Company Case: Starbucks Starbucks’ stock value dropped by 50 percent to

around $10 a share. The weakened economy

Just Who Is the Starbucks Customer?
certainly played a role. But for years, many industry
After a trip to Italy in the early1980s, Howard Schultz observers had worried that the company was
was inspired to transform Starbucks—then just a growing too fast. Revenue and traffic at Starbucks
handful of coffee shops in Seattle—into a chain of began slowing more than a year before anyone
European-style coffeehouses. His vision wasn’t uttered the word recession. In a sign of recognizing
based on selling only gourmet coffees, espressos, a problem, Schultz cut back on the number of new
and lattes, however. He wanted to provide store openings. Then he did what had previously
customers with what he called a “third place”— a seemed unthinkable. In 2008, he announced store
place away from home and work. As CEO of closures—first 600, then 300 more. In fact, as
Starbucks, Schultz developed what became known Starbucks trimmed its 2009 forecast for new store
as the Starbucks Experience, built around great openings to 310, it projected a decrease in its
coffee, personal service, and an inviting ambiance. number of outlets for the first time ever.

WHAT GOES UP… THE EVOLUTION OF THE STARBUCKS

CUSTOMER
It wasn’t long before Starbucks became a household
word—a powerhouse premium brand in a category There was no shortage of armchair CEOs willing to
that previously consisted of only cheaper commodity give their opinions as to what had gone wrong that
products. In 20 years’ time, Schultz grew the led to Starbucks’ fall from perpetual growth. One
company to almost 17,000 stores in dozens of issue often mentioned was that Starbucks had
countries. From 1995 to 2005, Starbucks added U.S. developed an identity crisis with respect to its target
stores at an annual rate of 27 percent, far faster than customer. In its early years, the Starbucks customer
the 17 percent annual growth of McDonald’s in its profile was clearly defined. The typical customer was
heyday. At one point, Starbucks opened over 3,300 wealthier, better educated, and more professional
locations in a single year—an average of 9 per day. than the average American. The customer was far
In one stretch of crowded Manhattan, a person could more likely to be female than male, predominately
get their caffeine fix at any of five Starbucks outlets Caucasian, and between the ages of 24 and 44. It
in less than a block and a half. In fact, cramming so was this customer who fell in love with the Starbucks
many stores so close together caused one satirical Experience. She was very loyal, often visiting a store
publication to run this headline: “A New Starbucks everyday or even more than once a day. She loved
Opens in the Restroom of Existing Starbucks.” For the fact that the barista greeted her by name when
many years, new store growth was what kept she came in and chatted with her while making her
Starbucks percolating. As it grew, company sales custom coffee drink, not caring if it took a while. She
and profits rose like steam from a mug of hot java. lounged on the comfy furniture, enjoying the perfect
Growth routinely averaged 20 percent or more each mix of music that always seemed to fit her mood.
year. And Starbucks made investors happy with a 25 She met friends or just hung out by herself reading
percent annual increase in the value of its stock for a good book. But the more Starbucks grew, the more
more than a decade. Schultz confidently predicted the Starbucks Experience began to change. With
that there was no end in sight for the Starbucks more stores, the place wasn’t quite so special. As
boom. Just a few years ago, he announced his each location filled with more customers, baristas
intentions to open 10,000 new stores in just four had more names to put with faces. As the menu
years and then push Starbucks to 40,000 stores. But expanded with more options, the number of
not long after Schultz shocked Wall Street and the combinations for coffee drinks grew into the
industry with his projections, Starbucks’ steam hundreds, leaving baristas less time to chat with
engine of growth started to slow. Then it started customers. As the atmosphere in each store turned
running in reverse. By the end of 2008, the 20 to “hustle and bustle,” it became a less attractive
percent annual growth had dropped to 10 percent, place to hang out. With all these changes, Starbucks
with existing store sales decreasing by 3 percent. progressively appealed less to the traditional
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Total company profits dropped by a scalding 53 customer and more to a new customer. This
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percent for the year. And for a second year in a row, customer shift was inevitable; there simply were not
enough traditional customers around to fuel the kind Starbucks was about the only option. Not only were
of growth that Schultz sought. The new breed of Dunkin’ Donuts and McDonald’s selling premium
customer was less affluent, less educated, and less coffee drinks to the masses, but just about every
professional. Not only was Starbucks drawing mini-mart in the country boasted about the quality of
indifferent customers in places where stores already its coffee. All of these competitors had prices
existed, but it was also putting stores indifferent considerably lower than those of Starbucks, which
neighborhoods, cities, and countries. As the made the most well-known coffee bar much less
customer profile evolved, the Starbucks Experience justifiable to the “grab and go” crowd. As much as
grew to mean something different. To the new breed Schultz denied being in direct competition with the
of customer, it meant good coffee on the run. It was lower-status coffee pourers, many critics seemed to
a place to meet and then move on. The more be thinking the same thing: Starbucks had shifted
accessible Starbucks was, the better. Speed of from a warm and intimate coffeehouse to little more
service was more important than a barista who than a filling station, battling fast-food outlets for
wanted to talk current events. This new customer some of the same customer dollars.
came in much less frequently than the traditional
“VALUE” TO THE RESCUE?
customer, as seldom as once a month. As a sign of
just how much this shift in customer was affecting its Throughout 2009, Schultz continued to direct
business, by 2007, 80 percent of all Starbucks coffee activities aimed at increasing growth. Starbucks
purchased was consumed outside the store. launched a campaign designed to educate
SOUL SEARCHING consumers that Starbucks really wasn’t as
expensive as they thought it was. That was followed
When Starbucks’ growth first started tapering off, the by something Schultz held back for as long as
executives took notice. In a now famous memo to possible: price reductions. “Breakfast pairings”—
management, Schultz lamented that “in order to coffee cake, oatmeal, and an egg sandwich—soon
achieve the growth, development, and scale followed. All these tactics helped. By the end of
necessary to go from less than 1,000 stores to 2009, Starbucks was regaining ground. With same-
15,000 stores and beyond, [Starbucks had made store sales up 4 percent and profits up 24 percent
decisions that may] have led to the watering down of for the year, Starbucks’ stock price doubled versus
the Starbucks experience. Stores no longer have the the previous year. But Schultz made it clear that he
soul of the past and reflect a chain of stores versus was just getting started. “What a difference a year
the warm feeling of a neighborhood store.” makes. We’re going to radically reframe Starbucks
Starbucks management believed that efforts to growth strategy.” He outlined a three-pronged
recapture that soul would get the company back on growth strategy to illustrate that Starbucks might
track. At first, however, Starbucks was caught have a grip on defining segments of coffee
between the conflicting goals of reestablishing its customers after all. In searching for Starbucks’ roots
image as the provider of a holistic experience and and re-creating the Starbucks store experience,
offering better value to the cash-strapped consumer. Schultz also aimed to reach customers outside the
Starbucks set out to put some water on the fire and store. The first prong of the new strategy centers on
get some of its customers back. It added labor hours Via, an instant coffee that Starbucks introduced last
and time-saving automated machines to stores. It year. It is available in single serve packets at all
focused on the quality of its coffee with a Coffee Starbucks stores and in grocery stores at $1 each or
Master training program for its baristas and a new $9.95 for 12 packs. Via lets Starbucks promote a
line of ultra-premium whole-bean coffees. It even genuine cup of Starbucks coffee for under a buck.
tried free Wi-Fi service and sold its own music. But Promotions for the new instant have made it clear
none of these actions seemed to address the core that Starbucks isn’t moving downscale; instant
problem: Although Starbucks still charged a coffee is moving upscale. At a New York taste
premium price, it was no longer a special place. As testing, Schultz told a group of analysts, journalists,
the recession tightened its grip and more people cut and retailers that he was ready for the critics who
back on discretionary purchases, the problem grew say, “This is desperate, this is a Hail Mary pass, this
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worse. Compounding the problem was an increase is off-brand for Starbucks. We are going to reinvent
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in competition. For years, if you wanted a latte, the category. This is not your mother’s instant
coffee.” Via is off to a good start, having surpassed the same sentence as downscale competitors.
company expectations. In fact, Via accounted for Michelle Gass, Seattle’s Best president, clearly
more than half of the 4 percent increase in defines the difference versus Starbucks: “Starbucks
Starbucks’ 2009 same-store sales. According to is a destination coffee experience and an active
Annie Young-Scrivner, global chief marketing officer choice made by the customer. Seattle’s Best will
for Starbucks, half of all Via serving occasions are at instead be brought to the consumer when they make
home, 25 percent are in the office, and 25 percent other retail choices.” Gass is going to make sure that
are “on the go.” Many Via customers aren’t just out she has as many of those other retail choices
for a cheap coffee fix. (You can mix up a cup of covered as possible. She is taking the brand from
Folger’s for about 25 cents.) They are people who 3,000 points of distribution in 2009 to more than
want premium coffee but are in situations where they 30,000 by the end of 2010. The three-pronged
don’t have access to a store or brewing their own. strategy provides three good reasons to believe that
An ad campaign supporting Via is the first concerted Starbucks growth story will return, even without
advertising push aimed at grocery customers, who opening nine stores per day. As icing on the coffee
are now accessible through 37,000 retail locations. cake, only one-fifth of Starbucks’ sales come from
The second prong of Starbucks strategy also outside the United States. The company sees huge
focuses on the grocery business but through potential growth abroad. But perhaps the greatest
ground-flavored coffees. According to NPD Group, strength in Starbucks’ new strategy is that it will allow
four out of five cups of coffee are consumed at the company to go after new customer segments
home. Starbucks has a very small share of that while also restoring the essence of the Starbucks
market. Via will certainly help. But aiming more Experience.
directly at the “brew it at home” customer, Starbucks
is partnering with Kraft to launch flavored coffees
you can brew yourself. Sixty percent of bagged Questions for Discussion
coffee buyers are either drinking flavored coffee or
adding flavored creamer. Seventy-five percent of 1. Using the full spectrum of segmentation variables,
those customers said they would buy a flavored describe how Starbucks initially segmented and
product at the grocery store if Starbucks made one. targeted the coffee market.
So after more than two years of testing, this 2. What changed first—the Starbucks customer or
substantial segment of grocery-store buying the Starbucks Experience? Explain your response
customers can now get Starbucks Natural Fusions by discussing the principles of market targeting.
in vanilla, caramel, and cinnamon. The third prong of
Starbucks strategy is its ace in the hole Seattle’s 3. Based on the segmentation variables, how is
Best Coffee. Starbucks purchased the brand back in Starbucks now segmenting and targeting the coffee
2003 but is just now doing something with it. market?
Rebranding efforts have given Seattle’s Best a new
4. Will Starbucks ever return to the revenue and
look and tagline, “Great Coffee Everywhere.” As with
profit growth that it once enjoyed? Why or why not?
Via and Natural Fusions, and now with Seattle’s
Best, Starbucks is going after customers who don’t
normally buy Starbucks coffee. It is placing Seattle’s
Best where Starbuck’s customers aren’t—in vending
machines, coffee carts, fast-food restaurants
(Burger King and Subway, among others), theatres,
and convenience stores. These are places that
Starbucks has avoided for fear of eroding its upscale
image. With prices ranging from $1 to just over $2,
Seattle’s Best also reaches customers who perceive
Starbucks as too expensive. Gap has Old Navy.
BMW has Mini. Now, Seattle’s Best allows
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Starbucks to go head-to-head with competitors like

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McDonald’s without putting the Starbucks name in