Starbucks and Price Discounting



Starbucks opened operations in Seattle’s Pike Place Markets in 1971 with the future aim of providing coffee to a number of restaurants and surrounding bars. Fastforward to 1982, Starbucks had five retail stores and was selling coffee to restaurants in the area. Fastforward and drop in quarterly profit, to $25 million. The company’s operating margin shrank to 1.8 % from 7.1 % in the fiscal second quarter of 2008. Starbucks has been cutting costs and closing stores in an effort to boost profit. In January, Starbucks announced plans to lay off 6,700 employees and to close 300 more stores on top of the 600 announced last year”

Clearly, Starbucks is in trouble. The whole Starbucks experience-ordering the coffee, having the baristas prepare it in front of you, and then sitting down in an overstuffed chair to work on your laptop has worked very well. The marketing niche Starbucks created worked so well and in doing so the concept and the brand-value has become very attractive to mainstream providers. The other providers such as McDonalds and Dunkin Donuts and others are more suited for a convenient, faster, and can operate more efficiently. This translates into being profitable at a lower price. Starbucks has recently added to many of its locations a drive thru window. . Hence, they began the “coffee wars”. McDonalds has introduced a “premium” coffee to the marketplace and it has done well. Is it even possible in today’s recession for Starbucks to survive? Is it impossible to maintain a premium price while targeting a mass market? If so, can they survive by discounting the product? Will that completely change the branding, mission and values that the company has built its reputation on? To explore these questions we must look at basic marketing concepts but look at them knowing the industry and economy are completely different then they were twenty years ago when the company was established.

Starbucks succeeded in creating the...