Brands in the News

Starbucks: Segmentation and Profits

7 Nov 2009  

This week Starbucks reported some very strong financial results.

Overall operating income for the third quarter improved from $14 million in 2008 to $199 million in 2009. In the U.S, profits more than doubled. This is very impressive because revenues in the U.S. were down during the same period by -4%. Operating margin in the U.S. improved dramatically, from a paltry 1.7% in Q3 2008 to 9.3% in Q3 2009. This is impressive indeed.

There were clearly a number of things that contributed to the strong results. One of the important drivers was segmentation based pricing.

Earlier this year Starbucks made some  significant pricing moves; the company rolled back the prices on regular coffee drinks and increased prices on fancier drinks such as caramel macchiatos.

I suspect this pricing move aligned perfectly with customer segmentation. Traditional drip coffee drinkers are a more price sensitive bunch. They appreciate both quality and price. Reducing prices for this group will sustain loyalty. The caramel macchiato crowd appreciates the customer experience. These folks are willing to pay. Increasing price for this group is a good way to build margins with little volume risk.

Segmentation is a powerful tool. When a company uses the technique to modify pricing and optimize margins, it can become a key profit driver. The strong results at Starbucks demonstrate how understanding and capitalizing on customer segmentation can drive impressive results.

2 Responses

  1. Profits Theme…

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  2. Dear Tim,

    I think that as you said, Starbucks commanded by Howard Schultz again, not only conducted a better pricing strategy but also he applied a cost reduction strategy, based on a analysis of operations, applying “Lean Operations”, the Toyota concept for reducing waste and accelerating processes.

    Also closing bad performing stores, which impacted not only eliminating stores that were loosing money, but also revitalized sales of other stores located near to the ones that were closed.

    Last comment has to do with the fact that 2008 P&L statement carried a $200+ reestructuring cost, which are not present in 2009 figures.

    Will Starbucks stock price go back to $40? Will the company regain its fast growing pace? Will the experience offered be still valued by the consumer? How much and more will McDonald’s hurt Starbucks in the future? Are there strong new business alternatives connected to Starbucks business model? Those are some of the questions I have for the near future. I hope that they will manage to make the necessary chages in order to give Starbucks a second growing wave that could keep the company growing in sales, stores and profits.

    Jacques Albagli
    Kellogg MBA

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