American entrepreneurs Jerry Baldwin, Zev Siegl, and Gordon Bowker opened the first Starbucks store in Seattle, Washington on 30 March 1971 at 2000 Western Avenue. They drew inspiration from coffee roasting entrepreneur Alfred Peet. They later moved this store to 1912 Pike Place in Seattle in 1976. Note that Starbucks originally sold coffee beans and equipment.
It was in 1986 when the company began selling espresso coffee in six Seattle stores. The following years saw gradual expansion both in its geographic score and service offering. Starbucks eventually become the largest coffeehouse chain in the world and a cultural symbol responsible for the second wave of coffee culture.
How exactly did it become a successful food and beverage business and a well-recognized brand? What are the factors that contributed to its success? How does the company approach management and leadership? What did it do to become a global brand? This definitive article explores the key elements in the business strategy of Starbucks Coffee Company.
Key Elements in the Business Strategy of Starbucks
Core Principles of the Mission and Vision Statement of the Company
Like in most established organizations, all of the strategies of Starbucks, as well as its leadership and organizational principles and practices are founded on a pronounced corporate mission and vision. These mission and vision are based on its objective which is to maintain its standing as one of the most recognized and respected brands in the world. To achieve this, the company has identified three key points profit-positive, people-positive, and planet-positive.
The profit-positive goal is aligned with the “Growth and scale” agenda of the company centered on focus and discipline to deliver consistent revenue and growth. All of its expansion and revenue strategies and initiatives are pursued following the realization of this goal. The people-positive goal is a multi-stakeholder approach to improving its value chain by cultivating an exclusive environment for its employees, suppliers, and communities.
On the other hand, the planet-positive goal is central to its corporate social responsibility and the main philosophy behind its sustainability strategy. Starbucks has aspired to do business that has minimal to zero impact on the environment while ensuring environmental conservation and addressing pressing environmental problems. The company acknowledges the fact that the environment is critical to its operation and continued survival.
General Organizational and Operational Strategies of Starbucks
Starbucks Coffee Company operates as a publicly-traded company. It is specifically listed in the Nasdaq Stock Market and is part of the Nasdaq Index of 100 public companies in the United States, as well as the Standard & Poor or S&P 100 Index and the S&P 500 Index. This general structure has allowed the company to raise funds from retail and institutional stock market investors for reinvestment and expansion purposes.
Apart from trading its shares in a stock exchange, the company also raises capital by issuing bonds and debt-related securities to creditors and investors. It is interesting to note that it also invests its profits to maximize its earning potential. Starbucks maintains an investment portfolio of highly liquid available-for-sale securities, including corporate debt securities, domestic and foreign, government treasury securities, and commercial paper.
Corporate leadership is headed by its President and Chief Executive Officer who oversees the entirety of the organization. Furthermore, it has numerous executive-level positions that oversee different departments or aspects of the operation. For example, it has a dedicated Group President for North America who also serves as the Chief Operating Officer and the Group President for International and Channel Development.
There are also four Executive Vice President positions. These include an Executive VP who also functions as the General Counsel, an Executive VP that serves as the Chief Financial Officer, another Executive VP with a specific role as the Chief Partner Officer, and an Executive VP who oversees the Public Affairs and Social Impact department of the company. These executive officers provide top-level oversight and decision-making across the board.
Market Entry and Global Reach Using Licensing and Franchising Models
One of the critical elements of the business strategy of Starbucks is its licensing program and a franchise business model. Note that it has over 30 thousand stores in 80 countries. These stores operate either as licensed stores or as a franchise. There are considerable differences between these two programs. The license program allows existing companies to operate a Starbucks kiosk within their existing establishments.
Examples of companies licensed to operate stores include the Dutch multinational retail company Ahold Delhaize that operates in several European countries, the American big-box department store chain Target Corporation, the American bookstore Barnes & Noble, the employee-owned Publix Super Markets chain of supermarkets in the United States, and the Idaho-based American grocery company Albertson Companies.
For most of the Europe, Middle East, and Africa markets, the particular market penetration strategy of Starbucks centers on its franchising program. Franchise owners are also independent companies but they are allowed to operate new and freestanding stores. An example is the 23.5 Degrees Limited company founded by Anil Patil which opened the first franchise in Hampshire in 2013 and now operates 60 franchise stores across the United Kingdom.
The utilization of the licensing program and the franchise program allows Starbucks to maximize market entry and global reach. Licenses have enabled it to form partnerships with organizations with an established geographic presence in specific markets and existing establishments. Franchises have allowed it to appeal to the interest of independent business owners and investors that want to open and operate their own coffee shops using an established brand.
Business Expansion Through Acquisition of Relevant Businesses and Brands
The company has also been pursuing acquisition strategies even during the early 1990s. For example, the company acquired the high-end coffee retailer The Coffee Connection in 1994, thereby gaining rights to use, make, and sell “Frappuccino” beverages. Note that Frappuccino is a trademark that represents a line of blended iced coffee drinks. It has generated billions in revenue. Starbucks owns the intellectual property over this trademark.
A series of acquisitions has allowed the company to enter and capture specific markets, as well as expand its business interest beyond its brand. Note that it acquired two of its fiercest competitors the Seattle’s Best Coffee and Torrefazione Italia from AFC Enterprises for USD 72 million in April 2003. This acquisition added another 150 stores to the portfolio of the company while also giving it an additional stream of income.
The acquisition of the coffee equipment developer and manufacturer Coffee Equipment Company in March 2008 also improved the existing value chain of Starbucks by giving it access to equipment and system relevant to its operations. An example is the Clover Brewing System. The system has been described by analysts and observers as revolutionary because it can freshly brew a cup of coffee faster than other machines or equipment in the market.
Vertical and Horizontal Integration in Managing the Entire Supply Chain
Access to relevant and quality supplies is critical to the operations of Starbucks. Remember that it is a coffee shop first and foremost, as well as a food and beverage company that operates similar to a fast-food chain providing an in-store dining experience and sells processed and packaged food and beverage products. Its entire operation is essentially dependent on the inputs sourced from food producers and other suppliers.
The company approaches supply chain management through a combination of vertical and horizontal integration. For example, through a vertically integrated supply chain, it works with thousands of coffee growers across the world to ensure the quality of its end-use products. Note that it interacts with these farmers through its corporate social responsibility program to transfer relevant competencies while also improving their living standards.
Horizontal integration fills the gaps in its entire supply chain. Of course, it would be detrimental to the business strategy of Starbucks if it would control all the facets relevant to its production inputs or supplies. To illustrate this better, note that the company does not need to bother itself with how its in-store dining items such as cups and straws, as well as packaging materials are produced. It is easier to allocate this task to more experienced suppliers.
Marketing and Specific Sales and Promotional Strategies of Starbucks
Product Strategy For Brand Differentiation and Product Diversification
Brewed coffee is at the heart of Starbucks. With the acquisition of the “Frappuccino” trademark, the company has become one of the pioneers in selling blended iced coffee for the mass market and through a fast-food model. Note that the entire product line is based on a general recipe derived from the Italian cappuccino and a concoction of coffee, cream, syrup, and milk. Starbucks has introduced numerous variations throughout the years.
The company has continuously been developing recipes based on the Frappuccino concept. Some of these recipes take advantage of moment marketing and topical marketing strategies. It has a specific line of iced beverages for Halloween and Christmas. It has also created special recipes for hot coffees, iced and hot teas, and non-caffeinated beverages. Starbucks has evolved to become more than just a typical coffee shop.
Furthermore, the menu has become diversified. Franchise stores offer other beverages such as fresh juices and bottled beverages while also selling non-beverage food items such as bread and pastries. Most stores also give customers an option to personalize their orders or blend them according to their unique dietary needs. There are options for sugar-free and dairy-free blends or adding flavors and altering the coffee-to-flavor ratio.
Starbucks also sells a range of products outside the realm of dine-in food and beverage category. Part of its product strategy is a product line of processed and packed items sold in its stores and its retail partners. It also sells coffee beans for home-brewing, instant coffee, coffee capsules, and coffee markers. There are also branded merchandise items such as coffee mugs and tumblers. In recent years, it has experimented with offering alcoholic and energy drinks.
Note that it also operates so-called Stealth Starbucks stores in metropolitan areas. These stores are devoid of Starbucks branding. Their purpose is to do market research aimed at understanding the reaction of customers to coffee stores and similar establishments offering experimental products and services. For example, it opened a store in July 2009 on Capitol Hill that served liquors and provide live music. It has now carried the Starbucks branding.
Strategic Partnership With Other Companies To Expand Customer Reach
To reach more customers further and improve its brand equity, part of the marketing strategy of Starbucks is to enter into numerous partnerships with other companies. An example is its partnership with Kraft Foods in 1998 which allowed it to sell its products in Mondelez grocery stores. It also signed a deal with PepsiCo in 2015 to help it market and distribute its processed products in several countries in Latin America.
A partnership with tech company Apple paved the way for the two companies to collaborate on selling the “coffeehouse experience” which is a curated track of music. Apple added the Starbucks Entertainment category to its iTunes Store in 2006. There was also an endorsement deal with MSNBC that spanned from 2009 to 2013 that worked similar to a product placement in which the Starbucks branding was featured on the Morning Joe television show.
Several stores also operate in entertainment and leisure parks owned and operated by The Walt Disney Company. One of the most notable stores was located in the Animal Kingdom on Discovery Island. There are also in several Walt Disney World locations such as the Magic Kingdom Park on Main Street, EPCOT and the Hollywood Studios in Florida, Disney Springs, Disneyland in Anaheim, Disney California Adventure, and Disney Village in Paris.
Operating Similarly To A Bank Through Its Starbucks Card Business
Another interesting aspect of the business strategy of Starbucks is its specific sales and revenue tactic coursed through the Starbucks Card membership and rewards program. This is somewhat similar to the miles program of airliners. More than 41 percent of its earnings come from the sales of its value-added card which has been positioned both as a rewards card and a gift card. Most consumers would buy it as a gift to their relatives, friends, and colleagues.
Note that the card comes preloaded with a particular amount and can be redeemed in-store for a particular product. It can also be loaded through Starbucks stores or a mobile app. There are four ways in which the company earns from these cards. The first is when a consumer uses the card to purchase a beverage. Of course, the preloaded amount is not enough to purchase other items such as food or high-priced beverages.
The card fundamentally turns a USD 25.00 sale into a USD 35.00 sale or more. Furthermore, whenever a consumer buys a card as a gift to a friend or officemate, he or she would usually pick another item for herself or himself. The total purchase shelled out by this consumer would be more than the amount of the card itself. The third way Starbucks earns money through this card is through unused amounts. Some cards are never used by their recipients.
Starbucks can make more than USD 100 million in pure profits from unused or unredeemed cards. It is also important to note that whenever consumers purchase these cards, the funds they give in exchange become floating money. They will never get anything in return if they do not use the card or if the recipients never use their cards. Starbucks earns interest from investing this floating money. This is similar to how commercial banks earn money.
Integrated Marketing Communication and Corporate Social Responsibility
The marketing messages of Starbucks are coursed primarily through its social media channels, website, and in-store displays to promote its brand and products. However, on several occasions, the company also pursues paid marketing through advertisements using traditional and digital mediums. Examples include television spots, advertorials and copies in print mediums such as newspapers and magazines, outdoor signages, and digital advertisements.
However, part of its integrated marketing communication strategy is the utilization of other promotional tactics and communication mediums. It uses public relations and other non-paid publicity tactics, sales promotions, moment marketing, events, and direct marketing in a manner that it would be able to reach more customers while ensuring adherence to its marketing and branding guidelines, as well as to multiply the impact of its promotion strategy.
The company also has a pronounced and well-thought-out comprehensive corporate social responsibility program intended to create a win-win situation for itself and its stakeholders. It has several environmental policies that include the banning of plastic straws, the use of recycled paper in its food packaging and containers, donation of spent coffee beans for composting, and the promotion of reusable and other utensils.
Of course, this program does not only promote the corporate image of Starbucks. It also allows it to enhance its value chain and all stakeholders that are critical to its business operation and the entirety of its existence. For example, its Coffee and Farmer Equity or CAFE Program promotes innovativeness in farming by rewarding farmers with higher market prices while also ensuring that the company receives high-quality agricultural products.
It has also introduced a line of products that adheres to international fair trade standards. Note that the fair trade movement intends to help producers in underdeveloped and developing countries by ensuring equitable trade arrangements and promoting a better standard of living across involved communities while compelling them to adhere to environmental standards. These products enable Starbucks to maintain a sustainable supply chain.