Starbucks’ Psychology Behind That Gourmet Cup of Coffee Is a Careful Marketing Strategy to Get Customers Addicted

SEATTLE, May 10, 2007

If you think there’s already a Starbucks coffee shop on every corner, just wait: The company hopes to eventually run 40,000 of these latte-serving storefronts.

But how can the company sustain so many shops, with one just a few blocks away from its rival?

It has everything to do with the marketing strategy behind this designer coffee chain, which devised a clever way of creating its own community. It also pinpointed one key aspect of caffeine shoppers: They want their coffee immediately.

“Because it’s a cup of coffee, you can get it in a lot of places, and so we won’t go very far & and they know that,” said author Karen Blumenthal, who chronicled Starbucks for a year in “Grande Expectations.”

In Seattle, the birthplace of coffee culture, there are 60 of the shops downtown. And within 20 miles of the downtown area, the suburbs house 300 additional Starbucks.

Across the United States, there are 9,814 stores with a total of 13,728 worldwide. The Starbucks management has watched coffee drinks, and figured out exactly what people will and won’t do for coffee.

“We actually study traffic patterns,” said Starbucks CEO Jim Donald. “If it’s in a downtown area, we study foot-traffic patterns.”

Company officials also managed to get customers comfortable, paying up to six times as much for Starbucks coffee as they could pay elsewhere.

“Not everyone can shop at Tiffany’s, but everyone can afford a cup of coffee — even if it’s $2, $3 or $4,” Blumenthal said. “You can do something nice for yourself by buying yourself a good cup of coffee every day.”

Home Away From Home

People are ordering so many of these beverages. The average Starbucks sells $1 million of coffee a year, and more than half of the coffee is sold before noon.

While 80 percent of the sales are takeout, they’re still delighted to have customers stay and sit with their computers for hours to make the place feel lived in.

The tables are also rounded to give it a comfortable atmosphere. As Blumenthal explained, round tables are more welcoming than those with square edges, and people look “less alone” while seated at a round table.

Blumenthal also noted the Starbucks menu vocabulary, with its “frappucino” and “half-caf” orders, was a clever way to add to the store’s appeal.

“It did seem to be nuts, but it worked,” she said. “It felt [like] sort of a special language — like you were part of a special community when you could walk into a Starbucks.”

It’s all part of their strategy to make Starbucks a third primary “place” in the day of Americans.

“We say the first place is home, second place is office, and then Starbucks is a third place,” Donald said. “They use our stores for gathering spots, and we think that that that’s what makes that whole experience what it is today.”

NEARLY 3000 nurses and lower-paid NHS workers in the Lothians have challenged their “demoralising” new salaries following a major pay review.

Their posts have been regraded as part of a nationwide overhaul of health service pay, called Agenda for Change. The scheme - which covers all NHS staff apart from doctors, dentists and senior management - has largely benefited workers, many of whom received backpay as a result.

But hundreds of employees are unhappy with their new gradings, which place them in lower salary bands than their current earnings.

Although the workers receive “protection payments” to ensure their actual annual income does not fall, they will not receive subsequent yearly pay increases designed to cover rising living costs. Instead, salaries are frozen until the new pay bracket catches up with the employee’s previous level of pay.

Union leaders today said many staff had become “demoralised” and “aggrieved” as a result.

The review process for the 3000 workers is set to start this autumn, and could take about a year to complete.

Mick McGahey, Unison branch secretary for the Lothian University Hospitals Division, said: “This is a huge number of people. There have been mistakes in the regrading, some bad job descriptions have emerged, and the Agenda for Change scheme hasn’t recognised the role of administration workers in the NHS.

“Some people are now on substantial protection payments, which doesn’t bode well for recruitment in the future or help morale levels.

“Their wages are standing still, which is a pay cut in real terms as the cost of mortgages, rent and general living goes up.”

One NHS Lothian worker, based at the Western General Hospital, said her new salary was more than 3000 below her previous level.

The secretary, who asked not to be named, has now asked for a review of her grading.

“I was devastated as my financial status was crushed,” she said. “My job description was changed so that porters were on higher grades.

“I am down more than 40 a month as they took my cost of living rises away from me.

“I would like the public to know exactly how the NHS are treating their staff and the personal effect this is having on people. It’s very demoralising.”

Around 4000 workers still need to be assessed before the Agenda for Change review can finally be completed, around two years behind schedule.

The review process, which involves a panel of staff and management, often takes several hours to complete for each individual post, depending on the complexity of the job involved.

The panel’s decision is sent to the Scottish Government to be compared to other health board areas for consistency before being finalised.

Some nurses were expected to receive an extra 4000 a year and staff overall were likely to receive an average ten per cent pay rise over three years.

Eddie Egan, employee director and vice-chairman of the NHS Lothian board, said: “Around 20,000 people have had their jobs assimilated under the Agenda for Change process - of that number just under 3000 have asked for a review of the outcome.

“The review process is just about to start and each panel will involve two members of the staff partnership forum.”

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Small businesses and homeowners will bear the brunt of Pacific Gas and Electric Co. rate increases in January - a reversal from last week, when the utility said big businesses would shoulder more of the burden.

Small businesses will pay 6.9 percent more for electricity than they do this year, while residential rates will rise 4.1 percent, PG&E reported late Thursday.

Just one week ago, the company said rates in January would rise 1.3 percent for small businesses and 0.9 percent, on average, for homeowners. Large businesses - from grocery stores to manufacturing plants - were expected to face the steepest increases, as much as 6.4 percent.

But after a ruling by state energy regulators on Thursday, PG&E recalculated its rates and gave big business a break. Now, some large companies will see their electrical rates drop in January by 3.7 percent while others face a more modest rise of 1.9 percent.

Small-business owners say the rate increase won’t kill them. But they aren’t happy to pay more while some corporations get a cut.

“Small businesses, to a large degree, don’t have lobbyists,” said Scott Hauge, a San Francisco insurance broker and president of the Small Business California advocacy group. “What we see is the people who are represented - consumers and larger businesses - seem to get a better deal.”

Why and how did PG&E change its rates so much in just one week? The answers lie in the byzantine process through which California energy regulators approve electricity rates.

Each year, utilities such as San Francisco’s PG&E perform an exercise called a “true-up.” They look at their costs to provide electricity, run energy-efficiency programs and pay off long-term power contracts with the state, among other things. Then they calculate how much they’ll charge their customers, based on rate structures that state regulators have already approved.

The rates PG&E announced last week were based on the company’s latest true-up. PG&E faced a Sept. 1 deadline for filing that information with the state.

But on Thursday, the California Public Utilities Commission approved changes in the underlying rate structures that PG&E uses. The commission’s vote determined what proportion of the utility’s revenue next year will come from different types of customers - how much would come from homeowners, from farms, from factories, from shops.

As a result, PG&E had to recalculate its rates, producing a wildly different set of numbers. Spokesman Jon Tremayne said the utility couldn’t incorporate the new rate structures into the numbers it announced last week because the commission hadn’t voted on them yet.

“We don’t know the commission will approve a rate design until they approve it,” he said.

The significant changes in big businesses’ electrical rates were not the result of last-minute pressure from large corporations, he said. The changes approved by the utilities commission on Thursday had been under discussion since late 2005.

“The proposal on how that rate design would work we filed almost two years ago,” Tremayne said.

Big companies faced the steepest rate increases during California’s energy crisis of 2000 and 2001. Since then, PG&E has been shifting more of the financial burden away from large corporate customers and onto homeowners and small businesses. The recalculated rates for next year reflect that shift.

The rates may change one more time before they go into effect. PG&E will perform another true-up in December, using more recent financial data. Any changes at that point, however, are expected to be small.

For small businesses, a 6.9 percent boost in electrical rates probably won’t spell financial doom. But it joins a long list of escalating prices entrepreneurs face every day.

The Arizmendi Bakery in San Francisco’s Inner Sunset neighborhood spent about $480 for electricity in July, said Lorenzo Dodaro, one of the shop’s workers and owners. The higher rates will tack on an additional $33.

“It wouldn’t affect us that much, but everything’s going up,” Dodaro said. “Fuel’s more expensive, so all our suppliers are charging us more.”

E-mail David R. Baker at dbaker@sfchronicle.com.