Harvard Business Review

The Starbucks effect

The Starbucks effect

Starbucks made coffee hip. Its success set off a chain reaction of innovation that boosted the whole category's profits.

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The Starbucks effect
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The full version of this article is available on Harvard Business Online (subscription required).

The Idea in Brief

The success of Starbucks cafés has been good for coffee distributors all over the United States. Why? Because Starbucks has given coffee a new cachet. All coffee. Not just the product sold by Starbucks (which represents only a minute fraction of the coffee drunk in the country) but also the 80% sold in supermarkets—and all the rest.

What’s more, Starbucks’ creativity has set off a chain reaction of innovation in the once-sleepy industry. Kraft’s Maxwell House now markets a slew of new brands, including Italian Espresso Roast, Rich French Roast, Master Blend, and Colombian Supreme, and it has also successfully expanded its upscale mail-order business, Gevalia.

Coffee’s greater cachet has had a big effect on the bottom line. Ten years ago, only 3% of all coffee sold in the United States was priced at a premium—at least 25% higher than value brands. Today, 40% of coffee is sold at premium prices.

Over the past decade, we have tracked the cachet of 39 categories of fast-moving consumer goods measured as the percentage of the product category sold at a premium over value brands. We’ve found plenty of evidence of the Starbucks effect. When individual companies increase the perceived “premiumness” of a product through innovations in the product itself or the way it’s delivered, the entire category can reap higher prices and profits.

Read the full article on Harvard Business Online.

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