When Starbucks went public in 1992, it had only 165 stores spread throughout Seattle and its neighbouring states. Today, it has surpassed its 10,000 goal and is planning on adding another 10,000 outlets worldwide. What was the Starbucks strategy that enabled this initially West Coast yuppie fad to become a global phenomenon, placing Starbucks at 338 on the 2006 Fortune 500 List?
It is simple: saturate the market. The accepted business model at the time was to spread out the location of your chain outlets so as not to cut the profits of one store from another. Typically, stores would place their retail outlets in locations based on demographics, traffic patterns, the location of competitors as well as the location of its own stores. However, the Starbucks strategy went against the grain. Instead of following the trend, CEO Howard Schultz had a different idea. He decided that the Starbucks strategy would be to blanket an area completely.
Instead of worrying about stores eating up each other’s business, the Starbucks strategy focused on heavily increasing the foot traffic in one specific part of town. Not only would this cut down on the company’s delivery and management times, but also it would shorten the waiting lines for customers at each individual store and hopefully increase overall traffic. Schultz knew that his Starbucks strategy was a risk, but it was one he was willing to take.
In the end, the unique Starbucks strategy paid off. Clustering its stores in one area helped Starbucks quickly achieve market dominance. With over 20 million regular customers per week, no other American retailer can claim a higher frequency of visiting customers. Since the company went public, sales have risen roughly 20% each year. Even when the rest of the economy seems to be in a slump, loyal patrons keep returning to Starbucks for their regular cup of Joe.
What makes this Starbucks strategy all the more amazing is the fact that the company spends less than 1% of its annual revenues on advertising, versus the typical 10% of most other retailers. Instead, the Starbucks strategy relies on word of mouth advertising. They believe that by creating an intimate and welcoming environment in their stores, as well as providing a great cup of coffee, patrons will not only keep coming back for more, but will tell all their friends and family about it too.
The Starbucks strategy has always involved thinking outside the box. In addition to clustering its outlets, the Starbucks strategy involves engaging in smart joint ventures with the right companies, such as their successful alliance with Pepsi-Cola Co., and rolling out fresh, new initiatives, including a new product line of hot sandwiches and breakfast food and new drinks such as coffee liqueurs. The Starbucks strategy is now also expanding online, allowing customers to pre-order and prepay for products via the Internet.
Starbucks continues to keep its customers happy and rely on non-traditional means of attracting new customers; that is the Starbucks strategy. Are they worried about over-saturation? Absolutely not, says Schultz. “Those who talk about saturation obviously don’t understand our business strategy.”
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