CASE: I Starbucks
In 2003, Starbucks accomplished something that few companies ever do: It became a Fortune 500 company—a phenomenal achievement for a company that went public only 12 years earlier. The company had over 6,000 stores worldwide—all company owned, as Starbucks does not franchise its outlets—and planned to expand rapidly to over 10,000 stores.
Starbucks created not only a successful business but a thriving industry. When the company started its massive expansion in the early 1990s, the United States had about 200 coffeehouses. In 2003 there were over 14000 coffeehouses, the majority of them not Starbucks but mom-and –pops that bloomed after the dawn of the $3 cup of coffee. According to a Starbucks executive, “We changed the way people live their lives, what they do when they get up in the morning, how they reward themselves, and where they meet. That’s more important to me than just building a company.”
More than 10 million coffee lovers spend an average of $3.60 at Starbucks weekly, and 10 percent of them come in twice a day. Starbucks has 7 percent of the U.S. coffee-drinking market and less than 1 percent abroad, suggesting ample room for growth. The coffee market is huge; coffee is the second most consumed drink in the world (water is first).
Starbucks’ iced beverages, which offer larger profit margins than regular drip coffee, are big sellers in the South and Southwest. After making some adjustments, such as adding outdoor seating and couches to stores to better serve the needs of its customers, Atlanta locations have shown double-digit sales growth. Atlanta boasts 33 successful Starbucks, and plans for expansion are in the works. Plans for further expansion in cities with even more Starbucks stores, such as New York City and San Francisco, are also on the drawing board. Although 70 stores operate in New York City alone, it is estimated that growth there will continue until 200 stores are operating in the city! As for fears of market saturation, Starbucks has none. In fact, the java giant has two highly profitable outlets that face each other on Robson Street in Vancouver, British Columbia. Each store has more than $1 million in annual sales. International expansion is also taking place. In fact, the number one Starbucks in the world is located in Tokyo, and a total of 500 stores are slated to be operational in Asia in the next three years.
What is the secret of Starbucks’ phenomenal success? According to Howard Schultz, chairman and CEO of Starbucks Corporation, the company’s success is due to the experience created within the stores as well as the unsurpassed quality of the coffee. A steaming café au lait must be perfectly replicated, whether the store is in Seattle or New York City. In a world filled with people leading busy, stressful lives, Schultz believes he has created a “third place” between home and work where people can go to get their own personal time out or to relax with friends.
Schultz also attributes his company’s success to the 40,000 employees working worldwide. Starbucks’ employee training program churns out “baristas” by educating 300 to 400 new hires per month in classes such as “Brewing the Perfect Cup at Home” and “Coffee Knowledge.” Here they are taught to remind customers to purchase new beans weekly and that tap water might not be sufficient when brewing the perfect cup of coffee. They are also encouraged to share their feelings about coffee, selling, and working for Starbucks. Employees are also given guidelines to maintain and enhance self-esteem, to learn how to listen and acknowledge, and to know when to ask for help. E-mail, suggestion cards, and regular forms allow unsatisfied workers to communicate with headquarters. If the annual barista turnover of 60 percent, compared with 140 percent for hourly workers in the fast-food industry, is any indication of quality of its training programs, Starbucks seems to have a handle on how to gain and maintain employee loyalty. What about the demographic makeup of the work force? About 80 percent of the employees are white, 85 percent have some education beyond high school, and the average is 26.
The Starbucks success story is continuing into the 21st century as the company is quickly expanding into Europe and Asia. However, one question remains regarding the success of the company in countries already known for their coffee-making expertise: Will such Romans and Parisians care for Starbucks? Continued expansion and visibility has been created domestically as Starbucks has formed partnerships with companies such as United Airlines and Barnes & Noble Booksellers, both of which draw form the same type of knowledgeable customer.
More recently, Starbucks has opened several full-service dining establishments (Café Starbucks) in response to customers who want more at lunch and dinner. The menu offers full meals, breads, pastries, alcohol, and of course coffee. The company has also launched an Internet site that sells not only expensive coffee but also pricy kitchenware, home furnishings, and gourmet food. After some skepticism by analysts and a subsequent drop in share price, Schultz emphasized that “Every company must stick to its knitting, understand its core competency, know what the value proposition is for the customer, and do everything possible to get close to the customer. So you won’t see us getting far afield from what we do now” As for the present, Starbucks is not likely to fall victim to a fad-driven society any time soon. The company seems to be doing fine.
You can learn more about Starbucks at http://www.starbucks.com.
1. Based on the case information and your personal experiences, list at least five things you know about Starbucks. This list offers you some idea about your cognitions concerning the coffee shop chain.
2. List at least things you like or dislike about Starbucks. This list gives you some idea of your affect for the coffee shops.
3. List at least five behaviors involved in buying a gourmet coffee drink from Starbucks. This list gives you an idea of the behaviors involved in a coffee purchase.
CASE: II Barnes & Noble
For decades, bookstores were simply that—places that sold books. The typical mom-and-pop bookstore on the corner was small, quaint, sometimes a little musty, and bursting at the seams with books. It was a wonderful place to visit now and then, look around for a bit, find a book you like, and go home. Today that old bookstore seems like a relic of a bygone era. Barnes & Noble’s approach to book selling has revolutionized the entire industry.
Barnes & Noble has risen from rather ordinary beginnings to become the largest bookstore chain in the world. Founder and CEO Leonard Riggio began his empire by purchasing a struggling Manhattan bookstore in 1971. Riggio opened his first superstore, with 100,000 square feet of selling space, in New York in 1975. That store was so successful that he quickly opened more superstores throughout Manhattan and downtown Boston. The formula worked and the number of stores multiplied. In the early 1990s, the company began spreading the superstore concept throughout the United States. Today Barnes & Noble operates around 950 bookstores and another 426 video game and entertainment software stores. The company boasted sales of nearly $3.5 billion and operating profit of $232 million in 1999.
Riggio took a decidedly different approach to selling books. “Shopping is a form of entertainment,” he says. “To customers, shopping is a social activity. They do it to mingle with others in a prosperous-feeling crowd, to see what’s new, to enjoy the theatrical dazzle of the display, to treat themselves to something interesting or unexpected.” Riggio made sure both the layout and operation of his stores provide customers with what they want. Barnes & Noble superstores are huge, yet clubby and inviting. They typically cover about 25,000 square feet (some are much bigger) and offer a selection of up to 150,000 titles, compared to 10,000 to 20,000 at the typical independent book seller. Books usually are discounted 20-30 percent. But a Barnes & Noble superstore is not defined merely by size and volume. The atmosphere is friendly, even somewhat luxurious—almost a cross between a public library and a den. There are large, overstuffed chairs; reading tables; background music; a coffee bar; bright lighting; and even well-maintained public restrooms. Book-store used to discourage customers from reading in the store—spend more than a few minutes with a book and you would have expected an employee to tap you on the shoulder and suggest that you either buy the book or put it back. But Barnes & Noble actually wants you to pull a book or magazine off the shelf, grab a cup of coffee, flop down on a sofa, and make yourself at home. A company spokesperson explains, “The philosophy behind this is, the more customers we attract into the store and the longer they are encouraged to stay, the more books we sell.” Many Barnes & Noble locations also offer a music section where the same philosophy applies. Customers are welcome to sit down with a pair of headphones and listen to a CD before they buy it.
Barnes & Noble also works to ensure that its superstores evolve into community meeting places. Each store or region is staffed with a public relations coordinator who works to bring events to the store. Live performances, readings, and book signing are common. Classes of elementary school kinds are invited to come in and browse on a regular monthly basis. Stores even offer classes, book discussion groups, puppet shows, and story hours for children. The long store hours (9 AM to 11 PM) also provide a compelling lure. “For people who work all day, this is their leisure time,” explains Lisa Herling, vice president for corporate communications. “Whether it’s after a movie or after dinner, it’s a destination location.” Riggio puts it more succinctly: “If I get you for two hours, I’ve got you.”
In 1995, a competitor with an entirely different value proposition emerged. Amazon.com began selling books over the Internet. Barnes & Noble countered two years later with BarnesandNoble.com, which tries to replicate the superstore experience on the Web. At the site you can participate in live chats with authors and listen to audio from one of the many archived book readings (featuring such renowned writers as Kurt Vonnegut, Susan Sontag, and Salmon Rushdie). Now the largest bookseller in the U.S., BarnesandNoble.com, also offers free online courses through “Barnes & Noble University,” where you can study subjects ranging from the humor of Shakespeare to overcoming shyness. You can even purchase a bag of Starbucks coffee and select the music you want to hear while you’re browsing the site. Oh, yes, they do sell books on the site, too—750,000 titles—along with music, software, and posters. BarnesandNoble.com has attracted more than 5 million customers since 1997 and has emerged as the fourth-largest e-commerce site on the Web. Sales were up 4.5% in 2002 as were expectations that the venture would turn a positive cash flow soon.
Barnes & Noble’s success comes not so much from what it is selling but how it is selling it. Both the brick-and-mortar stores and the online site provide customers with an atmosphere that turns book buying into a warm, friendly, inviting experience.
1. What affective responses do you think the Barnes & Noble environment creates? How might consumers’ cognitive systems interpret these responses? From a marketing perspective, which is more important to Barnes & Noble—affect or cognition?
2. Rob goes to Barnes & Noble location to hang out and meet people. Lisa goes only when she wants to purchase a specific book or CD. Describe how their integration processes might convince them to choose Barnes & Noble over the myriad other options they have.
3. Many of the activities that take place at Barnes & Noble stores (or at BarnesandNoble.com) do not require a purchase. Participating in discussion groups and going to in-store performances are free. And obviously it doesn’t cost anything to simply go in, sit in a chair, and read a book. So why do people buy? How do these free activities (behaviors) influence consumers’ affect and cognition?
CASE: III Rollerblade Inc.
In 2002, in-line skating ranked among the most popular sports for children ages 6 to 17, behind basketball and soccer, according to the Sporting Goods Manufacturers Association. About 7.5 million youths skate an average of over 25 times per year. This is quite a change from 1980, when Minneapolis-based Rollerblade Inc. introduced its first in-line roller skate.
Rollerblade’s founder, Scott Olson, was a hockey player with the Winnipeg Jets’ farm teams who envisioned a roller skate with the action of an ice skate that hockey players and skiers could use to train during the off-season. At first, the plan was to use modern materials to construct a model based on an 18-century design. However, Olson discovered a similar in-line skate already on the market and purchased the patent from Chicago Roller Skate Company. Olson and his brother, Brennan, perfected the design using a plastic molded ski-type boot atop a blade of polyurethane wheels. Their first sales were to Olson’s teammates as well as a few to sporting goods stores. Thus began the sport of blading
Although they generally cost twice as much as conventional roller skates, in-line skates are purchased for two reasons. First, they are faster and therefore more exciting to use than conventional skates. Second, they provide skaters with a better aerobic workout, requiring the use of more muscles. However, it is more difficult to learn how to use in-line skates because they require greater balance and their speeds may cause more severe injuries if a skater falls.
By 1986, wholesale sales of in-line skates had risen to $3.5 million. Recognizing an opportunity to get in on a growing market, a number of companies began producing competitive products. First Team Sports, Inc., also based in Minneapolis, started manufacturing its Ultra-Wheels brand skates, which included the first in-line skates for children. Roller Derby Skate Corporation in Litchfield, Illinois, a manufacturer of standard roller skates since 1936, produced an in-line skate with a toe-stopper for those accustomed to conventional skates (Rollerblades had a rubber stopper located on the heel). The ice skate manufacturer Bauer entered the market with a skate that had a leather rather than plastic boot.
Rollerblade Inc.’s sales increased when it expanded its target market. At first, the product was targeted to hockey players, who were 95 percent male and 18 to 25 years old. However, by broadening the target to include 18-to-35-year-old males and females, the company increased sales considerably.
By 1990, industry wholesale sales of in-line roller skates topped $50 million, which almost equaled sales in the conventional roller skate business.
Rollerblade Inc. maintained a 66 percent market share, First Team Sports had 22 percent, Bauer had 5 percent, Roller Derby had 3 percent, and other competitors combined had the remaining 4 percent. Rollerblade could have done better, but it could not fill store orders for several months because it ran out of inventory early in the year. By 1998 there were 30 million in-line skaters, although growth in the number of skaters was slowing down; skate boarding was taking off as a cool alternative.
The fierce competition in the industry involved not only product features but also marketing elements. Companies rushed to sign celebrities to promote their products. Competitors also moved into new retail markets, including discount and departmental stores. Rollerblade expanded its market by selling to Macy’s and Nordstrom.
Although the name of Rollerblades may become generic term for this type of skate, the company’s management will have to work hard to maintain its market lead. “We have been pioneers and continue to maintain an edge,” a company spokesperson said. “You only get one shot at pioneering a new sport, and that’s exciting.”
1. What role do you think modeling could have played in the diffusion of this innovation?
2. How could you use modeling to teach a friend how to use Rollerblades?
3. If you were designing a commercial for Rollerblades to be used for an in-store videotape demonstration, how would you design the commercial to take advantage of your knowledge of modeling?
CASE: IV The Saturn Family
Consumers are bombarded with advertisements and marketing hype everyday. When you log onto the Internet, watch television, listen to radio, read a newspaper, or open your mail, you are inevitably greeted with a plea to purchase brand X or visit store Y or website Z. In any given day, you are exposed to more information than you can realistically process. In the 1990s, marketers began to look fresh, innovative ways to make their companies stand out from the media clutter. Few have been as successful as General Motors’ subsidiary Saturn, whose 1994 “homecoming” of car owners has been described as “the mother of all marketing programs.”
Saturn’s mission statement emphasizes the concept of “family.” In an industry whose history is replete with labor conflict, Saturn has tried to erase the line between labor and management are somewhat taboo. Regardless of their positions in the company, all Saturn boasts that no one punches a time clock and that members of labor and management even eat in the same cafeteria! Moreover, the company expects its employees and dealers to make customers feel like a part of the Saturn family.
According to Joe Kennedy, Saturn’s corporate vice president of sales, service, and marketing, “Everything at Saturn hinges on our retail operations being enthusiastic about serving their customers.” Indeed, salespeople (or, as Saturn prefers to call them, “consultants”) have gone far out of their way to make current and potential customers happy. In one legendary story, a woman in Wyoming was interested in purchasing a Saturn only to find that the nearest dealership was hundreds of miles away in Salt Lake City, Utah. Not to worry. A salesperson from Salt Lake City flew to Wyoming, picked the woman up, flew back with her to the dealership in Utah, showed her the car, and made the sale. Saturn instituted a “no-haggle” pricing policy to reduce the traditionally antagonistic relationship between automobile salespeople and customers. Saturn’s television ads have featured employees discussing the family feeling at the company and actual customers sharing their own Saturn stories.
The “Saturn family” concept took hold with consumers. Soon delighted customers began calling and writing the company’s plant in Spring Hill, Tennessee (near Nashville), to learn how they could tour the facility and maybe meet other Saturn owners from across the country. So management decided to spend $1 million to hold its first “homecoming” of Saturn owners and their cars the weekend of June 24-25, 1994 in Spring Hill. It mailed out 650,000 invitations to Saturn owners and also purchased commercial time on CBS’s late Show with David Letterman.
The response was overwhelming. About 30,000 Saturns—and their owners—made the pilgrimage. If you were on the highway that week and saw a Saturn with an orange ball on the radio antenna, that car was probably headed home to Tennessee. Saturn owners came from as far as Taiwan and filled most of the 24,000 hotel rooms in the Nashville area. In fact, a dealer from Taiwan brought home the first Saturn ever sold in that country. That car was honored with its own tent. Throughout the weekend, car owners met members of the Saturn team, toured the plant, and shared their own Saturn stories. The homecoming had all the trappings of an old-fashioned outdoor revival with music, dancing, testimonials from celebrities (Olympic speed skater Dan Jansen), and food (everything from “southern Chinese egg rolls” to barbecued catfish).
Even though two Herculean thunderstorms blew over some tents, injured a few people, and forced the cancellation of a scheduled concert by country music star Wynonna, it didn’t seem to dampen many folks’ spirits. Mary Taylor, age 60, was part of a 22-car caravan that trekked 1,800 miles from Nevada to Tennessee to be part of the homecoming. She couldn’t stop raving about the dealer. “I couldn’t believe how much they cared,” Taylor said. “They know us when we walk in. It’s such a friendly atmosphere, I look forward to going to the dealership.” Another Saturn owner compared the weekend get-together with Woodstock: “This is another gathering in a field, except it’s about cars, not music.” Ruth Morrissey from South Dakota perhaps summed up the weekend best as she gushed, “We love our Saturns. We are all just a bunch of walking ads.” For those who couldn’t make it to Spring Hill, Saturn sponsored smaller-scale get-togethers at dealerships around the United States. An estimated 100,000 additional people attended those events.
The homecoming was just a part of Saturn’s overall strategy of making customers feel like part of a big Saturn family. Was this approach successful? Apparently it was. Company research in 1994 showed that out of the approximately 650,000 people who owned Saturns, 80 percent planned to buy another Saturn. Furthermore, Saturn reported that during the homecoming ad campaign (which ran from January through June 1994), sales were up 25 percent compared to a year earlier.
Other carmakers took notice and copied Saturn homecoming model. Daimler Chrysler’s Jeep division sponsored an event called Jeep 101 in which Jeep owners—many of whom drive exclusively on paved urban streets—took their vehicles off-road. Mercedes-Benz of North America invited 100,000 current and potential customers to Los Angeles for an unveiling of new models. The opportunity to ogle these pricey new automobiles—plus the lure of good food and wine—apparently was quite compelling. So many people showed up that they had to close down a highway. In another promotion, Mercedes invited 1 million people to “fall in love” with a new Mercedes by attending one of a variety of special customer bonding events at local dealerships.
To be sure, Saturn has had its share of problems since that first homecoming event in 1994. Some critics have sniped at Saturn’s boring styling and limited choice of models. Others believe Saturn has slipped compared to other carmakers in terms of performance and reliability. Sales of the L-series mid-size car were very disappointing, which forced production slowdowns and lay-offs in 2000. In addition, the harmonious relationship between labor and management hit a snag when Saturn’s 7,000 unionized employees began to express dissatisfaction with their special labor agreement with the carmaker. Seeing a problem, General Motors in 2000 pledged to invest $1.5 billion to expand the Spring Hill facility and provide Saturn with a SUV and a redesigned compact car in time for the 2002 model year. (To check out Saturn’s current model line and other company information, visit the company’s website at www.saturn.com.
But make no mistake, Saturn’s innovative marketing efforts have accomplished their goal. Even with the recent problems, surveys reveal that most consumers—especially younger people—still believe Saturn is, as its ad campaign declares, “a different kind of car company.” In 1999, Saturn held another large, successful homecoming and many industry experts believe that with new models in the offing, Saturn can regain the momentum it had in the mid-1990s.
1. Visit the Saturn website and try to determine the market segments the carmaker is targeting. What should Saturn do to better serve those segments? How might Saturn tailor its offerings to address the different stages of the family life cycle?
2. Other vehicles—such as Porsches, Mustangs, and Harley-Davidson motorcycles—also have “cult” followings. But these products also have very strong symbolic meanings associated with them. The Saturn is a solid and reliable, but basically unspectacular, car. Identify and discuss three reasons that you think Saturn has such a devoted following of involved customers.
3. An automobile is a high-involvement purchase. Discuss how the manufacturer of a lower-cost, lower-involvement product could generate greater personal relevance and long-term loyalty. Find and discuss an example of a company that has done so.
CASE: V Harley-Davidson, Inc.
Harley-Davidson, Inc., founded in 1903, is the only remaining American motorcycle manufacturer, although there are some new upstart companies. During the 1950s and 1960s, Harley-Davidson has virtual monopoly on the heavyweight motorcycle market. Japanese manufacturers entered the market in the 1960s with lightweight motorcycles backed by huge marketing programs that increased demand for motorcycles. These manufacturers, which included Honda, Kawasaki, Suzuki, and Yamaha, eventually began building larger bikes that competed directly with Harley-Davidson.
Recognizing the potential for profitability in the motorcycle market, American Machine and Foundry (AMF, Inc.) purchased Harley-Davidson in 1969. AMF almost tripled production to 75,000 units annually over a four-year period to meet increased demand. Unfortunately, product quality deteriorated significantly.
More than half the cycles came off the assembly line missing parts, and dealers had to fix them to make sales. Little money was invested in improving design or engineering. The motorcycles leaked oil, vibrated badly, and could not match the excellent performance of the Japanese products. Although hard-core motorcycle enthusiasts were willing to fix their Harleys and modify them for better performance, new motorcycle buyers had neither the devotion nor the skill to do so.
In late 1975, AMF put Vaughn Beals in charge of Harley-Davidson. Beals set up a quality control and inspection program that began to eliminate the worst of the production problems. However, Beals and the other senior managers recognized that it would take years to upgrade the quality and performance of their products to compete with the faster, high-performance of their products to compete with the faster, high-performance Japanese bikes.
To stay in business while the necessary changes in design and product were being accomplished, the executives turned to William G. Davidson, Harley’s styling vice president. Known as “Willie G.” and a grandson of one of the company founders, he frequently mingled with bikers and, with his beard, black leather, and jeans, was accepted by them. Willie G. understood Harley customers and noted:
They really know what they want on their bikes: the kind of instrumentation, the style of bars., the cosmetics of the engine, the look of the exhaust pipes, and so on. Every little piece on a Harley is exposed, and it has to look just right. A tube curve or the shape of a timing case can generate enthusiasm or be a total turnoff. It’s almost like being in the fashion business.
Willie G. designed a number of new models by combining components form existing models. These included the Super Glide, the Electra Glide, the Wide Glide, and the Low Rider. Although these were successful, Harley-Davidson was still losing market share to Japanese competitors that continued to pour new bikes into the heavyweight Market.
By 1980, AMF was losing interest in investing in the recreational market and sold the company to 13 senior Harley executives in a leveraged buyout on June 16, 1981. Although the company was starting to make money in the early 1980, its creditors wanted payment, and Harley-Davidson nearly had to file for bankruptcy at the end of 1985. However, through some intense negotiations, it stayed in business and rebounded to become a highly profitable company.
In 1996, Harley-Davidson controlled more than 47 percent of the heavyweight (651cc and larger) motorcycle market, far more than its all-time low of 23 percent. Its products are considered to have “bulletproof reliability” because of manufacturing and management changes that resulted in products of excellent quality.
Owners of Harleys are highly brand loyal, and more than 94 percent of them state they would buy another Harley. The company sponsors the Harley Owner Group (HOG), which has more than 1,200 chapters and 750,000 members worldwide. Executives of the company frequently meet with chapters to obtain suggestions for product improvements.
In 2002, Harley sold 215,454 motorcycles domestically and 48,199 in the global market. It also sold 10,943 Buell motorcycles in that year. Its net revenue for 2002 was over $4 trillion, about double its 1998 net revenue. Its net income for 2002 was $580 million compared to $213 million 5 years earlier. In 2003, its 100th anniversary product line included 7 Softail models, 7 Sportster models, 5 Dynaglide models, and 7 Touring models. In addition, its VRSCA V-Rod, a new-style, $17,000 Harley was selling quickly even though it was a departure for the retro look of traditional Harleys.
Harley-Davidson motorcycles are distributed worldwide by a network over 1,300 dealers. These dealers typically have upgraded facilities that merchandise not only motorcycles and service but also a variety of parts, clothing, and accessories. Clothing and accessories are highly profitable items that enhance the motorcycle-owning and riding experience. For more information, visit the company’s website at www.Harley-Davidson.com.
1. What kind of consumer owns a Harley?
2. What accounts for Harley owners’ satisfaction and brand loyalty?
3. What role do you think the Harley Owner Group plays in the success of the company?