In the late 1980s, General Foods, Nestle, and Procter & Gamble dominated the U.S. coffee market. Consumers drank coffee as part of a daily routine. Coffee was considered a commodity industry, marked by heavy price-cutting and an ongoing battle for market share. The industry had taught customers to shop based on price, discount coupons, and brand names that are expensive for companies to build. The result was paper-thin profit margins and low growth.
Instead of viewing coffee as a functional product, Starbucks set out to make coffee an emotional experience, what customers often refer to as a “caffeine-induced oasis.” The big three sold a commodity – coffee by the can; Starbucks sold a retailing concept – the coffee bar.
The coffee bars offered a chic gathering place, status, relaxation, conversation, and creative coffee drinks. Starbucks turned coffee into an emotional experience and ordinary people into coffee connoisseurs for whom the steep $3-per-cup price seemed reasonable. With almost no advertising, Starbucks became a national brand with margins roughly five times the industry average.
Today, Starbucks is a wireless-connected community meeting place bound together by the image and power of a global brand.