Question

In \(2016,\) Howard Shultz announced that he would step down as CEO of Starbucks to establish luxury coffee shops that would charge as much as \(\$ 12\) for a cup of coffee. Although some analysts questioned whether many consumers would be willing to pay such high prices for coffee, Erich Joachimsthaler, an executive at a brand-strategy consulting firm, believes the projects could be successful. Joachimsthaler compared the market for coffee to the market for beer, which has experienced competition from small craft breweries. "They [established companies such as Coors and Anheuser-Busch InBev] never protected themselves from the high end.... I think Starbucks sees that the middle is slowing down." a. Briefly explain what Joachimsthaler means by the "high end" and "the middle is slowing down." What relevance do his observations have for the success of Schultz's project? b. Briefly explain whether Schultz establishing luxury coffee shops illustrates: • Product differentiation • Marketing • Brand management

Short answer

Joachimsthaler's terms 'high end' and 'middle slowing down' refer to market segments. 'High end' refers to expensive, top-quality products, while the latter implies stagnation or decline in the sales of regular products. His statements indicate potential success for Schultz's project aimed at the 'high end' market. Schultz is differentiating his product by focusing on the luxury segment, which involves adept marketing and brand management to successfully communicate the unique benefits and position the brand as 'luxury'.

Step-by-step solution

Understanding the Terminology

Firstly, it's important to understand the terminology used by Joachimsthaler. 'High end' refers to the market segment that includes expensive, top-quality products or services. 'The middle is slowing down' implies that regular products or services are facing sales stagnation or even decline, as there is an observable shift in consumer behavior towards either lower cost or higher quality products.

Implementation to Schultz's Project

Erich Joachimsthaler is basically implying that there is potential for Schultz's project to cater to the 'high end' - people who are willing to pay a premium for luxury, high-quality coffee. With the middle market slowing down, consumers are more likely to either 'downgrade' to lower cost coffee or 'upgrade' to luxury, high quality coffee. Hence, this represents an opportunity for Schultz's luxury coffee shops.

Product Differentiation, Marketing and Brand Management

Schultz establishing luxury coffee shops can illustrate product differentiation, marketing, and brand management. By creating a 'luxury' coffee shop, he's differentiating his product from regular coffee shops, offering something premium and unique. The successful implementation of this strategy would require effective marketing to communicate these unique aspects to the target customer base. Lastly, it is also an example of brand management as Schultz is attempting to position his brand as 'luxury' or 'premium' in the minds of the consumers, adding value to the coffee itself.

Key concepts

Product Differentiation

Product differentiation is a marketing strategy that businesses use to distinguish their products from competitors. In the context of Howard Schultz's venture into luxury coffee shops, product differentiation is vital. Unlike standard coffee offerings, Schultz aims to serve coffee that is perceived as premium, justifying a higher price point. This strategy involves special characteristics like unique blends, sourcing, and perhaps a more upscale ambiance within the shop.

For students wrapping their heads around this concept, think of product differentiation as what makes a product stand out in a crowded market. It's like wearing a bright red hat in a sea of blue ones – you're naturally going to stand out. Successful differentiation makes a product more attractive to a specific target market, which in Schultz's case, is the 'high end' consumer.

Brand Management

Brand management is the process of building, managing, and improving a brand. It's the efforts made to maintain the perceived value and reputation of a brand in the marketplace. For Schultz's luxury coffee shops, brand management would involve curating experiences and associations that resonate with ideals of luxury and quality.

Students should envision brand management as the art of storytelling where the brand is the main character. The goal is to make the character loved and admired by the audience through every word spoken (communications) and every action taken (brand experiences). Managing a brand like Starbucks means continuing its narrative towards premium markets, ensuring it remains relevant and esteemed among luxury-seeking coffee lovers.

Luxury Goods Economics

Luxury goods economics deals with the unique market behaviors and principles associated with high-end products. These goods, like the $12 cup of coffee from Schultz’s luxury venture, are often seen as status symbols and can possess a quality known as 'Veblen goods.' Unlike typical goods, Veblen goods see an increase in demand as the price increases, because the high price itself is an indicator of its exclusivity and status.

For a more tangible grasp, students should think of luxury goods as the designer handbag in the world of retail; it's not just about functionality, it's about the image and status that comes with carrying it. In the economics of luxury goods, understanding consumer motivations—like the desire for prestige and exclusivity—is crucial for justifying high prices and predicting demand.

Consumer Behavior

Consumer behavior examines the reasons behind consumers' purchase decisions. In luxury markets, this behavior includes a preference for prestige, a desire for quality, and often, the willingness to pay more for those attributes. Joachimsthaler's reference to 'the middle slowing down' implies that consumer behavior is shifting - away from the saturated middle market towards more polarized ends, either affordable or luxury goods.

Students can view consumer behavior as a puzzle that marketers and companies are constantly trying to solve. It's understanding why someone would choose an artisanal handcrafted coffee over a standard brew. Factors such as individual preferences, societal trends, and economic factors all interplay to shape consumer behavior. Businesses that successfully decode these behaviors can tap into new markets and create products that align better with consumer desires, as Schultz intends to with his luxury coffee shops.