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Starbucks remains to be the biggest coffee shop brand and no single brand is likely to beat them in the near future but a collective of small coffee shop just might do the trick. In 2005, a small coffee shop in Portage Avenue in Winnipeg called Daily Grind Coffee on a 1,500 square foot space. The challenge was obvious, they were the new kid on the block. They were unknown and there were hundreds of other eating and coffee options around including several Starbucks stores. So he did the one thing big institutions like Starbucks can’t do, he differentiated his shop by offering the home element. He offered a home atmosphere and offered homemade soups, dishes, and coffee (Litz 2010).
This is a strategy that is duplicated by other smaller coffee shops. It is least likely that Daily Grind Coffee will put Starbucks to the ground but a couple of thousands of smaller coffee shops might hurt them bad enough to push them to close hundreds of stores. Last year, they closed 600 stores, even with vibrant efforts to come up with new coffee flavours and pastries.
It is this competitive strategy that forces Starbucks to come up innovate both in product and branding.
Techniques that Starbucks Could Use When Developing Products
The one thing that Starbucks has or could afford to have that smaller coffee shops can’t afford is an intelligent system of data collection, monitoring, and analysis. This system could easily cover all their stores because they already have an existing infrastructure that connects all stores. The infrastructure is currently designed to monitor and track financial and inventory transactions. The same system could easily be used to determine trends and market response to different marketing programs.
Starbucks is also one of the top three biggest fanbase on Facebook, the other two being Coca-Cola and Linkin Park. What is even more astounding is the fan participation on their site. With no stimulus, fans mention their brand, post photos of themselves inside a Starbucks coffee shop. Starbucks can easily utilize their SNS sites to develop new products, new services or come up with general brand improvements.
In fact, they should current free technologies offered by Google to track down every mention of Starbucks in any part of the Web at any time. Google has a free API that allows any brand to see every single mention of their brand. If Starbucks can take this data and create a program on their end to intelligently analyse it, they would be able to determine what kinds of changes they could be making with their brand, one that has a greater possibility of success than those that came from their laboratories.
The New Product
Instead of growing vertically, Starbucks would better off to grow horizontally by acquiring smaller coffee shops that will continue to run as an independent alternative coffee house. Many companies, such as Google, find that horizontal growth allows them to explore greater white space (Dibbs, 2006). This way, they will not cannibalize their current market and without losing the opportunity to capture new market segment that is being explored by smaller coffee house (Mullins, 2009).
Creation of a New Brand
They can opt for small coffee houses that hold several branches across the US such as Caribou Coffee which is worth $170 million dollars. Their stocks are worth $8 per share (Boscheratto et al, 2010). Buying off companies like this will cut administrative costs without losing Starbucks can merge administrative costs of both organizations and have separate incomes. They can also merge the R&D and their distribution system.
They can also choose to acquire even smaller coffee shops such as the Daily Grind Coffee. Such a set up will require total independence from Starbucks in operation including marketing. See figure 4 for coffee shop market share.
These smaller coffee shops can have a smaller price point than Starbucks which will capture a bigger segment that Starbucks is unable to serve since it needs to maintain a global standard in image, pricing, and delicacies. There are a lot of customers from the lower social classes and they are bigger than the upper class. This means that Starbucks will open its business to a larger market.
Market Analysis Summary
Among the big coffee brands, Starbucks gets 75 percent of the market share but the compounded market share of all small coffee houses is 50 percent of the total coffee market (Isidro, 2004; Iwata, 2006). This is also the industry that is steadily growing even during the economic slump.
The Northern part of the U.S. is the biggest coffee consumer. They favour brewed coffee over other gourmet coffee and they specifically value great service. The smaller coffee shops that Starbucks will acquire should offer the same homey environment that has been the main selling proposition of smaller coffee shops.
The alternative brands will reach out to the lower earners, students, and others who simply prefer alternative venues to relax. The choice for brewed coffee is pretty much universal among all market segments which allow Starbucks better integration in their operation. See figure 1 for the target market segment.
Target Market Segment Strategy
Since the smaller shops will serve as the alternative brands, Starbucks should choose locations that are remote from their other Starbucks branches. Acquisition should vary in location to accommodate student-heavy areas, smaller commercials areas, and even residential areas.
Market research shows that these are discerning customers that gravitate towards better tasting coffee with no regard for the brand and the rest are simply unable to go to bigger ones because of the price.
The coffee industry is steadily growing at a steady rate of 2.5% annually in the United States. In 2010, total sales went up to $1.5 billion with gourmet coffee representing 45%. Areas that have long winter are also a conducive location for gourmet coffee consumption. On the other hand, those that have long and hot summers also encourage people to buy iced coffee and other cold beverages.
As of December 2010, 45% of total coffee shops in the US are small. Their total sales go up $7 Billion of the total $14.5 Billion total coffee shop revenue (Iwata, 2006). Starbucks will be able to stop competing against small coffee shops and let their alternative brands take care of that segment. By allowing the smaller brands to operate independently, coffee shops will be able to establish a more intimate relationship with the segment.
Starbucks has been vigilant in their pursuit to be acknowledged as a company with great concern to the environment, to children’s rights, and rights of their employees. However, the controversy that started about how they are treating coffee harvesters remains in the memory of the market.
Back in 2008, they were openly talking about progressive capitalism and giving their employees stock ownership plans and great health benefits. Coffee pickers in Guatamela, where their coffee comes from, cried foul for being paid two cents a pound for picking berries. These are the same berries that are used to sell it for $9 a pound in the US market.
Guatamelans call it a slave plantation. It is a poor country and Starbucks is taking advantage by dangling job opportunities that pay less than one percent of what Americans would get had the plantation been in the U.S.
Starbucks downplayed the issue and hardly made any comment on it. In fact, they addressed it by highlighting other corporate social responsibility issues. To a certain degree, the strategy worked since the issue is hardly talked about now. However, this could be a problem with the alternative brands who often associate their brand with a “homey” atmosphere which includes fair treatment towards their employees.
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