From its establishment in 1971 to 2000, the company had expanded to more than 150 countries with approximately 17000 stores. Coffee business reached its peak in 1990. In the years between 1990 and 2000, coffee was one of the fastest growing businesses in the world. According to Johnson (2017), 49% of Americans above 18 years take coffee on a daily basis. The coffee giant Howard Schultz acted as the chief executive officer from its establishment to 2000, when he stepped down for Jim Donald. Donald led the company to losses which forced Schultz back to management. In 2000, Starbuck's revenue was soaring. However, his successor did not meet such success in the market with the company losing almost 50% in operating income.
The rise of Starbucks: wake up and smell the coffee
Many factors contributed to Starbuck's exponential growth in the 1990s. First, the organization had built on quality. It sourced its raw material from Africa, Central America, and the Asian pacific areas. It sold richly brewed coffee, Italian-style espresso coffee, cold-blended drinks, and the finest tea. Besides, it sold whole-bean coffee and offered other products such as pastries, sodas, and juices. Second, the Starbucks stores got conveniently located in high-traffic, highly accessible areas such as university campuses, office buildings, and malls. The company worked on its setting, with the aim to provide a relaxed environment that people could go to instead of home or work. Also, Starbucks distributed its coffee and coffee products through airlines, hotels, and restaurants. The company worked on its customer service as well while continually taking care of their employees. Workers in the US enjoyed generous health benefits. It had trained employees known as baristas, knowledgeable in the art of coffee making. It had become a cultural icon, receiving admiration from many and contempt as well. The company had achieved $10billion in profits by 2009. The company had expanded to Europe and Asia.
The fall of Starbucks: four bucks is dumb
Some reasons contributed to the fall of Starbucks mid to the late 2000s.The exponential growth of Starbucks alerted others to this market. Between 2000 and 2005, the number of coffee stores in America had increased by 70%, totaling 21,400 with one shop serving approximately 14,000 customers. The trend was similar in other countries that Starbucks operated. The company faced competition from new market entrants and other established companies that became interested in the coffee business such as MacDonald's and Dunkin Donuts. These companies targeted the lower end market, and their key marketing strategy was lower prices for coffee. Companies servicing the upmarket also mushroomed increasing the pressure on Starbucks.
According to Business today (2017), Starbucks was growing too fast for its good. The vast expansion reduced customer intimacy by introducing automated espresso machines and pre-bagged coffee beans. The theatre is making coffee that the customers initially idolized not there anymore, and the management worried that there was commoditization of the brand, that is, a firm whose priority is profits. Further, there was trouble down the supply chain as coffee prices pummeled up significantly between 2000 and 2010 due to climate changes in coffee growing countries.
In a move to salvage the brand, Starbucks extended its market towards home consumption. The company started packaging and distributing its products in grocery stores. It also improved its product by introducing Frappuccino, a home espresso machine and a beverage drink dubbed Via (Starbucks, 2000). However, these moves did not protect Starbucks from the worldwide recession back in 2008 which led to a considerable drop in sales.
After the 2008 recession, Howard Schultz got reinstated as the CEO of Starbucks. 600 Starbucks outlets which were not making profits were closed down. There was a massive reduction of employees too, and emphasis was put more revitalizing the previous company culture. In March 2008, the company's profits had fallen by 28% compared to the previous year at the same time. In 2009, the company also laid off some 6700 employees and closed down other 300 stores (Lynn, 2008). Schultz shifted the focus back to the customer service in a letter he wrote to all employees. The company invited opinions from customers on its services, products, layout, marketing, and CSR. Customers gave their input via social media, and the brand took this opportunity to market via the social media platform. Since then, Starbucks has used social media to build its brand and mitigate any negativity arising against the company, for instance in 2009; there were rumors that the company was financing the Israel army. This got refuted quickly and corporate image restored.
The company also formed alliances with software companies to come with a mobile app that helped customers experience Starbucks in a more personalized way. This earned Starbucks a substantial competitive advantage because none of its competitors had embraced this. The apps had features such as store locators, nutrition-based information that helped customers make decisions on their diets, and a rewards program. The store also had promotional pastries to customers who came into the stores before 10am.
The employees played a big part in reviving the company in social media and by improving the way they treated the customers. In return, the company did not cut off their generous health benefits. The store recently began to experiment by branding their stores differently, for instance, they rebranded one cafe as15th avenue coffee and tea and decorated the place with beautiful wooden tables and paintings from local artists. This rebranding creates a local environment rather than the corporate image which could increase traffic as people feel more at home. These strategies have begun to work as the company has reported increased profits and revenues. The sustainability of these changes is uncertain; only the future can tell.
What I would advise Schultz to do next.
The company could embrace mobile transactions as Domino's pizza and Panera Bread (Weiner, 2017). Incorporating mobile into the restraint experience fastens transactions and is convenient for customers. Mobile transactions allow customers to order and pay before entering the store, especially at peak hours. This could be effective because a long queue of customers waiting for their coffee discourages walk-in traffic.
Starbucks has been able to maintain a competitive advantage from its competitors by offering a third-place experience, that is a comfortable environment, maintaining quality in its products, operating internationally, and by integrating technology in its business processes. It also has effective management that ensures that the company is ahead of the rest of the players in the field. Starbucks is a name that will remain in the coffee business for generations to come.
Business today. (2017). Retrieved from https://www.businesstoday.in/magazine/lbs-case-study/how-starbucks-survived-the-financial-meltdown-of-2008/story/210059.html
Dudovsiy, J. (n.d.). Starbucks Business Strategy and Competitive Advantage. Retrieved from https://research-methodology.net/starbucks-coffee-business-strategy-2/
Jacobson, L. (2017). starbucks case study. Retrieved from https://laurenmjacobson.wordpress.com/case-studies/starbucks-case-study/
Kachra, A., & Richard Ivey School of Business. (1997). Starbucks. London: Richard Ivey School of Business, University of Western Ontario.
Lynn, M. (2008, July 23). The decline of the empire of Starbucks. Retrieved from https://www.spectator.co.uk/2008/07/the-decline-of-the-empire-of-starbucks/
Starbucks, & Starbucks. (2000). The Starbucks. Karlsdorf-Neuthard: Jochen Sachse, Frank Simml.
Weiner, A. (2017). Harvard Case Studies. Retrieved from https://arweiner.wordpress.com/portfolio/harvard-case-studies/
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