Closing Case

Starbucks Corporation

Coffee drinking became popular in the Middle East and North Africa during the 16th century and spread to Europe in the 17th century with the opening of coffee houses in Venice, London, Paris and Amsterdam. By the early 20th century, coffee had become the most popular everyday beverage in continental Europe and throughout the Americas. The introduction of instant coffee in the 1950s further expanded the mass market for coffee. The fact that coffee drinking had been an established feature of Western culture for almost 500 years made it all the more remarkable that an appliance salesman from Brooklyn, New York could a create global chain of 21 000 coffee houses with a stock market value of $52 billion.

The rise of Starbucks: Wake up and smell the coffee

When Howard Schultz visited the Starbucks coffee store in Pike Place Market, Seattle, the coffee he sampled was a revelation. He joined the company in 1982 and, after a vacation in Italy, became convinced of the potential of Starbucks to sell brewed coffee as well as coffee beans in an effort to recreate the Italian coffeedrinking experience: 'I saw something. Not only the romance of coffee, but ... a sense of community. And the connection that people had to coffee - the place and one another.'33The owners of Starbucks were not convinced, so Schultz left to set up his own coffee house. Later, when the opportunity arose, Schultz acquired the original Starbucks business and began its transformation and expansion.

Schultz's vision for Starbucks was based not just on serving superior coffee but also on creating an entire experience in which Starbucks coffee houses represented a 'third place' - somewhere other than home and work where people could engage socially while enjoying the shared experience of drinking good coffee. The strategy comprised several elements:

• Acquiring coffee beans of a high, consistent quality and carefully managing the 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.'34Starbucks partnered with growers in order to promote best practice in coffee cultivation.

Employee involvement. The counter staff at Starbucks stores - the baristas - were central in creating and sustaining the Starbucks Experience. Their role was not only to brew and serve coffee but also to engage customers in the unique ambiance of the Starbucks coffee shop. Starbucks' human resource practices were based upon a distinctive view of the company's relationship with its employees. If Starbucks was to engage customers in an experience which extended beyond the provision of good coffee, 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 committed and enthusiastic communicators of the principles and values of Starbucks. This in turn required the company to regard its employees as business partners. Human resource practices aimed to attract and recruit people whose attitudes and personalities were consistent with the cultureof the company and to foster trust, loyalty and a sense of belonging that would allow them to project that culture. Starbucks' employees were selected for their adaptability, dependability, capacity for teamwork and willingness to further Starbucks' principles and mission. Training extended beyond basic operational and customerservice skills and placed particular emphasis on educating employees about coffee. Unique among catering chains, Starbucks provided health insurance for almost all regular employees, including parttimers.

• 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 wherever you came from, whatever the color of your skin, whatever your level of education. Offering healthcare was a transforming event in the equity of the Starbucks brand that created unbelievable trust 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.'35Starbucks' social role extended from the local level where 'every store is part of a community, and we take our responsibility to be good neighbors seriously', to its global presence: '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 integral to the overall ambiance. Starbucks' store design group was responsible for the furniture, fittings and layout of retail outlets and, following Schultz's dictum that 'retail is detail', subjected store design to meticulous analysis. Each Starbucks store was adapted to reflect its unique neighbourhood, while at the same time communicating a unifying theme: 'the clean, unadulterated crispness of the Pacific Northwest combined with the urban suavity of an espresso bar in Milan.'
• Starbucks' location strategy - its clustering of 20 or more stores in each urban hub - created a local 'Starbucks buzz' and facilitated 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 coffeetogo, Starbucks added drivethrough windows to some of its stores and built some new stores adjacent to major highways.
• The results were stupendous: between 1993 and 2007 Starbucks expanded across the US and into 51 other countries growing revenues from $160 million to $9,412 million. During 2005-2007, it earned an operating margin of 29% and a return on equity of 26.5%.36
• Crisis and renaissance

Schultz relinquished his position as Starbucks' CEO in 2000, while retaining his role as chairman. By 2007, even before the financial crisis had struck, problems were becoming apparent. In 2007, growth of samestore sales slowed dramatically and, during 2007-2008, profits slumped. After reaching a peak of $40 in October 2006, the share price declined by more than 75% over the next two years. Amidst increasing concern that the quest for rapid growth had compromised Starbucks' core values, Schultz returned as CEO at the beginning of 2008.Schultz's turnaround strategy comprised retrenchment and rebuilding. Planned new US store openings were cut back; 600 stores in the US were closed along with most stores in Australia. Companywide cost cutting measures were implemented and almost 6000 employees lost their jobs. Rebuilding comprised reaffirming Starbucks' values and business principles and reconnecting with its customers. Schultz reviewed operating practices to examine their consistency with the Starbucks' Experience and its reformulated mission statement: 'to inspire and nurture the human spirit - one person, one cup and one neighbourhood at a time'. Key changes included a return to 'handmade' coffee - replacing automated espresso machines with machines requiring individual cups from freshly ground beans - and revision of Starbucks' food menu, including withdrawing toasted breakfast sandwiches, whose aromas masked that of the coffee. Starbucks increased its commitment to corporate social responsibility.

Reconnecting with customers involved Schulz in worldwide travel to meet with Starbucks' employees ('partners') in concert halls and theatres to remind them of Starbucks' values, to reignite their drive and enthusiasm and to recount inspiring tales of the 'humanity of Starbucks'.37It also involved extensive use of social media and mobile technology. Facebook offered a key platform for building loyalty and community among customers. Starbucks pioneered mobile payments - using its partnership with Square to introduce credit and debit payments by cell phone.

Rekindling growth

Once Starbucks had stabilized, Schultz returned to the quest for growth - however, in contrast to 2000-2007, growth would be 'disciplined'. Revenue growth was sought in two main areas: the grocery trade and international markets.

In the grocery trade, Starbucks head of Channel Development and Emerging Brands anticipated that sales of Starbucks' products through thousands of supermarkets and other food retailers would 'eventually rival Starbucks retail store portfolio in terms of size and profitability'. A range of new products would augment established products, such as Starbucks and Seattle Best ground and whole bean coffees and Tazo Teas. A major new product was the Via, a new type of instant coffee, launched in February 2009 at $2.95 for a pack of three individual servings. Via used a patented process to 'absolutely replicate the taste of Starbucks coffee'. It achieved sales of over $100m in its first year.

A key feature of Starbucks' strategy for the grocery trade was to use its own coffee houses to introduce new products and then to roll them out to other retailers. In relation to Via, Schultz explained: 'If we took Via and we put it into grocery stores and it sat on a shelf, it would have died. But we can integrate Via into the emotional connection we have with our customers in our stores. We did that for six to eight months and succeeded well beyond expectations in our stores. And as a result of that, we had a very easy time convincing the trade, because they wanted it so badly.'38

In relation to international markets, Schultz viewed emerging markets as a huge opportunity for Starbucks. While Starbucks had struggled in some welldeveloped coffee markets - in Australia and the UK strong competition made profits elusive - in emerging markets it pioneered a novel caf experience that appealed to the Westernized tastes of the emerging middle classes. China and India were Starbucks' primary targets. China would have 1500 in 70 cities by 2015 and would be Starbucks' biggest market after the US. In India, a 50/50 joint venture with Tata Group was building a national chain of Starbucks coffee houses beginning in Mumbai, Delhi, Pune and Bangalore. In addition, Starbucks diversified its range of retail outlets.39During 2011-2012, it acquired premium juice maker Evolution Fresh, teashop chain Teavana and the California bakery chain La Boulange.stores

The future

During fiscal years 2014 and 2015, Starbucks looked set to continue its impressive growth. Analysts expected average annual revenue growth of 11% and earnings growth of 14%. Yet, despite acclaim for Schultz's remarkable success in restoring Starbucks' profitability and growth, doubts remained as to the longterm sustainability of its performance. Starbucks faced competition from multiple sources. Starbucks' success had spawned many imitators - both independent coffee houses and chains. In addition to speciality coffee houses, most catering establishments in the US, whether restaurants or fastfood chains, served coffee as part of a broader menu of food and beverages. Increasingly, these chains - notably McDonald's with its McCafs - were competing directly with Starbucks by adding premium coffee drinks to their menus. Starbucks also faced competition from premium coffee roasters such as the Italian firms Illycaff, Lavazza and Segafredo Zanetti, all of which were expanding their retail coffee houses. The gourmet coffee market was also seeing a revolution in homebrewed coffee: sales of espresso coffee makers (which used highly pressurized hot water) had grown rapidly - especially singleserve coffee pod systems pioneered by Nestl's Nespresso subsidiary.

Some commentators wondered whether Schultz's multiple initiatives risked repeating the errors of the past by losing focus on Starbuck's core identity and foundations of its competitive advantage. Did diversification into tea, juices, instant coffee and sales through the grocery trade fit with Starbucks' mission and capabilities?

Questions

1.Conduct a stakeholder analysis for Starbucks, based on the information available from the case study.

2.Identify a strategic capability which will help Starbucks to achieve a competitive advantage through an internal analysis.

3.Advise Mr. Schultz on whether and how Starbucks should amend its strategy to remain successful.

4.What is Starbucks global strategy? Apply Porter's National Diamond Framework to identify Starbucks comparative advantage.