Thesis on "How Starbucks Handled the 2008 Recession"

Thesis 9 pages (3266 words) Sources: 20 Style: APA

[EXCERPT] . . . .

S&P 500 company analysis and recommendations: How Starbucks has coped with the 2008 recession

Firm analysis

Even firms not directly involved in the real estate, insurance, and credit markets were impacted by the 2008 credit crisis and subsequent market meltdown. The hospitality industry was especially concerned, as data indicated that more and more people were eating at home: an industry survey revealed that 82% of representatives from the food, beverage, and hospitality industry said that they believed the 2008 crisis would have a "direct impact" in terms of people's immediate buying habits (Survey, 2008, 21food.com). They also expressed more obvious concerns with liquidity of daily working capital and their ability to improve their enterprise's technology through the use of new capital.

Starbucks, a Standard and Poor's (S&P) Index 500 company, sells a good and a service often viewed as a luxury item, namely that of purveying and making of premium coffee, breakfast pastry and some savory light foods. Although people are addicted to coffee, no one needs to buy coffee at a coffee shop. Moreover, one of the first things people were advised to give up in the wake of the credit crisis was their morning latte. Popular financial guru Suze Orman even created a buzzword: "She's particularly into what is commonly termed the 'latte factor': cutting down on unnecessary expenses and investing them are real keys to moving forward with a strong personal finance plan" (Hamm 2007). Latte calculators abounded on the Internet, demonstrating in real financial terms how much people could save if they gave up pricey coffee.

Starbuck's immediate response to the credit crisis as a company was strong, in terms of its marketing. In the United Kingdom and Ireland, for example, Starbucks even offered free cups of filter coffee to customers," acknowledging that "premium coffee experience has, over time, been an affordable luxury. And at this time, it isn't for some people" (Clout 2008). But as the recession spiraled, Starbucks seemed to enter into an "existential crisis, floundering…as its CEO Howard Schultz tried a mixed array of approaches, including "closings, layoffs, promotions featuring lower priced products, and the introduction of instant coffee" (Smith 2009). This last addition was seen as particularly damaging in terms of diluting, no pun intended, the strength of the Starbucks brand. "I have an expectation of what it will be like, and I think it will be harmful for the brand," said one analyst. "They're really looking to generate revenue in the short-term to meet the expectations of investors" (Kimes 2009).

Yet concerns about people's willingness to shell out for Starbucks remained, forestalling a purely premium-brand driven strategy. While the frequent reference to the 'latte factor' in the media regarding consumer cutbacks does not single out Starbucks by name, there is little question that most people are thinking of Starbucks when the phrase is mentioned. Plus, even before the credit crisis, Starbuck's prices were the subject of much derision. One survey by a popular marketing research firm Customer Think elicited these responses in 2007, when the recession (according to economists) had already begun but the 'panic alarm' had yet to be pushed by the media and the Federal Reserve (Andrews 2008): "Just overpriced coffee." "I hate paying more than $3 for coffee." "I have had far better coffee at half the price -- pricing is ridiculous." "With so many other options available to me, it is not always worth the added expense." "Raising of prices would cause me to leave Starbucks. They are already very high." "If prices go any higher, I will have to reduce my visits." "If prices go up again, I'm out" (Lee 2007). Of 3,865 valid responses from Starbucks patrons across the globe in the survey, price was the leading factor respondents rated lowest regarding Starbucks (Lee 2007).

Starbucks long-term response to the threat of the 'latte factor' -- the risk people will give up patronizing a company with an expensive image that sells a frivolous product -- has been to reformulate its pricing polities. Its stock prices bumped slightly upward as it announced in August of 2009 that it was raising its prices on fancier beverages with more complex ingredients, like Frappucinos, but cutting the costs for simpler and more basic fare like coffee, so people could still afford Starbucks during the recession. (Starbucks raises prices, 2009, the Huffington Post). This seems like a savvy approach, given that it ensures the 'latte habit' of going to Starbucks remains a part of people's morning routine and yet establishes that Starbucks was an ethical company that is responsive to the current economic environment and its customer's economic pain. Starbucks remains much beloved, despite Starbucks 'hate' in some pockets of non-chain coffee shop aficionados: in How Starbucks Saved My Life, one 2007 'downsized' advertising executive praised the company in print for giving him a job, a routine, but most importantly health insurance, even while he labored as an entry level barista

"The issue at hand ... is the cost of losing your core customer," Howard Schultz, the company's chief executive, said in an interview, "it's very hard to get them back" (Adamy & Wingfield 2008). The new pricing policy further confirms Starbucks' image as an affordable luxury -- Starbucks has always denied its elite image, stressing that the amount of money people spend upon even its high-end caramel macchiatos is small in comparison to extraneous shoes and gadgetry. Some argue that "a doppio macchiato half-caf skim foam" at a store for $4 is cheap, as they consider it a form of relaxation and psychotherapy (Smith 2009). The prices of basic beverages like plain coffee and lattes under the new policy would be slashed 5 to 15 cents while other complicated, high-end beverages would increase 10 and 15 cents and as much as 30 cents (Starbucks raises prices, 2009, the Huffington Post).

Of course, the question then arises -- why not simply cut prices across the board? However, the response to this is twofold: firstly some of Starbucks' patrons may be very loyal customers but are very financially encumbered at present, such as college students graduating with high student loans, no prospects of an immediate job, who developed a habit of drinking Starbucks coffee that began in high school when they were still subsidized by mom and dad. Many job hunters bring their laptops to the local Starbucks to sip coffee and search the Internet, making use of free Wi-Fi. Slashing regular coffee prices keeps these individuals loyal, and helps secure their patronage even after the recession ends and they get jobs.

Starbucks executives admit that they are struggling to balance between value and prestige. Still, "if we are a premium brand, it doesn't mean we can't provide value," insists Howard Schultz, Starbuck's chief executive. Starbucks customers range from "BMW-driving professionals who often come in twice a day" because they are too busy to make coffee due to job pressures "to budget-conscious people who used to come in once a month and now come even less…that last group is huge, so to get one more visit out of these guys a month is huge" (Miller 2009). Starbucks thus has a difficult task, to straddle to schizophrenic goals of being an affordable luxury and being a premium brand, in contrast to Dunkin' Donuts and McDonald's.

Part II: Different directions

"What is Starbucks? Is it a momentary retreat from the stress of work and life? Is it a fast-service coffee chain? Is it a snack shop? Is it a luxury coffee manufacturer? What is Starbucks' reason for existence?" (Smith 2009). Starbucks faces a number of potential options. On one hand, it could try to keep its luxury, yet ethically-conscious image as a purveyor of 'special coffees,' the creator of unique and intimate environments for patrons to enjoy while drinking European-style beverages, or, in a second and contrary approach, it could try to create a more budget-friendly image. Its third approach is that it could emphasize the two-pronged marketing strategy of being price-conscious and luxurious at the same time. This is the policy it is currently embracing, although this runs counter to most conventional wisdom from marketing gurus about confusing the consumer. Regardless, this current policy seems wise, given that there will always be cheaper options than Starbucks, on the road (in the form of Wawa or McDonald's) or having coffee at home, even making it at the office. But a solely premium image discounts some of Starbucks' core consumers, particularly the young. And there are even more expensive coffees at the very high end of the market.

Starbucks is pursuing a holistically 'schizophrenic' strategy of trying to be both an affordable luxury and 'above and beyond' the common Dunkin' and McDonald's experience. It is aggressive in its deployment of both techniques: even for customers who are seriously… READ MORE

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