Starbucks’ expansion has presumably backfired; so the coffee king has put in place a new plan of action. But why will this work better than before?
It’s a classic problem of plenty. If you had limited money and if you had to invest in either expanding retail outlets or maintaining/improving quality in current outlets (with each choice being mutually exclusive of the other), which one would you have chosen in the current times of economic slowdown? One line of thought would say that people don’t stop drinking coffee even when there is slowdown, so it’s better to expand. Another line of thought would say that people would surely stop drinking coffee during economic slowdown ‘if’ the coffee was a premium (relatively) high priced brand; and therefore the focus should then be on consolidating current customers, improving and maintaining quality rather than on expansion.
The $10 billion turnover Seattle based Starbucks, the world’s largest coffee chain, went in for the former; that is, expanded. But more interestingly, in their expansion drive, they adopted a mixed positioning strategy (that is, they positioned Starbucks as a coffee for masses, yet tried to hold on to their premium positioning). The result? It was forced to shut down 600 stores across the globe – a hefty number considering that Starbucks has 16,000 plus stores globally. While the share price was at a high of close to $17 a year back on Nasdaq, it fell rapidly to the $7-8 range by the first quarter of this year.
Starbucks, because of a focus on expansion rather than delivering a quality coffee product, ended up in a situation where the brand was definitely available to a wider consumer group; but because of the premium price, it was still not affordable to everyone,” explains Elizabeth Higgins, Consumer Foodservice Industry Manager, Euromonitor International. But all was not lost; as Starbucks perchance realised the mistake and immediately started correcting the positioning back to a premium one. To that effect, the coffee king has taken in many measures. For example, Starbucks is planning to roll out coffee in small quantities and also is adding items such as wine and beer to its menu for evening visitors. Apart from this, it also plans to offer live entertainment to its customers by way of movie screenings, live music, dance, community theatre, et al. “Their recent [changed] focus on the product should help them win back consumers that were turned off previously by the quality or service,” adds Higgins.
However, the challenge that lies ahead of it is that if Starbucks wishes each one of its stores to be on the same pattern, it may have to shut down some more stores, especially those in areas where consumer segments are not interested in spending more for coffee. What has been the current result? Net revenues for the quarter gone by (Apr-Jun 09) fell 6.6% to $2.40 billion from $2.57 billion in the same quarter previous year, more because of outlets being closed down. What about profit? For the quarter in question, Starbucks got in $151.5 million as net profit. This is considerable, as last year same quarter they had a huge loss of $6.7 million. So are things looking up? Well, the share price has already crossed 52 week high barrier of $17 in Jul-Aug 2009...
Savreen Gadhoke
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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It’s a classic problem of plenty. If you had limited money and if you had to invest in either expanding retail outlets or maintaining/improving quality in current outlets (with each choice being mutually exclusive of the other), which one would you have chosen in the current times of economic slowdown? One line of thought would say that people don’t stop drinking coffee even when there is slowdown, so it’s better to expand. Another line of thought would say that people would surely stop drinking coffee during economic slowdown ‘if’ the coffee was a premium (relatively) high priced brand; and therefore the focus should then be on consolidating current customers, improving and maintaining quality rather than on expansion.
The $10 billion turnover Seattle based Starbucks, the world’s largest coffee chain, went in for the former; that is, expanded. But more interestingly, in their expansion drive, they adopted a mixed positioning strategy (that is, they positioned Starbucks as a coffee for masses, yet tried to hold on to their premium positioning). The result? It was forced to shut down 600 stores across the globe – a hefty number considering that Starbucks has 16,000 plus stores globally. While the share price was at a high of close to $17 a year back on Nasdaq, it fell rapidly to the $7-8 range by the first quarter of this year.
Starbucks, because of a focus on expansion rather than delivering a quality coffee product, ended up in a situation where the brand was definitely available to a wider consumer group; but because of the premium price, it was still not affordable to everyone,” explains Elizabeth Higgins, Consumer Foodservice Industry Manager, Euromonitor International. But all was not lost; as Starbucks perchance realised the mistake and immediately started correcting the positioning back to a premium one. To that effect, the coffee king has taken in many measures. For example, Starbucks is planning to roll out coffee in small quantities and also is adding items such as wine and beer to its menu for evening visitors. Apart from this, it also plans to offer live entertainment to its customers by way of movie screenings, live music, dance, community theatre, et al. “Their recent [changed] focus on the product should help them win back consumers that were turned off previously by the quality or service,” adds Higgins.
However, the challenge that lies ahead of it is that if Starbucks wishes each one of its stores to be on the same pattern, it may have to shut down some more stores, especially those in areas where consumer segments are not interested in spending more for coffee. What has been the current result? Net revenues for the quarter gone by (Apr-Jun 09) fell 6.6% to $2.40 billion from $2.57 billion in the same quarter previous year, more because of outlets being closed down. What about profit? For the quarter in question, Starbucks got in $151.5 million as net profit. This is considerable, as last year same quarter they had a huge loss of $6.7 million. So are things looking up? Well, the share price has already crossed 52 week high barrier of $17 in Jul-Aug 2009...
Savreen Gadhoke
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
1 lakh copies sold in less than 10 days of Arindam Chaudhuri’s “Discover The Diamond In you”
IIPM fights meltdown, places 2300 students By Education Mail Bureau
Delhi/ NCR B- Schools get better By Swati Sharma
Events at IIPM
Detail of all IIPM branches
IIPM set to beat economic slowdown
IIPM - Admission Procedure
IIPM, GURGAON
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