“We aren’t in the coffee business, serving people.

We are in the people business, serving coffee”

Howard Schultz, Starbucks Chairman and Chief Global Strategist
Fortune Magazine, Vol. 149 No. 2

Title: Starbucks: “The Non-Coffee Treat”

Submit To: P.V. Sundar Balakrishnan

Completed By:

Matthew Carmean Julie Anstett Julia Toochette

Partner Partner Partner

Joel Ennis Joey Eaton Trang P. Huynh

Partner Partner Partner
 Table of Contents

TABLE OF CONTENTS...............................................................................................................................................................2
EXECUTIVE SUMMARY............................................................................................................................................................3
MANAGERIAL PROBLEM.........................................................................................................................................................4
SITUATION ANALYSIS...............................................................................................................................................................4
Company ................................................................................................................................................................................. .4
Customer ................................................................................................................................................................................. .4
Competitor .................................................................................................................................................................... ..........5
Complementors.................................................................................................................................................................... .....5
STRATEGY (STP).........................................................................................................................................................................5
Segmentation............................................................................................................................................................ ................5
Target................................................................................................................................................................................ ........5
PRODUCT LIFE CYCLE.............................................................................................................................................................6
Introductory Stage............................................................................................................................................. .......................6
Growth Stage.............................................................................................................................................................. ..............6
Maturity Stage ..................................................................................................................................................... ....................7
Decline Stage................................................................................................................................................................... .........7
IMPLEMENTATION PLAN AND RECOMMENDATION .....................................................................................................7
Product..................................................................................................................................................................................... .7
Price...................................................................................................................................................................................... ....7
Place (Distribution)............................................................................................................................................................. ......8
Promotion................................................................................................................................................................. ................8
APPENDIX.....................................................................................................................................................................................8
PRICE............................................................................................................................................................................................13
PROMOTION...................................................................................................................................................................................13
PLACE..........................................................................................................................................................................................13

Starbucks: “The Non-Coffee Treat” 2

Executive Summary

Starbucks is the leading retailer and roaster for brand specialty coffee in the world. It has over
7,500 stores located worldwide. As Starbucks continues to expand, it will encounter all sorts of new
product markets, with new and demanding customers for unique and appealing products. Starbucks has
begun by introducing an extension of the Frappuccino line targeted to the non-coffee drinker. Entering
this new market, Starbucks faces many challenges from having to compete to retain brand recognition of
its primary products, yet increase awareness of its new product line. Our analysis and research of the
market have resulted in keys findings as follows:

• The new Frappuccino blended beverages, also known as the Summer Drink flavors will help
Starbucks reposition itself in the developing non-coffee iced-beverage market; Starbucks will also
need to enhance the product perception to maintain the perceived high quality. Customers of this
segment are sensitive to taste and quality of food product and nutritional data.

• With this new line extension, Starbucks will be facing many new competitors such as Jamba Juice,
Orange Julius and other local non-coffee iced-beverage providers. Special care must be
implemented to maintain Brand equity for it’s primary product, and not become to diversified the
current customers seek alternatives.

• Based on our research, we found that the married couples age 25-54 with children to be the
primary potential target market.

• Additionally, we have concluded generating awareness about the product via a Web Campaign
would be highly advisable. A Secondary approach would be Network TV or Print Media such as
magazines, journals, and newspapers.

Starbucks: “The Non-Coffee Treat” 3

Managerial Problem
Starbucks strategic goal is to increase market share of the non-coffee drinker; they have begun by
introducing an extension of a product line targeted to this segment. To ensure market growth, Starbucks
has repositioned one of its current products, the Frappuccino line, this product has been extended to
include 3 new flavors; Double Chocolate Chip Crème, Vanilla Bean Crème, and Strawberries & Crème,
introduced throughout the summer months. Faced with the challenge of entering a new competitive
market Starbucks must compete to retain brand recognition of its primary products, yet increase
awareness of its new product line.
Situation Analysis
Company
Starbucks is the leading retailer for roaster and brand specialty coffee in the world (See Figure 1).
It has over 7,500 stores, which are located in the United States, Canada, Europe, Asia and the Middle
East1. Besides high quality coffee drinks, Starbucks sells bottled coffee drinks, such as Frappuccino® and
Starbucks DoubleShot™.
Starbucks revenue is growing by 20% a year and is opening approximately three stores every day.
Starbucks is capable of managing its successful operations by having steady market growth. It achieved
this by financing through their cash flow instead of franchising, selling stock or increasing their financial
leverage2. Its strategy to success is “blanket an area completely.” This approach is to “cuts down on
delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for
all the stores in an area,” that gives Starbucks a competitive advantage.3

Customer
At first only yuppies went to Starbucks, but now it attracts a much wider demographic of customers
including people of different ethnic backgrounds and ages. Today, Starbucks has the striking number of 25
million people visitors in its stores each week3. This success is due to the combination of high quality drinks
and friendly environment with good music, comfortable chairs, and good services. This creates the
“Starbucks experience” which customers can relate to that lead to brand loyalty. In addition, Starbucks

1
Sewer, Andy, “Hot Starbucks to Go” Fortune Magazine” January 26, 2004 p.74
2
Sewer, Andy, “Hot Starbucks to Go” Fortune Magazine” January 26, 2004 p.70
3
Source: “Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2004.”and
“Market Share Reporter an Annual Complication of Reported Market Share Data on Companies, Product, and services 2003.” Robert S.
Lazich, Editor. Thomson Gale, 2003
Starbucks: “The Non-Coffee Treat” 4
needs to deal with customers’ cultural preferences in all its worldwide locations to maintain customers’
loyalty. (See Figure 2) Also see Figure 3 for influences on the consumer purchase decision process.

Competitor
To ensure further market growth and be competitive, Starbucks is developing new products for
non-coffee drinkers. Starbucks provides its current customers and attracts new customers not only with
quality products but also with varieties flavors that customers’ desire (See Figure 3).
Starbucks’ two largest competitors are Dunkin’ Donuts and Krispy Kreme, both are national chains.
These companies use aggressive price-cutting, up to 20%, for their drinks.5 Other competitors are small
local coffeehouses, and other coffee brands like Tully’s and Pete’s Coffee. Their direct competitors for the
new product line are Orange Julius, Jamba Juice, fast food chains such as McDonald’s and Burger King,
and other small coffee alternative providers.

Complementors
Starbucks recently teamed up with Bank One to offer the Starbucks Card Duetto Visa.7 This is a
stored-value card and traditional credit card. Starbucks has also introduced a T-Mobile Hotspot service
which allows the Starbucks customer to have access to wireless internet for a fee.8 Offering more services
like the Visa card, wireless internet and customized CD will add more value to the Starbucks experience
and help draw more customers to Starbucks which will lead to higher revenues.
Strategy (STP)

Segmentation
One dimension of segmentation will be demographics (age and household status). We have
selected married couples age 25 – 54 with children to be our primary target market. According to our data
in figure 5, we found that these households spend more than other households on non-alcoholic beverages
away from home. We also like this segment because the children can consume the coffee-free
Frappuccino as well. We expect such events as parents buying the child a Frappuccino as a treat for a
soccer game victory, or on a family trip to the beach. We anticipate the exciting summertime experience,
will remain in the child’s mind and will influence their purchase decisions as they mature. (See Figure 10)

Target
Points of Difference:
Starbucks cannot expect to grow by offering the same products as its competitors. Starbucks must
offer “points of difference” that will make customers want to come to Starbucks rather than competitors.

Starbucks: “The Non-Coffee Treat” 5

The “points of difference” that make Starbucks new Frappuccinos distinctive relative to competitors fall
into four important areas:
• Brand Experience: At Starbucks you aren’t just drinking a beverage, but are undertaking in an
emotional experience by the surroundings.
• Brand Quality: Starbucks has been recognized for exceeding expectations by the quality of their
products and their service. This is what will create their loyal customers.
• Perceived Health: People that are active are perceived to be healthier then those not active. According
to our survey, Figure 6, aside from the coffee, Starbucks is perceived as a healthy establishment,
which makes the new coffee-free Frappuccinos appear healthy as well.
• Convenient Access: Starbucks is everywhere and easily accessible. In many locations Starbucks offers
drive-thru windows, which are more convenient then its competitors.
Positioning
Starbucks products always have been perceived with a prestigious image. With their high quality
products, unique tastes, friendly environment, conveniences, customers are willing to pay a premium
price for its products. As Starbucks extends their product line with the new Frappuccino flavors, it faced
against competitors like Jamba Juice. Therefore, to retain a position in the customers’ minds as high
quality, Starbucks needs to enhance its position by making it appear as nutritional. This can be achieved
by lowering the calories or by adding real fruit to the product. As the product’s nutritional and taste
increase, their perceive quality will also increase. Offering a more quality product for the same price will
help increase sales and enable them to be more competitive in the customers mind.
Product Life Cycle

The summer drinks are currently in the introductory stage of the product life cycle. Refer to
Figure 4. The summer drinks are currently in the life cycle in reference to where we hope it will be in
seasons/years to come.

Introductory Stage
During this stage we expect to have slow sales growth and low profits but are optimistic for the
growth stage to increase both. The introductory stage is simply being used as an introduction to these new
flavors of the Frappaccino drink.

Growth Stage
As the summer draws near we expect sales to rapidly increase. Due to the timing of the hot
weather and the promotion effectiveness we expect to see an increase in sales. With the new-segmented
Starbucks: “The Non-Coffee Treat” 6
market hearing about the new “non-coffee” beverages sales are bound to grow due to curious consumers
and their wants to be in some way affiliated with the Starbucks brand.

Maturity Stage
The maturity stage will be reached near the end of summer and beginning of fall of the first year.
As the product is consumed and referred to as the “Summer Drink” sales will eventually slow and reach
maturity. We recommend selling these flavors year round making them available to those who still desire
to consume them. We do not see sales increasing from summer through winter.

Decline Stage
This stage is expected to come every year in late fall and proceed through winter and mid spring.
Due to the environmental change, the weather, and the promotional aspect of the “summer drink” sales
will surely decline during this period. As shown in Figure 4 we expect throughout the coming years to see
sales progress and gain more market share every year.
Implementation Plan and Recommendation

Product
Starbucks is known for providing superior products and services. Consumers have enjoyed the
experience they encounter at Starbucks, and now for those who seek a high quality non-coffee drink can
enjoy the same experience. By introducing these new summer drinks, Starbucks will enjoy an entirely
new segment to market its products to. When looking at the sales revenues for the summer drinks it is
important to consider that some of the existing customers will inevitably cross over and begin consuming
the new drinks. In the end, the expansion of the product line is a wise decision because of the ease of
adoption to Starbucks reputation for quality as well as the low cost of implementation.

Price
The main competitor to the new summer drinks is Jamba Juice with its smoothies. Comparatively,
Starbucks summer drinks are priced significantly lower. In addition to low comparative price, the
perceived benefits for consuming a Starbucks drink are quite high for most consumers. Therefore, when a
customer does a value analysis and divides perceived benefits by the price, the resulting value for the
customer is quite high. With the price of the summer drinks being lower than it competitors, its price
sensitivity is low. However, over time as consumers adopt the product they may become aware of other
products and therefore the price sensitivity will increase overtime. The delicate balancing act is to manage
the price of the drink low enough to gain market share while still preserving Starbucks’ prestigious image.

Starbucks: “The Non-Coffee Treat” 7

Place (Distribution)
Starbucks distributes its New Frappuccino Blended Beverages directly to customers through its
own retail stores. Currently these new Frappuccino flavors are only available in North American Stores.
With numerous locations, it will be convenient for customers to buy these new Frappuccino products.
These new Frappuccino flavors are available year round. Due to the demand and appeal of the products,
revenue from this product will fluctuate as the seasons change.

Promotion
The easiest methods for promoting the latest summer drinks are by internal advertisements within
its retail stores, such as posters, new product signage, and other internal means. However, this type of
promotion will have the least amount of effect on gaining more market share of non-coffee drinkers.
Therefore we have done analysis of other mediums for promotion; the top 3 mediums of advertising,
according to figures from 2000, include Newspaper, Network TV, and Spot TV4. After reviewing the goal
of increasing awareness of the product to attract people to the retail locations we recommend using a
medium that today is in direct competition to the TV, website marketing. Starbucks has historically
avoided advertisements on TV, due to attempts that had reduced the brand image, furthermore the cost to
do TV spots is far greater then by websites, this is not to say they should not do TV spots, but we
recommend they avoid head-to-head marketing with competitors such as McDonalds, and other Fast-food
chains.
Starbucks has determined that most of its targeted customers consider themselves relatively
technology savvy via the computer. An increasing number of companies are using the World Wide Web to
communicate and after considerable review, we highly recommend a web campaign aimed to increase
awareness of the Summer Drinks. Websites that are highly reputable or that can be partnered with will be
the most successful in generating awareness. See Figure 9.
TV Commercials may also be done, however we do not recommend during the introduction stage.
During Growth would be far more effective. See Figure 11.

Appendix

Figure 1
TOP GROUND DECAFFEINATED COFFEE BRANDS, 2002

4
Krishnamurthy, Sandeep, E-Commerce Management: Text and Cases P. 169 source: Advertising Age, http://AdAge.com
Starbucks: “The Non-Coffee Treat” 8
 30
25
Folgers
20
Maxw ell House
15
Starbucks
10
Folgers Coffee Singles
5 Millstone
0

Based on sales for the year ending November 3, 2002 Starbucks is in third place among top ground decaffeinated coffee brands
with a 7.8 percent market share. This is an increase of 2.6 percent compared to its market share in 2001.

TOP GROUND COFFEE BRANDS, 2002

25 Folgers

20 M axwell House

15 Folgers Coffee House

10 M axwell House M aster Blend

5 Starbucks
0
Hills Brothers

Based on sales for the year ending November 3, 2002 Starbucks is in fifth place among top ground coffee brands with a market
share of 6.66% and $109.2 millions in sales.

TOP WHOLE BEAN COFFEE BRANDS, 2002

35
30
25 Eight O'Clock
20 Starbucks
15 Folgers Select
10 Millstone
5
0

Starbucks: “The Non-Coffee Treat” 9

Starbucks falls among four top whole bean coffee brands and has a 21.7% market share of the whole bean category this places the
company in second place after Eight O’clock. In 2001 Starbucks had only 19.1%5

Figure 2

CULTURAL INFLUENCE ON THE CONSUMERS BEHAVIOR DIFFERENCE

90
80
70
60
Percentage of customer that spend
50
time in coffeehouses
40
30 Percentage of customers that buy
coffee to go
20
10
0
USA Europe

By increasing its market share worldwide Starbucks needs to deal with cultural issues. For instance, in Europe 85% of coffee customers like to
spend time in coffeehouses, in the USA this number is only 14%, the remaining 86% prefer to have their coffee to go. Starbucks needs to
consider new ways to increase foreign markets. One way is by adopting its menu and service to segment markets.6

Figure 3
FLAVOR PREFERENCE SURVEY

45
40
35
30
Strawberry
25
Chocolate
20
Vanilla
15
10
5
0

To create its 2004 summer drinks Starbucks sponsored a survey during which it was revealed the degree of flavor preferences.
This survey shows that Americans most enjoy the taste of chocolate (41%), strawberry (29%), and vanilla (28%). As a result,

5
Source: “Starbucks Steaming Ahead with Aggressive Expansion plans” by Jake Batsell. The Seattle Times. March 28,2004.
Retrieved on April 25, 2004 From http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document
6
Source: “Starbucks Steaming Ahead with Aggressive Expansion plans” by Jake Batsell. The Seattle Times. March 28,2004.
Retrieved on April 25, 2004 From <http://seattletimes.nwsource.com/cgi-bin/PrintStory.pl?document>

Starbucks: “The Non-Coffee Treat” 10

Starbucks for 2004 developed new drinks: Java Chip Frappuccino, Double Chocolate Chip Frappuccino, Strawberries & Crème
Frappuccino, and Café Vanilla Frappuccino. 7

Figure 4
Summer Drink Frappuccino Life Cycle
Sales

Spring Summer Fall Winter Spring Summer Fall Winter Spring Summer Fall Winter
2004 2005 2006
= Current Progress in Product life Cycle

Figure 58

Percentage of total annual spending on non-alcoholic beverages away from home, by household type
Non-Alcoholic Total married Married couples, Married couples, Single parent at Single person
beverages away couples no children with children least one child
from home 62.20% 17.90% 38.60% 5.20% 18.90%
Average annual spending of consumer units on non-alcoholic beverages away from home, by household type, in
thousands
Non-Alcoholic total married Married couples, Married couples, single parent at single person
beverages away couples no children with children least one child
from home 191.77 135.83 232.66 147.84 101.41
Percentage of total annual spending on non-alcoholic beverages away from home, by age
Non-Alcoholic total under 25 25 - 34 35 - 44 45 -54 55 - 64 65 - 74 75+
consumer
beverages away units
from home 100.00% 6.50% 20.90% 28.50% 23.80% 11.80% 5.60% 2.40%
Average annual spending on non-alcoholic beverages away from home, by age, in thousands
Non-Alcoholic total under 25 25 - 34 35 - 44 45 -54 55 - 64 65 - 74 75+
consumer
beverages away units
from home 158.55 136.7 192.3 206.39 188.28 144.14 83.94 38.76
This information is based on unpublished data collected by the Bureau of Labor Statistics’ Consumer Expenditure Survey,
an ongoing, nationwide survey of household spending. From this data we have found that when going out for non-
alcoholic beverages householders spanning the ages of 25 – 54 spend the most overall. We also conclude married couples
with children at home spend more than other household types when going out for non-alcoholic beverages. With this data

7
“Business Wire. “On April 23, Starbucks introduces five new Frappuccino(R) blended beverage flavor, including
Strawberries &Cream Frappuccino(R) blended cream.” Retrieved on April 22, 2004 at
< http://aolsvc.news.aol.com/business/article.adp?id=2004022 >

8
Household Spending. 8th Edition. Nov. 2003. Ed. New Strategist Publications.

Starbucks: “The Non-Coffee Treat” 11

we have decided to target the segment of married couples ages 25 – 54 with children at home.

Figure 6
Small Random Survey

Besides the coffee aspect, do you view Starbucks

as a healthy establishment?
Yes: 12
No: 4
This survey was taken on the streets of Seattle around Pike Place Market. Sixteen random individuals were asked,
“Besides the coffee aspect do you view Starbucks as a healthy establishment,” twelve answered yes, and four answered
no. According to this survey we conclude that America’s view Starbucks as a healthy establishment.

Figure 7

Average Customer Expense & Visits per Week

Customer Expenditure Purchase Cycle
Customer 1 $3.50 4
Customer 2 $8.50 3
Customer 3 $5.00 5
Customer 4 $6.50 6
Customer 5 $6.00 3
$5.90 4.2
Average Expenditure Average visits per customer
per week
Starbucks Customer Lifetime Value
Average expenditure per visit $5.90
Purchase cycle in weeks 4.2
Gross Margin 21.3%*
Annual contribution from exchange (53) $279.74
Forecasted customer life (years) 20
Lifetime profit $5594.80
Net present value of future cash flows using 10.0% $2381.58
discount rate *Gross
Margin figured using most recent 13 weeks ended March 28th 2004. Cost of goods sold was figured by adding Cost of
Price
sales, Store operating expenses, and other operating expenses. That number was then subtracted from total net revenues
and the answer was then divided by total net revenues9. High

Figure 8
Repositioning of New Frappuccino Product Perceptual Map

Perceived
Quality Perceived
Low Quality
High
9
Retrieved on May 10, 2004 from:
http://ir.10kwizard.com/filing.php?repo=tenk&ipage=2775907&doc=1&num=3&total=35&count=0&source=518

Starbucks: “The Non-Coffee Treat” 12

Price
Low
 Jamba
Juice

Orange
Julius

Starbucks
Italian Soda
Bubble Tea

Milk Shake

Slurpees

Soda

Perceptual map reflects how the new Frappuccino products perceived quality relative to its price, and how customers perceives
the Frappuccino compared with other non-coffee competitors. To increase it perceived quality and increase sale, Starbuck
should move to a more desirable position by enhance the nutritional side of the product while attempting to maintain the same
price level.

Figure 9
Ad Marketing Campaign Purpose: Brand-Building device that improves product awareness
Behavioral Targeting:
Delivering ads based on how and
when a visitor uses the web. For
example, Starbucks can request
more advertisements be placed on
websites during the hotter days of
the year.

Content Targeting:
Involves delivering ads based on
the content of a website or
interest category chosen by a
consumer. This would include
marketing on websites where
more non-coffee drinkers surf
then coffee drinkers surf.
Figure 2 Example of Summer Drink Banner Ad
http://www.carmean.net/starbucks

Figure 10 – Influences on Consumer Purchase Decision Process

Marketing mix influences

Product
Coffee products and Starbucks experience.
Price
More expensive than average coffeehouses.
Promotion
Starbucks: “The Non-Coffee Treat” In-store advertisements, interviews and articles in 13
newspapers and magazines.
Place
Everywhere, you don’t have to go far to find a
Psychological influences: Sociocultural influences
Motivation Personal influence
Physiological need Opinion leaders – Important
Personality associates drink Starbucks coffee
Compliant - prefer known brand you want to too.
names Word of mouth – A friend mentions
Perception how great the new Frappuccino
Selective exposure, notice Consumer purchase decision process flavors are.
Starbucks when tired or thirsty. Problem recognition: Reference groups
Attitude Feeling thirsty, need of energy caffeine Membership group such as college
Favorable attitude toward ↓ students or business associates.
Starbucks experience. Information search: Family
Belief Friend’s relatives, advertising and display of posters Parents go to Starbucks when child
You will always receive good ↓ matures will remember the
coffee and service Alternative evaluation: experience.
Lifestyle Other acceptable brands of coffee drinks Social class
Busy, fast-paced ↓ Middle to upper class business
Purchase decision: associates and college students.
Assessment of receiving value for given price
↓
Postpurchase behavior:
Satisfaction from product and experience

Situational influences Physical surrounding

Purchase task Jazzy and relaxing music, funky décor, plush velvet chairs, unique
Want an energizer boost and a good experience. light fixture and comfortable atmosphere.
Social surroundings Temporal effects
People reading, doing homework, just sitting drinking coffee, In a hurry, drive-thru and quick ready to eat pastry.
relaxed surrounding. Antecedent states
Tired? Get coffee. Short on cash? Use Starbucks card.

Figure 11 - Starbucks Commercial

Starbucks: “The Non-Coffee Treat” 14

Table 1 Starbucks Commercial Layout– Simulates an individual walking through the Pikes Place market and observing other
people carrying Starbucks drinks and enthusiastically enjoying them. Titles appear briefly over the people suggesting the “self
image” of the drinker. Chocolate – Romantic, Vanilla – Stylish, and Strawberry – Bold. The observer then ends finding the
Starbucks and the scene ends with a zoom in on the logo. The Starbucks old logo then fades out into the new one and an image
of a new summer product comes in. The wording is simple yet clear. Summer, Starbucks, Enjoy. The consumer clearly
understands this summer you can enjoy yourself at Starbucks. This could be a very strong but clean prestige image commercial.
The audio has a nice fresh beat that can easily be found in the “Experience” at a Starbucks location.

Starbucks: “The Non-Coffee Treat” 15