Marketing Audit Example

Market Audit - 1

Starbucks – Marketing Audit

Market Audit - 2 Table of Contents Starbucks Marketing Audit.........................................................................................3 Executive Summary ..................................................................................................3 Environmental Aspects..............................................................................................4 Demographics. ..............................................................................................5 The growth rate of the US has been between 1.10% and .90% from 19992003. The market demands are constantly increasing. Their unique approach to expansion goes beyond the traditionally accepted methods. Starbucks has broken the rules and set a new standard amongst its competitors. Starbucks primarily chooses to focus on the demographics, psychographics, and lifestyle of their customers. Starbucks targets both males and females, ranging in age from 18-30 year olds, and middle to upper middle class. Starbucks caters to all needs; they offer noncaffeinated drinks, for children or non-coffee drinkers, sandwiches, sweets, and a variety of juices and pastries. .............................................................5 COMMUNITY..................................................................7 COMMUNITY..................................................................7 Culture.......................................................................................................................8 Markets......................................................................................................................9 Market Needs..........................................................................................................10 Market Trends.........................................................................................................10 Market Forecast............................................................................................11 Competition...................................................................................................14 SWOT Analysis.......................................................................................................15 Strengths.........................................................................................................15 Opportunities........................................................15 Strengths.................................................................................................................16 Global Presence. Starbucks has a widespread global presence. The company operates about 8500 retail store locations, the majority of which are company owned and operated across32 countries worldwide. The company’s widespread presence provides prevalent brand recognition and a strong customer base. .............................................................................16 Weaknesses............................................................................................................17 Lower revenues and income per employee. The company generates lower revenues and income per employee as compared to the industry average. Its revenue per employee was $71,544 during fiscal 2004, as compared to the industry average of $110,841. Furthermore its net income per employee is $5294 as compared to the industry average of $9500. The company’s lower returns per employee as compared to the industry average reflect adversely upon its employee efficiency........................................................18

Market Audit - 3 Opportunities...........................................................................................................19 New products. Starbucks has expanded its beverage categories by signing an agreement with the wine and spirits group Jim Beam Brands to develop and market a Starbucks branded coffee liqueur drink. The partnership with Jim Beam Brands provides Starbucks with access to a nationwide sales and distribution network. It also offers a partner with a proven track record in product development and marketing. In the US, cordials and liqueurs represent a $4-5 billion opportunity and approximately 20 million cases. Liqueurs flavored with coffee or often mixed with coffee represent a substantial segment of the liqueur market. Additionally, US specialty coffee consumption is on the rise. Research indicates that there is a significant overlap between consumers of liqueurs and consumers loyal to the Starbucks brand which provides the company a strong revenue potential..20 Threats...........................................................................................21 Marketing Strategy..................................................................................................22 Marketing Mix..........................................................................................................25 Starbucks marketing information has been consistently accurate. When it has been wrong, sales have exceeded expectations. Based on the SWOT analysis and industry research, Starbucks current marketing decisions have been extremely effective and timely. They are targeting the global market, primarily in the Pacific Rim and Europe. They have increased pricing with little affect on demand. They have also improved their distribution and protected themselves from a slow US market. Their products have been consistently updated based on consumer demand. Success can be somewhat deceiving. Starbucks may have “left money on the table” by not being more aggressive, more targeted to local segments and not concentrating their efforts toward the global market. ..........................34

Starbucks Marketing Audit Executive Summary The US specialty coffee market continues to have an increasing number of firms looking to enter the market. Starbucks must be aware of competition on all levels and maintain its operational performance if it is to retain its status as the world’s leading specialty coffee retailer. The company’s focus on taste, quality and customer service is consistent with the market segment. The current product mix is in line with the industry and market forecast. Continual product review, particularly in non-food items, for additional sources of revenue is needed to

Market Audit - 4 increase sales. The current product line would be improved through a more regional perspective on consumer demand. The present pricing is competitive with other specialty coffee stores. The company has protected itself from the volatile coffee prices and could use pricing advantage should the cost of coffee rise. Customers view Starbucks products from a value perspective rather than a price perspective, consequently pricing could be increased. Due to the recent price increase adjustments are not recommended until 2006 or later. More aggressive advertising would reduce the risk of competition and a slumping US market. Additional marketing would expand awareness of new programs, generate interest in recent promotion efforts such as free refills and deliveries, and lead to increased sales of Starbucks non-food items. Taking advantage of the company’s significant social contributions would increase global brand image.

To keep competitors from entering the US market, the

use of non-traditional methods of expansion is suggested. The declining US hot drinks market and growing global market should shift marketing focus on overseas markets. Asia and Europe represent 73% of the hot drink market. To maintain Starbucks position as the premier purveyor of the finest coffee in the world, a doubling of efforts toward overseas markets in Europe is warranted. Environmental Aspects

Market Audit - 5 Demographics. The growth rate of the US has been between 1.10% and .90% from 19992003. The market demands are constantly increasing. Their unique approach to expansion goes beyond the traditionally accepted methods. Starbucks has broken the rules and set a new standard amongst its competitors. Starbucks primarily chooses to focus on the demographics, psychographics, and lifestyle of their customers. Starbucks targets both males and females, ranging in age from 18-30 year olds, and middle to upper middle class. Starbucks caters to all needs; they offer non-caffeinated drinks, for children or non-coffee drinkers, sandwiches, sweets, and a variety of juices and pastries. In 1991, as the company continued to grow, Howard Schultz formed an inhouse team of architects and designers to ensure each store would convey the right image and character. The company didn’t buy real estate, spaces were leased so stores had to be custom designed in order to maintain consistency of atmosphere and appearance. Stores were predominately located in suburban retail centers, airport terminals, university campus areas, or busy neighborhood shopping areas convenient to pedestrian foot traffic. Similar materials and furnishings were used to keep the look of each store consistent, no two stores ended up being exactly alike (McGraw-Hill, 1997) . Locations of all stores are carefully selected for convenience and Starbucks specifically targets places that are heavy with pedestrian street traffic. Starbucks has leased space in supermarkets, airports, and shopping centers. Starbucks has been successful even with their non-traditional approach towards retail locations.

Market Audit - 6 Since Starbucks watchword is convenience, they have broken the rules by saturating a small area with numerous stores. Offering numerous locations in a small area assures that customers have choices, and that the choice remains Starbucks. “Not surprisingly, today's most devoted coffee shop patrons are 18- to 34year-olds and those with annual incomes over $75,000. Forty-two percent of 18- to 34-year-olds and 46 percent of those who earn more than $75,000 say that when they drink coffee away from home, they head straight for Starbucks-like shops, compared with just 32 percent of all away-from-home coffee drinkers. The younger folks are attracted to the coffee-bar atmosphere, music selections and what tends to be a younger customer base, according to the report, while the wealthy simply want the best” (DAWIDOWSKA, 2002).

Starbucks is quickly becoming known as the best coffee in the world. “Cup by cup Starbucks has changed the way people from different continents drink coffee” (Isidro, 2004). Their expansion into numerous countries has them leading the world in a coffee revolution. Locations include, but are not limited to; Australia, Austria, Beijing, France, Germany, Greece, Japan, Hawaii, Hong Kong, Malaysia, New Zealand, Shanghai, Singapore, South Korea, Spain, Switzerland, Taiwan, Thailand, Turkey, and the United Kingdom.

Market Audit - 7 Starbucks differentiation is that the Starbucks Corporation does not change its menu when it changes venues. The products are the same weather one is in the US or in Hong Kong. Contrary to traditional marketing strategies, Starbucks does not personalize their coffees or have different products to suit various countries' tastes.

The table below is a measure of the number of Starbucks stores per 10,000 populations in cities across the U.S., as of March 2005. The cities with the highest store-to-population ratios nationally are provided. (Analysis is limited to cities with at least 10,000 people, using the 2000 census figures. Supermarkets and other stores selling coffee beans were not included in the totals. Store locations were based on the addresses cited on the Starbucks Web site.)

COMMUNITY

POPULATION

STARBUCKS PER 10,000 PEOPLE

Falls Church, VA

10,377

7.7

Katy, TX

11,775

6.8

Greenwood Village, CO

11,035

6.3

Issaquah, WA

11,212

5.4

Palm Beach, FL

10,468

4.8

Littleton, CO

40,340

4.5

Destin, FL

11,119

3.6

Lincoln, CA

11,205

3.6

Sherwood, OR

11,791

COMMUNITY

POPULATION

3.4 STARBUCKS PER 10,000 PEOPLE

Naples, FL

20,976

3.3

Williamsburg, VA

11,998

3.3

Lynnwood, WA

33,847

3.2

Spring, TX

36,385

3.0

Bel Air, MD

10,080

3.0

Alpharetta, GA

34,854

2.9

Fairfax, VA

21,498

2.8

Vienna, VA

14,453

2.8

Freehold, NJ

10,976

2.7

Duluth, GA

22,122

2.7

Grand Haven, MI

11,168

2.7

Brentwood, CA

23,302

2.6

Market Audit - 8 Lake Oswego, OR

35,278

2.6

Silverdale, WA

15,816

2.5

Auburn, CA

12,462

2.4

Tumwater, WA

12,698

2.4

March, 2005 Sources: ePodunk; Starbucks.com; U.S. Census Bureau

Culture

Starbucks ultimate goal is to provide a third place outside of work and home. Providing a place where people can relax and enjoy top-quality coffee and coffee-related products, while creating an atmosphere of comfort and belonging. “David Chichester, Chief Financial Officer Starbucks Coffee Japan says: “The culture is so important at Starbucks that all executives also go through an orientation during which they spend several days or more actually working at the store level to get the feel of the Starbucks experience and culture” (Coffee Culture article). Starbucks culture has been compared to the old Japanese traditional business style where members of the company are considered family. A large piece of the Starbucks culture is a strong focus on environmental awareness and preservation. Starbucks Corporation takes their role to society very seriously. The Corporate Social Responsibility Report addresses many social concerns and issues important to Starbucks. Concerns addressed include, but are not limited to; coffee and farmer equity practices, investing in social programs, building strong community ties, The Starbucks Foundation - supporting youth education, being responsible to our customers, understanding environmental

Market Audit - 9 issues and sharing with our partners, and fostering diversity and inclusion (Corporate Social Responsibility annual report, 2004). Markets The United States hot drinks market is the largest in the world, accounting for roughly a fifth of all global sales. Despite this leading position, the market has been performing badly for a number of years now with growth rates consistently negative, and thus the market steadily shrinking. The US hot drinks market reached a value of $11.9 billion in 2003, having decreased with a compound annual growth rate (CAGR) of -1.1% in the 1999-2003 periods. This decline went against the general trend of the global hot drinks market. The decline lead to the US’s market’s global share to decrease by 2 percentage points between 1999-2003, accounting for 19.2% of the global market by the end of this period. The leading revenue source for the US hot drinks market in 2003 was the coffee sector, which accounted for nearly 85% of the market’s value. In value terms the coffee sector was worth $10.1 billion in 2003, a decrease of 4.9% since 1999. The decline of 4.9% in 1999 made this sector the poorest performing within the market. The sector showing the best performance was tea, but even this declined in value by 0.4% between 1999 and 2003. Looking ahead, the market is expected to experience consistent negative growth rates. By 2008, the market forecast is to reach a value of $11.7 billion, which equates to a compound annual growth rate (CAGR) of -0.4% in the 20032008 periods, lower than the global market. Indeed, of all the major hot drinks markets in the world, the United States is the only one expected to decline in

Market Audit - 10 value. The result of this analysis indicated that the US’s global market share will have decreased dramatically from 21.2% in 1999 to 17.1% in 2008. Market Needs Starbucks’ immediate goal is to continue adding new stores throughout the US and internationally. In 1992 and 1993 Starbucks developed a three-year geographic expansion strategy that targeted areas which not only had favorable demographic profiles but which also could be serviced and supported by the company's operations infrastructure. For each targeted region, Starbucks selected a large city to serve as a "hub"; teams of professionals were located in hub cities to support the goal of opening 20 or more stores in the hub in the first two years. Once stores blanketed the hub, then additional stores were opened in smaller, surrounding "spoke" areas in the region. To oversee the expansion process, Starbucks created zone vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores. Each of the new zone vice presidents Starbucks recruited came with extensive operating and marketing experience in chain-store retailing. Market Trends In 2003, the US market accounted for 19.2% of the global hot drinks sales. Europe remains the largest regional market in the world, accounting for 41.9% of global hot drinks sales. The Asia-Pacific accounts for a further 31.5% of the global hot drinks market.

Market Audit - 11

Much of this decline can be blamed on a consumer shift away from coffee towards soft drinks, as coffee accounts for a large proportion of hot drinks sales in the US. However, there is evidence of manufacturers trying to broaden the range of products that they sell, possibly learning from the success enjoyed by Starbucks and their vast range of different flavored coffees. One possible area for product development is within the herbal and fruit tea sector, particularly considering the recent American fascination with health and wellbeing. The American tea sector is in comparison fairly small but still enjoys healthy sales and growth rates. Tata Tea and Unilever lead the sector with their Tetley and Lipton ranges. Private labels perform distinctively better in the tea sector than in coffee, managing to claim over a third of all retail sales. Market Forecast

Market Audit - 12 In 2008, the United States hot drinks market is forecast to reach a value of $11,653.3 million, a decrease of 1.9% since 2003. The compound annual rate of change of the market in the period 2003-2008 is predicted to be a fall of 0.4%. Due to the high consumption levels within the US hot drinks market, there is little

Market Audit - 13 scope for increased volume sales.

Market Audit - 14

Competition The global coffee market is a very competitive sector, The US specialty coffee market continues to grow, and an increasing number of firms are looking to enter the market. The US has the largest coffee sector in the world, and is led by a number of global players. Procter & Gamble lead the sector with their two major brands, Folgers and Millstone, covering a variety of whole bean, ground and instant coffees. Kraft Foods comes in a close second in the sector with its vast range of different coffee brands, including General Foods International, Gevalia, Yuban and Maxwell House. Nestlé is the other large company in the sector, having a history of success with its Tasters Choice and Hills Brothers brands. It also introduced the Nescafe brand to the US back in 2002 with a new Frothé line of instant coffee, and has already experienced strong and expanding sector share. Kraft Foods owns Starbucks, which accounts for a healthy proportion of US coffee sales through its specialist coffee shops. Starbucks' closest competitor, Second Cup, a Canadian franchisor with stores primarily in Canada, was less than one-third its size. Second Cup, a franchisor of specialty coffees, has stores located primarily in malls throughout the United States. No other rival has as many as 250 stores, but there were at least 20 small local and regional chains that aspired to grow into rivals of Starbucks, most notably New World Coffee, Coffee People, Coffee Station, Java Centrale, and Caribou Coffee.

Market Audit - 15 SWOT Analysis

Datamonitor’s Business Information System reports; Starbucks Corporation Company Profile and Marketingteacher.com SWOT Analysis Starbucks provides the following. “Starbucks Corporation, a specialty coffee retailer, producing and selling a wide variety of hot and cold beverages, as well as pastries and confections, through 8500 coffee shops across 32 countries worldwide. The company recorded an increase in revenues and profits. It faces the threat of reduction in margins due to rising dairy costs.

• • • • •

• • •

Strengths Global presence A disciplined innovator Increase in revenues and profits Clustering of company units Starbucks Corporation is a very profitable organization, earning in excess of $600 million in 2004.The company generated revenue of more than $5000 million in the same year. It is a global coffee brand built upon a reputation for fine products and services. a respected employer that values its workforce. committed to a role of environmental leadership in all facets of our business.

Opportunities

Weaknesses • • • • • •

•

Reliance on US market Reliance on beverage innovation Lower revenues and income per employee Lower returns on equity than peers Problems in some international Operations strong presence in the United States of America with more than three quarters of their cafes located in the home market. dependant on a main competitive advantage, the retail of coffee. This could make them slow to diversify into other sectors should the need arise.

Threats

Market Audit - 16 • • • • •

•

Growth in global coffee market New product Strong record of taking advantage of opportunities. New products and services that can be retailed in their cafes, such as Fair Trade products. The company has the opportunity to expand its global operations. New markets for coffee such as India, the Pacific Rim, and European nations Co-branding with other manufacturers of food and drink, and brand franchising to manufacturers of other goods and services both have potential.

• • • • • •

Market expansion Volatile coffee markets Rising dairy costs Slowing US retail sales Competition Market entry of many competitors and “copy cat” brands that pose potential threats.

Strengths Global Presence. Starbucks has a widespread global presence. The company operates about 8500 retail store locations, the majority of which are company owned and operated across32 countries worldwide. The company’s widespread presence provides prevalent brand recognition and a strong customer base.

A Disciplined Innovator. Starbucks is a disciplined innovator. The company effectively manages its innovation timeline generating consistency in same store sales. In fiscal 2002, the company introduced new Frappuccino Blended Beverages, and in 2003, the "Iced Shaken" refreshments product line was launched. In 2004, it pioneered the new Frappuccino Light blended coffee. Starbucks’ ability to roll out new products relatively quickly is a considerable competitive advantage for the company.

Market Audit - 17

Increase in revenues and profits. The company recorded revenues of $5294.2 million during the fiscal year ended September 2004, an increase of 29.9% over 2003. The company’s revenues grew at a compounded annual growth rate of 25% from fiscal 2000 and fiscal 2004. Furthermore, the operating profit of the company during fiscal 2004 was $610 million, an increase of 43.7% over fiscal 2003. Its’ net earnings also increased by 46% in fiscal 2004. This significant rise in revenues and profits provides the company with a strong financial base and enables it to undertake new business ventures.

Clustering of company units. With the continued growth of the coffee market, the company has looked to expand its business, including those areas where it has an established presence. Operating on the basis that a critical driver of business is the convenience of the company’s outlet location, Starbucks has targeted clustering its units so as to dominate particular areas. The financial reward derived from this practice is considerable. Existing outlets are not hurt by the new stores. A continued strategy of unit clustering, and a focus on stores that have convenient access for pedestrians and drivers, represents further opportunity for Starbucks to capture an increasing share of the coffee market. Weaknesses Reliance on US market. Starbucks’, headquartered in Seattle, derives approximately 85% of its revenue from its domestic US market. The company is an international brand with wide ranging operations, consequently it should be

Market Audit - 18 generating a greater proportion of revenues from outside the US. Should the company’s US unit under-perform due to economic conditions or increased levels of competition, Starbucks’ performance will be materially affected.

Reliance on beverage innovation. An important long-term risk to the company’s stock is a lower valuation caused by a slowdown in US sale store growth. Starbucks’ store sales growth has been largely driven by beverage innovation, but there are questions over how long this can last. Diminishing return from beverage innovation, one of the company’s competitive strengths, would have a significant adverse effect on the company’s performance.

Lower revenues and income per employee. The company generates lower revenues and income per employee as compared to the industry average. Its revenue per employee was $71,544 during fiscal 2004, as compared to the industry average of $110,841. Furthermore its net income per employee is $5294 as compared to the industry average of $9500. The company’s lower returns per employee as compared to the industry average reflect adversely upon its employee efficiency.

Lower return on equity than peers. The company’s five year average returns on equity have been lower than the industry average. Its five year average return on equity was 13.65% as compared to the industry average of 15.09%. The

Market Audit - 19 company would need to effectively manage its finances to ensure that returns are at par or higher than industry average.

Problems in some international operations. The company has been facing certain difficulties in some of its international operations. Starbucks’ has faced problems of expansion, with a number of openings failing to be successful. Starbucks has experienced continued same-store sales sluggishness in its Japanese operations. Also, in 2003 Starbucks Coffee International ended its joint venture with the Delek Group of Israel. Following this decision, Shalom Coffee Company, the joint venture between Starbucks Coffee International and the Delek Group, closed its six Starbucks stores in Tel Aviv. This adversely affects the international operations of the company and thus the growth prospects in the region. Opportunities Growth in coffee market. The specialty coffee sector accounts for roughly 15% of the US retail coffee market, which is worth $21 billion. By 2005, the retail coffee market is expected to be worth $22 billion, and the specialty coffee sector will grow to account for 41% of this market. Starbucks has a market share of over 40% of the specialty coffee market, and the anticipated growth in this category will offer the company considerable opportunities for further growth and expansion in the near future.

Market Audit - 20

New products. Starbucks has expanded its beverage categories by signing an agreement with the wine and spirits group Jim Beam Brands to develop and market a Starbucks branded coffee liqueur drink. The partnership with Jim Beam Brands provides Starbucks with access to a nationwide sales and distribution network. It also offers a partner with a proven track record in product development and marketing. In the US, cordials and liqueurs represent a $4-5 billion opportunity and approximately 20 million cases. Liqueurs flavored with coffee or often mixed with coffee represent a substantial segment of the liqueur market. Additionally, US specialty coffee consumption is on the rise. Research indicates that there is a significant overlap between consumers of liqueurs and consumers loyal to the Starbucks brand which provides the company a strong revenue potential.

Market expansion. The company is targeting 15,000 international stores in the next few years. Starbucks expects major expansion potential in China. The company is also looking towards markets such as Brazil, India, and Russia for expansion opportunities. Starbucks envisions China as its next significant international opportunity. Citing its large urban population, rising economy and increase in coffee consumption, Starbucks estimates that China could ultimately be one of its largest markets. In China, the company will continue to focus on current markets such as Beijing and Shanghai along with rapid expansion in new cities. These developments will provide the company with new opportunities for revenue growth.

Market Audit - 21

Threats Volatile coffee markets. The price and available supply of coffee experience high volatility. Starbucks’ requirements for quality standard coffee creates complications within the producing countries. Barriers may include; weather, and political and economic conditions which may adversely affect the company’s business. In the past, the actions of some organizations and associations have affected the prices of green coffee. This has been accomplished through agreements establishing export quotas or restricting global coffee supplies. The actions of these associations could cause a degree of disruption to Starbuck’s operations.

Rising dairy costs. The company faces the threat of rising dairy costs. Dairy prices have risen considerably and this could adversely affect Starbucks’ margins. Raw milk prices in 2004 are expected to be above the 2003 levels. Milk and other dairy products represent between 3% and 5% of sales, and sustained increase in prices could affect the company’s margins.

Slowing US retail sales. The company faces long-term concerns regarding its US store growth potential. If current growth continues, saturation levels within the North American retail division will be reached within five years. This represents a considerable concern for Starbucks, given that over the last two years, domestic retail has been the source of about 75% of the company’s revenue growth and an

Market Audit - 22 even greater proportion of profit growth. Before reaching saturation point, US retail sales growth will slow considerably over the next three to five years, further increasing the pressure on the international division to justify the company’s investment in expansion. (MAY 2005) Marketing Strategy The Starbucks Mission Statement and Six Guiding Principles are foundation of the entire organization. The mission statement reads as follows: To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow. The Six Guiding Principles are as follows; 1. Provide a great work environment and treat each other with respect and dignity. 2. Embrace diversity as an essential component in the way we do business. 3. Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee. 4. Develop enthusiastically satisfied customers all of the time. 5. Contribute positively to our communities and our environment. 6. Recognize that profitability is essential to our future success. Marketing Objectives/Financial Objectives

Market Audit - 23 Starbucks revenue had more than doubled since 2000. For the year ended October 1, 2000 Starbucks reported revenue of $2.17 Billion and reported revenues of $5.29 Billion for the year ended October 3, 2004. Starbucks has taken a very aggressive approach to opening new stores both in the United States and around the world. Based on their track record it is difficult to disagree with their tactics. All Starbucks coffee shops opened in the United States are owned by the corporation, they currently do not offer franchising opportunities. Starbucks has expanded into 35 countries outside of the United States. The following is a list of the international store counts for each country: (SEC filing 10-k) Asia Pacific Japan China Taiwan South Korea Philippines Malaysia New Zealand Indonesia

534 152 136 102 70 52 36 24

Europe/Middle East/Africa Germany 35 Saudi Arabia 32 United Arab Emirates 31 Spain 27 Kuwait 27 Greece 25 Switzerland 18 Turkey 15 Lebanon 10 Austria 8 Qatar 6 Bahrain 5 France 4 Oman 3 Cyprus 2

Americas Canada Hawaii Mexico Chile Puerto Rico Peru

66 45 32 9 6 3

Starbucks focuses their efforts in three areas of development; product enhancement, licensing relationships, and store development. Their rapid increase in sales (and profits) is directly related to these three areas of growth.

Market Audit - 24 “In fiscal 2004, the Company expanded its licensing relationship with Kraft Foods, Inc. (“Kraft”) to include a larger selection of Starbucks® whole bean and ground coffees, as well as Seattle’s Best Coffee® and Torrefazione Italia® branded coffees and a selection of premium Tazo® teas, in grocery and warehouse club stores throughout the United States. Kraft manages all distribution, marketing, advertising and promotion and pays a royalty to Starbucks. By the end of fiscal 2004, the Company’s coffees and teas were available in approximately 20,000 grocery and warehouse club stores, 19,000 in the United States and 1,000 in International markets. Revenues from this category comprised 27% of specialty revenues in fiscal 2004. The Company has licensed the rights to produce and distribute Starbucks branded products to two partnerships in which the Company holds a 50% equity interest: The North American Coffee Partnership with the Pepsi-Cola Company develops and distributes bottled Frappuccino® and Starbucks DoubleShot® coffee drinks; and the Starbucks Ice Cream Partnership with Dreyer’s Grand Ice Cream, Inc., develops and distributes superpremium ice creams. In fiscal 2004, the Company entered into an agreement with Jim Beam Brands Co., a unit of Fortune Brands, Inc., to develop, manufacture and market a Starbucks-branded premium coffee liqueur product in the United States. The Company conducted tests of this product in two U.S. markets in the fiscal fourth quarter and expects to introduce the product nationally during the fiscal second quarter of 2005 in retail locations licensed to sell distilled spirits, such as restaurants, bars and retail outlets where

Market Audit - 25 premium distilled spirits are sold. The Company will not sell the liqueur product in its Company-operated or licensed retail stores. The associated revenues from this category accounted for 1% of specialty revenues in fiscal 2004“ (www.starbucks.com/aboutus/investor).

The specialty licensing division recorded revenues of $565.8 million in 2004, an increase of 38.1% over fiscal 2003. The specialty foodservice and other division recorded revenues of $271.1 million in 2004, an increase of 25.3% over fiscal 2003. Marketing Mix Starbucks Corporation’s marketing mix involves the product determination, pricing considerations, channels of distribution, and promotions adapted by the company to ensure that the desired level of sales will be achieved in Starbucks’ target markets. The company's products and services include: Beverages: Brewed coffees Italian-style espresso beverages Cold blended beverages Roasted whole bean coffees Tea products Fruit juice Sodas Coffee liqueur

Food: Sandwiches Salads Pastries Ice creams

Non food items: Mugs Travel tumblers Coffeemakers Coffee grinders Storage containers Compact discs Games Seasonal novelty items Starbucks card Media bar

Market Audit - 26 Product Strategy Starbucks Corporation’s product strategy involves the generation of new products and the enhancement of existing products. This strategy achieves both the advantage of introducing product evolution within the company and the retention of old and existing products that symbolizes the Starbucks tradition. The company's retail sales mix was roughly 61 percent coffee beverages, 15 percent whole-bean coffees, 16 percent food items, and 8 percent coffee-related products and equipment. The product mix in each store varied, depending on the size and location of each outlet With coffee as its main product, Starbucks continues to introduce new goods so that consumers spend more time and money in their stores. In addition to coffee, Starbucks also offers coffee mugs, coffee grinders, coffee-making equipment, filters, storage containers, and other accessories for sale. Food products include pastries, hot and cold sandwiches, salads, breakfast sandwiches, and tea. As of 2001 Starbucks began to offer wireless Internet to patrons and later this year, plans to increase the stores music products by implementing CD burners to enable customers to sample online music from its subsidiary HearMusic.

The introduction of new products in the company is demonstrated through the promotion of the following products: the ready-to-drink Starbucks Doubleshot, Starbucks Ice Cream, and Starbucks Coffee House Blend brand. The RTD drink Doubleshot is a new Starbucks product aimed to satisfy the needs of consumers who are always in a hurry. Thus, Doubleshot is a Starbucks product that is “the

Market Audit - 27 ideal way to start a busy day!” Meanwhile, Starbucks had moved to expand its supermarket sales of ice cream (available in 6 flavors), the Doubleshot, and their whole beans. The special signature brand House Blend Coffee of Starbucks introduces a new way wherein home-based consumers will also enjoy the goodness of Starbucks coffee. This product comes in different flavors (ranging from African, Arabian, to French Roast flavors), customized to fit the coffee-lover’s taste and need for new, yet, equally delicious taste of the traditional Starbucks coffee.

Starbucks continuously researches and implements new products as well as enhanced its existing products in order to create diversity and added features to the traditional lineup of coffee beverages and services. Customers play a large part in this; feedback has been the catalyst for many new products and services currently available through Starbucks. An example of the company’s product strategy with its existing products is the introduction of the Tazo Tea and Crème Frappuccino beverages in the traditional Starbucks menu list. Adding extra features in the beverages enhances Starbucks’ famous product, Frappuccino. That is, new flavors and variations of the said product were introduced. Furthermore, Frappuccino blended beverages have become accessible to consumers with the introduction of the bottled Frappuccino. These product strategies focused on the product’s packaging, making the product commercially available everywhere, especially where Starbucks retail stores are not available.

Market Audit - 28 With the introduction of prepaid purchase cards and the ability to preorder via the telephone and online, Starbucks has enhanced their ability to assist consumers with orders and purchases. Starbucks also introduces seasonal drinks to its menu for the holidays, the Pumpkin and Gingerbread lattes have become staples of the holiday coffee repertoire.

Pricing Strategy

Starbucks Corporation’s pricing strategy is largely based on competition, especially since many specialty coffee shops are emerging after Starbucks’ success in the commercial market. In 2004, prices of nine chains in eight cities, including Seattle, were compared to see how the coffee company fared against companies such as Tully's Coffee Corp, Peet's Coffee & Tea, and Coffee Bean & Tea Leaf. The result: Starbucks regular coffee was 4 percent less expensive and its iced blended drinks were as much as 30 percent less expensive when compared with specialty competition. Increased milk and green coffee bean prices are primarily responsible for higher overall prices. In October of 2004, Starbucks increased retail prices for beverages by an average of 11 cents per cup. Starbucks last price increase, during August of 2000, was an average of about 7 cents per cup in August 2000. With whole bean prices ranging from a minimum of $8 and a maximum of $18, Starbucks coffee are in the average price range for the specialty coffee market. These prices are maintained throughout the company’s retail stores in America. International prices, however, tend to be lower or higher due to currency adjustments and variations in exchange

Market Audit - 29 rate. By marketing their products and developing a culture, it is not the price consumers focus on but the value of the products.

Distribution Strategy

Starbucks’ wide range of business activity allows it to utilize numerous channels of product of distribution. The company adapts the vertical channel integration so that distribution of the company’s wide range of products and services will be effectively distributed to the consumers. Starbucks specifically adapts the Corporate Vertical Marketing System (or Corporate VMS) wherein a corporation owns and operates its own production facilities, warehouses, and retail stores.

Starbucks Corporation uses coffee beans which are directly produced for the company. Through the company’s funding, coffee farms in Mexico and Latin American nations are cultivated according to Starbucks’ quality standards. Establishment of the company’s own coffee farms reduces the problem of quality coffee beans often encountered by specialty coffee shops like Starbucks. Under the company’s supervision, coffee beans are produced and categorized according to their unique taste and quality: the Fair Trade blend, Organic, Farm Direct (commonly produced in Costa Rica), and Conservation, which is cultivated primarily in Mexico. Another advantage in Starbucks’ distribution strategy is that the company does not allow franchising; rather, licensed stores are only allowed, giving the

Market Audit - 30 Starbucks Corporation full control of the management and operations of the retail store. This policy is applied in both domestic and international business operations of Starbucks. This strategy is used in order to maintain the quality of Starbucks coffee despite the different locations and environment in which the store is located. The Starbucks strategy aims to introduce to consumers to the original Starbucks coffee taste regardless of nationality. Using the Corporate VMS allows Starbucks Corporation to have a significant degree of control over the entire distribution system. Ensuring that the company’s products adhere to the Starbucks’ standards beginning with the raw ingredients and concluding with the finished product.

The Starbucks Company has had notable success in identifying top retailing sites for its stores. The company has the best real estate team in the coffee-bar industry. It is also recognized for its’ sophisticated system which enabled it to identify the most attractive individual city blocks and the best store location. The company’s site location track record is so good that as of 1997 Starbucks only closed 2 of the 1,500 sites it had opened (McGraw-Hill, 1997).

“Today the company that weaned us away from the free mud in the office kitchen and hooked us on $3 tall double caramel macchiato (with nonfat milk, please) has 5,945 stores in the United States and 2,392 more overseas and in Canada” (Stone, 2005).

Market Audit - 31 Promotion Strategy

Publicity Strategy

Starbucks Corporation primarily relies upon news stories, conferences and public service announcement to gain publicity about the company’s products and services. Starbucks promotes new product lineups or new promotions through press releases and conferences, and is often used when launching a print and/or broadcast advertisement about a new or enhanced product.

Starbucks utilizes public service announcements and sponsorships as its main publicity strategy. Through the promotion of programs and activities that aim at the company’s sense of ‘social responsibility,’ Starbucks Corporation is able to project to the consumers the good and quality product that the company is producing and distributing in the commercial market. Examples of these programs that promote Starbucks’ social responsibility to its consumers are evident through its community building programs, Starbucks Foundation, and environmental preservation programs. It sponsors community-building programs through its local support programs (funded by the Starbucks Foundation) such as the establishment of Seattle Hometown and Zion Preparatory Academy, and grants such as library grants for the company’s literacy program and funding projects.

Market Audit - 32 Advertising Strategy

Print ads and broadcast (television) are the primary media source Starbucks uses in its advertising campaigns. Examples of Starbucks’ advertising campaigns are TV ads that promote the bottled Frappuccino and Starbucks Doubleshot products. These ads are both 15 minute-ads that are strategically played ‘back-toback’ for greater brand and product retention. Starbucks mainly uses product rather than institutional advertising. Because of the audiovisual appeal of TV ads, most of the company’s advertising campaigns are through the broadcast media. Furthermore, the accessibility and flexibility of the television medium allows everyone to receive information about Starbucks and its products. Similarly, print media are also used because of Starbucks’ business employees/executives target market are primary consumers of newspapers, allowing the company’s dominant consumers to gain access to information about Starbucks’ new products. Both media are therefore useful in proliferating the Starbucks Coffee Company and its wide range of products.

Personal Selling Strategy

One of Starbucks’ main business operations is the distribution and offering of the company’s services through the Office Beverage Service and Office Delivery Service. These personal selling strategies provide small business offices a continuing supply of Starbucks coffee without going into the nearest Starbucks coffee shop. The Office Coffee Provider service offers the traditional Starbucks coffee using a special thermal brewing system that will be supplied to the office

Market Audit - 33 (consumers). Starbucks coffee in retail packs are also available and can be delivered to establishments interested in using the company’s products through the Office Delivery Service. These two services provide additional convenience to consumers.

Sales Promotion Strategy

Although Starbucks introduces many short-term promotions to increase sales, its Starbucks Card is a special sales promotion program that helps consumers to buy Starbucks products online as well as at outlets. Purchasers of this Starbucks Card can take advantage of the company’s special promos and deals, which includes discounts, special gifts and rewards, and other Starbucks freebies. Such benefits are exclusively distributed to Starbucks Cardholders.

Conclusion/Recommendations

Market Audit - 34 Starbucks marketing information has been consistently accurate. When it has been wrong, sales have exceeded expectations. Based on the SWOT analysis and industry research, Starbucks current marketing decisions have been extremely effective and timely. They are targeting the global market, primarily in the Pacific Rim and Europe. They have increased pricing with little affect on demand. They have also improved their distribution and protected themselves from a slow US market. Their products have been consistently updated based on consumer demand. Success can be somewhat deceiving. Starbucks may have “left money on the table” by not being more aggressive, more targeted to local segments and not concentrating their efforts toward the global market.

Starbucks Corporation’s Mission Statement: “To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles”, and its strategic planning seem to be in line. The objectives for sales and revenue have consistently been achieved. The critical issue for Starbucks is the decline of the US hot drinks market. To take advantage of the company’s strengths and considering the weaknesses, opportunities, and threats we recommend the following marketing strategies. •

Revamp product lines to meet specific location consumer demands both regionally and globally.

•

Use aggressive advertising to reduce the risk of increased competition and mitigate the risk from the downturn of the US hot drinks market.

•

Leverage the company focus on Corporate Social Responsibility in marketing its brand image.

Market Audit - 35 •

Focus expansion on additional overseas markets (Europe)

•

Increase pricing if the price of coffee rises in 2006-2008.

•

Continue to expand in the US market to mitigate the threat from

competitors. •

Continue to add additional non-food/beverage products and services

to increase sales and meet higher level customer needs.

REFERENCES Anonymous. SWOT: Starbucks. Retrieved June 1, 2005 from http://www.marketingteacher.com/SWOT/starbucks_swot.htm BOLT, K. M., Starbucks' same-store sales spring a surprise 9% increase tops analysts' 7.4% expectations SEATTLE POST-INTELLIGENCE May 5, 2005 Retrieved May 17, 2005 from seattle.bizjournals.com Clearly, M. Marketing Manager. Starbucks Corporation Retrieved June 1, 2005 from http://www.mhhe.com/business/management/thompson/11e/case/starbucks .html Datamonitor Business Information Center Hot Drinks in the United States Industry Profile November 2004 Datamonitor Business Information Center Starbucks Corporation Company Profile May 2005 DAWIDOWSKA, K. ePodunk; Starbucks.com; U.S. Census Bureau http://www.findarticles.com/p/articles/mi_m4021/is_2002_April_1/ai_871097 53 ISIDRO, I. Learning from Starbucks: 10 lessons for small business Retrieved May 5, 2005 from http://www.powerhomebiz.com/vol144/starbucks.htm

Market Audit - 36 LINN, A. Starbucks Hopes to Expand in 2002 Associated Press February 27, 2002 Retrieved May 26, 2005 from http://www.organicconsumers.org/starbucks/expanding2002.cfm Official Web site of Starbucks Coffee Company (Starbucks Corporation). Available at: http://www.starbucks.com. STARBUCKS COFFEE JAPAN How Starbucks Perked Up Japan’s Coffee Culture http://www.accj.or.jp/document_library/FDICaseStudies/1069040679.pdf. March, 2005 Starbucks Company Background Retrieved May 28, 2005 from http://www.mhhe.com/business/management/thompson/11e/case/starbucks .html (McGraw-Hill, 1997

Starbucks company profile Retrieved May 28, 2005 from http://www.starbucks.com/aboutus/CompanyProfileFeb05.pdf STONE, R. Grande Plans Retrieved May 23, 2005 from http://www.msnbc.msn.com/id/6100243/site/newsweek/ Starbucks SEC report 10-K filed 2/18/2005, accessed on http://ir.10kwizard.com/? source=518 through http://80dbic.datamonitor.com.ezproxy.apollolibrary.com/companies/company/? pid=E86AFA79-07E1-4115-AA0C-0016416541FE