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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