Starbucks – Related Diversification

Starbucks is a global coffee chain, originating from the U.S. . The business has been pursuing a long-term strategy of diversifying its core offering beyond beverages; this is designed to help differentiate the brand, which is very important considering coffee is almost a commodity.  The latest development is that Starbucks now plans to increase its focus on food. In the U.S. Starbucks is now serving La Boulange pastries – a bakery that the firm acquired for $100 million – and Evolution Harvest granola bars – again acquired for a tasty $30 million. Across the sea in the U.K Starbucks has launched a new food range, with the ‘Duffin’ doughnut/muffin hybrid serving as the flagship product.

This post will look at the benefits and drawbacks to Starbucks of expanding into the food market.

Diversification is just one of four growth strategies of the Ansoff Matrix (below), which shows the four ways a firm can increase sales:

1. Market penetration – is growing sales of existing products in existing markets.  For instance, Starbucks have started writing names of customers on coffee cups.  The intention of this is to increase sales as a result of greater customer satisfaction.

2. Product Development – intends to increase sales by launching new products into an existing market.  An example of this would be Starbucks introducing a new premium coffee made with rare and exclusive beans.

3. Market Development – is growing sales by launching existing products into new markets.  Starbucks are a great example of this by having coffee shops all over the world.

4. Diversification – is launching new products into a new market, potentially increasing sales by a significant amount.  However, this is the most risky strategy.  Starbuck’s latest plans to launch a new food range is a diversification strategy because the firm is using a new product to tap into a new market for meals.

Until now, their food range has only been intended to compliment their beverages and not a significant source of revenue or consumers’ meals.  As this form of diversification is very similar to their current product range and market, it is considered ‘related diversification’.

 
Despite the risk, why do Starbucks want to diversify into food?

Grow Sales!  As mentioned earlier, diversification has the potential to rapidly grow sales.  Particularly for Starbucks, the new food range can become a major source of revenue.  Sales of food items have been flat for the past three years, however the coffee chain is aiming to increase sales by 30%.  Food items also help increase the spend per customer in store, which is important for coffee outlets that are limited by the amount of customers that can be seated.  Therefore this is a more efficient strategy than increasing the amount of consumers visiting Starbucks.

Spread uneven demand.  Currently peak sales for Starbucks occur in mornings and afternoons for coffee breaks; an emphasis on food encourages consumers to visit their outlets at meal times.  Consequently, it will be easier for Starbucks to manage their capacity and not have to use inconvenient shift patterns.

Gain a competitive advantage.  It goes without saying that the coffee shop market is extremely competitive.  And there are no signs of competition becoming less severe: McDonalds have now decided to enter the coffee market to diversify their offering.  To an extent, expanding into the food sector is almost a retaliation from Starbucks, aiming to steal hungry coffee consumers.

Diversification is the last available strategy to grow sales for Starbucks.  The coffee shop market is far too saturated for market penetration strategies to grow sales significantly – the benefits of market penetration are often short term anyway.  Starbucks have an incredibly vast range of drinks, which means that there is very limited opportunity to develop further products.  Lastly, the chain has over 20,000 outlets in 63 countries, again, limiting the possibility to grow sales through market development.

To quickly recap, Starbucks’ plans to diversify is one of the Ansoff Matrix growth strategies. The alternative strategies to grow sales are market penetration, market development and product development.  The benefits to Starbucks are to grow sales, spread uneven demand and gain a competitive advantage.  This strategy is also suitable for Starbucks because they have exhausted the ability to grow sales through the other means.

 

© Josh Blatchford, author of Manifested Marketing, 07/10/2013

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Heinz and Glaxosmithkline – Balancing Diversification

While Heinz and Glaxosmithkline (GSK) appear to be two heterogeneous companies – the former is food processing company while the latter is a pharmaceutical-focused conglomerate  – they have both utilised diversification strategies in recent years.

As per Ansoff’s matrix, below, diversification is where a company launches – or acquires – a new product/brand in a different market.  Depending on how much experience the company has with the new product or marketing, ‘diversification’ can be considered to be related or unrelated.

However, while Heinz have thrived, GSK have turned their diversification strategy on its head with a planned sale of its Ribena and Lucozade brands.

But what lessons marketers learn from this?  What is the main success factor for the implementation of a diversification strategy?

I believe that – nine times out of ten – a successful diversification strategy depends on striking a balance between utilising a firm’s competencies while also expanding to take advantage of new opportunities.  If you like, this can be considered to be the ‘Goldilocks’ Zone’ of diversification: the strategy should avoid being too similar to current products/markets, and at the same time it should not be too dissimilar from current products/markets.

GSK, unfortunately, appears to be recognising that the firm’s Lucozade and Ribena brands are too-divergent from their mission to help people ‘feel better and live longer’.  Namely, it seems contradictory for a pharmaceutical company to sell and endorse products that have been criticised for their sugar content. This conflicting portfolio is only set to become more evident in the near-future as GSK plans to focus more on consumer health in emerging-markets, where Lucozade and Ribena are weak brands.

Heinz, in contrast, has become general food product giant through continuous diversification.  For instance, if we take a look at the firm’s history, Heinz started with horse radish in 1869, tomato ketchup in 1876 and baked beans and tomato ketchup in the 1910s.  The range of condiments and soups continued to expand throughout the 20th Century.  And still today Heinz diversifies with more bean-variants like Heinz Five Beanz; this product, as the name suggests is a new mixture of five types of beans.  Five Beanz is designed to target the new market – created by the pro-longed recession – of adults that can no longer afford to eat out but want an exciting, new meal that is easy to prepare at home.  Further to this, Heinz has also recently launched a range of spicy sauces.

Hence, while GSK has expanded beyond their core business of health, Heinz’s products are all supported by its original, founding principals.  For example, it does not strike one as unimaginable that a horse radish manufacture may also produce a spicy sauce; whereas, it does not appear logical that a malaria vaccine (GSK’s first research project) business would also sell soft and fizzy drinks.

However, I am sure many readers are ready to cite Virgin as an example of a company that has ignored the rules of diversifying not too little and not too much: the Virgin conglomerate is composed of numerous seemingly unrelated businesses.  Yet if you take a closer look at Virgin’s successful brands – Virgin Atlantic, Virgin Active and Virgin Media – at their heart is excitement and great customer service.  Interestingly, one or both of these components appear to have been absent from Virgin’s failed ventures, such as Virgin Cola, Virgin Make-Up and Virgin Megastores.  Therefore, the point I am trying to make is, although Virgin appears to have expanded into unrelated businesses, the successful brands have still retained Virgin’ core values and competencies.  In comparison to most other firms, Virgin’s key skills are highly applicable to a wide range of industries allowing the firm to diversify further than GSK or Heinz.  Thus, Virgin’s successful diversification strategies may be still be considered to be in the ‘Goldilocks’ Zone’.

© Joshua Blatchford, author of Manifested Marketing, 26/04/2013

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