Caribou Coffee: Strengths And Weaknesses

Coffee represents 75 of all caffeine consumed in the United States and is the second most consumed beverage in the world behind water. It is more than just a drink to many people and people do not drink it just to quench their thirst. People drink coffee to jumpstart the neurons in their brain that drive them toward ambition and motivation to get things done. This is one of the main reasons employers are okay with giving it away for free on the job.

The coffee industry is one of the most profitable industries today. It is the one of the heaviest traded commodities in the world, second only to oil. Consumers spend over $100 billion each year worldwide to enjoy their daily cup of coffee, and Americans are the leading coffee drinkers of the world devouring an average 400 million cups per day. To put the numbers in better perspective, if an entrepreneur just getting started could manage to grasp one-tenth of 1% of this market, it would mean taking in $100 million per year. Coffee export alone is a $20 billion industry and the coffee farms provide income for more than 25 million people around the world. Coffee is currently grown in more than 50 countries and 67% of the world’s coffee supply comes from North and South America.

Starbucks has carved a niche around specialty coffee as being a small indulgence and offers a range of exceptional products that customers enjoy in stores, at home, and on the go with more than 30 blends and single‐origin premium coffees. Since 1971, Starbucks has been committed to “ethically sourcing and roasting the highest quality Arabica coffee in the world” (Annual). The company operates in more than 50 countries, roasting their own special blends and they control their own coffee purchases, roasting and packaging, and the global distribution of their operations. In 2007, the company overtook the No. 3 rank of the top five restaurant chains in the U.S. and reported $11.7 billion in total revenue last year, which a 9.2% increase. The company’s specialty coffee drinks account for approximately 75% of its sales, though an increasing amount of business is focused on selling whole bean coffees and merchandise. Overall, their retail objective is to be the leading retailer and brand of coffee in each of their target markets by “selling the finest quality coffee and related products, and by providing each customer a unique Starbucks Experience” (Annual). The “Starbucks’ experience” is also a core part of the chain’s appeal based on the environment of the stores. This idea is based on “superior customer service as well as clean and well-maintained company-operated stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty” (Annual). They provide comfortable seating, wireless internet service, and more upscale décor, all of which have helped it become a defining example of the notion of restaurants as a “third place” beyond the home or office. However, with their whole bean coffee products, they are now giving consumers an opportunity to have that “Starbucks’ experience” at home. Starbucks’ commitment to only selling the finest coffee beverages and whole bean coffees and their commitment to ensure that their customers get the highest caliber of satisfaction helps them communicate their product’s value proposition.

The Starbucks mission is “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time” (Annual). They hold around 33% of the market share for coffee in the U.S. and sell almost as much coffee as fast food restaurants and convenience stores combined despite the fact that the bulk of its consumers are in cities or upscale suburban areas. They have been able to accomplish this by catering specifically to a well-defined target audience. Through trendy, modern design from their décor to their advertising, they work to sustain their product as a status symbol. Almost half of Starbucks total business comes from men and women age 25 to 40, which is their primary target market at 49%. This trend tends to appeal to metropolitans and suburbanites with moderately high income, professional careers, and a focus on social welfare. The other large target market that accounts for 40% of total business consists of young adults, age 18 to 24. Starbucks’ appeal to this consumer group is due to how they have positioned their stores as a place for college students to hangout, study, or meet people. The company has built an image of being “cool” through introducing the latest technology and focusing on social networking.

According to Starbucks’ annual report, their primary competition for coffee beverage sales is quick-service restaurants, specialty coffee shops, and well-established companies directly. In the area of their whole bean coffees, ground packaged coffees, teas, and ready brew, they compete directly against specialty teas and coffees sold through supermarkets, club stores, and specialty retailers. Indirectly, they face competition from all other coffees on the market, restaurants, and specialty retailers, all of which they also have to compete with for prime retail locations and qualified personnel as well.

SWOT analysis of Starbucks, McDonald’s, Dunkin’ Donuts, and Caribou Coffee show information these firms can use to anticipate and understand change in order to allot appropriate resources (see figure 1).

Figure 1 SWOT Analysis for Starbucks, McDonald’s, and Dunkin Donuts

Source: Grewal, Dhruv, and Michael Levy. Marketing. 3rd ed. (New York: McGraw-Hill/Irwin, 2009) 34. Print.

Caribou Coffee Strengths Weaknesses

2nd largest gourmet coffeehouse/US Growth of new stores slowed to halt

Internal High quality product Active in limited number of markets

Strong presence in hometown markets Slow technological advances

In the midst of rebranding process Re-brand may not appeal to non-mid-west markets

Opportunities Threats

Word of mouth – satisfied customers Distant 2nd to Starbucks

External Increased spending on advertising Current recession hurting sales of luxury to reach new customers purchases

Awareness and calibrating new store Continuous increase of small locations where income/education chain/independent coffee shops

levels are higher

In the past year, more consumers have started purchasing coffee from retail venues. At 52%, a little more than half of consumers report they mainly get their coffee from Dunkin’ Donuts, McDonald’s, or Starbucks, which is higher than the 35% last year. Since 2009, McDonald’s share of stomach in the ready-to-drink coffee market has matured by 7%. There has actually been an increase in consumers who are getting coffee from other locations compared to March 2009, with the biggest portion going to convenience stores and gas stations.

“Where Consumers are Sourcing Their Coffee” Market Brief:Technomic. American Express. pg. 2. Dec. 2010. Web. 24 Sept. 2012

However, Starbucks has an astounding stronghold on the consumption of coffee in the US with 6 out of 10 consumers reporting they primarily buy their specialty coffee from Starbucks. It is the “go-to” place for 3 out of 10 if those who drink regular coffee. Less than 4 out of 10 consumers usually make regular coffee at home, while only 6% report brewing their specialty coffee from home, which is reasonable since specialty coffees require special brewing equipment. Dunkin’ Donuts is the source used by 13% of coffee drinkers of regular coffee and 12% of those who drink specialty coffee. Surprisingly, McDonald’s has only a 9% regular coffee clientele and barely larger 12% clientele for specialty coffee. Only a mere 11% of coffee drinkers source any other type of primary coffee source.

Starbucks has established a competitive advantage by developing customer value through all four macro, or overarching, strategies. By focusing their strategy on retaining loyal customers, Starbucks has achieved customer excellence. Rather than thinking of customers as a one-time, one-cup consumer, Starbucks sees their customers as from a lifetime value perspective, which is an important element of customer retention programs. Their focus on the consumer’s experience has really helped them build a solid reputation for customer service. The retail store sites they choose are normally in highly visible, high-traffic areas and their ability to vary the size and formatting of stores to include suburban retail centers, kiosks, college campus, office building, and off-highway locations provides them with greater versatility to meet the needs within a community. This gives them a strong competitive advantage based on locational excellence. Over the last decade, Starbucks has worked with Conservation International to develop C.A.F.E. (Coffee and Farmer Equity) Practices, which are buying guidelines that help address their principles for ethical sourcing. It is a complete set of measureable standards centered around product quality, economic accountability, social responsibility, and environmental leadership. This program along with the Farmer Support Centers operated by Starbucks in Costa Rica and Rwanda, among other locations, helps ensure sustainability and future supply of their high-quality coffees and provides them with product excellence. Based Starbucks’ good standings with a substantial number of suppliers, ranking in the Top 100 of Fortune’s Best Companies to Work For 2012, and their own well-oiled roasting and distribution operations serving all segments, they have achieved operational excellence.

Since the famous Starbucks coffee chain caters to a somewhat higher income customer, it chose to utilize a higher-end pricing strategy. This strategy targets the customer segments that are not bothered by paying the premium price for high quality products therefore Starbucks can focus on their products to make sure the consumer is receiving the highest quality and satisfaction. Paradoxically, when other companies were cutting prices due to the slow moving economy in 2009, Starbucks actually raised their prices by an average of about 1% citing expectations of higher costs on things like coffee, milk, and fuel. Given their positive brand equity and presence in the coffee industry, they can get away with it. They feel it is a premium a premium price to match their premium product. However, this increase in price was also due to the Fair-Trade Movement. Starbucks is the largest purchaser of Fair-Trade certified coffee and they feel like paying a premium price stimulates the production of high quality coffee. This line of thinking allows farmers to increase income, reinvest in farms, and plan for the future. It also helps promote steady, sustainable growth in a market subject to significant volatility. Even though most coffee is traded in the commodity market, Starbucks’ high altitude Arabica coffee tends to trade on a negotiated basis due to the quality sought out by Starbucks. Both the premium and commodity price demand rely on the supply and demand at time of purchase, the supply and price can be affected by many factors in the countries that produce it. These factors can include weather, political, and economic conditions. Although Sumatra once had a stable climate, it has unexpectedly changed and introduced new challenges for farmers. For instance, the coffee berry borer, which is a small beetle native to Africa and recognized as the most harmful pest to coffee crops, is posing a greater threat to coffee crops as it has started to expand to the higher altitudes required to grow the Arabica coffee beans. With the help of Conservation International, a Sumatra program was developed to help farmers address the challenges of recent climate changes. These pests, combined with the rising costs of commodities, are driving up the prices. Looking at this price increase in terms of elasticity, this moves the popular premium drinks to the inelastic part of the demand curve. People want the product regardless of the price, so as long as sales do not drop very much, the price increase will have been a smart and profitable move for Starbucks. Starbucks also uses relative pricing. It offers premium items, like its espresso drinks or its Starbucks brand whole-bean coffees sold in grocery stores, alongside lower-cost items, like its drip coffees or its Seattle’s Best line. While the risk exists that more customers will choose the lower-priced items, by offering higher-priced items alongside lower-cost alternatives, Starbucks is justifying the higher price through comparison. All of this seems to be working for the company, as their profit margin has stayed in the general range of 8.5 to 10.5%, which is the average for most other coffee shops as well.

Starbucks has even found a way to make purchasing their products more convenient. According to Technomic, Starbucks is now accepting mobile payments at all of its nearly 6,800 company-owned U.S. coffeehouses and about 1,000 units inside Target stores. The service is available to customers who download the Starbucks card Mobile app, which is currently available for iPhones and iPod touch devices as well as select BlackBerry smartphones. To make a mobile payment, customers hold their mobile device in front of a scanner and scan the application’s on-screen barcode. The Starbucks Card Mobile App also allows users to manage their Starbucks Card account and find their nearest store. Starbucks is currently working on an app for Android smartphones.

Starbucks uses “brand marketing” as their main promotional strategy. This type of promotion relies on their image and reputation to increase consumer awareness. By placing emphasis on product quality, customer satisfaction, innovation, atmosphere and community, Starbucks is able to use word-of-mouth advertising and high visibility to maintain its position in the market. Starbucks is known for having a diverse selection of high quality products and can be easily recognized through its many partnerships and key alliances with other companies and ethical social organizations.

One of the promotional tools used by Starbucks is word-of-mouth because satisfied customers will go to work with a Starbucks cup in hand, talk about going there, and encourage others to try their favorite products. Many people that really enjoy a particular product will enthusiastically tell others why they should try it and this can make a new customer more willing to try things. People tend to follow the actions of others they spend time with and/or admire. Gift cards are another promotional tool used by Starbucks. Customers that frequent their store may need to pick up a quick, easy gift for someone they know and it provides convenience for them to simply add a card to their purchase. The person receiving the card may not be a regular Starbucks customer and may enjoy the experience enough to become another loyal customer while it could be someone who already loves the products and this creates an additional positive experience for the customer which could deepen their loyalty.

Other tools used to promote Starbucks’ coffee are social perception, media sources, and mobile marketing. Many people want to be viewed by others in a certain way, so those wanting approval from their desired social group will drink Starbucks coffee in order to fit into the stereotype held by those peers. Although Starbucks does not use very many commercials, when they do, they tend to use them as a way to show their involvement in community projects and encourage customers to joint them. In the past, some of the commercials they have used have centered around the positive feeling a customer will feel during and after consumption of their product. They have used both humor and celebrity appearances in these commercials. With mobile marketing via Foursquare, Starbucks customers can earn badges or titles such as Starbucks Mayor, which unlocks an offer for a $1 off the purchase of a Frappuccino.

In the location of stores and products, the company will highly saturate certain markets to ensure that their location is the quickest and most convenient to the customers. Their products are also located in multiple grocery stores and Barnes and Noble bookstores. Having a lot of stores and products easily available helps aid in promoting the brand by making the name easy to recognize, highly visible, and widely available. Starbucks partners with various companies and organizations in several industries tin whatever way it seems to be beneficial for both parties. These include alliances with non-profit organizations and charities, along with partnerships with the music and film industries. Most of the media promotion used by Starbucks involves a strategic alliance and partnership with companies within the media industry itself. It is very common to see a well-placed Starbucks store in mainstream movies or television shows, or hear characters mention the store and/or products by name. Starbucks has made cameo appearances in major motion pictures such as The Devil Wears Prada, You’ve Got Mail, Sex and the City, Meet the Fockers, and even Shrek 2.

Starbucks’ whole promotion strategy seems to be working perfectly. Their name is now synonymous with high quality coffee despite the higher prices of their products and their efforts continue to attract and retain new and existing customers that are loyal and involved. According to Starbucks’ annual report, their marketing expenses include several components. They report expenses for advertising costs totaling $141.4 million in the 2011 fiscal year with previous years’ totals varying by about $30 million more or less. The word-of-mouth advertising they receive is free, while Starbucks’ gift cards are paid for by the customer. Gift cards are most often purchased by loyal customers who give them to their friends, coworkers, and family which in turn become promotion for the company.

The company’s marketing mix as a whole is structured the way it is due to extensive research and development into the specialty coffee niche, products it offers, and understands the consumers’ needs expectations. I believe it is effective because they offer a high quality product accompanied by a superior customer service experience, zoned in one their appropriate target market, and delivered as promised on every level as communicated to the customers.

With well over 16,000 locations, many people believe Starbucks is a franchise, however this is not true. Most of the stores in the US are company operated but sometimes the company will enter into a licensed arrangement with a company who can provide the right to use a location that would otherwise not be accessible to it such as college campuses, airports, or grocery store chains. Although Starbucks’ subsidiary, Seattle’s Best Coffee, does franchise the operations of its cafes and kiosks.

There are several significant properties owned or leased for use by Starbucks in connection with roasting and its distribution operations. Starbucks uses these facilities to store coffee and other beverage ingredients, as well as other non-food retail merchandise sold in stores that are obtained through a number of different channels. The company leases one facility and owns four others that are used for roasting and as distribution centers. Starbucks also owns an additional warehouse, leases three other facilities for storage, and leases three additional facilities for use as warehouses and distribution centers in order to supply the distribution operations needed to run the company smoothly and effectively. For their dairy needs, the company uses 7-day dairy suppliers to fulfill fluid milk requirements and for food products like fresh pastries, sandwiches, and lunch items, they use national, regional, and local sources.