Starbucks

MGMT 402-101 Crafting and Executing Strategy

Prof. Jai Goolsarran Case study # 1 Starbucks Corporation

Student Names: (Print) & Student Number: Number: VAIBHAV KHIANI

Starbucks Corporation

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Starbucks case study Starbucks Corporation

:

The largest coffee house retailer in the world today.

Stores and countries

:

16858 stores in 54 countries of the world by 2011

Headquarters

:

Seattle, Washington, US

& Global Strategist

:

Howard Schultz (Founder of Starbucks coffee house)

CEO

:

Jim Donald

Schultz Target

:

25000 to 30000 stores worldwide by 2013

:

To establish Starbucks at the most recognized, respectful and

Founder, Chairman

Management long term Objective & Problem

preeminent brand in the world by sustaining its growth, being innovative, taking risks and adapting the vision of who it was, to expand in huge potential market of Brazil, Russia, India and China is a strategic challenge for Starbucks management today for their tomorrow

Introduction:


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Starbucks Corporation (Starbucks) is the roaster and retailer of specialty coffee in the world, operating in more than 50 countries. Starbucks purchases and roasts whole bean coffees and sells them, along with handcrafted coffee and tea beverages and a variety of fresh food items, through Company-operated retail stores. It also sells coffee and tea products and license its trademarks through other channels, such as licensed retail stores and, through certain of its licensees and equity investees, the Company produces and sells a variety of ready-to-drink beverages. In addition to its flagship Starbucks brand, its portfolio includes brands, such as Tazo Tea, Seattles Best Coffee, and Starbucks VIA Ready Brew. Starbucks has three operating segments: United States (US), International, and Global Consumer Products Group (CPG). In October 2010, the Company acquired Magic Johnson Enterprises remaining 50% interest in Urban Coffee Opportunities.

The US and International segments both include Company-operated retail stores and certain components of specialty operations. Specialty operations within the US include licensed retail stores. International specialty operations include retail store licensing operations in nearly 40 countries and foodservice accounts primarily in Canada and the United Kingdom. Its International segments markets are Canada, Japan and the United Kingdom. The CPG segment includes packaged coffee and tea, Starbucks VIA Ready Brew and other branded products sold worldwide through channels, such as grocery stores, warehouse clubs and convenience stores, and the United States foodservice accounts. CPG operates a portion of its business through licensing arrangements and a joint venture with a large consumer products business partner.


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The Company purchases green coffee beans from multiple coffee-producing regions worldwide. Starbucks operates Farmer Support Centers in Costa Rica and Rwanda. In addition to coffee, it also purchases dairy products, particularly fluid milk, to support the needs of its companyoperated retail stores. Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Beverage ingredients other than coffee and milk, including leaf teas, as well as its selection of ready-todrink beverages, are purchased from several specialty suppliers, usually under long-term supply contracts. Food products, such as fresh pastries, breakfast sandwiches and lunch items, are purchased from national, regional and local sources. It also purchases a range of paper and plastic products, such as cups and cutlery, from several companies to support the needs of its retail stores, as well as its manufacturing and distribution operations.

Starbucks Corporation (Starbucks) is the roaster and retailer of specialty coffee in the world, operating in more than 50 countries. Starbucks purchases and roasts whole bean coffees and sells them, along with handcrafted coffee and tea beverages and a variety of fresh food items, through Company-operated retail stores. It also sells coffee and tea products and license its trademarks through other channels, such as licensed retail stores and, through certain of its licensees and equity investees, the Company produces and sells a variety of ready-to-drink beverages. In addition to its flagship Starbucks brand, its portfolio includes brands, such as Tazo Tea, Seattles Best Coffee, and Starbucks VIA Ready Brew. Starbucks has three operating segments: United States (US), International, and Global Consumer Products Group (CPG). In October 2010, the Company acquired Magic Johnson Enterprises remaining 50% interest in Urban Coffee Opportunities. Starbucks Corporation

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The US and International segments both include Company-operated retail stores and certain components of specialty operations. Specialty operations within the US include licensed retail stores. International specialty operations include retail store licensing operations in nearly 40 countries and foodservice accounts primarily in Canada and the United Kingdom. Its International segments markets are Canada, Japan and the United Kingdom. The CPG segment includes packaged coffee and tea, Starbucks VIA Ready Brew and other branded products sold worldwide through channels, such as grocery stores, warehouse clubs and convenience stores, and the United States foodservice accounts. CPG operates a portion of its business through licensing arrangements and a joint venture with a large consumer products business partner.

The Company purchases green coffee beans from multiple coffee-producing regions worldwide. Starbucks operates Farmer Support Centers in Costa Rica and Rwanda. In addition to coffee, it also purchases dairy products, particularly fluid milk, to support the needs of its companyoperated retail stores. Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Beverage ingredients other than coffee and milk, including leaf teas, as well as its selection of ready-todrink beverages, are purchased from several specialty suppliers, usually under long-term supply contracts. Food products, such as fresh pastries, breakfast sandwiches and lunch items, are purchased from national, regional and local sources. It also purchases a range of paper and plastic products, such as cups and cutlery, from several companies to support the needs of its retail stores, as well as its manufacturing and distribution operations.


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Q uestions:

1) Line chart comparing the share price of Starbucks Corporation with that of McDonalds Corporation from 1992 up to the present time.

In above line chart we can see that Starbucks and McDonalds are equal at in 1992 but with the passage of time Starbucks performance continually growing compare to McDonalds. Both have brand name in the market and both corporations is very successful in the market but if we can see McDonalds performance rising continually up to 2004 and afterwards its slightly declining due to some reasons where Starbucks performance is going up from 2004. Further we can see that from 2007 Starbucks performance went down and again going up from 2009. In compare McDonalds is stable on its performance. In the end we can say that Starbucks covered bigger market than McDonald and got amazing customer positive response.


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2) 2010 Annual report of the Starbucks, Revenue ($B), net income ($B) and the total number of stores in respects of the last three fiscal years:

Years 2010

2009

2008

Total Revenue

$ 10.7 B

$ 9.77 B

$10.38 B

Net Income

$ 945.6 M

$ 390.8 M

$ 315.5 M

Total stores

16,858

16,635

16,680

Content


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3)

HRDP 401 - Human Resource Management

The company, recognizing that its frontline employees are critical to providing the perfect cup, has built an organizational culture based on two principles: (1) Strict standards for how coffee should be prepared and delivered to customers and (2) A laid-back, supportive, and empowering attitude toward its employees. All new hires, referred to as partners, go through a 24-hour training program that instils a sense of purpose, commitment, and enthusiasm for the job. New employees are treated with the dignity and respect that goes along with their title as baristas (Italian for bartender). To emphasize their responsibility in pleasing customers, baristas are presented with scenarios describing customers complaining about beans that were ground incorrectly. The preferred response, baristas learn, is to replace the beans on the spot without checking with the manager or questioning the complaint. Baristas learn to customize each espresso drink, explain the origins of different coffees, and claim to be able to distinguish Sumatran from Ethiopian coffees by the way it flows over the tongue. Starbuckss Coffee Master program teaches the staff how to discern the subtleties of regional flavor. Graduates (there are now 25,000) earn a special black apron and an insignia on their business cards. The highlight is the "cupping ceremony," a tasting ritual traditionally used by coffee traders. After the grounds have steeped in boiling water, tasters "crest" the mixture, penetrating the crust on top with a spoon and inhaling the aroma. As employees slurp the brew, a Starbucks Coffee Educator encourages them to taste a Kenyan coffee's "citrusy" notes or the "mushroomy" flavor of a Sumatran blend. If the ritual reminds you of a wine tasting, that's intentional. Schultz has long wanted to emulate the wine business.


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Holding on to their motivated, well-trained employees is important, so all are eligible for health benefits and a stock option plan called Bean Stock. Each employee is awarded stock options worth 12 percent of his or her annual base pay. (Starbucks now allows options at 14 percent of base pay in light of good profits.) Employees are also given a free pound of coffee each week and a 30 percent discount on all retail offerings. Baristas know about and are encouraged to apply for promotion to store management positions. Every quarter the company has open meetings at which company news, corporate values, and financial performance data are presented and discussed. Due to the training, empowerment, benefits, and growth opportunities, Starbucks turnover is only 70 percent, considerably less than the 150 to 200 percent turnover at other firms in the food service business. We treat our employees like true partners and our customers like stars, comments Schultz. Starbucks stood out for its employee-friendly policies and supportive work culture. The company was especially noted for the extension of its benefits program to part-time workers something that not many other companies offered. As a result, Starbucks employees were among the most productive in the industry and the company had a relatively low employee turnover.

However, by the early 2000s, three possible problems had to be considered - would the company be able to support its staff with the same level of benefits in the future, given the large increase in the number of employees; would the company be able to retain employees if it made any move to lower its human resource costs by cutting down on benefits; and would Starbucks be able to maintain its small company culture, an important element in its past growth. Starbucks Corporation

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Starbucks realized early on that motivated and committed human resources were the key to the success of a retail business. Therefore the company took great care in selecting the right kind of people and made an effort to retain them. Consequently, the company's human resource

policies

reflected

its

commitment

to

its

employees.

Starbucks relied on its baristas and other frontline staff to a great extent in creating the 'Starbucks Experience' which differentiated it from competitors. Therefore the company paid considerable attention to the kind of people it recruited. Starbucks' recruitment motto was "To have the right people hiring the right people."

Starbucks hired people for qualities like adaptability, dependability and the ability to work in a team. The company often stated the qualities that it looked for in employees upfront in its job postings, which allowed prospective employees to self-select themselves to a certain extent. Having selected the right kind of people, Starbucks invested in training them in the skills they would require to perform their jobs efficiently. Starbucks was one of the few retail companies to invest considerably in employee training and provide comprehensive training to all classes of employees, including part-timers

Analysts said that Starbucks biggest challenge in the early 2000s would be to ensure that the company's image as a positive employer survived its rapid expansion program, and to find the right kind of people in the right numbers to support these expansion plans. Considering the rate at which the company was expanding, analysts wondered whether Starbucks would be able to retain its spirit even when it doubled or tripled its size. By the early 2000s, the company began to show signs that its generous policies and high human resource costs were reflecting on its


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financial strength.

4) Advertising:

Starbucks spend smaller percentage of its revenue on advertising because it relies to a greater extent on its image advertising such as movies and television.

The main reason of Starbucks not engaged in advertising as because it target market tend to educated customers who do more reading than a verage.

Starbucks spends lot of promotion time and money to interact with customer mainly through internet so they can interact with product and leave comment.

In terms of advertising strategy, the company uses a push strategy, which involves the active engagement of customers using direct selling channels and emphasizing promotion and advertising At the same time, there are elements of a pull strategy being used, as the company has developed a highly visible brand to encourage customers to seek out its products.

5) Corporate Culture and growth:

Starbucks success is mainly based on what is referred to as the Starbucks Experience, which CEO Howard Schultz describes as You get more than the finest coffee when you visit a Starbucks-you get great people, first-rate music and a comfortable and upbeat meeting place. We establish the value of buying a product at Starbucks by our uncompromising quality and by building a personal relationship with each of our customers. Starbucks is rekindling Americas


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love affair with coffee, bringing romance and fresh flavor back to the brew. In effort to ensure

that each and every person who walks into Starbucks has the same Starbucks experience all Starbucks partners receive the best training in the business. Before training even begins Starbucks starts to recruit. In screening possible new hires for positions they look for passionate people who love coffee Starbucks HR leaders search for a diverse workforce which represents the community.

Directing has been and will continue to be a crucial part in the Starbucks organization. Starbucks is the #1 coffee retailer in the world with approximately 10,000 coffee shops spread across more than 30 countries. With already so many stores and a long-term expansion plan to grow to 15,000 US stores and 15,000 i nternational stores, Starbucks must have a tactical plan to keep the morale consistent across the globe and motivate their employees to achieve common goals. There are a few key actions that Starbucks is taking to lead the community in social responsibility and the positive treatment of their employees.

Starbucks has a unique company and customer culture. In order to build and sustain that culture, certain controls need to be put in place. Culture maybe defined as employee behaviors, norms, attitudes, language, and traditions of an organization. Cultural controls can help build and maintain certain company attributes. Certain companies may adopt normative controls which make customers want to behave in a certain manner in order to preserve their culture. To use normative controls effectively, companies need to create an environment in


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which customers care about the impact of their behavior on others. This forces employees and customers to behave in a way the company endorses. Starbucks has its own language, tradition, and attitude. The charm of Starbucks is how a customer orders a product. Customers choose among many permutations of sizes, flavors, and preparation techniques in its beverages. In the interests of filling orders accurately and efficiently, Starbucks trains its counter clerks to call out orders to beverage makers in a particular sequence. It is all the better when customers themselves can do so. Therefore, Starbucks attempts to teach customers its ordering protocol in at least two ways. It produces a guide to ordering pamphlet for customers to peruse, and it instructs clerks to repeat the order to the customer not in the way it was presented but in the correct way to control its culture. Employees are educated on the nuances of coffee-making, such as aroma, body, acidity, and flavor. Starbucks rewards employees for completing the program, but that is not the only benefit. By creating more sophisticated, knowledgeable employees who are more engaged in the business, Starbucks sets itself apart from the competition in an increasingly crowded marketplace and maintains customer loyalty to those famous $5 cups of coffee. Customers are willing to pay more for the Starbucks brand not only because of its gourmet appeal but also because of the positive associations and experiences they have in each retail store. Additionally, Starbucks hiring practices also ensure that the right people are hired and screened appropriately. 6)

FACTORS AFFECTING PERFORMANCE OF THE COMPANY IN RECENT YEARS:

As it enters international market in the formed of three modes in entry that are joint venture, licensing and wholly owned subsidiaries which become burden on mother company in later


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stage. Those types of entry modes need lot of training, supervising, management assistance and technology transfer which leads to inability to engage in global strategic coordination.

It faced problems due to economic recession in countries such as Switzerland, Germany and Japan in early 2000s where it experienced declining sales and revenue.

As due to increase in tension between US and rest of the world, especially business got affected in Middle East and South East Asia. After US declaration war against Iraq in 2003 matter became more worsen.

Starbucks only imports all their coffee beans, so possible threats could include a change in import laws. A change in the status quo as far as imports go could greatly affect numerous areas of production for the company. For example, if it costs more to import or the process is made more difficult the result could ultimately be a change in price, which would affect the level of consumption for Starbucks coffees.

In addition to these incidents, Starbucks topped the list of companies to be boycotted due to Schultz's alleged closeness to the Jewish community. Till now in the Arab countries & Middle East a lot of rumours that Starbucks is sponsoring the Jewish community against Palestinian crises. Due to increasing security threats, Starbucks closed down its six stores in Israel.


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7)

Specific measures has the company embarked upon to effect a turnaround in performance:

The company has taken some significant measures towards its high performance, like Starbucks is providing free Wi-Fi services to enable its customers to sit for long. They have maintained their high quality of serving coffee and have created an emotional bond with its regular customers. Starbucks has made a partnership contract with its store owners internationally in order to learn and experience about the culture and tradition of different countries. Starbucks have made sure that each of its employees is covered under Health Care program. It sells books and music as retails in their coffee shops. They keep experimenting with new ideas of showing documentary movies and attracting more crowd towards it.

8) STARBUKS AS A JOINT VENTURE Starbucks International chooses to be involved with partnerships for the benefits these relationships offered over their typical wholly owned subsidiary philosophy. However, choosing the right partner, poses a potential problem for the company.

Although Starbucks uses

multiple lines of distribution to saturate to US coffee market, its international operations consist only of coffee-bar restaurants. Therefore, they only have one channel of distribution internationally. Through this, Starbucks had to choose a partner that would facilitate their creation and expansion of coffee bars in the international arena, specifically Asia and Japan their primary target. Starbucks developed a series of criteria to which they evaluated different potential partnerships in Japan and other foreign countries. First, they sought to implement


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the idea of partnership first, county second, as a means of developing partnerships that focuses on the companys goals, and not the countries goals. Second Starbucks noted six additional criteria they used to narrow and conclude their partnership search. (1) They looked for companies with similar ideas about values and corporate life. (2) They wanted companies that had experience in the multi-restaurant business. (3) Potential partners had to have enough financial resources to help saturate a given market so as to counter the possibility of imitations. (4) Starbucks sought partners that had the ability and experience to l ocate prime real estate for coffee-bar locations with a (5) Knowledge of the retail market. Finally, (6) Starbucks looked for partners who had the manpower available to make a full commitment to the project.

It was this selection criterion which aided Starbucks in implementing the

benefits of partnerships to their international operation expansion.

When looking at Starbucks international entry strategy, three main potential benefits arise from the development of the partnership. These benefits had and have the potential to be varying in their degree of usefulness dependent upon the entry strategy Starbucks chooses, in this case Joint Venture (partnership). The three main potential benefits of a joint venture entry strategy are: protection of the sustainable competitive advantage, reduction in the financial risk incurred by the firm (Starbucks), and the benefit of knowing how well the US product will do in the foreign market through local adaptation. We will examine each of these more fully from the viewpoint of Starbucks entering into the Ja panese foreign market.


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9) RETAIL SALES MIX BY PRODUCT TYPE FOR THE YEAR 2010(October 3rd)

80 Beverages

70 60

Food

50

40 30

Whole beans & soluble coffee

20 10

Coffee-making equipment and other merchandise

0 %

10) Howard Schultz statement of Starbucks business was recession proof, with Charlie Rose : There are 44 million people visiting Starbucks every week, it has become a third place between office and home. People like to visit Starbucks knowingly that it is expensive than regular coffee shops because of the environment and the product. It has become a place of human connections. Starbucks believe that Sense of Humanity and Sense of


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Community are the assets of the company. And because of the exceptional services and having an emotional bond with the customers Starbucks remained recession proof.

11) The strategic options Starbucks embraced in China: The first store Starbucks opened in China is in 1999. The Starbucks store owners in China are into retail business are in partnership with Starbucks Corporation. Starbucks believe in having trust and people respect globally for the business. It has taken major steps in making sure to cover its employees under health care provisions of the company. The peoples approach towards Starbucks coffee shop in China is very much different than America. In China people visit Starbucks with different reasons and spend more long hours meeting friends and having chat. Starbucks also started providing Wi-Fi and make people sit for long time with their wireless device and play music. Today, Wi-Fi has become a big asset for Starbucks.

12) Table indicating geographical distribution of the company operated stores as at the end of the 2010 fiscal year:

ASIA-PACIFIC

EUROPE/MIDDLE

AMERICAS

EAST/AFRICA

JAPAN

892


TURKEY

137

US

4424

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CHINA

525

UK

102

CANADA

274

SOUTH

315

UAE

95

MEXICO

283

PHILIPPINES

168

SPAIN

75

OTHER

63

MALAYASIA

117

SAUDI ARABIA

69

INDONESIA

85

KUWAIT

66

TOTAL

5044

KOREA

NEWZEALAND

TOTAL

39

2141

GREECE

60

SWITZLERLAND

47

RUSSIA

37

OTHER

152

TOTAL

840

In the US, 166 and 286 licensed stores were opened during 2010 and 2009, respectively, and 106 and 251 stores were closed during 2010 and 2009, respectively. Internationally, 335 and 375 licensed stores were opened during 2010 and 2009, respectively, and 100 and 84 stores were closed during 2010 and 2009, respectively.


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13) Factors which adversely affect the performance of the company in the future: 1) lower customer traffic or average value per transaction, which negatively impacts comparable store sales, net revenues, operating income, operating margins and earnings per share, due to: 2) the impact of initiatives by competitors and increased competition generally; 3) customers trading down to lower priced products within Starbucks, and/or shifting to competitors with lower priced products; 4) lack of customer acceptance of new products or price increases necessary to cover costs of new products and/or higher input costs; 5) unfavorable general economic conditions in the m arkets in which Starbucks operates that adversely affect consumer spending; 6) declines in general consumer demand for specialty coffee products; or 7) adverse impacts resulting from negative publicity regarding the Companys business practices or the health effects of consuming its products; 8) cost increases that are either wholly or partially be yond the Companys control, such as: 9) commodity costs for commodities that can only be partially hedged, such as fluid milk, and to a lesser extent, high quality arabica coffee (See also the discussion under Product Supply in Item 1); 10) labor costs such as increased health care costs, general market wage levels and workers compensation insurance costs; 11) litigation against Starbucks, particularly class action litigation;


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12) construction costs associated with new store openings; or 13) information technology costs and other logistical resources necessary to maintain and support the global growth of the Companys business; 14) delays in store openings for reasons beyond the Companys control, or a lack of desirable real estate locations available for lease at reasonable rates, either of which could keep the Company from meeting annual store opening targets and, in turn, negatively impact net revenues, operating income and earnings per share; 15) any material interruption in the Companys supply chain beyond its control, such as material interruption of roasted coffee supply due to the casualty loss of any of the Companys roasting plants or the failures of third party suppliers, or interruptions in service by common carriers that ship goods within the Companys distribution channels, or trade restrictions, such as i ncreased tariffs or quotas, embargoes or customsr restrictions; and 16) the impact on Starbucks business of factors such as labor discord, war, terrorism (including incidents targeting Starbucks), political instability in certain markets and natural disasters.


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Starbucks

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