Reference no: EM131304033

Starbucks' Products Create a Unique Coffee Experience

Starbucks was founded in 1971 by three partners in Seattle's renowned open-air Pike Place Market and was named after the first mate in Herman Melville's Moby Dick. Howard Schultz joined Starbucks in 1982 as director of retail operations and marketing. Returning from a trip to Milan, Italy, with its 1,500 coffee bars, Schultz recognized an opportunity to develop a similar retail coffee-bar culture in Seattle. In 1985, the company tested the first downtown Seattle coffeehouse, served the first Starbucks Café latté, and introduced its Christmas blend. Since then, Starbucks has been expanding across the United States and around the globe and now operates 12,440 locations in 36 countries.

It opens about three new stores a day and serves more than 30 million customers a week. Starbucks purchases and roasts high-quality whole coffee beans and resells them, along with fresh brewed coffees, Italian-style espresso beverages, cold blended beverages, bottled water, complementary food items, coffee-related accessories and equipment, premium teas, and a line of CDs, primarily through company-operated retail stores. It also sells coffee and tea products and licenses its trademark through other channels, and through some of its partners, Starbucks produces and sells bottled Frappuccino coffee drinks, Starbucks DoubleShot espresso drinks, and a line of super-retail stores in select rural and off-highway locations to serve a broader array of customers outside major metropolitan markets and further expand brand awareness.

To provide a greater degree of access and convenience for nonpedestrian customers, the company has increased development of stores with drive-thru lanes. Starbucks constantly strives to update its products and introduce new drinks with each season. At Christmastime, drinks such as eggnog lattés, peppermint mochas, and gingerbread lattés helped boost earnings. Starbucks also tries hard to keep up with consumer desires and needs, for example, introducing a low-calorie version of its popular frappuccino, which has about 30 to 40 percent fewer calories than the original.

The low-cal frappucino has been very successful. The company also introduced breakfast and lunch sandwiches and a new line of coffee-flavored liquors. Through a joint venture with PepsiCo, Starbucks is introducing Starbucks vending machines. Although Starbucks is always developing new products, a few drinks have fallen flat. In 2006 Starbucks pulled Chantico, its "drinkable dessert," from the menu. Chantico was marketed to resemble the thick, sweet hotchocolate drinks found in European cafés, but it was available without any variations in a 6-ounce size.

The size limitation proved fatal: Customers are used to dictating not only the size of their lattés but also whether they want them regular or decaf and with nonfat, whole, or soy milk; sugar-free or regular flavor shots; and extras such as whipped cream and caramel. However, Starbucks will try to replace the failed Chantico with a similar product with more available variations. Starbucks' executives believe that the experience customers have in its stores should be the same in any country.

The company tries to foster brand loyalty by increasing repeat business. One of the ways it has done so is through the Starbucks Card, a reloadable stored value card that was introduced in 2001. It has exceeded $2 billion in total activations and reloads, and more than 100 million cards have been activated to date. The typical Starbucks customer visits Starbucks about 18 times a month. Starbucks has been ranked on Fortune's "100 Best Companies to Work" for list for eight years and in 2006 ranked twenty-ninth. The company offers both full- and premium ice cream.

Starbucks locates its walk-in stores in high-traffic, high-visibility locations. While Starbucks can be found in a few shopping malls, the company generally focuses on locations that provide convenient access for pedestrians and drivers. The stores are designed to provide an inviting coffee-bar environment that is an important part of the Starbucks product and experience. Because the company is flexible with regard to size and format, it can locate stores in or near a variety of settings, including downtown and suburban retail centers, office buildings, and university campuses.

It also can situate part-time employees a comprehensive benefits package that includes stock-option grants through Bean Stock, as well as health, medical, dental, and vision benefits. It also embraces diversity as an essential component of doing business. The company has 91,056 employees with 11,444 outside the United States. Of these, 28 percent are minorities and 64 percent are women.

However, being a great employer does take its toll on Starbucks. In 2005, Starbucks spent more on health insurance for its employees than on raw materials required to brew its coffee. The company, which provides health-care coverage to employees who work at least 20 hours a week, has faced double-digit increases in insurance costs each of the last four years. Nonetheless, the Starbucks' benefits policy is a key reason that it has notably low employee turnover and high productivity. In the process of trying to establish Starbucks as the most recognized and respected brand of coffee in the world, the company also has built an excellent reputation for social responsibility and business ethics. Starbucks pays coffee farmers premium prices to help them make profits and support their families. It is also involved in social development initiatives that invest in programs to build schools, health clinics, and other projects that benefit coffee-growing communities.

It collaborates with farmers through the Farmer Support Center, located in Costa Rica, to provide technical support and training that promotes high-quality coffee for the future. It strives to buy conservation and certified coffees, including Fair Trade Certified, shade grown, and certified organic coffee, to promote responsible environmental and economic efforts. In 2006, Starbucks ranked seventeenth on Business Ethics' "100 Best Corporate Citizens" list, up from its 2005 position of forty second. Starbucks' sense of social responsibility, fair trade, and support for the environment are a part of the total product it markets for consumers who are concerned about these social issues.

Questions for Discussion

1. What is the total product that Starbucks markets?

2. What is the role of the development of new products in Starbucks' success?

3. Why do you think some new Starbucks products succeed and others, like Chantico, fail?