Starbucks' cost control and brand portfolio strategies during economic downturn

Sawbucks Strategies

With the current global economic downturn, the company's strategies will need to be sufficiently diverse so as to cover two parallel levels. On one hand, the company will need to promote a prudent approach, one that will minimize the costs and expenses so that financial situation will remain stable and help Starbucks through the current economic situation. On the other hand, the organization also needs to have an outlook towards the future, capitalizing on its numerous strength and opportunities in order to ensure that the market leader position it currently benefits from will remain in the future as well. In view of these different aspects, the following strategies can be proposed and implemented in the short and medium term:

Control costs and expenses

This strategy needs to be concurred with the following three, because the organization can indeed deliver both a cost reduction and a parallel development of its business. This strategy will also help partially solve the problem brought about by the high overall unit costs relative to key competency. The high unit cost shows that there may be potential problems with the cost management in the company that will need to be solved with a sustained strategy of cost reduction.

The cost and expense control should be targeted both towards those areas of the business that are no longer profitable and towards areas that are not necessarily part of the core business. In terms of the first aspect presented, an analysis and evaluation will need to be made in order to determine which brands and locations are not delivering from a market share and financial point-of-view. As mentioned, the analysis will need to comprise both brands and stores. This will mean an overall evaluation of the brand portfolio -- in some cases, some of the products will be performing well in some countries or regions, but not so well in some of the others. In these cases, the evaluation will need to consider the overall effect on the company's profitability.

At the same time, some of the locations that the company has been developing may be performing at lower levels. In these cases, it is necessary to have an evaluation both of their present and future potential in order to determine whether it is still a good idea to retain these stores or whether they are not likely to have a significant turnaround in the next period of time.

Obviously, with these type of reductions in terms of products and stores will also come a reduction in the personnel allocated for these segments. While this downsizing is probably decreasing morale, on the other hand, it is freeing significant financial resources that will be used to support the profitable brands and products, develop new ones and implement the strategies that deal with the international expansion of the company.

2. Develop the brand portfolio

The fact that the company already has strong and recognized brands in its portfolio allows it to experiment and develop new brands based both on traditional coffee, as well as some of the more targeted brands. An example of the latter category could be healthy and organic products, which greatly appeal today to the health-conscious individuals.

The development of the brand portfolio is also based on the fact that, as the SWOT analysis has shown, the company benefits both from a strong global brand image and from the reputation it has developed of quality products. With this type of reputation, new products introduced to the market can benefit from a 6 to 9 months period of grace during which customers are willing to try them. Because of this, the actual cost of developing and launching new products is likely to be lower than in other conditions.

At the same time, the development of the brand and product portfolio of the organization should also capitalize on the international exposure that the company benefits from. Launching any type of product in a country where Starbucks is relatively new will most likely decrease the risks associated with such an act, including financial and operational risks. In developing countries and especially in the countries that have experienced an economic development in the past decades (countries of Eastern and Central Europe or China, for example), despite the overall lower income per capita, the openness to try out new products that the company might bring is significantly high and important.

3. Pursue an aggressive marketing campaign

Certainly, the company is well-known across the world, as has been pointed out in the previous paragraphs of the paper, but this is something that needs to be supported with constant investments in the company's image and brands. At the same time, such a strategy would also allow the company to continue to be considered edgy and up-to-date with the younger generation, as well as its traditional consumers.

The marketing campaigns need to be contemporary and associated with some of the current events. For example, given the different perspectives of coffee and some of the meanings that can be associated with such a drink, the company could decide to sponsor some of the cultural events of the year, in a similar manner that Pepsi has sponsored some of the pop concerts throughout the 1990s and after 2000, helping to calibrate the brand for the newer generation. Starbucks could thus be associated with new dimensions of its brand, such as cultural diversity, openness to culture and cultural events etc.

As any consistent marketing campaign, it would also have an important and fundamental informational component. The marketing strategy would aim to bring additional information to potential and current customers both about the existing products and some of the innovations that the company is working on, as well as on the new products that would be launched.

Decision Criteria

The strategies described in the previous paragraphs are based on the SWOT analysis and on the identification of the company's most important strengths, weaknesses, opportunities and threats. The first strategy took into consideration two elements identified with the SWOT analysis. First of all, the company has shown alarmingly high overall unit costs relative to key competencies, which triggered a cost reduction strategy.

On the other hand, the threats in the industry come not only from the competitors (although from this perspective as well a cost reduction strategy is most adequate), but also from the current economic condition. The economic downturn is affecting all companies through a decrease in demand for most products. In order to ensure a stable financial approach and development, a cost reduction strategy was suggested.

All other three strategies take into consideration the positive aspects of the company, along with the opportunities that the global market still offers. Starting with the latter, it seems obvious that the organization should continue its international expansion, because it will increase its market share, as well as its long-term revenues. At the same time, international expansion will help the company diversify its customers and tap into the new markets of Asia and Central and Eastern Europe.

The international expansion should be pursued through the internal instruments of the company alone rather than through entering alliances or joint ventures. The main reason for this is that such alliances might dilute the brand rather than bring palpable positive elements to the company's development.

However, expansion should also be done internally through the diversification of the portfolio of brands and products. This will imply investing in research and development, but also an important marketing campaign, aimed both at maintaining the global brand and in informing the potential and current customers about new developments, new products, as well as on existing ones and current trends.

The costs involved with these three strategies will most likely be quite significant. However, this is a sustainable effort to capitalize on the company's strong global brand image and on the fact that the company has always been associated with quality products, customer service and unique atmosphere. In the same manner, when the economic crisis passes and the global economy starts to rebound again, the company will find itself in a privileged position as compared to its competitors.

Conclusions

Starbucks is operating in the premium coffee market, offering premium products at premium prices. Lately, the company has also diversified into other industries, such as the music industry, but it remains, primarily, a company operating in the retail coffee industry. Its history and quality of products have ensured a leadership position on market for the last decades.

However, currently, there are several threats on the market, coming both from the competitors and the economic downturn. The latter seems to have contracted the premium coffee market, mainly because individuals are no longer as willing to pay as much as $4 for a coffee product. They have turned to cheaper product, to the regular coffee or to simply brewing it in their own homes before going to work.

In terms of competitors, several companies have developed similar business formulas based on premium coffee and a pleasant coffee shop atmosphere. Among these, one can enumerate The Coffee Shop. It is difficult to differentiate one's products from similar products that another company develops, which is one of the threats for Starbucks. As a leader in the market, there will always be a temptation from some existing Starbucks customers to go and try products from other companies.

As the economic downturn passes and the global economy resumes its growth, one is expected to see the rebound of the coffee retail industry as well and, possibly, the addition of new competitors to the market.

Recommendations

As mentioned, the company's focus should be both in the present and in the future. In the present, the company is affected, as all other economic actors, by the current economic crisis. In order to counter the effects that this crisis may have, the company should have a prudent, financially sustainable approach that will include a cost reduction strategy aimed at cutting out those products that are no longer profitable and giving up on stores in some regions that, again, are not turning the right figures.

The company also has to focus on its future and on the future development of organization. For this, expanding internationally seems like the best recommendation. There are several developing markets around the world, where the potential customers have increasing incomes and where Starbucks could benefit from the idea of new and innovation that it can bring about in these markets.

A final recommendation is that the future and present approaches should be well balanced in terms of costs and expenses. On one hand, the company needs to invest in its future development, but, on the other, it also needs to watch out for its costs, especially since the SWOT analysis pointed out to this as being one of the company's weaknesses. Balancing development with the cost reduction strategy will probably be the most important and difficult challenge that Starbucks management will face.