- What are some of the challenges associated with Starbucks’ aggressive growth strategy?
- Could an unanticipated change in coffee consumption patterns disrupt Starbucks in the same way that it paved the way for the company’s growth in the 1980s?
- What problems might arise from Starbucks’ efforts to expand rapidly into nations such as India.
- Comment on the pricing strategies of Starbucks.
- How would you see the competition of Starbucks in India, with players like Costa Coffee, Mc donalds, Barista and Café Coffee day. Draw out a competitive strategy for Starbucks.
Starbucks was founded in 1971 in Seattle, by Gordon Bowker, Jerry Baldwi and Ziv Siegl. By 1982, Starbuck had five retail stores and was selling high quality whole bean and ground coffee products to restaurants and espresso stands in the Seattle area. In the same year, Howard Schultz joined Starbucks to manage retail sales and marketing. After convincing the firm to open a down town Seattle coffee bar in 1984, which was successful, Schultz left Starbucks to open his own coffee bar, II Giornale, which served Starbucks coffee. Schultz acquired Starbucks in 1987, and locations were opened in Chicago and Vancouver. The company published its first mail order catalog in 1988. in 1991, Starbucks became the first U.S. based privately held company to offer stock options to all employees. The company went public in 1992.
Today, Starbucks coffee shops and Kiosks can be found in a variety of shopping centers, office buildings, bookstores, and other outlets. Starbucks is capitalizing on taste changes that predate the company’s founding. In the early 1960’s, American adults consumed on an average of three cups of coffee each day. Today, consumption has declined to less than two cups, with only half of American adults as coffee drinkers. During this time, decaffeinated coffee sales soared. In addition, a new category of intensely loyal coffee drinkers was born. This group of adults consumes “specialty” or “premium” coffees, including regular and decaffeinated versions with a variety of origins and flavors. Sales of specialty coffee have climbed from about $45 million annually to more than $2 billion today, accounting, for about 20 percent of all coffee sales.
Because Starbucks markets whole beans and coffee beverages, its competition comes from two distinct groups of firms. A number of regional coffee manufacturers distribute premium coffees in local markets, while several large national coffee manufacturers such as Nestle, Proctor & Gamble, and Kraft General Foods market and distribution specialty coffees in supermarkets. Coffee beverages are distributes by restaurants, grocery stores, and coffee retailers. Seattle’s Best Coffee is a fierce competitor.
Chairman Howard Schultz projects that Starbucks will grow from its present 6,000 stores to more than 20,000, 75 percent of which are in the Unites States. The company added 280 intentional locations in 2001 and is targeting an additional 650 stores in Europe by 2004 and 900 locations in Latin America predominantly Mexico by 2005, Starbucks is also moving into China. Retail stores account for more than 80 percent of revenues, with specialty operations accounting for the remainder.
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American coffee consumption had been on the decline for more than a decade when Seattle entrepreneurs Jerry Baldwin, Gordon Bowker, and Zev Siegl opened the first Starbucks in Seattle’s Pike Place Market in 1971. By the 1970s, the country’s major coffee brands were engaged in a bitter price war that forced them to use cheaper beans in their blends to reduce costs, resulting in a dramatic decline in the quality of America’s most popular coffees. Accompanying this decline in quality was a decline in coffee consumption, which had peaked at 3.1 cups per day in 1961. As Americans gradually became disenchanted with the store brands, java enthusiasts—concentrated primarily on the West Coast—began experimenting with the finer coffees of Europe that offered richer, fuller flavors.
To harness the potential of the gourmet coffee trend in the Seattle area, the founders of Starbucks experimented with the new concept of a store dedicated to selling only the finest whole-bean coffee and coffee brewing equipment. At the time, Starbucks coffee was not brewed in-store, but rather by consumers themselves after they took the whole beans or grounds home. This emphasis on quality whole-bean coffee retail was fairly unique; only a handful of American cities had stores like Starbucks up to that point. Such a store would satisfy the demand of Seattle’s gourmet coffee enthusiasts for high-quality coffee products that could previously only be obtained through catalogs from companies in Europe. Starbucks also sought to convert Seattleites who had never experienced gourmet coffee to break away from traditional brands and integrate the finer European coffee blends into their daily lives.
From the start, Starbucks placed quality as its top priority. The Starbucks founders recognized that if they wanted to enhance Seattle’s appreciation for fine coffee, they had to provide the best ingredients and brewing equipment to ensure that customers had the most enjoyable coffee experiences possible. The Starbucks management dedicated a great deal of their time and financial resources to establishing strong relationships with coffee growers from around the world. To distinguish their coffee from the bland and tasteless store brands, Starbucks only purchased Arabica beans from a carefully selected network of suppliers across the globe; including places like Sumatra, Kenya, Ethiopia, and Costa Rica. Arabica beans were selected because the bean’s chemistry could withstand high roasting temperatures, resulting in a richer flavor. Starbucks also sought vendors who sold products that would protect, and even enhance, the Arabica’s flavor. This required the formation of partnerships across the globe with coffee brewing equipment suppliers who provided products that captured the essence of the coffee brewing tradition. Simplicity was valued over advanced technology because the machines Europeans and others had been using to brew coffee for centuries often proved the most effective in delivering the richest flavors.
Starbucks Reinvented
It was not until Howard Schultz, Chairman and Chief Global Strategist of Starbucks, came to the company in 1982 that a vision for expanding the scope and reach of the Starbucks brand came under serious consideration. Schultz realized the powerful business opportunities that lay ahead of the company if he could preserve Starbucks’ core values while exposing a wider range of people to the brand. The fledgling company had seen great success in converting its small group of loyal Seattle customers into coffee enthusiasts, but Schultz recognized that the conservative business plans of early Starbucks management hindered the company from reaching other potential coffee lovers. Schultz saw that the next logical step for Starbucks was to begin serving freshly brewed coffee by the cup in every store. This realization came to Schultz following a trip to Italy, where he witnessed the bustling café culture where people stopped to socialize at various points throughout the day, always with a fresh cappuccino or espresso in hand. He reasoned that Americans would embrace the concept of consuming fresh coffee in a sociable coffeehouse atmosphere.
Transforming Starbucks from a coffee retailer into a café business resulted in several important competitive advantages. First, it increased quality control because the coffee was brewed by its own knowledgeable employees. Second, Starbucks captured the business of Seattle’s business community who loved high quality coffee, but had hectic schedules. Starbucks made enjoying good coffee convenient, thereby enabling the entire community to enjoy all the brand had to offer. Lastly, incorporating a coffee service aspect into the business differentiated Starbucks from its coffee retail competitors, who were quickly growing in Seattle and in other major American cities.
With the coffeehouse model as the primary focus of the company’s retailored business plan, Schultz began to concentrate on reshaping Starbucks’ brand identity. As the company entered a period of explosive growth through market expansion it needed a reinvented image that captured the elegance of European coffeehouse culture, but was familiar enough to appeal to a broad range of Americans. Schultz’s previous coffeehouse, Il Giornale, had acquired Starbucks in 1987, but Schultz recognized that keeping the Starbucks name was pivotal to the brand’s success. It was already familiar to Seattleites, patrons of the nationwide mail order business and was more memorable than Il Giornale. The name was inspired by Starbuck, a deckhand in the classic American novel Moby Dick. For this reason, the logo included an image of a mermaid done in a woodcutting style. The Starbucks name captured all the aspects of Schultz’s innovative coffeehouse concept; it was bold yet not overwhelming, mysterious yet not foreign, and romantic yet not impractical.
Creating a Look
Starbucks needed to shape the look and feel of the environment of its stores to reflect the synergy of Italian elegance and American informality that Schultz envisioned for his unique coffeehouse model. First, the original Starbucks logo was updated to appear more contemporary and the color was changed from the original earthen brown to the green used by Il Giornale. Next, each of the original Starbucks stores was redesigned so that they echoed the romantic atmosphere of Italian coffee bars.
Rich browns in the wooden fixtures and vibrant green logos on the detailing and packaging formed the primary color scheme of Starbucks store design. This palate was selected to represent the company’s emphasis on European romance and elegance coupled with casual American warmth. In addition to selling only “best-of-class” coffee, Starbucks worked to fill its stores with only the highest quality of everything—from the coffee-making equipment to the fixtures and furnishings to the music and artwork. In Schultz’s words, each Starbucks store “is carefully designed to enhance the quality of everything the customers see, touch, hear, smell or taste.” Schultz envisioned that the Starbucks store would become a “personal treat” for its customers, whether they saw it as a convenient stop on the way to work, a refreshing break in their day or a place to relax at night. Starbucks was to be, for its clientele, a “Third Place,” a comfortable, sociable gathering spot bridging the workplace and the home. Designing a warm, inviting environment was essential to Schultz’s objective of making Starbucks symbolize not just a coffeehouse, but a pleasurable coffee-centered experience.
Investing Ahead of the Growth Curve
This focus on developing creative solutions for solidifying a rich brand identity complemented the Starbucks executive team’s philosophy of “investing ahead of the growth curve.”Constant reinvention—critical to developing a healthy Starbucks brand—could only be accomplished by making fundamental changes to the structure of Starbucks management and by investing in innovation. As Schultz assumed the role of CEO of the new Starbucks, he recognized that although he possessed keen entrepreneurial skills and vision to lead Starbucks in this period of immense growth and brand redevelopment, he would also need the support of experienced professionals to set his vision into motion. Schultz assembled a dynamic management team from some of the country’s most successful and innovative corporations such as Nike, Deloitte & Touche, and Macy’s. Each executive joining the Starbucks team brought years of experience and fresh creative perspectives.
Investments in Starbucks infrastructure and process efficiency were equally as crucial to building the brand. Schultz’s team of executives identified the need for state-of-the-art facilities (namely roasting and packaging plants) that would allow Starbucks to continue producing the highest quality products on a nationwide, and eventually a global, scale. In 1989, Starbucks invested in high-speed coffee roaster and packaging equipment that would meet the needs of the growing business for at least 10 years. The company later implemented an advanced computer information system to keep track of sales across the hundreds of stores that would be opening within the first decade of expansion. Between 1990 and 1991 alone, Starbucks raised $18.5 million in venture capital to fund this expensive internal development.
Innovation to Support Growth of the Brand
As Starbucks began focusing on a nationwide growth strategy, the problem of how to protect the freshness and flavor of coffee during shipments to distant Starbucks locations became a pressing issue. In the time it took to ship fresh roasted beans thousands of miles across the country to store locations in Atlanta or New York, for example, the quality of the coffee would decline dramatically. Therefore, significant time and resources were invested to develop a vacuum packaging system that prevented harmful air and moisture from seeping into the coffee. After the roasting process, coffee would be sealed in “FlavorLock” bags that would remain unopened until ready for use in stores. Such an investment allowed Starbucks to preserve its quality, while saving the company from the significant costs entailed in building roasting plants in every new Starbucks market. Innovations such as the FlavorLock bags highlight the flexibility that Starbucks leveraged in order to adapt to new business climates.
Starbucks Core Values
The new Starbucks management strengthened many of the same core values that the company founders had established in the early years and reinvented others to meet the unique challenges it faced as a high growth brand. To communicate these core values, a diverse group of employees contributed to the development of the Starbucks Mission Statement. In drafting the mission statement, the Starbucks executive team listened to the views of employees at all levels and incorporated their beliefs into company policies. Consensus on company values among the diverse group of Starbucks employees was imperative for Schultz’s vision of a unified team.
Pivotal to the values asserted in the mission statement was a continued commitment to investing in both Starbucks employees and customers. Schultz and his colleagues observed that the company had become too product oriented; Starbucks had to focus on people to achieve healthy organic growth. The key to the company’s success and widespread appeal had always been the employees, whose knowledge and dedication attracted customers to continue returning to the store.
Schultz firmly believed that his business could not grow without the strongest team possible at all levels of the organization. Starbucks could only attract loyal customers if employees were skilled in delivering the highest quality service possible. The Starbucks work force deserved a disproportionate amount of company resources because they were essentially the key component in the revenue generating functions of the company. Therefore, under Schultz’s leadership, Starbucks management adopted several policies that focused on recruiting and retaining a strong team of “partners”—the company’s term for employees.
The first and most important policies concerning the development of a strong team of partners regarded the company’s commitment to training. Starbucks spent more money on training than marketing, a fact that highlights the crucial role Schultz assigns to his employees—that of fostering positive customer relations so as to engender widespread word-of-mouth publicity. Starbucks also developed several policies regarding partner compensation and benefit packages to attract and retain a competent work force. These benefit packages included full health insurance coverage for all employees and the Bean Stock program, which awarded every partner between 12 percent and 14 percent of his or her annual base pay in Starbucks stock options. In extending equity to employees, Starbucks hoped to communicate that every employee would benefit as the company grew and performed well, providing an incentive for partners to work as a unified team toward achieving business objectives.
New philosophies were also adopted regarding Starbucks commitment to customers. The original company believed that they should educate the customer to appreciate coffee the way Starbucks liked it. Then-president Howard Behar and other top executives argued that the company needed to become more customer focused and serve coffee the way customers like it. Behar proposed a different model that called for Starbucks to “do whatever it takes to please the customer as long as it is moral, legal, and ethical.” Although the “customer is always right” philosophy made sense to Schultz, he also recognized that it posed a threat to the integrity of Starbucks products. Schultz wondered how much flexibility should be given to customer demands when they compromised the traditions that the company’s products were based on.
When health conscious customers began to request skim milk as an option in place of the cream used in various coffees, Schultz was forced to tackle this issue of flexibility head on. While at first he remained steadfastly committed to preserving the authenticity of his coffees by forbidding the use of skim milk in recipes, Schultz finally conceded, recognizing that “a lost customer is the most powerful argument you can make to a retailer.”If Starbucks wanted to maintain its loyal following, it had to listen to customer feedback. Compromise had to be integrated into Schultz’s decisions regarding product development. As long as Starbucks could continue to deliver the highest quality products possible, flexibility would be favored over dogmatic adherence to tradition.
Growing the Brand
Geographical Market Expansion
Starbucks’ carefully planned its expansion of specialty coffee stores into new markets throughout North America and eventually worldwide. The first phase of the expansion strategy secured a major foothold in the Pacific Northwest while experimenting in other key markets that were farther away such as Chicago, Los Angeles, San Francisco, New York, and Washington, D.C. Each of these new markets had its own strategic purpose for the company’s market expansion program. In 1996, Starbucks International successfully launched Japan’s first store in Tokyo’s Ginza business district, proving that the coffeehouse concept even had cross-cultural appeal. Success with the original Starbucks in Tokyo led to 25 new stores in Japan by 1998.
The Starbucks management team agreed at the beginning of the company’s massive expansion program that all stores would be owned and operated by the company instead of pursuing a franchise model like many other successful American food service companies. Although franchising offered advantages for some companies—a source of capital, an inexpensive means of rapid entry into new markets, and a guaranteed commitment by franchisees to the financial success of the business—it posed potentially negative consequences for brand development. In building a strong brand, Schultz recognized that he and his executive team needed complete control over the brand to cultivate an unparalleled image of quality. In too many other companies, franchisees did business their own way, which could potentially sacrifice Starbucks’ commitment to excellence in order to turn higher profits. Schultz could not risk compromising the brand’s image and kept the brand under the control of the Seattle headquarters to foster healthy growth.
The success of the expansion program rested on investment in extensive word-of-mouth publicity campaigns that created brand awareness even before the first Starbucks arrived to a new market. Local consumers were excited about welcoming Starbucks to their towns because of the attraction of having a trendy cafe environment for relaxation and personal enrichment. Grand openings became community events that encouraged local consumers to experience the new cultural dimension that Starbucks brought to their communities. Once a new Starbucks opened, highly skilled “baristas” (or servers) and managers would further strengthen the positive brand image by delivering the highest level of service possible.
Starbucks also employed a “hub” market strategy where its coffeehouses entered a new market in a clustered group. For each new region, a large city would serve as the hub where teams of professionals trained to support new stores were located. In the large hub market, the goal would be to rapidly open 20 or more stores within the first two years. From the established hub, Starbucks stores then spread to new “spoke” markets. These spoke markets consisted of smaller cities and suburban locations with demographics similar to the typical customer mix. This deliberate saturation strategy predictably resulted in cannibalization of almost 30 percent of own store sales by virtue of the introduction of a near-by store. This drop in revenue was offset, however, by efficiencies in marketing and distribution costs, and an enhanced image of convenience.
Source: MBA Knol
