• Author / Uploaded
• Prachi Rajan

Citation preview

Pepsi and Starbucks case study Building and defending a strong position in readyto-drink coffee

Reference Code: CSCM0042 Publication Date: 04/05

www.datamonitor.com Datamonitor Europe

Datamonitor USA

Datamonitor Germany

Datamonitor Asia Pacific

Datamonitor Japan

Charles House

245 Fifth Avenue

Kastor & Pollux

Room 2413-18, 24/F

Aoyama Palacio Tower 11F

108-110 Finchley Road

4th Floor

Platz der Einheit 1

Shui On Centre

3-6-7 Kita Aoyama

London NW3 5JJ

New York, NY 10016

60327 Frankfurt

6-8 Harbour Road

Minato-ku

United Kingdom

USA

Deutschland

Hong Kong

Tokyo 107 0061

t: +44 20 7675 7000

t: +1 212 686 7400

t: +49 69 9750 3119

t: +852 2520 1177

t: +813 5778 7532

f: +44 20 7675 7500

f: +1 212 686 2626

f: +49 69 9750 3320

f: +852 2520 1165

f: +813 5778 7537

e: [email protected]

e: [email protected]

e: [email protected]

e: [email protected]

e: [email protected]

Japan

ABOUT DATAMONITOR Datamonitor plc is a premium business information company specializing in industry analysis. We help our clients, 5000 of the world’s leading companies, to address complex strategic issues. Through our proprietary databases and wealth of expertise, we provide clients with unbiased expert analysis and in-depth forecasts for six industry sectors: Automotive, Consumer Markets, Energy, Financial Services, Healthcare, Technology. Datamonitor maintains its headquarters in London and has regional offices in New York, Frankfurt, Hong Kong and Japan.

All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Datamonitor plc. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Datamonitor delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Datamonitor can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect. Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 2

WHAT IS THIS REPORT ABOUT? This report forms part of Datamonitor's case studies series, which explores business practices across a variety of disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and insurance, pharmaceuticals and software. Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations, highlighting the ways in which the company has become one of the best in its field or how it deals with different problems encountered within that sector.

Who is the target reader? This case study is designed for industry executives, consultants, analysts and researchers, providing them with a useful benchmarking tool and offering a blueprint for potential improvements. It provides valuable insight into the methods used by important industry players that give them a competitive edge, allowing the reader to capitalize on the knowledge of experienced companies when, for example, entering a new niche or market.

Report content The report is divided into three main parts – Introduction, Case Study and Conclusion – followed by Research Methodology and Related Research sections: ƒ

Introduction: provides historical background on the company and explains how the company has responded to a particular business challenge.

ƒ

Case study: provides the main body of text, detailing the company's approach to a particular challenge; for example, superior customer relationship management, use of technology, sales and marketing techniques, etc.

ƒ

Conclusion: highlights the main findings of the report, summarizing the key strategies the company has employed.

ƒ

Research Methodology: details when research was carried out and the approach used in writing the report.

ƒ

Related Research: lists a number of reports on a similar theme to the case study, which may assist the reader in further research.

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 3

Table of Contents

TABLE OF CONTENTS

ABOUT DATAMONITOR

2

WHAT IS THIS REPORT ABOUT?

3

Who is the target reader?

3

INTRODUCTION

6

Background

6

CASE STUDY

7

Seizing the opportunity

7

Increasing awareness

8

Marketing message

9

Comparing the adverts

9

Competitive landscape

9

CONCLUSIONS Future outlook for RTD coffee

RESEARCH METHODOLOGY Research Methodology

RELATED RESEARCH US Coffee 2005: Innovation for growth

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

11 11

12 12

13 13

CSCM0042 Page 4

Table of Contents

LIST OF FIGURES Figure 1:

Starbucks DoubleShot expresso

7

Figure 2:

Starbucks Frappuccino drinks

8

Figure 3:

Wolfgang Puck Gourmet Lattes

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

10

CSCM0042 Page 5

Introduction

INTRODUCTION

Background In 1994 Starbucks and Pepsi formed a joint venture called North American Coffee Partnership (NACP), with the aim of marketing coffee drinks. The joint venture now markets two products, Frappuccino iced coffee and DoubleShot espresso drinks, which compose about 90% of the sales in the ready-to-drink coffee category. The two brands, though holding dominant market share, have continued to work on expanding market size through promotional campaigns and advertising. Anticipating that competition may increase in the RTD space, the JV increased spending on television advertising by 10% in 2004. This case study looks at how the companies, through their joint venture, have developed the category and held onto their dominance of the RTD coffee market, despite increased competition.

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 6

Case Study

CASE STUDY

Seizing the opportunity Starbucks and Pepsi's joint venture aimed to exploit the gap in the market for readyto-drink coffee products. They set out to produce marketing campaigns that would boost consumer awareness of the RTD coffee category - the percentage of US households that had tried RTD coffee drinks was low, at about 5% to 7%. Coffee consumption on the other hand was approximately 79% of the US population, according to a survey by the National Coffee Association. Starbucks and Pepsi recognized a large opportunity relative to the potential market size. The companies set out to produce marketing campaigns that would enhance people's awareness of the ready-to-drink coffee category. These campaigns were largely successful, with much of the market's expansion due to the success of Frappuccino and DoubleShot. Figure 1:

Starbucks DoubleShot expresso

Source: Productscan online database

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

DATAMONITOR

CSCM0042 Page 7

Case Study

Increasing awareness Starbucks and Pepsi have launched two marketing campaigns over the last two years aimed at increasing awareness of their ready-to-drink coffee products. In the 2003 campaign, the companies set out to establish a problem and then provide a solution, in order to make people believe the drinks were worth buying. They did this by attempting to redefine consumers’ expectations of coffee products by awakening them to a whole new convenient, RTD coffee experience. In 2003, the North American Coffee Partnership spent about $5.8 million on Frappuccino TV ads and another $7.8 million on DoubleShot ads. In their May-October 2004 ad campaign, the problem is presented in a less complex way and more time is spent establishing the product's benefit. The campaign, produced by Publicis Groupe SA's Fallon NY, debuted on both national cable stations and regional broadcast stations. In addition to the TV commercials, DoubleShot also had a separate national radio campaign. Figure 2:

Starbucks Frappuccino drinks

Source: Starbucks

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

DATAMONITOR

CSCM0042 Page 8

Case Study

Marketing message Rather than attempt to reinvent their advertising efforts, the NACP chose to build from the success of the 2003 campaign. In the 2004 campaign, DoubleShot is positioned as a drink to "get you going" in the morning, while Frappuccino is marketed as an afternoon indulgence. The products also appeal to different demographics, which has the advantage of avoiding cannibalizing sales from each other. DoubleShot is positioned at the 18-to24-year-old demographic which it has termed "intensity seekers," while Frappuccino's audience is largely 18- to 44-year-old women.

Comparing the adverts The TV ad for DoubleShot opens to tune of "Eye of the Tiger" as the 1980s band Survivor appears in the living room of Glen, a young professional who may one day become a supervisor. The band follows him on his way to the office, all the way singing his praises. The images of Glen's apartment recall "Suit," the ad DoubleShot used in 2003 in its first TV campaign. In that commercial, a young man attempts to find ways to delay the start of his day when his suit, apparently displeased with his stall tactics, springs to life and chases him around the apartment. In the 2003 commercial, after a sip of DoubleShot, Glen is ready to seize the day. The 2004 Frappuccino ad is again set in an office environment and depicts a woman dealing with the stresses of her job. In 2004, the message is more straightforward than the 2003 version. Singers doo-wop and croon that it is "Stacey's time" as the woman sits down in her cubicle to sip her Frappuccino. The ad uses the tagline: "Work can wait." 2003’s incarnation took time to detail the sources of the young woman's stress, which were depicted as items literally sticking to her as she walked around the office.

Competitive landscape Pepsi and Starbuck's success in the beverage industry has made it difficult for competitors to enter the RTD coffee category, as it is hard to gain distribution without a powerful bottling network. Those that do enter the market face some hard facts: in 2003, Frappuccino held an 86.4% share of the coffee-drink market, while DoubleShot held a 4.5% share. Such dominance would be hard to break in the short term.

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 9

Case Study

One competitor which would find it easier is Coca Cola, although currently, Coke is not participating in the RTD coffee segment in the US market. Coke, does however, lead the market in Japan — the world's largest bottled coffee market — with its canned Georgia coffee. In the US, Coke attempted to enter the RTD coffee segment with Planet Java, a bottled coffee brand from the Northeast that it acquired. After months of trial, Coke withdrew Planet Java from the market, because "the size and scale of the market didn't meet Coke's financial criteria," according company spokesman Ray Crockett. Other players in the market include Folgers Jakada, a product marketed by the Morningstar Foods division of Dean Foods, which licensed the Folgers name from Procter & Gamble. WP Beverage Partners, maker of Wolfgang Puck Gourmet Lattes, has also recently entered the RTD coffee segment. Until last year, the products, named for the famed chef and restaurateur, were only sold in limited markets, but the company expanded its distribution nationally in the summer of 2004. WP indicated that it does not expect to go head to head with Frappuccino and DoubleShot, rather is looking to “grow the pie” through innovative RTD coffee products, including the company's low-carb line and self-heating coffee packaging. Figure 3:

Wolfgang Puck Gourmet Lattes

Source: WP Beverage Partners

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

DATAMONITOR

CSCM0042 Page 10

Conclusions

CONCLUSIONS

Future outlook for RTD coffee With the release of their ready-to-drink coffee products, Pepsi and Starbucks have taken on a small beverage in a small category and have patiently educated the market and waited for the demand to catch up to the market opportunity. Through the joint venture, the companies have the opportunity to establish themselves in a category that few others are yet operating in. This contrasts widely with their other major operations, with both the coffee shop market and carbonated soda markets being overrun with competition. Industry consultants have predicted the RTD coffee market will not stay this way for long, however, with the sheer pace of the category's growth expected to attract a variety of newcomers in the near future. In 2003, the ready-to-drink coffee category continued to gain momentum, with the volume of drinks sold rising by 11.5% from 2002. With competitors expected to be hot on their heels, Pepsi and Starbucks will have to come up with some clever marketing campaigns to retain such a high share of the market in the future.

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 11

Research Methodology

RESEARCH METHODOLOGY

Research Methodology This case study was derived from Datamonitor's study of the ready-to-drink coffee market, which was carried out between January and March 2005. The hypotheses presented in this report were supported by a series of interviews with industry executives, in addition to secondary literature and in-house sources of information.

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 12

Related Research

RELATED RESEARCH

US Coffee 2005: Innovation for growth This report provides an overview of the US retail and foodservice coffee markets Published: March 2005

Everyday Self Indulgences 2004 A 2004 NCI report examining the latest consumer needs, behaviors and trends that affect impulse product purchase and consumption. Published: December 2004

North American Coffee Quantitative Trends 2004 This report provides an overview of US and Canadian retail and foodservice coffee markets, examining established and emerging niche coffee segments, quantifying their presence and assessing potential emerging opportunities for manufacturers. Published: August 2004

Global Consumer Trends Datamonitor has identified the 10 global consumer trends that will determine the success of future product and marketing innovation. This report provides the essential insight in order to be "on-trend" in the future. Published: Julyr 2004

Pepsi and Starbucks case study © Datamonitor (Published 04/2005) This brief is a licensed product and is not to be photocopied

CSCM0042 Page 13