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Case The Coffee Shop Market Starbucks Marketing Essay

Starbucks Corporation is an international coffeehouse chain, founded in 1971 in Seattle, Washington. Starbucks serves a variety of beverages including brewed coffee, tea, hot chocolate, espresso and a selection of bottled drinks. Starbucks also sells whole bean coffee and a variety of ready-to-eat snacks. The first Starbucks location to open outside of North America was in Tokyo in 1996; and from then on Starbucks became an international brand, expanding both nationally and globally.

This report will attempt to examine the situation of Starbucks in Japan. It will bring out the marketing strategy to be adopted for a rise in profitability of Starbucks Japan in the next two years. In addition, it will attempt to explain the use of marketing mix to aid the chosen strategy.

SWOT ANALYSIS:

1.1 STRENGTHS:

1.1.1 Strong brand image:

Starbucks brand name, quality customer service and store ambience are its key strengths. It has maintained its international operations to ensure consumer recognition. Starbucks is renowned for its high quality products and has maintained a consistently positive consumer experience that has helped Starbucks build a strong brand image. Starbucks spends less than 1% of revenue on advertising and promotion each year which indicates they rely on an established company image (P. Ghauri, International marketing case study: Starbucks-Going Global Fast). Starbuck’s key competitor in Japan-Doutor coffee, had taken advantage of Starbuck’s brand image and copied its logo, while replicating the experience rendered to customers in its retail outlets. (Ono, 2003). This shows that the Starbucks image is a strength worth mimicking. With a well-established brand image in America, it was sure to expect recognition in the Japanese market, because the consumers there have a fondness for everything western. (http://azjatycka.wordpress.com/2009/11/05/international-marketing-strategy-of-starbucks-in-japan-success-or-a-failure/)

1.1.2 Commitment to community:

Starbucks contributes a considerable amount of its resources to corporate social responsibility programs (Kotabe & Helsen, 2004). According to Butler (2006)-“CSR programs influence 70% of all consumer purchasing decisions, with many investors and employees also being swayed in their choice of companies”. As a result, Starbucks involvement in the CSR programs helps its competitiveness in the business world.

1.1.3 Widespread Presence in International Markets:

Starbucks has ventured into foreign markets with astonishing pace opening its outlets in 40 countries with 2068 stores worldwide. This widespread expansion has allowed its presence to be felt across the globe.

1.1.4 Retail outlets present at convenient and accessible locations:

Starbucks has opened a number of coffee shops at convenient locations like shopping malls, libraries, university campuses, office buildings etc. They are typically located in high traffic, high visibility locations.(Starbucks annual report, 2008)

1.1.5 Presence of a variety of food items & Beverages in addition to Coffee:

Starbucks stores offer a choice of regular and decaffeinated coffee beverages, a broad selection of Italian-style espresso beverages, cold blended beverages, iced shaken refreshment beverages and a selection of premium teas. Starbucks stores also offer a variety of fresh food items, including healthier choice selections focussing on high-quality ingredients, nutritional value and great flavour.

1.1.6 Well Developed Corporate Strategy and Good Marketing skills.

Weaknesses:

1.2.1 Lack of internal focus:

Starbucks focuses too much on over-expansion, at times tending to ignore the problems arising within--consistent employer dissatisfaction.

The number of competitors:

There are an ever increasing number of competitors that either mimic the Starbucks concept or try to get on par with its growth by providing the same line of products at a lesser price.

Examples: Dotour Coffee, Tully’s Japan, Mac Donalds.

Self- cannibalisation:

The strategy of over expansion has resulted in stores opened very close to each other, thus eating into the other’s sales.

Product Pricing:

Starbucks perceives itself as a premium gourmet coffee brand and bases its price on the quality of its beverages and in-store customer experience. Unfortunately, many competitors while offering a similar type of environment and lesser priced beverages are eating into Starbucks’ market share.

1.3 Opportunities:

Flexible Tastes:

Japanese consumers are influenced by western brands and have a fondness for them. They are open to new products and tastes and hence Japan is a viable market to test new products. New concepts can be concocted and brought out in the market at a faster pace, when compared to US or Europe. Thus those products that turn out to be popular and gain acceptance in the Japanese market can be introduced in the US market with positive expectations. For example, the ‘Green Tea Frappuccino’ which was first introduced in Japan turned out to be a sensation and was thus launched in the United States too. (http://www.qsrmagazine.com/articles/news/story.phtml?id=4589). Thus, the flexible tastes of Japanese consumers give Starbucks an opportunity to develop new products and gain profits.

Instant products:

Starbucks recently launched its first premium soluble coffee stick product in Japan. About 60% of the total coffee sold in Japan is soluble. Hence Starbucks can capitalise on this aspect of Japan’s coffee market to enhance its sales through a variety of soluble ready to make coffee products. (http://news.starbucks.com/article_display.cfm?article_id=416)

Diversifying its beverages:

Starbucks is looking to sell regional wine and beer at its outlets in Seattle. It could introduce this concept in some of the Japanese stores as consuming western alcoholic brands is a trend among the Japanese clientele. (http://www.thestreet.com/story/10891284/starbucks-tests-alcohol-cheese-offerings.html .

Growth opportunities:

Though the overall market in Japan is nearing saturation, and Starbuck’s overexpansion in big cities has given it a lesser change at a steep growth, it could still expand to the less-saturated regions allowing it to exceed its growth potential.

1.4 Threats:

1.4.1 Cannibalisation:

Starbuck’s extravagant growth and over expansion involves a risk of customer fatigue. Starbucks has introduced an array of new products and an increased product innovation lowers the sale of current products. Also with many stores opened close to one other, there is a risk of some stores facing loss. Thus, cannibalisation is a major threat as the coffee chain is reaching saturation in most of the big cities.

1.4.2 Dependency on raw materials

The fluctuations in coffee and dairy prices are a potential threat for Starbucks. Starbucks is reliant on dairy and a rise in prices of the raw material could affect its profit margins. (Wikinvest, 2008).

1.4.3 Cultural differences:

In USA, about 80% of Starbucks sales are takeout orders. In Japan 80% of consumers prefer to drink in the store outlets. Thus consumer’s preference to use the store atmosphere might turn out to be a threat to Starbuck’s plans of building a number of drive through outlets in Japan. (Chozick,2006).

1.4.4 Shrinking Disposable incomes.

1.4.5 Competition:

- Immediate competition from fast-food restaurants catching on the specialty coffee wave and developing products that competes with Starbucks.

- Tim Hortons -Nestle

- Dunkin Donuts

- McDonalds

PESTLE ANALYSIS:

Political Factors:

Despite being far apart geographically, Japan & USA have similar political structures. The Emperor is the head of the state, but the real power resides in the parliament and is mainly held by the Prime Minister.( House of Councillors, 2008). In USA, different states have the power to regulate businesses; whereas in Japan, regulations are laid down by the Diet and enforced throughout the country. This indicates that there are less complicated and less conflicting regulations to be concerned about when International businesses seek entry into the Japanese market. ( House of councillors, The constitution of Japan, as promulgated on November 3, 1946). (http://www.sangiin.go.jp/eng/law/index.htm)

Economic Factors:

Measured on a purchasing power parity basis, Japan is the 3rd largest economy in the world. But going by the official exchange rates, Japan would emerge as the 2nd largest economy, behind USA. Japan had a spectacular economical growth in the 1980s, however, growth slowed down considerably in the 1990s. Japan entered into recession in 2008, with 2009 marking a return to near 0% interest rates( CIA, as accessed on 24th oct,2010) with its GDP rising to 5.3%, when compared to 1.2% in 2008.

Socio-cultural:

Individuals from varied backgrounds are exposed to different traditions, rituals, customs and religions. All these factors provide human beings with various learning environments, which cause significant variations in standards, behaviour, attitudes and beliefs (David,1998). A comparison of the subsidiary & parent countries is important for the success of a business seeking to expand in the foreign market, as this would lead to a better understanding of the local market. The Japanese as opposed to the Americans act more collectively and tend to be loyal to their respective groups. The Japanese often sacrifice their personal goals and ambitions to promote group interests.

A low context society in USA shows that Americans are more direct in their communications and their messages are explicit. Whereas the Japanese use indirect ways to communicate and their voice intonation, timing and expressions play important roles in conveying information. (David, 1998)

Technological:

Technological factors greatly influence business strategies as they provide an opportunity to exploit innovations and inventions. Japan is one of the most technologically advanced countries in the world and ranks 18th on the list.(http://gpmgroup.info/2007/04/27/the-most-technologically-advanced-countries). Thus it is more convenient to introduce technologically driven customer service into the Japanese market. There is scope for incorporating the American system of internet ordering in to Japan with the intension of faster service. Starbucks is continuously searching for ways to better a customers’ experience. With the introduction of the Starbucks Card for example, the Company has created the opportunity to improve customer service, shorten lines and make a customer’s visit at Starbucks quicker and more convenient. Also, most stores are equipped with WI-FI.

Legal:

There are no significant legal factors to consider while entering the Japanese market. Though, Starbucks has chosen to enter through a joint venture with SAZABY Inc., a Japanese retailer and restaurateur, because of the peculiarities of the local market. By doing so, Starbucks has given itself a better chance of exploiting the market as SAZABY would have a better understanding of how the Japanese consumers viewed food and coffee.(http://www.docshare.com/doc/155323/Starbucks-global-expansion-strategy2)

Porter’s Five Forces

Competition

Tully’s Coffee, Gloria Jean’s, Caribou Coffee etc.

Competitors selling similar products, incl. specialty coffees & high quality food.

Competition nowhere in terms of volume of operations.

Threat of new entrants

Controlled access of distribution channels

Innovation & product differentiation

Bargaining power of buyers

More options due to no. of competitors.

Large variety of products.

Bargaining power of suppliers

Overcrowding of market.

Rise in prices of coffee beans.

Choose suppliers based on quality, social, environmental & economic issues

Threat from substitutes

Tea

Soft drinks

Juices

Marketing Strategy to Enhance Profitability in the next 2 years:

Segmentation:

Segmentation is dividing the consumer market into distinct groups based on each individual group’s wants, needs, preferences and behaviour.

Starbucks is a company that embraces diversity, not limiting themselves to one specific demographic, behavioral, or geographic segment. Individuals appreciate how, regardless of any little difference, at Starbucks they are always treated as equals. (starbucks.com)

Taking the demographic factor as the desired basis for segmentation:

--Gender:

Sixty percent of Starbuck’s Japan market are woman customers in their 20s and 30s. (http://community.seattletimes.nwsource.com/archive/?date=20020819&slug=starbucks19). Hence Starbucks should further penetrate the market by retaining the woman customer base and increasing its appeal amongst them by providing incentives in terms of products, ambience and experience.

--Age:

Most of Starbuck’s customers are educated, working personnel who can afford the high prices of the products offered. Starbucks has a limited consumer base with females in the age group of 25-39 forming their major share of consumers.(http://www.euromonitor.com/Japan_a_nation_of_coffee_lovers). It should reach out to the younger and much older groups by introducing a line of nutritional beverages.

--Education & Income:

Starbucks’ genius was to redefine the meaning of affordability regarding coffee. Target consumers were identified with regards to their living environment, level of income and education. They were convinced to pay premium prices for the experience, service and quality they were getting. The company was able to capture the changing consumer behaviour since the 1980’s: more out-of-home entertainment, more self- gratification from consumers towards a good movie, a good glass of wine and a good cup of coffee. By raising the perceived value of the product for the consumer, Starbucks was able to raise its prices while keeping the product affordable. Creating brand loyalty through quality and innovation was also an important factor in decreasing the price elasticity of this commodity product. Thus, Starbucks should maintain this strategy and look less towards price reduction and more towards quality enhancement, a characteristic that has helped it build its brand.

Targeting:

Starbucks should practice differentiated targeting as it should try and capture a more wider section of the society. As it has identified the female gender to be its major consumers, Starbucks should retain this market and further expand it by targeting the woman clientele and coming out with more products that appeal to them.

Also in order that it recieves a larger share of the male consumers, it should try and blend with the Japanese culture and accept their preference for smoking in some stores.

Starbucks has already established its image amongst the educated and high income society. But, it should go one step further by seperately targeting the younger generation who are bound to follow in the footsteps of their peers and elders. In order that it recieves more number of teenagers, it should try and develop an atmosphere within its stores in terms of products and store experience that would appeal to the teens.

Product Positioning:

Starbucks is listening to the needs of the educated by devoting its business and research to developing ways to cater to this group’s wants and needs. In addition to further building on its product quality and in-store customer experience, Starbucks should make itself more accessible to a wide variety of people by opening several quick stop services that would cater to the new generation of coffee drinkers because college-age students and the general population are always in a rush with little time to spare. The quick stop services and kiosks will make the process of buying coffee easier by eliminating long lines and creating alternative ways to buy coffee faster and will avoid the prospect of impatient customers. Starbucks should position itself as a brand not reserved only for the premium, high income society, but as a quality store that reflects on the needs and wants of all. As most Japanese are health conscious, it should try and build an image which does not discourage the teens and older people from visiting its stores. By bringing out more food items that match the Japanese palate, it should position its brand image as “An American taste induced with Japanese flavors”.

Using the Marketing Mix to assist the chosen growth strategy:

1. Product:

--Diversify the product line:

The tradition of tea drinking in Japan has been prevalent from the early beginning. There are many varieties of tea, and some of them, especially Green tea can be bought anywhere. Tea has proved to be a popular drink for most Japanese because of its wide variety of tastes. Thus, by introducing a few select varieties of tea in its store outlets, it would touch at the roots of the consumers. It would directly be percieved as a renowned American brand that cares to accomodate the Japanese tastes. (http://azjatycka.wordpress.com/2009/11/05/international-marketing-strategy-of-starbucks-in-japan-success-or-a-failure/).

The presence of soybean in Japanese dishes is indispensable. Its not only widely accepted as the staple ingredient in Japanese dishes,be it rice, curd or soup, but also has great nutritional value. It finds its place in Japanese breakfast, lunch and dinner. It contains a chemical, soy isoflavones, which when accumulated in the body, functions like the female sex hormone(estrogen), which in turn promotes bone formation. Hence it is considered useful for post-menopausal women whose estrogen levels are low. Also ‘soy isoflavones’ has been found to reduce the risk of breast cancer by 40%.( http://www.mindfully.org/GE/2003/Kikkoman-Non-GM-Soy22jun03.htm). Since Starbucks has found its presence to be more popular among woman, it will only increase its appeal to them by introducing a variety of beverages and food items that contain soybean in its diet. It should also bring about innovations in its product line, making them more nutritious to consume, thus forwarding its appeal to the health conscious society.

Introduce a line of health drinks, fruit juices that would attract teenagers who percieve Starbucks as a high end store selling speciality coffee. The presence of flavored non-caffeine drinks would help capture the teen market.

2. Place:

--Diversify its stores:

Many critics had expected Starbucks to fail because of its strict no-smoking policy within its stores. The general Japanese customer prefers to smoke with food and drinks. But this strategy attracted many young health concious women who then accounted for Starbuck’s majority sales.(http://community.seattletimes.nwsource.com/archive/?date=20020819&slug=starbucks19). Although starbucks has so far managed to sustain its growth, competitors with a tolerance to smoking are providing good reason for its drop in sales in recent years. Hence,in order to attract a more varied clientele and improve profitability, Starbucks should make an exception in the case of Japan and introduce some stores that accept smoking; adapt to its culture. They could still stick to their rationality behind ‘no-smoking’ environment to preserve the aromas & flavors of the coffee beans(Starbucks website) by not allowing in-store smoking. Certain stores with a wider space facility could bring in open-air seating arrangements. This way, those who wish to smoke can take a seat outside and enjoy a starbuck coffee. Another way would be to introduce balconies in some stores that have 2 or 3 storeys.

--Build on its in-store experience:

Starbucks should build more in its store atmosphere rather focus on building drive-through outlets. In Japan 80% of the coffee consumers like to drink inside the store, while relishing the ambience.(chozick,2006). Although starbucks has an untarnished brand image, it should further build on its superior quality of store atmosphere in order to remain competitive and keep up sales. The hygiene of the stores, book readings, baby changing stations, sleek furniture and posh interiors are the key to its ability to provide a quality customer experience. Given that the majority of its customers are women and the Japanese love for the English language, it should transform certain sections of the store to accomodate a reading section that would comprise more of women oriented magazines and books that teach english.

--Choose a larger number of distribution units:

Starbucks should improvise on its plan to introduce its instant coffee-‘starbucks VIA’ across convenience stores in Japan. It had announced the launch of its instant products in 11000 convenience and grocery stores in september. (http://www.finchannel.com/Main_News/Business/70201_Starbucks_VIA_Ready_Brew_Hits_Grocery_Aisles_Around_the_World/). By doing so, it has exposed its brand to the world’s largest instant coffee market. (http://www.reuters.com/article/idUSTRE63C1NG20100413). Now the availabity of starbuck’s instant products is not limited only to its retail outlets. However, the presence of its competitors( Nestle and Kraft) in the instant coffee segment is more widespread and well established. Thus, it should try to capitalise on Japan’s $5 billion instant coffee market by providing its instant products to more number of distribution units and seal its presence.

3. Price:

--Prices of instant products:

Starbucks should consider reducing the price of its instant products to enable higher sales. Starbucks is to sell a box of 3 VIA instant soluble sticks for 300 yen, which amounts to 100 yen per cup, and a box of 12 sticks for 1000 yen. When compared, its competitor Nescafe has a rival offering of 15 sticks for 300 yen. (http://www.reuters.com/article/idUSTRE63C1NG20100413?pageNumber=2). Thus, there exists a wide price gap for its instant products and since Starbucks VIA will be occupying the same shelf space as Nescafe, Kraft etc., it would find it difficult to gain acceptance in the market. A customer would go up to the racks and find the rival offerings more viable. Hence, Starbucks should look to cut down its prices on instant products. It can afford to do so without the risk of diluting the brand image built on high end coffee, as the instant coffee would come without the experience of physically being in the store.

--Prices of in-store products:

Starbuck’s prices of in-store products are higher when compared to its competitors. It is looking to further raise the prices of some 20 beverages and 5 coffee bean products. (http://www.japantoday.com/category/business/view/starbucks-japan-to-raise-coffee-prices). It should retain this pricing strategy as it differentiates itself from its competitors by providing an excellent quality customer experience. Also most of its outlets are located on expensive pieces of real estate in centralized, busy areas of Japan.

4. Promotion:

--Cultural & Entertainment campaigns:

Starbucks should come out with various cultural and entertainment campaigns to attract the Japanese youth, a segment of the society it has still not managed to woo successfully.

Conclusion

Starbucks is ahead of the rest in the Japanese coffee market, but there is still room for improvement. A decentralised structure accompanied with a mixed global strategy has helped the company to find a balance between reaching economies of scales and responding to the local market. By establishing a joint venture with local retail chain Sazaby Inc., it has reduced their risks of being unfamiliar with the market; and Starbucks has successfully gained the knowledge and channels of distribution from its partner. Starbucks’ strong brand image and customer loyalty has contributed to their maintaining a leading position in this market. By diversifying its target consumers and innovating its product line, it should be able to further strengthen its market share.

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