Last revised 6 December 2008; get the PDF
Though its origins wend all the way back to 1971, it was not until the 1990s, after a successfully IPO, that Starbucks became the household name. One can trace both its precipitous proliferation as well as its near-singlehanded revival of the gourmet coffee market over nearly fifteen years, but as of 2008, Starbucks’ business model and its brand have taken blows. Despite all this, Starbucks seems to continually rank in the top tier of admired companies, even improving its ranking in Fortune’s “Top 100 Companies to Work For” poll (Levering, 2005; Levering & Moskowitz, 2008; “Top 20,” 2008). Its story is a textbook case of clever marketing, opportune timing, and the ultimate consequences of market saturation and dilution of brand.
The first Starbucks store opened in Seattle in 1971, though at the time it was known as “Starbucks Coffee, Tea, and Spices” (“Company Fact Sheet,” 2008). Though it had become a well-established brand in the Washington area by the 1980s, it was the work of Howard Schultz which turned it into the Starbucks known today. When he bought the company in 1987, he merged it with his own Il Giornale espresso bars, which introduced the idea of baristas serving lattes and cappuccino (Pendergrast, 1999, pp. 367-68, 370-72). Its early competition came from Gloria Jeans Coffee Beans, a Midwestern franchise that was much larger than Starbucks at the time.
Starbucks experienced explosive growth during the 1990s and early 2000s, at one point opening new stores at an average rate of several per day. Even well into 2007, new store openings continued apace, until founder Howard Schultz resumed his role as CEO after an eight-year hiatus. Per a leaked memo, Schultz expressed his dismay that the overexpansion had appeared to dilute the Starbucks brand and remove the personal, unique experience from ordering coffee at a Starbucks location (Reuters, 2008).
Design and Branding
Starbucks has become one of the most powerful brands in the world, and its logo synonymous not only with coffee, but often with market oversaturation. The well-known branding of Starbucks today is also the product of Howard Schultz, who changed the franchise’s slightly racier logo when he bought the company in 1987.
A comparison of Starbucks logo: the original (left) and modern (right)
Schultz showed remarkable prescience (or perhaps simply common sense) in doing so: trying to expand the Starbucks brand beyond the more liberal Seattle area would necessarily involve expanding into the more conservative Midwest and South. In fact, when Starbucks attempted to revive the old logo for a limited time during its 35th anniversary marketing blitz, it drew the ire of social conservatives who object to its bared breasts (York, 2008, pp. 4, 33). The end result was a reworked version of the original logo with the mermaid’s hair modified to cover her breasts.
The temporary switch emphasized for some people the inherent quality of the modern Starbucks logo and its brand strength. Wall Street Journal contributer Tom Weber, citing the Seigel+Gale design firm, asserts “Seeing the retro Starbucks logo seems so jarring because the company’s familiar logo is so incredibly good. Distinctive and iconic, it is ultra-recognizable. See a flash of green on a white cup from down the street and you know it’s a Starbucks. Most companies can only dream about that kind of brand visibility” (2008).
During its boom years, Starbucks backed up its familiar logo with a consistent and laudable atmosphere in its stores. The company history paid a premium for the best quality beans it could acquire; one former executive famously wondered aloud why the company did so, rather than buying as low a quality as customers would accept (Pendergrast, 1999, p. 371). Some of this dedication seems to have fallen to the wayside as a result of Starbuck’s explosive growth. Even by 1993, well before Starbucks’ peak, some employees had quit. Kevin Knox, the former manager of coffee quality, complained, “It used to be a product-driven company. Now it’s clearly a marketing-driven company” (quoted in Pendergrast, 2008, p. 373).
Much of Starbucks’ identity and initial market was tied up in just such a high-brow élan; Pendergrast describes its major competitor, Gloria Jeans, as being “thoroughly middle-class,” a market which Starbuck could not at that time hope to wrest away (1999, p. 371).
The trickle-down effect of trends, however, all but assured Starbucks’ inevitable dominance of the market. According to Pendergrast, the company spent under $10 million during its first 25 years of existence (1971-1996); “Starbucks had become a household word without mounting a national advertising campaign” (2008, p. 378). Alice Cuneo of Advertising Age called it a “word-of-mouth wonder” in 1994. It wasn’t until 2007 that Starbucks attempted its first television advertisement, prompting an indignant hue and cry from some disillusioned employees (“Coffee Jitters,” 2008, p. 24).
Howard Schultz attributes that to a strategy of “[building] up brand loyalty one customer at a time” (1997, p. 246). Also helpful is that Starbucks’ brand is so strong, and its logo so iconic and pervasive, that its customers do the advertising for it, in the form of mugs, thermoses and other paraphernalia emblazoned with the familiar mermaid (Pendergrast, 1999, p. 378).
One public relations front on which Starbucks has never wavered is its philanthropic and stewardship efforts. During 2006, according to its Fact Sheet, it donated $36.1 million in cash and coffee, 383,000 community service hours via company program, made significants efforts to “green” its energy consumption, and participated in Fair Trade initiatives, which seek to pay coffee farmers in poor countries a fair price for green coffee (2008). Starbucks goes to great effort to publicize these data, and why not? Associating a company with charity or charitable efforts is a surefire way to increase both brand loyalty and revenues (Basil, Deshpande, & Runte, 2008, pp. 4-6).
Starbucks’ recent loss of market share can probably be attributed to its overautomation of the whole coffee-making process; as of early 2008, Starbucks operated over 7,000 stores in the US and almost 2,000 in the rest of the world, in addition to an additional 7,000 licensed stores worldwide. The logistics of operating this kind of network prompted Starbucks to eliminate in-store grinding (thus removing the prevalent aroma of beans) and stop pulling espresso shots by hand. Joseph Michelli, a marketing consultant for Starbucks, opined “Management stopped having daily conversations about service excellence. They were so focused on achieving growth, they failed to keep redefining what customers wanted from their experience” (“Coffee Jitters,” 2008, p. 24).
Starbucks’ accelerated growth had successfully effaced the “the romance, warmth, and theater” (Reuters, 2008) from the chain, leaving customers with the purely economic decision to continue purchasing expensive coffee from Starbucks, or buy it more cheaply from Starbucks’ up-and-coming competitors like Dunkin Donuts.
To some, the idea of paying $3 or $4 for a cup of coffee has always been absurd, but the idea is deeply entrenched in the collective consciousness now, and Starbucks has always been willing to exploit the economic marvel of price differentiation in order to extract a maximum possible amount of money for its product.
According to Tim Harford, “[Starbucks] will serve you a better, stronger cappuccino if you want one, and they will charge you less for it” (2006). The drink in question is the “short” cappuccino, which is smaller in volume, lower in price, but contains the same amount of espresso as the “tall,” which is the smallest size listed on the menu. Though Starbucks maintains that the short size is not listed on the menu due to space constraints, it is actually strategy based on a very economic common principle called price differentiation. By selling large and expensive drinks to any customers who are willing to pay for them, Starbucks is maximizing its profit, but it also allows for less “price-blind” to purchase a smaller, cheaper beverage as well, rather than lose those customers altogether to a different, less expensive store (Harford, 2006).
This, however, is largely the product of Starbucks’ market dominance, which has been waning significantly in the last few years. According to Brian McManus, an assistant professor at the Olin School of Business, “The bottom end of any market tends to get distorted. The more market power firms have, the less attractive they make the cheaper products” (quoted in Harford, 2006). With the average markup on coffee at around 150%, there is a lot of room to undercut the market leaders on price (Harford, 2007, p. 5).
In much the same way as Starbucks (like most businesses) exploit price differentiation, so location is an equally important factor. One is likely to find Starbucks at critical junctures in morning commutes and high-traffic areas—metros, lobbies, downtown streetcorners—because of the relative scarcity of supply in such locations (Harford, 2007, p. 4); additionally, the mere presence of a Starbucks storefront or kiosk in such a place serves the secondary purpose of advertising. As Harford says, “The main reason that Starbucks can ask $2.55 for a cappuccino is that there isn’t a shop next door charging $2.00.” Part of Starbucks’ market dominance, he concludes, has to do with how well it has expanded; though it is easy to criticize Starbucks for perhaps taking the notion to extremes, it is a perfectly plausible explanation that Starbucks’ ubiquity—a bad word to those who believe Starbucks went astray by growing too fast and losing its personal touch (“Coffee Jitters,” 2008, p. 24)—has a great deal to do with why customers have traditionally been willing to pay its high prices. It is also why profits in such prime locations are relatively low after paying rent (Harford, 2007, p. 6).
Some of this might also explain why Starbucks started to buck its existing trend of moving into a historic storefront and is instead throwing up prefabricated buildings—or was, until it began to slow new store openings and close some existing stores in unprofitable areas (“Coffee Jitters”, 2008, p. 23).
Some place the blame for Starbucks’ recent woes squarely on the economy, which has been somewhat deflated for several years now, reaching its nadir (so far) in 2008. At a time of $4 gas, customers are less likely to pay for a $4 latte, preferring instead a $2 coffee with cream from Dunkin Donuts, or even just brewing their own coffee at home. While this may be true, Interbrand CEO Andy Bateman points out that even in a recession, a $4 latte on the way home from work “is not an expensive purchase” (“Coffee Jitters”, 2008, p. 26).
Starbucks has not just been losing on issues of price, however. According to the marketing consultant firm Brand Keys, Starbucks now lags behind Dunkin’ Donuts and McDonalds in the quality/taste category, and behind Dunkin’ Donuts in service/surroundings, despite Starbuck’s wireless internet service and comfortable chairs (“Coffee Jitters”, 2008, p. 26).
Given Starbucks’ current state of affairs, its encroaching competition from below, and an economic climate (at least in America) which would seem, on the face of it, to preempt impulse purchases of expensive coffee and espresso drinks, how can it best turns itself around and begin to show a profit again?
One sensible idea comes from Matthew DiFrisco, and analyst at Oppenheimer & Co, New York, who suggests rolling back many of the food items Starbucks has attempted to roll out. Starbucks, aside from pastries, has never been a vendor of food; it is not its core competency, and it seems likely that the overhead involved in providing a new and different product will detract from what the brand has always been about—coffee. “It didn’t drive business during off-peak hours, and added an unnecessary complexity to an already busy time,” according to DiFrisco (quoted in “Coffee Jitters,” 2008, p. 25).
Similarly, Starbucks would do well to stop wasting money on mass advertising and rely on the same kind of marketing that played a part in its meteoric rise. McDonalds and Dunkin’ Donuts shouldn’t worry Starbucks, because as long as the latter remains faithful to its core market, the former two cannot compete.
There are no signs that Starbucks as a brand has diminished much at all: its ubiquity and the strength of its trademarks are all waiting for its operations to get back on its previously successful track. The current economic woes which may be contributing to its slump in market share should be the catalyst that inspires the company to remember what made that brand so strong and pervasive in the first place.
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