant chains. Organisations like PETA People for Ethnic Treatment for Animals have given a bad name to the company which may prove disastrous to the image of the firm. Currently, KFC is undermassive attacks from animal organisations, questioning the way KFC’s suppliers are threatening the chicken, before they got slaughtered. AntiKFC campaigns, such as the one from PETA are affecting KFC’s brand image in a negative way and result in direct dollar losses, as less people are consuming KFC chicken • Saturated US Market: Now KFC cannot rely on just its home market to generate sales. As the US markets are already saturated and leave no or little scope for growth, company necessarily needs to look at offshore foreign markets to generate sales
MARKETING STRATEGIES OF KFC: There are different strategies adopted by KFC for different events. They market their products on different events and in different activities as they are helping SOS village. According to KFC, kids become the future permanents customers and we know very well that without any marketing strategy no marketing program and no product is successful because we depend upon customers, customer not depend on us. • KFC is following Niche Marketing and Societal Marketing techniques. • KFC are moving from Divisional Level to the District level by opening branches • KFC also offer free home delivery. • KFC open their outlets on reachable places. • KFC menu consists of more than 30 products. • KFC gives more priority to Family.
“One world, One Burger”
Ray Kroc, at 52 years old, invested his entire life savings to become the exclusive distributor of a milk shake maker called the Multimixer. Hearing about the McDonald's hamburger stand in California owned by Dick & Mac McDonald running eight Multimixers at a time, he packed up his car and headed West. It was 1954. Ray Kroc had never seen so many people served so quickly. He pitched the idea of opening up several restaurants to the McDonald brothers, convinced that he could sell eight of his Multimixers to each and every one. "Who could we get to open them for us?" Dick McDonald said. Well," Kroc answered, "what about me?" Ray Kroc opened the Des Plaines, Illinois restaurant in 1955 and never looked back. In 1965 McDonald's went public with the company's first offering on the stock exchange. In 1967, the first McDonald's restaurant outside the United States opened in Richmond, British Columbia. In 1968, the Big Mac® sandwich was introduced, followed by the Egg McMuffin® breakfast sandwich in 1973. Milestones and accomplishments have followed ever since. Today, there are tens of thousands of McDonald's restaurants serving millions of people daily around the world. The incredible growth and success of McDonald's can be summed up with the first thought that went through Ray Kroc's mind when he first saw McDonald's: "This will go anyplace." McDonalds celebrated its 53rd anniversary in April 15, 2008 and remained true to the statement "As far as I can tell, the only place you can't get a Big Mac is in outer space." The company operates as a global business through franchising. In 2004, the company reported to have established 30,000 local restaurants located in 115 countries across five continents. It is the biggest fast food retailer conquering markets worldwide. In almost every country, there is a McDonalds restaurant and in a single state or region, there are several branches. The company has spread so widely that the term “mcdonaldization”, was coined to describe the organization and culture of the company. The term has evolved to refer to the general business strategy of expansion. Vision McDonald’s vision is to be Estonia's "best" quick service restaurant, experience supported by a set of core values and guiding principles. Values and Principles of McDonald’s
The core values McDonald live by
• • • • • • • • Dedication to provide customers unparalleled levels of Quality, Service, Cleanliness and Value. Commitment with the people, because it knows that a diverse team of welltrained individuals, working together, is the key to its continued success. To approach all aspects of business with honesty and integrity. It backs to the system that provides success. Celebrating the achievements, yet we always strive to achieve new heights. Commitment to exceed the customers' expectations in every restaurant every time. McDonald believes its success is dependent upon our three-legged stool Corporate, Franchisee Partners, and Supplier Partners. McDonald is committed to franchising, maintaining a highly collaborative relationship with its franchisees and making franchising decisions based on what's best for its customers.
The principles that guide McDonald
McDonald’s mode of entry in foreign Market and Expansion Strategy: McDonalds enter in the foreign market through direct selling its product in its private outlets. It may be called as a specialty product producer. Product being produced, sold, & promoted by its own self. This mode of entry requires McDonalds to have deep study of the market in which it is planning to go. McDonalds expands its operations through franchising. Franchising is a hybrid manner of expanding and organizing the business by establishing a relationship of agency with the franchisees. Franchising involves the convergence of a parent company and several small businesses. The parent company sells to the smaller businesses the right to distribute its products or use its trade name and processes. A contract governs the agency relationship established between the parent company and the franchisees. The franchise contract defines the conditions of the agency and the duration of the relationship. Company Management and Marketing Strategies Organizational culture is the concept that guides the operations of McDonalds. McDonalds operates according to four values: quality, service, convenience and value. Organizational culture is part of the knowledge and information transmitted by McDonalds to the franchisees in other countries. Part
of organizational culture is the delivery of uniform quality of food and service wherever the branch is located. The good reputation of the company and the expectation of an excellent service no matter which branch people eat is a marketing strategy of McDonalds. McDonalds sets a standard applicable to all its branches worldwide. However, the company also gives leeway for innovation by allowing the branches to integrate culture into food and service increasing market share. Market Segmentation and Product Positioning There is little market segmentation because McDonalds target households in general. Although at the beginning, there may be an initial segmentation with the middle and upper income classes composing majority of its market, the company expects to reach out to lower income brackets as Estonia’s economy continuous to grow, employment and income increases resulting to higher ability to pay together with the change in food culture as more people are exposed to American food and the fast food culture. McDonalds will introduce the restaurant as a viable alternative to local restaurants because it offers a different culinary environment targeting the Estonian family culture and to local food since McDonalds offers American food. However, McDonalds will also encourage the operators/owners to design innovative ways of integrating Estonian values and culture into the food, service delivery, marketing and management of the restaurants to attract customers. Competition McDonalds does not have a major competitor in Estonia because of the relatively less number of foreign, non-European restaurants in the country. Competition comes from established local restaurants. McDonalds carries the competitive advantage of management and marketing expertise coupled with knowledge of the local market through the owners/operators. However, a possible competitive weakness is the views of the Estonians towards the United States since McDonalds is an American business and towards the company as an international business firm. Negative perceptions should be addressed.
McDonald’s products are standard in all franchises. However, the company adjusts to culinary differences in various cultures. In the case of India, McDonalds offered vegetarian burgers to practicing Buddhists. Asian countries preferring spicy taste saw the introduction of spicy burgers, chicken and seasoning. This provides options for customers to purchase food with either the American taste or the local taste. McDonalds achieves balance by maintaining standardization in products but adjusting to the local taste.
McDonalds prices differ in difference franchises since product price depends upon the expenses and costs in the locality. However, McDonalds determines price by ensuring the profitability of the restaurant while considering affordability to customers. Owners/operators should be trained to be cost-effective in their expenditures. Balance between profitability and affordability is achieved through the company’s pricing policy based on actual expenses and the receiving value for value given. This means that people are willing to pay a certain price when the company delivers and equivalent quality food and service.
McDonalds distribution channels in exclusive to its franchise restaurants. The way of increasing its channels of distribution is by obtaining several franchise requests in Estonia. Population, income and industrialization trends influence the decision to increase franchises.
McDonalds promotions are made internationally by the mother company and locally by the owners/operators through advertisements espousing company values and promotions such as taste-tests, discounting and frequency cards. McDonald's Advertising McDonald's original advertising symbol was a winking little fellow named "Speedee", designed to promote McDonald's fast service. In the 50s and early 60s, McDonald's drive-in restaurants were easily identified by their red and white tile buildings, which were capped with a slanted roof and framed on either end by a single golden, neon arch. Restaurants began to use the advertising theme, "Look for the Golden Arches" and in 1961, the "Speedee" symbol was replaced by a new logo - an "M" slashed with a line, symbolizing the neon arches and restaurant roofline. The arches, updated over the years, remain the advertising symbol for the company and are now one of the most recognized icons in the world.
Product and service delivery of McDonalds is customer centered. This means that McDonalds’ primary concern is the satisfaction of its customers. This is ensured by applying a strict standard of food and service quality. Periodically, representatives from the mother company visit certain branches in order to ensure the maintenance of quality standards, to discover problems and issues, and to provide updates on operation, management and marketing techniques. The quality standard is integrated in the entire supply chain process, starting with the products obtained from suppliers, the process of transforming raw materials into consumable products, packaging the food products, taking the orders of customers, and delivering the food.
• Customer Oriented
• Under direct Supervision of Mother Company
McDonalds employees play an important role in the delivery of quality product/service delivery. Employees are also responsible for providing customers service by asking the preferences of clients and listening to their requests and needs, and addressing these accordingly.
• Quality focused
McDonalds values its employees as much as it values its customers. The company applies the employment policy of providing sufficient training to its workforce. Prior to starting work, newly hired employees are given a rundown of the rules and regulations, company practices and the goals of the company. After this, the employees are introduced to the different components of the menu, process of food preparation, food-packaging techniques, serving of food, handling the cash register, and establishing rapport with customers. New employees are given practical exercises for experience.
• Customer’s Value
From its humble beginnings in Illinois, McDonald’s has become one of the prevailing brand names in the world that has become synonymous to the fastfood concept in the food industry. McDonalds has a strong marketing strategy, being supervised by the mother company, no matter at which part of the world the outlet is. The marketing strategies of McDonald’s guarantee lucrative proceeds for the company. It is said that McDonalds focuses to a specific kind of consumers with particular kinds of personalities. (Shank and Langmeyer 1994, 162) Other articles have pointed out that McDonald’s has given the market with an alternative dining experience. Debres (2005, 115) noted that McDonald’s has launched a sensibly priced set of meals that gives an unfailing level of quality for the public. As well, those who are under thirty-five years of age are deemed as the most frequent consumer’s of McDonald’s stores
Starbucks began in 1971 when three academics—English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker—opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle. The three partners shared a love of fine coffees and exotic teas and believed they could build a clientele in Seattle much like that which had already emerged in the San Francisco Bay area. Each invested $1,350 and borrowed another $5,000 from a bank to open the Pikes Place store. Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first mate in Herman Melville's Moby Dick(so company legend has it), and because they thought the name evoked the romance of the high seas and the seafaring tradition of the early coffee traders. The new company's logo, designed by an artist friend, was a twotailed mermaid encircled by the store's name. The inspiration for the Starbucks enterprise was a Dutch immigrant, Alfred Peet, who had begun importing fine arabica coffees into the United States during the 1950s. Peet viewed coffee as a fine winemaker views grapes, appraising it in terms of country of origin, estates, and harvests. Peet had opened a small store, Peet's Coffee and Tea, in Berkeley, California, in 1966 and had cultivated a loyal clientele. Peet's store specialized in
importing fine coffees and teas, dark-roasting its own beans the European way to bring out their full flavor, and teaching customers how to grind the beans and make freshly brewed coffee at home. Baldwin, Siegel, and Bowker were well acquainted with Peet's expertise, having visited his store on numerous occasions and spent many hours listening to Peet expound on quality coffees and the importance of proper bean-roasting techniques. All three were devoted fans of Peet and his dark-roasted coffees, going so far as to order their personal coffee supplies by mail from Peet's. The Pikes Place store featured modest, hand-built nautical fixtures. One wall was devoted to whole-bean coffees; another had shelves of coffee products. The store did not offer fresh-brewed coffee by the cup, but samples were sometimes available for tasting. Initially, Siegel was the only paid employee. He wore a grocer's apron, scooped out beans for customers, extolled the virtues of fine, dark-roasted coffees, and functioned as the partnership's retail expert. The other two partners kept their day jobs but came by at lunch or after work to help out. During the start-up period, Baldwin kept the books and developed a growing knowledge of coffee; Bowker served as the "magic, mystery, and romance man."1 The store was an immediate success, with sales exceeding expectations, partly because of a favorable article in the Seattle Times. In the early months, each of the founders traveled to Berkeley to learn more about coffee roasting from their mentor, Alfred Peet, who urged them to keep deepening their knowledge of coffees and teas. For most of the first year, Starbucks ordered its coffee beans from Peet's, but then the partners purchased a used roaster from Holland and set up roasting operations in a nearby ramshackle building. Baldwin and Bowker experimented with Alfred Peet's roasting procedures and came up with their own blends and flavors. A second Starbucks store was opened in 1972. By the early 1980s, the company had four Starbucks stores in the Seattle area and could boast of having been profitable every year since opening its doors. But the roles and responsibilities of the cofounders underwent change. Zev Siegel experienced burnout and left the company to pursue other interests. Jerry Baldwin took over day-to-day management of the company and functioned as chief executive officer; Gordon Bowker remained involved as an owner but devoted most of his time to his advertising and design firm, a weekly newspaper he had founded, and a microbrewery he was launching (the Redhook Ale Brewery). Product Line Starbucks stores offered a choice of regular or decaffeinated coffee beverages, a special "coffee of the day," and a broad selection of Italian-style espresso drinks. In addition, customers could choose from a wide selection of fresh-roasted whole-bean coffees (which could be ground on the premises and carried home in distinctive packages), a selection of fresh pastries and other food items, sodas, juices, teas, and coffee-related hardware and equipment. In 1997, the company introduced its Starbucks Barista home espresso machine featuring a new portafilter system that accommodated both ground coffee and Starbucks' new ready-to-use espresso pods. Power Frappuccino—a version of the company's popular Frappuccino blended beverage, packed with protein, carbohydrates, and vitamins—was tested in several markets during 1997; another promising new product being tested for possible rollout in 1998 was Chai Tea Lattè, a combination of black tea, exotic spices, honey, and milk.
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. Larger stores carried a greater variety of whole coffee beans, gourmet food items, teas, coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers, and other accessories. Smaller stores and kiosks typically sold a full line of coffee beverages, a limited selection of whole-bean coffees, and a few hardware items. In recent years, the company began selling special jazz and blues CDs, which in some cases were special compilations that had been put together for Starbucks to use as store background music. The idea for selling the CDs originated with a Starbucks store manager who had worked in the music industry and selected the new "tape of the month" Starbucks played as background in its stores. He had gotten compliments from customers wanting to buy the music they heard and suggested to senior executives that there was a market for the company's music tapes. Research that involved looking through two years of comment cards turned up hundreds asking Starbucks to sell the music it played in its stores. The Starbucks CDs, created from the Capitol Records library, proved a significant addition to the company's product line. Some of the CDs were specifically collections designed to tie in with new blends of coffee that the company was promoting. Starbucks also sold Oprah's Book Club selections, the profits of which were donated to a literacy fund supported by the Starbucks Foundation. The company was constantly engaged in efforts to develop new ideas, new products, and new experiences for customers that belonged exclusively to Starbucks. Schultz and other senior executives drummed in the importance of always being open to re-inventing the Starbucks experience. Store Ambience Starbucks management looked upon each store as a billboard for the company and as a contributor to building the company's brand and image. Each detail was scrutinized to enhance the mood and ambience of the store, to make sure everything signaled "best of class" and that it reflected the personality of the community and the neighborhood. The thesis was "Everything matters." The company went to great lengths to make sure the store fixtures, the merchandise displays, the colors, the artwork, the banners, the music, and the aromas all blended to create a consistent, inviting, stimulating environment that evoked the romance of coffee, that signaled the company's passion for coffee, and that rewarded customers with ceremony, stories, and surprise. Starbucks was recognized for its sensitivity to neighborhood conservation with the Scenic America's award for excellent design and "sensitive reuse of spaces within cities." To try to keep the coffee aromas in the stores pure, Starbucks banned smoking and asked employees to refrain from wearing perfumes or colognes. Prepared foods were kept covered so customers would smell coffee only. Colorful banners and posters were used to keep the look of Starbucks stores fresh and in keeping with seasons and holidays. Company designers came up with artwork for commuter mugs and T-shirts in different cities that was in keeping with each city's personality (peach-shaped coffee mugs for Atlanta, pictures of Paul Revere for Boston and the Statue of Liberty for New York).
To make sure that Starbucks' stores measured up to standards, the company used "mystery shoppers" who posed as customers and rated each location on a number of criteria. Building a Top Management Team Schultz continued to strengthen Starbucks' top management team, hiring people with extensive experience in managing and expanding retail chains. Orin Smith, who had an MBA from Harvard and 13 years' experience at Deloitte and Touche, was brought in as chief financial officer in 1990 and then was promoted to president and chief operating officer in 1994. The four key executives during the company's formative years—Howard Schultz, Dave Olsen, Howard Behar, and Orin Smith—contributed the most to defining and shaping the company's values, principles, and culture. As the company grew, additional executives were added in marketing, store supervision, specialty sales, human resources, finance, and information systems. Schultz also took care to add people to Starbucks' board of directors who had experience growing a retail chain and who could add valuable perspectives. Mail Order Sales Starbucks published a mail-order catalog that was distributed six times a year and that offered coffee, candies and pastries, and select coffee-making equipment and accessories. A special business gift-giving catalog was mailed to business accounts during the 1997 Christmas holiday season. The company also had an electronic store on the Internet. In 1997, sales of this division were about $21.2 million, roughly 2 percent of total revenues; almost 50,000 mail-order customers were signed up to receive monthly deliveries of Starbucks coffee as of late 1997. Starbucks management believed that its direct-response marketing effort helped pave the way for retail expansion into new markets and reinforced brand recognition in existing markets. Joint Ventures In 1994, after months of meetings and experimentation, PepsiCo and Starbucks entered into a joint venture arrangement to create new coffee-related products for mass distribution through Pepsi channels, including cold coffee drinks in a bottle or can. Howard Schultz saw this as a major paradigm shift with the potential to cause Starbucks business to evolve in heretofore unimaginable directions; he thought it was time to look for ways to move Starbucks out into more mainstream markets. Cold coffee products had generally met with very poor market reception, except in Japan, where there was an $8 billion market for ready-to-drink coffee-based beverages. Nonetheless, Schultz was hoping the partners would hit on a new product to exploit a good-tasting coffee extract that had been developed by Starbucks' recently appointed director of research and development. The joint venture's first new product, Mazagran, a lightly flavored carbonated coffee drink, was a failure; when test- marketed in southern California, some consumers liked it and some hated it. While people were willing to try it the first time, partly because the Starbucks name was on the label, repeat sales proved disappointing. Despite the clash of cultures and the different motivations of the two partners, the partnership held together because of the good working relationship that evolved between
Howard Schultz and Pepsi's senior executives. Then Schultz, at a meeting to discuss the future of Mazagran, suggested, "Why not develop a bottled version of Frappuccino?"18 Starbucks had come up with the new cold coffee drink it called Frappuccino in the summer of 1995, and it had proved to be a big hot-weather seller; Pepsi executives were enthusiastic. After months of experimentation, the joint venture product research team came up with a shelf-stable version of Frappuccino that tasted quite good. It was tested in West Coast supermarkets in the summer of 1996; the response was overwhelming, with sales running 10 times over projections and 70 percent repeat business. In September 1996, the partnership invested in three bottling facilities to make Frappuccino, with plans to begin wider distribution. Sales of Frappuccino reached $125 million in 1997 and achieved national supermarket penetration of 80 percent. Sales were projected to reach $500 million in 1998; Starbucks management believed that the market for Frappuccino would ultimately exceed $1 billion. In October 1995 Starbucks partnered with Dreyer's Grand Ice Cream to supply coffee extract for a new line of coffee ice cream made and distributed by Dreyer's under the Starbucks brand. The new line, featuring such flavors as Dark Roast Espresso Swirl, JavaChip, Vanilla MochaChip, Biscotti Bliss, and Caffe Almond Fudge, hit supermarket shelves in April 1996; by July, Starbucks coffee-flavored ice cream was the top-selling superpremium brand in the coffee segment. In 1997, two new low-fat flavors were added to complement the original six flavors, along with two flavors of ice cream bars; all were well received in the marketplace. Additional new ice cream products were planned for 1998. Also in 1995, Starbucks worked with Seattle's Redhook Ale Brewery to create Double Black Stout, a stout beer with a shot of Starbucks coffee extract in it. Licensed Stores and Specialty Sales In recent years Starbucks had begun entering into a limited number of licensing agreements for store locations in areas where it did not have ability to locate its own outlets. The company had an agreement with Marriott Host International that allowed Host to operate Starbucks retail stores in airport locations, and it had an agreement with Aramark Food and Services to put Starbucks stores on university campuses and other locations operated by Aramark. Starbucks received a license fee and a royalty on sales at these locations and supplied the coffee for resale in the licensed locations. All licensed stores had to follow Starbucks' detailed operating procedures, and all managers and employees who worked in these stores received the same training given to Starbucks managers and store employees. Starbucks also had a specialty sales group that provided its coffee products to restaurants, airlines, hotels, universities, hospitals, business offices, country clubs, and select retailers. One of the early users of Starbucks coffee was Horizon Airlines, a regional carrier based in Seattle. In 1995, Starbucks entered into negotiations with United Airlines to have Starbucks coffee served on all United flights. There was much internal debate at Starbucks about whether such a move made sense for Starbucks and the possible damage to the integrity of the Starbucks brand if the quality of the coffee served did not measure up. After seven months of negotiation and discussion over coffee-making procedures, United Airlines and Starbucks came up with a way to handle quality control on some 500-plus planes with varying equipment, and Starbucks became the coffee supplier to the 20 million passengers flying United each year.
In addition, Starbucks made arrangements to supply an exclusive coffee blend to Nordstrom's for sale only in Nordstrom stores, to operate coffee bars in Barnes & Noble bookstores, and to offer coffee service at some Wells Fargo Bank locations in California. Most recently, Starbucks began selling its coffees in Chapters, a Toronto book retailer with sites throughout Canada, and in Costco warehouse club stores. A 1997 agreement with U.S. Office Products gave Starbucks the opportunity to provide its coffee to workers in 1.5 million business offices. In fiscal 1997, the specialty sales division generated sales of $117.6 million, equal to 12.2 percent of total revenues. International Expansion In markets outside the continental United States (including Hawaii), Starbucks' strategy was to license a reputable and capable local company with retailing know-how in the target host country to develop and operate new Starbucks stores. In some cases, Starbucks was a joint venture partner in the stores outside the continental Untied States. Starbucks created a new subsidiary, Starbucks Coffee International (SCI), to orchestrate overseas expansion and begin to build the Starbucks brand name globally via licensees; Howard Behar was president of SCI. Going into 1998, SCI had 12 retail stores in Tokyo, 7 in Hawaii, 6 in Singapore, and 1 in the Philippines. Agreements had been signed with licensees to begin opening stores in Taiwan and Korea in 1998. The company and its licensees had plans to open as many as 40 stores in the Pacific Rim by the end of September 1998. The licensee in Taiwan foresaw a potential of 200 stores in that country alone. The potential of locating stores in Europe and Latin America was being explored. The Future Industry analysts in 1998 saw Starbucks as being well on its way to becoming the Nike or Coca-Cola of the specialty coffee segment. It was the only company with anything close to national market coverage. The company's most immediate objective was to have 2,000 stores in operation by the year 2000. Its longer range objective was to become the most recognized and respected brand of coffee in the world. The company's efforts to greatly increase its sphere of strategic interest via its joint ventures with Pepsi and Dreyer's, its move to sell coffee in supermarkets, and the possibility of marketing fruit-juice drinks and candy under the Starbucks label represented an ongoing drive on Schultz's part to continually reinvent the way Starbucks did business. In order to sustain the company's growth and make Starbucks a strong global brand, Schultz believed that the company had to challenge the status quo, be innovative, take risks, and alter its vision of who it was, what it did, and where it was headed. Under his guidance, management was posing a number of fundamental strategic questions: What could Starbucks do to make its stores an even more elegant "third place" that welcomed, rewarded, and surprised customers? What new products and new experiences could the company provide that would uniquely belong to or be associated with Starbucks? What could coffee be—besides being hot or liquid? How could Starbucks reach people who were not coffee drinkers? What strategic paths should Starbucks pursue to achieve its objective of becoming the most recognized and respected brand of coffee in the world?