Starbucks Strategy

Fortune writes about the entry of Starbucks into its top 500 at No. 465:

The Starbucks story epitomizes “imagine that” in every sense. When the company went public 11 years ago, it had just 165 stores clustered around Seattle and in neighboring states. At the time coffee was a 50-cent morning habit, and your local diner was the pusher of choice. Skeptics ridiculed the idea of $3 coffee as a West Coast yuppie fad.

Today the company, which does not franchise, has over 6,000 stores in more than 30 countries, with three new stores opening every day. Critics on Wall Street give Starbucks two more years before the market here at home is saturated. Schultz, sitting impatiently in his office with its unscenic views of the Port of Seattle train tracks, scoffs at that interpretation. “Those who talk about saturation obviously don’t understand our business strategy,” he says.

The strategy is simple: Blanket an area completely, even if the stores cannibalize one another’s business. A new store will often capture about 30% of the sales of a nearby Starbucks, but the company considers that a good thing: The Starbucks-everywhere approach cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores in an area. Last week 20 million people bought a cup of coffee at a Starbucks. A typical customer stops by 18 times a month; no American retailer has a higher frequency of customer visits. Sales have climbed an average of 20% a year since the company went public. Even in a down economy, when other retailers have taken a beating, Starbucks store traffic has risen between 6% and 8% a year. Perhaps even more notable is the fact that Starbucks has managed to generate those kinds of numbers with virtually no marketing, spending just 1% of its annual revenues on advertising. (Retailers usually spend 10% or so of revenues on ads.)

Starbucks is aiming to have 10,000 stores worldwide by 2005.

The Starbucks story is remarkable because (a) it as happened in front of us (b) tey have done it with a commodity product (c) they have spent almost nothing on advertising.

Published by

Rajesh Jain

An Entrepreneur based in Mumbai, India.