Starbucks & Instant Coffee: Good Business Strategy?

Over October 2 to 5, Starbucks was offering free samples of its new VIA Instant Coffee product in Canada – a product they refer to as “Ready Brew.”  This Wednesday, the VIA product will begin to be rolled out across the United States.

Starbucks foray into the instant coffee market is intriguing. Why would a company that took great pride in “educating” the world about fair-trade coffee and espresso-based beverages enter a market that is typically scoffed at by java connoisseurs?

One of the primary reasons claimed by Starbucks is that the global market for instant coffee is a $21 billion. But there is more going on here…

Let’s break this down. From a Canadian perspective.

From ongoing national research study, conducted by ZINC Research and its partner Dufferin Research, we recently investigated Canadians coffee consumption habits.

“When you purchase your coffee, where are you most likely to buy it?” Source: Canada Voyageur Omni (September 2009)

“When you purchase your coffee, where are you most likely to buy it?” Source: Canada Voyageur Omni (September 2009)

“Where Canadians are most likely to get their coffee” was a multiple response question. So respondents had the opportunity to choose more than one outlet for their coffee. It was noted that 23% of Canadians don’t drink coffee. So the market for coffee starts among 77% of adult Canadians.

Almost half of Canadians (49% total, 62% of coffee market) get their daily caffeine fix at Tim Hortons or a similar doughnut establishment. 2 in 5 (or 51% of coffee market) make it at home or get their coffee at the office. 1 in 6 (or 20% of coffee market) go to Starbucks or a similar coffee house chain.

On first blush, a slight majority of coffee drinkers enjoy their beverage at home or the office. Unless you are among the dedicated and obsessed with having an espresso machine, most Canadians would be making either brewed or instant coffee on their own. Yes, convenience and simplicity dominates this market.

Also of interest here are the 13% of Canadians (17% of the coffee market) that enjoy their cup of joe at a locally-owned, independent coffee house. Starbucks evolved out out of this niche, but is now a publicly traded company and considered a global giant in the retail coffee trade. For coffee-drinkers seeking a “more authentic” coffee house experience and wanting to support the “small guy,” they have been turning to local and independent own purveyors of their favourite brew. It is no secret that Starbucks has been losing business to this market based on three factors – quality of coffee, the social coffee house experience and price. To address the bleed to this market, Starbucks has been experimenting with “non-branded community cafes.” This is a curious move by a corporation who invests tremendous resources in branding their coffee experience.  More on this below.

Let’s now consider the beverage of choice among Canadian coffee drinkers…

“What type of coffee do you drink most often?” Source: Canada Voyageur Omni (September 2009)

“What type of coffee do you drink most often?” Source: Canada Voyageur Omni (September 2009)

7 in 10 Canadians indicate that they drink brewed coffee most often. In a distant second, about 1 in 9 indicated that they are most likely to sip instant coffee. This was followed by a stated preference for cappuccinos, lattes and espressos. At a glance, Starbucks was able to cover off 4 out of the top 5 choices of Canadians – 84% out of 95% of the market. With the introduction of VIA Ready Brew, Starbucks can effectively serve the entire spectrum of the top 5 choices among Canadian coffee drinkers. I suspect that this may be the case for the US market as well.

As noted above with the “community cafes,” and the introduction of VIA, Starbucks is entering unique territory with competing interests.

  1. New Opportunities. As they may feel that their market space is mature, Starbucks may likely feel that the strength of their brand can be extended across the breadth of the coffee market. With its stated intent to get into big box retailers and served on airlines, Starbucks may feel that a highly regarded brand will translate into a profitable market share. Demography may also be in play here – aging Boomers may prefer the simplicity of making instant coffee instead of using the drip-maker and cleaning a host of equipment. Further, instant coffee is enjoyed around the world and with increasing immigration from Asia and Eastern Europe where the product is well entrenched, Starbucks maybe looking towards the future.
  2. Brand Clarity. This may be the risky play. Starbucks’ share price was in decline from the latter part of 2006 to the depths of the recent economic downturn in early part o 2009. With the rise of other coffee choices (e.g., Tim Hortons’ introduction of frozen coffee beverages) and competition from independent coffee houses, two things occurred: (a) Starbucks’ product line became mainstream and substitutes readily available; and (b) Educated and savvy consumers and connoisseurs began abandoning the retailer for independent options (e.g., the rise of Caffe Artigiano in western Canada). It is this latter phenomena that was particularly vexing to Starbucks – these independents mimicked Starbucks attention to process, offered free wi-fi, started to innovate in their product and develop their own community and social networks (e.g., barista slams). As such, Starbucks started to have an identity crisis (hence the “community cafes”). The same could be said for the introduction of the VIA product – is instant coffee (no matter how good it is) congruous with a $5 latte?

Starbucks is very lucky for one critical fact – coffee is addictive. However, they need to carefully consider their product lines relative to their brand. While our polling data clearly indicates a substantial market opportunity, Starbucks is beginning to navigate from a formerly strong and well-defined position into an increasingly cluttered coffee market. From a strategic perspective, I suspect that their executives have to consider the following key questions:

  • Will the sale of instant coffee dilute to perceptions of Starbucks’ “premium” position in the coffee market?
  • Can the instant coffee market support a premium-priced brand? (At about $1 per serving, VIA is priced substantially higher than other instant coffee brands.)
  • What would instant coffee markers do to take on Starbucks entry into this market?

With a sizeable opportunity, Starbucks is certainly swinging for the fences and looking at their bottom line. However, from a strategic perspective, recent performance does indicate that, given their distribution channels, reinforcing and differentiating their core product and experience (especially given the “affordable luxury/indulgence” their products offer) may be a better long-term investment.

We look forward to tracking the performance of the VIA product and Starbucks’ excursion from its core brand.

Interesting aside: Active social media users are almost four (4) times as likely to drink lattes and/or cappuccinos compared to casual and non-users.

The Bridge – Canadians & Social Networking Sites” is one of a number of nationally syndicated studies conducted by ZINC Research Inc. and its partner, online research specialists Dufferin Research, via their monthly Voyageur Omnibus.

This survey was conducted between September 11 and 15, 2009, via and online poll of 1,200 Canadians (adults, 18 years+). The sample is census representative by region, gender and age. Based on global tracking, approximately 84% of Canadians have access to the Internet (higher incidence when teenagers and adults considered exclusively), and this methodology is considered representative of the Canadian population.

Contact:

Brian Singh
Managing Director – ZINC Research, Inc
brian@zincresearch.com
(403) 861-9462

Rick Frank
President – Dufferin Research, Inc.
rickf@dufferinresearch.com
(613) 730-4664 x 221

4 Comments
  • The Green Coffee Extract
    April 27, 2013

    Woah! I’m really loving the template/theme of this website. It’s simple, yet effective.

    A lot of times it’s hard to get that “perfect balance” between usability and visual appearance. I must say that you’ve done a awesome job
    with this. Also, the blog loads super quick for me on Firefox.
    Outstanding Blog!

  • brianfsingh
    May 8, 2013

    Thanks!

  • http://greencoffeediets.org
    May 8, 2013

    Have you ever considered about adding a little bit more than just your articles?
    I mean, what you say is valuable and all. But think of if you added some great visuals or
    videos to give your posts more, “pop”! Your content is excellent
    but with images and videos, this website could certainly be one
    of the most beneficial in its field. Terrific blog!

  • Annie
    July 9, 2013

    Having read this I thought it was very enlightening.
    I appreciate you spending some time and effort to put this information together.
    I once again find myself spending a lot of time both reading and posting comments.
    But so what, it was still worthwhile!

Leave a Reply

Your email address will not be published. Required fields are marked *