Starbucks Coffee Segmentation and Target Market

Starbucks Corporation was started at Seattle by Gordon Bowker, Jerry Baldwin and Zev Siegl in 1971
(Burks 2009). They were initially selling whole beans coffee in one of the Seattle store. By 1982, the
business had tremendously grown and opened up five stores that were selling a roasting facility,
coffee beans and a wholesale business to local restaurants. It started its business with only a small
coffee shop. The Starbucks owners’ mission was to educate their customers about the fine coffee and
feel the dark roasted coffee’s smell. Howard Schultz who was appointed as the retail and marketing
manager brought new ideas to the owners on how to improve their operations though he was turned
down. He in turn opened his own I1Giornale coffee bar based on Italian coffee cafes in 1986, which
was selling brewed Starbucks coffee. He expanded his business to three coffee bars by 1987 and
acquired Starbucks for $4 million from the owners and changed the name from I1 Giornale to
Starbucks. His intention was to ensure the company grows slowly with a solid foundation. The
company experienced losses within the first two years as a result of increased operating and
overhead expenses due to its expansion. By 1991, Starbucks increased its sales by 84% and the
company had no outstanding debts.

Executive Summary

Starbucks is the leading roaster and retailer for the specialty of coffee brand in the world. It has
opened up over 7,500 stores all over the world. As it continues to expand, it encounters different
types of new product markets, with new customers demanding appealing and unique products. It has
already begun by introducing a Frappuccino line extension targeted to the non-coffee drinker.
Starbucks faces challenges and difficulties when entering this new market as it has to compete in
order to retain its primary products brand recognition, and still increase its new product line
awareness.
Marketing strategy of Starbucks

Marketing strategy refers to the process of carrying out segmentation, positioning and targeting
(Kerins 2009). It involves having a detailed knowledge of the marketplace into strategic decisions and
the appropriate targeting of customer groups. It should emphasize on any differential advantages and
have a suitable positioning within the target segments (Simkin and Dibb 1996). Starbucks has
adopted a differential strategy which is seeking to provide a service or product that is different from
competitors, and offer benefits that are that are widely valued by customers. When Starbucks was
launched in 1971, there were many coffee bars in the US, but Starbucks wanted to have a unique
stand from others. Marketing can powerfully contribute to the highly important aspects of the
organizational competitiveness such as competitive analysis (Varadarajan 1992) and innovation
(Kerrin 1992). Starbucks is mainly focusing on the strategy of new products, stronger customers’
connection as third place and expanding their store locations in US and abroad. It has followed the
Segmentation, Targeting and Positioning process (STP).
 Segmentation

It is a process of subdividing a market into buyers’ distinct groups with different characteristics,
needs, or behavior that might require marketing programs or separate products (Amstrong and Kotler
2006). In the beginning, Starbucks was based on socio-Economic segmentation in consumer markets
due to its concentration on social class of people working at the office and wanted to have a cup of
coffee with good facilities and atmosphere. Starbucks has also segmented its markets by
demographically and geographically selecting the store location with educated and coffee lovers
(Dibb and Simkin 1996).
Target market

Since 1960’s, consumption of coffee in the U.S. has been trending down. Starbucks has been
extremely cautious on its target markets. According to Pinsen (2008), a target market consists of a set
of buyers with common characteristics or needs that the company decides to serve. The decision of
selecting the target segments can be assessed by considering competitive factors, market factors,
social, political and environmental factors (Jobber 1995). Price, customers’ bargaining power,
suppliers and barriers to entry that comes under market factors, and in the case of Starbucks, they
had expensive coffee and were trying to implement a new coffee culture in America. However, they
have low entry barriers. In their effort to maintain suppliers’ long-standing relationship, they were
extremely careful in each coffee making step (Stanley 2002), and they did not have any real
competition threats. Starbucks targeted middle to high income office workers with a desire to
purchase premium products. Schultz wanted to make Starbucks ‘Third Place', the place in between
home and work where people could relax, gather and interact with one another. This made them be
vigilant about their quality control and meet the high expectations. They also paid a great deal of
attention to the store details from layout to furniture and the music. Moreover, Starbucks were in the
‘introduction’ stage of their product lifecycle. There are three different ways of doing target marketing;
differentiated, concentrated and undifferentiated. A concentrated/niche marketing concentrates its
efforts towards a single market segment, maintains and creates an exclusive strategy for each
segment (Dibb 1994). Another approach is the differentiated/segmented marketing. It takes the mass
market approach through designing a separate marketing and products programs for the different
segments (Walker Boyd 1990). Concerning the undifferentiated /mass marketing, the company
ignores the differences in the market segment and uses one strategy to target the whole market
(Amstrong and Kotler 2004). When it was launched, they applied undifferentiated marketing strategy,
created and maintained the marketing mix as they considered the market as a single segment. A
major challenge in using this target market strategy is developing the brand that satisfies all
customers. They used their services without quality compromise for attaining this targeting strategy.
Moreover, their aggressiveness in the market was displayed by opening 15 new stores in 1988, 20
stores in 1990, 31 stores in 1991, and 53 stores in 1992.
Marketing Positioning

After deciding which market segments the company should enter into, it must decide the position
that it wants to occupy in their target market. Market positioning is the way products are arranged in
order to occupy desirable, clear and distinctive place that is relative to the competing products in the
targeted customers’ mind (Williams 2010). Starbucks developed a unique market position for their
products. This was meant to make their products different from others so as to attract customers.
According to Kotler and Amstrong (2006), Starbucks positioned itself in the market as a highly
reputed brand. In this case, the company has planned its positioning in a way that brings a distinction
between their products’ brand from those of competitors, and enjoy the greatest strategic advantage
in their target markets. Their positioning strategy was based on the customer so as to provide the
best service beyond customers’ expectations. They gained a competitive advantage over employee
and customer satisfaction. This was enhanced by its positioning development strategy that was
customer based which provided the utmost facility in terms furniture, layout and music. Concerning
employee satisfaction, they make them as partners and provide them with personal security, freedom
to participate in every decision of the business and make it successful (Miller 1985).

Developing marketing mix

One of the major modern marketing concepts is when a business has planned its overall
marketing strategy than planning the marketing mix details. Marketing mix refers to a set of tactical,
controllable marketing tools which include; price, product, promotion and place that is blended by a
firm to produce the target market's desired response (Frey 2010). The company has come up with
good decisions on marketing mix tools.
Product

Starbucks tried to position themselves in the coffee industry as a premium product through
creating a high standard, providing an excellent service and introducing innovative products. Schultz
knew that his coffee was perishable making them so fanatical about quality control, and thus they
monitored each and every coffee production step very carefully. They purchased dark-roast, whole
bean coffee from Kenya, Sumatra, Ethiopia, Costa Rica and Ethiopia. They roasted coffee in their
own plants and later sold it through company-owned stores. They applied Total Quality Management
(TQM) that all company’s people are constantly involved in improving the products’ quality (Kanji
1996). Use of introduction of Frappuccino and nonfat milk made a significance presence in the
Starbucks’ balance sheet. Moreover, they gave seasonal offerings, such as cream Frappuccino and
strawberry in the summer and gingerbread latte was introduced during Christmas. Gradually, food
items such as pastries, cookies, salads and sandwiches made their way into the stores. They later
developed new products with other companies, which show how cautious they were in maintaining
their premium quality image and keep their standards high.
Price

According to Dalrymple (1986), price refers to the money paid to the seller the buyer for a given
quantity of the product. Quality and price determine the value of the product. When Starbucks was
launched, it was positioned in accordance with its expensive products. They purchased the quality
beans, gave efficient and effective training to staffs, created an atmosphere to enjoy coffee, interact
with fellow people and have a break from the busy life. They all justify their pricing and indicate how
pricing supported their positioning.
Distribution and Service

Distribution channels link the products or services of the organization to its customers. In a
producer-consumer channel, it is significant to maintain personnel relationship with the customers as
it is the case of Starbucks (Brassington 2000). However, Starbucks got an advantage from a
distribution point of view through sticking on its winning store location formula for its new stores. They
opened stores like clusters and selected highly visible locations. Due to the increased demand, they
were enabled to manage the increased traffic and maintained their competitive position. The company
invested heavily on staffs’ training and did innovative tactics in the management of their human
capital. They differentiated themselves from other competitors in the market through constant
provision of higher quality services.
 Promotion

Shimp (1997) defined promotion as all marketing activities that stimulate buyer action or product
sales. Starbucks used to have big community events before opening its stores. Each city’s personality
was boosted by the designed artworks, and it was used on T-shirts and commuter mugs. They did not
use funds in advertising but instead they used them in acquiring key locations. Starbucks always tried
to establish a national dominance to take the first priority before other specialty coffee bars comes
into the picture.
Relationship between consumer behavior and target markets and branding

Consumer behavior is commonly accepted to refer to the process of decision-making employed

by consumers when choosing, purchasing and using services and products (Noel 2009). An
understanding of consumer behavior brings important clues that help in identifying market segments.
They are most likely to respond to the service offering or product and marketing communication
programs.
Quantitative Market Segmentation

There are four types of qualitative and quantitative market segmentation tools used to determine
the factors affecting buying decisions when identifying target markets: demographic, psychographic,
geographic and behavioral influences. Demographic and geographic factors such as age, location,
family income, occupation, education attainment and ethnicity help to identify market segments.
Observable influences help in making inferences about social, lifestyle and cultural influences that
drive consumer behavior.
Qualitative Market Segmentation

Behavioral and psychographic influences are qualitative, emotional factors explaining why target
markets behaves as it does. Psychographic influences include attitudes, beliefs, personality, opinions,
values, self-image and interests. Behavioral influences relate to the customer's relationship with
brands in terms of experience, knowledge, perceptions and usage. These include perceived brand
benefits, brand attributes, usage rates, brand loyalty and usage occasions. They are essential in
terms of assessing cognitive levels versus intuitive involvement in buying deliberations.
Alignment between Company Strategy and Marketing Decision

Alignment refers to an arrangement of activities in a straight line, or inappropriate or correct

relative positions. On the other hand, strategy alignment refers to the complete organizational
component integration to the strategic vision, mission, day-to-day decision making, planning
processes and human performance systems. It facilitates continuous monitoring, updating the
strategy, review, which is crucial in today’s constant environmental change. The laid down company
strategies influences the marketing decision made by a business.
Conclusion

Starbucks claimed their leadership through focusing on a new products’ strategy, a stronger
customers’ connection as the Third Place and expanding the company’s store locations both in United
States and abroad. They had no compromise on their service standards and quality and maintained
customer relationship with utmost care. This paper analyzed the positioning strategy and target
markets of Starbucks while it was launched. It also shows how different marketing mix variables
supported their positioning. Starbucks has spread in all cities in America and other 48 countries all
over the world. The level of success obtained by Starbucks has important lessons, and much
aspiration is needed in the business world.
References
Burks, M. (2009). Starbucks. Santa Barbara, Calif.: Greenwood Press. Frey, A. W. (2010). The
effective marketing mix; programming for optimum results. Hanover, N.H.: Amos Tuck School of
Business Administration. Kerin, R. A., Hartley, S. W., & Rudelius, W. (2009). Marketing (9/e [9th ed.).
Boston: McGraw-Hill/Irwin. Mullins, J. W., & Walker, O. C. (2013). Marketing management: a strategic
decision-making approach (8th ed.). New York: McGraw-Hill. Noel, H. (2009). Consumer behaviour.
Lausanne, Switzerland: AVA Academia ;. Pinson, L., & Jinnett, J. (2008). Marketing: researching &
reaching your target market. Fullerton, CA: Out of Your Mind ... and into the Marketplace. Williams, T.
(2010). Positioning for professionals how professional knowledge firms can differentiate their way to
success. Hoboken, N.J.: Wiley. Source document

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