Please read the fact patterns before class. We will answer the questions
in our case teams during class.
Case Assignment #1 - What Would You Do?
STARBUCKS
Headquarters, Seattle, Washington.
Twenty years ago, if you said, “Give me a venti, vanilla, nonfat latte, no room, three Splendas,”
people would have thought you were speaking a foreign language. And you would have been
because Starbucks was just getting started. It began with 4 stores in Seattle in 1987, and today
there are over 17,000 stores in 40 different countries. That means Starbucks has opened an
average of 8 new stores per day! Unfortunately, with profits now a thing of the past, Starbucks
has closed 800 stores and laid off 25,000 workers.
Starbucks clearly overexpanded, providing fodder for late-night TV comedians who have
cracked jokes about Starbucks opening new stores inside existing stores. Customer Leslie Miller
said, “Starbucks was stupid. They put them right next to each other.” Because managers focused
on opening new stores for new customers, they paid less attention to existing stores where samestore sales dropped by 3 percent. While that doesn’t seem like much, Starbucks has to lose only 6
to 8 customers per store per day to see a 1 percent drop in a store’s sales. In other words, small
changes in customer buying habits make a big difference in Starbucks’ growth and profitability.
Consumers are stretching their dollars, which means Starbucks is fighting the perception—
some would say reality—that Starbucks is a luxury. McDonald’s coffee is undoubtedly cheaper,
but Starbucks points out that half of its coffee drinks are less than 3 dollars, while one-third are
less than 2 dollars. Moreover, Starbucks coffee is actually less expensive than Dunkin’ Donuts
coffee after adjusting for the small serving sizes at Dunkin’ Donuts. Most consumers, however,
don’t see it that way. Graduate student Amy Osbourne has cut her monthly Starbucks budget
from $60 to $30. Said Osbourne, “I haven’t been going as often. I’ve been making my tea at
home.”
When Starbucks’ board of directors fired CEO James Donald, it asked founder Howard
Schultz to take charge again. Even though he had stepped down as CEO to become the board’s
chair in 2000, he stayed involved in such operational details as deciding the color of holiday cups.
Schultz has always been a detail -oriented, hands-on boss, a perfectionist who demands a lot of
last-minute changes. When Starbucks launched its new Pike Place Roast coffee, he selected the
logo and then had it redesigned right before going to market. He even rewrote the press release.
Schultz is revered at Starbucks and workers sometimes applaud when he enters meeting rooms or
stores. He is such a legend within the company that “What will Howard think?” drives nearly all
decisions. Not surprisingly, that creates a tremendous amount of anxiety among managers and
employees. Schultz recognizes that this isn’t a good thing. Said Schulz, “It’s not healthy for the
organization if everyone’s waiting for me to tell them what to do.” Still, Stanley Hainsworth, who
was a vice president under Schultz, would have to tell people, “You’re not meeting with the
king.” Said Hainsworth, “A lot of people were nervous, so if Howard asked them what they
thought, they would tell him what he wanted to hear.”
Schultz’s return has unfortunately not yet produced a turnaround in sales or profits. Shultz,
who is feeling the pressure, told employees, “We have to defend our position; we have lots of
companies small and large who want to take a piece of our business away.” If you were the CEO
of Starbucks, what would you do?
Sources: “Is the Global Domination of Starbucks Finally on the Wane?” Belfast Telegraph, 3 July 2008, 1; J. Adamy,
“Schultz’s Second Act Jolts of Starbucks; Already Intense, He Faces New Pressure: Peltz Owns a Stake,” The Wall
Street Journal, 19 May 2008, A1; M. Barbaro and A. Martin, “Overhaul, Make It a Venti,” The New York Times, 30
January 2008, C1; E. Campbell, E. Ailworth, and A. Jennings, “Average Joe Figured Out the Problem a While Ago,”
The Boston Globe, 3 July 2008, E1; P. McNamara and B. Hutchinson, “Not So Grande for Starbucks. Java Giant’s
Bean Counters to Close 600 Stores,” New York Daily News, 2 July 2008, 6; D. Mitchell, “Starbucks Faces Existential
Crisis in Downturn,” The Washington Post, 22 March 2009, G01.
Please read the fact patterns before class. We will answer the questions
in our case teams during class.
Questions
1. So, what does Starbucks need to do to return to growth and profitability? Should it lower
prices? Should it expand its menu?
2. As founder, Schultz brought enormous success to Starbucks. But is he the right leader for
Starbucks now? Should he continue as CEO? Is he meeting his basic responsibilities as
Starbucks’ top manager? What key mistakes is he making?
3. Finally, how should Starbucks counter its new competition, McDonald’s and Dunkin’
Donuts?