Starbucks' business model and competitive positioning in the U.S. market

Starbucks Case Study

In responding questions, refer case study "Starbucks U.S.: Too Much Coffee Spilling All Over?" 1. Based information provided case, view Starbucks' business model (i.e. feel sound business fundamentals)? Substantiate response referencing (4) examples, ideally case, relevant business concepts.

Starbucks in U.S.: Too much coffee spilling all over?

Starbucks' business model

Starbucks' business model is to offer higher-than-average quality coffee at a relatively high price point. Its coffee is an 'affordable luxury.' It is not the cheapest coffee on the market or the most expensive but is positioned so that middle and upper middle-class consumers feel comfortable making frequent purchases. It offers a 'home away from home' to consumers who want to relax, do some work, and get away from the stresses of the office and home in a relaxed atmosphere (Jain 2009: 3-4). This social aspect of Starbucks was why it focused upon word-of-mouth advertising and used cities as its central hubs for expansion. Urban stores were presumed to be prominent enough to generate a great deal of foot traffic.

At the time, Starbucks was offering a unique product, an Italian coffee shop experience to a nation weaned on Folgers. Having a unique product is essential to survive in a competitive marketplace. The downside of the Starbucks approach, however, was that it was positioned in the 'middle range' of the market, neither high-end nor low-end, and middle income consumers are often very willing to cut out the 'affordable luxury' of a cappuccino when needed, unlike the poor who do not buy them and the rich who are insulated from economic downturns. Starbucks hoped its ethical orientation as a company as well as its quality would generate sustained consumer loyalty, and for a time this worked.

Q2. SWOT

Strengths: A high level of brand recognition; many established stores internationally; a strong company vision and ethos

Weaknesses: Over-saturation of many markets, declining quality of product, perceived high price and poor value for price of product

Opportunities: There are many developing markets full of new, middle class consumers, particularly in the Far and Near East, eager for American food experiences and 'affordable luxury' shopping.

Threats: Other, lower-cost chains in the U.S. are offering Frappuccino knockoffs and cheaper flavored and specialty coffee drinks.

Q4. Commoditizing the Starbucks brand

Starbucks marketed itself as offering an independent neighborhood cafe experience, even though it was a chain. It super-saturated every area into which it expanded, letting stores 'cannibalize' one another in a survival of the fittest. This worked for the company when its primary marketing aim was to change how Americans viewed and consumed coffee. To retain control over the store experience, Starbucks at first only allowed its product to be bought at Starbucks stores. When it expanded abroad, it licensed out its stores rather than franchised them, as franchising could have resulted in a loss of corporate control (Jain 2009: 5). However, in its rush to expand, some of the company's initial quality orientation was lost. To support such a large number of stores, Starbucks began using some shortcuts to store and make its coffee, and consumers begin to complain and lose faith in the brand.

Q5. Corporate social responsibility (CSR)

When CSR 'works' for Starbucks, Starbucks is willing to pursue it. Because it is not a low-cost business model, Fair Trade and ethically responsible sourcing of higher-quality coffee makes sense for Starbucks, as does giving its employees more benefits. However, in establishing itself in the marketplace, there are certain aspects of the Starbucks corporate model that will always be ethically questionable, such as its ability to operate on an economy of scale and to drive out local coffee shops. The company's CSR measures do not constitute public 'appeasement' but rather are a demonstration that some forms of self-interested corporate responsibility activity can serve a business model (and generate good PR that attracts additional customers within the Starbucks target demographic) while some do not.

Q6. The economic downturn of 2007

The corporate redefinition of Starbucks in 2008 with Howard Schultz at the helm was essential. At the time, Starbucks had lost its 'true north' and was no longer producing a high-quality product. Without quality, there was little reason to patronize Starbucks, given the availability of cheaper substitute goods at McDonald's and Dunkin' Donuts. Its rigorous training of baristas had softened, in the desire to fulfill its 'more is better' expansion strategy. Schulz had to pull back the company, downsize in its domestic market, and rebuild the core components of the brand that had made it so successful in the past (Jain 2009: 7-8).

Reference

Jain, S. (2009). Starbucks in U.S.: Too much coffee spilling all over. IBS-CDC.