A National Advertising Effort for Starbucks

Starbucks, the famous chain of specialty coffee stores, was founded in Seattle in 1971, although it was not until 1987 that any expansion beyond Seattle occurred. In less than 40 years, the chain grew from a single store to now more than 11,000 U.S. locations and 6,000 more in other countries. Although there were cutbacks in 2008, Starbucks’ store growth in the United States is ambitious, to say the least, with new-store additions exceeding 1,500 each year. Some analysts contend that Starbucks has reached a saturation point and cannot sustain the continual addition of large numbers of new stores, but executives at Starbucks counter that demand for specialty coffees remains largely untapped and that there is considerable potential for additional growth. (You may recall in Chapter 5 the discussion of McDonald’s entry into the specialty coffee business, which seemingly supports the view that much latent demand remains to be fulfilled.)
It is questionable whether Starbucks will be able to achieve its ambitious growth plans and maintain sales levels in existing stores. That is, although the addition of new Starbucks outlets likely will add to the overall level of Starbucks’ corporate revenue and profit, existing stores may experience lost volume from customers shifting their purchases to new Starbucks outlets—the net effect being that incremental revenues and profits may not be proportionate to the number of new stores being added. What can Starbucks do to achieve its ambitious growth plans while maintaining proportionate sales volume at all of its stores?
Historically, Starbucks’ growth was achieved with low levels of advertising and mostly via the power of word of mouth—satisfied customers telling other people, who in turn further spread the word, and so on. But, by late 2007, Starbucks executives determined that they would have to increase the level of advertising effort and the company launched its first national television advertising campaign in November 2007. The idea was to sustain store growth and with the objective of reaching out to a broader audience that had not previously experienced Starbucks.
This move into TV advertising reflects a significant development for a company that heretofore was able to grow at a double-digit rate without advertising at the level undertaken by most businesses that compete in the retail food and beverage business. Currently, Starbucks spends approximately $94 million on media advertising— outspent by 2 to 8 times by rivals such as McDonald’s. Yet, their efficient advertising combined with steady price points and complementary food items appears to have paid off. Starbucks passed Wendy’s and Burger King in 2011 to be the number 3 restaurant chain based on sales, behind only McDonald’s and Subway.

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