Introduction
Starbucks is the largest premium coffee selling chain in the United States with more than 17,000 retail stores worldwide. Though the company was originally involved in selling coffee beans and ground coffee, it had also added newer products such as fresh coffee, various Italian coffee flavors, premium teas and even coffee brewing equipment for personal use.
Background
Although founded in 1971, Howard Schultz in 1987 re-branded Starbucks, and started with about 17 stores employing a ‘sit-in’ coffee store format, thus positioning itself as lifestyle product. Eventually, the company also started selling its products through the retail and grocery formats as well. The mermaid logo on Starbucks appeared as late as 1996 as part of its branding exercise on more than 1,000 Starbucks stores. Initially, the company ensured store selection only in the wealthy areas in order to target the affluent and highly educated customers. Later, Schultz also initiated businesses such as Seattle’s Best as a brand with pricing higher than mass market coffee but lower than Starbucks coffee.
The entry of a large number of stores in this segment changed the competitive scenario, and to remain profitable Starbucks employed a whole lot of new strategies including different brand, different product formats coupled with global expansion. The case is written to emphasize the manner in which a modern corporation responds to, and changes its strategies in the face of competition, even if that means straying away from its core beliefs, or taking tough strategy decisions to ensure competitiveness. Being one of the first entrants, Starbucks finds itself under threat from competitors, not only in its own segment, but also in the newer segments that it has entered. Thus, the case also shows the dynamic nature of our market, and the manner in which corporate leadership could respond to such changes.
- In the beginning, how was Starbucks different from other coffee options for coffee drinkers in the United States? What activities and assets did Starbucks leverage to differentiate itself from competitors?
Differentiating factors for Starbucks from other coffee options
- Aesthetic store design
- Unique flavor of the coffee, not tasted by Americans before
- Unique method of production and distribution
We start by refering to the SWOT Analysis in Appendix 1. When Starbucks started operations, it positioned itself as a premium coffee shop, not only in the aesthetic aspects, but also the flavor. The company roasted its own beans, and shipped it to its own stores where it was ground and served fresh. Further, Starbucks also ensured that the coffee was diligently prepared by a barista, and also begun using quasi Italian lingo for its products. The whole ambience combined with the flavor and aroma of the coffee made Starbucks a very different product for American coffee drinkers, who were hitherto accustomed to home brewed brands.
Starbucks realized the need for product differentiation by leveraging its newly built brand image, in order to triumph competition and sustain growth. The company launched new products in partnership with other companies such as Pepsi and Dreyer. Further the company signed an agreement with United Airlines to serve only Starbucks Coffee on board its flights, as well as Hyatt Hotels to serve Starbucks Coffee in all of Hyatt’s hotel services such as room, conference rooms and restaurants. The company further started expanding its footprint rapidly by adding nearly 4000 stores between 1996 and 2001 to its pre 1996 tally of 1000 stores. In the process, the company also made significant operational changes to its existing assets and stores. The company believed these steps would ensure that it would have a competitive edge, and also sustain high growth in its business.
- When Starbucks was rapidly expanding its store locations, in 2006-2009 it made specific changes in order to facilitate that growth. What did Starbucks gain- and give up- as a result of each change?
- Closure of almost 1000 stores and operational changes
- Starbucks gained operating leverage, but gave up part of its competitive market share as well as product consistency
While many changes were undertaken by Schultz including returning to in store grinding of coffee beans, introduction of semi automatic coffee machines, one significant change impacted Starbucks the most.
The 1000 stores that were closed by Starbucks gave it a major operating flexibility, since it reduced operating costs including a number of fixed costs saving nearly $580 million, but in the process the step was criticized by critics of the company. It was probably felt that the company had gone too fast and too far ahead. In the process, Starbucks lost ground in the store segment to some extent, and ceded it to other competitors. (Refer SWOT Analysis in Appendix 1)
The closure of these stores also probably dented investor confidence in Starbucks as well, since the price of the Starbucks stock declined to half its peak value. Major shareholders including Schultz stood to lose heavily due to this price fall. In effect, the gains that Starbucks made due to operational transformations were offset due to the possible loss of market share, and erosion in the price of the Starbucks stock.
- When Schultz returned to Starbucks as CEO in 2008, how had the competitive context changed since his first tenure running the firm? What had caused or facilitated the change? Use Strategic Maps to evaluate the competitive context change.
The whole competitive landscape had undergone a major change when Schultz returned as CEO in 2008. During his first tenure, Starbucks had a first mover advantage which it lacked now. The change in the competitive scenario is evident in the Strategic Positioning Map shown in Appendix 3 below.
The change in the competitive scenario as shown above was largely enabled by Starbucks’ entry into the marketplace commonly termed as the ‘Starbucks Effect.’ If we analyze the scenario above, we see Starbucks sandwiched somewhere between the low end and high end coffee chains, and the independent chains present in that segment in which Starbucks had once started out. This made sustainability a question for Starbucks.
The change must have occurred since Starbucks had successfully led the way in the segment, and most entrepreneurs realized that the cost of setting up this business was relatively low. A host of smaller, independent coffee shops as well as smaller chains mushroomed in the coffeehouse segment. High level of product differentiation, better service levels, higher level of personalization tilted the scales against Starbucks, thus leading to a complete change in the competitive scenario.
The five forces model in Appendix 2 below shows how the change might have occurred. The company got squeezed due to the high pressure of all the competitive forces. To make matters worse, getting into the market although was a little difficult, it was not impossible. This encouraged the rise of independent coffee stores that priced products higher than Starbucks, but were preferred by customers for having the image of a customized ‘home grown coffee shop’.
Thus, it becomes evident that the market had turned so competitive at the time that Schultz had to now frame a coherent strategy to counter this.
- Why did Schultz respond the way he did to changes he found in 2008? What other options did he have? What was he trying to achieve? Were his responses effective or ineffective?
When Schultz took over as CEO he did not find Starbucks in a good spot (refer to the Strategic Map in Appendix 3 below). At that point in time, Schultz had very few or possibly No Options left. He did not have the luxury of time to strategize and try any other strategy since the situation only got worse on the financial front with every passing quarter. It was much better off for him to close the stores that were doing little or no business, since each store that was open and running had a fixed cost attached to it, irrespective of the business it brought in. By taking this step, Schultz had hoped to reduce operating costs, improve logistics, reduce operation related wastage and labor cost (all of which were fixed costs per store). Any other strategic step besides this would have simply meant investing more money, coupled with the uncertainty of returns from these stores given the fickle market condition. Hence he responded by taking such stringent measures considering the lack of options and the dismal situation.
On the supply chain and operations front, Schultz’s response was highly effective since it led to a $580 million savings in fixed operating costs, and a significant improvement of 90% of store orders delivered on time with no errors. However, the market did not buy this response from the Starbucks management and gave the stock a thumb down, which resulted in the share price going down to almost half of its peak price. Critics of Starbucks also clearly criticized the policy through snide remarks in the media about the company and its CEO.
- Did the introduction of VIA make sense in light of the market and company’s other actions?
In fact, VIA was probably the much needed product needed to revive the company morale. The dismal market scenario and closure of shops had created a question on the company’s strategies as well as future sustainability. The agreement termination with Kraft opened up the windows for a product in this category. This also gave Starbucks a window of opportunity to diversify their product portfolio, which had become the need of the hour.
Sure enough, within a year of launch VIA took away a reasonable chunk of market share away from the larger competitors in that segment such as Folgers Instant. In conclusion, the introduction of VIA made complete sense from a brand diversification perspective as well as from gaining market share in a different segment (which was not as fragmented as the coffee house segment).
Conclusion
This case is a classic example of how corporations need to keep reinventing themselves in order to stay at the top of the game. Most of them don’t mind taking tough decisions when times are challenging, and implement it in the face of bad publicity and criticism. Most other companies preempt the situation, and constantly evaluate the competitive landscape, review their competitive strategies, keep a track of customer spending patterns at their institutions and threats of new players entering the market.
The case also warns us of the effects of unbridled expansion carried out by most corporations in today’s marketplace. In the event of a problem, whether competitive or market based, the result can be catastrophic. Expansions of any kind should be measured and evaluated carefully.
Hence corporations like Starbucks need people like Schultz who can constantly think of ideas to sustain growth, and stay ahead of the competition.
APPENDICES
Appendix 1: SWOT Analysis for Starbucks
Appendix 2: Five Forces Analysis For Starbucks
Appendix 3: Strategic Positioning Analysis Map
