Starbucks: Past, Present & Future
July 2010
Brad Buchanan
Starbucks – Strategic History
Over the last 40 years, Starbucks has enjoyed explosive growth and become one of the
preeminent brands in the world through execution of a series of successful strategies
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Small, Private Company
• 1971: founded
• 1982: hired Howard
Schultz
• 1984: Schultz
convinces to open a 6th
“test store” to test out
the sale of products
• 1987: Schultz and his Il
Giornale chain buyout
the 6 Starbucks stores
and rebrand them as
Starbucks
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Going Public
• 1987: with 17 stores
(Seattle, Vancouver,
Chicago), Schultz
announces ambitious
growth of 125 stores in 5
years
• 1988: begin to branch out of
stores and open a mailorder business
• 1991: expand into California
• 1992: successful IPO, 167
stores total
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Strategic Growth & International
Expansion
• 1993: Barnes & Noble partnership
• 1994: purchase of Coffee Connection,
gaining 15 new markets; now have
425 stores total
• 1995: PepsiCo partnership to
distribute Frappucino and broaden
customer base
• 1996: 1st International stores open in
Tokyo in partnership with Sazaby
• 1998: expand into the U.K. with the
acquisition of the Seattle Coffee
Company
• 1998: buys Tazo Teas, a premium tea
company to broaden the offerings instore
• 1999: extends the Starbucks brand
into grocery channels across the U.S.
through licensing agreement with Kraft
Foods, Inc.
• 1999: partner with Conservation
International to promote sustainable
coffee-growing practices; now have
2,498 stores across the world
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Growth At All Costs
• 2000: Howard Schultz
transitions from CEO to
chief global strategist; Orin
Smith promoted to President
and CEO; 3,501 stores
• 2003: Acquires Seattle’s
Best, gets access to their
wholesale contracts with
about 12,000 grocery stores
and food service accounts;
7,225 stores
• 2005: Orin Smith retires, Jim
Donald takes over and
focuses on: growth to
30,000 stores, music
distribution, and food
offerings; 10,241 stores
• 2006: promotional partner
for "Akeelah and the Bee“,
which many see as the
commercialization of the
brand; 12,440 stores
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Collapse and Reinvention
• 2007: memo from
Schultz is leaked that for
the 1st time admits the
"watering down" of the
company; 15,011 stores
• 2008: Howard Schultz
replaces Jim Donald as
President and CEO
amidst a free-fall in the
stock price and
announces plans to
close 600 stores
• 2008: announces a
series of bold changes to
re-invent the business,
Clover Brewing System,
Pike Place Roast, less
focus on entertainment;
16,680 stores
• 2009: rollout VIA instant
coffee, revamps food
offerings; 16,635 stores
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Starbucks – Strategic Missteps
The missteps that occurred in the last 5 years led to a decline in sales and ultimately
earnings growth
• Overexpansion
– “The big issue I think was that growth is not a strategy, it
is a tactic, and if growth becomes a strategy I don't think
it is an enduring one. I think growth covers up mistakes.“
(H.Schultz interview with The Guardian, 1/21/10)
– Diluted the brand by losing control over quality of the instore experience
– Drop in operating margin from 20.2% in ‘07 to 16% in ’08
• Underestimating Competition
– Dunkin Donuts and McDonalds each aggressively
launched revitalized brands during 2006-2008
– Their brand was focused on a lower cost, but similarly
priced product
•
Lack of Focus
–
–
Shift began to market other items more aggressively
such as equipment, movies, and music
Management was slow to react to the economic
downturn in 2008
Number of Stores vs Same Store Sales
Growth
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
2005
2006
2007
2008
# of Stores
Same Store Sales
2009
GAAP Operating Income vs Margin
1,200
14%
1,000
12%
10%
800
8%
600
6%
400
Operating Income
($MM)
Operating Margin
4%
200
2%
-
0%
2005
2006
2007
2008
2009
The time has come to clearly define core values and chart a course for the future…
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Starbucks – What It Isn’t
What Starbucks isn’t…
• An entertainment conglomerate
– Forays into movies and increasing focus on producing music
have directed attention away from the core in-store
experience
• A fast-food retailer
– Sales are sluggish and much of the sandwich offering is
mediocre
– Focus on food as a margin leader rather than trying to cater to
every possible need
• On every corner
– Over-expansion has diluted the brand and created
inconsistency in quality
– Better leverage other brands (Seattle’s Best, VIA) to achieve
the same level of penetration without the capital investment
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X
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Starbucks – What It Is
What Starbucks IS…
A “third place”,
after work and home
Provider of high-quality
beverages across all
brands
“The reframed Starbucks business
proposition will deliver great coffee to
every customer, in every format, and in
every place they want it” (H.Schultz,
2010 Annual Meeting, 3/24/2010)
"We strive to create a welcoming
environment for all of our customers.
We do not have any time limits for
being in our stores, and continue to
focus on making the Third Place
experience for every Starbucks
customer” (cnet.com, 8/15/09)
Socially conscious
Rewarding place to work
"Now is a time to invest, truly and
authentically, in our people, in our
corporate responsibility and in our
communities. The argument - and
opportunity - for companies to do this
has never been more compelling.“
(H.Schultz, Fortune, 1/20/2009)
“You can't expect your employees to
exceed the expectations of your
customers if you don't exceed the
employees' expectations of
management. That's the contract.”
(Pour Your Heart into it: How
Starbucks Built a Company One Cup
at a Time)
A leader in innovation
“Our future lies in our ability to innovate,
to be forward-thinking and nimble”
(H.Schultz, 2009 Annual Report))
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Starbucks – The Future
Changes announced over the last 18 months have started to show results:
2Q10 revenues were up 8.6% after a 4.1% increase in 1Q10; however, there is still
more work to do…
Quality
“Third Place”
Socially Conscious
Workplace
Rekindle
In-Store
Emotional
Attachment
Seattle’s
Best
Rebranding
• Rollout of concepts
such as the 15th
Avenue Coffee &
Tea
• Partnership
executed with
Subway and Burger
King, expand to
other chains
VIA
Rollout
Show
You
Care
Innovation
• Introduce specialty
coffees and
alternative beverage
selections
• Continue to
embrace social
media; encourage
“twitter-ups” at
Starbucks locations
as traffic drivers
• Wholesale
distribution to mass
market: stadiums,
convention centers,
kiosks, vending
machines
• Continue to rollout
to retailers and
grocery stores
• International
expansion
• New flavors
• Rollout special 401k
bonus if targets are
exceeded; reward
employee loyalty for
sticking it out
• Continue to
demonstrate and
build upon recycling
programs and other
environmentally
friendly initiatives
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