Starbucks Marketing Mix Analysis and Competitive Benchmarking

Industry Overview and Competitors

The coffee shop industry in the United States is percolating with opportunities, according to Mintel Research (2006). Starbucks is the dominant leader in this industry, followed by regional competitors Diedrich Coffee and the many individually owned and operated coffee shops throughout metro areas and the nation. This analysis profiles Starbucks, using regional competitors Diedrich Coffee and Coffee Bean and Tea Leaf Company as the two competitors included in the comparative analysis and competitive benchmarking.

The core products of each of these companies are beverages, bakery items, and increasingly light lunch items including sandwiches and salads. Starbucks has successfully moved into this arena by offering light lunches and a wider variety of items than its two competitors. Starbucks has test marketed vitamin-enriched caffeinated drinks in the U.S. and regularly test markets drinks specific to regions of the world. In Sydney, Australia, for example, the company completed a test market for a Banana Crème Frappuccino that performed very well during the summer of its introduction in 2006. Baird (2006) sees high growth opportunities throughout China for Starbucks, as well as continued growth domestically.

Segmentation Strategies

Coffee Bean and Tea Leaf Company, Diedrich Coffee, and Starbucks each rely primarily on demographic segmentation in defining their target markets of prospects and customers. This is the easiest and most cost-effective approach for all three companies, as the U.S. Census provides a wealth of demographic data by census tract. Using Geographic Information Systems (GIS) applications, it is possible to analyze demographic data and identify the census tracts that have characteristics or attributes associated with higher coffee consumption. Research has shown how Starbucks potentially uses GIS software to map income by store location in the Chicago area — a region that is generating more GIS-based analysis of Starbucks segmentation than any other area in the country.

Income is by far the easiest demographic variable to use in defining segments, as age, occupation, and profession tend to correlate highly with income. Starbucks recognizes, however, that to distance itself from competitors it also needs to focus on the self-concept and behavior of customers — an approach known as psychographic segmentation.

While psychographic segmentation is primarily an attitudinal variable, it can be predicted by analyzing a series of demographic and lifestyle spending variables. Dr. Peter Haas, Technical Information Manager for the Center for Neighborhood Technology in Chicago, built statistical models to measure gentrification in neighborhoods. Gentrification refers to the rejuvenation of older and more run-down parts of cities, making them more attractive to wealthier and upwardly mobile couples and families. Dr. Haas conducted research on the gentrification of inner-city Chicago neighborhoods and the corresponding rise in Starbucks locations, illustrating the relationship between demographic shifts and the company's expansion strategy.

Starbucks' segmentation is also globally focused. Segmenting globally has opened an entirely new set of revenue opportunities for the company, which expected by 2009 to have the majority of its revenue generated outside the United States — a projection investment analysts tracking Starbucks supported. The backlash against globalization from Western corporations is a major issue for Starbucks' global growth plans. The company's approach of highly customizing its stores, hiring only local workers, providing health insurance and profit sharing, and respecting local customs has helped make its globalization strategy successful.

There is substantial work underway inside Starbucks to bring GIS expertise in-house to support segmentation planning, overlaying demographic, psychographic, and attitudinal segmentation criteria against potential market areas.