Starbucks Also Faced Issues

Imagine starting late to the office at home and hopping to grab your morning coffee on your way down the street or a quick coffee in the afternoon for relief. I get it! Long lines get the hopes down 😖

Or how about trying a not-so-regular coffee on a cold day? While you were just about to give up on the hope, Starbucks came as a savior.

We now have various options beyond different coffees, and importantly, we no longer have to wait in lines 🙂 as we used to. Thanks to the Starbucks app and its creative team.

However, Starbucks faced some challenges on its way up the ladder. What challenges did this globally well-known brand face? And how did it overcome them?

Let's see!

Background and Context

Starbucks started in 1971 as a small coffee shop in Seattle. At first, it only sold high-quality coffee beans, not brewed coffee. The founders, Jerry Baldwin, Zev Siegl, and Gordon Bowker, motivated by Italy's rich coffee culture, wanted to bring premium coffee to the U.S.

However, Starbucks’ changeover began when Howard Schultz joined the team in 1982. During a trip to Italy, Schultz observed how Italians made coffee a social experience, with cafés serving as gathering spots.

That sight sparked the idea of turning Starbucks into more than just a place to buy coffee beans - a cozy environment where people could relax, work, or meet friends - a third place between home and work.

In 1987, Schultz became CEO and changed Starbucks's path by selling espresso-based drinks and creating an inviting atmosphere. This shift helped Starbucks stand out from competitors like Dunkin' and local cafés.

By 1992, Starbucks had 165 stores and went public, raising $271 million in its IPO. Today, Starbucks is a global coffee giant with over 33,711 stores in 80 countries.

It has grown by offering more than just coffee, expanding into teas, cold beverages, snacks, and ready-to-drink products. Here’s an image of the price of Starbucks country-wise:

Challenges

Despite its success, Starbucks has faced several challenges over the years. These challenges tested the company's ability to adapt and stay relevant in a fast-changing market.

1. Overexpansion

In the mid-2000s, Starbucks opened new stores at a record pace. For example, in 2007 alone, the company opened 2,571 stores globally. While expansion helped Starbucks reach more customers, it also led to market saturation, particularly in the U.S.

Many stores were too close to each other, which hurt sales and reduced the unique experience Starbucks had built. By 2008, Starbucks realized that its aggressive expansion had diluted its brand.

It was no longer a premium coffee shop, and some customers felt the quality of the coffee and service had declined. This overexpansion put a strain on the business and led to financial difficulties.

2. Economic Downturn

The global financial crisis in 2008 was another challenge for Starbucks. As people tightened their spending, buying expensive coffee became a luxury many could not afford.

Known for its higher-priced coffee, Starbucks was hit hard by this shift in consumer behavior. During this period, Starbucks had to close 600 underperforming stores in the U.S. and lay off employees.

Check out this 16-year-old news clip announcing the hardest decision by the company:

It was a wake-up call for the company to focus more on efficiency, costs, and the customer experience to weather future economic storms.

3. Shifting Consumer Preferences

Today, customers are more health-conscious and environmentally aware than ever before. This change was a problem for Starbucks, as many saw its products as sugary treats that did not align with healthier lifestyles.

Also, consumers demand that the companies they buy from practice sustainability and ethical sourcing. Starbucks had to quickly adapt to these changes to avoid losing its younger, eco-conscious customers.

4. Competition

Starbucks has also faced growing competition from both large and small players. Companies like Dunkin’ and McDonald’s offered cheaper coffee options and began to attract cost-conscious customers.

Additionally, the rise of boutique coffee shops, which use artisanal and locally sourced products, competed with Starbucks' position as a leader in premium coffee.

These competitors had various options for their diverse customer base, and Starbucks had to rethink maintaining its brand loyalty in such a crowded market.

5. Global Supply Chain Issues

Like many global companies, Starbucks has faced supply chain issues. Natural disasters, political instability, and the COVID-19 pandemic made it harder for Starbucks to supply its usual coffee beans and other products.

These disturbances impacted store operations, leading to product shortages. To address these challenges, Starbucks had to invest in improving its supply chain stability and work closely with farmers to ensure a stable supply of high-quality coffee beans.

Here’s a YouTube video explaining how Starbucks manages its supply chain:

Solution

Starbucks has faced many challenges over the years but overcome them through strategic changes. These solutions helped Starbucks recover, improve its business model, and continue growing.

Store Closures and Focus on Quality

To deal with the issue of overexpansion, Starbucks took a bold step in 2008 by closing 600 underperforming stores in the U.S. This helped reduce operating costs and allowed the company to focus more on improving the customer experience.

Starbucks also took measures to return to its roots – offering high-quality coffee in a welcoming atmosphere.

CEO Howard Schultz even temporarily closed all U.S. stores for a day in 2008 to retrain baristas on how to make the perfect espresso. This move helped restore the brand’s premium image and regain customer trust.

Digital Transformation

One of the most impactful solutions Starbucks implemented was adopting digital technology. Starbucks launched its mobile app in 2011, and that quickly became a game-changer.

The app allowed customers to order and pay ahead, skip long lines, and earn rewards through the Starbucks Rewards program. Check out this cool YouTube shot:

Today, the Starbucks mobile app has over 25 million active users in the U.S. alone, and digital orders now account for 52% of all U.S. sales. The app made transactions faster and more convenient for customers and boosted customer loyalty.

Starbucks also uses the app to send personalized offers, reward frequent customers, and gather valuable data on consumer preferences.

Product Diversification

As consumer preferences shifted, Starbucks expanded its menu to meet new demands. In response to the growing health-conscious trend, Starbucks introduced healthier options like low-calorie, plant-based beverages and snacks.

They also added dairy alternatives like almond, coconut, and oat milk to address customers who prefer non-dairy options. Here’s an Instagram promotion of a plant-based drink:

In addition to new drinks, Starbucks ventured into the ready-to-drink market by selling bottled beverages like Frappuccinos and cold brew coffee in grocery stores.

This strategic step helped Starbucks reach customers beyond its stores and create new revenue streams. The ready-to-drink segment now contributes more to Starbucks’ overall revenue.

Sustainability and Ethical Sourcing

In response to growing consumer demand for sustainable and ethically sourced products, Starbucks boosted its commitment to sustainability.

The company introduced its Coffee and Farmer Equity (C.A.F.E.) program to ensure they source coffee beans from farmers who are paid fair wages and use sustainable farming methods. This is how Starbucks makes it happen:

Starbucks also set environmental goals, such as reducing carbon emissions, conserving water, and cutting waste by 50% by 2030.

To encourage more sustainable practices, Starbucks introduced reusable cups and offers a discount to customers who bring their own cups. Here’s how they make this happen:

These sustainability efforts helped Starbucks target environmentally conscious customers and positioned the company as a leader in responsible business practices.

Global Expansion with Local Adaptation

Starbucks continued to grow globally but adapted its offerings to local tastes. For example, in China, one of Starbucks’ fastest-growing markets, the company introduced tea-based beverages for regional preferences.

And here’s where it all started:

Starbucks also designed its stores to reflect local cultures and traditions, creating a more personalized experience for customers in different areas. This approach helped Starbucks succeed in various markets while strengthening its global brand identity.

Results

• In 2023, Starbucks’ revenue reached $36 billion. The company now has over 35,711 stores in 80 countries, making it the largest coffeehouse chain in the world.

• The Starbucks Rewards program, integrated into the app, now has 31.4 million active members in the U.S.

• In 2023, the global ready-to-drink coffee market was valued at $26.94 billion, with Starbucks being a key player.

• China has become Starbucks’ second-largest market, with over 6,000 stores. In 2023, Starbucks announced plans to open one new store in China every 9 hours until 2025.

• In 2015, Starbucks achieved 99% ethically sourced coffee, a milestone that sets the brand apart from competitors. In 2023, Starbucks revealed plans to reduce carbon emissions and cut waste by 50% by 2030.

Conclusion

Starbucks’ journey shows how focusing on quality, innovation, and adaptability can bring you long-term success. By adopting digital transformation, responding to changing consumer preferences, and investing in sustainability, Starbucks overcame challenges and strengthened its global position.

It's your turn now (we will feature the best answers in the following post):

1. How can you localize your global expansion strategy to ensure success in diverse markets?

2. How can other brands replicate Starbucks' strategy of creating a "third place" customer experience?