Case Study Assignment For Financial Management-I

Topic- STARBUCKS CORPORATION

INTRODUCTION TO THE BRAND-

Starbucks Corporation popularly known as Starbucks Coffee. It is an American company
and has the largest coffeehouse chain in the world, with headquarters in Seattle,
Washington.
In 1971, the original Starbucks opened with the 3 partners/ founders named Jerry
Baldwin, Zev Siegal and Gordon Bowker in Pike Place Market in Seattle, Washington.
Their focus was to sell coffee beans and equipment. They purchased green coffee beans
from Peet’s, a specialty coffee roaster and retailer, during their first year of operation.
Later, they began buying coffee beans directly from the growers. In 1983, an
entrepreneur by the name of Howard Schultz joined the company; Schultz felt that the
company should sell coffee and espresso drinks as well as coffee beans. The partners
felt that selling coffee and espresso drinks would take away from their primary focus of
selling coffee beans. Since the idea did not work, Schultz started his own company
called II Giornale coffee bar chain in 1985. In 1987, the original owners of Starbucks
sold their chain to Schultz’s II Giornale. Schultz changed II Giornale outlets to Starbucks
chains and quickly began to expand.

Starbucks coffee has grown into the largest coffeehouse company in the world with
16,120 stores in 94 countries such as in Australia, Canada, China, Puerto Rico, etc.
Starbucks has thirty blends and single-origin coffee. Starbucks brand coffee can also be
purchased in local stores to brew at home. Starbucks employs over 140,000 employees
worldwide with over five million customers a week. At one point they had typical
customers coming in on an average of six times a month while loyal customers came in
on an average of eighteen times a month spending an average of $50. Starbucks is one
of Fortune magazine’s 100 Best Companies to work for in 2008 and is Business Ethics
100 Best Corporate Citizens for the fourth year.

PRODUCT OVERVIEW-
Starbucks product line has grown to include fresh brewed coffee, hot and iced espresso
beverages, coffee and non coffee blended beverages, Tazo tea, baked pastries,
sandwiches, and salads. Starbucks paraphernalia includes coffee grinders, espresso
machines, coffee brewers, music CD’s, books, movies and gift cards. The global
consumer products include bottled Frappuccino, iced coffee, and espresso drinks, whole
bean coffee, tea, coffee liqueurs and premium ice cream.

Starbucks understands concepts of brand identity and product differentiation. They have
tapped in on what the consumer perceives and have managed to identifiable
differentiate themselves between other companies’ products or services. Starbucks
realizes this success depends significantly on the value of the Starbucks brand while
relying on its excellent reputation for their product quality, superior, and consistent
customer service.

The management believes it must safeguard and develop the value and importance of
the Starbucks brand in order to bring continued success in the future. The perception of
brand value by the consumer is based on an array of personal qualities. Starbucks has
been able to establish an ambiance of sophistication and intellect. Loyal customers
enter the retail chain as an escape from their mundane lives into a serene, regal
atmosphere where they proudly sip from their branded mugs. Starbucks profits from the
way they make their customers feel, allowing them to portray a prominent image and
feel like the upper crusted elite in society. Therefore, Starbucks brand equity and quality
is synonymous with high prices and a classy image. The Company already owns and has
also applied to register many service marks and trademarks both in the United States
and in many countries around the world. Some of the Company’s trademarks, including
Starbucks, the Starbucks logo, Frappuccino, Seattle’s Best Coffee and Tazo are all of
great value to the Company. Starbucks owns numerous copyrights for items such as
product packaging, promotional materials, in-store graphics, and training materials. In
addition, the company also holds patents on certain products, systems, and designs and
has registered and maintains numerous Internet domain names, including
“Starbucks.com” and “Starbucks.net.

MARKET STRUCTURE-
Starbucks, despite their inflated prices have been able to create a sense of brand loyalty
with an array of loyal followers. Coffee is a fairly homogeneous item which Starbucks
has been able to market their standards of portraying a luxurious lifestyle. Starbucks
operates in a monopolistically competitive market structure in which they have been
able to maintain a control over their inflated prices. They have been able to create a
standard for their coffee and in which they require their customer base to be
exaggerated prices for a cup of their various brews. With usage of the Starbucks logo,
quality, and various trademarks, they differentiate their coffees from their competitors.
Starbucks prides itself on being completely different from any other coffee house and its
competitors, which is a reason why Starbucks has become so successful. The company’s
strategy to focus on their core competencies to differentiate themselves has made
Starbucks into a coffee powerhouse. Starbucks has mastered knowing how to benefit
their customer; leverage the company widely to many products and markets, and create
ideas that are hard for competitors to imitate.

COMPETITION-
Starbucks main competitors are quick-service restaurants and specialty coffee shops.
There are an abundant amount of competitors in the specialty coffee beverage industry.
The company believes that its customers choose among retailers primarily on the basis
of product service, service, price, and convenience. Starbucks, in recent times, has
experienced drastic direct competition from large US competitors from quick-service
restaurants. These restaurants have significantly greater marketing and operating
resources than they do. Starbucks is also faced with well-established competitors in the
International markets with increased competition in the U.S. ready-to-drink coffee
beverage market.

Starbucks whole bean coffees compete directly against specialty coffees sold through
supermarkets, specialty retailers and a growing number of specialty coffee stores. Both
their whole bean coffees and coffee beverages compete indirectly against all other
coffees on the market. Starbucks Specialty Operations face significant competition from
established wholesale and mail order suppliers, some of whom have greater financial
and marketing resources than the Company. Starbucks faces intense competition from
both restaurants and other specialty retailers for prime retail locations and qualified
personnel to operate both new and existing stores.

The intensity of rivalry increases as businesses try to improve their position in the
industry. In order to gain new customers, competitors may reduce prices, introduce new
products or substitutes, and increase marketing efforts.

1. Dunkin Donuts

The first Dunkin Donuts was opened in 1950 in Quincy, Massachusetts by William
Rosenberg. Today, there are over 13,000 Dunkin Donuts located in 50 countries
worldwide with sales of $6.4 billion in 2006. Dunkin’s headquarters is located in
Canton, Massachusetts. Dunkin Donuts is known for their doughnuts and coffee. Over
the years, Dunkin has introduced new products such as bagels, muffins, breakfast
sandwiches. In order to compete with the lunch crowd, Dunkin expanded their product
menu to include pizzas and sandwiches. In order to compete with the specialty
coffeehouses, Dunkin expanded their coffee offerings to include flavored coffees, lattes,
coolattas, flavored hot chocolate and teas.

1. McDonalds

The first McDonald’s restaurant was opened in 1940 in San Bernardino, California by
two brothers named Dick and Mac McDonald. As of December 31, 2007, there were
31,377 McDonald’s restaurants in 118 countries serving 54 million people each day.
McDonald’s is the world’s largest fast-food chain restaurant. While Starbucks is the
leader in the specialty coffeehouse market, McDonalds is becoming an emerging
competitor when it first upgraded its coffee in 2006. McDonald’s coffee sales increased
15% in 2006, and plans to grow coffee sales with the plan to install coffee bars in all
14,000 U.S. locations. The McDonald’s new specialty drinks, which are now in about
half of the company’s nearly 14,000 US stores, already have a following among some
former Starbucks customers. McDonalds has a larger customer demographic than
Starbucks. Starbucks coffee is considered to be a luxury for the affluent, while
McDonald’s caters to families with children, teenagers, adults, and senior citizens with
its well-established menu offerings. Like Starbucks, McDonalds has a strong brand
recognition and loyal customer base. The advantage McDonald’s has over Starbucks is
that it has a considerably larger volume of traffic compared to Starbucks. While
customers are stopping for a quick breakfast, lunch or dinner, they may get a specialty
coffee to go too.

PRICE STRATEGY-

Starbucks positions itself as a specialty premium coffee retailer and has a strong and
well known brand image. As Starbucks is a premium coffee brand, its target market has
always been middle and upper class with the disposable income needed to frequent the
coffeehouse. One of the main reasons Starbucks has been so successful is because they
focus on quality and experience rather than price. Starbucks' image and experience has
been one of the key elements to their success. Starbucks has succeeded in giving coffee
a new cachet and established themselves as a price setter through product
differentiation. Consumers have been willing to pay for what they consider an elite
lifestyle and many believe that the higher the price, the better the quality. Although
premium brand coffee makers have some market power to set prices above the generic
value brands, Starbucks operates under monopolistic competition where there are many
small firms that sell similar products, therefore they do not exert complete market
power in the industry.

Starbucks has, up until now, been able to take advantage of premium pricing but
according to an article in Business week, “Starbucks is looking to rebound from dismal
US sales as more consumers cut back on spending. In its first-quarter report last week,
same-store sales – a key indicator of a retailer’s performance – dropped 10 percent.
That’s worse than the 8 percent decline in the fiscal fourth quarter.”
Pricing decisions also serve as a marketing tool and are one of the most compelling
attributes of product positioning. It makes a very clear statement about how a consumer
should perceive a product. Starbucks cannot become the low price leader; it takes away
from the brand image and ambience that they are known for.

When Starbucks became a major competitor, it was because the company’s environment
was like none other and focused on the benefit of the customer. People considered
Starbucks as a “third place” after home and work. Howard Schultz’s vision was not to
build a coffee shop, but instead build a company that treats people with dignity and
respect. He wanted to establish a place where you can go relax and have a delicious
coffee and smother yourself in a comfortable seat that makes you feel like you’re sitting
on your living room couch. Ear pleasuring music will consume your background and
make a customer feel as if they are at their home away from home. Or a place where
you can bring your laptop and get some work done if there are any distractions at home
or work. Starbucks is also the type of place where you can meet a friend, stay and talk
for hours, and feel like you’re the only two people in the place.

Customers and employees as well receive an experience for Starbucks, in which

Starbucks constantly strives to pleasure everyone around them. The environment is so
inviting, relaxed, and probably trendier than most people’s living room, and at the same
time, quick paced if you need a coffee to-go. Starbucks has set an environment where
the relationship between customers and employees sets the company apart from other
coffee shops. Starbucks sets a different type of trend than any other coffee house that
seems to be contagious to customers and even other companies.

CONCLUSION-

Starbucks has had much market power in the gourmet coffee industry. They have
attracted customers by an experience of an upscale French coffee shop with a
neighborhood feel. All are welcome to join the bandwagon as long as they are willing to
pay the price for premium. In the current economic state, their prices have caught up to
them causing their demand to decrease. People don’t want to spend their limited
income on premium coffees that they can get from any of their competitors, like Dunkin’
Donuts, McDonalds etc.
Starbucks has been forced with the changing times and the economy to drive down their
prices to compete in the industry. The closing of stores and the reduction of staff proves
that their pricing model only projected a short term profit, as in the case of any firm
operating in a monopolistic competition. Whatever forecasting models Starbucks has
projected does not hold true as the income effect and added popularity of their
competitors began monopolizing the premium coffee market. This proves that the price
of coffee is elastic and if prices are high then the demand for the good will decrease.

Many outside factors also contribute to Starbucks losing its brand appeal. People have
begun to realize that they have alternatives to purchasing Starbucks coffee and still
sample the luxurious blend by brewing it at home themselves. Customers no longer
follow the hype supported by the Starbucks name and are becoming more price/value
oriented. To remain a major player in the coffee shop market, Starbucks must reinvent
themselves with the changing lifestyles, tastes and react to the alternatives within the
market.

THANK-YOU
SONIA KESWANI
BBA-2ND YEAR
200187