Firm Managed the Financial Collapse Thesis
- Length: 9 pages
- Sources: 20
- Subject: Business - Advertising
- Type: Thesis
- Paper: #93932473
Excerpt from Thesis :
The instant coffee, called Via, Starbuck's newest entry into supermarket-style purchases, is sold at its lowest price point, compared with its higher-end coffee ice creams and bottled Frappucinos and espresso shots. Despite initial criticism Via has kept the Starbucks name alive on store shelves and in consumer's minds who are not currently going to cafes, because these former patrons and Starbucks loyalists have lost their jobs or because their investments have been decimated.
The current policy of keeping the prices high for only some of more elite types of coffee and drinks secures another facet of Starbuck's complex image -- namely, that of a luxury brand, without pricing all consumers out of the market across the board. "Price as an attribute, while relatively unimportant in affecting overall customer satisfaction, is certainly important in affecting the generation of a differentiating customer experience. That does not mean that customers are satisfied with Starbucks price. It means only that the premium price is one of the key differentiators of Starbucks from other brands. Theoretically speaking, if Starbucks cut prices, assuming other elements remained constant, the store would be less differentiated from its competitors" (Lee 2007).
Starbucks must also keep up the appearance of quality at its stores. Like American Girl Store or Nike Town, Starbucks is an experience, and consumers are buying a kind of self-image as they drink at one: "Customers seeking the Starbucks experience know they can get an acceptable cup of coffee elsewhere," but would find it difficult to replicate the experience of smells and music, and the way their beverage seems to define who they are (Smith 2009). This is especially true abroad, where Starbucks conveys a certain kind of 'Americanness' and also where similar coffee venues are lacking. Even in Japan, where coffee is seldom consumed, people come to Starbucks for tea and food.
The slashing of high-end drinks is not simply about adjusting dollar values -- it is also about positioning. In some neighborhoods of New York City that have undergone a rapid decline in fortunes: "Starbucks is adjusting the menus that hang in stores. Expensive specialty drinks like Frappucinos used to be front and center, but new menus will highlight $2 brewed and iced coffees instead. It is teaching servers that the majority of drinks are under $3, so they can tell [this to] consumers who complain about pricing" (Miller 2009). Frappucinos have been the beverages hardest-hit in terms of sales during the recession (Adamy & Wingfield 2009). Yet this downscaling is not all-pervasive, and in some less price-sensitive areas of the country, the two-pronged Starbucks strategy of affordability and luxury is evident. In Seattle, which has been less hard-hit by the credit crisis than New York, Starbucks is going back to its roots, opening a new chain of elite Starbucks, a "series of more sophisticated-looking stores that emphasize traditional coffee drinks. & #8230;Starbucks opened a store in downtown Seattle featuring wood decor that is reminiscent of the company's first location, at Seattle's Pike Place Market. It is an environmental design that features recycled materials, including a large wood table that once was used at a local restaurant and inside a Seattle home" (Adamy & Wingfield 2009). However, prices are not even listed on the menu -- customers must ask, or they only discover the real price at the end of the transaction. This is to encourage buying based on taste, not price, as a customer may be embarrassed to ask or reject a purchase, after experiencing sticker-shock.
As consumers hold onto their wallets in many areas of the country, though, many are more concerned about food than drink, hence Starbucks recent retooling of its menu in newly price-sensitive New York. In many markets Starbucks has introduced its own formulation of the McDonald's Extra Value meal of combined drinks and breakfast sandwiches. Starbucks calls these "breakfast pairings," and allows customers to save $1.20 if they bought the items separately (Miller 2009). Starbucks is so highly sensitive to the '$3 latte' taint in light of the recession, the breakfast pairing menu was deliberately priced not just for financial reasons, but also marketing reasons. "The $3.95 price point is a backhanded way to go at the four-buck perception -- it's less than four bucks, and it's not just a drink, but food to go with it," said Terry Davenport, Starbucks's chief marketing officer" (Miller 2009). Keeping quality high is a must but a challenge: although some Starbucks customers may be sopped up by McDonald's new premium line of roasts, Starbucks must give added value in terms of quality as well as price, to justify its still slightly higher price point, premium image, and commitment to quality ingredients.
This new reformulation of Starbucks' image is seen as ineffectual by many analysts: "Very few customers -- except perhaps the very most loyal and penny-counting -- have any idea what they're paying for beverages. After all, many habitually put the change for their purchases in the tip jar, so the only time it becomes noticeable is when the cost gets to the next whole dollar. A nickel or a dime won't make a difference to anyone, I predict, other than the baristas -- whose tips could be, 'nickel and dimed,' as the new prices leave less change from each transaction. For a customer, saving five cents won't have much impact, even if you add it up for a year's worth" (Gilbert 2009). The price changes, in other words, may simply not be radical enough to make a real difference. After all Dunkin' Donuts rolled back its prices on lattes a full 15%, a far more significant difference, despite the relatively lower prices of its specialty beverages. Dunkin' Donuts, however, has a more price-sensitive consumer and Starbucks' decision may have a symbolic effect (Dunkin' Donuts rolls back prices 15%, 2009, DoobyBrain).
Others have praised the new approach: "The market has changed and consumers are focusing on cost savings. Starbucks has long offered affordable coffee beverages. Highlighting these options does not destroy the coffee experience," and regarding the value meals of food and drink: "offering bundles in largely fixed costs enterprises is a proven means to capture marginal customers and generate increased revenues and profits" (Smith 2009). Yet Starbuck's current financial situation remains shaky. At its annual meeting, its board of directors was forced to announce that shares of Starbucks have fallen about 38% since the credit crisis (Adamy & Wingfield 2009).
The two-pronged strategy of having premium and discount lines and stores must be continued but refined. Maintaining and enhancing store ambiance and product image of in-store food and drink is a vital component in ensuring customer satisfaction; given this is one thing customers cannot purchase at home. "After years of broadening its customer base and making forays into entertainment, Starbucks has made its top priority retaining its existing patrons" (Adamy & Wingfield 2009). Pleasantness of atmosphere, ability to relax, taste of coffee, and cleanliness were the attributes ranked as most important to the experience of drinking and buying coffee in the Customer Think survey (Lee 2007).
But other price-cutting strategies may be necessary if the recession deepens and unemployment escalates. Scaling back on some of its expansion efforts is a must. Starbuck's ubiquity worldwide has become something of a joke. One recently-opened Broadway play depicted one urban, young African-American male character employed at a non-chain doughnut store joke: "There are Starbucks in wheat fields!" (Lunden 2009). This may prove to be the real challenge, as scaling back will not only deprive the brand of some of its core, luxury associations but also convenience of location. Yet by not scaling back the premium and also the quality of the experience that is so subconsciously important when consumers choose to go to Starbucks is lost: "Starbucks' main problem…is that it had expanded too much and had 'commoditized' the Starbucks 'experience' through sheer ubiquity. The emphasis on expansion had taken the focus off quality. Despite the store closures, Starbucks is still ubiquitous in the United States" (Mitchell 2009). To retain customers in the recession, Starbucks must remain 'special' yet not so special it is seen as extraneous to the daily life of the coffee-conscious average Joe, when he seeks his 'cup of joe.'
Adamy, Jane & Nick Wingfield. (2009, March 17). Starbucks to present recession strategy.
The Wall Street Journal. Retrieved October 11, 2009 at http://online.wsj.com/article/SB123723335325646025.html
Andrews, Edmund L. (2008, December 8). U.S. recession began last December, economists say.
The New York Times. Retrieved October 11, 2009 at http://www.nytimes.com/2008/12/02/business/worldbusiness/02iht-02econ.18315318.html
Clout, Laura. (2008, July 19). Starbucks offers free refills. The Daily Telegraph.
Retrieved October 11, 2009 at http://www.telegraph.co.uk/news/uknews/2472814/Starbucks-offers-free-refills-to-beat-credit-crunch.html
Economic definition of a luxury good. (2009). Econ Guru. Retrieved October 11, 2009 at http://glossary.econguru.com/economic-term/luxury+good
Dunkin' Donuts rolling back prices by 15% in New York City. (2008, May 5). DoobyBrain.
Retrieved October 11, 2009 at http://www.doobybrain.com/2009/05/04/dunkin-donuts-rolling-back-latte-prices-by-15-in-new-york-city/