STARBUCKS / COSTA COFFEE: Marketing analysis of two leading brands in the coffee shop market

4. Promotion

Definition:  Promotion targets advertising, personal selling, sales promotions, public relations, direct marketing, and Internet and online promotion.
The aim is to encourage as many people as possible to buy a product.

• Starbucks does not use advertising; its fame is due to:

•  Word of mouth.
• A very developed internet website.
• Appearance of its logo on TV shows, especially in US broadcasts
• Setting up of a fidelity card to establish a trust relationship between Starbucks and its consumers.

2.  4 P Costa Coffee

1.  Product

Definition:  The product decision is what a company should offer as goods or services to satisfy the needs of a group of customers.

• Costa Coffee offers different types of products:

• Beverages with whole coffee beans (Espresso, Americano…)
• Beverages related with coffee (Cappuccino, Café Latte…)
• Beverages without coffee (Tea, Juices, Water)
• Food products (muffins, cakes, pastries, sandwiches)

2.  Price

Definition: The price is the financial value of a product; it represents what the company receives for a product or service that has been sold.

3. Place

Definition: The place involves decisions concerning how a product is distributed, where, and how it is transported to the consumer. The aim is to ensure that products and services will be at the right place, in time and in proper quantities.

• Costa Coffee’ stores are located in shopping place areas and in all strategic places where there are people travelling to work or abroad (airports, underground, rail station….)
• Costa Coffee also makes partnerships with big firms or universities to promote and sell its products.

4. Promotion

Definition:  Promotion targets advertising, personal selling, sales promotions, public relations, direct marketing, and Internet and online promotion.
The aim is to encourage as many people as possible to buy the products.

• Costa Coffee does not use advertising; its fame is due to:

•  Word of mouth.
• An very developed internet website
• Setting up of a fidelity card to establish a trust relationship between Costa Coffee and its consumers.
• The Costa Book Award and the Costa Book Club are quite famous organisations, settled by Costa Coffee to promote its products.
• Partnerships with other brands or organisations.

2. UNCONTROLLABLE

3.  PEEST Analysis

5. Political and Legal forces

- To prevent firms from abusing a position of market dominance, the government established a law to discourage them from practising a monopoly situation and discriminatory prices. Such a situation could harm small buyers with little bargaining.

• The Sherman Antitrust Act (1890) is a measure passed by the U.S. Congress to prohibit trusts.

- In relation with this law, Starbucks has been accused in September 2006 of having a monopoly power on the market coffee (73% share of the U.S). The company is suspected of leasing establishments above the market price, and in exchange landlords guarantee to exclude other coffee shops from the building. But there is no clear evidence of the exclusivity that Starbucks obtains through these leases.

- Costa Coffee wasn’t affected because it hasn’t as many stores as Starbucks.

- Due to new trends entering the market it is vital that Costa and Starbucks are aware of the changes and adapt effectively and efficiently to deliver customer wants, needs and demands.  In Europe, companies are affected by legislation at EU and national levels.

• UE drugs law (2003): the deal of illegal drugs are allowed or tolerated in some European countries, whereas other countries ban this practise.  For example, in the Netherlands cannabis is smoked and sold in coffee shops, it creates disagreements across Europe. That’s why the European commission has voted the drugs law in 2003 in order to harmonise all national laws. The European Commission has decided that offering, selling or producing drugs should be sanctioned, except in the Netherlands, where the sale of cannabis remains allowed, but only in coffee shops, and is restricted strictly to Dutch residents, in order to dissuade tourists from going to the Netherland to buy or use drugs. 

         As a result of the law, Costa Coffee and Starbucks have made all their areas smoke free to completely avoid the use or the sale of cannabis.

• Smoking ban law (1st July 2007): smoking was banned from all public places and workplaces in the UK. For coffee shops it’s a good way to guarantee a healthy area. Costa Coffee was awarded a Platinum Certificate.

6. Economical forces

- The move by eight central and eastern European countries to join the EU and their change to market-driven economies has marketing implications. Their significant cost advantages (low income, educated workforce) attract many companies:

• Starbucks entered the European market in 2000 and opened stores all over Europe, by means of joint-venture.
• Between 2004 and 2008, Costa Coffee opened coffee shops in 11 Eastern European countries. These stores are franchised.

- Bad Economic times have pushed down demand: In recent months prices have gradually increased due to the Credit Crunch; this has lead customers to struggle to afford these products.

• Starbucks has seen its share price fall as costs have risen. Starbucks has planned to close unprofitable stores (Rising price of fuel: It costs so much that people now put aside the coffee break in Starbucks)  
• Costa Coffee: it still plans to double the number of Costa outlets to 2,000 over the next five years. (Its UK market share grow from 24% to 26%)

- The economies of China and India are growing rapidly and both nations have consumers with growing incomes. As a consequence coffee shops can benefit from the China’s and India’s economic boom

• Starbucks penetrated the Asian market in 1999.
• Costa Coffee entered the China Market in December 2006 via a joint venture agreement with the Yueda Group. Costa Coffee was the first international brand to enter the Indian market via joint venture with the RKJ group in 2004.

- The international coffee agreement is an agreement for international cooperation in the field of coffee in the best interests of Governments and the world coffee industry. It has been created to improve relationships between nations that produce, distribute and consume coffee. As coffee is the major economic force in the world, this agreement maintains the fair price of coffee.

As a result, coffee companies, in order to reinforce this agreement associate with fair trade companies to protect coffee growers from the world coffee prices. Minimum prices for coffee beans are paid and business support and development programmes are provided.

7. Ecological and Physical forces

- Energy policy: as energy prices have risen and with the growing concerns of climate change, companies are trying to save energy as well as minimise their impact on the environment and reduce their costs.

• Costa reduces costs of energy and water, food preparation and waste.
• Starbucks policy focuses on energy conservation and purchasing renewable energy.

• Recycling and non-wasteful packaging: more and more associations tend to increase population and firms awareness of the ecological issues.

• Starbucks contents itself with providing cups only 10% post-consumer recyclable.
• Costa Coffee cups contains about 40% recycled plastic.

8. Social and Cultural forces

1. Population in the world

The global population is increasing and will increase again in the future. The experts say the population will grow by an average of 97 million per year.

But the rate of growth is unequal across the world.

The Asian countries (China and India especially) will see an unceasing increase of their population in the future. This population is more youthful than in the developed countries where the population is ageing.

Population by age in percent in the world, 2007

Therefore the coffee shops should straight away adapt a strategy towards young people in the developing countries. The aim of going to a coffee shop has become a habit in these future consumers’ life.

But we note that in the developed countries it is the opposite. The population is becoming older and older. We choose the example of the UK to show this difference.

2. Population is in the UK

1. Demographic forces

At this moment the part of less-than-fifteen-year-olds is the same in the UK than the part of the more-than-sixty-five-year-olds.

We know that the branded coffee shops are most popular among those aged 20-34, but it doesn’t fall significantly before the age of 65 and above.

38% of the 20-34-year-olds have visited a branded coffee shop in the previous 12months, 33% of the 15-19-year-olds, and between 26% and 30% of the 35-64-year-olds.

The demographic composition of the UK population is constantly changing that’s why the branded coffee shop market has to follow these changes and be careful of the effects it could provoke, especially on their sales.

• Population growth :

A positive growth is seen in the majority of age ranges, the largest is seen in those 55-64 which increased by 12,2% between 2001 and 2005.

In order to continue with positive growth in this age range, coffee shops may need to appeal increasingly to the older age range, without driving away younger customer who are also important for coffee shops.

2. Household in the UK

Coffee shops are used by those in the A, B and C1 socio-economic categories and these are also the groups most likely to have a positive attitude toward coffee shops. People from these socio-economic categories like the coffee shops environment and the choice and variety of flavours of coffee.

Between 2001 and 2005 there was an increase in these categories, with the number of AB rising by 5%.

The A, B, C1 categories count for 54% of the adult population visiting a coffee shop. This is due to an increase in the number of higher education graduates with a move towards more managerial roles and away from manual work.

At the same time, there was a decrease in the percentage of those in the C2, D and E categories.

3. Cultural forces

1. Attitude to health

Many studies have been conducted on caffeine effects and some of them want to warn consumers.

Even if caffeine has stimulating effects on our body ( diminution of fatigue), drinking coffee has been linked with insomnia, stomach problems, heart disease, high blood pressure and miscarriage but the real effect on human’s health is still being debated.

In order to help solve the obesity problem in the UK, the FSA (Food Standards Agency) introduced a legislation which makes it compulsory for all food and drinks sellers to provide the calorie content of any product they offer. This is why companies have to now show nutritional information. As many of the coffee shops products have a high calorie content, this is likely to affect sales.

2. Subculture

The UK is said to be a huge tea consumer, with its tea-time and Earl Grey, but coffee shops managed to reverse the tendency.

Nowadays English people drink coffee as well as tea.

Coffee shops are trying to encourage this in countries like China or India.

5. Technological forces

4. Starbucks

• Starbucks followed the advances in technology offering new payment methods

Starbucks installed a system of prepaid cards, The Starbucks Card, which allows the customers to pay their drink without cash. Cards are accepted in all the US stores and in almost all the Starbucks stores in Australia, the UK and Hong Kong.  

This card also allows consumers to have some benefits like free refills when they pop in for a drink.

Another way to build up customer loyalty is the Starbucks reward Card. These rewards are aimed at regular customers who possess a registered Starbucks Card.

• Starbucks also adopted the internet and Wi-Fi. Indeed, for example, the Starbucks Card Rewards allows free access to Wi-Fi for two hours per day in any US store, coffee that offers Wi-Fi service. A great innovation Starbucks put in place is the possibility to download the music you hear in a Starbucks Coffeehouse, with iTunes. You just have to connect yourself to the Wi-Fi with T-Mobile Hotspot and find what you’re looking for.

• Starbucks went into partnership in 1999 with Hear Music, a label which was created in 1990. The Starbucks Hear Music Coffeehouse stores have been created to combine the pleasure of coffee and the one of music. Customers can create their own mixed CDs using tablet-based PCs.

5. Costa Coffee

• Costa Coffee equipped its stores with wireless connection in 2002. It is provided by the BT Company which, at this time charged from £6 for 60 minutes of access valid for 24 hours over the hot spots, to £85 a month for unlimited access.
• Costa created a payment system by card you can top-up online or in store. You can also arrange an auto top-up as to not worry about how much you have on your account.

4.  Competitors

While the coffee shop market has found his customers and the coffee break has become element of the daily life, the competition is extending to offer its own products and/or services.

In the UK, Starbucks’ main competitor is Costa Coffee first because it exceeds it in terms of outlets and then because they offer the same kind of products, whereas in the US Starbucks must cope with less important competition because it’s the leader in the market.

Costa Coffee has to be careful with many companies which reach market shares and tries to attract more and more people.

The competitors can be classified in 3 groups:

1. The coffee shops

In the UK Starbucks and Costa have three main competitors:

• Caffé Nero was founded in 1997 to give consumers an extensive food offer in an Italian deli-style. It’s the largest independent UK-owned chain and nowadays it has over 360 stores. The brand is well-known for the quality of its coffee and food.

Caffé Nero extended itself first by acquiring 29 Aroma stores from the McDonald’s corporation in 2002 and then 12 Coffee Republic sites in March 2004.

This expansion conducted the brand to be ranked the 20th among the growing company in Europe.

The majority of the outlets are in high street stores, in airports or railway stations.

• Coffee Republic was founded in 1995. It spreads accross the country and is the largest independent espresso bar brand in the UK. Coffee Republic can be found in airports, shopping centres or in the business district of The City of London.

Most Coffee Republic stores have access to the Internet, but only offer ten minutes for free.

Coffee Republic has launched a franchising programme which allows it to be present in countries such as Turkey or Bulgaria.

• Puccino’s began in 1996. It’s a private owned company with 20% belonging to franchisees and the remaining owned by its hands-on board of directors. Puccino’s declines in three formats: Café bars, Deli bars and Espresso bars. It offers various products from Segafredo Zanetti Espresso and coffee to Panini, pizza, pasta, grills…

In the US, Starbucks has some competitors but remain the leader of the coffee shops:

 

• Dunkin’ Donuts was founded in 1950 in Massachusetts. In 2007, there were around 8000 stores around the world (5 800 in the US and 2 200 in the rest of the world.)

Dunkin’ Donuts offers a large product range: almost 52 varieties of donuts, dozens of coffee beverages and bagels, breakfast sandwiches and pastries.

Nowadays Dunkin’ Donuts serve more than 3 million customers per day.

Its Internet website is well developed and allows people to buy many by-products (coffee equipment, gifts…). The brand has also developed the concept of paying by card.

• Caribou Coffee was founded in 1992 in Minneapolis. There are almost 500 company-owned locations in 16 US states and countries in the world.

Caribou Coffee has a strong ethical policy: indeed, it has a social responsibility and sustainability and it helps communities to build clinics, finance schools, invest in reforestation efforts and support water-cleaning programs.

Moreover, Caribou Coffee has partnerships with the Coca-Cola Company, Rainforest Alliance, USA Today, Frontier Airlines etc…

6. Store Catering

At the end of 2007, some brands such as Burger King or McDonald’s introduced coffee and other hot or cold beverages in their menus. Sometimes, the price is 50 cents less expensive than in a coffee shop like Starbucks.

This kind of competitor is quite dangerous for the leaders because they combine the fame in the fast food market and from now on the possibility to take a coffee after lunch without moving place or having to take away. All the advantages that made them go to the fast food restaurant also apply for the coffee break.

7. Pubs

In an extent, pubs can be considered as coffee shops’ competitors.

There are around 57,000 pubs in the UK and they benefit from the image of clichés associated with the country. Even if they are very popular in the evening because they sell beers, during the day most pubs offer coffee and lunches.

People who go to the pubs look for an atmosphere that is lacking in a coffee shop.

3. SWOT ANALYSIS

5.  Starbucks

Strengths

• The annual revenues in 2008 were $7.8 billion, this allows Starbucks to improve its R&D department, to be a weighty concurrent in the international market.

• There are around 13 000 coffee shops in around 40 different countries; and around 40 million customers each year. Starbucks is well-known and manage to develop its size and selling points, not only in the US market.

• Starbucks was the first coffee shop brand in the world, before Costa Coffee.

• Starbucks holds strong ethical missions, especially in underdeveloped coffee producing countries, where it builds schools and provides education.

• It is the creator of the coffee shop system (coffee to take away). Which means it was the first to reap the benefits of this system.

• It has the monopoly of the US market, which means it does not have any serious competitor.

 

• Starbucks manages to diversify its products; it created a new range of product based on tea beverages.

• Starbucks also manages to diversify its by-products by using the Internet to offer people the option to purchase Starbucks coffee online; by selling CDs in Starbucks stores; by producing Premium coffee ice cream with Dreyers.

• Starbucks developed its market working in partnership with other companies such as United Airlines Flight in 2000.

• Starbucks, who want to cultivate stable relationships with farmers, sell Fair Trade Certified coffee in 23 countries. The aim is to help ensure that farmers receive an equitable price for their coffee and strengthen their farms for the future.

Weaknesses

• Starbucks remains vulnerable on its innovations because the coffee market and the innovations following are restricted, especially concerning the retailing of coffee.

• More than three quarters of its coffee shops are located in the home market (the US); it should diversify its market to spread business risks, especially nowadays with the economic crisis in the US.

 

• Their packaging has a bad environmental impact because of their containers which are disposable. It’s a waste of raw material and a source of pollution.

• Starbucks has been criticised of wasting water because of a non-stop running tap policy, 24.3 million litres water are poured every day.

Opportunities

• As it is fashionable to sell fair trade products, Starbucks should follow this, to promote a positive image of its firm.

• The expansion of the Asian market (China & India) could be a good way to develop the firm by gaining more consumers.

• Co-branding with another manufacturer of food or drink, or brand franchising, could be a good solution to try to reinforce their positioning, or to reach new market segments.

Threats

• Who knows what will happen in the future? (Customer, coffee market…)

• Who knows if another type of beverage or leisure activity will replace coffee?

• The rises in costs of raw materials could affect the production of beverages as the rise in oil price could affect transport costs or the consumer purchasing power.

• Entry of many competitors on the coffee shops market ( Costa Coffee but also any company selling drinks)

6.  Costa Coffee

Strengths

• Costa Coffee has overtaken Starbucks as the leading coffee chain in the UK and is now the first coffee shop brand in the UK. As the leader on the UK market, Costa Coffee is more represented, so it could attract more people. For example in Wolverhampton, there is only 1 Starbucks opposed to 3 Costa Coffee stores.

• The annual revenues were $270 million in 2005 for Costa Coffee but its owner group Whitbread realised a $1.82 billion turnover. It means that Costa Coffee can invest in R&D and keep growing; Costa Coffee is said to be the largest and fastest growing brand in the UK.  

• There are 750 stores in the UK and more than 300 in the world in 23 different countries. The 1000th Costa Coffee store was opened in March 2008 in Moscow and Costa managed to establish itself in China just before the Olympic Games in 2008. It underlines Costa’s expansion all around the world.

• Costa buy one third of the Rainforest Alliance’s coffee production and because of this  it is the most important group to source its coffee through the Rainforest Alliance. Through this Costa aims at being a brand with strong ethical values.

• Costa created the Costa foundation in 2006 to give something back to its coffee productive communities. Education of children is the priority of the foundation in 2008-2009 by building schools, providing educational materials, building teacher accommodations, and providing school buses. But it also invested in water supplies, and developed plots of land, so that families could produce their own crops.

Costa wants to expand its humanitarian aspect in addition to its ethical values.

Weaknesses

• Costa Coffee remains vulnerable on its innovations because the coffee market and the innovations following are restricted, especially concerning the retailing of coffee.

• Their packaging has a bad environmental impact because of their containers which are disposable. It’s a waste of raw material and a source of pollution.

• Costa is less represented than Starbucks in the world and not as well-known so, even if it is the first coffee shops brand in the UK, it does not mean that Costa is the first brand on the people’s mind.

Opportunities

• Costa aims to double its number of stores by 2013 to gain new market shares, especially in the Middle East and in Asia. The emergence of these countries encourages Costa to adopt an aggressive expansion strategy.

• After its success during the Olympic games in Beijing, Costa plans to open hundreds more stores in China’s main cities over the five next years and thus to capture the Asiatic market. To do so, Costa made a joint-venture with a Chinese partner, the Yueda Group. It’s easier to establish itself in a foreign country when it has a partnership with a local group than without a joint venture.

• In India the company is aiming to open more stores to make the country its third largest in terms of number of stores. Costa thus wants to make profits of the Indian economic growth.

• Even if Costa is less represented in the world than Starbucks, Costa should be delighted as Starbucks has recently announced store cuts and slower growth to deal with the current recession. (especially because of its number of stores in the US)
  

Threats

• Who knows what will happen in the future? (Customer, coffee market…)

• Who knows if another type of beverage or leisure activity will replace coffee?

• The rises in costs of raw materials could affect the production of beverages as the rise in oil price could affect transport costs or the consumer purchasing power.

• Entry of many competitors on the coffee shops market ( Starbucks but also any company selling drinks)

4. MARKET SEGMENTATION

7.  Consumer segmentation 

9. Behavioural 

• Benefits sought:  benefits could be done in function of the different drink proposed in coffee shops. The product which is the most attractive is of course the coffee but coffee shops can also hope for benefits from juice, tea, or from their products range in general. They tried to diversify their offered products to widen their products’ range in order to attract the more people possible.

• Purchase occasion: People go to coffee shops when they go shopping or when they are travelling; this travel could be short distance, like going to work or further afield, like travelling abroad. Coffee shops are thus located in shopping areas or travelling places (airport, rail way station, underground…) for people who regularly drink coffee on a weekly basis.

• Purchase behaviour:  Coffee shops set up loyalty cards in order to increase the number of solus buyer in their consumers because this kind of people is brand-loyal.

• Usage:  there are 3 categories of people going to coffee shops, heavy users (higher managerial people, intermediate managerial people, young working people, retired people), light users (skilled or semi-semi skilled workers) and non-users (unemployed people)

• Perceptions and beliefs: considering the coffee shops success we can say that there are more people for, than people against; those who are in favour of coffee shops love belonging to a fashionable movement; those who are against coffee shops are afraid of an Americanisation of the world.

10. Psychographic

• Lifestyle: Customers, who tend to have an expensive style, want the best brand. There are different kinds of people going to coffee shops: people who work and have no time to have breakfast, people who just want to have a good time in an enjoyable place, thus people who just like the coffee shops environment and the choice and variety of flavours of coffee and who move with the times.

• Personality: people who like to have a social life.

11. Profile

• Demographic: Coffee shops succeeded to establish themselves as something which cannot be ignored.

• Socio-economic: Coffee shops are used by those in the A, B and C1 socio-economic categories and these are also the groups most likely to have a positive attitude toward coffee shops

• Geographic: Starbucks is the leading brand in the US market and Costa Coffee is the leading brand in the UK market.

5. CONCLUSION

Starbucks and Costa Coffee are two coffee brands which success rest on a firm foundation.

 They have a lot of common characteristics although they are not implanted in the same geographic areas and if at first, they were based in countries with different cultures. In order to develop themselves and have a world-wide thinking, they had to put aside their specificities.

As many external elements can encourage firms to change their behaviours, they have to be aware and responsive of their surrounded world.

These elements are important if the firms wants to keep their market shares and do not lose it in favour of the competition.

For these two well-ranked and developed brands it is hard to find new innovation, but it is even harder to remain a brand leading company.

The kind of people they target is widespread which means they cover a large range of customers. Their implantation is worldwide as well as their customers.

Considering the ongoing economic situation, there is no way to know how this crisis will evolve in the future. A firm such as Starbucks which is mostly based in the US has to be vigilant.

BIBLIOGRAPHY

8. Books

1. Principles and Practice of Marketing, 5th edition, David Jobber
2. Mintel Report, Coffee Shops

9. Internet websites

6. www.timesonline.co.uk/tol/news

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