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Starbucks places the customer and the service delivered to the customer above everything else. Even though Starbucks is a retail coffee store, the value proposition is not about the coffee exclusively but about the coffee culture and the experience of drinking coffee. With its value proposition, Starbucks moves away from the tangible benefits that the coffee offers, such as taste, stimulation, alertness and concentrates on the quality of its coffee and the intangible benefits of the experience of drinking Starbucks coffee. Starbucks value proposition is not about coffee, it is about the experience of drinking coffee in a Starbucks store integrating the product with the emotional benefits.
All these factors were strong enough to maintain Starbucks success after a slowdown when consumers seemed to draw inward after September 11; Starbucks is rocketing ahead once again. Sales in stores open at least 13 months grew by 6% in the 43 weeks through July 28, and the company predicts monthly same-store sales gains as high as 7% through the end of this fiscal year. That is below the 9% growth rate in 2000, but investors seem encouraged. “We’re going to see a lot more growth,” says Jerome A. Castellini, president of Chicago-based CastleArk Management, which controls about 300,000 Starbucks shares. “The stock is on a run.”Moreover, the Starbucks name and image connect with millions of consumers around the world. “Starbucks now commands so much “disk space’ in consumers’ heads that it’s extremely difficult to compete against them,” said Nancy Koehn, a professor of business administration at Harvard Business School.ââ‚¬It built its brand through its storefronts, and that is a very powerful word of mouth.” It was one of the fastest-growing brands in a BusinessWeek survey of the top 100 global brands published Aug. 5, 2002. At a time when one corporate star after another has crashed to earth, brought down by revelations of earnings misstatements, executive greed, or worse, Starbucks has not faltered. The company confidently predicts up to 25% annual sales and earnings growth this year. On Wall Street, Starbucks is the last great growth story. Its stock, including four splits, has soared more than 2,200% over the past decade, surpassing Wal-Mart (WMT ), General Electric (GE ), PepsiCo (PEP ), Coca-Cola (KO ), Microsoft (MSFT ), and IBM (IBM ) in total return. Now at $21, it is hovering near its all-time high of $23 in July, before the overall market drop.
From commodity to indulgent necessity
Starbucks blasted open a new market by turning a basic commodity into an indulgent necessity for the 20-million customers it serves each week, creating an espresso bar culture nonexistent in this country only two decades ago. In 1992, right when the company became public, Starbucks had 140 stores located in the Northwest and Chicago. Ten years later, in 2002, Starbucks had over 4500 stores scattered throughout the U.S and internationally. During those ten years, Starbucks established itself as the ââ‚¬Å“number oneââ‚¬ coffee store in the U.S by following an expansion strategy. Starbucks had locations in 42 of the 50 states and was continuing this expansion strategy in order to capture new markets and cluster existing markets. Starbucks retail expansion strategy consisted of the company selecting locations based on whether the demographics of an area matched the profile of a typical Starbucks drinker, the level of coffee consumption and the nature and intensity of competition. An important component of this strategy was that Starbucks did not mind cannibalizing the sales of its stores as long as the incremental sales resulting from the opening of a new store were higher than before. Clustering stores increases total revenue and market share, Schultz argues, even when individual stores poach on each other’s sales. The strategy works, he says, because of Starbucks’ size. It is large enough to absorb losses at existing stores as new ones open up, and soon overall sales grow beyond what they would have with just one store. Meanwhile, it is cheaper to deliver to and manage stores located close together. In addition, by clustering, Starbucks can quickly dominate a local market. “The lesson learned by both Starbucks and Dunkin’ Donuts is that a retailer can create demand where demand is latent,” said Jim McKenna, president of McKenna Associates Corp., a retail real estate training company in Milton, Mass. “They can increase the size of the pie.”
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Progress or Regress
The retail expansion has led the Starbucks customers to view it as more corporate and caring about making money. Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication: “A New Starbucks Opens in Rest-room of Existing Starbucks.” And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets. “We probably self-cannibalize our stores at a rate of 30% a year,” Schultz says. Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Starbucks is at a defining point in its growth. It’s reaching a level that makes it harder and harder to grow, just due to the law of large numbers.
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