Case-19-20 Trouble Brews at Starbucks – Marketing Strategy, Text and Cases : Chapter Notes

This Document Contains Cases 19 to 20 Teaching Note TROUBLE BREWS AT STARBUCKS Lauranne Buchanan and Carolyn J. Simmons wrote this teaching note as an aid to instructors in the classroom use of the case Trouble Brews At Starbucks, No. 9B09A002. This teaching note should not be used in any way that would prejudice the future use of the case. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail: [email protected]. Copyright © 2009, Ivey Management Services Version: (A) 2009-01-22 SYNOPSIS After going public in 1992, Starbucks’ strong balance sheet and double-digit growth made it a hot growth stock. The Starbucks vision was coffee culture as community, the Third Place between work and home where friends share the experience and exotic language of gourmet coffee. Its growth was fueled by rapid expansion in the number of stores both in the United States and in foreign markets, the addition of drive-through service, its own music label that promoted and sold CDs in stores and other add-on sales including pastries and sandwiches. In an amazingly short time, Starbucks became a wildly successful global brand. But in 2007, Starbucks’ performance slipped; the company reported its first-ever decline in customer visits to U.S. stores, which led to a 50 per cent drop in its share price. In January 2008, the board ousted CEO Jim Donald and brought back Howard Schultz — Starbucks’ visionary leader and CEO from 1987 to 2000 and current chairman and chief global strategist — to re-take the helm. Starbucks’ growth strategies have been widely reported and analyzed, but rarely with an eye to their impact on the brand. This case offers a compelling example of how “non-brand” managerial decisions — such as store locations, licensing arrangements and drive-through service — can make sense on financial criteria at one point in time, yet erode brand positioning and equity in the longer term. Examining the growth decisions made in the United States provides a rich context in which to examine both the promise and drawback of further foreign expansion. OBJECTIVES AND DISCUSSION OUTLINE One of the overarching objectives of the case is to demonstrate how brand value and positioning can be influenced by seemingly unrelated, non-branding decisions. That Starbucks’ new-product initiatives — from food to music, books and movies — influenced brand meaning is obvious. But the Starbucks story offers a more nuanced appreciation of how brand value is built and maintained. The company’s aggressive expansion through company-owned stores and licensees added millions of new customers, but it also changed the nature of Starbucks’ customer base and eroded its positioning as a destination or Third Place. Its decision to add drive-through windows created customer convenience, but shifted the competitive set from specialty coffee houses to fast-food restaurants. In addition, rising food and gas prices and the entry of McDonald’s and Dunkin’ Donuts into the specialty coffee market created new challenges for Starbucks. The discussion questions lead participants first to consider why Starbucks’ growth initiatives were so successful in generating growth and then to consider the impact of the same initiatives on brand positioning and value. An important distinction here is between strategic growth — growth that is consistent with the company vision and that reinforces the brand’s positioning — versus opportunistic growth — growth for growth’s sake. This leads into the discussion of whether further foreign expansion is strategic or merely opportunistic. Finally, participants are asked to recommend what Starbucks’ positioning should be today and — given that recommendation — to evaluate some of the initiatives taken to recover the brand. Some class participants may be familiar with Starbucks’ early history, but reviewing that history while focusing on brand management should lead to significant new insights. ASSIGNMENT QUESTIONS 1. When Howard Schultz launched Starbucks, who was the target market, how was Starbucks positioned and what decisions about product, price, distribution and promotion supported this positioning? 2. Wall Street and Starbucks management placed great emphasis on the company’s ability to continue its impressive growth rate. What were some of the growth initiatives undertaken by Starbucks and how did they fuel company growth? 3. It’s clear that, in general, the company’s growth initiatives were sound in terms of generating the growth expected by Wall Street. But which of Starbucks’ initiatives, in retrospect, were sound decisions for the brand and which were inconsistent with brand positioning? 4. What role should foreign expansion play in Starbucks’ strategy? 5. How should Starbucks define its target market and positioning after its decline in 2007? 6. Evaluate the actions taken to reinvigorate Starbucks. Some content contained in this teaching note is not included in the case itself, but may be introduced in class to supplement and stimulate discussion. ANALYSIS 1. When Howard Schultz launched Starbucks, who was the target market, how was Starbucks positioned and what decisions about product, price, distribution and promotion supported this positioning? • Target Market Initially, the target market was consumers interested in gourmet coffee and the gourmet coffee culture. They tended to be older, more highly educated and to have higher incomes than Starbucks’ current market. • Positioning Starbucks was positioned as the Third Place, the place between work and home where friends shared the experience and exotic language of gourmet coffee. • Marketing Program Initially, the marketing program consistently conveyed the image of Starbucks as an “experience” and as the Third Place. - Product ○ Dark-roasted, European-style coffee ○ In-store sensory experience: aroma of coffee, welcoming surroundings, friendly baristas - Price points - significantly higher than the average coffee shop or fast food restaurant - Promotion relied largely on word-of-mouth created through events and buzz marketing — more credible and far cooler than mass advertising - Placement: ○ All stores were company-owned, allowing Starbucks to control every aspect affecting the quality of the coffee and the experience ○ Flagship stores at “Main and Main” — a store reference for locations that represented the “in” location, e.g. DuPont Circle in Washington, D.C. 2. Wall Street and Starbucks management placed great emphasis on the company’s ability to continue its impressive growth rate. What were some of the growth initiatives undertaken by Starbucks and how did they fuel company growth? As an organizing framework for the discussion, we use the Profit Impact equation. Profit Impact = (Margins × Volume) – Fixed Costs Volume = Number of Customers × Amount Purchased × Frequency of Purchase The intent here is not to delve into Starbucks’ financial statements. Rather, it is to understand in a qualitative, yet concrete, way how the company’s various growth initiatives led to its phenomenal growth. It is obvious that many of Starbucks’ initiatives were intended to increase volume. But an in-depth consideration of how each initiative affected volume — what consumer behavior was affected — reveals a comprehensive approach to sales growth and provides a segue to a discussion of two key metrics used by Wall Street to evaluate retail performance: (1) number of new store openings and (2) same-store sales. In general, the opening of new stores by Starbucks was facilitated by brand-building activities which created demand and by the aggressive pursuit of opportunities in the United States and abroad. Same-store sales were increased via new products (food/beverages and entertainment) as well as via tactics to increase store traffic during slower periods. But volume alone does not ensure profitability. To that end, the company created an image that allowed it to command higher price points. And it simultaneously worked to control costs. In short, Starbucks’ magic was its ability to manage all the components of the profit equation. • Margins - Selling Price Value to customers. Starbucks’ marketing of flavorful dark-roast coffees overcame Americans’ resistance to paying $1.50 for a cup of coffee — an argument Schultz heard as he tried to raise money for his first stores. In part, customers were paying for a better cup of coffee — which Starbucks delivered through its obsession with quality control and ownership of the process from the “raw green beans” to “the steaming cup” of coffee. But they were also paying for the “Starbucks Experience” — the “romance and theatre” of exotic coffee and the culture of “discovery” within the stores. Limited price competition. In its first twenty years, Starbucks benefited from a competitive environment in which there was little price pressure from other specialty coffee houses. - Variable Costs Over the years, Starbucks weathered the effects of roiling commodity prices. In 1994, frosts in Brazil tripled the wholesale price of coffee; in 1997, heavy rains and labor problems in South America sparked another increase. Due to its comparative size, Starbucks was in a better bargaining position relative to competitors in the specialty coffee category; it also benefited from having bought coffee beans in advance through forward contracts. Each time, though, Starbucks raised prices of whole beans and beverages; in 1997, beverage prices went up $0.10 to $0.15 (a five to 10 per cent increase). Demand for the whole beans suffered, but beverage demand remained steady. In 1994, Starbucks’ share price remained flat; in 1997, it dropped 20 per cent, and analysts questioned whether it would recover. It did, of course. • Volume - Number of Customers Adding customers through new locations. Starbucks’ site location model — based on regional demographics and infrastructure support — was so successful that only two of its first 1000 stores were closed because of site misjudgments. The model was further validated by other retailers emulating it. Partnerships with other retailers also allowed Starbucks to capture customers when it could not yet afford to build out its own stores. Starbucks preferred licensing contracts to franchising because franchisees, in all likelihood, would limit Starbucks’ ability to locate stores in close proximity to one another — another mechanism used by Starbucks to add customers. Global expansion also added to the number of customers. Despite the skepticism of some analysts, the company succeeded in cultures as diverse as the United Kingdom and China, perhaps because the concept of a Third Place already existed in these cultures (e.g. English pubs). In non-U.S. markets, 80 per cent of purchases were consumed in the store, compared to only 20 per cent in U.S. stores. Increasing number of customers through store clusters. By clustering stores, Starbucks captured sales that would be lost during times of peak demand due to customer frustration and impatience. Starbucks cannibalized as many as one third of its stores every day, but argued that it didn’t matter which store made the sale because the stores were company-owned. Increasing number of customers through market response, policies and procedures. Participants may find Starbucks’ initial indifference to customer preferences somewhat surprising. As is often the case with entrepreneurial firms, it took the addition of more seasoned professionals to the management team, specifically Howard Behar, to focus the company on providing the products/services that customers wanted. The company subsequently took this lesson to heart, with the addition of products to accommodate customers’ palates and drive-through windows to accommodate their desire for convenience. - Frequency of Visits and Amount of Purchase Creating opportunities for incremental sales. The ubiquity of Starbucks’ locations encouraged impulse purchases and allowed customers to indulge more easily in an “affordable luxury.” The availability of food and other merchandise also stimulated impulse purchases. Increasing loyalty with the Starbucks experience. With comfortable furnishings and friendly baristas, Starbucks drew customers in and encouraged them to linger. Varying the experience created a sense of “discovery” and encouraged return visits: limited-time drink offerings created excitement and anticipation; new musical artists/genres, authors and movies aroused intellectual interest. Managing non-peak periods. Starbucks strategically introduced products (such as cold coffee beverages and sandwiches) and services (such as the drive-through) to increase customer patronage throughout the day. Special events, such as book discussions, also encouraged customer visits after the morning rush. • Fixed Costs - Operational Costs Systems and processes. In Schultz’s mind, one of the things separating Starbucks from its competitors was its attention to the processes and systems needed to operate on a global scale. From large investments in computer systems to the small details of shelf placement, it was the infrastructure of the organization that enabled the partners to serve customers in three minutes, the standard set for both internal and drive-through operations. Employee efficiencies. Schultz appreciated the role of the baristas and store managers in delivering the Starbucks experience, and he understood that human capital was much more difficult to manage than physical capital — a fact made evident by the number of front-line part-time workers. Providing benefits (health insurance) and incentives (Bean Stocks) for partners must have seemed like an extravagant expense at a time when the company was still struggling, particularly to the Starbucks’ board, which had its own money invested in the company. Yet these investments proved to be financially sound. - Marketing Costs Promotions. Starbucks was one of the first global brands to be built primarily on word-of-mouth efforts. In its first twenty years, the chain spent less than $20 million on advertising — in comparison, McDonald’s was estimated to have spent $1.1 billion on U.S. advertising in 2007 alone. Starbucks’ innovative grassroots campaigns not only were effective, they also added to the cachet of the brand because the programs were unique and tailored to the local market. Leveraging partnerships. Starbucks’ partnerships were a low-cost means to build brand awareness, capture new customers and limit competitive expansion. Host Marriott took Starbucks into airports and United took it onto planes at a time when it could not afford to finance expansion on this scale. Pepsi and Dreyer’s got the brand on grocers’ shelves, limiting trade promotion expenses. Safeway and Barnes & Noble grew the number of Starbucks retail locations, reaching more customers and making it harder for competitors to break into the market. One of Starbucks’ most impressive traits during these early years was its comprehensive approach to managing the profit equation. It didn’t just focus on opening new stores as a means of increasing volume — it also looked for ways to engage its current customer base. It didn’t just focus on coffee — it looked at other product categories that would appeal to its customers. It didn’t use traditional marketing activities — it built partnerships and thought outside-the-box to reduce marketing costs. In short, everything it did seemed a textbook case of how to grow a company profitably. 3. It’s clear that, in general, the company’s growth initiatives were sound in terms of generating the growth expected by Wall Street. But which of Starbucks’ initiatives, in retrospect, were sound decisions for the brand and which were inconsistent with brand positioning? Growth is necessary for any company. But each opportunity for growth should be considered in light of whether it is strategically sound — whether it is good for the brand in the long term — and if so, how it can be effectively implemented. For example, music CDs and food items were both consistent with enhancing the customer experience in the Third Place. But Starbucks’ implementation of music (choice of genres and artists) was much better than its implementation of food items (overwhelming aroma or unappealing choices). On the other hand, some choices are more opportunistic — that is, they pay off in the short term, but they can be detrimental to the brand in the long run. Installing drive-through windows, for example, increased customer convenience and led to 30 per cent higher sales. But it also changed Starbucks’ positioning, putting it squarely in competition with fast-food restaurants. With these ideas in mind, participants should review Starbucks’ primary growth initiatives — new products, locations, entertainment and global expansion — and evaluate their impact on the Starbucks brand. When the initiative is strategically sound but poorly implemented, they should be pressed for ways in which Starbucks could have achieved the desired end through better means. And for at least one example, participants should work through the pros and cons of the suggested alternative. We provide a complete example of the branding issues and recommendations (pros/cons) for “Extended Menu Items.” For other initiatives, we provide ideas to guide the discussion of the branding concerns. • New Products - Extended Menu Items Branding issues: Food items add to sales and have the potential to draw customers in during different times of the day. However, Starbucks’ implementation fell below consumer expectations. ○ Poor-quality pastries and unappealing sandwiches were inconsistent with consumer expectations of the Starbucks experience and price points. ○ Starbucks’ hot breakfast sandwiches overwhelmed the aroma of coffee in the stores, diluting the sensory experience of the store. ○ Hot breakfast sandwiches invoked images of McDonald’s Egg McMuffin — further eroding the distinction between competitors. Evaluation of alternative: ○ It’s an easy call that pastries/food go with coffee and that the pastries and sandwiches simply should be better. Press participants to think about how that could be accomplished in a cost-effective fashion. • Is baking pastries from scratch or making cold sandwiches on-site feasible from an operational efficiency standpoint? • Is it advisable from a marketing standpoint? ○ For those who argue against food items, press them to consider how they would resolve the ancillary problem of creating store traffic at different times of the day or increasing the average sale per customer. - Partnerships with Pepsi, Dreyer’s and Jim Beam Branding issues: ○ Not every “partnership” and corresponding brand extension is equally consistent with Starbucks’ positioning — potentially diluting the value of the core brand. • Locations - Starbucks’ Ubiquitous Presence and Accessibility Branding issues: ○ Widespread exposure alters how customers perceive the store. With such ubiquity, how can Starbucks be special? ○ Emphasis on customer convenience changes the competitive set for Starbucks. What implies “fast food” more than a drive-through? ○ Starbucks’ choice of partners was not always consistent with its positioning as the Third Place. Airports and book stores create an atmosphere in which people are more likely to chat with one another as well as to enjoy a cup of coffee. Grocers, in most cases, are more task-oriented and cater to the customer on the go. - Site Locations The point here is to recognize that (1) good location decisions from a growth standpoint can have some unintended negative consequences from a branding standpoint and (2) poor location decisions (beginning in 2004) are not good for growth or for the brand. Branding issues: ○ The expansion of locations, even prior to the 2004 “frenzy,” broadened the demographic profile of the customer base (younger, lower income). • Starbucks became more vulnerable to a downturn in the economy and to competition from lower-priced alternatives, such as Dunkin’ Donuts and McDonald’s. • Customer-to-customer relationships, the core of the Third Place experience, became more complicated with a more diverse customer base. ○ Poor location decisions were made during the “frenzy” to open new stores. • Unattractive neighborhoods tarnished perceptions of the store. • Store closures lowered employee morale and diluted the Starbucks experience. • Store closures disappointed customers and tarnished the brand’s image of “coolness” and success. • Entertainment - Music and CD sales Branding issues: ○ It became more difficult to tailor music offerings to the more diverse, convenience-oriented customers. - Books and Movies Branding issues: ○ There are differences between music and movies in terms of the “fit” with the Starbucks experience. Music contributed to the ambiance of the store; movies required promotion. • A barista’s recommendation and trailers played via Wi-Fi were more intrusive and “commercial” than background music. • The barista may not be perceived as a credible endorser of movies. ○ Were the choices of movies — a family film and social documentary — a good fit for the Starbucks customer? ○ Did Starbucks overreach in playing the role of “cultural arbiter”? Did customers go to Starbucks to discuss global warming or to hang out and relax? A brand can only be stretched so far before customers fail to make the connection and an endorsement crosses the line to crass commercialism. As a result of this discussion, participants should begin to appreciate the importance of anticipating the unintended consequences of incremental decisions. Each initiative was initially in line with achieving financial goals as seen from Q2. But some of these decisions took on a life of their own — as with the extension from music to books/movies or catering to customers through the added convenience of a drive-through window, apparently with limited understanding of the implications for the brand or its positioning. 4. What role should foreign expansion play in Starbucks’ strategy? Students will often jump to the conclusion that Starbucks should simply refocus its attention on global expansion. It has, after all, been successful in creating demand in the markets it has entered. Yet as seen in Q2, Starbucks’ initial success in the United States didn’t just happen — it was the result of careful strategic planning. And as the discussion of Q3 points out, it was the incremental and more opportunistic decisions that have led to a dilution of the experience, if not the brand. The decision to expand its global presence should therefore be carefully considered, and students should be pressed to recognize the potential problems that can arise in relying on global expansion. • Cost - As the case points out, the expense of building stores and other infrastructure in overseas locations has meant that Starbucks global operations have not contributed significantly to the company’s bottom line. • Implementation - Ownership and Employee Relations: Starbucks built its brand by owning the entire process from roasting the beans to serving the coffee. This was the only way Schultz felt Starbucks could deliver on “uncompromised quality.” Its employees have been an integral part of its ability to deliver the “Starbucks Experience.” Will practices designed to motivate and engage its workforce — e.g. providing health benefits — transfer to other markets? - Site Selection: In foreign markets, Starbucks has relied on partnerships to secure and manage the selection of real estate. Without an in-depth understanding of the local markets and without a winning site-selection formula in these markets, will Starbucks be able to expand profitability beyond tourist destinations? - Product Assortment: Starbucks came to see itself as a “cultural arbiter” of music and other forms of entertainment. Even in the United States, its success was limited as it strayed outside of music; in addition, music became more difficult to manage as the customer base became more diverse. Can Starbucks be a cultural arbiter in complex foreign cultures? • Branding issues: - Public relations missteps — such as the location in the Forbidden City — can generate negative publicity worldwide. If focused on securing sites in high-traffic tourist areas, how will Starbucks avoid these gaffs in the future? - The potential that Starbucks, like McDonald’s, may become a symbol of encroaching U.S. capitalism and culture. Will success breed contempt from local populations? 5. How should Starbucks define its target market and positioning after its decline in 2007? • Target Market Schultz’s original vision was to bring the Italian coffee bar experience to the United States — creating knowledgeable baristas engaged with customers relaxing over a cup of gourmet coffee. But over time, Starbucks adapted itself to the American “on-the-go” experience — 80 per cent of sales are now take-out. Today, its customer base is largely convenience-oriented, gourmet coffee drinkers interested in short lines and fast service. It is probably unrealistic to think that Starbucks’ U.S. customers will change their off-site consumption patterns; Americans are simply too time stressed and convenience-oriented. Customer demographics also shifted over time to a younger, more racially mixed, less educated and lower income group — again, a likely result of operations and location decisions. In itself, this change may not be troubling, but with uncertain economic times and encroaching competition from Dunkin’ Donuts and McDonald’s, it is more challenging to build business with this customer base. In short, consumers themselves have changed the Starbucks Experience. Is it advisable — is it even possible — for Starbucks to refocus its customer base? • Positioning If its customer base cannot be refocused, the question of Starbucks’ positioning — what it should be — is really the heart of its future. Is Starbucks the Third Place? Is it a premium fast-food alternative? Or is it an “affordable luxury” (the moniker sometimes used by Schultz)? Starbucks has sent conflicting signals on this — it emphasized the “experience” while simultaneously opening drive-through windows, placing it in competition with fast-food restaurants. But consumers nonetheless seem to have a very clear idea of the positioning of Starbucks vis-à-vis McDonald’s, as indicated here: The differences between the two businesses are just too great for Starbucks to worry about McDonald’s, or vice versa. Service, ambience, wireless connection, price and so on distinguish the two. I, for one, would never schedule a business meeting at McDonald’s, and I certainly don’t go to Starbucks for food. What actions can Starbucks take now to reinforce this difference? 6. Evaluate the actions taken to reinvigorate Starbucks. The key initiatives taken by CEO Jim Donald in 2007 are described in the case and included in the discussion below. Actions taken by Howard Schultz after his return are not included in the case, primarily because the company seems to be trying a lot of different things, making decisions and then reversing them. However, his key actions in the first seven months of 2008 are outlined below and provide a rich basis for discussion. Instructors may also wish to focus the discussion on actions taken even later in time, depending on their needs. Jim Donald’s Initiatives In large part, Donald’s initiatives look like an attempt to compete with Dunkin’ Donuts and McDonald’s on their terms, rather than an attempt to strengthen the differentiation between Starbucks and fast-food outlets. • $1 Coffee and Free Refills The goal, presumably, was to attract price-sensitive customers in order to boost same-store sales, thereby allaying Wall Street’s fears. But price competition is the domain of fast-food outlets, not Starbucks. Not only would a $1 coffee be unlikely to attract new customers to Starbucks, it would also be likely to further dilute Starbucks’ positioning. • National TV Advertising According to Jim Donald, the goal of the TV ads was “to reach out to this broader audience that maybe [has] not had a chance to experience Starbucks.” Some Wall Street analysts had long advocated this move, even though it was a break with Starbucks’ previous reliance on word-of-mouth to create its image as “a neighborhood store.” Although the planned future ads seem more in line with Starbucks’ positioning as the Third Place, the tension of political topics and the banality of pop culture may turn off more customers than they would attract. While it is possible to advertise and remain cool — witness Apple — this move for Starbucks seems risky. Howard Schultz’s Initiatives As evidenced by this list of Schultz’s activities, there is no deficit of ideas on how to recreate the company. And yet, most of these ideas are patches; they focus on shoring up sales or reducing costs in the short term, rather than reevaluating Starbucks’ strategy for the long haul. • Re-creating the Starbucks Experience Recognizing that the company had drifted away from its Third Place positioning, Schultz developed many initiatives to re-ignite the customer connection with coffee, brand, people and stores. - Inspiring partners. On a Tuesday night in March 2008, Starbucks closed thousands of stores for three hours for the retraining of baristas. Advertising Age estimated that the cost to Starbucks in lost sales was $2 to $4 million, but that it gained media coverage worth hundreds of millions of dollars. Schultz also reinstated the Starbucks leadership conference, which was canceled last year in order to subsidize raises for store employees. About 10,000 store managers and other leaders were scheduled to meet for career development and “to reinvigorate the passion within the company,” according to Schultz. “It’s really hard to describe, in words, just how meaningful, how thrilling and inspiring our conferences have been over the years . . . our partners were fired up to do great things and to inspire others to join in the effort on the behalf of Starbucks, which they did. And I anticipate that the reaction after this year’s conference will be the same.” - Enhancing the baristas’ contact with customer. The tall Verismo 801 espresso machines are being replaced with low-profile Mastrena machines, so that customers and baristas can make eye contact. - Emphasizing the romance of coffee. In-store grinding of coffee will be reintroduced to restore the aroma and ambiance of a coffee house. - Enhancing dialog with customers. MyStarbucksidea.com is a social networking community that gives customers a round-table for proposing, discussing and voting on ideas for the chain. When one customer suggested coffee ice cubes to prevent dilution of cold coffee beverages, almost 8000 customers voted for the idea. Idea partners — specially trained Starbucks employees — host the discussions. According to Chris Bruzzo, chief technology officer, “These are the people at the dinner party who make sure everyone is having a good time.” They take suggestions back to their departments, so customers “have a seat at the table when product decisions are being made . . . We’re truly going to adopt it into our business process, into product development, experience development, and store design.” One promising idea that emerged is to record a customer’s regular order on his or her Starbucks card. Then the customer can swipe the card to place and pay for the order and the line will move faster as a result. • New Products - Breakfast sandwiches without the smell. In January 2008, the company announced that it would eliminate warm breakfast sandwiches because cooking smells overwhelmed the aroma of coffee in the stores. Then in July, it said that it would instead change the recipe — a different cheese and less butter on the eggs — to reduce the odor and improve the taste of the sandwiches. - New, milder coffee roast. In April, Starbucks introduced a new blend for brewed coffee, Pike Place roast. Pike Place tastes milder than most Starbucks brews, and appears to be aimed at winning over consumers who don’t like the strong taste of European roasts. At the same time, stores stopped making other brewed coffees in the afternoon. But in response to customer complaints, Starbucks later announced that it would bring back the more flavorful brews in the afternoon. - Smoothies. Starbucks introduced its version of the smoothie, the Vivanno. The Vivanno comes in two flavors. One is made with banana, milk, orange-mango juice, whey protein and fiber powder; it has fewer than five grams of fat and 270 calories. A 16-oz. size sells for $3.75 ($3.95 in New York). Dunkin’ Donuts’ same-size smoothie sells for $3.39 but has 350 calories. McDonald’s is testing a smoothie in three sizes, with the price ranging from $2.79 to $3.99. According to Schultz, “In our research, more than 60 percent of customers surveyed said they would come to Starbucks to buy healthy, nutritious beverages, and we are confident we have found the perfect answer to their needs.” • Location - Trimming U.S. expansion. By May, the company had revised its plans for new stores — planning to open only 1020 new U.S. locations, down from a forecast of 1175 stores in January. Future growth will slow even further, with only 400 net new locations a year in the United States. In an interview, Schultz said Starbucks doesn’t plan to pull back store growth in any specific regions, but said “we’re going to be highly disciplined when it comes to those areas of the country that have been deeply affected by the mortgage crisis.” - Closing of under-performing stores. Schultz announced the closure of 600 U.S. stores, 70 per cent of which were opened after 2005. - Sales in non-Starbucks outlets. Expansion of sales of packaged coffee and beverages in supermarkets and other non-company retail outlets are expected to yield a billion dollar business. • Entertainment Options - Reorganizing the entertainment segment. Starbucks will hand over management of its Hear Music record label to Concord Music Group. President of Starbucks Entertainment Ken Lombard left the company; Chris Bruzzo, chief technology officer, now leads the entertainment segment. An executive familiar with the reorganization said Lombard had done “what he was asked to do; it’s not that he was doing anything wrong. It’s a refocusing of the business. It’s going to be a different business…” The company sold more than 4.4 million CDs last year. - Moving away from movies. The business will focus on digital content in music and books. Starbucks announced that it didn’t plan to market any movies in 2008. • Enhanced Marketing Communication - Sales promotion. The chain introduced its first rewards program for registered Starbucks card holders (the Starbucks card is a stored-value card). These customers received a complimentary beverage of their choice, up to two consecutive hours of free Wi-Fi each day in company-operated U.S. stores, free refills on brewed coffee and a complimentary tall beverage with a purchase of one pound of whole-bean coffee. Starbucks also distributed coupons for a free tall (small) coffee in USA Today, the Washington Post and other newspapers. According to some analysts, couponing programs raise concern on Wall Street about the brand’s pricing power. But Scott Bedbury, a former Starbucks executive, said, “No brand follows a steady, straight line in terms of sales, profits, and brand loyalty . . . This is a brand revitalization in the face of a difficult economic period that doesn’t look like it’s abating anytime soon.” - Advertising. Starbucks also ran full-page ads targeted at men, who tend to drink brewed coffee, in the Wall Street Journal and other newspapers. TEACHING PLAN We initiate the discussion with these ideas: In 2007, Starbucks had more than 15,000 stores worldwide and was regarded as one of the world’s most successful brands. It had made the top 100 in Business Week’s Best Global Brands list every year since the inception of the rankings in 2001. Starbucks’ success was largely due to Howard Schultz’s vision, passion and leadership. He taught Americans about the rich flavor of Italian espresso, instructed them in the exotic language of coffee culture and gave them an intimate café setting in which to enjoy the experience of both. This is the Starbucks experience and it has captivated millions. But there was a downside to Starbucks’ success. The business grew explosively by catering to the convenience-oriented customer with drive-throughs and dense store placement. It also expanded its product mix enormously — not just coffee, but food and other beverages, music, books, movies and even teddy bears. These changes broadened the customer base and changed the nature of the brand. Facing competition from Dunkin’ Donuts and McDonald’s, Starbucks must now confront the question of whether it can be all things to all specialty coffee drinkers, especially in an environment of rising gas and food prices. We begin by considering Starbucks’ marketing strategy at its inception in 1987. Then we examine the growth initiatives that got it where it is today, first in terms of their profit implications and then in terms of their implications for the long-term viability of the brand. In doing so, we make a distinction between strategic growth — growth that is consistent with the company vision and that reinforces the brand’s positioning — and opportunistic growth — growth for growth’s sake. Finally, we consider what the brand’s marketing strategy should be today and evaluate some of the initiatives taken to recover the brand (see Exhibit 1 for the board plan.) EPILOGUE The first months of Schultz’s return in 2008 showed that Starbucks’ turnaround would not be quick or miraculous. Thousands of jobs were cut, top executives were shuffled among as many as three different jobs and many decisions were made only to be reversed. The company reported its first quarterly loss on July 30, 2008, suggesting that problems had deepened. The company cited a worsening sales picture and a $167.7 million charge for costs associated with closing 600 U.S. stores. For the first time in its history, the company would close more U.S. locations than it planned to open in the coming fiscal year. In addition, the company began paring down growth in international markets, which had been touted as the most likely source of continued growth. Starbucks announced it would add 825 new locations in international markets in FY 2008 and 900 in FY 2009 — 150 fewer stores each year than it had planned as late as April of 2008. All of this led some to question whether even Howard Schultz could return the company to its former glory. Exhibit 1 BOARD PLAN Initial Strategy Target market Positioning Marketing mix Starbucks Activities Designed for Growth: Higher margins Higher volume Number of customers Frequency Amount purchased Lower costs Impact Growth Initiatives on Brand New products New locations Entertainment Global expansion Desired Strategy in 2008 Target market Positioning Examination of Actions Taken Teaching Note GROUPON Sayan Chatterjee, Sarah O’Keeffe and Alison Streiff wrote this teaching note as an aid to instructors in the classroom use of the case Groupon, No. 9B12M004. This teaching note should not be used in any way that would prejudice the future use of the case. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]. Copyright © 2012, Richard Ivey School of Business Foundation Version: 2012-02-13 SYNOPSIS The collective buying industry has grown by leaps and bounds over the past several years, and Groupon stands out as a major player that has revolutionized this market. This case study describes the beginnings of Groupon, as well as the firm’s rise to power, the rise of its numerous competitors, its decisions and expansion strategies, and the collective buying industry as a whole. Key demographic data about Groupon’s customers (consumers and small businesses) are also described, along with recent developments at Groupon and within the industry in general. While Groupon has undoubtedly discovered a unique model that takes advantage of a ‘white space’ in sales and marketing to local businesses, it is unclear what the future holds for Groupon. Will it be able to sustain its incredible growth rate, or is its business going to peak quickly and then fade? RESEARCH METHODS This case was developed using publicly available information from journalistic and scholarly articles and studies that were posted on the Internet or stated in publicly available interviews. All sources are referenced in the case study’s footnotes. COURSES AND LEVELS This case is suitable for a capstone strategy course or as an advanced elective in competitive strategy at the MBA level. We have also used the case with MBAs in classes dealing with strategic management. Astute students will note the following: • Groupon’s ability to capitalize on the white-space intersection of social media/word-of-mouth connectivity of consumers and small businesses’ need to increase local customer traffic. • The growth strategy of rapid expansion through both acquisition and leveraging a skilled sales force. • Groupon’s well-targeted consumer demographic and its contribution to the company’s impressive success. • The double-edged sword of a powerful but easily replicated business model. The case is an excellent vehicle for developing the notion of capabilities as the means for achieving competitive advantage and for exploring the ways new companies strategize to stay on top in an increasingly contested space. This case can also be used to help students develop the customer outcomes, competitive objectives, activities and resources (COAR) methodology (see Exhibit TN-1). TEACHING AND LEARNING OBJECTIVES We want students to learn and understand how the different components of a strategy combine together to create competitive advantage. We also want to demonstrate that although competitors may be able to copy one or more parts of a strategy, it is the holistic manner in which those parts combine that makes a strategy inimitable and therefore difficult for competitors to copy. We also want students to learn how to sift through different options, going forward. This case is best suited to a discussion format. THEORETICAL CONTEXT We use the outcome-to-objective methodology developed in the following article to analyze the case. This framework represents an operationalization of the value-chain framework in that it explicitly links activities (primary activities) and resources (support activities in the value-chain framework) to outcomes that customers’ value. The key insight that comes out of this methodology is clarity concerning how different activities interact to deliver value to the customer as well as to the shareholder. Sayan Chatterjee, Core Objectives: Clarity in Designing Strategy, California Management Review. Vol. 47, No. 2 (Winter 2005): 33-49. A brief description of the Outcome to Objective Methodology or COAR (Customer outcomes, competitive Objectives, Activities, Resources) framework follows (see Exhibit TN-1). Outcome to Objective This brief synopsis of the CRM article will familiarize instructors with the framework. The desired outcomes constitute a broader representation of customer needs. For the purpose of this teaching note, we can think of outcomes and needs synonymously. The key feature of this framework is that it forces a company to identify the specific and measurable high-level goals that will allow it to deliver the desired customer outcomes. Moreover, since these goals are specific and measurable, they allow the firm to track the execution of the strategy in real-time, thereby reducing the level of corporate risk, since the firm gets an early warning if things do not go as planned. In the article cited above, these specific and measurable goals are labeled as core competitive objectives. Core competitive objectives should clearly state how the firm will deliver the outcomes that its customers desire. The key is to understand how the firm’s customers are different from other customers. In other words, the customers have to be identified at a suitably detailed level in order for this process to be successful. Finally, the core competitive objectives should collectively capture the firm’s method for creating value for its shareholders. Instructors can easily modify the analysis for use with other frameworks, such as SWOT. (A sample SWOT is provided in Exhibit TN-2.) DISCUSSION QUESTIONS Discussion Questions 1. What is Groupon and how does it work? What is Groupon’s market? What does this company do and how does it make money? a. What does Groupon do that makes businesses willing to pay for its services? b. Why is Groupon such a big deal? That is, why should consumers pay attention to what Groupon has to offer? 2. Using Porter’s Five Forces as a framework, describe the competitive environment of the collective buying industry, pre-Groupon and post-Groupon. 3. How should Groupon’s business model be classified? a. What are the core objectives for Groupon, and what are the critical activities and resources that support these objectives? (Outlined in COAR Map, Exhibit TN-3). b. How does Groupon’s core customer segment fit with the company’s business model? 4. What is the viability of Groupon? Will this business survive in the long run, or will it fade away? a. Is Groupon a pioneer? Does it have a first-mover advantage? b. What barriers to entry is Groupon trying to create? Are they working? c. What competitive advantages exist for Groupon’s potentially biggest threat (i.e., Google, which tried to buy out Groupon)? d. Groupon was started in November 2008. What are the long-term plans for maintaining and creating company growth? e. How would an initial public offering (IPO) affect the company’s go-to-market strategy? Would an IPO alter the relationships Groupon has with local businesses in various cities? OVERVIEW OF ANALYSIS Company Analysis Groupon started a phenomenon that spread like wildfire: an Internet coupon linked with an irresistible social component and a hip approach to marketing. Groupon’s ability to maintain its growth and footprint as the dominant deal-of-the-day vendor rests on its future ability to persuade businesses that they should market their unique product and experience through Groupon rather than through the growing number of alternative online coupon media options. Critical to Groupon’s value proposition is the fact that, in offering deals through Groupon, a business gains exposure to a large volume of potential customers and, just as importantly, to the right kind of customers. The right kind of customers would be those who would be apt to expand their purchases beyond just the Groupon deal and revisit the business in the future. Groupon embarked on an aggressive international expansion plan in early 2011. It is critical to the sustainability of the company’s business plan to develop not just the quantity of its consumer/subscriber customer base but also the quality of this base. The demographic makeup of Groupon’s core consumer/subscriber base (i.e., young, single, well-educated, professional, urban women) has been one of its strongest assets in establishing a quality customer base for its business partners. Groupon must continue to engage its educated and prosperous consumer/subscriber base with interesting experiences in order to keep from being outdone by rivals such as LivingSocial and Google. Industry Analysis In the highly crowded space of the group-purchasing industry, it is difficult (and almost impossible) to identify competitive advantages between firms. There are few technological differences between any of the firms competing in the space and, for the most part, the deals offered by each company are interchangeable as well. Groupon’s true advantage comes from its user base. By establishing its first-to-market advantage, Groupon enjoys the luxury of the largest user base in the industry, a position that has also helped the company secure large sums of funding from venture capitalists and other investors. Groupon’s most recent $950-million round of financing will allow the company to further expand its international operations and buy back shares from early investors and employees. This development brings Groupon’s true competitive advantage — its international dominance — into focus. LivingSocial, which ranks second in the industry to Groupon, has also expanded outside the United States, into the United Kingdom and Australia. However, LivingSocial’s presence does not yet rival that of Groupon, which, as of February 2010, spanned 28 international markets across five continents. Groupon’s tremendous capital reserves allow the company to quickly purchase copycats in other countries. This ability, in turn, enables the company to expand its user base and leverage any existing relationships that acquired companies have already forged with local merchants. After a purchase, the acquired companies fully integrate into Groupon’s interface and can take full advantage of Groupon’s brand strength. A quick snapshot of Google Trend data (see case Exhibit 6) helps to better express Groupon’s growth potential; according to the data, France and Brazil lead the world in search volume for Groupon. In comparison, as the graph also shows, LivingSocial’s search volume is primarily regulated to the United States and Canada, where the company has established itself as a worthy competitor to Groupon. DETAILED DISCUSSION QUESTIONS AND ANSWERS 1. What is Groupon, and how does it work? What is Groupon’s market? What does this company do, and how does it make money? Groupon is a company within the collective buying industry that offers customers attractive daily deals on items such as dining, entertainment, or retail within a certain city or region. Local businesses are encouraged to offer deals through Groupon, as each deal ensures that businesses will receive a certain quantity of customers by advertising its discounted deliverables over its extensive local subscribership. Groupon makes money by working with local businesses to tailor a deal that fits the needs of each business. There are other intangible benefits that businesses receive from a Groupon promotion. Competitively, as more companies enter the group purchasing space, it may be necessary to adjust the company’s pricing strategy. Money can continue to be made in this industry, since Groupon offers a simple pricing model and gives local companies a new channel for capturing a local segment to which they may not have previously had access. a. What does Groupon do that makes businesses willing to pay for its services? Groupon provides its business customers with access to an entirely new client base and to free advertising through Groupon’s daily e-mail to subscribers. This kind of promotion helps small and medium-sized businesses gain greater exposure, in light of the fact that they might not have budgets for large marketing campaigns. There are no upfront advertising costs for the promotion, and the results are more efficient and effective than individual, grassroots promotions. For such businesses, the Groupon strategy can bring a large number of new customers through the door. It is then up to the business to convert these new customers into repeat customers. Groupon may make sense for a business with a large, fixed-asset expense base that is struggling to maintain customer volume. Many of the businesses that Groupon attracts operate through service-centered and asset-utilization models. Small business owners have invested money into fixed assets, such as kitchen equipment, massage tables, facilities and more. Meanwhile, the increased demand brought about by a Groupon deal has the potential to turn new clients into a steady stream of customers, without any initial investment by the small business itself. Businesses do have to consider whether Groupon is right for them, however. Some businesses take a loss of profit during a Groupon promotion and have to reconsider their strategy; how will the business establish repeat customers through the promotion? Is the business using a loss-leader strategy, etc.? Groupon has proven to be less than ideal for low-margin companies, since the promotion has the potential to eat up the already-limited profit margins of these types of businesses. Businesses offering deals through Groupon also have access to a savvy, young audience that is often hard to reach through traditional advertising campaigns. Subscribers read Groupon’s fun, colorful ads in their daily e-mail; through social media sites, they are able to see the coupons their friends have bought and can plan various social activities around the Groupon’s they purchase. The ability to reach this demographic in such an effective manner can be invaluable to a business. While businesses do need to achieve expanded purchases beyond the initial Groupon deal and convert those consumers into repeat customers, it behooves Groupon to assist its business partners in providing a successful Groupon experience. After all, when all parties are satisfied with the interaction, they will continue to use Groupon’s services. The satisfied consumer will continue to subscribe to Groupon for other deals, while the satisfied business may elect to offer another Groupon in the future. Groupworks has already addressed these concerns. Using Groupon allows businesses to: (1) gain broad exposure with limited marketing effort; (2) attract new customers, especially from the young, well-educated population; and (3) create overnight business. b. Why is Groupon such a big deal? That is, why should consumers pay attention to what Groupon has to offer? As price-conscious consumers look for ways to save money on purchases, collective buying companies offer a new venue for savings in the consumers’ local area. Consumers have the opportunity to enjoy a great deal on a good or service that they might not normally know about or use, and the business has the opportunity to gain a new client that might not have been available through traditional marketing campaigns. The “big deal” behind Groupon, in particular, is that consumers have the opportunity to take advantage of goods and services at deep discounts, while experiencing something new and exciting within their own region. Beyond the simple economic rewards that Groupon deals offer, subscribers are also buying an experience, potentially as a group. This aspect of the offering fits Groupon’s consumer demographics particularly well, since the members of Groupon’s target market live a socially active lifestyle. Through Groupon, subscribers are exposed to and can purchase unique social experiences that appeal to the young, hip consumer that Groupon targets. Furthermore, Groupon guarantees its deals by saving subscribers from inconvenience and misunderstandings in purchasing through its Fine Print and The Groupon Promise mechanisms. When there are so many collective buying sites from which to choose, these guarantees serve to maintain Groupon’s high degree of popularity by minimizing the threat of being stuck with a bad deal. 2. Using Porter’s Five Forces as a framework, describe the competitive environment of the collective buying industry, pre-Groupon and post-Groupon 2008 — Time of Groupon Launch 2010 — Groupon expansion Market Size SMALL Size LARGE Market Growth MEDIUM Growth RAPID Porter’s Five Forces: Threat of Entry MEDIUM Threat of Entry HIGH Rivalry NONE Rivalry HIGH Buyer Power (consumers) LOW Buyer Power (consumers) HIGH Supplier Power (Businesses) LOW Supplier Power (Businesses) MEDIUM Number of Substitutes LOW No. of Substitutes MEDIUM 3. How should Groupon’s business model be classified? This company started as an idea — a software platform that used a tipping-point philosophy to spur people to act. This root concept represents the classic beginning of an IP-based model, where the idea needs to be protected and cultivated above all else and, if possible, provide the company with a premium price. The model also has attributes of a hub-and-spoke set up or an auction-type arrangement, where buyers (individual consumers) and sellers (local businesses) come to the Groupon hub to complete at least part of their transaction. While Groupon’s model did not allow it to charge a premium price, its first-mover status did allow it to capitalize on the value of its original idea. The initial limit of One Deal a Day has allowed Groupon to maintain its edge as a fresh phenomenon. The company was able to attract new businesses and new individual consumers on an ongoing basis, as everyone waited to see what would be featured next. Groupon also strategically used the Internet and its existing social-media structure to get its consumer audience used to this new idea and service, thereby increasing demand across some vast parameters. As Groupon’s popularity grew due to expansion, and as copycat companies exploded onto the scene, the model emphasis shifted from the IP (software platform) towards ensuring a large user base — the foundation of an installed-base model. (See case Exhibit 2.) Due to its rapid expansion in 2010 and its acquisition of competitors along the way, Groupon has become the company with the largest user base — 40 million by December 2010 — in the collective buying industry. Now that the user base is successfully tied to Groupon, the company finds itself nicely set up to transition its product offerings into other sectors, should it determine that the current offerings limit its growth potential or its ability to compete. a. What are the core objectives for Groupon, and what are the critical activities and resources that support these objectives? (Outlined in COAR Map, Exhibit TN-3) At its core, Groupon’s business hinges on targeted marketing at an individual level on a global scale. The company achieves this objective through a fairly new concept called collective buying. Instead of traditional marketing and advertising through traditional media channels (newspapers, radio, TV) and the outdated online approach of hosting ads, Groupon adopts a proactive approach to online advertising and selling. One of the core objectives for the Groupon team is to continuously find innovative ways of serving ads and offers in ways that will encourage business partners to stay interested and willing to act as Groupon’s promoters. The execution of this strategy involves extensive relationship management with local businesses worldwide. As a result, Groupon must maintain robust, localized sales forces around the globe. At the same time, Groupon has to be able to keep its consumers engaged. The consumer/subscribers who participate in deal-buying are a crucial part of Groupon’s business. Keeping consumer/subscribers happy by ensuring that Groupon delivers on its promises (see case Exhibit 7) stands as another of the company’s key objectives. A third high-priority objective is to stay ahead of the competition. Groupon has achieved a good head start by acquiring similar startups across the world, a strategy that has landed the company in an incredibly strong position in its market. However, as one of Groupon’s biggest competitors, Google is projected to enter the market soon (see case Exhibit 5). As Groupon expands its international presence and its product offerings, it will need to stay vigilant in order to maintain an edge over powerful competitors by continuing to deliver on the promises it makes to businesses and consumers. A key advantage for Groupon over Google, or over any other potential competitors, is the fact that it still has the local and small-business friendly feel. Although Google may enter the market as the giant that wants to win it all, Groupon should continue to establish itself as the major player in its industry, continuing to nurture the loyalty of the local businesses and consumers. Once these core objectives have been locked in, then the firm can begin to focus on other non-core goals. b. How does Groupon’s core customer segment fit with the company’s business model? Groupon’s optimal scenario would be to bolster its installed base among its customers and among the businesses with which it partners. Groupon aggressively researches the appeal of its deals to its typical consumer demographic (i.e., young, well-educated, professional women) in order to maintain a desirable user base that it can leverage in developing businesses partnerships with local merchants around the world. Groupon subscribers’ level of education, coupled with high employment, translates into strong earning power, which is obviously a very attractive trait to businesses. Groupon will continue to grow in value and thus be able to offer better service to its business partners, as long as those businesses succeed as well. In order for this outcome to occur, businesses need to promote expanded purchases beyond the Groupon deal and establish repeat customers. In light of this goal, young women with disposable income represent a good fit as the customers-of-choice. While men increasingly use coupons for purchases, women are by far the most significant users and, hence, represent biggest target market for the company. Women are also more likely than men to enroll in loyalty programs that stimulate repeat and expanded purchases. Groupon already currently rewards loyalty through friend referral Groupon dollars. Are these demographic characteristics likely to change? Chances are, yes, they will. While Groupon has successfully catered to the working-female market segment, the company is aggressively expanding its advertising and viral marketing efforts as a means of increasing its number of customers across diverse demographic markets. 4. What is the viability of Groupon? Will this business survive in the long run or will it fade away? Groupon, as it exists now, will not survive in the long run. There are simply too many high-caliber competitors entering the market, or poised to enter the market, in the near future. While this situation constitutes a clear reality for Groupon, it is also clear that the company’s intentions reach well beyond a sole investment in the retail sector. In order to survive in the long-term, Groupon must continue its strong investment in international expansion and expand its offerings laterally into deal sectors that involve hotels and travel. With regard to technological advancements, Groupon must continue to build on its understanding of individual tastes and preferences in order to compete with other technological giants like Google, and it must continue to deliver the most relevant deals to the most relevant consumers. a. Is Groupon a pioneer? Does it have a first-mover advantage? Groupon can truly be considered a pioneer in the collective buying industry, coupled with enjoying a distinct first-mover advantage. Groupon has become a household name that is synonymous with collective buying, a phenomenon similar to “copies” and “Xerox” or “tissues” and “Kleenex.” Groupon put the finishing touches on its model by pioneering the concept of fun, hip, eye-catching deals (both visually and fiscally) that attract local businesses that are in need of promotional assistance and then matching them up with customers who are looking for big-time savings from the businesses they frequent or from those they may be looking to try. Pair this premise with Groupon’s extensive use of social media (i.e., to help businesses and customers spread the word about deals), and you get a recipe for the kind of success that Groupon has enjoyed since its founding in late 2008. b. What barriers to entry is Groupon trying to create? Are they working? Given the nature of the collective purchasing industry, there are few barriers to entry for would-be competitors. The Internet is free and, theoretically, anyone has the ability to partner with local businesses or to establish an attractive website. The biggest entry barrier comes from the existing robust user base controlled by Groupon and the company’s proven ability to expand this user base at a rapid pace. While there are certainly consumers who would be willing to experiment with one of the countless numbers of other group-deal sites, Groupon’s ability to maintain its subscribers’ loyalty will help it to remain dominant within the industry. Groupon’s actions in the face of recent negative publicity are evidence of its commitment towards keeping its subscribers happy and upholding its promises (see case Exhibit 7). In addition to the current collective buying companies that compete directly with Groupon (see case Exhibit 5), there are several smaller sites that have launched since Groupon’s rise to the top of the group purchasing industry. The power these companies wield against Groupon is not held by the individual companies themselves but rather by a larger collective purchasing set. For example, the company Yipit provides services that aggregate deals from other group purchasing sites and delivers the compiled deals to subscribers by e-mail. Companies that offer services similar to this one could pose a substantial threat of entry to Groupon, but at present, it is unclear exactly how these aggregation sites will make money on the same scale as Groupon. c. What competitive advantages exist for Groupon’s potentially biggest threat (i.e., Google, which tried to buy out Groupon)? Advantages 1. Google is a universal word — it is featured in the Oxford dictionary — and hence, it has a massive brand advantage over most of the companies on this planet. If Google were to enter the collective buying market, it could compete with any of the other players. 2. If Google enters the business, it will have the luxury of possessing virtually endless capital dollars to spend in order to establish its foothold. This advantage translates into state-of-the-art IT infrastructure and top talent (by being able to offer higher salaries). It also means that Google will be able to advertise and market more actively/extensively than Groupon is able to do on its clearly more limited budget. 3. Along the same lines, Google can also afford to take a less of a cut from the coupon revenue, an aspect that will serve as a huge incentive to small businesses that might be swayed by a name like Google and by a discount price. 4. If we think about the most extreme case, Google can, if it wishes, make a hostile bid for Groupon and buy out the company. At the right price, everything is for sale. Disadvantages 1. From where we stand today, Google has a slight disadvantage when it comes to winning the group-sales patronage of local businesses, since Groupon account managers have already established a relationship and a rapport with these small businesses. 2. With its huge footprint, Google may not be able to provide the kind of hands-on, personal relationship that small, local businesses might desire. Google may appear too corporate or too formal for them. 3. Yet another disadvantage is the fact that Groupon is actively buying up similar startups in other countries in order to expand its global reach. Google is more likely to expand by acquisition rather than organically, and if the prominent players in the emerging markets are already under Groupon’s belt, Google may not be able to leverage its might in this area. 4. Another disadvantage could be the lack of focus/dedication. If Google were to enter this market, this new venture would be just another pet-project for the corporate giant, like Picasa, Google Goggles, Google Sky Map, etc. A collective sales venture would not constitute a core business for Google, so it might suffer from a lack of management attention. d. Groupon was started in November 2008. What are the long-term plans for maintaining and creating company growth? Since there are few barriers to entry in the industry, it would appear that Groupon’s competitors could easily steal market share by offering businesses a larger cut than what Groupon currently offers. If competitors opted to take just 25 per cent to 30 per cent of the revenue generated by each deal purchased, compared to the 40 per cent to 50 per cent that Groupon currently charges, the competitors’ partnership would probably hold more appeal to participating businesses. The trade-off here is that Groupon’s individual strength remains its user base, the size of which guarantees that each deal will be seen by the greatest number of people. Still, competition is heating up, and while the company has yet to explicitly enter new product markets, it seems obvious that Groupon will need to increase its product offerings to keep ahead of LivingSocial and other competitors in the domestic market. Groupon is already exploring various options for new products. The Groupon Stores concept allows expanded deal offerings and the opportunity to realize increased revenue. The potential danger is a loss of control of deal volumes and deal constraints that could set up businesses for poor experiences and loss of profits. Meanwhile, Deal Feed would expand the current social and word-of-mouth advertising aspects of Groupon’s model, potentially growing the Groupon audience. e. How would an initial public offering (IPO) affect the company’s go-to-market strategy? Would an IPO alter the relationships Groupon has with local businesses in various cities? As the company expanded, Groupon’s management made a strategic decision to maintain internal control of the company’s growth rather than outsourcing sales and marketing efforts. In order to execute this strategy and maintain Groupon’s dominant footprint in the markets it served, significant infusions of capital were needed. Groupon’s declination of Google’s December 2010 bid for acquisition was rapidly followed by infusions of capital from various investors in January. These monies will make up the foundation of Groupon’s multifocal growth strategy of international expansion through acquisition and of its diversification of its product base. If Groupon is able to increase brand equity and market share through its rumored IPO, then the company will have created a new barrier to entry in the online collective buying industry. Meanwhile, going public could change the company’s management significantly. We have already pointed out that good relationship management is key to Groupon’s success, and hence, continued management of this important resource will have to be closely considered if and when the company does go public. WHAT HAPPENED Expansion of Product Offerings With relatively low entry barriers to insulate the firm from copycat competitors, Groupon began to focus on new product offerings, such as a concept called Groupon Stores, which allowed firms to offer their own deals online at any time, through Groupon. Businesses could control the number, frequency and amount of the discount deals. The benefit of this concept for Groupon is that it would allow expanded deal offerings and the opportunity to realize increased revenue. The potential danger is a loss of control of deal volumes and deal constraints that could set up businesses for poor experiences and loss of profits. Another reported concept that was explored was called Deal Feed. This product would bring personalized deals to a targeted audience that matched the buying and activity characteristics of a particular audience. Deal Feed would also use social media links to inform people of what deals their friends were buying. IPO Offering Groupon met with underwriters in early 2011 to valuate a public offering for later in the year, estimated at $25 billion; Groupon filed in July 2011. By October 3, 2011, the IPO valuation was projected to decrease to $3 billion from $5 billion due to questions raised about Groupon’s accounting practices, the costs of acquiring new subscribers’ e-mails, and the turnover of management. Exhibit TN-1 COAR METHODOLOGY Exhibit TN-2 SAMPLE SWOT ANALYSIS Helpful Harmful Strengths Weaknesses Internal • Provides great deals • Easy for customer to use • Get young, educated hard-to-reach customers in the door with the goal of gaining their repeat business • Working toward high customer satisfaction and has guarantees • Reach out to local businesses • First to market • Recognizable name • Savvy, regionalized sales force • Word of mouth growth • Easily replicated model • Dissatisfied business and consumer customers • Depends on trends and other businesses • Businesses didn’t know the strain the Groupon would create on their day-to-day business • Hard to have quality control when expanding so fast Opportunities Threats External • Occurred during recession, allowing good deals to be highly desirable • Utilize social media and peer to peer recommendations • Chance to expand quickly • Google • Continued Recession • Large number of competitors Exhibit TN-3 COAR MAP FOR GROUPON Exhibit TN-3 (continued) OUTCOMES TO OBJECTIVES Customer Outcome 1 Consumer gets deals s/he wants or is most interested in buying. Objectives 1. Understand the consumer. 2. Present the right deals to the right people to increase the chances of a purchase. 3. Customize the deals based on geographic location, prior purchases, public information on various websites, etc. Activities that Support the Objectives 1. Collect data (as much is legally possible) from the “public” profiles of members (through social media such as Facebook and other websites) within a certain geographic area. 2. Collect reviews after the member uses the Groupon. This approach can be used for future offers for a repeat Groupon. 3. Use market analysis from prior deals/sales concerning which kind of deals sell the most. Try to structure the subsequent deals similar to these successful deals. Resources for these Activities 1. Talented data analysts and market research personnel. 2. Savvy and localized sales team that is in tune with what the young, professional audience demands/likes; understands local culture/market. Customer Outcome 2 Increase consumer traffic/volume for small businesses. The key here is to introduce new or first time customers. Objectives 1. Understand the local markets. 2. Increase the number of Groupon subscribers. This will ensure that the new crowd is reached — basically use the hipness of Groupon to introduce new customers to Sally’s Nail Salon (which does not have a mobile app and does not advertise on Facebook). 3. Leverage electronic marketing media tools (e-mail, mobile apps and social media) to reach more customers than these small businesses can otherwise reach because of their lack of marketing and advertising budgets. Exhibit TN-3 (continued) Activities that Support the Objectives 1. Sales team should work closely with local businesses. 2. Use membership e-mails and social media for marketing to increase awareness about Groupon and about the local businesses it promotes. 3. Create incentives for new customers to be subscribers and for current Groupon members to get their friends to join. Offers for first purchase, every Xth purchase is free, etc.; each subscriber who gets a friend to use a Groupon and become a subscriber receives $10 in Groupon money. 4. Secure financing Resources for these Activities 1. Localized sales staff — folks with great local knowledge 2. IT and other technology, social media 3. Creative deal writers 4. Strategic public and private financing Customer Outcome 3 Provide convenient and consistent solution for the small businesses. Objectives 1. Structure the deal in a very simple and intuitive manner — no gotchas, no complicated algorithms to determine the payment. 2. Continually create innovative deals so that the small businesses and the consumers stay interested. Create consistency by continuously innovating the deal. 3. Maintain consistence in procedures and deal delivery. (Internally adapt the technologies to tailor the deals for e-mail versus for mobile devices. The small-business customer should not see any difference in the way he/she interacts with Groupon.) 4. Champion small business — make Groupon available in many local markets. Activities that Support the Objectives 1. Decide and lock on to an appropriate pricing model early on. 2. Recruit talented staff: Hire creative people who can put a new spin on deals. To reduce the learning curve, hire employees who are in tune with the technology and programming for mobile devices. 3. Stay abreast of technological advances and capacity (with growing business) so the business is not affected. Resources for these Activities 1. Creative deal writers that understand and can communicate with the hip population 2. Personnel with long-term vision 3. IT resources 4. Strategic public and/or public financing Instructor Manual for Marketing Strategy, Text and Cases O. C. Ferrell, Michael Hartline 9781285073040, 9781285170435