These are what my teacher expects for a strategic analysis essay: "Strategic Case Analyses - Case studies provide important windows into the real problems that firms are trying to solve. Note, since these are messy problems there isn't necessarily a single precise answer (although there are better options than others). I am more interested in your analysis, interpretation, measurable recommendations, and justifications than I am at your arrival at a specific \"answer.\" Full credit can potentially be earned for a strategic recommendation that is somewhat different than what we conclude in class. Formatting guidelines for these assignments are: (1) Two (2) double-spaced pages, not including exhibits; (2) One (1) inch margins; (3) Twelve point (12pt) font (4) Exhibits (e.g. financial analysis, 5-forces analysis, VRIO analysis) are expected and should be included in an appendix. Be certain to appropriately reference your exhibits in the body of the case analysis. Case analyses must address the two questions assigned for that particular case (see schedule below) and apply the theory and concepts from the relevant chapter(s). To receive full credit the case analysis should: (1) demonstrate polished formatting, spelling and grammar, (2) answer the assigned questions, (3) support your position, (4) relate chapter concepts to evidence from the case and (5) make clear and concise recommendations expressing what you believe to be the appropriate course of action. Case analyses should not be a summary of the case or a list of issuesassume that your reader is familiar with the background of the case, and use case facts along with related chapter concepts specifically to support your arguments. Cases should be evaluated at the point in time in which they were written. See the Appendix (Page 343) in Barney & Hesterly (2015) - \"Analyzing Cases and Preparing for Class Discussions\" - for guidelines on preparing case analyses (and class discussions). Starbucks Study Questions 1. Can Starbucks create value through its diversification strategy? Will management be able to create valuable, rare, and imperfectly imitable economies of scope through its expansion into juice, tea, pastry, and new distribution channels or will the expansion be the downfall of Starbucks as it was in 2008? 2. Does Starbucks have a core competency in establishing differentiated, premium products in \"previously commoditized\" markets or is this merely an \"invented competency?\" 3. Do competitors represent a significant threat to Starbucks competitive advantage through their additions of customized, higher quality coffees to their menus? 4. Should Alex Poole sell his Grandma's Starbucks stock or keep it in her portfolio?" As what my teacher expects, we need write up an essay at least 2 pages which include: Five forces and VRIO analysis, few recommendations; and he expects somewhere in those two pages answer 4 above questions. Please let me know if you still have any question about this essay. Thanks Starbucks: An Alex Poole Strategy Case Alex sighed heavily and rubbed his tired eyes. It was the fourth time in the past hour he had read the letter from his grandfather. \"I don't know what to do,\" Alex thought. I wish Gramps could have put someone else in charge of his estate. What if I make a mistake? Then what will Grandma do?\" Alex Poole was a senior in college, working on a double major in Finance and Management, and a minor in Chinese. He hoped to land a job with a large, multinational company after graduation and move to Hong Kong or Singapore. He was determined to get his foot in the door at a Fortune 100 company - no matter how hard he had to work. Alex was used to hard work. For the past three years, he had held down a part-time job while attending school full time. His philosophy was that he could afford to go to school only if he earned enough money to cover his expenses, so he would find a way to do it. Alex shuffled some papers on his Grandfather's desk and pulled up the stock chart on Starbucks on his MacBook. \"This chart is amazing,\" he thought. After going public at a split-adjusted $0.53 per share in June 1992, the stock had taken off. A person who had invested $1,000 in Starbucks in the initial public offering would have had shares worth nearly $22,000 on the same day 10 years later. The stock continued its run until late 2006 when the combination of the Great Recession and internal problems caused it to fall from a high of $39.43 per share to a low of $6.80 per share in November 2008. The Board brought Howard Schultz, the iconic founder of Starbucks back as CEO in January 2008 as the company faltered. Schultz engineered a spectacular turnaround of the company. As of November 2013, the stock traded at over $80 per share. \"Gramps sure was a savvy investor. When everyone else was saying Starbucks was roasted, he bought the stock. \" Alex thought. \"But now what should I do? I could sell it and take profits, but Grandma will end up paying a lot of taxes. I don't know where to put the cash either. If I hold on to it and the stock goes down a lot, I'll feel terrible.\" Alex yawned and rubbed his eyes again. \"I guess I'd better get some sleep and try to figure it out tomorrow. I think I'll stop by the Starbucks on the corner in the morning and check it out. If it's crowded, I'll feel better.\" WRRAANNNN! WRRAANNNN! WRRAANNNN! WRRAANNNN! Alex groaned, rolled over and tried to hit the snooze button on his Clocky alarm clock. The Clocky expertly evaded his hand, rolled off the night table, and on to the floor. In order to cut off the ear-piercing shriek of the alarm clock, Alex was forced to roll out of bed and chase it around the room. Sarah, Alex's girlfriend, had given him the alarm clock after a couple of close shaves in which Alex slid into his seat next to her their 7:30AM investments class just in time to take the weekly quiz. The professor took missing a quiz as a personal affront and was likely to cold call the miscreant on multiple occasions to ensure the point about being prepared and on time for class was hammered home. Students rarely missed more than one quiz. Once Alex's brain woke up enough to process information, he realized that it was Saturday so he didn't need to rush to class. He took a quick shower, got dressed and laced up his Asics running shoes. After a brisk 3 mile run, he stopped in at the Starbucks on the corner for coffee and a snack. There was a line of customers waiting, but it was moving fairly quickly. Once he made it to the head of the line, the Barista at the register greeted him by name with a bright smile and asked how his day was going. Alex ordered a Venti Starbucks Blonde Roast with a slice of iced lemon pound cake. He'd heard a rumor that the chain planned to cut the lemon pound cake from the menu, but it was still available. Prior to the addition of the distinctly lighter flavored Blonde Roast, Alex rarely shopped at Starbucks. He was one of the estimated 40% of Americans that felt 1 Starbucks traditional coffee offerings were too dark and too bitter[1] for his taste. The launch of Starbucks Blonde Roast along with its recent \"converts wanted\" ad campaign had persuaded Alex to give the new coffee a try. Now, he was hooked on Starbucks and often joked about needing his \"Starbucks fix\" to make sure he had a good day. While he sipped his coffee, Alex pulled out his iPhone 4S and began to surf the Internet for recent news on Starbucks. After reading the company's press release on 3Q:13 earnings, he moved over to SeekingAlpha.com to try to gauge investors' reactions to Starbucks better-than-anticipated earnings. As usual, the opinions on the stock ranged from \"buy, buy, buy\" to \"great company but overvalued stock.\" \"That didn't help a whole lot.\" Alex thought. \"Gramps always said the company's management team, brand franchise, and business model were a lot more important than the stock's valuation or Wall Street sentiment. He thought a company's balance sheet was super important too. I guess I had better figure out what this company does besides serve a great cup of coffee. I know Gramps thought Howard Schultz was one of the best business leaders of all time, but I sure don't know much about him.\" Alex waved good-bye to the Barista and headed out the door. He intended to spend the afternoon in his university's library digging up as much information as possible on Starbucks. Over the next week, Alex had amassed a lot of information on Starbucks. After visiting the library, Alex had gone back to his apartment and pulled out his previously unread copy of Howard Schultz's book, \"Onward.\" He had been meaning to read it for months, but hadn't gotten around to it due to his schoolwork and Gramps' passing. In the course of his research, Alex found out that Howard Schultz was not the founder of the original coffee roasting and retail business named Starbucks. Schultz purchased the six Starbucks stores and the brand name for $3.8 million in 1987 from the company's founders. Alex thought about what he had read about Howard Schultz - how he had joined Starbucks as its head of marketing in 1982 and had fallen in love with Italian coffee bars at a trade show in Italy 1983. Schultz was enchanted by the connection between the customers and coffee bar employees. "I saw something. Not only the romance of coffee, but ... a sense of community. And the connection that people had to coffeethe place and one another," Schultz recalled in a 2013 interview with The Biography Channel. "And after a week in Italy, I was so convinced with such unbridled enthusiasm that I couldn't wait to get back to Seattle to talk about the fact that I had seen the future."[2] Schultz persuaded the owners of Starbucks to let him install a coffee bar in one location. Despite the success of the coffee bar test, Starbucks' founders were not interested in transforming the company into a restaurant. They had served coffee throughout the 1970s, and even had an espresso machine in the stores. Nevertheless, Starbucks' founders felt the restaurant industry was an unattractive one. Schultz reckoned that Italy's 200,000 coffee bars serving a population of just 55 million people meant the US market had huge potential to support his vision of what he called a \"third place.\" The \"third place\" would be place outside of the home and the office that would allow people to congregate and gain a sense of community. Schultz left Starbucks to start his own coffee business, Il Giornale in 1985. Two years later, he purchased Starbucks and merged it with Il Giornale. \"The weird thing about it,\" Alex thought \"is that anyone would want to be in the coffee business in the 1980s. From what I can tell, it was a pretty unattractive market.\" Alex glanced down at the chart on US coffee consumption [3] he had put together and shrugged his shoulders. According to the USDA data, Americans consumed about 33 gallons of coffee per capita in 1970. By 1987, annual per capita coffee consumption was down to about 27 gallons. That translated into a large drop in the number of cups of coffee Americans drank per day. The decline had started way back in 1962, when Americans consumed 3.12 cups of coffee per day. By 1980, 2 average per capita coffee consumption was down to about 2.0 cups per day. US average per capita coffee consumption fell to a new all-time low of 1.67 cups per person per day in 1988. [4] \"How could someone look at a declining product market - a market in which in one generation usage had fallen to 52% of the population from nearly 75% of Americans [5] - and see a phenomenal business opportunity?\" Alex wondered. Moreover, the competition at retail was brutal. Three large companies -- Procter & Gamble (Folgers), General Foods (Maxwell House, Sanka), and Nestle (Nescafe, Taster's Choice, Hills Brothers) -- dominated the retail coffee business with a combined market share of over 80%. [6] As coffee consumption declined, the roasting companies often relied upon promotions and price cuts to stimulate demand. Moreover, retail prices tended to be tied to volatile coffee commodity prices, as roasters were unable to hold off demands by powerful supermarket buyers to cut prices when bean prices fell. To protect margins, roasters hiked retail prices when bean prices soared, but the price hikes hurt demand and were difficult to maintain. Although discerning Americans began to get interested in high quality coffees at the beginning of the decade, specialty coffee only accounted about $750 million in sales in 1990 or roughly 10% of the market, up from 3% of the market or $210 million in 1983[7] and $50 million in 1979. [8] Source: USDA Economic Research Service Against that backdrop, Howard Schulz invented the modern Starbucks - transforming the coffee roasting company into a retailer that was backward vertically integrated into coffee bean purchasing and roasting. Alex reflected on the incredible success the new concept had enjoyed during its first 20 years. By 1997, Starbucks revenues had grown to $975 million and the balance sheet showed positive net cash position (cash minus debt) of $42 million. About 86% of revenues were derived from the company's 1,325 retail stores. Starbucks tested sales of coffee through 10 West Coast supermarkets - expanding to 4,000 grocery stores the next year. By the end of its next decade, Starbucks had over 15,000 company-owned and licensed stores. 2007 revenues came in at $9.4 billion accompanied by operating income of over $1 billion for an operating profit margin of 11.2%. Return on invested capital was an impressive 17.7% in 2007 - despite the company's whopping $282 million in cash. The company's average annual sales 3 growth of 57% along with its 65% average yearly jump in operating profits over the decade put Starbucks squarely in an elite class of American success stories such as Wal-Mart. \"That's right when things turned sour for Starbucks.\" Alex thought. Howard Schultz stepped down as CEO in 2000 and took a much less active role in day-to-day operations as the company's Chairman. Store traffic began to slow early in 2007. By Fall 2007, cracks appeared in Starbucks business model. The company announced in November 2007 that traffic at its US stores had fallen for the first time. The company also lowered its projected store openings for fiscal 2008 and lowered its estimates on comparable store sales growth (sales growth in stores open 12 months or longer). Starbucks was feeling the effects of the stagnant economy. At the same time, Starbucks was struggling to offset rising dairy and labor costs, and trying to fight off strong competitive pressure from McDonalds and Dunkin Donuts. The stock dropped nearly 50% in 2007. \"Comps,\" Alex thought. \"Comps were the company's downfall - at least that's what Schultz said in his book. Alex's Grandfather had given him a copy of the book last Christmas. He had inscribed, \"To Alex, I hope Howard Schultz's extraordinary leadership and his passion will inspire you. Love, Gramps.\" Alex choked up a bit thinking about Gramps and how much he had tried to stand-in for Alex's Dad. Alex had lost his Dad in a car accident, when Alex was in the 3rd grade. Alex cleared his throat and went back to reviewing his notes on Starbucks. \"Comps had gotten really ugly in 2008.\" Alex thought. Source: Starbucks 2012 10-K. Schultz and the Starbucks team spent months diagnosing Starbucks' problems. As Schultz noted in Onward, \"The more rocks we turned over, the more problems we discovered.\"[9] Operating margins had slumped from a peak of 12.3% in 2005 to 11.2% in 2007, but earnings still increased. That all changed in 2008, when operating earnings plunged nearly -27% excluding restructuring charges, and -52% including charges. Schulz went on to say, \"From where I sat as 4 CEO, the pieces of our rapid decline were coming together in my mind. Growth had been a carcinogen. When it became our primary operating principle, it diverted attention from revenue and cost-saving opportunities, and we did not effectively manage expenses such as rising construction costs and additional monies spent on new equipment...Then, as customers cut their spending, we faced a lethal combination - rising costs and sinking sales - which meant Starbucks' economic model was no longer viable.\"[10] Although Starbucks had a sizable presence in international markets, the US still accounted for 76% of company revenues. The US had to be fixed in order to turn around the company. Schulz spent the next couple of years refocusing Starbucks on the coffee business. He cut breakfast items from the menu, and got managers to think about customer service and selling coffee. Schultz closed all the US stores for a day and retrained baristas on preparing the perfect cup of espresso. He also replaced top management and built up the company's capabilities in supply and logistics. The management team tackled major inefficiencies in the supply chain as well as in the stores. Stores were redesigned to improve efficiency and reduce on the job injuries. He also emphasized the Starbucks experience and the importance of being passionate about coffee. Despite significant pressures from Wall Street, Schultz refused to drop health care benefits for part-time employees as he recognized the barista was one of the fundamental drivers of company performance. Starbucks also closed nearly 1,000 underperforming stores and laid off about 12,000 workers. It slowed dramatically the rate of store expansion from about 1,300 per year in the US to about 300. After a painful few years, the company came roaring back with outstanding results. Schultz vowed never to allow the company to make the same mistakes again. Alex Meets With His Broker Two weeks later, Alex pushed his books aside and opened his Starbucks folder on his MacBook. He sipped his Tall Salted Caramel Mocha and looked around the Starbucks store. There was a steady stream of customers even at 2:00 in the afternoon on a Monday. Alex had arranged a meeting with his Grandfather's stockbroker, and the broker was 10 minutes late. He glanced down at his blue steel ESQ Movado watch, checked the time for the hundredth time, and drummed his pen on the table impatiently. Gramps' broker was an old pro - a self-made man with a flair for stock picking. Gramps and the broker, Harry Wallace, had been close friends. They were both members of the local Rotary Club and avid golfers. \"Alex, how've you been?\" Alex looked up and saw Harry Wallace walking toward him, hand outstretched. After the two had exchanged greetings and small talk, Alex got down to business. \"Harry, I'm trying to sort out Gramps' portfolio. His largest position is in Starbucks, so I started there.\" Alex said. He went on, \"I need to figure out whether to sell the stock or not.\" I've done quite a bit of research on it already but it would help if you filled in the details on the company's strategy for me.\" Alex said. \"Sure, I'd be happy to.\" Harry said. \"The stock had been hitting all-time highs until it hit a bump in the road when an arbitrator decided that Starbucks would have to pay Kraft $2.23 billion plus $537 million in attorney's fees to settle a 3-year old fight between the two companies. Starbucks and Kraft had been partners in the packaged coffee business since 1998. Starbucks supplied the coffee and the brand name. Kraft supplied the distribution to mass retail outlets. In 2004, the two companies re-negotiated their contract and extended it to 2014. In 2010, Starbucks terminated the agreement and claiming Kraft had not upheld its part of the bargain and had failed to work closely with it on marketing decisions and customer contacts. [11] Harry went on to say, \"Starbucks claimed Kraft had hurt the performance of the Starbucks brand at retail, but Kraft pointed out that it had grown the company's packaged coffee business from$50 million in sales to $500 million in sales. Starbucks maintained terminating the Kraft agreement early was the right thing to do to 5 accelerate the growth of its mass retail business.\" Harry added, \"The stock sold off -1.5% on the news before rebounding the next day as Starbucks convinced investors that it had ample funds to make the payment.\" The company's revenue and earnings growth had been pretty astonishing over the past couple of years as it pulled out of its 2008, 2009 slump. In the short term, the risk in the stock was that investors are looking for another positive earnings surprise when the company commented on holiday sales in a few weeks in Harry's opinion. \"I'm not all that interested in the short term outlook. You know Gramps always focused on a company's long term prospects.\" Alex said. \"Tell me how things look for Starbucks over the next couple of years.\" \"Starbucks has approached long-term growth in a unique way. The way I see it, the company's so-called blueprint for growth has a lot of potential to keep the company's growth high. \" Starbucks Blueprint For Profitable Growth In late 2010, Starbucks management announced plans to create long-term shareholder value through a new \"blueprint for profitable growth.\" Howard Schultz said, \"Our next phase of growth will come from extending the Starbucks Experience to our customers beyond the third place to every part of their day, through multiple brands and channels. Starbucks US retail business and our connection with our customers form the foundation on which we build all of our lasting assets, and we will combine that with new capabilities in multiple channels to accelerate the model we've created that no other company can replicate.\" Starbucks Chief Financial Officer, Troy Alstead, went on to say, \"Starbucks has reached a critical juncture as we move from a high unit growth specialty retailer focused on coffee in our stores, to a global consumer company with diversified growth platforms across multiple channels.\" [12] In short, Starbucks intended to introduce new products and brands in its Starbucks retail stores, establish a base of customers for the new items, and later expand distribution to mass-market channels like grocery stores. The company meant to transform itself from a specialty retailer selling a few coffee and tea products through mass outlets into a global consumer products powerhouse. To do so, Starbucks planned to augment its proven model for new brand development with vertical integration, and acquisitions. Management was confident it would be able to build a stable of billion dollar brands by following the model Starbucks developed with two key products - Frappuccino and VIA. Frappuccino was a coffee blended with ice and milk. The sugary beverage became enormously popular with Starbucks devotees immediately after its summer 1995 introduction. Frappuccino built up a following in Starbucks stores before Starbucks and Pepsi pushed a bottled version of the product into mass retail outlets. Schultz credited a large part of Frappuccino's retail success to Starbucks having the \"unique opportunity every single day to reinforce the equity of the Frappuccino blended product in our stores.\"[13] The $2 billion global brand commanded nearly two-third of the US iced coffee category in 2012. Similarly, Starbucks introduced VIA instant coffee in its stores in 2009. According to Howard Schultz, the product introduction marked the first innovation other than in packaging in the instant coffee market in 50 years. [14] Schultz regarded the category as one that was \"ripe for renewal.\"[15] Although the US market for instant coffee was relatively small at about $700 million in 2009, Shultz regarded the product extension as a critical one for the company. He felt it would spur innovation within the company, put Starbucks into new retail channels like specialty sporting goods stores, and support the company's objective to be the undisputed coffee authority. 6 The instant coffee market accounted for about 40% of worldwide coffee consumption and generated an estimated $21 billion per year in sales. Higher end instant coffees generated less than 20% of instant coffee sales globally, which suggested to Schultz the category was a candidate for \"premiumization\" - just as the US coffee market had been prior to Starbucks entry into the market. In addition, instant coffee consumption had grown at a much faster clip in emerging markets than in the US, where sales of the product were flat. Global Coffee Review magazine pegged worldwide instant coffee growth at 7%-10% and 15%-20% in emerging markets from 2000-2012. [16] Coffee drinkers in emerging markets favored instant or soluble coffee over brewed coffee, because consumers often could not afford special coffee making equipment. Starbucks management reckoned that it could establish the VIA brand in the US in its own stores, expand into mass retailing, and then move the brand into Starbucks stores in the UK and Japan, and in emerging markets. (Instant coffee accounted for about 80% of all coffee sales in the UK and 63% of sales in Japan.) Schultz believed Starbucks could use technology to produce a cup of instant coffee that would taste the same as a cup of Starbucks brewed coffee. The challenge for Starbucks was three-fold. First, the company had to overcome the stigma of instant coffee being associated with weak, low quality, poor tasting coffee in the US. Second, Starbucks had to convince consumers to pay a hefty premium for VIA, which retailed for $0.82-$0.98 per serving. Other instant coffees could be purchased for as little as $0.04-$0.07 per serving of coffee. Folgers Instant Coffee Singles were priced at $0.20 per serving. Third, the company had to overcome substantial competition in the segment, once it launched the product into supermarkets and other mass outlets. In order to change consumer perceptions of instant coffee, the company employed extensive use of sampling in its own stores to encourage consumers to taste VIA side by side with Starbucks brewed coffee. The taste tests continued for a year before Starbucks rolled out the product into grocery and other mass retail stores. The company also sent baristas into its network of 3,000 licensed store-within- a- store Starbucks locations in retailers such as Target and Safeway to give out millions of VIA samples to customers. Starbucks created free publicity for the brand by inviting reporters to participate in blind taste tests comparing Starbucks brewed coffee to VIA instant coffee. The evidence from the taste tests overwhelmingly supported Starbucks' claim that VIA was a convenient, less expensive version of a Starbucks coffee rather than a low quality, watered down version of \"real\" coffee. (An 8-ounce serving of brewed coffee in Starbucks stores cost $1.50 in 2009.) In April 2012, the Huffington Post conducted a blind taste test of instant coffees and concluded that VIA Columbia was not only the best instant coffee on the market, but was indistinguishable from regular brewed coffee. [17] Starbucks had to compete against well-established brands in the US and elsewhere. Nestle, the worldwide leader in instant coffee and inventor of the product, held about 34% of the US instant coffee market in 2010. Kraft General Foods (Maxwell House) was number two in the market with a share of about 26%, followed by JM Smacker (Folgers) with about a 21% share. Nestle had used its first mover status to its advantage - holding 51% of the global market for instant coffee. In fact, Nestle was the largest manufacturer of packaged coffee in the world with nearly a 22% global share due largely to its huge presence in the instant coffee market. Nevertheless, Starbucks grabbed more than 10% of the US instant coffee market in VIA's first year on the market. Starbucks aimed to turn VIA into a $1 billion dollar brand by leveraging its international presence and taking on Nestle head to head. The company launched VIA in the Chinese market in April 7 2011 where Nestle controlled 75% of the instant coffee market. Instant coffee accounted for 80%-90% of coffee consumption in the $11.3 billion Chinese coffee market. [18] Still, by 2012, VIA had generated $300 million in annual worldwide revenues through 80,000 distribution points in 14 countries. Evolution Fresh Juice Starbucks acquired premium juice brand, Evolution Fresh Juice, for $30 million in cash in late 2011. The acquisition was Starbucks' first major plank in a new health and wellness platform for the company. Starbucks intended to expand the brand by launching a chain of juice bars, selling the line through Starbucks coffeehouses, and expanding the brand's retail distribution. Howard Schultz commented, \"This is the first of many things we're going to do around health and wellness...We're not only acquiring a juice company, but we're using this acquisition to build a broad-based, multi-million-dollar health and wellness business over time.\"[19] As it had done in the coffee and instant coffee markets, Starbucks aimed to \"reinvent the $1.6 billion superpremium juice segment.\" Starbucks claimed the company would be able to take \"a currently undifferentiated, commoditized product segment and introduce a unique, high-quality product to redefine and grow the super-premium juice market.\"[20] According to Howard Schultz, "Our intent is to build a national Health and Wellness brand leveraging our scale, resources and premium product expertise. Bringing Evolution Fresh into the Starbucks family marks an important step forward in this pursuit.\" [21] By October 2013, Evolution Fresh juice was sold in 8,000 retail locations - up from 2,000 in 2012 -- as well as in four standalone Evolution Fresh stores. The company opened a $70-million factory in Rancho Cucamonga, CA in late 2013 to support the rollout of Evolution Fresh products across the US. Sales of fruit and vegetable juices and juice drinks generated an estimated $20 billion in annual revenues in 2012. Industry sales had not grown appreciably for over five years. Moreover, per capita juice consumption had declined as Americans turned to other beverages like energy drinks and fortified waters to slake their thirst. Per capita juice consumption declined from 6.1 gallons in 2006 to 5.17 gallons in 2011. [22] In contrast, the super premium juice segment had boomed, and sales jumped to an estimated $2.25 billion in 2013 as \"juice cleanses\" gained popularity and manufacturers touted the health benefits of cold pressed juices. Norman Walker supposed \"health expert\" and sometime mountebank invented cold pressing in 1910. His Norwalk hydraulic juicer was still considered by many to be the best on the market in 2013, and retailed for a whopping $2,000. Cold pressing pulverized fresh fruits and vegetables in order to extract all of the juice from the produce. Evolution Fresh Juice and others placed cold pressed juices in bottles and then subjected the filled bottles to high pressure while floating in water. The high-pressure pascalization (HPP) process stunted the growth of pathogens, and extended the shelf life of the juice from a few days to about 3 weeks. Mass-market brands such as Tropicana relied on high heat pasteurization to kill pathogens in juice. Fans of cold pressed juice claimed it was healthier than pasteurized juices. While there was little scientific evidence to support manufacturers' claims of superior health benefits, so-called juicers asserted the flavor of cold pressed juice was \"closer to fresh\" than mass market stalwarts like Minute Maid or Tropicana. Critics of cold pressing were concerned about the product's safety. They noted that Odawalla juice, a leader in the cold pressed juice category, introduced flash pasteurization after a batch of apple juice was contaminated with E. coli in 1996. The contaminated apple juice had caused at least 66 people to become ill, and reportedly led to the death of a 16-month old child. In fact, the FDA had begun to push cold pressed juice makers to include HPP or an alternative process as a way to increase the product's safety. Given that each HPP machine cost $800,000 to $2 million, it was difficult for small juicers to jump on the HPP bandwagon. [23] Nevertheless, an E.coli outbreak could generate a consumer backlash against all cold pressed juices. 8 Despite Starbucks' ambitious plans, it was not clear that the juice market could be characterized as \"commoditized.\" The category was bombarded annually with product introductions touting new flavor combinations and health benefits. Some of the more exotic juices introduced into the mass market in recent years included coconut water, acai, beet juice, and Suavva Cacao. Ironically, health concerns had stymied growth in the mass market as consumers became concerned about the high sugar content in juices. While whole fruits had been shown to reduce the risk of type 2-diabetes, the high sugar content in fruit juices had some consumers shying away from the product due to concerns over obesity. PepsiCo had scrambled to find a solution to the sugar problem. While the company continued to experiment with new sugar-free sweeteners, it launched Tropicana Light and Trop50 products under the $6.2 billion Tropicana brand. Tropicana Light was sweetened with sucralose, and Trop50 was sweetened with stevia. Trop50 products also contained only 42%-43% juice as the liberal additional of water allowed PepsiCo to bring down calorie count significantly and increase gross margins. While consumers responded favorably to the new products, PepsiCo management knew the secret to long-term success lay in continued product innovation in sugar replacement. PepsiCo was determined to find a natural sugar replacement to protect its enormous global beverage business. Juice prices ranged from a few cents per ounce for mass brands to well over $1 per ounce for super premium products. In the super premium segment, large food and beverage companies trying to capitalize on the higher growth in the segment owned the top four brands. Odawalla (acquired by Coca-Cola in 2001), Naked Juice (PepsiCo), Bolthouse Farms (Campbell Soup) and BluePrint (Hain Celestial Seasonings) together controlled an estimated 51% of the super premium market. The juice bar business also was crowded with competitors trying to take cash in on demand for healthy foods. Sales at juice bars and smoothie chains nearly doubled between 2004 and 2012, according to Barron's magazine. Barron's pegged sales at the 6,200 juice bars and smoothie operations at about $2 billion. The top 5 juice and smoothie chains -- Jamba Juice, Freshens, Maui Wowi, Smoothie King, and Orange Julius accounted for over 50% of all of the juice and smoothie retail locations in the US in 2012. The top 10 operators owned or had franchised about two-thirds of the industry locations. [24] Rivalry appeared to be fierce as the large chains attempted to fight off small local competitors who often positioned themselves as the most \"authentic\" purveyor of juices. Marcus Antebi, CEO of Manhattan's trendy Juice Press, commenting on Organic Avenue's appointment of a non-vegan CEO to the New York Daily News said, \"They'll no longer represent the glossy, sexy brand that they were five years ago, before Juice Press smothered them. I actually water boarded them with green juice.\" [25] US Tea Market Quick as thought the ships were boarded Hatches bust and chests displayed; Axe and hammers help afforded, What a glorious crash they made. Quick into the deep descended, Cursed weed of China's coast; Thus at once our fears were ended Freemen's rights shall ne'er be lost.[12] Anonymous American Balladeer Commemorating the Boston Tea Party [26] 9 According to some sources, coffee's popularity in the US relative to tea stretches back to the Revolutionary War and the Boston Tea Party. In protest to unfair taxation and the granting of a tea monopoly to the East India Company by British Parliament, colonists snuck on board three tea ships (the Dartmouth, the Eleanor, and the Beaver) on December 16, 1773 and dumped 90,000 pounds of tea into Boston Harbor. Colonists went on to boycott British imports, including tea, for many years. Coffee and herbal teas supposedly became popular due to the boycott as substitutes for the colonists' favorite beverage. Retail and foodservice sales of tea generated about $6.5 billion in revenues in the US and $40 billion worldwide in 2011. Tea was the second most consumed beverage worldwide, behind water. However, tea remained distinctly less popular with Americans than coffee. The beverage came in at a distant #6 among American favorites behind soft drinks, water, coffee, milk, and beer (in that order). Nevertheless, per capita consumption of tea grew about 5% from 2001 to 2011 as Americans sipped slightly more than 7 gallons of tea per person. In contrast, per capita coffee consumption fell (1%), and carbonated soft drink consumption plunged 16% over the period. [27] As tea consumption increased, the number of US tea shops had jumped from about 1,500 in 2009 to approximately 4,000 in 2011. Costs to open a single tea shop were relatively low with some tea shop owners estimating it cost $10K-$25K (comparable with opening a non-franchised pizza place) and others coming in at $100,000-$250,000 (a bit lower than opening a franchised pizza restaurant). [28] Starbucks had long been a player in the tea market with its Tazo tea brand, which it had acquired in 1999 for $8.1 million. The company sold Tazo tea in grocery stores and other mass outlets as well as in Starbucks coffeehouses. By 2012, Tazo overall was a $1.4 billion brand for Starbucks. Although the company had been successful in establishing a large tea brand, tea had never been a focal point for Starbucks until it acquired Teavana Holdings. Starbucks announced it would purchase Teavana Holdings for $620 million in cash in November 2012. Teavana was the largest tea shop operator in the US with 300 retail stores mainly in shopping malls. Founded in Atlanta in 1997, Teavana sold high-end loose leaf teas exclusively through its own stores. Teavana's mission was to establish its brand \"as the most recognized and respected brand in the tea industry by expanding the culture of tea across the world.\" [29] As noted by Seattle's Crosscut.com reporter, Ronald Holden,\"Just as a wine aficionado can wax on (and on and on) about grape varieties and legendary vintages, a devotee of tea can cite literally hundreds of varieties of camellia sinensis leaves (white, green, oolong, black), and their methods of \"withering\" (steaming, pan-firing, shaking, bruising, rolling, drying, oxidizing). Then there are the tea-like drinks that don't contain Camillia sinensis, like prepared herbal infusions, rooibos (red teas) and the green-powdered mats.\"[30] Teavana management identified the key elements of its strategy as 1. developing and sourcing the world's finest assortment of premium loose-leaf teas and tea-related merchandise; 2. locating stores in high traffic areas primarily in shopping malls and lifestyle centers; and 3. creating a \"Heaven of Tea\" retail experience for customers. Teavana's emphasis on training \"passionate and knowledgeable teaologists\" to \"engage and educate customers about the ritual and enjoyment of tea\" [31] allowed it to charge premium prices and develop a loyal following in the US. Indeed, Teavana's approach to the market had been a very successful and profitable one with sales soaring to $168.1 million and operating profits of $32.6 million. Teavana's highly productive stores generated nearly $1,000 per square foot in sales and comparable store sales growth of nearly 9% in 2011 and over 11% in 2010. New stores had an average cash payback period of just a year and a half. The retailer believed it could drive tea category growth in the US 10 by educating consumers about the health benefits of tea and the culture of tea drinking. Each Teavana store included the \"Wall of Tea\" which allowed customers to \"experience the aroma, color, and texture\" of any of the store's approximately 100 different varieties of single-estate and specially blended teas. [32] Like Starbucks and its coffee culture, Teavana emphasized a company culture that celebrated a passion for tea. To that end, Teavana had a policy of promoting from within company ranks, extensive employee training, and teaologist career development. Management recognized that retail success was heavily dependent upon teaologists in the same way as Starbucks' success rested upon the barista. Starbucks intended to develop Teavana as a major growth platform beginning with the US market. In late October 2013, Starbucks opened the first Teavana tea bar on the Manhattan's ultra-wealthy Upper East Side. Howard Schultz told reporters the company expected 1,000 tea bars in the US over the next five years.[33] Schultz was confident that Starbucks could transform the US tea market with Teavana in the same way it had transformed the coffee market. Some industry observers were not as sanguine about Teavana's prospects. Brian Sozzi of Belus Capital Advisers noted to Forbes magazine, \"I don't believe Teavana will ever grow into what the Starbucks brand has become for one simple reason: tea lacks the major caffeine count,\" he added. \"That sounds silly, but the bottom line is that in this day and age of frantic tech-driven lifestyles, people want to run on 100 mg of caffeine, and they will trade taste to make that happen.\"[34] In fact, the contrast between Teavana and Starbucks products was stark at the cultural level. Coffee typically was associated with early morning commutes, and midday pick-me ups. While Starbucks had done a great job creating a welcoming atmosphere in its coffeehouses, the pace of each shop was quick and energetic particularly during the morning rush hour. Tea culture was one associated with tranquility and relaxation. Teavana's new tea shop invited customers to slow down and find some quiet time while their tea brewed. According to a University of Northumberland study consisting of 180 hours of testing and 285 cups of tea, it took 8 minutes to brew the perfect cup of tea - 2 minutes of soaking the tea bag in boiling water (100 C or 212 F), removal of the tea bag, addition of milk, and a 6 minute wait for the temperature to drop to 60 C or 140 F.[35] La Boulange Caf & Bakery Starbucks acquired a small chain of San Francisco bakeries for $100 million in third quarter 2012. The chain, La Boulange, included 19 store locations. Starbucks intended to roll out La Boulange products to 17,000 Starbucks coffeehouses by the end of 2013. La Boulange Caf's major investor, commented in a release about the sale, "We have confidence that Starbucks will stay true to the La Boulange brand while bringing the romance of an authentic French bakery to consumers across the United States." [36] Long criticized for having mediocre food, Starbucks nonetheless sold $1.5 billion in food items annually. About one-third of purchases in the US included a food item. [37] According to Pascal Rigo, Vice President of Starbucks Food Division and Former Owner of La Boulange, food had been an afterthought at Starbucks. [38] The company planned to significantly upgrade the quality of its food and add lunch items to the menu under the La Boulange banner. Baked items were to be displayed on pink paper in the coffeehouse's glass cases and served warm. About 25% of La Boulange items would be customized for local markets. Starbucks hoped to both take a bigger slice of the lunch business and compete more aggressively with fast growing Panera Bread in the US. Starbucks Loyalty Card Starbucks launched \"My Starbucks Rewards\" in 2009 as a way to create value for its most loyal customers. Customers received points for each purchase regardless of the amount they spent. Points were redeemable for free Starbucks drinks and food. By early 2013, Starbucks had 4.5 11 million rewards program members. The company intended to double its reward program membership to 9 million members by fall 2013. To that end, Starbucks announced Teavana shoppers were eligible for My Starbucks rewards beginning in April 2013. Starbucks customers who purchased Starbucks packaged products in grocery stores and other retail outlets also were eligible for My Starbucks Rewards by registering for the program and entering product codes on the Internet. Starbucks hoped to create value across its brands and distribution channels through its unique loyalty program. That evening, Alex sat down and thought about what he had learned about Starbucks over the past few weeks. \"Well, at least mid-terms are over.\" Alex thought. He sighed wearily. The past few days had gone by in a blur of exams, studying, and not enough sleep. His girlfriend, Sarah, had gotten exasperated with him for waiting until the last minute to study for their investments midterm. He was sure she had aced the exam, but was less confident about his own score. Alex had gotten bogged down studying for his mid-term in his third year Mandarin course, and hadn't spent much time on studying for investments. The Mandarin class was a lot harder for Alex than his finance courses, but the investments class was a tough one. \"Sarah was right. I shouldn't have put studying off for so long.\" To top it off, his strategy mid-term also had been a difficult one. His strategy professor put a lot of emphasis on applying concepts to real company situations. \"It was tough to apply concepts on a couple of hours of sleep.\" Alex thought ruefully. \"Well, there's nothing I can do about it now. I need to focus on finishing this Starbucks analysis, because I am just going to get busier as the term goes on. I haven't even thought about the competition. I need to figure out what McDonald's and Dunkin Donuts are up to.\" Alex thought. Bitter Dregs: Starbucks Rivalry With McDonald's With $35.6 billion in US sales in 2012, McDonald's was the largest quick service restaurant in America and nearly three times larger than the number 2 fast food operator, Subway. Coffee accounted for an estimated 6%-7% of McDonald's US sales or $2.1-$2.5 billion in annual revenues. Despite its substantial coffee sales, Starbucks management did not publically acknowledge McDonald's as a competitor. On the surface, the world's largest fast food franchise had little in common with Starbucks. Known for efficiency and low costs, McDonald's was the Wal-Mart of fast food. Starbucks was a premium purveyor of specialty coffees. McDonald's empire was built on standardization. Starbucks ran on customization. Nevertheless, McDonald's was long known for serving good, inexpensive drip coffee. Moreover, McDonald's dominated the breakfast market with over a 25% share. The company announced in mid-2009 the rollout of McCafe specialty coffee shops within 11,000 of its 14,000 US locations. Developed in Australia in 2001, the McCafe brand and McCafe shops gave McDonald's an entry into the pricey and profitable premium coffee segment just as consumers felt the pinch of the Great Recession. As McDonald's gained momentum in the US coffee market, Starbucks retaliated by announcing it would expand distribution of Seattle's Best Coffee to Burger King and Subway restaurants as well as AMC movie theaters and other mass market outlets. Starbucks had acquired the brand for $72 million in 2003, but had done little to expand Seattle's Best market presence since the acquisition. Starbucks' management commented that the move into fast food enabled the company to further its objective to offer great coffee everywhere. Industry observers saw the move as a direct response to McDonald's market share in-roads. Morgan Stanley's John Glass noted to Time magazine, \"...it makes sense to partner with Burger King and Subway against a common enemy: McDonald's."[39] At the time of the rollout announcement, McDonald's also announced its intentions to launch frozen coffee drinks in its restaurants during summer 2010. The Frappe retailed for $2.29-$3.29 compared to $3.00-$5.00 for Starbucks' Frappuccino.[40] 12 Whether Starbucks wanted to admit it or not, McDonald's new product introductions placed it squarely in competition with Starbucks in multiple segments of the coffee market. In fact, McDonald's had garnered close to 13% of the US coffee market by 2012. McDonald's US coffee sales had soared 70% since the introduction of McCafe. The company introduced a pumpkin spice latte in fall 2013 and announced it would introduce white chocolate flavored mocha at the end of November 2013. Both product launches were aimed directly at Starbucks where pumpkin spice latte was a perennial customer favorite. McDonald's had struggled with execution in the lucrative specialty coffee market with many McDonald's customers complaining about lengthy waits in the drive-through line resulting from the increased time to make the customized drinks. Nevertheless, the coffee business remained a bright spot in McDonald's otherwise lackluster US operations. In November 2013, McDonald's announced it would partner with Kraft to bring a McCafe line of packaged coffees to supermarkets and other mass retail outlets. McDonald's CEO Don Thompson told investors that coffee was one of the fastest growing product categories in its worldwide beverages business. Thompson also told investors that McDonald's did not yet have what he called \"its fair share\" of the business. Kevin Newell, chief brand and strategy officer for McDonald's US, noted that 70% of US coffee consumption occurred at home. He characterized the move into supermarkets with Kraft as a way to build awareness of the McCafe brand and drive sales in McDonald's restaurants. [41] Analysts noted that McDonald's had 4,200 McCafe shops in international markets - including standalone locations as well as those inside McDonald's restaurants - and intended to add another 350-400 locations in 2014 alone. Death of the Doughnut: Dunkin' Donuts -- A Beverage Company Dunkin' Donuts CFO, Paul Carbone, told investors in mid-2013 that Dunkin' Donuts had moved to acknowledge publically that the chain was no longer a doughnut company. Carbone told analysts, \"We're a beverage company.\"[42] Dunkin' Donuts reported that 58% of its franchise revenues were derived from espressos, Duncacinnos, Coolattas and about two dozen other beverages. The shift away from doughnuts to coffee and coffee drinks began in about 1995. Dunkin' Donuts launched a line of flavored coffees to respond to Starbucks expansion into its home market -- Boston. At the time, Dunkin Donuts was known primarily for its doughnuts and an ad campaign that featured \"Fred the Baker.\" Fred's catch phrase was \"It's time to make the doughnuts.\" According to Time magazine, Dunkin Donuts kicked off in 2006 \"the most significant repositioning effort in the company's 55-year history.\" Its new ad slogan was \"America Runs on Dunkin.\" Time noted in the same article, Dunkin' Donuts had positioned its mostly-East Coast coffee business as \"fuel\" for America rather than a lifestyle choice like Starbucks. [43] With lower prices and an emphasis on practicality, Dunkin' Donuts appealed to the every man in a hurry. Dunkin' Donuts share of the US coffee and snack shop market was about 25% in 2012 compared to Starbucks share of about 33%. Nevertheless, Dunkin's core business remained in the East. Very few of Dunkin's 7,300 US locations were east of the Mississippi in 2012. However, Dunkin Donuts management aimed to change that by moving into California with 1,000 Dunkin' Donuts shops. (Starbucks had over 2,000 locations in California in 2013 - its largest market by far.) Overall, Dunkin' Donuts also planned to increase the number of Dunkin' locations in the US to about 15,000 by 2020. Dunkin' Donuts overall expansion plans were likely to put it increasingly in head-to-head competition with Starbucks. Starbucks planned to add about 1,500 stores to its US store base of about 11,000 coffeehouses. Industry observers noted that Dunkin' Donuts expansion into California marked its third attempt to crack the market in the past thirty years. The chain had about a dozen stores in 13 California until the late 1990's, according to Bloomberg BusinessWeek. [44] Dunkin' tried to reenter the Sacramento market in 2002, but pulled out quickly. [45] Conclusion Alex realized that he hadn't spent enough time thinking about the questions that needed to be answered in order for him to make a decision on the stock. He spent an hour compiling questions, scratching them out and condensing them into their most fundamental elements. At the end of the exercise, Alex realized that he needed to answer three questions in order to make a decision about whether to sell the stock or not. Could Starbucks successfully expand beyond the coffee shop business in a meaningful way without destroying its core business? Could the company create value through its diversification strategy? Would McDonald's and Dunkin Donuts eat into Starbucks business enough to slow the company's growth rate? 14 \f\fStarbucks is one of the most recognized brands in the world. Since 1971 Starbucks has become synonymous with coffee which they used to embody the brand and create a lifestyle behind it. Starbucks wants the world to know they have more to offer than coffee and are committed to meeting the needs of society. \"We're not just passionate purveyors of coffee, but everything else that goes along with a full and rewarding coffeehouse experience. It's not unusual to see people coming to Starbucks to chat, meet up or even work\" (Starbucks). In addition to coffee Starbucks locations keep a customer base by offering free WiFi, music, and partnerships with Barnes and Nobles throughout the country. Starbucks is aware that competition is gaining ground since many fastfood chains have upgraded their coffee menus trying to mimic their style. Also coffeehouses/shops are opening who have adopted the idea of community and become just as popular and profitable. The company realized it reached a plateau and needed to develop new marketing and strategies to be competitive, retain, and gain customers. Porters Five Forces Analysis of the Retail Coffee and Snacks Industry: Threat of New Entrants: Moderate There is a moderate threat of new entrants into the industry as the barriers to entry are not high enough to discourage new competitors to enter the market. (Appendix 1 shows Barriers to Entry Checklist). The industry's saturation is moderately high with a monopolistic competition structure. For new entrants, the initial investment is not significant as they can lease stores, equipment etc. at a moderate level of investment. At a localized level, small coffee shops can compete with the likes of Starbucks and Dunkin Brands because there are no switching costs for the consumers. Even thought it's a competitive industry, the possibility of new entrants to be successful in the industry is moderate. But this relatively easy entry into the market is usually countered by large incumbent brands identities like Starbucks who have achieved economies of scale by lowering cost, improved efficiency with a huge market share. There is a moderately high barrier for the new entrants as they differentiate themselves from Starbuck's product quality, its prime real estate locations, and its store ecosystem 'experience'. 6 The incumbent firms like Starbucks have a larger scale and scope, yielding them a learning curve advantage and favorable access to raw material with the relationship they build with their suppliers. The expected retaliation from well-established companies for brand equity, resources, prime real estate locations and price competition are moderately high, which creates a moderate barrier to entry. Threat of Substitutes: High There are many reasonable substitute beverages to coffee, which are mainly tea, fruit juices, water, soda's, energy drinks etc. Bars and Pubs with non/alcoholic beverages could also substitute for the social experience of Starbucks Consumers could also make their own home produced coffee with household premium coffee makers at a fraction of the cost for buying from premium coffee retailers like Starbucks. There are no switching costs for the consumers for switching to substitutes, which makes the threat high. But its important to note that industry leaders like Starbucks are currently trying to counter this threat by selling coffee makers, premium coffee packs in grocery stores but this threat still puts pressure their the margins. Bargaining Power of Buyers: Moderate to Low Pressure There are many different buyers in this industry and no single buyer can demand price concession. It offers vertically differentiated products with a diverse consumer base, which make relatively low volume purchases, which erodes the buyer's power. Even though there are no switching costs with high availability of substitute products, industry leaders like Starbucks prices its product mix in relation to rivals stores with prevailing market price elasticity and competitive premium pricing. Consumers have a moderate sensitivity in premium coffee retailing as they pay a premium for higher quality products but are watchful of excessive premium in relation product quality. Bargaining Power of Suppliers: Low to Moderate Pressure The main inputs into the value chain of Starbucks is coffee beans and premium Arabica coffee grown in select regions which are standard inputs, which makes the cost of switching between substitute suppliers, moderately low. Strategic Analysis Of Starbucks Corporation Starbucks, with its size and scale, has the power to take advantage of its suppliers but it maintains a Fair trade certified coffee under its coffee and farmer equity (C.A.F.E) program, which gives its suppliers a fair partnership status, which yields them some moderately, low power. 7 The suppliers in the industry also pose a low threat of competing against Starbucks by forward vertical integration, which lowers their power. Starbucks also forms a highly important part of the suppliers business, due its size and scope, which make the power of the suppliers lower. Given these factors, suppliers pose a moderately low bargaining power. Intensity of Competitive Rivalry: High to Moderate The industry has a monopolistic competition, with Starbucks having the largest markets share and its closest competitors also having a significant market share, creating significant pressure on Starbucks. Consumers do have any cost of switching to other competitors, which crates high intensity in rivalry. But its important to note that Starbucks maintain some competitive advantage as it differentiates its products with premium products and services, which cause a moderate level of intensity in competition. The industry is mature and growth rate has been moderately low which cause the intensity of competition among the companies to be moderately high due to all of them seeking to increase market shaper from established firms like Starbucks. This industry does not have over capacity currently and all these factors contribute to the intensity among rivals to be moderately high. Looking at the Porters five forces analysis, we can get an aggregate industry analysis that the strength of forces and the profitability in the retail coffee and snacks industry are Moderate. VRIO analysis VRIO analysis based on the value chain illustrated in Appendix 2 indicates that Starbucks has core competencies in the areas of human resource management, marketing, and in operating its retail locations. These competencies are discussed in further detail below. Human Resource Management: Starbucks has created an environment and an organization around its employees, one of its most important assets and sources of sustainable advantage. The empowering corporate culture, above industry standard employee benefits, and employee stock ownership programs have aided in crafting an exceptional workforce that takes pride in its work and is treated with dignity. This culture is apparent in all levels of the organization from the baristas and managers, all the way to the executives. Store Manager Darla Blazer is happy to be a part of the team and strives to perpetuate that culture by ensuring that the contentment and participation of her entire staff is second only to ensuring that the customers are well served. The culture towards employees is laid back and supportive. Employees are empowered by management to make decisions without management referral and are encouraged to think of themselves as a part of the business. While the company has both functional and product based divisions, there is transparency and participation from the ground up. Marketing: Starbucks has created a brand that exudes an understanding of people's values, lifestyles, and needs. The company's attention to the experiential factor has been pivotal to its success. In fiscal 2005, Starbucks spent $87.7 million on advertising including billboards, online advertising, and signs at Safeco field. That's about 1.4% of its 2005 revenues which is far less than other firms such as CocaCola and Pepsi. Instead of big bucks, they resort to oldfashioned charm and appeal. For instance in New York, Starbucks is handing out subway passes and in Boston and San Francisco it is giving away free cab rides as a way of passing out good cheer for the holidays. \"If you make an emotional connection with them, you've captured their heart. That's what creates brand loyalty\