Pepsi and Starbucks case

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

Reference Code: CSCM0042

Publication Date: 04/05

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ABOUT DATAMONITOR
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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:

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

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.

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

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

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

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Table of Contents

TABLE OF CONTENTS

ABOUT DATAMONITOR

WHAT IS THIS REPORT ABOUT?

Who is the target reader?

INTRODUCTION

Background

CASE STUDY

Seizing the opportunity

Increasing awareness

Marketing message

Comparing the adverts

Competitive landscape

CONCLUSIONS
Future outlook for RTD coffee

RESEARCH METHODOLOGY
Research Methodology

RELATED RESEARCH
US Coffee 2005: Innovation for growth

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Table of Contents

LIST OF FIGURES
Figure 1:

Starbucks DoubleShot expresso

Figure 2:

Starbucks Frappuccino drinks

Figure 3:

Wolfgang Puck Gourmet Lattes

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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.

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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

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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

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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." 2003s 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.

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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

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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.

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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

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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

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