CASE - STARBUCKS
For use only by IBAcc Competition Committee 2014
The History of “Starbucks”
If the rise of Starbucks from a single Seattle coffee store to the world‟s biggest
supplier of coffee drinks is now part of the mythology of American entrepreneurial
capitalism, the story of its guiding genius, Howard Schultz, fits a much older folkore, that of
“the hero‟s return”. After lifting Starbucks from obscurity to become one of the wold‟s most
successful service corporations, Schlutz stepped down from the CEO position in 2000. By
2007, Starbucks‟ performance was flagging: margins and same-store sales were both in
decline. Amidst fears of market saturation, increasing competition, and depressed consumer
expenditure, Starbucks‟ fortunes were restored. Growth had been rekindled, operating profits
and margins hit new records, and on April 13, 2012, Starbucks‟ shares closed at an all-time
high of $62, up from $10 in March 2009.
The rise of Starbucks from a single store in Seattle‟s Pike Place Market to a Fortune
500 company (number 229 on Fortune‟s 2012 listing) is an exemplary tale of American
entrepreneurship.
When Starbucks was founded in 1971, coffee consumption in the United States had
been on the decline for nearly a decade. Most American Coffee drinkers drank home-brewed
Folgers, Maxwell House, or Nescafe-grocery store brands of light roast coffee with the
smooth flvor generally preferred by Americans. Away from home, they ordered coffee with a
meal at a diner or restaurant, or on the go from a fast food outlet, convenience store, or gas
station.
However, in a few neighborhoods in San Fransisco and New York, small local
coffeehouses and specialty coffee roasters such as Peet‟s had recently been established.
Starbucks was created in this mold with the aim to roast and sell great coffee.
By 1982, Starbucks had five retail outlets that sold beans and supplies for brewing
coffee at home, but not prepared beverages. It also had a roasting facility and a wholesale
business. This growth attracted the attention of Schultz, then the vice president of the
American subsidiary of Hammarplast, a Swedish housewares company that made plastic cone
coffee filters for home coffee brewing. Schultz went to Seattle to find out why a small
company called Starbucks ordered more of these filters than any other customer. He liked
what he found and joined Starbucks later that year as director of retail operations.
During a business trip to Milan, Italy, the following year, Schultz was struck by the
city‟s ubiquitous espresso bars. The bars served well-prepared espresso and brewed coffee
and were important places for conversation and socializing. Schultz realized that America
lacked similar places offering high-quality coffee in a comfortable setting for meeting and
relaxing. He left Milan with a determination to create such an establishment in America.
Schultz later dubbed this “the third place” beyond home and work, a term he borrowed from
The Great, Good Place, a book in which sociologist Ray Oldenburg laments the decline of
traditional American community meeting places like country stores and soda fountains.
Starbucks‟ management, however, was not receptive to the idea of selling epresso,
espresso-based drinks such as cappucino, and food items within six months, prompting Shlutz
to open two more locations. Despite his success, Schultz faced skepticism from investorswhen he was trying to raise $1.25 million to fund his expansion, Schultz was turned down by
217 of the 242 potential investors he approached, many of whom expressed concern that he
had no patent on his dark roast, no special access to coffee beans, and no way to prevent
someone else from imitating his concept.
In 1987 Il Giornale acquired Starbucks, including its retail outlets, coffee roasting
facilities, and wholesale operation. Schultz rebranded the existing stores with the Starbucks
name. The first Il Giornale had been a virtual copy of a Milanese espresso bar, complete with
bow-tied waiters, a stand-up coffee bar, and sleek European furniture. By contrast, the new
Starbucks-branded locations were decorated in earth tones with overstuffed chairs, wood
floors and cozy fireplaces the encouraged patrons to linger and relax.
Starbucks coffee was different from the coffee most Americans were used to
consuming. In addition to being much more expensive, Starbucks coffee had a taste unlike
typical American coffee. Starbucks roasted its beans in its own carefully controlled facility,
where they were given a robust European-style flavor derisively called “Charbucks” by some,
and then shipped them whole to its stores where they were ground immediately before
brewing to ensure maximum freshness, flavor, and aroma. Starbucks espresso drinks were
also prepared in a different way : a barista, a master of both the art and science of coffee
production, “pulled” shots of espresso by hand using a La Marzocco machine, steamed milk
to just the right temperature, and scooped elegant dollops of foam for cappucinos, all while
chatting with customers about the different varieties of Starbucks coffee.
In a nod to the heart of coffee culture, Starbucks invented a quasi-Italian lingo for its
drink sizes (short, tall, grande, and vent) and the drinks themselves (e.g., Caramel Macchiato
and Frappuccino). No matter how a customer ordered, counter clerks were trained to repeat
the order using the correct terms in the Starbucks-specified order. Their tone was described as
“not one of rebuke, but nevertheless most customers learn to avoid the implied correction by
stating their order right is an aspiration, a small victory on the way to the office.
By 1996, the Starbucks mermaid logo appeared on more than 1,000 stores. Starbicks
selected its locations carefully, targeting areas with large numbers of wealthy and highly
educated professional workers. These were the new American elite-dubbed “ bobos”
(bourgeois bohemians) by commentator David Brooks-who used consumption as a way to
distinguish themselves from the less enlightened masses.
Soon, more and more American consumers aspired to emulate the coffee drinkers that
were first attracted to Starbucks. “Customers believed that their grande lattes demonstrated
that they were better than others-cooler, richer, and more sophisticated. As long as they could
get all of this for the price of a cup of coffee, even an inflated one, they eagerly handed over
their money, three and four dollars at a clip. ”As Roly Morris, one of the team that helped
bring Starbucks to Canada, observed, “We‟re offering a lifestyle product...that transcends the
usual barrier. May be you can‟t swing a Beamer (BMW)...but most people can treat
themselves to a great cup of coffee.
Starbucks Expands (1996-2006)
Beginning in 1996 Starbucks embarked on a significant wave of growth by
concurrently executing two initiatives : (1) selling Starbucks products through mass
distribution channels, and (2) dramatically expanding its retail footprint. Schultz played an
important role in both initiatives, first as CEO until 2000, and thereafter as chairman and
chief global strategist.
Selling Through Mass Distribution Channels
The first product Starbucks sold through mass distribution channels in the United
States was its bottled Frappuccino coffee drink, brought to market through a joint venture in
1996 with Pepsi-Cola North America. The arrangement drew on Pepsi‟s expertise in
managing store supply and demand but allowed Starbucks to retain control over the
developmentand sale of its products.Around the same time, the company partnered with
Dreyer‟s to produce a premium coffee-flavored ice cream. Soon after, Starbucks began to test
market Starbucks-branded coffee beans and ground specialty coffee in grocery stores and
supermarkets. In 1998, approximately a year after market testing, Starbucks coffee was on the
shelf in approximately 3,500 supermrkets in ten West Coast cities.
By 1996 Starbucks had opened just over 1,000 stores. Within five years, that number
had grown to nearly 5,000. In 2007 Starbucks operated 15,000 stores and in the same year
publicly announced a goal to open 40,000 locations worldwide, with 20,000 in the United
States alone. (In the same year, McDonald‟s operated approximately 14,000 restaurants in the
United States and 31,000 locations worldwide.
The Rise of Competitor (2006-2008)
The expansion of Starbucks was good for the coffeehouse industry in the United
Stated, a phenomenon dubbed the “Starbucks Effect” By 2006 there were approximately
24,000 specialty coffee establishments in the United States, nearly 60% of which were
independently owned and operated(having three or fewer outlets).
Starbucks also found itself competing against smaller chains that resembled preexpansion Starbucks stores, complete with manual espresso machines and hand-scooped
coffee. These chains-including Peet‟s coffee dan tea (which featured La Marzoco namual
espresso machine in many stores), the Coffee Bean & Tea Leaf and Caribou Coffee-operated
between 150 and 500 stores, but customers seemed to perceive them more like independent
coffeehouses. When Caribou Coffee was forced to close in Ann Arbor, Michigan, as a result
of escalating rent, one patron claimed it was “like the end of Ann Arbor.” By contrast,
Starbucks was often perceived as a hearthless corporate predator. As one observer noted,
“For a growing slice of the population, “Wal-Mart,‟ „Starbucks‟ and „chain‟ have become
dirty words, while local, independent and unique have become core values.” Similiar to
independent coffee retailers, those small chains charged prices about 10% higher than
Starbucks location in the same geographic area.
PREMIUM
PRICE
Schultz Return as CEO (2008)
As 2008 dawned, Starbucks was in crisis: financial results from the previous quarter
were the worst in its history as a public company. On January 7, Schultz returned to
Starbucks as CEO at the request of the board of directors. He immediately announced a
“transformational agenda” of strategic initiatives to revitalize the company with which he was
so closely identified.
Closing underperforming stores was part of a broader strategy aimed at reducing
operating costs. Through a combination of procurement savings, improved logistics, reduced
operations waste, and labor cost savings, Starbucks cut $580 million in operating costs in
2009. The revamped supply chain operations delivered 90% of store orders on time and
without errors.
While he was closing underperforming stores and improving the supply chain, Schultz
undertook several smaller initiatives, including introducing new low-profile but still semiautomatic espresso machines; offering free refills on same-day purchases; and returning to instore coffee grinding. Schultz also took the very public step of closing all Starbucks company
owned stores for an afternoon to retrain all baristas in the production of espresso-based
drinks.
During this time, Starbucks also introduced a new roast of coffee, Pike Place Roast.
Previously, Starbucks had offered rotating selection of coffee bean/roast combinations, such
as French Roast, Sumatra, or Kenyan. This meant that a Starbucks tall drip coffee could taste
dramatically different on different days or in different stores. Customers that did not know
Starbucks rotated its coffees attributed the difference to operational inconsistencies. The new
roast, whose flavor was described as “round, smooth, and balanced” with a “mild, sweet
finish,”was offered every day as the Starbucks “default” coffee alongside a bolder-flavored
option.
Starbucks Pursues New Growth Initiatives (2009-2011)
Starting in 2009 Starbucks undertook three new growth initiatives outside of its retail
coffeehouse presence. First, it made several moves to expand its presence in the”away from
the store” coffee market. Second, it pursued coffee initiatives outside of the Starbucks brand.
Finally, Starbucks acquired a supplier that moved it into the business of manufacturing highend coffee brewing equipment.
Starbucks had been experimenting with instant coffee since 1989, when it was
approach by Don Valencia, a cell biologist who had developed an innovative method for
freeze-drying cells for examination under a microscope. Valencia had developed a way to
apply the technique to coffee beans, which enabled him to carry high-quality coffee on long
hiking trips. After being hired by Starbucks to create a commercially viable version of his
technique, Valencia first created a powdered coffee extract that was critical to the creation of
a shelf-stable Frappuccino, a Starbucks ice cream created with Dreyers‟s and Double Black
Stout, a coffee-and-beer combination product from Redhook Ale Brewery.
In late 2009 Starbucks launched the culmination of Valencia‟s research : Starbucks
VIA, a water-soluble coffee offered in single-serve packages or “sticks.” Even though instant
coffee represented a $20 billion market worldwide, analysts were skeptical about the
company‟s chances in the category, which accounted for $700 million in sales in the United
States, or about 8% of the overall market. This external skepticism was matched by internal
resistance and hesitancy among partners (the Starbucks term for employees) because instant
coffee was perceived to be a “down-market” category.
VIA was priced at about $1 per 3 oz (85g) stick. This price was two-thirds the price of
a cup of Starbucks in-store coffee, but three to ten times the price per serving of other instant
brands, most of which cost less than twenty cents per serving. In March 2011, Coffe Review
conducted a blind taste test of VIA and competing instant coffee brands that showed price
and appeal were not closely correlated. Despite its high price, the taste of Starbucks
Colombia VIA was ranked below the lower priced Nescafe Taster‟s Choice 100%
Colombian. The result were even more striking for Italian Roast VIA, which was ranked
seventh in taste, scoring below Trader Joe‟s Colombia Instant Coffee despite a per-serving
price ten times higher.
After one year, global sales of VIA topped $135 million. This made it the number five
instant coffee brand by volume in the United States, taking share from other brands, including
market leader Folgers instant. That same year, the instant coffee category grew 15% after
declines in three of the previous four years.
In addition, to growing its presence in the “away from the store” coffee market,
Schultz also focused on developing non-Starbucks branded businesses.
In July 2009 Starbucks opened 15th Avenue Coffee and Tea in Seattle, followed
closely by Roy Street Coffee and Tea. Both stores served espresso drinks made with the La
Marzocco machine used in the original Starbucks stores and offered multiple options for
brewing coffee by the cup, including manual pour-over, French press, Synesso, and Clover
drip coffe machines. The decor featured recovered furniture, and the menu offered select
small-batch micro-roasted coffe along with beer, wine, and made-to-order food items. The
stores offered Starbucks coffee and Tazo tea and delivered “the same high quality with the
same heart in a new way.” Some customers protested that the stores were a deliberate attempt
by the company to deceive them.
Starbucks also announced it would grow its Seattle‟s Best Coffee brand into a
multibillion dollar “approachable” premium coffee using the tagline “Great Coffee
Everywhere.” The brand had been acquired by Starbucks in 2003 along with its fifty stores
and its large supermarket business, which included a strong presence in the profitable
flavored beans category-a category Starbucks had never entered. Seattle‟s Best president
Michelle Gass described Starbucks as a destination coffee experience” and Seattle‟s Best as
Coffee “brought to the consumer when they make other retail choices.”
Starbucks’ Strategy
Starbucks‟ strategy was grounded in its mission “to inspire and nurture the human
spirit-one person, one cup and one neighborhood at a time.” To put this mission into practice
required Starbucks to not just serve excellent coffee but also engage its customers at an
emotional level. As Schultz expained: “We‟re not in the coffee business serving people, we
are in the people business serving coffee.”
Central to the Starbucks‟ strategy was Schultz concept of the “Starbucks Experience,”
which centered on the creation of a “third place”-somewhere other than home and work
where people could engage socially while enjoying the shared experience of drinking good
coffee. The Starbucks Experience combined several elements:

Coffee beans of a high, consistent quality and the careful management of a chain of
activities that resulted in their transformation into the best possible espresso coffee:
“We‟re passionate about ethically sourcing the finest coffee beans, roasting them with
great care, and improving the lives of the people who grow them.”.

Employee involvement. The counter staff at Starbucks stores-the baristas-played a
central role in creating and sustaining the Starbucks Experience. Their role was not only
to brew and serve coffee but to engage customers in the unique ambiance of the
Starbucks coffee shop. Starbucks‟ human resource practices were based upon a
distinctive view about the company‟s relationship with its employees. If Starbucks was
to engage customers in an experience which extended beyond the provision of good
coffee, then it was going to have to employ the right store employees who would be the
critical providers of this experience. This required employees who were commited and
enthusiastic communicators of the principles and values of Starbucks. This in turn
required the company to regard its employees as business partners. Starbucks‟ human
resource practice were tailored, first, to attracting and recruiting people whose attitudes
and personalities were consistent with the culture of the company and, second, to foster
trust, loyalty, and a sense of belonging, which would, in turn, facilitate their engagement
with the Starbucks‟ experience. Starbucks selected employees with care and rigor,
placing a heavy emphasis on adaptability, dependability, capacity for teamwork, and
willingness to further Starbucks principles and mission. Its training program extended
beyond basic operational and customer service skills and placed particular emphasis on
eduvating employees about coffee. Unique among catering chains, Starbucks provided
health insurance for almost all regular employees, including part-timers.

Community relations and social purpose. Schultz viewed Starbucks as part of a broader
vision of common humanity: “I wanted to build the kind of company my father never
had the chance to work for, where you would be valued and respected whatever your
level of education. Offering healthcare was a transforming event in the equity of the
Starbucks brand that created unbelievable trus among our people. We wanted to build a
company that linked shareholder value to the cultural values that we want to create with
our people.” Schultz‟s vision was of a company that would earn good profits but would
would also do good in the world. This began at the local level: “Every store is part of a
community, and we take our responsibility to be good neighbors seriously. We want to
be invited in wherever we do business. We can be a force for positive action-bringing
together our partners, customers, and the community to contribute every day.” It
extended to Starbuck‟s global role: “we have the opportunity to be a different type of
global company. One that makes a profit but at the same time demonstrates a social
conscience.”

The layout and design of Starbucks stores were seen as critical elements of the
experience. Starbucks has a store design group that is responsible for the design of the
furniture, fittings, and layout of Starbucks‟ retail outlets. Like everything else at
Starbucks, store design is subject to meticulous analysis and planning, following
Schultz‟s dictum that “retail is detail.” While every Starbucks store is adapted to reflect
its unique neighborhood, “there is a subliminal unifying theme to all the stores that ties
into the company‟s history an mission-“back to nature” without the laid-back attitude;
community-minded without stapled manifestos on the walls. The design of a Starbucks
store is intended to provide both unhurried sociability and efficiency on the run, an
appreciation for natural goodness of coffee and the artistry that grabs you even before the
aroma. This approach is reflected in the designers‟ generous employment of natural
woods and richly layered, earthy colors along with judicious high-tech accessorizing...No
matter how individual the store, overall store design seems to correspond closely to the
company‟s first and evolving influences: the clean, unadulterated crispness of the Pacific
Northwest combined with the urban suavity of an espresso bar in Millan.”

Starbucks‟ location strategy-its clustering of 20 or more stores in each urban hub-was
viewed as enhancing the experience both in creating a local “Starbucks buzz” and in
facilitating loyalty by Starbucks‟ customers. Starbucks‟ analysis of sales by individual
store found little evidence that closely located Starbucks stores cannibalized one
another‟s sales. To expand sales of coffee-to-go, Starbucks began adding drive-through
windows to some of its stores and building new stores adjacent to major highways.
Looking Ahead
The release of Starbucks quarterly financial results on April 26, 2012 offered further
confirmation of the strength of Starbucks‟ recovery under Schultz‟s leadership and reinforced
the view that the downturn of 2007/2008 had been an aberration resulting from Starbuck‟s
overeager pursuit of growth.
Yet amidst the acclaim for Schultz‟s remarkable success in returning Starbucks
profitability and growth, many of the concern that had worried investment analysts in 2008
had not disappeared: the US recovery and the world economy remained fragile and the
competitive forces that had threatened Starbucks in 2008 appeared even stronger in 2012.
Some had doubts about the consistency and coherence of Starbucks‟ strategy. After
refocusing Starbucks on its core values and core identity, might Schultz‟s multiple initiatives
be a distraction for the company? For those who had perceived an uneasy relationship
between Starbucks‟ claim to be providing authentic, gourmet coffee and its offerings of
syrup-flavored coffees, the introduction of instant coffee was viewed as brand-threatening.
Starbuck‟s push into the grocery trade was taking the company into an intensely competitive
field where it would need to develop new capabilities. Barclays Capital analyst Jeff Bernstein
commented, “They‟re starting a new chapter from scratch. While viewed favorably by most,
the question has to be: Do you realize the agnitude of the task you‟re taking on?”
Leadership Performance:
According to leadership theories, there are many styles of leaders to be used in order
to achieve the excellence organization performance. Some theories and model that introduced
and growth over 70 years namely: Trait Approach of Leadership, The Behavioral School, The
Contingency or Situational School, Leader and Followers model. One of leadership style that
interesting to correlate with culture is Transformational Leadership. James MacGregor Burns
(1978) is the one who first introduce about transformational leadership theory. Burns define
transformational leadership as “a relationship of mutual stimulation and elevation that
converts followers into leaders and may convert leaders into moral agents”. Burns injected
the humanistic psychology factors into leadership theory. Bernard Bass is the next researcher
who developed Burns‟ concept of transforming leadership. According to Bass and Avolio
(1994) “Transformational Leadership is closer to the prototype of leadership that people
have in mind when they describe their ideal leader, and it is more likely to provide a role
model with which subordinates want to identify”. Furthermore, they said that there are four
indicators of Transformational Leadership, with acronym 4I‟s: Individualized Consideration,
Intellectual Stimulation, Inspirational Motivation and Idealized Influence. Speaking of
Starbucks, there are four facts that show us the transformational leadership of Schultz:
1. He is Individualized Consideration, it means have feeling of empathy and listening.
Schultz says that “if you treat people like family you will make them loyal and encourage
them to give their all”.
2. He is Intellectual Stimulation, it means questioning. Schultz says that “we are not in the
coffee business serving people, we are in the people business serving coffee”.
3. He is Inspirational Motivation. Schultz inspired his employee for an active action, bring
together partners, customers, and the community to contribute, tend to Starbucks global
role.
4. He is Idealized Influence. Schultz cut his own salary as confidence in his action of
minimizing the operational costs. He did this once he back at 2008, since the performance
of Starbucks is going decrease and going bad. After he returned, Shultz need one year and
half to put Starbucks back again on its excellence position. The action of cut his own
salary is the strong communication of Schultz to all the people (employee and customer),
to show about the sense of urgency for change.
In Schultz perspective, people are the fundamental of business performance. This
paradigm is same with another phenomenal concept such as transformational leadership or
Balance Scorecard framework. According to Kaplan - the professor from Harvard University
and the man who invented Balance Scorecard - the fundamental of financial result is the
employee and customer. Employee and customer is about the people, as Schultz view
Starbucks as “people business serving coffee”.
“People business” is really the core culture in Starbucks. Schultz always tries to
communicate that culture in every opportunity with his employee (training and annual
leadership meeting) and customer. Definitely, customer is only about the buyer, but they also
included the community and the citizens. The facts we can notice that Starbucks participate in
community project (cleanup and restoration after Hurricane Katrina), launching Starbucks
Shared Planet and “My Starbucks Idea”. Those activities make Starbucks or Schultz got some
award regarding corporate responsibility:

2000-2012: one of the “100 best corporate citizens”

2009-2011: most ethical company

2011-2012: Sustainability design award
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EXHIBIT 1 (Revenue of Starbucks, in millions)
EXHIBIT 2 (Starbuck‟s Stock Price, Feb 7th 2014)