op
y
Trouble at Starbucks: Will the Visionary
Founder Howard Schultz be Able to Transform
the Company?
No
tC
Case Study Reference No. COS0073A
This case was written by Sandhya Hotchandani under the direction of
Joel Sarosh Thadamalla, IBSCDC. It is intended to be used as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a
management situation. This case was compiled from published sources.
© 2008, IBSCDC
No part of this publication may be copied, reproduced or distributed, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or medium – electronic,
mechanical, photocopying, recording, or otherwise – without the permission of IBSCDC.
Do
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1
Trouble at Starbucks: Will the Visionary Founder Howard Schultz be
Able to Transform the Company?
op
y
“They have a big challenge in front of them, and I think they’ve lost their way.”1
Marian Salzman (Salzman), a trend-spotter at advertising firm JWT Worldwide.
No
tC
Starbucks Corp. (Starbucks), world’s largest chain of coffeehouses, has become a synonym for coffee for
many people.2 It has been one of the most admired businesses worldwide for its focus on quality and the
unique Starbucks Experience that it provides to customers. Since the late 1980s and through the 1990s,
under the leadership of Howard Schultz (Schultz), Starbucks enjoyed success in its core US market and all
over the world. In 2000, Schultz transited from chairman and chief executive officer (CEO) to chairman and
chief global strategist. The rapid expansion of Starbucks after Schultz’s departure as CEO wrought
problems to the company. ‘The Starbucks Experience’, the main reason for the success of the coffeehouse
downgraded heavily and as a consequence the customer traffic in its domestic stores started declining.
Starbucks in the US was struggling to keep its sales and share prices afloat. Moreover, the rising dairy
prices, an economic slowdown in the US and a cut-price competition from McDonald's Corp.3 and Dunkin'
Donuts4 posed significant challenges for Starbucks.
Precipitated by declining domestic sales, relentless decline in share prices, and growing anxieties about the
company’s brand and performance, Schultz returned as CEO in January 2008. Immediately, Schultz laid out
plans for turnaround of Starbucks to boost sagging sales and stock prices of the company. Schultz planned
to focus on reigniting the emotional attachment with the customers by reviving ‘the Starbucks Experience’.
Schultz also planned to streamline under-performing domestic stores. However he decided to continue store
extensive expansion in the international market. Will the visionary founder be able to transform the
distressed company with his return?
Howard Schultz: The Making of Starbucks
Starbucks began in 1971 when three partners – English teacher Jerry Baldwin, history teacher Zev Siegel,
and writer Gordon Bowker – opened a small store called Starbucks Coffee, Tea, and Spice in Seattle,
Washington. The store sold fresh-roasted, gourmet coffee beans and brewing and roasting accessories
(Annexure I). A second Starbucks store was opened in 1972. By the early 1980s, the company had four
Starbucks stores in Seattle.
Do
In 1982, Starbucks came to Schultz’s attention who was then working as a national marketing manager of
Perstorp, a Swedish kitchen equipment company. He noticed that Starbucks was purchasing a
disproportionately large number of coffee makers from his company. He visited Starbucks and the three
partners to see what was going on. Envisioning the potential of Starbucks, he wished to join the company. “I
saw Starbucks, not for what it was but for what it could be”5 mentioned Schultz. After an initial disagreement
among the three partners on taking an outsider into the company, in September 1982, Schultz joined
Starbucks as the Director of Marketing.
Persch Jasmin Aline, “Starbucks: Cool or a commodity?”, http://www.msnbc.msn.com/id/22884101/, January 30th 2008
“Starbucks' CEO Refill”, http://www.businessweek.com/bwdaily/dnflash/content/jan2008/db2008017_731161.htm, January
7th 2008
3 US based McDonald’s is world's largest fast-food chain, with more than 30,000 restaurants in more than 100 countries
4 Dunkin' Donuts is US based coffee and donut retailer founded in 1950. At the end of 2007, there were 7,988 Dunkin'
Donuts stores worldwide, including 5,769 franchised restaurants in the U.S. and 2,219 internationally.
5 Stallard Michael Lee, “Starbucks: The story untold”,
http://economictimes.indiatimes.com/Features/Corporate_Dossier/Starbucks_The_story_untold/articleshow/2784059.cms,
February 15th 2008
1
2
2
op
y
In 1983, during his trip to Italy, Schultz noticed the popularity of espresso bars. Schultz was amazed with the
vibrant coffee culture of Italy as he noticed people at the café talking and laughing exiguously while sipping
on their coffees in the luxurious surroundings. Inspired by the Italian espresso bars, he thought it would be a
great idea to create a similar experience in the US and make it a differentiating factor for Starbucks. He
envisioned Starbucks as a store for people to visit and a place to meet friends. He felt it should be an
experience, a special treat and decided that Starbucks (in addition to beans and coffee equipment that it
already sold) needed to serve fresh-brewed coffee, espresso, and cappuccino in its stores.
The three partners, however, argued that Starbucks was a retailer and not a restaurant or bar. They
preferred to remain a coffee roaster with a small retail presence and feared that Schultz’s vision of serving
drinks would dilute them from the core business and put them in the beverage business. Having been
rebuffed by Starbucks partners, Schultz decided to leave Starbucks and start his own company. His plan
was to open espresso bars in high-traffic downtown locations that would emulate the friendly, energetic
atmosphere he had encountered in Italian espresso bars. Schultz left Starbucks and founded his own coffee
company – Il Giornale, in late 1985.
No
tC
In 1987, the founders of Starbucks decided to purchase Peet's Coffee & Tea and sell off its Starbucks unit
to Schultz. Schultz managed to raise $3.8 million by convincing investors of his vision and he acquired
Starbucks' name and assets from its founders when the company then had 17 stores in Seattle.6 He
renamed Il Giornale as Starbucks. Thus founded Starbucks Corp. and Schultz at the age of 34 became
Starbucks' president and CEO.
Schultz rapidly expanded his store base in the US. Instead of a plain coffee with cream and sugar, a wider
variety such as café latte, cappuccino, espresso, and different coffee flavours were offered at Starbucks.
With its different variants of coffee, Starbucks capitalised the entire industry and soon became popular
among the people in the US. Starbucks became a phenomenon in the US. In 1992, Starbucks came up with
an initial public offering when there were 125 stores and 2,000 employees.7
Following the incredible success in the US, Schultz started expansion of Starbucks in the international
market. In 1996, Starbucks opened its first overseas store in Tokyo, Japan. Consequently, Schultz
continued to open new stores in the US and in various international markets. Starbucks by 1996 had over
1000 stores, and by 2002 it comprised over 5000 stores and by the end of 2007 it had around 15,756 stores
worldwide8 (Annexure II).
Do
Apart from its coffee house business, Starbucks expanded its product portfolio by selling whole bean
coffees. It sold whole bean coffees through a specialty sales group and supermarkets in addition to sales
through company-operated retail stores. It also produced and sold bottled Frappuccino coffee drink and a
line of premium ice creams through its joint venture partnerships and offered a line of innovative premium
teas produced by its wholly owned subsidiary, Tazo Tea Company. With Starbucks Entertainment it entered
into the music, books and films market to offer Starbucks customers the opportunity to discover quality
entertainment in a fun and convenient way as part of their daily coffee routines (Annexure III).
Nevertheless, coffee had been at the core of Starbucks’ business and majority of its sales revenues still
came from beverages (Exhibit I).
Archer Adam P, “How Starbucks Made Coffee History”, http://ezinearticles.com/?How-Starbucks-Made-CoffeeHistory&id=613405
7 “Starbucks voyage of success”, http://www.mondaymemo.net/020923feature.htm
8 “Company Timeline”, http://www.starbucks.com/aboutus/Company_Timeline.pdf, February 2008
6
3
No
tC
op
y
Exhibit I
Percentage of Sales of Various Product Categories of Starbucks
Source: Ellis David, “Starbucks needs a shot of caffeine”,
http://money.cnn.com/2007/06/08/markets/spotlight_sbux/index.htm, June 8th 2007
The Starbucks phenomenon has been tied to Schultz’s vision of ‘the Starbucks Experience.’ He envisioned
people to flock to the company’s stores for the total Starbucks Experience. Schultz imagined that the
customer's experience should be wonderful from the moment he or she walked in the door of a Starbucks
store. The Baristas (the Italian word for bartender and the term used at Starbucks for a coffee preparer)
should recognise the customer and greet him or her by name. The Baristas should also know the customer's
regular order and start preparing it right away. As explained by Schultz “The success of Starbucks
demonstrates… that we have built an emotional connection with our customers… we have a competitive
advantage over classic brands in that every day we touch and interact with our customers directly. Our
product is not sitting on a supermarket shelf like a can of soda. Our people have done a wonderful job of
knowing your drink, your name, [and] your kids’ names.”9
Do
Eventually, Starbucks was conceived as the ‘third place,’ between home and work, where one could indulge
in a cup of coffee in a soothing setting, including cozy chairs and eclectic music. With its exclusive line of
brewed coffees, espressos and ‘the Starbucks Experience’, the specialised little joint of Seattle grew to be
one of the biggest brands in the US and worldwide. Recognised as one of America’s most admired and best
employers, one of the best worldwide brands and one of the most socially responsible companies,
Starbucks had always been well known for its culture, brand and product excellence.10
To create the unique Starbucks Experience, Schultz carefully nurtured an inspiring identity for the company
in the hearts and minds of his employees. Schultz paid extra attention to the training programmes meant for
the employees. These training programmes developed habits such as making eye contact with customers,
remembering regular customers’ drink orders, and anticipating customer needs. Schultz brought human
value to the Starbucks culture by paying employees well relative to other retailers, and also providing
Michelli Joseph A., “Introduction”, The Starbucks Experience, 1st Edition (ISBN 0-07-063673-1), Tata McGraw-Hill, 2007,
page 12
10 “Introduction”, op.cit., page 4
9
4
generous benefits such as health-care insurance and participation in the Starbucks stock option plan. At
Starbucks the employees are called as ‘partners’.11
Starbucks: Declining Performance
op
y
Nevertheless, with the incredible growth also came headwinds for Starbucks. Trouble started brewing at
Starbucks when once a reliable investment for the firm's constant growth, Starbucks shares slumped almost
by 50% during 2007, making them one of the worst performers on the NASDAQ exchange.12 This was amid
the decreasing store traffic at its domestic stores that set hindrances about the prospects of the global iconic
coffee house.
In the final quarter of 2007, Starbucks revealed that although its business remained strong in Britain and
other overseas markets, footfall at Starbucks' 10,500 American outlets was slowing down in the consecutive
quarters.13 Since the company went public, it was for the first time in 2008, that the same store sales14
growth of Starbucks went negative (Exhibit II). This decline had been primarily a result of cannibalisation
from new store openings.15
No
tC
Exhibit II
Starbucks Same Store Sales Growth Performance 2004 - 2008 (in percentage)
Year
2004
2005
2006
2007
2008 (Till 30th January)
US
11%
9%
7%
4%
-1%
International
6%
6%
8%
7%
5%
Consolidated
10%
8%
7%
5%
1%
Source: “Starbucks Corporation: Starbucks Consolidated Comparable Store Sales”, http://media.corporateir.net/media_files/irol/99/99518/Starbucks_Comparable_Store_Sales_At_A_Glance.pdf, January 30th 2008
Do
Though the net revenues of Starbucks remained high, the growth rate of the revenue as compared to
previous years was getting low (Exhibit III).
“Starbucks: The story untold”, op.cit.
“Schultz Faces Challenges at Starbucks”, http://www.ticker.com/market-update/Schultz-Faces-Challenges-atStarbucks/24839/1, January 8th 2008
13 Clark Andrew, “Wall St gets palpitations over caffeine fuelled growth”,
http://www.guardian.co.uk/business/2008/jan/07/starbucks.useconomy, January 7th 2008
14 Same store sales are sales revenues of retail stores that have been open for a year or more.
15 Muller Turley, “Starbucks Traffic Decline Is Due to Cannibalization”, http://seekingalpha.com/article/62893-starbuckstraffic-decline-is-due-to-cannibalization, February 4th 2008
11
12
5
No
tC
op
y
Exhibit III
Net Revenue of Starbucks and its Growth Rate Over the Years
Source:
“Starbucks
Corporation:
Fiscal
2007
http://www.starbucks.com/flash/yearinreview/Starbucks_Fiscal_2007_Annual_Report.pdf
Annual
Report”,
Schultz had sensed the trouble for Starbucks when on February 14th 2007; he issued an internal memo to
his senior leadership team warning about the ‘commoditisation’ of the brand. This memo was leaked on to
the Starbucks Gossip website and in the popular media as well. In this infamous leaked memo, Schultz
admitted, “Over the past ten years, in order to achieve the growth, development, and scale necessary to go
from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in
retrospect, have lead to the watering down of the Starbucks experience.”16 Schultz noted that the recent
decisions made by Starbucks served the demands of its rapid growth at the expense of its foundational
values and were inconsistent with the core customer experience that made Starbucks great.17 As an
example he cited the switch from hand-operated espresso machines to the automatic variety. This helped to
speed up service but also took away the ‘romance and theatre’ provided by the shiny La Marzocca coffee
machines that the new equipment replaced. The result, he conceded, was that some patrons were calling
Starbucks coffee shops sterile places that no longer reflected the company’s passion about coffee.18
Do
Notably, Starbucks, which had more than 10,000 coffee shops in its core US market by 2007, opened
around five new branches every day. In 2007, there were 2,571 new store openings by Starbucks of which
70% were in the US and 30% in International markets.19 As a result, the firm’s domestic market seemed to
have reached saturation point.20 To add to it, Starbucks had an ambitious long-term goal of having 40,000
stores worldwide of which 20,000 in the US and a further 20,000 overseas.21
“Starbucks: Not enough froth”,
http://www.economist.com/business/displaystory.cfm?story_id=10490218&CFID=12479241&CFTOKEN=6a9f5ec587f59bbA67369AF-B27C-BB00-012B4AD226950445, January 8th 2008
17 Michelli Joseph, “Commoditizing the Starbucks Experience?”,
http://www.gather.com/viewArticle.jsp?articleId=281474976958592, April 14th 2007
18 “Starbucks: Not enough froth”, op.cit.
19 “Starbucks: Global chain of coffee Shops”, http://nyjobsource.com/starbucks.html, February 22nd 2008
20 “Starbucks: Not enough froth”, op.cit.
21 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
16
6
op
y
Robert Toomey (Toomey), an analyst at E K Riley Investments22 Seattle, mentioned, “They're going to have
to slow the rate of new store openings - definitely in the US and perhaps overseas as well, it goes back to
the issues of a diluted experience and a saturated market.”23 Amber Perry, a former Starbucks barista who
works at Macy's in Seattle, mentioned, “Everybody is trying to copy Starbucks, and it hasn't come up with
anything new. It's the same settings, the same drinks also Starbucks went overboard with its expansion, you
go down to Bonney Lake, and there's a Starbucks everywhere, in every grocery store, even in the parking
lots of grocery stores. That's a little much.”24
With the rapid expansion, under the leadership of the former CEO, Jim Donald, Starbucks stores began
offering breakfast sandwiches; opened drive-thru windows and the company intensified its focus on music,
book deals and the promotion of two Hollywood movies, which had only modest success. As a result the
stores became cluttered, feeling more like a fast-food chain and the focus was moved away from coffee.
Thus, Starbucks that once excelled at introducing the hip, neighborhood coffee house vibe into disparate
markets tarnished the exclusive, upmarket image that made it so popular.25 Dean Crutchfield, a senior vicepresident of marketing at Wolff Olins, a branding firm, opined, “Starbucks really needs to refocus on the
luxury coffee experience; the smells, the sounds”.26
No
tC
Due to the watering down of the ambience and experience at Starbucks, about 80% of the orders at
Starbucks were now consumed outside the coffee chain.27 “They’re not the only third place. They’re kind of
a generic third place,”28 mentioned Salzman. Brian Morgan, professor of entrepreneurship, Cardiff School of
Management, mentioned, “Because coffee was at the heart of their brand, they made their customers feel
like discerning connoisseurs, they were proud to be associated with Starbucks. Now, with so many coffee
chains around they have no point of differentiation, there's nothing clever about going to Starbucks.”29
The decreasing store traffic at Starbucks was also due to several macro-economic pressures and a wider
slowdown in consumer spending in the US. Consumers hit by economic recession in the US and high fuel
prices reduced spending on small luxuries like expensive coffee. With larger drinks routinely priced around
$4 to $5 or above, Starbucks had traditionally been popular among affluent middle-class cappuccino
quaffers.30 However, with 15,756 stores worldwide, the social mix for Starbucks broadened which made the
company increasingly vulnerable to price-sensitive consumers. In a research note, Bear Stearns analyst
Joseph Buckley (Buckley) said Starbucks' fortunes now mirror those of mass-market, high street retailers.
He added, “We attribute this new cyclical sensitivity to the success the company has had in past years
broadening its customer base to include more blue-collar, less affluent consumers who are more likely to
react to economic pressures by scaling back visit frequency."31 A cup of Starbucks latte in the US costs
more than a gallon of gasoline at pump stations and the softening US economy could well discourage
consumers from buying $4 lattes.32 Financial analyst Nicole Miller of investment bank Piper Jaffray also
Do
E. K. Riley Investments, LLC is a registered investment advisory firm located in Seattle, Washington. In addition to
offering advisory services, E.K.Riley Investments, LLC publishes research on established Pacific Northwest companies
and a select group of national companies.
23 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
24 Allison Melissa, “Starbucks Shake-up: Schultz back as Starbucks CEO”,
http://seattletimes.nwsource.com/html/businesstechnology/2004113631_webstarbucks08.html, January 8th 2008
25 Smale Will, “Why Starbucks' sales have gone cold”, http://news.bbc.co.uk/2/hi/business/7219458.stm, February 1st 2008
26 Vella Matt, “How to Reenergize Starbucks”,
http://www.businessweek.com/innovate/content/feb2008/id20080220_372003.htm?chan=search', February 20th 2008
27 “Starbucks: Cool or a commodity?”, op.cit.
28 Ibid.
29 “Why Starbucks' sales have gone cold”, op.cit.
30 “Schultz Faces Challenges at Starbucks”, op.cit.
31 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
32 “How to Reenergize Starbucks”, op.cit.
22
7
mentioned that Starbucks' high prices were driving customers away. She said, “What was once considered
sort of an everyday convenience has really become a luxury for a lot of people now.”33
No
tC
op
y
Furthermore, Starbucks that nurtured the nascent US coffee-chain culture, nearly unchallenged, back in the
1980s was now facing competitive threats from its café competitors such as Dunkin’ Donuts and
McDonald's. These companies have been greatly improving the quality of their own coffee, which generally
has also been cheaper.34 Referring to Starbucks' prospects CIBC World Markets35 analyst John Glass,
mentioned, “We’d expect competition to get much worse before it gets better.”36 McDonald’s which began
offering premium coffee in 2006, planned to serve cappuccinos, lattes and mochas in nearly 14,000
American restaurants by 2008 by employing ‘baristas’ dedicated to turn out the sort of Italian-style coffees
that brought Starbucks its success.37 The coffee would be priced typically 15% cheaper than those at
Starbucks.38 Industry observers felt that the competition from quick service restaurants would hurt
Starbucks’ earnings as consumers are likely prefer cheaper alternatives for coffee to save few bucks.
Moreover, in a taste test conducted by Consumer Reports39, McDonald’s cheaper regular coffee was rated
better in taste than Starbucks’ coffee. “McDonald’s introduced a plan to win: Focus on being better, not
bigger. That’s an enormous success,”40 said John Owens, an analyst with Morningstar41. Although Dunkin’
Donuts, held half a number of US stores as Starbucks, it was also emerging as another close rival. Dunkin’
Donuts had been ramping up its expansion in the US and in Asia, and marketing itself as a Starbucks
alternative with its ‘America runs on Dunkin’ ad campaign.42
Thus, buffeted by rapid store expansion, increasing price sensitivity across coffee lovers and improved
offerings at fast food competitors, Starbucks faced a threat to its business. “If senior management does not
make the appropriate changes soon, losing control of the company is a real possibility. Many private equity
firms are still in business,”43 warned Friedman, Billings, Ramsey (FBR) Group Inc.44
As an effort to cope up with these problems in November 2007, Starbucks that historically had relied
primarily on ‘buzz’ and local gossip, made a major shift in marketing tactics and launched its first national
advertising campaign. More recently, in January 2008, the company announced Chairman Schultz to take
on the additional role of CEO.
Can Howard Schultz Transform the Coffee House?
Announcing the return of Schultz as CEO, Craig Weatherup, Chairman of the Starbucks Board's Nominating
and Corporate Governance Committee, mentioned, “Howard is the architect of the Starbucks brand and the
Do
“Starbucks: Out with the New, in with the Old”, http://www.findingdulcinea.com/news/business/Starbucks--Out-with-theNew--In-with-the-Old-.html, January 12th 2008
34 “Why Starbucks' sales have gone cold”, op.cit.
35 CIBC World Markets is the investment banking and brokerage subsidiary of Canadian Imperial Bank of Commerce
(CIBC), one of Canada's Big Five banks. It offers financial services to corporations, institutions, and wealthy private
investors.
36 Schoen John W, “Starbucks hopes Schultz can restore buzz”, http://www.msnbc.msn.com/id/22558230/, January 8th 2008
37 “Starbucks: Not enough froth”, op.cit.
38 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
39 Consumer Reports is an American magazine published monthly by Consumers Union. It publishes reviews and
comparisons of consumer products and services based on reporting and results from its in-house testing laboratory.
40 “Starbucks: Cool or a commodity?”, op.cit.
41 Morningstar is a leading investment research firm.
42 Ellis David, “Starbucks needs a shot of caffeine”, http://money.cnn.com/2007/06/08/markets/spotlight_sbux/index.htm,
June 8th 2007
43 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
44 FBR is a real estate investment trust that invests in mortgages and related securities, equities, and other assets. It is
best known for its majority stake in FBR Capital Markets, which provides investment banking, institutional brokerage, and
fee-based asset management services.
33
8
visionary behind the unique customer experience that is at the heart of this remarkable company's success.
Given what the Board believes needs to be done, there is no better person to drive change and ensure that
Starbucks is positioned to innovate, execute and relentlessly focus the entire organization on the
customer.”45
op
y
In a letter published on the company web site Schultz said, “I am returning to the position of chief executive
officer to help our partners (employees) build upon our heritage and our special relationship with you, and
lead our company into future.”46 After a year of decline, Starbucks’ shares rose by more than 8%, on
January 8th 2008.47 Schultz replaced Jim Donald who had been CEO since March 2005.
On his return as CEO, Schultz acknowledged that Starbucks had lost sight of the mission upon which it was
founded, – “the romance, warmth, and theater” of visiting the retailer's stores. He mentioned, “This is a
problem that I think we've created, and as a result of that, that we can fix”.48 “When you succeed at this level
for so long...you get a little soft. We have to get back to what made this company great, and that is to have
the courage and curiosity, and commitment, to do things that have not been done before,”49 said Schultz.
No
tC
“I have said for 20 years that our success is not an entitlement and now is proving to be a reality. Let’s be
smarter about how we are spending our time, money and resources,”50 mentioned Schultz in a conference
call with analysts on his appointment.
To bring the coffee house back on the path of recovery, Schultz decided to return to his original vision,
which highlighted the importance of premium coffee and customer focus. Schultz briefed about his
transformation plans for the company, “Improving the current state of the U.S. business: by giving our store
partners better training and tools, launching new products…and introducing new concepts in store design,
among other enhancements to the Starbucks Experience. At the same time, we will slow the pace of our
U.S. store openings and close a number of underperforming locations, so we can renew our attention on
store-level unit economics and be laser-focused on flawless execution.”51
Do
Following the turnaround plan spearheaded by Schultz, Starbucks announced to close down around 100
underperforming stores in the US or roughly 1% of its current coffee shops and slow down the pace of
expansion. He said, “By reducing the number of openings, we expect to optimize our resources and
potentially reduce cannibalization of our existing stores.”52 It planned to decrease store openings to 1,175 in
2008, a 34% drop from the chain's growth in 2007and planned to open fewer than 1,000 domestic stores
during 2009.53 Starbucks also planned to shift some of the money it was going to spend to open new stores
in the US to open stores in the international markets. Starbucks intended to raise its international growth
target for 2008 by 75 stores to 975 in total. More than 1,000 international stores were planned for fiscal
2009, which for the first time would mean that the overseas store expansion would outpace domestic
growth.54
“Starbucks Announces Strategic Initiatives to Increase Shareholder Value; Chairman Howard Schultz Returns as CEO”,
http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-newsArticle&ID=1092986&highlight=, January 7th 2008
46 “Schultz Faces Challenges at Starbucks”, op.cit.
47 Helm Burt and McGregor Jenam, “Howard Schultz's Grande Challenge”,
http://www.businessweek.com/magazine/content/08_03/b4067000369003.htm?chan=search, January 9th 2008
48 “Starbucks' CEO Refill”, op.cit.
49 “Why Starbucks' sales have gone cold”, op.cit.
50 “Starbucks: Out with the New, in with the Old”, op.cit.
51 “Howard Schultz Transformation Agenda Communication #1”, http://www.starbucks.com/aboutus/pressdesc.asp?id=814
52 Andrejczak Matt and Donley Michelle, “Profit slowdown trips up Starbucks' shares”,
http://www.marketwatch.com/news/story/starbucks-slips-profit-slowdown/story.aspx?guid=%7BBC7A8F58-9B75-451CA0BC-A64E3F5AFE8C%7D, January 31st 2008
53 “Starbucks to close 100 stores after weak results”, http://www.nrn.com/article.aspx?id=350174, January 30th 2008
54 Ibid.
45
9
op
y
Emphasising on the need of re-igniting the emotional attachment with customers Schultz mentioned, “Unlike
many other places that sell coffee, Starbucks built the equity of our brand through the Starbucks
Experience. It comes to life every day in the relationship our people have with our customers. By focusing
again on the Starbucks Experience, we will create a renewed level of meaningful differentiation and
separation in the market between us and others who are attempting to sell coffee.”55
In an effort to make the Starbucks’ ambiance more about coffee Starbucks announced to close down the
heated breakfast sandwiches, started during Donald’s leadership by the fall of 2008. Featured at about 4000
of the 7000 US stores the heated breakfast sandwiches made up about 3% of individual store sales, or a
$35,000 annual boost in revenue for Starbucks.56 Buckley welcomed the decision saying, “The warming
breakfast aroma is its biggest problem, overwhelming the coffee aroma that Starbucks views as critical to its
experience.”57 Agreeing with this view, JPMorgan analyst John Ivankoe, said, “We will welcome the removal
of this food ... because in certain cases the stores did in fact smell like cooked processed food, and not at all
like coffee.”58
No
tC
Schultz also acknowledged that the competition had got fierce and said the company would focus on
making changes that could differentiate Starbucks from its growing field of rivals. But he argued that
competition; rising dairy prices and a faltering economy were not the main problems for the company. “This
is the first time the U.S. business is under pressure. It’s a character test. But it’s not about the economy. We
don’t want to use that as an excuse. And it’s not about the competition. Don’t believe the media hype,
there’s no coffee war going on. This is about us. We somehow evolved from a culture of entrepreneurship,
creativity and innovation to a culture of, in a way, mediocrity and bureaucracy”59 mentioned Schultz. John
Owens, an analyst with Morningstar also opined that McDonald’s has not yet been a big threat for Starbucks
as people who seek out places like Starbucks still want the ambience that’s missing at McDonald’s. He
mentioned, “McDonald’s poses more a threat to Dunkin’ Donuts. Both those chains are keeping more on
price.”60
Brandon Borrman (Borrman), a spokesman at Starbucks’ Seattle headquarters, said the company would
continue to build on its strengths - the quality of its coffee, the in-store experience and the adeptness of its
baristas. “We look at what we're hearing from our customers, we know what our customers want from us.
We intend to focus on our points of difference - the things that set Starbucks apart” mentioned Borrman.61
He also added that Britain, Canada and Japan were delivering particularly strong results, suggesting foreign
expansion was delivering dividends even in relatively mature coffee markets.62
Do
Along with capitalising on its strengths, Schultz also announced initiatives to improvise the business
(Exhibit IV).
“Howard Schultz Transformation Agenda Communication #1”, op.cit.
LaMotta Lisa, “Starbucks: Ooh, That Smell”, http://www.forbes.com/2008/01/31/starbucks-sandwiches-mcdonaldsmarkets-equity-cx_lal_0131markets24.html, January 31st 2008
57 Ibid.
58 “Starbucks: Ooh, That Smell”, op. cit.
59 Stone Brad, “Starbucks Announces Sweeping Changes”, http://www.nytimes.com/2008/03/19/business/19cnd-sbux.html,
March 19th 2008
60 “Starbucks: Cool or a commodity?”, op.cit.
61 “Wall St gets palpitations over caffeine fuelled growth”, op.cit.
62 Ibid.
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Exhibit IV
Transformational Initiatives of Starbucks
Acquisition of Clover: Starbucks planned to buy Ballard-based Coffee Equipment Co., maker of the
highly regarded Clover single-cup brewer. Starbucks would become the exclusive provider of the
revolutionary Clover® brewing system;
New coffee blend: Called Pike Place Roast, it would be available as a regular and decaf brew at U.S.
stores beginning in mid-April 2008. A complete reinvention of brewed coffee in-store, that would be
brought to life by baristas across the U.S., who would scoop and grind a new unique coffee blend,
connecting customers to the early days of Starbucks;
New automated espresso machines: The introduction of a new state-of-the-art espresso system that
provides the perfect shot every time and helps facilitate the critical connection between barista and
customer;
Customer-loyalty program: The first phase of a Starbucks Card Rewards program, rewarding
registered cardholders and providing unique new benefits when using their cards in Starbucks stores;
Launch of MyStarbucksIdea.com: Starbucks’ first online community, that takes the Starbucks
Experience outside the store and enables customers to play a role in shaping the company’s future;
Ethical-sourcing label: Starbucks partnered with Conservation International to create a new label for
blends that meet Starbucks' guidelines for coffee grown to its standards for economic, environmental and
social responsibility. Ethically sourcing the world’s finest coffees and reaffirms Starbucks leadership
position in sustainable sourcing and climate preservation.
Compiled by the authors from: (a) Allison Melissa, “Starbucks' new blend for stronger standing”,
http://seattletimes.nwsource.com/html/businesstechnology/2004293831_starbucksbiz20.ht
ml, March 20th 2008
(b) “Starbucks Unveils New Strategic Initiatives To Transform and Innovate the Customer
Experience”, http://www.starbucks.com/aboutus/pressdesc.asp?id=850, March 19th 2008
Besides these initiatives, Starbucks introduced a new range of ‘skinny latte’ - nonfat drinks, made with
sugar-free syrup targeted at health-conscious people mainly women in the US. Starbucks also started
testing a $1 coffee cup and free refills of some of its offerings at a few of its locations in Seattle to attract
economically strained consumers who could not afford the $4 Starbucks latte.63 The $1 cup of coffee
undercut even low-cost coffee vendors, including McDonald's and Dunkin' Donuts, whose coffees generally
started in the low $1-plus range.64 Though $1 cup of coffee might bring in more customers, it had a risk of
undermining the Starbucks’ premium brand. However, Starbucks proclaimed that this test was not to move
from its core premium coffee segment as the company’s spokeswoman Bridget Baker mentioned that the
test “is not indicative of any new business strategy.”65
Do
With reference to the initiatives and efforts to reignite the Starbucks Experience, Schultz said, “We're
confident through our actions that we will get back on track in redefining the customer experience and
expanding the differentiation in the market between us and the others in the coffee business. Given all of the
work underway, we view fiscal 2008 as a year of refocus and renewal.”66
While many industry analysts and experts thought Schultz as the right choice, some wondered whether he
had the right strategy to jump-start the growth. They also opined that Schultz had a tough job before him.
Howard Penney, managing director of consumer research at Friedman, Billings & Ramsey, said, “People at
Starbucks love Howard, and they will have a renewed sense of direction and energy. If he's going to focus
“Starbucks: Cool or a commodity?” op.cit.
“Starbucks tests $1 cup of coffee”,
http://articles.moneycentral.msn.com/Investing/Extra/StarbucksTestsOneDollarCupOfCoffee.aspx, January 23rd 2008
65 Gillespie Elizabeth M., “Starbucks Tests $1 Coffee, Free Refills”,
http://biz.yahoo.com/ap/080123/starbucks_free_refills.html?.v=8, January 23rd 2008
66 “Profit slowdown trips up Starbucks' shares”, op.cit.
63
64
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100 percent of his time on Starbucks, that's a really good thing.”67 Morningstar analyst John Owens agreed
saying, “I don't think anyone is more qualified than Howard Schultz to turn around this business. I don't
believe anyone has more credibility to push through those changes and rally the troops.”68
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Toomey, mentioned, “The growth potential is less and the cachet has changed to some extent—it's more of
a chain than sort of a cozy coffeehouse. I think Schultz is the right person to do the job, but I think it's going
to be a tough job.”69
Analysts opined that the pertinent question was whether Schultz will be able to turnaround the company or
will see it eventually gobbling up by competitors after sticking to old ways of doing business, given that
Schultz never entirely left Starbucks. Most analysts said Schultz shared the blame for Starbucks' problems “It's not as if Howard was MIA during this process. I'm sure Howard had input, but the buck always stops
with the CEO,”70 said Sharon Zackfia, an analyst at William Blair71 in Chicago.
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Marc Greenberg, a Deutsche Bank (DB) analyst was also skeptical about Starbucks’ transformation as he
mentioned, “Their business model still appears to be building stores to grow, and if they just [build more
slowly and] become more relevant to consumers, everything will work itself out—I think those are all
dangerous premises. The run up in shares on Jan. 8 was a 'Hooray, Howard' rally, but does it say anything
to the fundamental prospects of next year? No.”72
Jeffrey Sonnenfeld (Sonnenfeld), senior associate dean, Yale University's School of Management explained
that a returning founder has more freedom than a hired CEO. Schultz has shown he can leverage the
Starbucks brand in new ways but founders' memories of the early days also can hinder change. Nostalgia
can be dangerous; [A company] is not a museum. It's not a religion mentioned Sonnenfeld.73
Do
On the whole, as the head of Starbucks, Schultz would come face to face with increased competition and
the need to attract new customers and regain old ones. Schultz mentioned, “I've been here 25-plus years,
and I've seen every aspect of growth and development of the company, and I am dissatisfied perhaps more
than anyone on this call with where we sit today.”74 He added that his reputation depends on getting it
right.75 The conundrum facing Schultz is how would he revive the company’s traffic growth and fend off
competition. Will he be able to lead Starbucks towards recovery?
“Starbucks Shake-up: Schultz back as Starbucks CEO”, op.cit.
Ibid.
69 “Starbucks' CEO Refill”, op.cit.
70 “Starbucks Shake-up: Schultz back as Starbucks CEO”, op.cit.
71 William Blair & Company, LLC is a Chicago-based investment firm offering investment banking, asset management,
equity research etc.
72 “Howard Schultz's Grande Challenge”, op.cit.
73 Ibid.
74 “Starbucks Shake-up: Schultz back as Starbucks CEO”, op.cit.
75 Ibid.
67
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Annexure I
Starbucks: Company Timeline
Detail
Starbucks opens its first store in Seattle’s Pike Place Market.
Howard Schultz joins Starbucks as director of retail operations and marketing; Starbucks
begins providing coffee to fine restaurants and espresso bars.
Schultz travels to Italy, where he’s impressed with the popularity of espresso bars in
Milan; He sees the potential to develop a similar coffeehouse culture in Seattle.
Schultz convinces the founders of Starbucks to test the coffeehouse concept in downtown
Seattle, where the first Starbucks® Caffè Latte is served; This successful experiment is
the genesis for a company that Schultz founds in 1985; Starbucks introduces Starbucks®
Christmas Blend.
Schultz founds Il Giornale, offering brewed coffee and espresso beverages made from
Starbucks® coffee beans.
Il Giornale introduces Eggnog Latte.
With the backing of local investors, Il Giornale acquires Starbucks assets and changes its
name to Starbucks Corporation. Opens in Chicago and Vancouver, B.C.Store; The total
no. of stores at fiscal year end is 17.
Starbucks store total at fiscal year end is 33.
Opens in Portland, Ore. Starbucks store total at fiscal year end is 55.
Starbucks expands headquarters in Seattle and builds a new roasting plant. Starbucks
store total at fiscal year end is 84.
Becomes the first privately owned U.S. company to offer a stock option program that
includes part-time employees; Opens in Los Angeles; Starbucks store total at fiscal year
end is 116.
Completes initial public offering (IPO), with common stock being traded on the Nasdaq
National Market under the trading symbol “SBUX.”; Opens in San Francisco; San Diego;
Orange County, Calif. and Denver; Starbucks store total at fiscal year end is 165.
Opens second roasting plant; Opens store in Washington, D.C.; Starbucks store total at
fiscal year end is 272.
Awarded ITT/Sheraton (now Starwood Hotels) account; Opens in Minneapolis; Boston;
New York; Atlanta; Dallas and Houston; Starbucks store total at fiscal year end is 425.
Begins selling compact discs (CDs) as a result of an extremely popular in-house music
program; Awarded United Airlines account; Opens another roasting facility; Starbucks
Coffee International forms joint venture with SAZABY Inc. to open Starbucks stores in
Japan; Starbucks store total at fiscal year end is 677.
Starbucks Coffee International opens in Japan and Singapore; Starbucks store total at
fiscal year end is 1,015.
Starbucks store total at fiscal year end is 1,412.
Introduces Milder Dimensions, a lighter and milder tasting line of premium coffee blends;
Acquires Seattle Coffee Company in the U.K. with more than 60 stores; Signs a licensing
agreement with Kraft Foods, Inc., to extend the Starbucks brand into grocery channels
across the U.S.; Launches Starbucks.com; Starbucks Coffee International opens in
Taiwan, Thailand, New Zealand, and Malaysia; Starbucks store total at fiscal year end is
1,886.
Acquires Tazo LLC (Tazo), a tea company based in Portland, Ore; Acquires Hear Music,
a San Francisco–based music company; Starbucks Coffee International opens in Beijing,
Kuwait, South Korea, and Lebanon; Starbucks store total at fiscal year end is 2,498.
Howard Schultz transitions from chairman and chief executive officer to chairman and
chief global strategist; Orin Smith promoted to president and chief executive officer;
Starbucks Coffee International opens in Dubai, Hong Kong, Shanghai, Qatar, Bahrain,
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Saudi Arabia, and Australia; Starbucks store total at fiscal year end is 3,501.
Starbucks Coffee International opens in Switzerland and Austria; Starbucks store total at
fiscal year end is 4,709.
Reinforces its dedication to coffee-producing countries and the farmers who grow
Starbucks® coffee through an expanded line of Commitment to Origins™ coffees;
Extends the beverage menu line to include crème, a non-coffee blended beverage option;
Starbucks Coffee International opens in Oman, Indonesia, Germany, Spain, Puerto Rico,
Mexico, Greece, and Southern China (Macau and Shenzhen); Starbucks store total at
fiscal year end is 5,886.
Starbucks Coffee International opens its 1,000th Asia Pacific store in Beijing, China;
Starbucks store total at fiscal year end is 7,225.
Starbucks Coffee International opens in Paris; Starbucks store total at fiscal year end is
8,569.
Orin Smith retires as Starbucks president and chief executive officer; Jim Donald
promoted to president and chief executive officer; Starbucks store total at fiscal year end
is 10,241.
Introduces ready-to-drink Starbucks® Iced Coffee, a refreshing, cold coffee drink with just
a touch of milk and sweetness; Starbucks store total at fiscal year end is 12,440.
Announces new “Skinny” platform, a nonfat Latte made with sugar-free syrup. Platform
takes the guesswork out of ordering lighter options. Introduced Mocha to the selection of
sugar-free syrups, which includes Vanilla, Hazelnut, Caramel and Cinnamon Dolce;
Starbucks store total at fiscal year end is 15,756.
Chairman Howard Schultz returns as CEO; Announces a renewed focus on customer
experience and innovation; will slow U.S. store growth and accelerate International
expansion.
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Source: “Company Timeline”, http://www.starbucks.com/aboutus/Company_Timeline.pdf, February 2008
Annexure II
Information of Starbucks Stores
Do
UNITED STATES STORES
50 states, plus the District of Columbia.
7,087 Company-operated stores.
4,081 Licensed stores.
INTERNATIONAL STORES
43 countries outside the United States.
Company-operated: 1,796 stores, including company-operated, in Australia, Canada, Chile, China
(Northern China, Southern China), Germany, Ireland, Puerto Rico, Singapore, Thailand and the United
Kingdom.
Joint Venture and Licensed stores: 2,792 in Austria, Bahamas, Bahrain, Brazil, Canada, China
(Shanghai/Eastern China), Cyprus, Czech Republic, Denmark, Egypt, France, Greece, Hong Kong,
Indonesia, Ireland, Japan, Jordan, Kuwait, Lebanon, Macau S.A.R., Malaysia, Mexico, the Netherlands,
New Zealand, Oman, Peru, Philippines, Qatar, Romania, Russia, Saudi Arabia, South Korea, Spain,
Switzerland, Taiwan, Turkey, United Arab Emirates and the United Kingdom.
Source: “Company Fact Sheet”, http://www.starbucks.com/aboutus/Company_Factsheet.pdf, February 2008
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Annexure III
Product and Brand Portfolio of Starbucks
Coffee: More than 30 blends and single-origin coffees.
Handcrafted Beverages: Fresh-brewed coffee, hot and iced espresso beverages, coffee and noncoffee blended beverages, and Tazo® teas.
Merchandise: Assorted home espresso machines, coffee brewers and grinders, a line of premium
chocolate, coffee mugs and coffee accessories, and a variety of gift items.
Fresh Food: Baked pastries, sandwiches and salads.
Starbucks Entertainment: A selection of the best in music, books and film from both emerging and
established talent, offering Starbucks customers the opportunity to discover quality entertainment in
a fun, convenient way.
Global Consumer Products: Line of bottled Starbucks Frappuccino® beverages, Starbucks
Discoveries® chilled cup coffee (in Japan, Taiwan and Korea), Starbucks DoubleShot® espresso
drinks, Starbucks® Iced Coffee, whole bean coffee and Tazo® teas at grocery, Starbucks™ Coffee
Liqueurs and a line of super premium ice creams.
Starbucks Card: Starbucks Card, a reloadable stored-value card, surpassed the $2.5 billion mark
for total activations and reloads since its introduction in 2001. Due to its success in the U.S. and
Canada, the Starbucks Card global program has been launched in other international markets,
including Mexico, Hong Kong, Australia, Thailand, Greece and the United Kingdom. Other markets
(Japan, Taiwan and Spain) have a stand-alone Starbucks Card program, specific to their market.
Brand Portfolio: Starbucks Entertainment, Starbucks Hear Music, Tazo, Ethos water, Seattle’s
Best Coffee and Torrefazione Italia Coffee.
Do
Source: “Company Fact Sheet”, http://www.starbucks.com/aboutus/Company_Factsheet.pdf, February 2008
15