1. How did Starbucks initially use segmentation to targeted coffee markets? 2. Did the Starbucks customer or the Starbucks Experience change...

1. Market segmentation is a very common strategy where instead of trying to appeal to the whole mass market which requires a sort of "least common denominator" approach that is acceptable to all but ideal to none, a company instead targets a specific group of people and tries to give them exactly what they want.

Starbucks did this expertly, targeting specifically young-adult to middle-aged upper-middle class urban professionals. While most of their competitors (e.g. Dunkin' Donuts, Tim Hortons) were simply offering coffee as cheap and fast as possible, Starbucks instead offered what they called the "Starbucks Experience": a comfortable coffee shop environment, standardized so it would be familiar and consistent when people travel (as this demographic travels extensively), with high-quality coffee that appeals to socially responsible customers by being organic, Fair Trade, and locally sourced. To pay for this, Starbucks needed to charge higher prices, but they knew this demographic has a lot of spending money and would be willing to pay a higher price if they could enjoy higher quality and a better overall experience.

2. This is a bit of a chicken-or-egg problem. While Starbucks targeted their market at an existing demographic, as they grew they also began to create pressure on our whole society, changing expectations about what coffee shops are or are supposed to be. Customers who had previously been accustomed to buying the cheapest coffee they found remotely palatable began to spend a bit more to try coffee of higher quality. Customer habits began to change, and more people began seeking out high-quality coffee -- a wave Starbucks was quite happy to ride.

3. Starbucks has now shifted their strategy to China, where they hope to capture the market of the new rising Chinese middle class. This means substantially changing their strategy; instead of the high-quality coffee they provide in the US, they will need to focus on low prices for the Chinese market because there simply aren't as many people with a lot of discretionary funds. Instead, Starbucks is trying to provide slightly better coffee than what is otherwise available, at a price low enough that people will be willing to stop making coffee at home and start buying it from Starbucks.

4. I don't think Starbucks will ever be able to restore the profit margins they had when they first established themselves in the United States. In the United States, Starbucks' successful strategy has drawn competitors to the market -- just as is supposed to happen under monopolistic competition in an efficient capitalist system. In China, they are already forced to adopt a strategy that is very competitive on price, simply because most of the population can't afford to pay any more. It's possible Starbucks could devise some new strategy or expand to some new market that would raise their profits back to that high level, but it's quite unlikely. For the foreseeable future, Starbucks will be a typical established blue-chip company: small but consistent profits, providing a low return at a low risk.