Situational Analysis & Marketing Strategy
Cal State University of Northridge
December 12, 2009
In the situational analysis, we found that Starbucks has grown to nearly 11,000 stores (6764 company-owned retail store and over 4000 licensed stores) by its popularity and aggressive expansion strategy. Its rapid expansion however, came with a price tag which Starbucks realized when customer traffic decreased for the first time and its price share plummeted by 54 percent in 2008. Coupled with a recession, cannibalization of Starbucks stores is said to be the cause of the decline in same-store sales.
The competitors such as McDonald’s, Dunkin Donuts and Jamba Juice continue to be a threat to Starbucks’ business. Although Starbucks offers a valuable proposition that other competitors are not able to deliver to its loyal customer base, it needs to improve its service and enhance its customers’ coffee drinking experiences, in order to stay competitive and maintain its market share. Starbucks currently serves all demographics, but there is a need to develop its target market by specific age groups or behavior distinct segments in order to gain a new market share. Despite its challenges of a recession, self cannibalization, competition, high raw material costs (of premium coffee beans and milk), Starbucks maintains a strong position and is able to take advantage during the economic recovery.
Based on the findings from our situational analysis, we developed a new blended fruit drink called SuperFruit Blenderz. This new product was developed to meet the need of our target market, which includes non-coffee drinkers, soccer moms, tweens and teenagers. This in turn will increase 5% of customer traffic and 4% of sales revenue. Starbucks will be competing directly with Jamba Juice and other leading smoothie retailers by setting their price at the average competitors’ price of $3.50. By using the current intimate communication strategy, we were able to lower the overall fixed cost. Furthermore, we were able to keep the variable cost down to achieve a projected 30% profit ratio by using Starbucks’ purchasing power and reputation of maintaining a positive supplier relationship.
SuperFruit Blenderz is scheduled to be launched in May 2010. Starbucks anticipates bringing the product awareness to our target market through its promotional mix scheduled to start in the beginning of 2010. As the market for the health-consciousness grows, our new product is expected to increase Starbucks’ revenue and market share.
BACKGROUND AND HISTORY OF STARBUCKS
Starbucks Corporation is a leading international coffee and coffeehouse, which was founded in 1971 with 16,120 stores in 49 countries. In the United States alone, it has about 11,000 stores (Starbucks Corporation: Starbucks Company Description). Starbucks started as a local coffee shop in Seattle, Washington by English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker. They initially purchased their coffee from Alfred Peet, the founder of Peet’s Coffee and Tea, and later set up their own roasting operations. Their passion for quality coffee as well as exotic tea and their good business sense helped them run a profitable business and open three more Starbucks stores by the early 1980’s (Starbucks Corporation: Private Company 1987 -92).
Howard Schultz, who was the Vice President of Hammarplast-a Swedish maker of kitchen and house wares- at the time, noticed that Starbucks was ordering more of a certain drip coffee maker than Macy’s was and he took interest in finding out more about the company. A visit to one of the Starbucks stores left him with quite an impression of the partners’ knowledge of coffee, their commitment to providing high-quality products, and their passion for educating customers about the merits of dark-roasted coffees:
“It was clear from their discussions that Starbucks stood not just for good coffee, but rather for the dark-roasted flavor profiles that the founders were passionate about. Top-quality, fresh-roasted, whole-bean coffee was the company’s differentiating feature and a bedrock value. It was also clear to Schultz that Starbucks was strongly committed to educating its customers to appreciate the qualities of fine coffees, rather than just kowtowing to mass-market appeal. The company depended mainly on word-of-mouth to get more people into its stores, then relied on the caliber of its product to give patrons a sense of discovery and excitement. It built customer loyalty cup by cup as buyers of its products developed their palates.” (Starbucks Corporation: Howard Schultz Enters Picture, parag. 4).
Howard Schultz saw the potential of the Starbucks enterprise expanding outside of Seattle and was elated about the opportunity to work at Starbucks. While attending an international house wares show in Italy, he discovered the popularity of espresso bars in Milan and saw the potential of developing a similar coffee bar culture in Seattle. He persuaded the owners of Starbucks to open an espresso bar in one of the stores, which was a huge success, and he wanted to continue expanding the beverage side of the business; however, the owners’ hearts weren’t in the beverage business. They wanted to keep the integrity of their coffee roasting business. Shultz eventually left Starbucks to start his own business and came back to purchase Starbucks when Jerry Baldwin and Gordon Bowker decided to sell the entire Starbucks operations in Seattle in 1987. When Howard Schultz acquired the Starbucks operations, it had nine stores. Starbucks opened a total of 161 stores from 1988 to 1992, exceeding Shultz’s initial business plan to open 150 stores. These were all company-owned stores, not franchised. In order to keep the company in “full control of the quality of its products and the character and location of its stores” franchising was avoided. (Starbucks Corporation: Private Company 1987 -92).
As expected by Shultz, Starbucks reported losses during its early years, as Starbucks invested its capital to cover the cost of expansion. Although Starbucks’ board of directors and investors were concerned about the loss, new venture capital had to be raised in order to support the profitable growth down the road. Starbucks started to reap its profits when the revenue increased by 80 percents in 1990 (Starbucks Corporation: Private Company 1987 -92).
Starbucks successfully went to initial public offering (IPO) in June 1992, which turned into one of the most successful IPOs of the year. Being a public company, Starbucks was able to gain a leverage to accelerate the expansion of its network. Starbucks’ success didn’t go unnoticed. The competitions arose as other specialty coffee shops, modeled after Starbucks, entered the business across the United States. “The Specialty Coffee Association of America predicted that the number of coffee cafés in the United States would rise from 500 in 1992 to 10,000 by 1999” (Starbucks Corporation: Starbucks Becomes a Public Company, parag. 1).
Starbucks has literally shaped the culture of America by altering what we’ll pay for coffee, what we eat, where we meet and how people spend their time. Since Starbucks went public in 1992, it became part of the popular culture that extends “beyond the espresso machine to influence the films we see, CDs we hear and books we read.” (USAToday.com: Starbucks aims beyond lattes to extend brand 2006, parag. 2). It definitely met its long range goal of becoming the most recognized brand of coffee in the world. Starbucks has expanded rapidly in number, averaging five stores opening every week, into the 2000s. In recent years however, its endeavor of expansion has been coming to a screeching halt due to the economic downturn. Faced with a rather difficult operating environment, Starbucks announced the closure of 900 under-performing stores since 2008. It’s a part of initiatives that Starbucks has been taking to “enhance long-term fundamentals by slowing growth, controlling costs and investing in traffic-driving [strategy]” (Forbes.com: Starbucks Changes Aim to Perk Up Profits. Parag. 6). Turning the market around will be a gradual transition, but the long term outlook of Starbucks is positive as many investors would agree based on its current financial performance. Howard schultz’s ongoing drive to reinvent the way Starbucks does its business is another positive attribute to the company that enhances the future outlook of the company.
Starbucks’ Management Team and Employees
Howard Shultz resumed his former Chief Executive Officer role effective January 2008, since then the structure of Starbucks’ management has changed. Below is a list of its current executive management team as of 2008:
- Terry Davenport, Senior VP of Marketing
- Harry Roberts, Senior VP/Chief Creative Officer
- Michelle Gass, Senior VP of Global Strategy
- Chet Chet Kuchinad, Executive VP of partner resources, development and execution of Starbucks’ HR strategy
- Chris Bruzzo, VP and Chief Technology Officer
- Martin Coles, Chief Operating Officer
- Pete Bocian, Chief Financial Officer
(Nation’s Restaurant News: Starbucks’ Schultz details new executive team lineup January 2008).
Shultz is known to hire Starbucks’s top management team with extensive experience in managing and expanding retail chains. The core executives who formed and developed Starbucks’ values, principles, and culture can be credited to Howard Schultz, Dave Olsen, Howard Behar, and Orin Smith. As the company expanded, additional executive positions were added in marketing, store management, specialty sales, human resources, finance, and information system. (Starbucks Corporation: Private Company 1987 -92)
Starbucks employs about 172,000 people worldwide as of September 2007. In order to accommodate the fast growing franchise, “Starbucks’ vice president for human resources used some simple guidelines in screening candidates for new positions” (Starbucks Corporation: Employee Training, Parag. 1):
- Passionate people who love coffee
- A diverse workforce that represent its community
- People who enjoy what they do (whom their work is an extension of themselves)
Starbucks calls its employees “partners”, representing its “direct and open relationship with them and [its] legacy of providing them with a positive workplace” (Starbucks Newsroom: Working at Starbucks, Parag. 4). Shultz practices what he preaches by putting the value in the growth and development of Starbucks’ employees. Every partner/barista undergo an extensive training to gain strong coffee knowledge, product expertise and customer service skills.
Starbucks was named as one of “100 Best Companies to Work For” in Fortune Magazine for the 11th time in 2009. It earned its name by treating their partners (employees) with respect and dignity and creating the best possible workplace environment. Starbucks implemented “Optimal Scheduling” in the fall of 2008, which provides more working hours to those who seek and need to work more hours. “Optimal Scheduling” was designed to offer more flexible and/or regular work hours to the employees, and it has been successful in serving its goal and has received positive feedback from its employees. Starbucks also offer a competitive wage and benefits to include health care, 401(k) savings plan, stock options and an employee stock purchase plan to its employees. Health benefits are offered to employees who work more than 20 hours a week. Despite the company’s strive to provide an above industry standard benefit packages and workplace environment, some employees want more (Starbucks Newsroom: Working at Starbucks). Recently, “a union formed in Manhattan to seek more pay and to make Starbucks more socially responsible to workers” (USA Today.com: Starbucks aims beyond lattes to extend brand 2009, parag. 27).
More than 45 million customers worldwide buy something from Starbucks every week, and its stock has appreciated almost 2,400% since it was listed in 1992, vs. 269% for NASDAQ. Starbucks has experienced a rapid expansion and an incredible success until 2007 when the economy took a downturn for the worst. During 2007 and 2008, the share price of Starbucks Corporation decreased sharply by 54% compared to a high of $39.63 in May 2006, as investors believed that the company had overextended itself in a premium coffee market. In its first quarter of fiscal year 2008, Starbucks suffered a 3% decrease in transactions for the first time (Financial Post: Starbucks growth seen tied to economy July 2009). Coming to terms with the difficult operating environment, Starbucks announced to close 600 under-performing stores and lay off as many as 12,000 employees. The cost savings from downsizing its operations is expected to be $500-milion (Financial Post: Starbucks growth seen tied to economy July 2009).
Starbucks is slowly making a come-back. Since October 2008, the stock has risen 87%, compared to the 31% increase for the NASDAQ. For its third quarter, which ended June 28th, the net earnings for the 13-week period were $151.5M, compared to a net loss of $6.7M in fiscal Q3 2008. Starbucks reported its improved performance for the fourth quarter and fiscal year ended September 27, 2009 and increased its FY10 earnings outlook by improving same store sales trends and increasing the cost savings efforts (BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results). For fiscal 2009, consolidated net revenues decreased 6% to $9.8 billion from $10.4 billion in fiscal 2008, predominantly due to lower retail revenues. Company-operated retail revenues in fiscal 2009 declined 7% to $8.2 billion from $8.8 billion in fiscal 2008, primarily due to a 6% decline in comparable store sales, and the effects of a stronger U.S. dollar relative to the British pound and Canadian dollar. The decline in consolidated comparable store sales was driven by a 6% decline in the U.S. segment.” (BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results, parag 7)
|Fiscal 2009 – Year in Review|
|52 Weeks Ended|
|Net New Stores||-45||1,669||-1,714|
|Revenues (in $ millions)||$||9,774.6||$||10,383.0||-6%|
|GAAP Operating Income (in $ millions)||$||562.0||$||503.9||12%|
|GAAP Operating Margin||5.7%||4.9%||80||bps|
|Non-GAAP Operating Income (in $ millions)||$||894.4||$||843.3||6%|
|Non-GAAP Operating Margin||9.2%||8.1%||110||bps|
(BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results, Parag. 9)
Fiscal Fourth Quarter 2009 Highlights:
- Comparable store sales trends improved in U.S. and International segments on both sequential quarter and year-over-year basis.
- Consolidated same store sales – improved to negative 1% from negative 5% in the previous quarter
- Operating margin improved 760 basis points to 8.2%.
- Non-GAAP operating margin improved 570 basis points to 10.4%.
- EPS of $0.20 compared to $0.01 in Q408
- Non-GAAP EPS increased to $0.24, a 140% increase from $0.10 in the prior year period.
(Business Wire: Starbucks Posts Strong Fourth Quarter and Fiscal 2009 Results November 2009, parag. 1).
Full Fiscal Year 2009 Highlights:
- Cost savings initiatives delivered full-year savings of approximately $580 million, exceeding target by $30 million
- Operating margin improved 80 basis points to 5.7%.
- Non-GAAP operating margin improved 110 basis points to 9.2%.
- EPS increased 21% to $0.52 from $0.43 in the prior year; Non-GAAP EPS increased 13% to $0.80 from $0.71 in the prior year.
- Operating cash flow totaled $1.4 billion and free cash flow exceeded $900 million.
- Non-GAAP operating margin improved 110 basis points to 9.2%.
(Business Wire: Starbucks Posts Strong Fourth Quarter and Fiscal 2009 Results November 2009, parag. 2).
According to a recent poll conducted by ChangeWave Research, the consumers are planning to purchase more coffee from Starbucks over the current quarter, while expecting to reduce coffee purchase from McDonalds. While McDonalds remains a solid investment, Starbucks offers a different value proposition and has a greater potential based on its underlying fundamentals. The company has proved the pliability of its business over the past 12 months, while maintaining a strong position to take advantage during the economic recovery (Seeking Alpha: Starbucks: On Track for Steamy Returns? October 2009).
Starbucks offers a selection of highest quality arabica coffee beans and continues to raise the bar of coffee standards. While the core product of Starbucks is coffee beans, it offers a variety of coffee drinks, snacks and coffee-related accessories and equipment. Below is the product mix offered through its retail stores:
- Fresh brewed coffees
- A variety of Italian-style espresso drinks
- Cold blended beverages (Frappuccino)
- A selection of premium teas
- Packaged roasted whole bean coffees
- Fresh pasties and other food items
- Coffee grinders and coffee-making equipment
- Special jazz and blues CDs
- Via Ready Brew
- Vivanno Smoothies
(Starbucks.com: Starbucks beverages and food details).
Starbucks has revamped its menu, adding a healthier selection of food. Fruit and yogurt parfaits and warm breakfast sandwiches are now part of its regular selection. Starbucks is constantly looking for innovative ideas, products and experiences that can be offered to its customers. However, Starbucks faces challenges in diversifying into other sectors as it is dependent on the retail of coffee. Recently, Starbucks had to change out the cheese on its breakfast sandwiches due to the smell of cheese overwhelming the smell of coffee. The newest addition is VIA Ready Brew, which is convenient premium quality instant coffee.
In addition to sales through its retail stores, Starbucks sells coffee and tea products directly to business units. Through its joint venture partnerships with Pepsi and Dreyer’s respectively, Starbucks also sells bottled Frappuccino coffee drinks and a line of coffee ice cream. Below is the chart that shows the revenues by different product category.
(wikiinvest: Starbucks (SBUX), parag. 5)
Through its aggressive expansion since 1992, Starbucks now serves and targets all demographics. This is apparent based on a wide range of selections of drinks, pastries and other goods that it offers. The store offers organic chocolate milk for toddlers, non-coffee ice blended beverages for those who don’t care for coffee and fruit salad for those who are more health conscious. Anyone, in any age group, will find a drink or snack that meets his or her palette. However, a coffee drink that costs $4 isn’t exactly for everyone when a fresh cup of Folger’s can be made at home for 20% of the cost of Starbucks’ brewed coffee. Although Starbucks focuses on all demographics, the loyal customers of Starbucks are business professionals (ages 26 and 35), who are less price-sensitive. Teen coffee-drinkers are also important to Starbucks; many believe that this segment will be the main driver of domestic specialty coffee consumption in the next few years. While Starkbucks does not want to be viewed as trying to lure kids to drink high-calorie, caffeinated drinks such as Frappuccino, it acknowledges that teenagers and tweens (preadolescences) have become part of its customer base (wikiinvest: Starbucks (SBUX)).
Current Pricing Strategies
For the first time in its history, Starbucks announced a modified pricing structure in July 2009. Impacted by the recession, Starbucks has suffered a loss of customer traffic to its stores and decided to lower its prices on some popular products; such as brewed coffees and lattes. “According to an article written by Claire Cain Miller in the New York Times, the coffee purveyor is also redesigning its menu to feature lower priced brewed coffees, as well as offering promotions on iced drinks.” (Pricing for Profit: Starbucks’ New Pricing Strategy: the Beginning of the End?, Parag. 1) Ironically, Starbucks is also raising prices of its more complex beverages such as Frappuccinos and caramel Macchiatos, by eight percent. Based on the third quarter ending June 28, 2009 earning release, same store sales in the U.S. were decreased by 6%, which consists of 4% from fewer transactions and remaining 2% from a decrease in average value per transaction. In other words, Starbucks’ loyal customers are continuing to spend the same amount on each visit; it’s a decrease in customer traffic that’s causing a lower sales. Using the concept of the Boston Consulting Group’s Growth Share Matrix, Starbucks’ specialty drinks are in the cash cow phase that generally allows a lower investment while harvesting profits from current demand. “All successful products have their heyday of strong growth and then eventually reach a point where demand remains constant or decreases” (Pricing for Profit: Starbucks’ New Pricing Strategy: the Beginning of the End?, Parag. 3). It’s not certain, how long Starbucks’ specialty drinks will sustain this cash cow phase, but for now Starbucks seems to be using this matrix in raising the price of its specialty drinks.
Starbucks’ pricing also relies on the prices of raw materials such as coffee beans and milk.
- Coffee: Coffee beans are a major expense for Starbuck because the company purchases premium green coffee beans that are traded above commodity coffee prices. This higher-quality coffee often carries a substantial price premium, depending on market supply and buyer demand at the time of purchase. In 2004, Starbucks established the Starbuck’s Coffee Agronomy Company, a wholly owned subsidiary located in Costa Rica, to ensure company’s continued role of the Central American coffee industry. By maintaining a voice in the coffee production industry and by negotiating flat premiums, Starbucks can manage its coffee spending to a degree–but it can never fully insulate itself from the reality of fluctuations in coffee prices. Coffee prices in 2008, for example, were 20% higher on average than 2007.
- Dairy: Starbucks is a major consumer of dairy, which accounts for another large fraction of production costs. In 2007, dairy prices increased 10% (wikiinvest: Starbucks (SBUX), parag. 12).
Starbucks purchases and roasts high-quality coffee beans and sells them, along with the other products mentioned above (refer to the product mix section) through its company-operated retail stores. In order to build closer relationships with its suppliers, Starbucks opened a field centre in Costa Rica. By doing so, Starbucks aim to work directly with existing and potential producers.
In 2008, Starbucks operated 7,238 retail stores in North America and 1,979 stores internationally (Starbucks Corporations: Starbucks Company Description). The revenue from its company operated stores accounts for 84% of its total revenue. A high percentage of revenue in company retail operation explains Starbucks’ strategy to increase its market share in existing market and opening new company-operated stores where the opportunity exists. Despite the closure of 600 under-performing retail stores, Starbucks plans to open another 10,000 retail stores. In addition, Starbucks has been developing the company’s brand through third parties outside the coffee house. Specialty retail operations include licensed stores, packaged tea and coffee, branded products, foodservice operations and generated 16% of Starbucks total revenue in 2008. There are more than 7,400 licensed and franchised stores, while there are 9,000 company-operated stores. Located in places like airports and supermarkets, licensed stores generate licensing fees and royalties as well as revenue from supplying Starbucks’ coffee, teas and CDs. Starbucks also sells whole bean and ground coffees to foodservice operators like restaurants, offices, hotels and cafes, which accounts for 25% of company’s specialty revenue. Lastly, through its joint venture partnerships with Pepsi and Dreyer’s respectively, Starbucks sells bottled Frappuccino coffee drinks and a line of coffee ice cream (wikinvest: Starbucks (SBUX)).
Starbucks launched several promotions in its retail stores across the country since July of 2008. The promotion varies by region and timing, but all the stores in the United States have participated in the promotions since July 2008. Below is the list of different promotions:
- Breakfast pair for $3.95 (Coffee and breakfast sandwich or latte and coffee cake)
- Receive a 50% discount on a cold blended drink in PM if you present a receipt for coffee purchased in the morning on the same date.
- Free pastry if you purchase a drink
- Free 12-ounce iced coffees on Wednesdays with an “iced brewed coffee card,” a reusable voucher found in stores and newspaper inserts
(The Seattle Times: Starbucks hopes promotions boost U.S. sales and stock price)
Starbucks is also merging its reward plans, combining its Gold Card program and Starbucks Card Reward into one called My Starbucks rewards. “It replaces the Gold Card’s 10 percent discounts and $25 annual fee with a tiered program that offers free birthday drinks, free refills and free Wi-Fi” (iStockAnalyst: Starbucks dropping Discount Plan, Parag. 1).
- Strong global brand
- Starbuck’s innovative initiatives
- High quality and diversified products
- Strong, loyal customer base
- Passionate, loyal employees
- Offers the value proposition that it’s biggest competitors are not able to deliver to Starbucks’ customer base
- Has a strong position to take advantage during the economic recovery
- Ongoing effort to maintain the price and high quality of coffee by building close relationship with suppliers.
- A long range outlook of the company due to its ethical approaches in building relationships with its customers, employees and suppliers.
- Overextended premium coffee market – self cannibalization
- Competition (i.e. McDonald’s)
- Current economy
- Ethical approaches in building relationship with its employees and suppliers are often costly and could hurt the bottom line of the company in a short-run.
- High pricing
- Targeting selective customer age group
- Diversifying non-coffee menu
Coffee is known to be one of the largest traded commodities “second only to oil…The coffee industry has long considered itself recession proof” (NCA, 3pp). The demand for coffee or caffeine is considered to be inelastic by the industry. Meaning that even with a rise in prices or decrease in income, coffee consumers are hesitant to replace it with another product. Coffee retailers, suppliers and manufactures have survived other “significant economic downturns” in the last 30 to 40 years and have even flourished (Ten 2010 Trends).
The National Coffee Association’s annual survey found that with the recent “economic downturn”, 80 percent of coffee drinkers have not changed their consumption of the beverage. The remaining 20 percent are making fewer trips to coffee shops and are switching to making coffee at home, purchasing cheaper brewed coffee and searching for deals. Although consumers are still buying coffee their spending habits have been changing. (NCA).
Brand Keys, a “brand and customer loyalty research and strategic planning consultancy” discovered that in the coffee industry, value is the main motivator in coffee purchases along with service and surroundings, followed by quality and taste and selection (NCA).
Quality and price are now the largest factors that affect consumers coffee purchases. According to Brand Keys President, Robert Passikoff, the brands that meet and even exceed the customers’ expectations, have utilized a “price-value formula” where consumers “calculate” which brands to buy based on quality and price (NCA, 1pp). Due to consumer’s tight budgets and more conscious spending, they are looking for brands with the greatest quality AND the greatest value. Dunkin’ Donuts was number one in meeting all of its consumer’s needs. Second was McDonalds, followed by Starbucks. The leading coffee brands find ways to match their customer’s need and their budgets (NCA).
Political and Regulatory Environment
After the terrorist attacks on September 11, 2001, the Bioterrorism Act was passed by congress and enforced by the FDA. The new law requires “all domestic and foreign facilities that manufacture, process, pack, or hold food for human or animal consumption in the United States must register with the FDA” (B&R Compliance Associates LLC, Slide 3). This act will help the FDA immediately react to a threat or attack on the U.S. food supply. Also, in the case of an outbreak, the FDA will have information to find the source and cause and contact the affected facilities (B&R Compliance Associates LLC).
The consumption of caffeinated products like coffee and soda are a major health concern for children and adolescents. So, regulations were placed on coffee within public schools. “Regulations for the National School Lunch Program (7 CFR 210, Section 210.11) and School Breakfast Program (7 CFR 220, Section 220.12) prohibit the sale of foods of minimal nutritional value (FMNV) during meal periods” (Competitive Food, 4pp). Coffee falls into this category of FMNV. “Section 10-221q of the Connecticut General Statutes completely eliminates the sale of tea, coffee and soft drinks to students in all public schools… This law applies to all public schools, regardless of whether they participate in USDA’s Child Nutrition Programs” (Competitive Food, 3pp).
Coffee is a culture or “the art of enjoying coffee in a relaxing atmosphere” (Elton, 1pp). Coffee culture and coffeehouses have been around since the 16th century, all over Europe, originally as a place for social gatherings and the arts. The U.S. is conforming to this Europe tradition of “slowing down and socializing over coffee at a local coffee shop” (Elton, 1pp). Not only is coffee a social drink but for some it is a way of life. According to the National Coffee Association’s 2000 Coffee Drinking Trends Survey, 54% of American adults drink coffee daily, and 25% drink coffee occasionally (Coffee Research Institute). Over half the adult population drink coffee everyday is a huge social impact.
Another social trend within the coffee industry is fair trade where coffee retailers work directly with coffee farmers, cutting out any middleman. This allows the coffee retailers to guarantee a minimum amount per pound of coffee (Economics of Coffee).
Lastly, with the recent increase in consumers and companies focus on “going green,” to follow this social trend the coffee industry must make “green” choices in order to compete. Ways companies can be environmentally friendly are by using biodegradable products, composting coffee grounds, donating to charities, conserving energy with energy saving lighting, water waste, recycling, and using hybrid and/or bio-diesel delivery vehicles (Milletto).
Although the way coffee is produced has not changed much through the years, technology in preparing coffee for the customer has made it easier to provide the best cup every time. New brewing systems and espresso machines like the new “revolutionary in-store Clover brewing system that delivers the best cup of coffee available anywhere” (DeGrande, 4pp). The $11,000 automated brewing system was made to customize every cup of coffee by maximizing the extraction (Harris). Also, the Mastrena, a “new state-of-art espresso system that provides the perfect shot every time” (DeGrande, 4pp). The new espresso machines are shorter making it easier for baristas to interact with customers. The Mastrena holds more beans than other machines for greater productivity, espresso shots are pulled with the push of a button and the machines grind the beans separately for every shot. Also it is equipped with other features like more options for milk steaming and steaming wands that are shorter and adjustable, giving more control to baristas, creating more customized and exceptional cups of coffee (Buchanan).
Another huge technological advancement in the coffee industry and coffeehouses is the internet and networking. Now most coffee shops offer internet access at little to no cost, allowing customers the opportunity to surf the web while enjoying their coffee beverages. Also, coffee companies are now utilizing networking sites like Facebook, Twitter, Myspace and the iPhone to stay connected to their customers, updating them on new products, promotions, events and customizing their coffee.
Present demographics in the coffee industry within the U.S, according to the National Coffee Drinking Trends 2006 market research survey, expresses 82 percent of American adults drink coffee, a rise from 80 percent in 2005. (NCA Works for You) Most coffee drinkers range from the age 25-39, which adds up to 47 percent, up from 41 percent in 2005, followed by 18-24 year olds who comprise 31 percent of all coffee drinkers which rose from 26 percent the previous year. Seniors daily coffee consumption rose from 70 percent to 73 percent (NCA Works for You).
As coffee and specialty coffee drinks are becoming more and more popular and for some consumers, a daily ritual, we see significant increases in future demographics within the younger generations, ages 18-24 and even 25- 39.
Trends Impact on Starbucks
The environmental trends impact on Starbucks can be seen as positive due to the fact that they are one of the leading companies in the industry. Starbucks is constantly innovating with the latest technology and changing practices for a more eco friendly impact. The company is known for consistently providing exceptional customer service. By marketing the of a “third place,” referring to a place other than home and work were people can come, feel welcome and connect with others over a cup of coffee (The Third Place, 5pp). The coffee company not only wants to provide their customers with a good cup of coffee but the whole Starbucks experience. But as the economic environment weakens and consumers start searching for deals on coffee and even making coffee at home, Starbucks must find ways to continue to bring value to their products and consumers, in order to keep their current customer base and bring in new customers.
Trends Impact on Starbucks’ Competition
Starbucks competitors, mainly McDonald’s and Dunkin’ Doughnuts, although provide the same basic product do have an advantage over Starbucks since they do not provide the same coffee house atmosphere they price their coffee beverages significantly lower. This is important in this economic environment where consumers are more consciously spending. Competitors have been able to create value to the consumer by basing their prices with quality of their product.
Trends Impact on Coffee Industry
The coffee industry can overall be positively affected by the environmental trends because even if companies are lacking in an area it gives them opportunities to improve their strategies in order to effectively compete. Coffee will always be in high demand it is just a matter of creating value to the customer with completive pricing and the best quality for that price, while meeting all customer’s needs .
Trends: Obstacles or Opportunities
All of the environmental trends discussed can be described as opportunities because the demand for coffee is always high and growing. Because younger generations, 18-24 and 25-39, are increasing their consumption gives Starbucks the opportunity to penetrate areas around universities and business districts. Due to the increase focus eco friendly business Starbucks has the opportunity to continue to find new ways to innovate and be more “green”. Overall all the trends can be opportunities to Starbucks by continuing to bring more value to the consumer better than the competition.
Coffee culture has created a community that is entranced with a variety of pop culture attributes, ranging from the quality of coffee beans to eclectic music. Coffee houses have attracted people from all walks of life; college students, musicians, professionals and more recently young professionals and even teenagers (talkcoffee.com). The sense of community and elite status that these coffeehouse create is very attractive and desired by many.
When Starbucks first began expansion operations in the early nineties, the primary consumers targeted where the upper middle class with an average age of 40 (starbucks.com). Since then, several other classes of consumers have been targeted, particularly with the changing environment where young adults are increasing their purchasing power and are increasing the significance of their opinions (www.purchasing.com). Starbucks is mainly focused on their consumer’s experience “…customer’s experience is “the marketing” for Starbucks” (Moore p. 10). Emphasizes is placed on providing an ambience and sense of a community within the coffee culture.
Starbucks consumers are diversified and can include people from all consumer segments. Young adults and especially college students have infiltrated Starbucks marketing strategies by placing themselves as a prominent target consumer. Business professionals, the original and largest target consumers, continue to provide a consumer segment that Starbucks places a marketing focus on, in order to maintain them as consumers. With all of this focus on young adults and business professionals, a new consumer has grown within teen-agers ages 13 – 17 year olds attempting to achieve the social status of being grown up and participating in adult activities; such as drinking gourmet coffee at coffeehouses or hot spots (www.coffeelife.com).
“Target consumers were identified with regards to their living environment, level of income and education. They were convinced to pay premium prices for the experience, service and quality they were getting. The company was able to capture the changing consumer behavior since the 1980’s; more out-of-home entertainment, more self gratification from consumers toward a good movie, a good glass of wine and a good cup of coffee. By increasing the perceived value of the product in the eye of the consumer, Starbucks was able to raise its prices while keeping the product affordable.” (Auch-Roy p. 15)
Demographics, Behavior, and Psychographics
Many people want to be within a certain type of status quo and be part of a lifestyle that is above their current position in life. Starbucks has taken this into account and has noted the “aspirational gap [that] exists between the lifestyle most consumers aspire to live and [the] actual lifestyle they do live” (Moore p. 12). Young adults and college students ages 18 – 24 are usually looking for a place to study, have group meetings, socialize, and have coffee readily available; as this seems to be an ideal placed in society as the place to be. With the addition of internet access at Starbucks stores young adults are able to stay in the store and satisfy many of the wants incorporated with studying and socializing. Starbucks has called itself the third place, “Starbucks uses the term the third place in its marketing because it vies to be the “extra place” people frequent after home and work. This idea came from a marketing concept by Howard Schultz. In an attempt to make Starbucks a “home away from home”, the café section of the store is often outfitted with comfortable chairs, as well as the usual tables and hard-backed chairs found in cafés (Wikipedia). This concept of the third place, has now permeated in the minds of consumers as a place of a gourmet coffee community, social gatherings, and almost a description of status. Business professionals ages 25 – 39 are interested in quality gourmet coffee at their convenience; on their way to work, after-work, and even during their lunch breaks. The social status that is associated with drinking Starbucks provides many business professionals with satisfaction from the recognition from other business professionals. Starbucks has been noted in the media as the new “in” thing and even though the media seems to show this in excess, consumers have held onto the allure of participating in this new and exciting thing.
|Young Adults||18 – 35||Studying, Socializing, internet use,||The place to be, ideal placed by society, Opinionated on gourmet coffee tastes|
|Business Professionals||26 – 35||Stop for coffee on the way to work, looking for quality product in gourmet coffee||Status quo within the business world, being able to determine the definition of “quality” coffee.|
|Kids||13 – 17||Walking from/ to school||Social status of being grown up closer to adulthood|
The decision process for young adults includes identifying or searching, for a place where they can study, socialize, meet with other students or friends and drink high quality gourmet coffee. Deciding on a place that can satisfy on as many of those wants as possible, is important and necessary to incorporate this “third place” into their lives. The high involvement in where to meet, the space available at that particular coffeehouse, the quality of the coffee’s taste and additions such as syrups and specific preparation provides a concentrated decision making process. College students meeting at Starbucks to work on a project, do research; or just to socialize has become so common place within the American society, that new young adults and college students are practicing this type of meetings at Starbucks merely because other people are doing it and advising them to participate. Word of mouth has assisted this type of meeting arrangements and provided added consumer benefits for Starbucks; where people are going merely as followers and then continuing to go out of satisfaction.
Business professionals are looking for a place that serves gourmet coffee with quality taste, ambiance and customer service on their way to work and after-work. The decision in choosing which place to purchase their coffee, requires them to purchase coffee from many different local coffeehouses and get a taste for the quality, ambiance, customer service and especially the taste. Starbucks offers a variety of flavors, syrups and coffee preparation methods that can satisfy the needs of all customers.
The kids that are interested in Starbucks coffee are searching for the social status that can show their peers that they are grown-up and also want their peers to also engage and socialize as if they were adults. These kids hear of and observe college students, business professionals and more likely their parents at Starbucks, and want to participate in these activities. The perception of this type of activity by kids is seen as cool. Children as young as kindergarten level, who go into a Starbucks with an adult, want to experience the third place and everything it has to offer. The involvement in the decision making process may be at a medium level considering that the sophistication of location, quality of coffee and customer service is not necessarily a high priority for kids. Merely the perception of adulthood lures these kids to Starbucks and its products.
Consumer Demand Forecast
There are strong indications that consumption of Starbucks coffee is rising. By diversifying its consumer base and including products for all types of target consumers, Starbucks has expanded its ability to bring in more consumers. Daily consumption among 25-39 jumped to 47% from 41% in 2005 and is still rising today. With the new young adult consumer consumption went from 26% to 31% in 2005 and is now more than likely much higher. This provides evidence that more and more people are consuming coffee. The frequency of consumption has also increased, people are not only have coffee in the morning, but throughout the day, after-work, social gathering and taking a relaxing moment to enjoy their coffee (NCA Works for You). These percentages show a significant rise in cofee consumption. In the future it is conceivable that coffee consumption will continue to rise, specifically with the increase in different segments of consumers entering the coffee industry.
Industry and Competition
Starbucks Inc. operates throughout various industries, but is best known for their coffee house retail stores. These retail stores sell a variety of beverages and have recently ventured into a breakfast and lunch style food selection. Because of the cross industry operations, Starbucks can be compared and contrasted to many types of companies. For this report we will only focus on Starbucks as a competitor in the Specialty Eateries industry.
Starbucks is not only a competitor in the Specialty Eateries industry, it is the industry leader in the coffee and specialty coffee segments with approximately 75% of the market (“U.S. Coffee Shops Simply Too Hot to Handle, 2007,:2). Starbucks has been known to dominate the coffee house market for more than a decade, with performance peaking in the early to mid 1990s. Before starbucks exploded into the industry leader it is today, it was a small corner shop that resembled countless other mom and pop type coffee houses that share the market.
However, the mom and pop shops that were once the prototype for coffee houses everywhere have been cast into the shadows of major competitors, such as Starbucks. Within the last three years Starbucks has been observing an invasion of their dominated market (Tirella, MSN Money. 2007). McDonald’s restaurants have introduced their McCafe product line, which is designed to directly compete with Starbucks. McDonald’s is not the only competition that has recently initiated an invasion of the Specialty Eateries market, Dunkin Donuts has invested aggressively to compete against both Starbucks and McDonald’s.
McCafe product line consists of cappuccinos, lattes and iced lattes, mochas as well as iced mochas, premium roast coffee, iced coffee, and hot chocolate. While Starbucks has dozens of drink varieties, McDonald’s has still been able to exceed expectations of the McCafe line and seeks to expand its menu pending the results of market analysis (Eng. Chicago Tribune. 2008).
A reason for the popularity of the McDonald’s coffee bar is the convenience of being able to get breakfast and a premium roast coffee at the same place. Many costumers that would usually go to Starbucks for their morning coffee and then to McDonald’s for breakfast, can now skip the extra step and get it all from one place. McDonald’s has over 14,000 locations nationwide compared to Starbucks’ 9,000 locations (Castro, U.S. News, 2009). Although Starbucks is infamous for saturating the coffee market with having a “store on every corner” approach, McDonald’s is probably the one restaurant that can compete in that respect. Not only can the costumers get breakfast and coffee in one place, they can get their drinks for less. McDonald’s knows that the coffee house experience is not their specialty so they price their drinks significantly less than competitors. McDonald’s prices their drinks about 20% lower than Starbucks (Castro, U.S. News, 2009). McDonald’s is aware that Starbucks’ target market is affluent consumers who are willing to pay in excess of $4 for a cup of coffee, so they have adapted their marketing strategy to capture the share of consumers who may want a premium roast coffee at a more economical price. McDonald’s positions its McCafe line as that exact picture, a premium gourmet experience comparable or even better then Starbucks, at a much more economical price.
McDonald’s McCafe line seems like it may have enough strength to take on Starbucks and any other competitors in the market. With McDonald’s advertising budget soaring over $100 million, and a restaurant count of 14,000 in the U.S. alone, McDonald’s has the resources and capabilities to strongly compete against Starbucks (Castro, U.S. News, 2009)
Dunkin Donuts is another direct competitor that has essentially waged war against Starbucks in the coffeehouse market. The primarily doughnut oriented restaurant chain has decided to put ready to serve coffee at the top of its focus. With products such as the Dunkaccino, White hot chocolate, Coolatta, lattes and iced lattes, as well as regular and seasonal hot and iced coffee, they will directly compete with Starbucks.
According to an MSNMoney article, Dunkin Donuts held major taste test across the country with surprising results “In late 2007, Dunkin’ Donuts made a surprising announcement: In a national taste test in 10 major U.S. cities, the chain had put its most popular brew up against Starbucks’ — and clobbered the coffee conglomerate, 58% to 42%.”(Tirella, MSN Money, 2007). The taste test shows that of the sample tested more people prefer the taste of Dunkin Donuts coffee over Starbucks. Dunkin Donuts will need this advantage to compete against Starbucks to compensate for the company’s shortcomings.
Dunkin Donuts has 6,395 locations in the U.S., which is a considerable amount less then its market leader Starbucks. This will lead to problems for Dunkin Donuts capturing nation wide market share, primarily because it only operates 75 locations west of the Mississippi River, mostly scattered within Arizona, Nevada, and Texas (DunkinDonuts.com). However, despite these restrictions Dunkin Donuts claims to be “America’s largest retailer of coffee-by-the-cup, serving nearly 1 billion cups of brewed coffee each year.”(DunkinDonuts.com)
Compared to other gourmet coffee establishments, Dunkin Donuts is known to be moderately priced to satisfy economic consumers. The positioning of their coffee products is very similar to that of McDonalds in relation to value and price. This may not differentiate Dunkin Donuts very much from McDonald’s but adopting a similar strategy will still bring more heat against Starbucks. According to Mintel Research Group, Dunkin Donuts does not have enough proverbial steam to compete with Starbucks. (U.S. Coffee Shops Simply Too Hot to Handle, 2007,:14)
Although not in direct competition with Starbucks, Jamba Juice, and similar juice bar establishments, affect the market share of Starbucks. They serve as a substitute for coffee and aim their product as a more health conscious and nutritious morning drink. Consumers may be compelled to substitute their usual caffeine intake, and therefore lower their visits to Starbucks, with a natural source of energy found in many of Jamba Juice’s menu selections. Jamba Juice also provides an “Energy Boost” which can be added to any smoothie selection for free. Jamba Juice quotes their energy supplement as follows “Boosts…contain vitamins, minerals, and functional ingredients blended to meet your personal health and lifestyle goals.”(http://www.jambajuice.com/#/nutrition101/). Much like Starbucks, Jamba Juice offers more than just a drink menu, their menu includes salads (Ginger Soy Salad Joy), wraps (Greek Goodness, Greens and Grain), and oatmeal as well as their dozens of varieties of fruit smoothies including: Aloha Pineapple, Blackberry Bliss, Caribbean Passion, and Mango-A-Go Go (http://www.jambajuice.com/#/smoothies/).
The Jamba Juice brand is known nationwide and is considered the market leader in its category (Jambafranchise.com). However, this following comes from a very dedicated costumer, the company only operates approximately 700 stores nationwide. According to the company website, Jamba Juice actively and aggressively recruits new franchise owners to compete in the national market. (Jambafranchise.com)
However reputable the Jamba Juice name may be, it is hardly likely that a health conscious smoothie bar will soon dominate a market in which McDonald’s and Starbucks both indirectly contend with your target costumers.
Potential Gaps in the Market
Because Starbucks positions a majority of its products at affluent consumers that want a premium gourmet drink in a serene and relaxing atmosphere, and McDonald’s and Dunkin Donuts both position there cafe lines to more economic consumers that want their premium gourmet coffee at a lesser price and are willing to give up the relaxing atmosphere for a more fast food or take out type atmosphere, there leaves a gap for a costumer that can provide the goods and services that are not provided to consumers from these vendors. The potential to create a coffee shop that offers premium gourmet coffees at an economical price to consumers that do not want to sacrifice the serene and relaxing atmosphere. This coffee shop would hold the potential to steal costumers from not only Starbucks, but also McDonald’s and Dunkin Donuts in a single swoop. While this potential gap is present, it is unlikely that a company could formulate a strategy to provide such amenities.
Another gap in the market is the potential to have a coffee shop that serves premium gourmet coffee as well as nutritious alternatives such as smoothies. This hybrid shop could cater to costumers of parties of multiple people, who want both coffee and smoothies. The idea would increase convenience to consumers in that they would be able to accommodate everybody’s taste in one single place.
As a strong global brand, Starbucks was built upon a reputation for fine products and services. It definitely met its long range goal of becoming the most recognized brand of coffee in the world and as of today, Starbucks Corporation still remains a fine coffee industry and a very profitable organization with its strong performance. According to their financial report, in its third quarter ended June 28t,h the net earnings were $ 151.5M for the 13-week period. Then, for its fourth quorter in fiscal year ended September 27, 2009, Starbucks again reported its strong performance and increased its FY10 earnings outlook based on improving same store sales trends and the increasing impact of its cost savings efforts (BusinessWire: Starbucks Posts Strong Fourth Quarter and Fiscal Results).
Starbucks is widely spread around the world. In recent years they expanded rapidly by opening stores in many foreign countries. According to and article in the Washington Post March 22, 2009, the only way to grow and stay profitable is through international expansion, since just one-fifth of chain’s sales come from foreign markets. That is the reason Starbucks is planning to open 170 stores this year, outside of the U.S., particularly in China, Russia and Brazil (Mitchell G1).
This map shows all the countries that Starbucks has coffee shops (wikipedia.com).
Strong and efficient management of Starbucks is led by Howard Shultz, who makes sure to have well trained, passionate, and loyal employees. Starbucks’s management gives priority to a diverse workforce that represents its community. According to Starbucks Corporation Fiscal year 2007 Corporate Social Responsibility Annual Report, Starbucks has a very diverse workforce, with more than 172,000 partners (employees) worldwide. In the diversity there are men and women of different ages, races, religion, national origin, gender, disability, and differing levels of education, skills and experiences. Starbucks’s management looks at its diverse workforce as an asset that encourages creativity, inspiration and improvement, which becomes an important asset for their success. “Reaching our goal of creating a truly diverse and welcoming environment – for our partners and customers – is a challenge. The people who work at Starbucks are the heart and soul of our company. We value and respect each partner because our success would not be possible without the contributions they make on a daily basis” (Starbucks Corporation Fiscal 2007 Corporate Social Responsibility Annual Report, pg 88).
Other strengths of Starbucks are their long range outlook of the company due to its ethical approaches in building relationships with its customers, employees and suppliers. Starbucks always attempts to keep a good relationship with suppliers, treating their customers in the best way in order to gain long-term customer loyalty. Starbucks offers the value proposition that its biggest competitors are not able to deliver to Starbucks’ customer base. Therefore, has a strong position to take advantage during the economic recovery.
Starbucks’ always offers high-quality and diversified products and try to come out with new promotional products. They target almost all demographics and offer a variety for everyone, such as organic chocolate milk for toddlers, non-coffee beverages, salads, fruits, snacks, free pastry with a drink, breakfast pair for $3.95, etc. Most importantly, the coffee that Starbucks offers is a great and rich tasting (The Seattle Times: Starbucks hopes promotions boost U.S. sales and stock price).
Along with so many strenghe, Starbucks has some weaknesses. Due to high price of their premium coffee beans, Sturbucks increased prices of some of their coffee drinks. Therefore, Starbucks lost many of its customers, 20% of coffee-drinkers either have stopped drinking coffee, or they make it at home by using less expensive brewed coffee (NCA, 7pp).
Then Starbucks ended up lowering the prices of some of their brewed coffee, and are offering promotions on iced drink in order to either regain those customers, or not lose others (Pricing for Profit: Starbucks’ New Pricing Strategy: the Beginning of the End?, Parag. 1). However, it is hard for Starbucks to maintain low prices, since premium coffee beans are always expensive, and it is the number one expense for Starbucks.
Because of Government regulations, the sale of coffee beverages is prohibited in public schools, which makes it hard for Starbucks to target teenagers (www.sde.ct.gov). Therefore, Starbucks has selective targeting customer age group, which is a weakness and needs to be addressed properly by creating more non-caffeine and healthy variety of drinks for teenagers. By diversifying the product line and creating new healthy beverages, Starbucks will not be dependant on coffee menu anymore and will be able to bring new customer base from its indirect competitors.
Since Starbucks belives in high ethical approaches in building relationship with its employees and suppliers which is often costly, and could hurt the bottom line of the company in a short-run.
Howard Schultz is making plans to reinvent the way Starbucks does its business which is a promising sign for Starbucks’s future. Since a high percentage of revenue comes from their retail operations, Starbucks is planning to open new stores throughout the Unites States and in the new markets in Eastern Europe to accomplish the goal of operating 40,000 stores worldwide (Mitchell G1).
Despite the closure of many under-performing retail stores, Starbucks plans to open another 10, 000 retail stores in markets where its stores already exist. By next year in the Unites States alone, Starbucks is planning to open 140 new stores, while closing 200. Schultz believes in investing in growth, and in the competition with McDonalds and Dunkin Donuts he competes in every possible way, without competing on price. One of the challenges for Starbucks will be to convince people to drink instant coffee and that coffee drinks aren’t so expensive after all (Mitchell G1).
The best expansion opportunity for Starbucks would be getting a license to open Starbucks coffee shops on University campuses. Starbucks has to expend its existing market segmentation throughout Generation Teens by offering free internet in all Starbucks coffeeshops, and new customized drinks, such as blenders with fresh fruits and variety of ingredients that teenagers would have fun and enjoy consuming. Since nowadays going green is a main concern in our lives, Starbucks could meet growing trends by offering environmentally friendly products, such as motivating customers to stay and drink their coffee in house in a ceramic cup vs. plastic cup. And offering free internet would help to attract customers to stay and enjoy their food or drink in the coffee shop.
Then when the time comes, Starbucks has to be the first to open a coffee shop on the Moon. Why not?
The current economy is a huge and major threat to the coffee industry, since during an economic downturn luxury products become secondary. Starbucks was faced with a difficult operating environment and ended up with the closure of 900 under-performing stores since 2008 (Forbes.com). During a recession people skip Starbucks more then ever because coffee is seen as an extravagant drink, and anything of extravagance is usually the first thing to go, during recession.
In its first quarter of fiscal year 2008, Starbucks suffered a 3% decrease in transactions for the first time (Financial Post: Starbucks growth seen tied to economy July 2009). For the first time in Starbucks history, Starbucks announced it would close its under-performing stores and lay of almost 12,000 employees. Economic crises and recession will always remain major threat for Starbucks and any other consumer based industry.
Increasing competitors in the coffee industry consider as major threat as well for Starbucks. The competition in the coffee industry, including restaurants, supermarkets, other coffee shops, and other caffeine based beverages, will always remain one of the main threats. Within the last three years Starbucks gained more competitors entering in their dominated coffee market than ever before (Tirella, MSN Money. 2007). An Increase in competitors in the industry have attracted consumers with tight budgets by offering less expensive coffee beverages. Dunkin’s Donuts and McDonalds recently initiated an invasion of the Specialty Eateries market by competing directly with Starbucks. McDonald’s has introduced their McCafe product line offering a large variety of coffee drinks, such as cappuccino, latte, mocha, premium roast coffee, and many other beverages. McDonalds still wants to expand the McCafe product line, in its future (Eng. Chicago Tribune. 2008). Another big competitor, Dunkin Donuts, has aggressively engaged into competing against Starbucks in coffee industry, with similar drink products.
Besides all the existing competitors, others can invent new ways of offering coffee beverages, or open coffee houses. Healthy consumption becomes an important part of people’s live, and many consumers try to minimize caffeine in their diets and chose healthier beverages rather then coffee drinks. Thus, customer trends toward healthier life style, choosing less caffeine consumption is becoming a potential threat for Starbucks. Therefore, Jamba Juice as and indirect competitor, also is a threat to Starbucks. However, this is a potential threat only, because Starbucks recently unveiled new healthy food in their breakfast menu with more nutritious alternatives, such as fresh fruit, banana walnut bread, outrageous oatmeal cookies and smoothies in their coffee shops. This new product line consist of all real delicious food with no artificial ingredients, no artificial trans fats, dyes and no high-fructose corn syrup (Starbucks.com).
One of the minor threats to the company is the current high prices of dairy products, which is an issue for Starbucks. In recent years, dairy prices increased 10% (wikiinvest: Starbucks (SBUX), 12 pp).
The marketing objective is to bring awareness to the new product, specifically its value and benefits to the selected target market, leading to a 5% increase in customer traffic and a 4% increase in sales of beverage drinks in company-owned retail stores. a new product line will be implemented. Increase within two years of introducing the new product. By the second year of introducing the new product, the targeted increase in customer traffic will be measured by the number of transactions in each store, and the increase in the revenue of beverage drinks will be measured by the total sales in each store over the period of two year.
Our customer base is classified into the following demographic and behavior distinct segments for the purpose of developing the marketing strategy for our new product:
- Non-coffee drinkers
- Yuppies who eat organic food
- Soccer mom
- Tweens and Teenagers
- Regular coffee drinkers
The non-coffee drinker segment consists of adults between the ages of 25 and 55, who do not drink coffee. Based on a study conducted by the National Coffee Association of the US in 2009, 63% and 77% of the overall adult population drinks coffee weekly and annually, respectively, which signifies a huge segment of the population that does not drink coffee at all or drink it very rarely (National Coffee Drinking Trends 2009). 25% of the adult population does not drink coffee for health reasons or simply because they do not care for the taste of coffee. By introducing the new SuperFruit Blenderz, Starbucks can meet the needs of this segment and provide quality that exceeds what is currently being offered by competitors. Starbucks has plenty of non-coffee drinkers who spend their times at Starbucks with their friends, co-workers and family and yet Starbucks’ products for this segment of customers are limited to water and juice compared to the virtually unlimited variety of specialty coffee beverages (refer to Exhibit I). Non-coffee drinkers are the potential customers of Starbucks whose needs can be better met by introducing a variety of non-coffee drinks and ultimately gaining their purchasing power.
Starbucks’ main target market continues to be young urban professionals, also known as yuppies in their 20’s and 30’s. Yuppies are high-income earners with annual incomes of $65,000 or more and single without children. Therefore yuppies as a group, naturally have more disposable income that they can spend at their discretion to improve their lifestyle and health.
Stroller Moms and Soccer Moms
Soccer moms are between the ages of 25 to 44 and have higher discretionary incomes than the average women. They are middle-class suburban moms, who are savvy shoppers and account for 30% of iPhone users (Is the iPhone mom the new soccer mom). They are motivated to improve their health and do not mind spending more for it. This group of moms is likely to bring their children to Starbucks, contributing to the customer traffic during the daytime.
A crowd of teenagers can be easily spotted at Starbucks near high schools before and after school. They are the loyal customer base for specialty drinks, such as the Frappuchino. This segment is believed to be the main driver of domestic specialty coffee consumption in the next few years. Starbucks has not been able to target this segment directly due to the concern about Starbucks’ image of trying to sell high-calorie, caffeinated drinks, such as Frappuccino’s, to under-aged kids. This group not only influences family spending decisions, but has its own purchasing power. Based on a study conducted by Teen Research Unlimited (TRU) in 2007, this group spends an average of $102 per week (Deep Pocket). Millennials, which includes today’s kids and teenagers have unprecedented purchasing power and are more engaged and more creative than ever, making them more willing to try new products.
General Coffee Drinkers
This group is the consistent customer base who visits Starbucks on the average of 3.5 times a month. The frequency of visits for individual customers varies significantly. While this group is the loyal customer base of Starbucks, the company must consider the current trend and focus on more health-conscious marketability. A study conducted by NCA in 2009 revealed that there was a 3% decrease in weekly and yearly consumption of coffee among the adults in U.S. from 2008 (National Coffee Drinking Trends 2009). The trend of customers seeking non-caffeinated drinks may be the reality of the coffee industry. Starbucks can diversify its menu to address this segment’s concerns by adding a variety of non-coffee drinks and ultimately increasing the frequency of visits from current customers who may not want the caffeinated-drinks during that particular time in the day.
The target market for our new product will be non-coffee drinkers, soccer moms, tweens and teenagers. Unlike the current target market described in the situational analysis we plan to target these new segments in order to increase the customer traffic, the revenue and ultimately the overall market share.
Our new product was developed with a focus on the needs of our new and existing customers as well as the current trends described in the situational analysis. For the introduction of this product however, the above three segments will be targeted to streamline the advertisement and the sales promotions. Furthermore, the consumers of our market segments are likely the loyal customer base of Jamba Juice and can be targeted to become the early adapters of “Starbucks SuperFruit Blenderz” by offering more customer value. Our survey results indicate that Starbucks does not offer enough of variety to the non-coffee drinkers and 20% of them stop at Jamba Juice or other establishments to purchase non-coffee beverages before coming to Starbucks to meet their friends or family. Essentially, Starbucks has been losing these customers to other establishments due to not extending the non-coffee beverage line. More importantly, Starbucks can provide the one stop convenience where coffee drinkers, non-coffee drinkers and health conscience groups can enjoy the quality and taste of our new drink, while relaxing and enjoying their time with their friends and family at Starbucks. By targeting our new segments of consumers, Starbucks can recover from the 3% loss of customer traffic reported in the situational analysis and gain more new customers by competing with Jamba Juice and other smoothie retailers.
Our new product will be positioned as a superior blended fruit drink packed with vitamins and antioxidants that are healthy, tasty and fun. In addition to superior quality, our new product allows customers to pick and mix the ingredients of blended fruit drinks; choice of a superfruit juice, sorbet, banana, strawberries and the choice of a fun dry ingredient; such as gummy bears, dried cranberries, chocolate chips and more. Consistent with Starbuck’s philosophy our new drinks will be made to our individual customer’s taste and wants. Starbucks SuperFruit Blenderz is diversifiable within its line to fit our customers’ different lifestyles and preferences without compromising the quality and the taste. More health-conscious customers will find low-calorie Blenderz with only fresh fruits and non-fat sorbet to be more attractive. Tweens, teenagers and other fun seekers will tend to add additional dry ingredients to experience the exciting new flavors of our SuperFruit Blenderz. Blenderz will be introduced with a “more-for-the-same” value position versus Jamba Juice. By adding the super fruit ingredients such as acai, mangoesteen and pomegranate to our new product, additional value and health benefits will be extended to our customers at the same of price of regular smoothies in the market.
The new product that will be added in Starbucks product line is called Starbucks SuperFruit Blenderz. The product considers the first and most basic marketing attribute in the marketing mix. Starbucks’ is already known as one of the “hottest brands” in the US and in the International markets (Kotler, pg 222). But even well known business’ have to come up with new product ideas constantly in order stay in the market and deal with their competitors the best way they can. They must do this to also satisfy their customers’ wants and needs, and remain a successful business. Therefore, understanding the importance of a new product, we have done extensive research before coming up with our new product, SuperFruit Blenderz. The main or “star” ingredients chosen for our blended fruit drinks, are Acai berries, Mangosteen, and Pomegranate, which are known as superfruits. Customers can choose from the main ingredients, either acai berries, mangosteen or pomegranate coupled with our basic ingredients in our blended fruit drinks: mixed berry sorbet (raspberries, strawberries, and blueberries), fresh bananas, and fresh strawberries. Moreover, customers will be able to customize their blended fruit drink by adding one of the products offered under the Blenderz Mixers menu: organic granola, gummy bears, peanut butter chips, shredded coconut, chocolate chips, and dried cranberries. The menu of our new product is shown on the next page.
4 ounces of Naked Juice choice (Acai, Mangosteen, Pomagranate)
2 ounces of mixed berry sorbet (one scoop)
3 whole strawberries
1 whole banana
Grande scoop of Ice
Mixed Berry Sorbet (Raspberry & Blueberry)
With Your Choice of SuperFruit (Choose One)
Blenderz Mixers (Choose One)
Peanut Butter Chips
The main benefits SuperFruit Blenderz will offer to the target market is its uniqueness and healthiness. Since the product, as a complex bundle, should be beneficial to consumers and satisfy their needs, thus while developing a new product for Starbucks we identified the “core customer value” and the benefits that consumers look for in an actual product (Kotler, pg. 225). Once again Starbucks will launch a high quality product which will its customers’ experience and will go beyond their expectations.
People who purchase our new Starbucks SuperFruit Blenderz, will be buying more than just another Starbucks high quality and delicious beverage. They will buy a super healthy blended fruit drink that is rare in the industry. Our new product Starbucks SuperFruit Blenderz will be made by the basic ingredients of mixed berry sorbet (raspberries, strawberries, and blueberries), fresh bananas and fresh strawberries. Customers get to chose one of the main superfruits; either acai berries, mangosteen, or pomegranate.
Superfruits have unique and important health benefits, such as high amounts of essential antioxidants and phytochemicals that contribute to good health and a balanced diet. Our new blended fruit drink will not only be of high quality and delicious, but it will also be very healthy. For example, acai berries are beneficial for humans because it reduces inflammation and blood clots, helps fight free radicals, improves the digestion system and promotes a healthy body weight. Mangosteen is a good source of daily fiber, reduces inflammation and infection, lowers risks of human diseases, and improves vision. Pomegranate is high in calcium which promotes healthy bones, supports cellular tissue growth, and promotes a healthy immune system.
The features and attributes of our new product include great nutrients and vitamin application of superfruits. Each of the superfruits that we have chosen to use in our new product have unique qualities. All three superfruits are mostly known for their outstanding antioxidant properties, which is essential for good health. Superfruits differ from other common fruits by their high Oxygen Radical Absorbance Capacity in the (ORAC) rating system, which is a method of measuring antioxidants (Myers, parag. 3). The importance of a high antioxidant capacity in fruits is the free-radical theory of aging. The following three superfruits—acai, mangosteen and pomegranate—are the main ingredients in our new blended fruit drinks.
Acai berries (Euterpe oleraceae) come from a 50 to 80 ft. high acai palm tree that grows in Central and South America, in the Amazon rainforest. Acai berry has a very similar look with blueberry, it is small, and has a distinct dark purple color. Natives of the Amazon call the acai tree: “The tree of life”. In society today the acai berry is considered a rare fruit, but is slowly gaining popularity mainly because of its natural richness in nutrition and vitamins (Rourke, parag. 6).
The Acai fruit is highly perishable and delicate, and must be processed within 24 hours after harvest. That is why instead of using the fresh acai berries in our new product, we will be using Acai Machine Naked juice, This juice has the same nutrition, vitamins and taste as the fresh Acai berries. The following picture represents fresh acai berries (wikipedia.org). http://en.wikipedia.org/wiki/File:Acai-berry.jpg)
The nutritional properties of the acai berry include: omega fats, antioxidants, electrolytes, amino acids, vitamins A, B1, E and protein. Beverages that contain acai berry are more popular then milk, in South America. The acai berry is an amazing fruit that is known to hold more antioxidants than any food ever reported. Acai is great for dieting, it promotes healthy aging, and it just might be the healthiest food in the world. Acai also has the ability to support healthy and normal cellular tissue growth (Rourke, parag. 7).
Acai berry is widely known for its benefits and attributes. Recently it became an American phenomenon, especially after Doctor Oz talked about the natural and alternative benefits of this extraordinary fruit during the Oprah show, and then it was also discussed during The Today Show. Acai berries have become popular because of their healthful and nourishing qualities. Acai increases the energy level of the body, helps digestive functions, improves mental focus, strengthens the immune system, cleanses and detoxifies the body from infectious toxins. It also has the most unique quality of fighting free radicals & cancerous cells (Schanbrom, paragraph 1).
In 2006 research was conducted by ten scientists to find out antioxidant capacity and other bioactivities in Amazonian acai berry. According to that research, Acai berries have significantly high antioxidant capacity, which can help prevent tissue damage, and reduce diseases caused by oxidation. In the study, the scientists demonstrated that “the antioxidant capacities of acai fruit was evaluated and found to have the highest antioxidant activity of any food reported to date”(Schanbrom, paragraph 1). Therefore, the acai berry has incredible health benefits. Moreover, the outcomes of the study suggest that acai berry could be an excellent food to study for potential disease prevention in the future (Schanbrom).
Acai is an excellent addition to any diet for any person, at any age. It can only offer good results, and extended use over time offers incredible potential to developing the healthiest body possible. As you can see in the anti-aging food pyramid above, supplements with high quality multivitamins and minerals and key antioxidants are needed in everyday diets. According to Dr. Lam, this is “the world’s most advanced Food Pyramid designed for anti-aging” (Healthy, parag. 7).Most people are not getting enough ORAC units to sustain a healthy anti-aging diet. Acai is good because it gives you those missing things you need to keep your body healthy.
Mangosteen is considered one of the top three superfruits because of its appealing subjective characteristics such as nutrient richness, antioxidant strength, potential impact for lowering risk of human diseases, and of course for its taste, aroma and visual qualities.
Mangosteen, also known as Garcinia mangostana, grows on a tropical evergreen tree, which is 20-80ft tall. The fruits are a deep reddish purple when ripe. It has a sweet and tangy smell with a peach flavor and texture (wikipedia.org). The most remarkable nutritional characteristic of mangosteen is its relative absence of essential macro or micronutrients which is shown in (Table 1). All the nutrients greater than 5% Dietary Reference Intakes (DRI), which are found in mangosteen are very important for human health (Gross, paragraph 1).
Table 1. Nutrients with greater than 5% DRI found in mangosteen aril
|Nutrient||Content (per 100 g)||DRI (NAS, adults)||Approx % RDI|
|Carbohydrates||14-18 g*||130 g||12|
|Dietary fiber||1-5 g*||30 g||10|
|Vitamin C||1-7 mg*||75-90 mg||5|
|Folic acid||31 μg^||400 μg||8|
|Manganese||0.2 mg^||2 mg||5|
Pomegranate just like acai and mangosteen, is known for its exceptional antioxidant properties that are necessary for good health. Antioxidants protect the body from molecules that cause premature aging. Pomegranate contains a significant amount of good sodium, calcium, vitamin C, niacin, thiamin and riboflavin. Pomegranate promotes a healthy immune system and supports cellular tissue growth. Because the pomegranate seed oil can support healthy and normal cellular tissue growth it is often used in the cosmetic industry. Therefore, the new blended fruit drink with pomegranate as the main ingredient will especially please women (pomegranates.org).
Pomegranates grow on trees up to 20 feet tall that can reach 200 years of age. This fruits origin is Mediterranean and the Middle East. The pomegranate seeds are red in color, vary in number, hardness, taste and size. The quality of the fruit is superior when it grows in hot dry summer climates, and it has poor quality when it grows in tropical climates (pomegranates.org).
Our new product, Starbucks SuperFruit Blenderz, is a tangible good served in a Starbucks cup, Grande size (16 oz) and Kids size (12 oz). We have chosen this Strarbucks cup because it is similar to the existing frappuccino cups. The cup has a Starbucks logo in the middle, which represents the brand. The following picture corresponds to our new product and the way it will be served in house. The actual blended fruit drink is perishable, because it contains fresh fruits. Therefore, it needs refrigeration.
There are some advantages and disadvantages regarding introduction of our new product. The advantages are that Starbucks is already a well known brand, which means as one of the “hottest brands” in the US it is easy to introduce a new product line that the existing and new customers will be willing to try.
The new product will create self-cannibalization within the Vivanno smoothie portfolio. We believe that this new product is high in quality and high in health benefits, which is more advantageous to the brand equity. Therefore, our new Superfruit Blenderz product line will help to build even stronger brand equity. In the long run Superfruit Blenderz will replace the Vivanno line, which is not currently profitable for Starbucks.
To bring awareness about our new product to the target market, we will start an ad campaign two weeks before launching the new product, providing “awareness cards” to people. The “awareness cards” shown in the Appendix, Exhibit 2, will explain about the benefits of the new SuperFruit Blenderz. Our goal is to achieve at least a 5% increase in customer traffic and a 4% increase in sales of beverage drinks in through the second year after launching the new product. We also want to gain new customers from all competitors, especially Jamba juice.
The new product ties in with our marketing objectives, because we brought awareness on the product’s value and benefits to the selective target market (through promotion, advertisements, sending email blasts, brochures, and “creating awareness cards”).
The blended fruit juice ties in with our target market and satisfies the wants and needs better than competitors because we will offer unique and super healthy blended drink with remarkable benefits and lower price.
Our new product fits positioning within the existing products, because it is a gourmet tasty drink with high quality and is healthy, fun for kids and teenagers, and unique.
Our new products decisions are supported and justified with primary and secondary data, and are consistent with marketing principles. The primary data is the survey results that backed up our decision making. According to our survey many non-coffee drinkers are willing to start going to Starbucks if they can find healthier non-caffeine drink. That means that Starbucks will gain customers in their target market. Many teenagers are very excited about the news of this new drink, because they are fun for Starbucks, but before they couldn’t find a healthier drink. Now instead of going to Jamba juice, they will go to Starbucks and get what they want. Also many families can go there; parents can get coffee drinks, while their children can enjoy healthy blended fruit drinks. The survey shows that people are excited to see such a product in Starbucks and that they will be willing to visit Starbucks more often.
The secondary data that justified our decision making is the benefits of the blended fruit juice. The research that was conducted helped to understand the importance of a healthy beverage being launched next to coffee drinks in Starbucks. The healthy ingredients of our blended fruit drinks are astonishing. Rich in vitamins, aging food supplements, high quality multivitamins, and minerals with key antioxidants that are essential in everyday diet.
In order to capture a target market that is new to the Starbucks experience, the various SuperFruit Blenderz will be priced using the more-for-the same pricing strategy. This strategy entails pricing our Blenderz at the same rate as our most direct competition, Jamba Juice, Smoothie King and Planet Smoothie. The reason for doing so is that Blenderz offer a better value compared to Jamba Juice and similar establishment’s smoothies, but will be offered at the same price as competitor’s similar products. This strategy will bring in curious customers that are willing to substitute their usual smoothie product to try the new Superfruit Blenderz.
As stated in the situation analysis, the main objective of introducing the Superfruit Blenderz product is to satisfy both coffee-drinking and non-coffee drinking customers in one stop. The product will save customers time and money while supplying a superior product then its competitors. The objective is to capture 4% of the smoothie market while also bringing in a healthy revenue for Starbucks.
The costs associated with introducing the Superfruit Blenderz include the fixed cost as well as the variable cost for producing the products. The fixed cost includes the cost of new equipment (please refer to the next section for more details), research & development and marketing. In order to better reach our target segments, an intimate communication strategy will be used instead of using the mass marketing and media outlets, which can cost millions of dollars. In the first year of introducing the SuperFruit Blenderz, $250,000 is budgeted to cover different venues of marketing expenses, which includes podcast, advertising on facebook, twitter, in-store poster/chalkboards and sending out emails. The main cost of our marketing will be producing posters, pamphlets, cards and promotional coupons to be used by our 6764 retail stores. Additionally, the project budget for Research and Development is $50,000, yielding the total fixed cost of $10,716,560.
The variable cost is relatively minimal considering the high quality of ingredients that have been selected. Starbucks was able to use its purchasing power to find the suppliers who can offer discounted pricing for the raw materials. The majority of the toppings, (shredded coconut, dried cranberries, granola, etc.), will be delivered from Bulkfoods.com, a major online food distributor. We have also found Naked Juice and Dreyer’s Sorbet to achieve the value we intend to set with the Superfruit Blenderz. Please refer to the variable cost section for more details.
To accommodate the new product, each store will initially have to purchase two (2) Blendtec, EZ Blenders, which is the standard blender used in all Starbucks stores. The cost of each blender is $250, equaling $500 for initial blender costs per Starbucks location. In addition to the blenders, each location will need to purchase three (3) additional blender jars at $50 each, totaling $150. Adding the cost of the blenders and the blender jars equals an initial equipment cost of $650 per store. By adding blenders and jars, the need to constantly wash the blender jars after each orders will be reduced, and thereby increasing the productivity of baristas.
The variable costs of the Blenderz will be the material costs for each ingredient and toppings needed for the Superfruit Blenderz. As stated above we have selected three vendors, who supply high quality ingredients. Dreyer’s Ice Cream will provide their Berry Rainbow Sorbet, Naked Juice will provide Starbucks with Acai Machine, Mangosteen Bliss, and Pomegranate juices, and Bulkfoods.com will provide the dry ingredients needed for the Blenderz. Below is the table summarizing the different components of variable cost, yielding a total variable cost per unit of $2.49:
|Raw Materials||Quanity||Unit of Measure||Quanity Used per 16 oz Blenderz||Cost per Unit||Cost to Yield 200 Units||Cost to Yield 1 Unit|
|Naked Juice||7||Gallon||1/2 cup||12.00||84.00||0.42|
|Peanut Butter Chips||15||Pound||1/4 cup||2.08||31.20||0.16|
|Chocolate Chips||15||Pound||1/4 cup||4.00||60.00||0.30|
|Shredded Coconut||5||Pound||1/4 cup||9.20||46.00||0.23|
|Dried Cranberries||10||Pound||1/4 cup||6.00||60.00||0.30|
|Cups & straws||200||Each||1||0.20||40.00||0.20|
|Total Variable Cost||497.40||2.49|
In the next section, we will break down the costs by vendor, please keep in mind that the following numbers are approximations.
Dreyer’s Berry Rainbow Sorbet
Each location of Starbucks will need Dreyer’s Berry Rainbow Sorbet as one of the primary ingredients used in the Blenderz, using four ounces per drink. Approximately 7 gallons of sorbet will be needed each month to meet our goal target sales in units of 200 Blenderz per month. Dreyer’s has agreed to provide each gallon of Berry Rainbow Sorbet at $9. The cost of sorbet will equal $63 per month.
Naked Juice has offered Starbucks their Super-fruit varieties as the primary ingredient for Blenderz at a significantly discounted price per gallon of each variety. The price agreed upon is $12.00 per gallon of each variety of super-fruit juice. Each store will need a monthly supply of seven (7) gallons of varieties, totaling $84 a month each store.
Bulkfoods.com will provide the majority of the secondary ingredients and toppings for the Blenderz. The following list is the quantity and price of each product that will be needed by each store per month.
* Bananas: 65 lb. x $0.42/lb. = $27.3
* Strawberries: 20 qt. x $2.5/qt. = $62.5
* Granola: 20 lb. x $1.17/lb. = $23.4
* Peanut Butter Chips: 15 lb. x $2.08/lb. = $31.2
* Chocolate Chips: 15 lb. x $4.00/ lb. = $60.0
* Shredded Coconut: 5 lb. x $9.2/ lb. = $46.0
* Dried Cranberries: 10 lb. x $6.00/ lb. = $60.0
* Cups and straws 200 each x $.2 = $40.0
Total = $497.4
The total cost of launching our new product is projected to be $51,089,523.20 in 2010. The breakdown of total cost is detailed in the below table:
|Total Fixed Cost||10,716,560.00|
|Production cost per unit||2.49|
|Projected units of sale||16,233,600.00|
|Total Variable Cost||40,372,963.20|
PRICE AND PROFITS
Based on our survey, customers are willing to pay an average of $3.95 for the SuperFruit Blenderz. Considering the current economic conditions and our competitors’ pricing, Starbucks will price each Superfruit Blenderz at $3.50. Each store is projected to sell at least 200 Superfruit Blenderz, yielding a monthly revenue of $700. If the average sale of 200 Blenderz is maintained, the Starbucks will yield the revenue of $57.8 Million a year. Using the unit variable cost of $2.49, the total variable cost is projected at $40.4 Million ($2.49×16,233,600). The profit of $5.7 Million is expected in the first year of introducing the Blenderz by subtracting the variable cost of $40.4 Million and the fixed cost of $10.7 Million from the anticipated revenue. In the second year, however, the net profit will increase to $24.5 Million as the fixed cost will be eliminated and the marketing cost will be decreases. Starting the second year, the profit ratio of SuperFruit Blenderz is forecasted at 29%. Please refer to Appendix I for more details.
TARGET MARKET SHARE
According to the marketing research firm, Mintel, the total smoothie and juice market reached $2 billion in 2006. To capture our goal of 5% of this market, a revenue of $85 million would need to be achieved. Because of Starbucks’ vast amount of stores, this goal is easily obtainable and could actually be realized in approximately 10 months.
The distribution strategy used for the new SuperFruit Blenderz will be a contractual vertical marketing system (vms) with an indirect marketing channel, where the Starbucks will be in contract with producers, who distribute the necessary products and ingredients to Starbucks stores across the country. To get the sorbet we will go through Dryer’s Ice Cream, for the superfruit we will go through Naked Juice and for the Blenderz mixers, including; bananas, strawberries, granola, peanut butter chips, chocolate chips, shredded coconut, dried cranberries, we’ll go through Bulkfoods.com. The marketing channel length will consist of one intermediary which is Starbucks (the retailer) and the breadth will be intensive distribution.
Starbucks SuperFruit Blenderz Distribution Channel Structure
Transportation Through Channels to End Customer
From Producer to retailer
From Retailer to End Consumer
Our distribution is consistent with our objective because it is intensive distribution across the U.S. in order to reach a 5% increase in customer traffic and 4% increase in sales by offering a healthier beverage made with superior products. Also our distribution fits with our target market because we are creating a one stop shop for coffee drinkers, who are already Starbucks customers and now for our target market of non-coffee drinkers, soccer moms, and tweens and teenagers. Our distribution is consistent with our product positioning because we are going with producers who provide quality products at good prices, creating a “more-for-the-same value position. Lastly our distributions is fits well with the rest of the promotion mix by finding producers that provide products that are healthy and benefit the consumer as well as give us competitive pricing in order to gain our 5% increase. Lastly our distribution must attract the customer with packaging and promotion such as advertising, to bring awareness, inform and persuade the consumer.
In order to justify our distribution decisions we used the primary data of surveys to generate data from the public in order to determine what the public wants and what trends there are in the industry. From the primary data we found that the public is interested in health and well being along with competitive prices. Our secondary data consisted of researching producers of quality products that provide health benefits at good prices.
Our company has focused on an advertising strategy that relates to consumers at a personal level, because of this Starbucks has stayed away from mass marketing and mass media outlets, and has focused on an intimate communication strategy in order to maintain a relationship with our customers on a personal level. We will avoid television commercials, magazine ads and radio commercials, the only form of public relations/mass media will be our press release presented online directly through our website and will be issued three months before our product is launched (refer to Exhibit II). There are several communication objectives that must be satisfied in order to obtain the market share we are seeking. In order to ease the flow of our promotion mix we will be following the AIDA Model (Awareness > Knowledge > Liking > Preference > Conviction > Purchase). The elements chosen for our promotion mix will follow this flow and provide an organized promotion schedule. For our integrated marketing communication, we will be using direct marketing such as podcast, advertising on facebook, twitter, in-store posters/chalkboards and sending out emails because of the close community oriented following we currently have established. Also, sales promotions such as coupons will be sent to our current online mailing list, as well as provided to in-store consumers and informational pamphlets and cards will be included. These methods will ensure the intimate level of customer relationship we are looking for will be maintained. Personal selling will be provided by our in-store employees by offering samples and up-selling our new SuperFruit Blenderz to consumers once again supplying the personal relationship with our customers.
Making our consumers aware will be our first primary source of communication because it is imperative to provide the necessary response regarding our new product SuperFruit Blenderz and the many health benefits associated with superfruits, to our target consumers. This will assist in attaining our target consumers attention and business. With our second promotion effort, we will provide informational trading card size brochures as “teasers” with a few of the nutritional and health benefits that come with our new line of superfruits, including a small reference picture of each SuperFruit we will be using. The card will have a picture of an Acai, Pomegranate or Mangosteen on one side and on the other side will provide quick reference facts on the benefits of each superfruit. These cards will be available at our stores two weeks before our launch (refer to Exhibit IV).
Our company currently has an established email list, where we can update our customers regarding new products and events happening at our retail stores. In addition to our in-store “teaser cards” we will be sending out an email two weeks before our launch with a similar set up to our informational cards. The email will have the three cards with a picture of each fruit on it in a row and as the receiver scrolls over each card, the card will flip over and reveal the same nutritional information on the in-store printed cards (refer to Exhibit IV). A link to our Starbucks website will be included in the email and also a note requesting that our customers on our email list add as on Facebook.com and follow us on twitter.com.
Once our target market has been made aware of the benefits associated with superfruits the next step will be to inform consumers to like our product and prefer our product over our competitors. At this point in our promotion efforts, we will focus on informing our target market and providing a rational appeal, where we can distinguish our product and its benefits. Society places a great focus on health, living a healthy lifestyle and maintaining a healthy weight. Since our new product has several health benefits ranging from large amounts of vitamins to antioxidants, our promotion of these benefits will target the rational appeal of our consumers as well as the emotional appeal. We will provide a small index card size pamphlet which includes detailed information of how each vitamin and antioxidant in each of our superfruits will be beneficial to our customers. Such as stating that vitamin C helps iron absorption, immunity, and is an antioxidant (refer to Exhibit V). Pamphlets will be available in our stores one week before our launch to coincide with samples that will also be provided one week before our launch. The want of consumers to maintain a healthy life will aid our product’s popularity and also provide a substitute for coffee in our stores.
PERSUADE AND PURCHASE
At this point in our promotion mix our target market has been made aware and informed of our new product, the next stride will be to persuade them to purchase our new SuperFruit Blenderz. The largest amount of promotion will be concentrated on persuading our consumers. An audio Podcast will be created for each superfruit. A podcast is a series of digital media files (either audio or video) that are released episodically and downloaded through the web (iTunes, Zune, Juice and Winamp). The podcast will provide the same information in our pamphlets in spoken words while providing a video of our new product, its ingredients and the process by which it will be produced. The use of podcasts will enhance our reach to consumers by providing the information in our pamphlets to potential consumers that currently do not frequent our stores and would not have access to our printed pamphlets. Podcasts will be made public one week before our launch to ensure that our customers are captivated by the information and will frequent one of our retail stores the following week, when our product is launched nationally.
The use of the internet has infiltrated our daily lives and is essential in promoting our new SuperFruit Blenderz. Since we have already established a Facebook page and a mass twitter following, updating both internet based pages will provide a no-cost advertising supplement that will reach millions. Our Facebook page will be updated to include our newest product and inform our nearly six million Fans. We will change our default picture to our new SuperFruit Blenderz surrounded by fresh fruit and post the information in our pamphlets and news feeds. We will also use twitter to gain attention and create a “buzz” about our new product, with nearly 600,000 followers, a simple paragraph of our new products benefits and attributes will provide an enhanced awareness and potentially bring in a large amount of our loyal customers to try the new SuperFruit Blenderz. This in-turn will spread the information via word-of-mouth to non-coffee drinkers and non-Starbucks customers. Our current loyal customers and followers will inform the friends, family and coworkers about the new upcoming product, increasing the buzz associated with our new product. These two forms of internet outlets will be implemented three weeks before our launch, in order to get our loyal customers to be interested and captivated with anticipation for a new product.
Sales promotions or short term incentives will be sent via email through our mailing two weeks before our launch. Printable coupons will be provided in the email for one free drink during the initial 2 weeks of our products launch. Also, we currently issue a “yellow” receipt where any purchase before 2 PM will get you a grande drink for $2 after 2PM. With this type of promotion we can substitute offering any grande drink for $2 and specify our new SuperFruit Blenderz for $2 after 2PM, this way we can ensure the purchase of our new product.
Once our product is available in stores (one week before launch) for sampling, our partners (in-store employees) will be able to push our product to customers through personal selling. Our partners can provide sample cup size SuperFruit Blenderz and introduce the many benefits each superfruit can offer. We will provide informational pamphlets for our partners and have training sessions of what we are trying to accomplish with our new product. The training sessions will also provide the necessary information for our partners to relay the health benefits and provide personal communication channels directly to our customers and all potential new customers to our SuperFruit Blenderz. Samples will offer a word-of-mouth flow of promotion that will optimistically gain the attention of more non-Starbucks consumers. Since we are using our sales force to push the product through the channels to our end consumer, we will be using a Push Strategy in our promotion mix.
During our launch, in-store posters will be used to promote our new SuperFruit Blenderz. The posters will depict a blended fruit drink in our clear Starbucks cup; the cup will be surrounded by fresh fruit. Each of our stores has chalkboards that can be updated to any new product or event we are currently promoting. Our chalkboards can be changed weekly to focus on one of our superfruits and provide added information to our customers regarding taste, health benefits, and the many mixers that can be added to customize their drink.
Our promotion mix will be integrated throughout the production of our new product. All elements have been created to complement each other with consistent information regarding the health benefits associated with the superfruits being used in our blended fruit drinks. From our press release to posters, pamphlets, teaser cards and even the information given directly by our partners (employees) will have a steady theme and will reinforce the product we are trying to sell and its benefits.
Our marketing objective requires extensive promotion to achieve the 5% increase in customer traffic and the 4% increase in sales. Because of our chosen promotional elements remaining on a personal level with our consumers the increase in both customer traffic and sales is foreseeable. Our promotion mix is consistent with our target market because of the exciting and fun appearance of our promotional advertisements. The teaser cards, emails and in-store advertisement will be colorful and bring in the desired market share. Since we have placed our product as a health conscience alternative to our coffee drinks, advertising and promoting the health benefits of our superfruit choices in all of our promotion elements provides a consistent message through all channels. All sections of our Marketing plan are relayed through our promotion efforts: our product and all its attributes are presented in our promotion efforts; pricing will be posted on our in-store menus; and our distribution channels will coincide with the high quality fruit and products we desire. We developed and fine-tuned our final product to coincide with the information gathered from our primary and secondary sources; we chose to satisfy as many wants from our consumers as possible in order to gain their business.
National Launch – May 20, 2010
Poduct Development – 4 Months (October 2009 – Feburary 2010)
National Launch and start promotion – 3 Months (Feburary 2010 – May 2010)
Promotion Mix Schedule
- Advertisment: Facebook, Online (Information), Press Release – 1 Month (April 2010 – May 2010)
- Coupons (online) and in-store advertising (2 weeks, May 1, 2010)
- Sampling of product in-store (1 week, May, 13, 2010)
Distribution Schedule – retailers will receive products 1 week before national launch for sampling
Pricing will remain the same (except with cupon and yellow receipt discount)
The budget for our new product was developed using the cost structure described in the price section of this report. Our new product has a relatively low production cost, which includes the cost of raw materials, which adds up to $2.49 per unit. The ingredients are sold by different measures of units based on the types of ingredients and the wholesale suppliers that have been selected. Based on the recipe and the projected sale of 200 Blenderz per month, the Research and Development team developed the quantities of each ingredient required to yield 200 units of 16 ounce Blenderz. As stated in the below table, the material cost or the variable cost per one unit of Blenderz is $2.49.
|Raw Materials||Quantity||Unit of Measure||Quanity Used per 16 oz Blenderz||Cost per Unit||Cost to Yield 200 Units||Cost to Yield 1 Unit|
|Naked Juice||7||Gallon||1/2 cup||12.00||84.00||0.42|
|Peanut Butter Chips||15||Pound||1/4 cup||2.08||31.20||0.16|
|Chocolate Chips||15||Pound||1/4 cup||4.00||60.00||0.30|
|Shredded Coconut||5||Pound||1/4 cup||9.20||46.00||0.23|
|Dried Cranberries||10||Pound||1/4 cup||6.00||60.00||0.30|
|Cups & straws||200||Each||1||0.20||40.00||0.20|
|Total Variable Cost||497.40||2.49|
The projected annual sale of 16,233,600 units, which is the equivalent of selling the monthly average of 200 units at a unit price of $3.50 in each of the 6,764 retail stores, will yield revenue of $56,817,600. As shown in the Appendix II, it’s predicted to reach a break-even point by selling 14,597,007 units of Blenderz, with a contribution margin of $10,716,560. The break-even volume of 14,597,007, equivalent of selling the monthly average of 180 units for the period of one year at each retail store, is a reasonable and achievable prediction considering the promotional mix scheduled for spring of 2010 with the launch of our new product. Promotional campaigns will focus on our targeted market and Starbucks will prepare for the peak sale of ice blended drinks in the summer of 2010. Conventionally, the sale of ice blended beverages such as the Frappuccino reaches the peak sale in the summer, and the company anticipates that the sale of Blenderz will also spike up in the summer, reaching the average of 350 units. Based on the sales prediction and other favorable circumstances, the break-even point will be attainable by October 2010.
The price of Blenderz is based on the “more-for-the-same” value position to maintain the brand value and compete with other smoothie retailers such as Jamba Juice. By offering a competitive pricing while differentiating our new product by adding a layer of additional service for our customers to customize their blended fruit drinks, Starbucks plans to win smoothie customers and expand its business into the smoothie industry.
According to the marketing research firm Mintel, smoothie retail industry earned over 2 billion dollars in 2007 with more than 4,000 retail establishments (U.S. Smoothie market more than doubled). Using the brand power of Starbucks and promoting the health benefits of the main ingredients in Blenderz such as acai, mangoesteen and pomegranate, the company is expected to gain 4% of the market share in two years and capture 10% of the market share in the long run. As the market for the health-conscious grows, the Starbucks Research and Development team must consistently improve and diversify the Blenderz line to successfully compete with leading competitors of the smoothie industry.
The methods that will be used to evaluate whether or not our objectives have been met will be relatively simple considering what our objectives are. Since one of our objectives is to increase foot traffic in Starbucks, our way to evaluate this would be to monitor the number of transactions per day, specifically per Superfruit Blenderz sold. This will allow us to evaluate whether the new product is meeting goals set. If we realize that the Superfruit Blenderz are not meeting expectations within a specific deadline then we will have to consider removing the product from Starbucks stores.
Another objective for the Superfruit Blenderz is to capture 10% of the overall smoothie and juice market. The way that we will analyze this is to set a specific time frame in which we want to realize this objective.
According to Coriolis Research, the overall market equals $663,700,000. To realize this 5% market share, revenue of $66,370,000 would need to be achieved by the specified deadline. Monitoring revenues is a daily process that is standard in all Starbucks stores, so the evaluation process will be simple. If the product does not reach the specified goal, it is possible that Starbucks may have to reconsider this objective or even this product.
The main risk of lunching the new SuperFruit Blenderz product line might be not meeting the go of achieving 5% increase in customer traffic and the 4% increase in sales. In order to be profitable the increase in both customer traffic and sales is foreseeable. In order for Starbucks to gain profit in this new product we need to sell to sell 200 units per month, which is 20 units more than the break even point, which is 180 units per month. In order to lunch the new product we spent $10,716,560. The total cost to lunch this product line is $51,089,523.20. If Starbucks doesn’t gain new target customers, then we will face loss.
Another risk that Starbucks might face is the self-cannibalization. Healthy consumption becomes an important part of people’s live, and many consumers try to minimize caffeine in their diets and chose healthier beverages rather then coffee drinks. Thus, customer trends toward healthier life style, choosing less caffeine consumption is becoming a potential threat for Starbucks. If instead of increasing customer traffic from our competitors, our existing customers start consuming the new blended fruit drink, we won’t gain profit and we will face loss.
Economic crises and recession will always remain major threat for Starbucks and any other consumer based industry. Therefore, the current economy is a huge threat to the smoothie industry, since during an economic downturn luxury products become secondary. Starbucks was faced with a difficult operating environment and ended up with the closure of 900 under-performing stores since 2008 and for the first time in Starbucks history, Starbucks announced it would close its under-performing stores and lay of almost 12,000 employees(Forbes.com).
During a recession people skip Starbucks more then ever because of high prices of all extravagant drinks offered in Starbucks. And during recession anything extravagance is usually the first thing to go out of market. Our new SuperFruit Blenderz is a super healty and extravagant beverage including unique fruits, such as acai berries, mangosteen and pomegranages, therefore, due to the economic downtern Starbucks might not be able to compete and gain market share.
Increasing competitors along with the direct competitors in the smoothie industry will always remain one of the main threats. Besides all the existing competitors, others can invent new ways of offering smoothie drinks. Therefore, Jamba Juice as a direct competitor in healthy fruit smoothie drink industry is a threat to Starbucks. However, since our new product is really unique, and some of the because Starbucks recently unveiled new healthy food in their breakfast menu with more nutritious alternatives, such as fresh fruit, banana walnut bread, outrageous oatmeal cookies and smoothies in their coffee shops. This new product line consist of all real delicious food with no artificial ingredients, no artificial trans fats, dyes and no high-fructose corn syrup (Starbucks.com).
One of the minor threats to the company is the current high prices of dairy products, which is an issue for Starbucks. In recent years, dairy prices increased 10% (wikiinvest: Starbucks (SBUX), 12 pp).
Our general marketing goals will be achieved as long as we focus on the objectives we have put in place. Our product positioned as a healthy alternative with many beneficial nutrients and antioxidants will gain the attention and revenue we are seeking. As long as we keep our price consistent with our competitors using the concept of “same price for more” and providing a superior quality drink, we can expect a profitable return. The promotion elements we have selected will positively gain new customers while also retaining our existing customer base. We will have to work closely with our distribution channels in order to ensure the quality of goods received and the quality of good being provided to our consumers. Staying with our implementation arrangement will provide the necessary course of action for our new product to run a profitable and extended life. The schedule and budget are key components in giving our new product equal weight with all of our beverage options and placing emphasis on cost while providing a superior product than that of our competitors. Brining all of our planning and organization of our new product line together to measure whether we are meeting and will meet our goals and objectives for this product will be imperative to the success of not only this line but our business as a whole. Additionally, assessing all risks and taking positive corrective action on any potential risks and/or threats associated with our new product will provide a sound basis to ensure the future production capabilities of our company and any future indeavours.
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|Caffè Misto/Café Au Lait|
|Coffee of the Week|
|Decaf Coffee of the Week|
|Iced Brewed Coffee|
|Iced Coffee with Milk|
|Pike Place Roast™|
|Caramel Brulee Latte|
|An indulgent beverage with flavors of sweet cinnamon, butter and brown sugar, combined with our signature Espresso Roast, freshly steamed milk, and topped with whipped cream and Cinnamon Dolce sprinkles.|
|Cinnamon Dolce Latte with Sugar-Free Syrup|
|cinnamon, butter and brown sugar, topped with cinnamon dolce sprinkles and the option of|
|whipped cream. It has the same great taste as the regular Cinnamon Dolce Latte, but with fewer calories and less sugar. A tall Cinnamon Dolce Latte with sugar-free Cinnamon Dolce|
|syrup, nonfat milk, and no whipped cream has only 90 calories.|
|at our store, in some countries espresso shots are sipped straight for a more intense experience in flavor.|
|Espresso con Panna|
|a touch of chocolate powder. This sophisticated beverage delivers rich chocolate flavor|
|with a velvety mouth feel balanced with a smooth coffee flavor.|
|with whipped cream and ground nutmeg.|
|Peppermint White Chocolate Mocha|
|Pumpkin Spice Latte|
|Skinny Caramel Latte|
|Skinny Cinnamon Dolce Latte|
|Skinny Hazelnut Latte|
|Skinny Vanilla Latte|
|Syrup Flavored Latte|
|Vanilla Latte + Protein|
|White Chocolate Mocha|
|(Starbucks.com: Starbucks beverages and food details, parag. 1)|
Caffè Vanilla Frappuccino® Blended Coffee Rich and creamy vanilla combined with Starbucks® coffees and milk, blended with ice, topped with whipped cream (optional).
Caramel Brulee Frappuccino® Blended Coffee
A decadent treat of buttery caramel combined with Starbucks® coffees and milk, blended with ice, topped with whipped cream and a swirl of caramel sauce.
Caramel Frappuccino® Blended Coffee
A decadent treat of buttery caramel combined with Starbucks® coffees and milk, blended with ice, topped with whipped cream and a swirl of caramel sauce.
Cinnamon Dolce Frappuccino® Blended Coffee
The rich and buttery flavors of Cinnamon Dolce combined with Starbucks® coffees and milk, blended with ice, topped with whipped cream (optional) and Cinnamon Dolce sprinkles.
Coffee Frappuccino® Blended Coffee
Starbucks® original Frappuccino®, Starbucks® coffees and milk, blended with ice.
Espresso Frappuccino® Blended Coffee
Starbucks® coffees combined with a shot of our signature Espresso Roast® espresso and milk, blended with ice.
Java Chip Frappuccino® Blended Coffee
A decadent combination of chocolate and java chips combined with Starbucks® coffees and milk, blended with ice, topped with whipped cream (optional) and chocolate drizzle, a chocolate lovers dream.
Mint Mocha Chip Frappuccino® blended coffee with Chocolate Whipped Cream
Classic chocolate and spearmint flavor combined with Starbucks coffees and milk, mocha sauce, Frappuccino® chips, blended with ice, and then topped with chocolate whipped cream and mocha sauce.
Mocha Frappuccino® Blended Coffee
A delightfully sweet and creamy combination of chocolate, Starbucks® coffees and milk, blended with ice, topped with whipped cream (optional).
Peppermint Mocha Frappucinno® Blended Coffee
A blend of Starbucks coffee, bittersweet chocolate, milk and bright peppermint flavor. Now topped with peppermint whipped cream and dark chocolate curls.
Pumpkin Spice Frappuccino® Blended Coffee
A delicious blend of pumpkin and traditional fall spice flavors combined with the finest coffees, blended with ice and topped with whipped crème and pumpkin spice spices.
White Chocolate Mocha Frappuccino® Blended Coffee
A delightfully sweet, creamy combination white chocolate mocha, Starbucks® coffees and milk, blended with ice, topped with whipped cream (optional).
(Starbucks.com: Starbucks beverages and food details, parag. 3)
Apple Chai Infusion
Berry Chai Infusio
Iced Apple Chai Infusion
Iced Berry Chai Infusion
Iced Tazo® Green Tea Latte
Lemonade Blended Beverage with Tazo® Zen™ Green Tea
Tazo® Awake Tea Latte
Tazo® Black Shaken Iced Tea
Tazo® Black Shaken Iced Tea Lemonade
Tazo® Chai Iced Tea Latte
Tazo® Chai Tea Latte
Tazo® Earl Grey Tea Latte
Tazo® Green Shaken Iced Tea
Tazo® Green Shaken Iced Tea Lemonade
Tazo® Green Tea Latte
Tazo® Passion™ Shaken Iced Tea
Tazo® Passion™ Shaken Iced Tea Lemonade
Vanilla Rooibos Tea Latte
(Starbucks.com: Starbucks beverages and food details, parag. 5)
Exhibit II Contact: Jane Doe, Starbucks Corp.
Starbucks promotes health and well being
by introducing SuperFruit Blenderz
Northridge, CA, April 12, 2009 – Starbucks Corporation a coffee-house focused on the well being and health of its customers, launches a national marketing campaign this week in order to promote the health benefits associated with the superfruits Acai berry, Pomegranate, and Mangosteen.
Superfruits are known to combine exceptional nutrient richness and antioxidant quality with appealing taste that can stimulate a healthy lifestyle. Antioxidants are known to fight free radicals which can lead to cancerous cell development. Superfruits can have a potential impact for lowering the risk of human diseases.
Starbucks will provide its customers with a superior blended fruit beverage that will provide energy and reinforce well being into customers fast-paced lifestyles. In addition to our coffee, everyone from High school students, college students, busy soccer moms, to the health conscience customer can purchase a healthy substitute AT Starbucks.
Starbuck’s visitors will be provided with information on the many health benefits our new SuperFruit Blenderz can offer. Our superior choice in only the best quality ingredients will distinguish our fresh taste and provide value difficult to surpass. Visit www.Starbucks.com
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