How firms managed the 2008 financial collapse and subsequent recession

S&P 500 company analysis and recommendations: How Starbucks has coped with the 2008 recession

Firm analysis

Even firms not directly involved in the real estate, insurance, and credit markets were impacted by the 2008 credit crisis and subsequent market meltdown. The hospitality industry was especially concerned, as data indicated that more and more people were eating at home: an industry survey revealed that 82% of representatives from the food, beverage, and hospitality industry said that they believed the 2008 crisis would have a "direct impact" in terms of people's immediate buying habits (Survey, 2008, 21food.com). They also expressed more obvious concerns with liquidity of daily working capital and their ability to improve their enterprise's technology through the use of new capital.

Starbucks, a Standard and Poor's (S&P) Index 500 company, sells a good and a service often viewed as a luxury item, namely that of purveying and making of premium coffee, breakfast pastry and some savory light foods. Although people are addicted to coffee, no one needs to buy coffee at a coffee shop. Moreover, one of the first things people were advised to give up in the wake of the credit crisis was their morning latte. Popular financial guru Suze Orman even created a buzzword: "She's particularly into what is commonly termed the 'latte factor': cutting down on unnecessary expenses and investing them are real keys to moving forward with a strong personal finance plan" (Hamm 2007). Latte calculators abounded on the Internet, demonstrating in real financial terms how much people could save if they gave up pricey coffee.

Starbuck's immediate response to the credit crisis as a company was strong, in terms of its marketing. In the United Kingdom and Ireland, for example, Starbucks even offered free cups of filter coffee to customers," acknowledging that "premium coffee experience has, over time, been an affordable luxury. And at this time, it isn't for some people" (Clout 2008). But as the recession spiraled, Starbucks seemed to enter into an "existential crisis, floundering…as its CEO Howard Schultz tried a mixed array of approaches, including "closings, layoffs, promotions featuring lower priced products, and the introduction of instant coffee" (Smith 2009). This last addition was seen as particularly damaging in terms of diluting, no pun intended, the strength of the Starbucks brand. "I have an expectation of what it will be like, and I think it will be harmful for the brand," said one analyst. "They're really looking to generate revenue in the short-term to meet the expectations of investors" (Kimes 2009).

Yet concerns about people's willingness to shell out for Starbucks remained, forestalling a purely premium-brand driven strategy. While the frequent reference to the 'latte factor' in the media regarding consumer cutbacks does not single out Starbucks by name, there is little question that most people are thinking of Starbucks when the phrase is mentioned. Plus, even before the credit crisis, Starbuck's prices were the subject of much derision. One survey by a popular marketing research firm Customer Think elicited these responses in 2007, when the recession (according to economists) had already begun but the 'panic alarm' had yet to be pushed by the media and the Federal Reserve (Andrews 2008): "Just overpriced coffee." "I hate paying more than $3 for coffee." "I have had far better coffee at half the price -- pricing is ridiculous." "With so many other options available to me, it is not always worth the added expense." "Raising of prices would cause me to leave Starbucks. They are already very high." "If prices go any higher, I will have to reduce my visits." "If prices go up again, I'm out" (Lee 2007). Of 3,865 valid responses from Starbucks patrons across the globe in the survey, price was the leading factor respondents rated lowest regarding Starbucks (Lee 2007).

Starbucks long-term response to the threat of the 'latte factor' -- the risk people will give up patronizing a company with an expensive image that sells a frivolous product -- has been to reformulate its pricing polities. Its stock prices bumped slightly upward as it announced in August of 2009 that it was raising its prices on fancier beverages with more complex ingredients, like Frappucinos, but cutting the costs for simpler and more basic fare like coffee, so people could still afford Starbucks during the recession. (Starbucks raises prices, 2009, the Huffington Post). This seems like a savvy approach, given that it ensures the 'latte habit' of going to Starbucks remains a part of people's morning routine and yet establishes that Starbucks was an ethical company that is responsive to the current economic environment and its customer's economic pain. Starbucks remains much beloved, despite Starbucks 'hate' in some pockets of non-chain coffee shop aficionados: in How Starbucks Saved My Life, one 2007 'downsized' advertising executive praised the company in print for giving him a job, a routine, but most importantly health insurance, even while he labored as an entry level barista

"The issue at hand ... is the cost of losing your core customer," Howard Schultz, the company's chief executive, said in an interview, "it's very hard to get them back" (Adamy & Wingfield 2008). The new pricing policy further confirms Starbucks' image as an affordable luxury -- Starbucks has always denied its elite image, stressing that the amount of money people spend upon even its high-end caramel macchiatos is small in comparison to extraneous shoes and gadgetry. Some argue that "a doppio macchiato half-caf skim foam" at a store for $4 is cheap, as they consider it a form of relaxation and psychotherapy (Smith 2009). The prices of basic beverages like plain coffee and lattes under the new policy would be slashed 5 to 15 cents while other complicated, high-end beverages would increase 10 and 15 cents and as much as 30 cents (Starbucks raises prices, 2009, the Huffington Post).

Of course, the question then arises -- why not simply cut prices across the board? However, the response to this is twofold: firstly some of Starbucks' patrons may be very loyal customers but are very financially encumbered at present, such as college students graduating with high student loans, no prospects of an immediate job, who developed a habit of drinking Starbucks coffee that began in high school when they were still subsidized by mom and dad. Many job hunters bring their laptops to the local Starbucks to sip coffee and search the Internet, making use of free Wi-Fi. Slashing regular coffee prices keeps these individuals loyal, and helps secure their patronage even after the recession ends and they get jobs.

Starbucks executives admit that they are struggling to balance between value and prestige. Still, "if we are a premium brand, it doesn't mean we can't provide value," insists Howard Schultz, Starbuck's chief executive. Starbucks customers range from "BMW-driving professionals who often come in twice a day" because they are too busy to make coffee due to job pressures "to budget-conscious people who used to come in once a month and now come even less…that last group is huge, so to get one more visit out of these guys a month is huge" (Miller 2009). Starbucks thus has a difficult task, to straddle to schizophrenic goals of being an affordable luxury and being a premium brand, in contrast to Dunkin' Donuts and McDonald's.

Part II: Different directions

"What is Starbucks? Is it a momentary retreat from the stress of work and life? Is it a fast-service coffee chain? Is it a snack shop? Is it a luxury coffee manufacturer? What is Starbucks' reason for existence?" (Smith 2009). Starbucks faces a number of potential options. On one hand, it could try to keep its luxury, yet ethically-conscious image as a purveyor of 'special coffees,' the creator of unique and intimate environments for patrons to enjoy while drinking European-style beverages, or, in a second and contrary approach, it could try to create a more budget-friendly image. Its third approach is that it could emphasize the two-pronged marketing strategy of being price-conscious and luxurious at the same time. This is the policy it is currently embracing, although this runs counter to most conventional wisdom from marketing gurus about confusing the consumer. Regardless, this current policy seems wise, given that there will always be cheaper options than Starbucks, on the road (in the form of Wawa or McDonald's) or having coffee at home, even making it at the office. But a solely premium image discounts some of Starbucks' core consumers, particularly the young. And there are even more expensive coffees at the very high end of the market.

Starbucks is pursuing a holistically 'schizophrenic' strategy of trying to be both an affordable luxury and 'above and beyond' the common Dunkin' and McDonald's experience. It is aggressive in its deployment of both techniques: even for customers who are seriously committed to buying coffee 'out' less, "as part of a broader effort to appeal to the value-conscious, Starbucks is also offering discount cards and training its employees to suggest bags of whole beans and instant coffee to people who are cutting back on $4 lattes" (Miller 2009). 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).

Conclusion

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.'

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