We arent in the coffee business, serving people.

We are in the people business, serving coffee

Howard Schultz, Starbucks Chairman and Chief Global Strategist Fortune Magazine, Vol. 149 No. 2

Title: Submit To: Completed By:

Starbucks: The Non-Coffee Treat P.V. Sundar Balakrishnan

Matthew Carmean Partner

Julie Anstett Partner

Julia Toochette Partner

Joel Ennis Partner

Joey Eaton Partner

Trang P. Huynh Partner

Table of Contents

TABLE OF CONTENTS...............................................................................................................................................................2 EXECUTIVE SUMMARY............................................................................................................................................................3 MANAGERIAL PROBLEM.........................................................................................................................................................4 SITUATION ANALYSIS...............................................................................................................................................................4

Company ................................................................................................................................................................................. .4 Customer ................................................................................................................................................................................. .4 Competitor .................................................................................................................................................................... ..........5 Complementors.................................................................................................................................................................... .....5

STRATEGY (STP).........................................................................................................................................................................5
Segmentation............................................................................................................................................................ ................5 Target................................................................................................................................................................................ ........5

PRODUCT LIFE CYCLE.............................................................................................................................................................6

Introductory Stage............................................................................................................................................. .......................6 Growth Stage.............................................................................................................................................................. ..............6 Maturity Stage ..................................................................................................................................................... ....................7 Decline Stage................................................................................................................................................................... .........7

IMPLEMENTATION PLAN AND RECOMMENDATION .....................................................................................................7

Product..................................................................................................................................................................................... .7 Price...................................................................................................................................................................................... ....7 Place (Distribution)............................................................................................................................................................. ......8 Promotion................................................................................................................................................................. ................8

APPENDIX.....................................................................................................................................................................................8 PRICE............................................................................................................................................................................................13 PROMOTION...................................................................................................................................................................................13 PLACE..........................................................................................................................................................................................13

Starbucks: The Non-Coffee Treat

Executive Summary
Starbucks is the leading retailer and roaster for brand specialty coffee in the world. It has over 7,500 stores located worldwide. As Starbucks continues to expand, it will encounter all sorts of new product markets, with new and demanding customers for unique and appealing products. Starbucks has begun by introducing an extension of the Frappuccino line targeted to the non-coffee drinker. Entering this new market, Starbucks faces many challenges from having to compete to retain brand recognition of its primary products, yet increase awareness of its new product line. Our analysis and research of the market have resulted in keys findings as follows: The new Frappuccino blended beverages, also known as the Summer Drink flavors will help Starbucks reposition itself in the developing non-coffee iced-beverage market; Starbucks will also need to enhance the product perception to maintain the perceived high quality. Customers of this segment are sensitive to taste and quality of food product and nutritional data. With this new line extension, Starbucks will be facing many new competitors such as Jamba Juice, Orange Julius and other local non-coffee iced-beverage providers. Special care must be implemented to maintain Brand equity for its primary product, and not become to diversified the current customers seek alternatives. Based on our research, we found that the married couples age 25-54 with children to be the primary potential target market. Additionally, we have concluded generating awareness about the product via a Web Campaign would be highly advisable. A Secondary approach would be Network TV or Print Media such as magazines, journals, and newspapers.

Starbucks: The Non-Coffee Treat

Managerial Problem
Starbucks strategic goal is to increase market share of the non-coffee drinker; they have begun by introducing an extension of a product line targeted to this segment. To ensure market growth, Starbucks has repositioned one of its current products, the Frappuccino line, this product has been extended to include 3 new flavors; Double Chocolate Chip Crme, Vanilla Bean Crme, and Strawberries & Crme, introduced throughout the summer months. Faced with the challenge of entering a new competitive market Starbucks must compete to retain brand recognition of its primary products, yet increase awareness of its new product line.

Situation Analysis
Company Starbucks is the leading retailer for roaster and brand specialty coffee in the world (See Figure 1). It has over 7,500 stores, which are located in the United States, Canada, Europe, Asia and the Middle East1. Besides high quality coffee drinks, Starbucks sells bottled coffee drinks, such as Frappuccino and Starbucks DoubleShot. Starbucks revenue is growing by 20% a year and is opening approximately three stores every day. Starbucks is capable of managing its successful operations by having steady market growth. It achieved this by financing through their cash flow instead of franchising, selling stock or increasing their financial leverage2. Its strategy to success is blanket an area completely. This approach is to cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores in an area, that gives Starbucks a competitive advantage.3 Customer At first only yuppies went to Starbucks, but now it attracts a much wider demographic of customers including people of different ethnic backgrounds and ages. Today, Starbucks has the striking number of 25 million people visitors in its stores each week3. This success is due to the combination of high quality drinks and friendly environment with good music, comfortable chairs, and good services. This creates the Starbucks experience which customers can relate to that lead to brand loyalty. In addition, Starbucks

1 2
3

Sewer, Andy, Hot Starbucks to Go Fortune Magazine January 26, 2004 p.74 Sewer, Andy, Hot Starbucks to Go Fortune Magazine January 26, 2004 p.70

Source: Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2004.and Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2003. Robert S. Lazich, Editor. Thomson Gale, 2003

Starbucks: The Non-Coffee Treat

needs to deal with customers cultural preferences in all its worldwide locations to maintain customers loyalty. (See Figure 2) Also see Figure 3 for influences on the consumer purchase decision process. Competitor To ensure further market growth and be competitive, Starbucks is developing new products for non-coffee drinkers. Starbucks provides its current customers and attracts new customers not only with quality products but also with varieties flavors that customers desire (See Figure 3). Starbucks two largest competitors are Dunkin Donuts and Krispy Kreme, both are national chains. These companies use aggressive price-cutting, up to 20%, for their drinks.5 Other competitors are small local coffeehouses, and other coffee brands like Tullys and Petes Coffee. Their direct competitors for the new product line are Orange Julius, Jamba Juice, fast food chains such as McDonalds and Burger King, and other small coffee alternative providers. Complementors Starbucks recently teamed up with Bank One to offer the Starbucks Card Duetto Visa.7 This is a stored-value card and traditional credit card. Starbucks has also introduced a T-Mobile Hotspot service which allows the Starbucks customer to have access to wireless internet for a fee.8 Offering more services like the Visa card, wireless internet and customized CD will add more value to the Starbucks experience and help draw more customers to Starbucks which will lead to higher revenues.

Strategy (STP)
Segmentation One dimension of segmentation will be demographics (age and household status). We have selected married couples age 25 54 with children to be our primary target market. According to our data in figure 5, we found that these households spend more than other households on non-alcoholic beverages away from home. We also like this segment because the children can consume the coffee-free Frappuccino as well. We expect such events as parents buying the child a Frappuccino as a treat for a soccer game victory, or on a family trip to the beach. We anticipate the exciting summertime experience, will remain in the childs mind and will influence their purchase decisions as they mature. (See Figure 10) Target Points of Difference: Starbucks cannot expect to grow by offering the same products as its competitors. Starbucks must offer points of difference that will make customers want to come to Starbucks rather than competitors.
Starbucks: The Non-Coffee Treat

The points of difference that make Starbucks new Frappuccinos distinctive relative to competitors fall into four important areas: Brand Experience: At Starbucks you arent just drinking a beverage, but are undertaking in an emotional experience by the surroundings. Brand Quality: Starbucks has been recognized for exceeding expectations by the quality of their products and their service. This is what will create their loyal customers. Perceived Health: People that are active are perceived to be healthier then those not active. According to our survey, Figure 6, aside from the coffee, Starbucks is perceived as a healthy establishment, which makes the new coffee-free Frappuccinos appear healthy as well. Convenient Access: Starbucks is everywhere and easily accessible. In many locations Starbucks offers drive-thru windows, which are more convenient then its competitors. Positioning Starbucks products always have been perceived with a prestigious image. With their high quality products, unique tastes, friendly environment, conveniences, customers are willing to pay a premium price for its products. As Starbucks extends their product line with the new Frappuccino flavors, it faced against competitors like Jamba Juice. Therefore, to retain a position in the customers minds as high quality, Starbucks needs to enhance its position by making it appear as nutritional. This can be achieved by lowering the calories or by adding real fruit to the product. As the products nutritional and taste increase, their perceive quality will also increase. Offering a more quality product for the same price will help increase sales and enable them to be more competitive in the customers mind.

Product Life Cycle

The summer drinks are currently in the introductory stage of the product life cycle. Refer to Figure 4. The summer drinks are currently in the life cycle in reference to where we hope it will be in seasons/years to come.
Introductory Stage

During this stage we expect to have slow sales growth and low profits but are optimistic for the growth stage to increase both. The introductory stage is simply being used as an introduction to these new flavors of the Frappaccino drink.
Growth Stage

As the summer draws near we expect sales to rapidly increase. Due to the timing of the hot weather and the promotion effectiveness we expect to see an increase in sales. With the new-segmented
Starbucks: The Non-Coffee Treat

market hearing about the new non-coffee beverages sales are bound to grow due to curious consumers and their wants to be in some way affiliated with the Starbucks brand.
Maturity Stage

The maturity stage will be reached near the end of summer and beginning of fall of the first year. As the product is consumed and referred to as the Summer Drink sales will eventually slow and reach maturity. We recommend selling these flavors year round making them available to those who still desire to consume them. We do not see sales increasing from summer through winter.
Decline Stage

This stage is expected to come every year in late fall and proceed through winter and mid spring. Due to the environmental change, the weather, and the promotional aspect of the summer drink sales will surely decline during this period. As shown in Figure 4 we expect throughout the coming years to see sales progress and gain more market share every year.

Implementation Plan and Recommendation

Product Starbucks is known for providing superior products and services. Consumers have enjoyed the experience they encounter at Starbucks, and now for those who seek a high quality non-coffee drink can enjoy the same experience. By introducing these new summer drinks, Starbucks will enjoy an entirely new segment to market its products to. When looking at the sales revenues for the summer drinks it is important to consider that some of the existing customers will inevitably cross over and begin consuming the new drinks. In the end, the expansion of the product line is a wise decision because of the ease of adoption to Starbucks reputation for quality as well as the low cost of implementation. Price The main competitor to the new summer drinks is Jamba Juice with its smoothies. Comparatively, Starbucks summer drinks are priced significantly lower. In addition to low comparative price, the perceived benefits for consuming a Starbucks drink are quite high for most consumers. Therefore, when a customer does a value analysis and divides perceived benefits by the price, the resulting value for the customer is quite high. With the price of the summer drinks being lower than it competitors, its price sensitivity is low. However, over time as consumers adopt the product they may become aware of other products and therefore the price sensitivity will increase overtime. The delicate balancing act is to manage the price of the drink low enough to gain market share while still preserving Starbucks prestigious image.
Starbucks: The Non-Coffee Treat

Place (Distribution) Starbucks distributes its New Frappuccino Blended Beverages directly to customers through its own retail stores. Currently these new Frappuccino flavors are only available in North American Stores. With numerous locations, it will be convenient for customers to buy these new Frappuccino products. These new Frappuccino flavors are available year round. Due to the demand and appeal of the products, revenue from this product will fluctuate as the seasons change. Promotion The easiest methods for promoting the latest summer drinks are by internal advertisements within its retail stores, such as posters, new product signage, and other internal means. However, this type of promotion will have the least amount of effect on gaining more market share of non-coffee drinkers. Therefore we have done analysis of other mediums for promotion; the top 3 mediums of advertising, according to figures from 2000, include Newspaper, Network TV, and Spot TV4. After reviewing the goal of increasing awareness of the product to attract people to the retail locations we recommend using a medium that today is in direct competition to the TV, website marketing. Starbucks has historically avoided advertisements on TV, due to attempts that had reduced the brand image, furthermore the cost to do TV spots is far greater then by websites, this is not to say they should not do TV spots, but we recommend they avoid head-to-head marketing with competitors such as McDonalds, and other Fast-food chains. Starbucks has determined that most of its targeted customers consider themselves relatively technology savvy via the computer. An increasing number of companies are using the World Wide Web to communicate and after considerable review, we highly recommend a web campaign aimed to increase awareness of the Summer Drinks. Websites that are highly reputable or that can be partnered with will be the most successful in generating awareness. See Figure 9. TV Commercials may also be done, however we do not recommend during the introduction stage. During Growth would be far more effective. See Figure 11.

Appendix
Figure 1

TOP GROUND DECAFFEINATED COFFEE BRANDS, 2002

Krishnamurthy, Sandeep, E-Commerce Management: Text and Cases P. 169 source: Advertising Age, http://AdAge.com Starbucks: The Non-Coffee Treat

30 25 20 15 10 5 0 Folgers Maxw ell House Starbucks Folgers Coffee Singles Millstone

Based on sales for the year ending November 3, 2002 Starbucks is in third place among top ground decaffeinated coffee brands with a 7.8 percent market share. This is an increase of 2.6 percent compared to its market share in 2001.

TOP GROUND COFFEE BRANDS, 2002

25 20 15 10 5 0

Folgers M axwell House Folgers Coffee House M axwell House M aster Blend Starbucks Hills Brothers

Based on sales for the year ending November 3, 2002 Starbucks is in fifth place among top ground coffee brands with a market share of 6.66% and $109.2 millions in sales.

TOP WHOLE BEAN COFFEE BRANDS, 2002

35 30 25 20 15 10 5 0 Eight O'Clock Starbucks Folgers Select Millstone

Starbucks: The Non-Coffee Treat

Starbucks falls among four top whole bean coffee brands and has a 21.7% market share of the whole bean category this places the company in second place after Eight Oclock. In 2001 Starbucks had only 19.1%5

Figure 2 CULTURAL INFLUENCE ON THE CONSUMERS BEHAVIOR DIFFERENCE

90 80 70 60 50 40 30 20 10 0 USA Europe

Percentage of customer that spend time in coffeehouses Percentage of customers that buy coffee to go

By increasing its market share worldwide Starbucks needs to deal with cultural issues. For instance, in Europe 85% of coffee customers like to spend time in coffeehouses, in the USA this number is only 14%, the remaining 86% prefer to have their coffee to go. Starbucks needs to consider new ways to increase foreign markets. One way is by adopting its menu and service to segment markets.6

Figure 3 FLAVOR PREFERENCE SURVEY

45 40 35 30 25 20 15 10 5 0
To create its 2004 summer drinks Starbucks sponsored a survey during which it was revealed the degree of flavor preferences. This survey shows that Americans most enjoy the taste of chocolate (41%), strawberry (29%), and vanilla (28%). As a result,

Strawberry Chocolate Vanilla

Source: Starbucks Steaming Ahead with Aggressive Expansion plans by Jake Batsell. The Seattle Times. March 28,2004. Retrieved on April 25, 2004 From http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document 6 Source: Starbucks Steaming Ahead with Aggressive Expansion plans by Jake Batsell. The Seattle Times. March 28,2004. Retrieved on April 25, 2004 From <http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document> Starbucks: The Non-Coffee Treat

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Starbucks for 2004 developed new drinks: Java Chip Frappuccino, Double Chocolate Chip Frappuccino, Strawberries & Crme Frappuccino, and Caf Vanilla Frappuccino. 7

Figure 4 Summer Drink Frappuccino Life Cycle

Sales
Spring Summer Fall Winter 2004 = Current Progress in Product life Cycle

Spring Summer Fall Winter 2005

Spring Summer Fall Winter 2006

Figure 58
Percentage of total annual spending on non-alcoholic beverages away from home, by household type
Non-Alcoholic beverages away from home Total married Married couples, Married couples, Single parent at Single person couples no children with children least one child 62.20% 17.90% 38.60% 5.20% 18.90%

Average annual spending of consumer units on non-alcoholic beverages away from home, by household type, in thousands
Non-Alcoholic beverages away from home total married couples 191.77 Married couples, Married couples, single parent at no children with children least one child 135.83 232.66 147.84 under 25 25 - 34 35 - 44 45 -54 55 - 64 single person 101.41 65 - 74 75+

Percentage of total annual spending on non-alcoholic beverages away from home, by age
Non-Alcoholic total consumer beverages away units from home 100.00% Non-Alcoholic total consumer beverages away units from home 158.55

6.50% under 25

20.90% 25 - 34

28.50% 35 - 44

23.80% 45 -54

11.80% 55 - 64

5.60% 65 - 74

2.40% 75+

Average annual spending on non-alcoholic beverages away from home, by age, in thousands

136.7

192.3

206.39

188.28

144.14

83.94

38.76

This information is based on unpublished data collected by the Bureau of Labor Statistics Consumer Expenditure Survey, an ongoing, nationwide survey of household spending. From this data we have found that when going out for nonalcoholic beverages householders spanning the ages of 25 54 spend the most overall. We also conclude married couples with children at home spend more than other household types when going out for non-alcoholic beverages. With this data
7

Business Wire. On April 23, Starbucks introduces five new Frappuccino(R) blended beverage flavor, including Strawberries &Cream Frappuccino(R) blended cream. Retrieved on April 22, 2004 at < http://aolsvc.news.aol.com/business/article.adp?id=2004022 >
8

Household Spending. 8th Edition. Nov. 2003. Ed. New Strategist Publications.

Starbucks: The Non-Coffee Treat

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we have decided to target the segment of married couples ages 25 54 with children at home.

Figure 6 Small Random Survey Besides the coffee aspect, do you view Starbucks as a healthy establishment?
Yes: 12 No: 4 This survey was taken on the streets of Seattle around Pike Place Market. Sixteen random individuals were asked, Besides the coffee aspect do you view Starbucks as a healthy establishment, twelve answered yes, and four answered no. According to this survey we conclude that Americas view Starbucks as a healthy establishment.

Figure 7
Average Customer Expense & Visits per Week Customer Expenditure $3.50 $8.50 $5.00 $6.50 $6.00 Purchase Cycle 4 3 5 6 3

Customer 1 Customer 2 Customer 3 Customer 4 Customer 5

$5.90
Average Expenditure

4.2
Average visits per customer per week

Starbucks Customer Lifetime Value Average expenditure per visit $5.90 Purchase cycle in weeks 4.2 Gross Margin 21.3%* Annual contribution from exchange (53) $279.74 Forecasted customer life (years) 20 Lifetime profit $5594.80 Net present value of future cash flows using 10.0% $2381.58 discount rate *Gross Margin figured using most recent 13 weeks ended March 28th 2004. Cost of goods sold was figured by adding Cost of Price sales, Store operating expenses, and other operating expenses. That number was then subtracted from total net revenues High and the answer was then divided by total net revenues9.

Figure 8 Repositioning of New Frappuccino Product Perceptual Map

Perceived Quality Low
9

Perceived Quality High

Retrieved on May 10, 2004 from: http://ir.10kwizard.com/filing.php?repo=tenk&ipage=2775907&doc=1&num=3&total=35&count=0&source=518

Starbucks: The Non-Coffee Treat Price Low

12

Jamba Juice Orange Julius Italian Soda Bubble Tea Starbucks

Milk Shake

Slurpees Soda

Perceptual map reflects how the new Frappuccino products perceived quality relative to its price, and how customers perceives the Frappuccino compared with other non-coffee competitors. To increase it perceived quality and increase sale, Starbuck should move to a more desirable position by enhance the nutritional side of the product while attempting to maintain the same price level.

Figure 9 Ad Marketing Campaign Purpose: Brand-Building device that improves product awareness
Behavioral Targeting: Delivering ads based on how and when a visitor uses the web. For example, Starbucks can request more advertisements be placed on websites during the hotter days of the year. Content Targeting: Involves delivering ads based on the content of a website or interest category chosen by a consumer. This would include marketing on websites where more non-coffee drinkers surf then coffee drinkers surf. Figure 2 Example of Summer Drink Banner Ad

http://www.carmean.net/starbucks Figure 10 Influences on Consumer Purchase Decision Process

Marketing mix influences Product Coffee products and Starbucks experience. Price More expensive than average coffeehouses. Promotion In-store advertisements, interviews and articles in newspapers and magazines. Place Everywhere, you dont have to go far to find a

Starbucks: The Non-Coffee Treat

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Psychological influences: Motivation Physiological need Personality Compliant - prefer known brand names Perception Selective exposure, notice Starbucks when tired or thirsty. Attitude Favorable attitude toward Starbucks experience. Belief You will always receive good coffee and service Lifestyle Busy, fast-paced

Consumer purchase decision process Problem recognition: Feeling thirsty, need of energy caffeine Information search: Friends relatives, advertising and display of posters Alternative evaluation: Other acceptable brands of coffee drinks Purchase decision: Assessment of receiving value for given price Postpurchase behavior: Satisfaction from product and experience

Sociocultural influences Personal influence Opinion leaders Important associates drink Starbucks coffee you want to too. Word of mouth A friend mentions how great the new Frappuccino flavors are. Reference groups Membership group such as college students or business associates. Family Parents go to Starbucks when child matures will remember the experience. Social class Middle to upper class business associates and college students.

Situational influences Purchase task Want an energizer boost and a good experience. Social surroundings People reading, doing homework, just sitting drinking coffee, relaxed surrounding.

Physical surrounding Jazzy and relaxing music, funky dcor, plush velvet chairs, unique light fixture and comfortable atmosphere. Temporal effects In a hurry, drive-thru and quick ready to eat pastry. Antecedent states Tired? Get coffee. Short on cash? Use Starbucks card.

Figure 11 - Starbucks Commercial

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Table 1 Starbucks Commercial Layout Simulates an individual walking through the Pikes Place market and observing other people carrying Starbucks drinks and enthusiastically enjoying them. Titles appear briefly over the people suggesting the self image of the drinker. Chocolate Romantic, Vanilla Stylish, and Strawberry Bold. The observer then ends finding the Starbucks and the scene ends with a zoom in on the logo. The Starbucks old logo then fades out into the new one and an image of a new summer product comes in. The wording is simple yet clear. Summer, Starbucks, Enjoy. The consumer clearly understands this summer you can enjoy yourself at Starbucks. This could be a very strong but clean prestige image commercial. The audio has a nice fresh beat that can easily be found in the Experience at a Starbucks location.

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