US Housing Bubble

Competition with McDonald's

Marketing strategy

Internal business Strategy

Service gapControversies

Schultz’s bow out

US Housing Bubble• Beginning 2007, Starbucks saw slowdown after years of growth.

• Company’s shares fell 20% in value compare to mid-2006.

•2 star states- California & Florida – generate one third of Starbucks’ revenue were among worst hit by housing slump.

• It was attributed to several factors, main was US housing slump.

• Gloomy economic environment made US consumers cut back their ‘frivolous spending’ and ‘expensive coffees’.

US Housing Bubble contd..Starbucks’ woes :

cost of opening new stores,

distribution expenses- price of oil was touching

record levels,

material costs were high like price of coffee and milk

rose sharply.

Internal business Strategy• Analysts pointed to internal factors for Starbucks’ disappointing performance.

• In many ways, the company had become a victim of its own success.

• Starbucks’ started as an up market and elegant coffee shop where yuppies went

and it added aspirational value to the brand.

• Positioned itself as an expensive & exclusive coffee brand that was not for just

anyone.

Internal business Strategy Contd..• It projected itself as “The Third Place” – outside from work and home, where one

could come and meet friends, chat, and generally unwind.• Its rapid expansion during 1990s and 2000s reduced exclusivity of the Starbucks

brand.• Company started to open kiosks at busy areas such as airports and book stores.

• A satirical newspaper, ‘The Onion’ in its mocking article—“New Starbucks Opens in Restroom of Existing Starbucks”.

Starbucks at Sydney International Airport

Marketing Strategy “A Slip between Cup and Lip.”

“Starbucks built its whole empire on the experience in the store - the aroma, the seats, the fact that customers can relax, read a newspaper or work on a laptop. There may have been brand dilution between the airport kiosks, its availability in bookstores, and the coffee beans appearing on shelves. It may have become just another coffee brand,”

-- Rick Ferguson, editorial director, colloquy, a loyalty marketing consultancy.

Marketing Strategy Contd..

• The failure in marketing strategy started with massive expansion and the crowds meant it no longer was personal.

• Many stores in close proximity to each other resulted in cannibalized sales, rather than increased sales made by attracting new customer.

• They have expanded too quickly, and have already saturated the US market.

Service gap

• Earlier in 1999, Schultz replaced the manual La Marzocco espresso machines with automatic ones.

• Old machines, were not ergonomic and caused frequent stress injuries.

• Some analysts believed that the change had been made to improve efficiency.

• It created gap between baristas and customers.

Schultz’s bow out

• Schultz’s stepping down from the post of CEO in 2000 was also seen by analysts as a mistake.

• Schultz found new interests:– Followed National health-care legislation– In 2001, co-owner of the Seattle Supersonics, basketball

team. Spent US$ 84mn for 42% stake in entity and “the principal voice of ownership.”

• “Even though I was not the CEO, I was around. I wasn’t here everyday, but I was here enough,” Schultz said.

Controversies• Labor disputes• Lattes & frappuccinos were calorie rich, reported by Center for Science , US.• Opening without planning permission• Violence against Starbucks in Canada & UK• US military viral email

“Over the past ten years, in order to achieve the growth, development, and the scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

--Schultz wrote to employees, internal company memo, February 14, 2007 (latter became public)

Competition with McDonald's

Product

Price

Place

Promotion

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