MGMT4842-601
Starbucks:
Case Analysis
Strategy and Internal Initiatives to Return to Profitable Growth
Teikisha Williams
12/7/2012
Background Information
Starbucks is a highly recognized brand name around the world. The infamous coffee
chain restaurant began their success in 1971 with three friends, Zev Siegel, Gordon
Bowker and Jerry Baldwin. They each equally invested $1,350 and borrowed $5,000
from their bank and opened Starbucks Coffee, Tea, and Spice in Seattle, WA. They
originally didn’t sell brewed coffee to the public but rather focused on whole bean
coffees and other coffee products. The trio was influenced to open a coffee store by
Alfred Peet, owner of Peet’s Coffee and Tea. He imported specialty coffees and teas to
his Berkeley, CA store introducing freshly roasted dark bean coffee to his American
customers. Peet helped educate Siegel, Bowker and Baldwin on high quality coffee and
how to roast the coffee beans.
In the early 1980s, Zev Siegel removed himself from the business to pursue other careers.
At this time, Starbucks grew to four stores in the Seattle area. In 1981, Howard Schultz
went to visit Starbucks since they were one of his top customers of his product that was
sold in the stores. He was impressed by the knowledge and expertise of roasting dark
coffee and the great impact of flavor that separated them from top supermarket brands.
Howard Schultz convinced the current owners of Starbucks to allow him to partner with
them although they were cautious of his NewYorker-type personality and questioned his
passion for the business since he wasn’t an original founder. Although they initially
denied his request for employment, Schultz was able to convince Baldwin that he was
trustworthy enough to take a chance on and agreed to hire Schultz as head of marketing
and overseeing the retail stores. Schultz was officially hired into Starbucks in September
1982. He became acquainted with the day-to-day operations of Starbucks and eventually
proved his love and dedication to the store. He brought forth new ideas to help relieve
customers of the overwhelming ordering process by training store employees on
customer sales skills and creating helpful brochures for customers.
A visit to one of the coffee capitals of the world, Milan, Italy in the spring of 1983 gave
Schultz great ideas and possibly the most strategic vision for the company. During his
visit, he was able to tour many espresso bars in the area. The bars in Milan illustrated to
him how well the employees and owners interacted with each other and the friendliness
of the baristas. He wanted this same atmosphere for the Seattle stores. It was also during
this trip that Schultz was given the revolutionary influence to serve lattes and expand the
Starbucks menu to serve espressos and cappuccinos as well as their famous coffees.
Unfortunately, Schultz’s new ideas weren’t immediately welcomed by the owners,
Baldwin and Bowker. They wanted the stores to remain a coffee retailer and stick to the
beans of the business without shifting into the coffee bar/restaurant business. They were
satisfied with the lucrative sales growth since starting and were timid of taking on new
business risks. They also bought and acquired Peet’s Coffee in 1984 which reduced their
cash flow, not allowing for much expansion based on Schultz’s vision for the business.
It wasn’t until April 1984, when Starbucks opened their sixth store that Baldwin was
confident enough to allow Schultz to test his theory and begin selling beverages similar to
the Milan bars. Customers loved the new flavor and espresso option Starbucks offered
and they skyrocketed past their target. Baldwin was still apprehensive about expanding
into the espresso market and didn’t want to lose focus from their primary product of
selling Arabica coffee. Eventually, Schultz grew tired of fighting the battle of turning
Starbucks in a more restaurant –style coffee bar and decided to leave the company in
1985 to start his own business.
Schultz ventured to start his own business with the help of Baldwin with a $150,000
investment and Bowker offered six months of consulting services. The company was
named II Giornale Coffee Company. His first store opened in April 1986 in spite of
Schultz having little luck in pursue investors he was able to raise $1.65 million for his
company. With some savvy adjustments to his Italian-influenced storefront, II Giornale
quickly became a success and famous with the Seattle locals. Schultz was able to expand
into British Columbia and gain approximately $1.5million with three stores.
In 1987, the Starbucks owners decided to sell the company and the roasting plant to
Schultz for $3.8 million. Schultz had a great vision for the company and finally felt he
was able to fulfill it. The employee morale had greatly decreased since he left back in
1985. Management and their employees needed to bridge their relationship in order for
the company to succeed. Schultz began to build his management team who had various
backgrounds and experiences to head up operations and grow the business into other
marketplaces such as Chicago and Vancouver.
The management team made strategic implementations to the business to reflect the
higher rents of their market. They eventually grew into the California market which
really helped promote the company. The coffee shops were easily embraced by the
western culture. The company began to grow as a rather fast pace reaching over 125
stores by 1992. However they did suffer losses through the beginning years having to
rely on investments by venture capitalists. Schultz was able to get the company back on
track with profitable sales for most of the remaining years due to his perseverance and
long-term vision for the company.
Discussion of Strategy
Starbucks uses a variety of strategic elements to maintain their stance in the coffee retail
market and maintain customer satisfaction. One of these methods is expanding their
stores. This is significant to promote growth but Starbucks in particular about the
geographical location of their stores to ensure they are favorable and beneficial to the
company. It takes various levels of management teams to oversee the expansion
processes. At one time, Starbucks began to grow at such a rapid pace that sales were low
in some stores due to close proximity and the strategic decision to close some stores had
to be made. Starbucks also ventured into international markets sharing the same
principles and values to finding ideal locations, adequate employees and a qualified
management team to ensure success in the foreign worlds.
Starbucks supersedes other companies with their vast product expansion strategies. They
were able to grown their brand worldwide by partnering with various companies through
joint ventures or acquisitions. Some of the major partnerships included PepsiCo where
the instant iced-coffee beverage, Frappucchino, was born. Other popular partnerships
include United Airlines, Sysco Corp, Aramark, various popular hotel chains, Dryer’s ice
cream, Unilever, Hear Music and Apple. Starbucks acquisition of Tazo Tea and Seattle’s
Best Coffee helped integrate them into another client market and acquire a higher share
of the coffee market. Starbucks definitely is not afraid to test product markets and team
up with other companies to enhance their success.
Starbucks also utilizes the strategic efforts in their purchasing power. The green coffee
beans (unroasted) are purchased from various countries to offer a variety and reduce
challenges and risks of economic issues or weather conditions. Starbucks was mindful of
farmer financial profitability and established contracts in order to direct supported small,
local farmers all while maintaining environmental sustainability. The company also
established guidelines called C.A.F.E. (Coffee and Farmer Equality) to assure fairness in
the business relations between Starbucks and farmers and assure organic freshness.
Social responsibility strategy is used by the company’s environmental awareness and
usage of biodegradable supplies in their stores. They were awarded the LEED
(Leadership in Energy and Environmental Design) certification in 2010. Their use of
recyclable supplies, being active in community improvement projects, helping many local
charities, and reduce solid waste helps to improve their corporate image rating to
suppliers and customers.
There are few other companies that can compare to Starbucks’ employee appreciation
efforts. It’s apparent they value their employees and expect excellence shown by offering
an extensive employee training program. The university styled learning techniques
educating the employee on the company culture, expectations, values and principles of
the business. Another good aspect is management encouraging open feedback from all
employees to help in company improvements.
5 Forces Model
Suppliers. Starbucks commitment and thoughtfulness to their farmers is outstanding.
The level of concern Schultz displays to the livelihood of their success shows a
compassion that is rare for most large corporations. It’s evident he is genuinely
concerned about the labor force and recognizes maintaining vital supplier relations is key
to the company’s success.
Buyers. Starbucks has built and established a certain clientele without much effort. The
brand has been popularized through movies, television and word-of-mouth advertising.
Simple carrying the logo cup has become a public status-symbol that denotes prestige and
confidence to others.
Potential New Entrants. Starbucks has the advantage over new entrants in the coffee
industry because they have the first-movers advantage. Although there may be new
entrants into the market, Starbucks quality brand, uniqueness, commitment and loyalty to
their shareholders will have limited impact of any new entrants into the market.
Other firms offering Substitute Products. Starbucks has to be able to continuously fight
the battle against lower cost competitors selling café style coffee as well. McDonald’s
product line McCafe and Dunkin Donuts are two prime examples of this where Starbucks
has to prove themselves as superior and set themselves apart from lower-quality products.
Rivalry among Competing Sellers. Starbucks is in a class by themselves and typically
outshine competition due to their high-quality products and higher cost structure. Since
acquiring and partnering with many other companies, they’ve allowed themselves to
grow at a pace that few competitors are able to contend with. Offering such friendly and
diverse environments than their competitors set them apart and allows them to maintain
their culture without much change necessary.
Driving Forces
Some of the driving forces behind the success of Starbucks are their willingness to
entering new markets. They also offer an extensive employee training program that
marvels in comparison to other retail outlets. Starbucks stores offer an comfortable
ambience to allow customers to experience “The Third Place” feeling similar to home
and work. They have been offering a WiFi connection for customers since 2002 and are
steadily thinking of innovative ways to keep up with technology in other areas.
It’s also a major driving force that they continue to offer the Arabica coffee keeping true
to their original company flavors and authenticity. The top quality coffee has become a
staple to their success. Adding other beverages, pastries, desserts, teas and various nonedible products has also been a driving force by expanding the stores product lines.
Finally, Starbucks high level of environmental stewardship, philanthropy,
humanitarianism and community service make them one of the best companies in the
world.
Key Success Factors
One of the major key success factors to the Starbucks franchise is the entry as first
movers and having that advantage over current retailers. They were the first retailer to
offer Italian based coffee products to the United States. Also their decision to incorporate
the foreign Italian terminology in some of the product names was a strategic management
decision.
Including employees in the decision-making process and taking their needs into
consideration was another key success factor the Starbucks management team developed.
I’m sure this helped boost employee morality and reduce turnover making Starbucks a
great place to work. Starbucks also does an outstanding job in recognizing and showing
employee/partner appreciation through awards. Schultz made the crafty decision to offer
part-time employees health benefits and stock options. These types of changes help build
employee satisfaction, morale, empowerment, trust, servitude, and commitment to the
company. Schultz was also mindful of the financial strain by paying for ¾ of the
coverage leaving the employee with only ¼ of the cost. Schultz believed if employees
were treated well, they would in turn treat the customers well.
Another key factor to Starbucks success was the multitudes of partnerships, joint ventures
and acquisitions to increase brand name, appeal, product line and variety. International
appeal and culturally specific product brands also contributed to help widen appeal
globally.
SWOT Analysis
Strengths:
 Vertically integrated by obtaining coffee from other countries and using top
quality beans to roast their own coffee.
 Publically traded company owned franchise.
 Benchmarking with other retail outlets.
 Offers a healthy variety of foods & beverages.
 Maintains a well-known brand, image and logo.
 Low employee turnover due to high employee motivation tactics.
Weaknesses:
 Dependent on Howard Schultz leadership skills, experience and expertise to
maintain success.
 High cost for menu items
 Locations only limited to high demographic, metropolitan areas.
Opportunities:
 Continue to grow and open more stores
 Build more supplier relationships
 Obtain more of the coffee drinking market, in US and internationally
Threats:
 Competitors offering self-proclaimed similar products at a lower cost
 Identifying good site locations to open new stores
 Maintaining employee satisfaction
 Maintaining customer loyalty
Analysis of Financials
Starbucks has done financially well overall throughout the course of their operation since
1971. The company has experiences steady sales revenue growth except for in 2000 &
2008. Starbucks experienced one of their best financial years in 2007 but the economic
downfall hit hard the following year. They’ve also had to account for the various
business acquisitions and joint ventures that have helped them grow the company.
Starbucks ability to open stores so frequently, maintain a high cost menu and stay
vertically integrated helps them to maintain top profits and continue to promote growth.
Managerial Worry List
It’s no secret that the Starbucks generation is getting older. Younger generations may not
embrace the coffee drinking habit as much as Generation X and Y. Management has to
come up with a diverse method to capture the attention of upcoming college students,
business people and patrons if they want to maintain their stake.
Economy failing can result in another catastrophic sales plummet. Starbucks top
management has to worry that this can result in another 2008 decrease in revenue.
Another worry is competition offering similar products and entrapping consumers to
believe the quality is comparable to Starbucks’ brands.
Recommendations
I have several recommendations for to help Starbucks improve operations. For starters,
they can increase their advertising efforts slightly. They would benefit by reaching out
and attempting to gain more of the market and appeal to new customers.
Another suggestion is to offer smaller, express locations in markets where a full-sized
store may not be ideal. These locations may also offer a lower-value menu to appeal to a
larger market base. A catering service may also be beneficial in corporate environments
where business people are unable to leave their workplaces.
Starbucks should also consider acquiring and/or sponsoring a sport facility. They have
the revenue and collateral to do so and it would greatly improve their branding. They
may also hire a celebrity to endorse their brand and gain appeal towards a younger
market. I can envision a Starbucks Arena in the near future.
An in-store vocabulary or guide to ordering their products would help unfamiliar
customers feel less intimidated by the foreign vernacular. Starbucks has to consider that
not all customers are savvy coffee drinkers or experts on the Italian language and
therefore avoid shopping there due to the overwhelming ordering process. When a new
customers overhears a regular order a “Grande coffee in a venti cup with 2 pumps
hazelnut, a pump of vanilla, 3 equals and 4 Splenda filled to the top with cream, double
cupped with no sleeve, a stir stick, and stopper put in the top” it can be overwhelming
and daunting.