The Historical Growth of Starbucks and Global Coffee Culture

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The Historical Growth of Starbucks and Global Coffee Culture

In 2007, Starbucks began to show signs of market saturation in existing markets. As Schultz developed his five-year plan, despite the successes during his second run as CEO, Starbucks still faced market saturation. In the third quarter of 2016, comparable-store sales had begun to drop. In order to achieve the goals he set in 2014, Schultz needed to find a way to increase sales again.

Top Management Team

Howard Schultz

Howard Schultz graduated from Northern Michigan University in 1975 with a bachelor’s degree in communications. After graduating, Schultz began his career working for the Xerox Corporation as a salesman. In 1979, he entered the coffee industry as General Manager for Hammarplast, a coffee equipment manufacturer. Starbucks was a client of Hammarplast and piqued Schultz’s interest. In 1982, he joined Starbucks as Director of Operations and Marketing. He bought the original founders out of the company in 1987, with the goal of bringing the Italian coffeehouse experience to America.

Schultz resigned as CEO in 2000, taking up the mantle of Chairman in the same year. He returned to the company as President and CEO in 2008 and has transformed the company, incorporating sustainability, strengthening the Starbucks community, and innovating the future of the coffeehouse brand.

Kevin Johnson • President & Chief Executive Officer

Kevin Johnson joined Starbucks in 2009, serving on the board of directors. In March of 2015, Kevin became the President and Chief Operating Officer. In this position, he focused on leading businesses globally and all core support functions of the Starbucks supply chain. When Howard Schultz transitioned to Executive Chairmen, Johnson rose to assume the role of President and Chief Executive Officer. Outside of Starbucks, Johnson graduated from New Mexico State University with a degree in business administration and started his career at IBM. After IBM, Johnson spent sixteen years working at Microsoft, followed by five years as CEO of Juniper Networks. Johnson also spent time on the National Security Telecommunications Advisory Committee. He works with nonprofits supporting causes including distributing technology to nonprofits, supporting women in business, and youth and family counseling in the Seattle area.

Rosalind Brewer • Chief Operating Officer & Group President

Rosalind ‘Roz’ Brewer works as the Chief Operating Officer and Group President at Starbucks. She leads corporate-run businesses in North America, as well as the licensed stores. She was appointed to the Board of Directors in March 2017. Before joining Starbucks, Brewer worked as CEO of Sam’s Club, making history as the first woman and the first African American to lead a division in the Walmart corporation. She also worked with the Kimberly-Clark Corporation for 22 years, starting out as a staff scientist. Brewer’s bachelor’s degree is from Spelman College, and she later attended both Wharton’s Advanced Management Program and Stanford University’s Directors’ College. In addition to Starbucks, Brewer works on the boards at Amazon, Lockheed Martin, Molson Coors Brewing Company, and Spelman College. In 2018, Brewer was ranked by Fortune as #33 on the list of the 50 Most Powerful Women in Business.

Competitors

The primary competitive category that Starbucks falls under is that of Specialty Coffee Shops. Coffee club and informational resource JavaPresse defines a specialty coffee as “an approach to coffee that is fueled by globally conscious ethics, a rich appreciation for quality and diversity, and a thriving community that spans the globe.” Companies that produce this specialty coffee will pursue a quality coffee from the farms, serve as a global community, and will prioritize relationships between company and consumer as well as company and supplier. These competitors include Dunkin’ Donuts, Caribou Coffee, Peet’s Coffee and Tea, and premium craft coffee companies.

Dunkin Donuts

Lower prices than Starbucks, with a similar menu
Originally focused on coffee, baked goods, and ice cream
Began selling premium espresso-based drinks in 2004
Directly competed with Starbucks product expansions
Starbucks released bottled coffee drinks with PepsiCo; Dunkin released bottled coffee drinks with Coca-Cola
58% of Dunkin’s franchises reported sales came from coffee sales
Starbucks still maintains a 75% market share of ready-to-drink bottled coffee drinks

Caribou Coffee

Smaller scale, directly competing with core offerings
Specialty coffee
Sustainable business practices, ‘third place’ customer experience, and high-quality drinks
As of May 2015, operated about 600 stores worldwide across 11 countries

Peet’s Coffee and Tea

Custom coffee roaster started in 1966
Traditionally focused on fresh, whole bean coffee; More recently increasing freshly brewed drinks
Recently acquired Mighty Leaf Tea, as well as craft coffee companies
Pursuing similar strategies as Starbucks and Caribou

Premium Craft Coffee Companies

Providing the highest possible coffee to the customer, despite cost and service time
Emerging movement among dedicated coffee drinkers
Also known as ‘third-wave’ coffee

Other competitors outside of the coffee shop category include McDonald’s, Panera, Keurig Green Mountain, and JAB Holding.

McDonald’s
Quick-service Restaurant AKA Fast Food – specializes in selling food products for an estimated $5 per meal
Offering healthier options, all-day breakfast, and espresso-based McCafes
Lower quality service and environment than Starbucks, focusing on price and efficiency
Winning markets based on price and blind taste-testing
Ownership is primarily franchise, with slowly declining revenues
Panera
Quick-service restaurant
Specializing in healthy, organic baked goods and meals
Aiming for a “warm, inviting, and comfortable environment” and for all-natural/organic products
About half of all restaurants are franchised
Presence of stores is growing, but with mixed financial response
Homebrewing Companies
Keurig Green Mountain, Nespresso, etc
Targeting customers who want to brew coffee drinks from home
Brewing with single-serve machines for basic coffee (Keurig) to complex espresso mixed drinks (Nespresso)
No service, but market primarily based on low cost and convenience
Has been pursued by Starbucks with single-serve pods
JAB Holding
German investment company with heavy portfolio of coffee and consumer packaged goods
Owns a variety of coffee shops, coffee brands, and quick-service competitors
Caribou Coffee, Peet’s Coffee and Tea, Einstein Noah Restaurant Group, Krispy Kreme, Keurig Green Mountain, and more
Varied product and service offerings across the many brands

SWOT Analysis

Internal Strengths

Mobile Performance – Starbucks was on the leading edge of mobile app performance, especially with its mobile order and pay system and high performing loyalty program. Starbucks has aligned itself as the coffee app

Benefits for Partners – Starbucks has continually provided benefits for its employees, who are known as partners. This includes tuition-free education from Arizona State University, stock options, and access to health care.

Sustainable & Ethical Structure – Across its the span of Starbucks’ goods and services, it has emphasized both sustainable solutions and ethical business models. This includes purchasing Fair Trade coffee, establishing a resource center for farmers (CAFE), LEED-certified stores around the world, using environmentally friendly materials, and sourcing local materials.

Social Responsibility & Activism – Howard Schultz has been very vocal about political and social issues via the Starbucks Corporation. The company has supported a variety of causes, verbally and with actions. Actions include partnering with (RED) to raise awareness and funds for HIV/AIDS, banning guns in their stores, hiring military veterans and spouses, and more.

Internal Weaknesses

High Prices – Starbucks represents a higher price point to maximize its profits, blocking the access of lower-income customers. These prices are also higher to accommodate for more materials and resources that may not be the cheapest option, given that they value sustainability and ethical products over low cost

Product Imitations – Starbucks’ physical product is not a unique product. In-store coffees have been imitated by many, and product expansions nearly directly copied.

‘Divisive’ Social Stances – With Starbucks and Schultz being vocal advocates for many social causes, it caused criticism from shareholders. Blowback included a forced store shutdowns due to a protest by gun owners and Schultz releasing a statement to tell critics to “buy shares in other companies” if they did not approve of the social actions

Lack of Insulation in Financial Crashes – During the 2008 financial crisis, Starbucks took a major blow from consumers who eliminated extraneous, non-necessary spending.

External Opportunities

Health Conscious Consumers – More health-conscious consumers have strayed away from fast-food style business like McDonald’s, but still purchase from quick-service restaurants that can provide quick, on-the-go meals. As Starbucks diversifies its food menu, expanding into more healthful products, it can attract more health-conscious consumers.

Increased Support for Eco-Friendly & Ethical Business – As issues like climate change and pollution to become more and more mainstream, customers have become more interested in supporting businesses that represent eco-friendly options. By zeroing in on this concept, Starbucks can increase their green marketing to emphasize its eco-friendly aspects, elevating themselves as the greenest coffee shop.

At-Home High-End Coffee Makers – also recession proofs – During the 2008 financial crisis, customers cut back on coffee shop purchases, but continued drinking coffee from home. Using at-home machines from a classic Mr Coffee to higher-end Nespressos, consumers did not eliminate the coffee drinking habit but rather altered it to a more budget-friendly alternative. By expanding more into the at-home coffee market, Starbucks can add an element to their business that will make them more recession-proof.

External Threats

Low-Cost Competitors – Other major restaurant chains have undercut the Starbuck base by providing similar products for a significantly lower price. McDonald’s is a primary competitor when it comes to cost.

Imitations by Competitors – Other competitors are followers in the coffee market and target brand extensions for imitation. Dunkin Donuts has previously done this with its bottled coffees released in partnership with Coca-Cola after Starbucks released its bottled coffees in partnership with PepsiCo

Threats to Coffee Crop – There are a variety of threats to the coffee crop including geopolitical limitations, monetary exchange rates, high labor production changing weather conditions, and climate change. These factors are impossible to control, and one change could affect coffee crop production for years to come.

Past Actions Taken by Firm

When Howard Schultz took the reins again at Starbucks in 2008, he had developed a “transformation agenda,” that set goals for developing the Starbucks customer experience. These goals included igniting emotional attachment, making each store a stronger part of their local neighborhood, and engaging and inspiring employees. A major element of achieving these goals included adopting new technology allowing for increased customer engagement. These new technological practices included using social media, a loyalty program, and an innovating online ordering system.

Social Media allowed both corporate partners a voice to communicate with all of their customers on social media, but individual stores as well, reaching into their communities in a familiar way, bringing Starbucks’ global marketing initiatives to a local scale. At the corporate scale, social media also provided a low-cost customer support system. When consumers reached out with problems or questions, social media allows them to get answers in just minutes, and communicate in a way that feels more direct and authentic.

Starbucks developed a custom app, making its loyalty program digital. In an era where smartphones were ubiquitous, especially among Starbucks ‘ main demographics, the consumer is more likely to be carrying a phone than a variety of membership cards at all times. The app was available on Apple and Android phones and allowed a variety of options including earning loyalty rewards, finding stores, and a new mobile order and pay option.

Mobile ordering and paying allowed customers to skip the store lines, and pick their drinks up directly from the barista. This option increases a store’s operating efficiency and allowed it to take more orders, quickly during their peak hours. Starbuck was one of the early adopters of this system, In the fourth quarter of 2016, mobile ordering represented 6% of all US transactions.

Beyond its own technology, Starbucks partnered with other tech companies, in order to bring better and unique services to its own customers. These partnerships benefited both the customers and the store’s employees and included other innovative companies like Spotify, Lyft, and Google.

Recommendations

In order to combat market saturation problems, it is my recommendation that Starbucks strengthens its digital engagement. A diversified menu will not do anything to aid a company if the customers aren’t aware of it. Today’s world is a technology-filled one, and the influence that the digital world has on customers and companies is only going to increase in time. Taking the initiative to develop and further Starbucks’ digital engagement with current and potential customers gives them an opportunity to develop their relationship with the customer, in a way that feels more unique and special to the individual. My recommendation has three main action points: online customer service, loyalty program, and social media.

My first digital engagement recommendation is to dedicate customer service resources to provide a strong contact point by social media, as well as a texting-based chat option. In order to provide an efficient, effective customer service system, Starbucks must be available in a way that makes customers comfortable to reach out regarding any and all issues they may have, no matter how big or small. The millennial demographic, defined as ages 20-35, is the largest consumer of coffee in the US. According to 2017 research, millennials prefer text-based communications over email or phone. In addition to that, 1 in 3 social media users prefer social media-based customer care to phone or email, resulting in 67% of consumers using social media networks for issue resolution. These data points emphasize the importance of providing a customer service situation that accommodates customers, making the process of contacting and issue resolution as easy as possible.

My second digital engagement recommendation is to review the current usage of the Starbucks reward system and update it to incentivize customers to use it more. In early 2019, it was announced that Starbucks’ loyalty program had topped 16.3 million people, and was growing an estimated 1 million people, per quarter. The process of getting people to join the loyalty program isn’t an issue, but keeping people active loyalty members does present a problem. The loyalty system allows customers to earn points for every drink they purchase with their loyalty app and then rewarding them at certain points milestones. In order to return loyalty members into active status, there needs to be a higher incentive for them to spend. This includes increasing the value of rewards, increasing the frequency of rewards, and providing more ways to earn points. Having in-app contests, weekly perk days, or seemingly random double or triple point earning opportunities, customers are more incentivized to remember, pay attention to, and use the Starbucks loyalty app.

My third and final digital engagement recommendation is to leverage the power of social media. According to data released by Apple, social media networks ranked among the top 20 apps of 2018. These include YouTube in the number 1 spot, Instagram in 2, Snapchat in 3, FB Messenger and Facebook ranking 4 and 5, respectively, newcomer TikTok coming in at 16, and Twitter at 20. More than ever, social media is the biggest opportunity to reach customers, with both paid and unpaid potential reaches. It is important to dive deep into the community aspect, finding ways to increase Starbucks’ transparency and increase customer trust. This can be done through something like Facebook groups to build a community around a special interest, or through IGTV, Instagram’s long-form video streaming service. Give customers a curated insight into how the world of Starbucks works, and make them feel like they are a part of not just the community around the corporation, but the community inside the corporation. Market research should be done to aid in the decision of what direction to go in, looking into the goal customer reach, and working backward to find out where they spend the most time. Whether it’s Gen Xers on Facebook, Gen Z on TikTok, or socially active individuals on Twitter, social media provides a simple, cheap, and effective system for reaching your customers in a familiar, and relaxed way.

Conclusion

Based out of the iconic Pike Place Market in Seattle, Washington, Starbucks has risen from a bean roaster to one of the largest specialty coffee shops in the world. Howard Schultz developed the concept, turning one coffee into an experience, a ‘third place’ for social interactions. As the company continues to grow, it has begun to hit the point of market saturation in the United States. This paper analyzed the historical growth of Starbucks as well as the domestic and global coffee culture to understand how the corporation has come to this point, and provide digital engagement recommendations on how to approach market saturation. The recommendations were dedicating customer service resources to provide a text-based and social media support system, review and update the Starbucks loyalty program to encourage and incentivize higher usage, and leveraging the power of social media to creatively reach specific demographic segments where they are currently spending most of their time online.

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