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Starbucks Coffee: A Model of Corporate Excellence

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Abstract

Starbucks Coffee, Inc. has demonstrated marketing genius, reinvented the concept of corporate values, and emerged as the worldwide leader in gourmet coffee.  This dynamic company combines the profitability of the four-dollar cup of coffee with a social awareness that is exemplary.   Starbucks’ success is based on investment in human resources; a long-term view which sometimes leads to short-term profit losses.  The focus of this paper is the rise and causes of an empire that has become an iconic bellwether on street corners nationwide and nearly every developed country in the world.

Introduction

¬†¬†¬†¬† Principles, as defined by Merriam Webster (2006), are underlying ingredients that exhibit or impart characteristic qualities.¬† The secret to Starbucks‚Äô success lies in its basic principles, as set forth in their Mission Statement (Starbucks Fact Sheet, 2005): ‚Äú‚Ķto establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow while making a positive contribution in the communities where we do business.‚Ä̬† The signature Green Mermaid and white cup have come to symbolize more than premium coffee.¬† Starbucks has startled Wall Street with its explosive growth, while transforming the way many do business.

¬†¬†¬†¬† In The Power of Logos, Haig (1997) asserts that effective catchwords have the power to help achieve company goals.¬† With over 11,000 retail outlets nationwide (not to mention their international venues), Starbucks has achieved fame as a reliable refuge for consumers,–the ‚ÄúThird Place‚ÄĚ according to Starbucks‚Äô own marketing literature.¬† This Third Place is a haven, a buffer between home and work that has become part of the daily routine for millions; it represents the main component of the Starbucks business model.

     Starbucks continues to experience exponential growth year after year, while maintaining an industry-leading, minimal personnel turnover (Fortune Magazine, 2006).  Additionally, the Starbucks Corporate Social Responsibility (CSR) agenda  will be analyzed to see how it has become their blueprint to success, changing the way millions conduct business, from Kalamazoo to Timbuktu.

     Starbucks goes way beyond coffee beans; the best quality coffee is merely the modus operandi for successful relationship building..

Starbucks History

¬†¬†¬† ¬†Starbucks began in 1971 when three business-minded intellectuals‚ÄĒEnglish teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker‚ÄĒopened a store called ¬†Starbucks Coffee, Tea, and Spice ¬†at the ¬†historic Pike Place Market in Seattle.¬† (Thompson & Strickland, 1999).¬†¬† According to Bock (2002), ‚Äúit starts out like the classic American entrepreneurial success story.¬† Three college friends get together from time to time and talk about what kind of business they could start.‚Ä̬† (par. 1).¬† ¬†.

¬†¬†¬† The three partners shared a love of fine coffees and exotic teas and believed they could build a sophisticated clientele in Seattle much like that which had already emerged in the San Francisco Bay area. ¬†¬†The climate for such a business didn‚Äôt seem ripe at the time, Bock (2002) says.¬†¬†¬† ‚ÄúWay back in 1971, coffee didn‚Äôt look like it was a great business.¬† It didn‚Äôt show signs of getting better, either.¬† Coffee consumption in the United States had peaked in the 1960s, but by 1971, it was on the decline.‚ÄĚ ¬†(par. 3). . Each invested $1,350 and borrowed another $5,000 to open the flagship Pike Place store.¬† Baldwin, Siegel, and Bowker chose the name Starbucks in honor of Starbuck, the coffee-loving first mate in Herman Melville’s Moby Dick.¬† Since Seattle is a coastal city, they thought the moniker would evoke the romance of the high seas and the seafaring tradition of the early coffee traders. ¬†The new company’s logo, designed by an artist friend, was a two-tailed mermaid encircled by the store’s name.

¬†¬†¬†¬† Alfred Peet, a Dutch immigrant, importer and storekeeper, inspired the founders of Starbucks.¬† Peet had begun importing fine Arabica coffees into the United States during the 1950s.¬† He viewed coffee with the same discrimination that a winemaker views grapes.¬† Peet evaluated coffee in terms of country of origin, estates, and harvests. ¬†Baldwin, Siegel, and Bowker were well acquainted with Peet’s expertise, having visited his store on numerous occasions, spending many hours listening to Peet expound on quality coffees and the importance of proper bean-roasting techniques. ¬†All three were devoted fans of Peet and his dark-roasted coffees, going so far as to order their personal coffee supplies by mail from Peet’s establishment (Thompson & Strickland, 1999).

¬† ¬†¬†¬†The first store the triumvirate built did not offer fresh-brewed coffee by the cup, although sometimes samples were available for tasting.¬† During the start-up period, Baldwin diligently studied everything he could lay his hands on about coffee and developed a growing knowledge of the precious, brown bean commodity.¬† Each of the founders traveled to Berkeley to learn more about coffee roasting from their mentor Peet, who urged them to continue deepening their knowledge of coffees and teas from around the world. ¬†During the first year of Starbucks‚Äô existence, they ordered their coffee beans from Peet, setting up roasting operations in a somewhat dilapidated building, close to the Pike‚Äôs Place Market.¬† They had experimented with Peet’s roasting procedures and came up with their own blends and flavors.¬† The second Starbucks store opened in 1972 (Thompson & Strickland, 1999).

     By the early 1980s, the operation had expanded to four retail locations in the Seattle area, all of which had been profitable since their inception.  In spite of the success of the business, the three founding entrepreneurs moved in different directions.  Siegel experienced burnout  and left to pursue other interests.  Bowker shifted his attention to his own advertising business, although he remained as a somewhat absentee owner.  Baldwin took over day-to-day management of the company and functioned as Chief Executive officer (Thompson & Strickland, 1999).

¬†¬†¬†¬† In 1981, Howard Schultz, vice president and general manager of U.S. operations for Hammarplast‚ÄĒa Swedish maker of stylish kitchen equipment and household appliances–noticed that Starbucks was placing larger orders than Macy’s Department Store was for a certain type of drip coffee maker.¬† (Thompson & Strickland, 1999). ¬†Startled that a company so much smaller would be ordering more of these items, he decided to pay the company a visit.¬† Schultz was impressed by what he saw and smelled.¬† The rich aroma of the coffee complemented the artfully displayed exhibits of coffee beans and accessories on walls and shelves.¬† He was pleased to see his own company‚Äôs machines perking away. ¬†While talking with the counter clerk, he was given a freshly brewed cup of coffee. ¬†After three sips, Schultz was hooked. ¬†He started to ask questions about the company, about coffees from different parts of the world, and about the different ways of roasting coffee.

     Schultz had long discussions with Siegel and Baldwin, and was impressed by the business philosophy of the two partners, who insisted on top-quality, fresh-roasted, whole-bean coffee.  Schultz  also admired  Starbucks’ commitment to educating customers regarding the qualities of fine coffees, and the intricate process that goes into growing the beans properly, shipping them, roasting them, even sipping the final product properly (Thompson & Strickland, 1999).

¬†¬†¬†¬† Schultz envisioned Starbucks going worldwide, but his ambitious outlook was not initially accepted by Siegel and Baldwin.¬† Slowly, he incorporated new concepts into Starbucks and bought out the founders in 1987.¬† (Thompson & Strickland, 1999).. ¬†Over time, Schultz expanded the menu from mere coffees and teas to bottled drinks, pastries, and gourmet sandwiches.¬† Schultz engineered the company from a four-unit, one-state affair, to a nationwide operation, quickly expanding into all fifty states, then into dozens of countries abroad.¬† He stressed human values‚ÄĒhonesty and civic mindedness—as the impetus to future success.¬† He encouraged employees at all levels of operation to contribute to company excellence.

¬†¬†¬†¬†¬† The commitment Schultz brought to community building differentiates Starbucks from most businesses, including gourmet eateries. ¬†Schultz provides a striking counterpoint to the average, bottom-line obsessed CEO.¬† According to Schultz (1999), The mission statement that emerged from that process puts people first and profits last.¬† It‚Äôs not a trophy to decorate our office walls, but an organic body of beliefs.‚Ä̬†¬† (p. 131). ¬†According to Siegel (2004), Howard Schultz‚Äôs cultural values have lifted his company above the pack.¬† Starbucks strongly reflects Schultz‚Äôs personal beliefs, and those beliefs permeate every aspect of company politics, transforming a generation in the process. ¬†¬†¬†

Organizational Structure 

¬†¬†¬†¬† Starbucks emphasizes individual contribution, teamwork and diversity¬≠¬≠¬≠¬≠—American cultural trademarks—as the core values of the company.¬† ¬†Democratic principles, in theory, guide the company. ¬†¬†In the real world, these principles are often superseded by expediency, depending on the location of the outlet.¬† Some owner/operators are less responsive than others to the call for democratic participation at all levels (Yammarino, 2006).

     Starbucks Corporation maintains a relatively horizontal organizational structure, encouraging employee involvement through the utilization of cross-functional work teams in the strategic planning processes.  The primary governing body at Starbucks is comprised of the Office of the Chairman and the Board of Directors, which receives substantial input from other senior level executives, in particular, the senior vice president of human resources.  In addition to this group, a steering committee comprised of the heads of each functional unit meet monthly to discuss corporate issues.

     This corporate model has proven its efficacy.  Encouraging employee participation in decision-making has probably proven to be an important contributor to an industry leading low employee turnover rate.  Starbucks promotes itself as a company responsive to the needs of the communities they find themselves a part of.  They encourage their officers to be as accessible to the public as possible.

        Table 1, below lists the senior corporate officers for Starbucks Corporation.

Table One:  SENIOR OFFICERS 

Howard Schultz Chairman
James L. Donald President and Chief Executive Officer
James C. Alling President, Starbucks Coffee U.S.
Martin Coles president, Starbucks Coffee International
Paula E. Boggs EVP, General Counsel and Secretary
Michael Casey EVP, Chief Financial Officer and Chief Administrative Officer
Dorothy J. Kim EVP, Supply Chain Operations
David A. Pace EVP, Partner Resources
Troy Alstead SVP, Finance
Cliff Burrows SVP, President, Europe/Middle East/Africa
Brian Crynes SVP, and Chief Information Officer
Christine Day SVP, president, Asia Pacific Group
Michelle Gass SVP, Category Management
Margaret Giuntini SVP, Partner Resources, U.S. Business
Juan Guerrero SVP, Global Logistics and International SCO
Julio Gutiérrez SVP, New Markets, Starbucks Coffee International
Willard (Dub) Hay SVP, Coffee and Global Procurement
Buck Hendrix SVP, President, Latin America
Gregg S. Johnson SVP, Global Business Systems Solutions
Gerardo I. Lopez SVP, President, Global Consumer Products
Dave Olsen SVP, Culture and Leadership Development
Michael Stafford SVP, Organization & Partner Development
Marc D. Stolzman SVP, Finance and Business Development, Starbucks Coffee International
Sandra E. Taylor SVP, Corporate Social Responsibility

Source: www.starbucks.com

Geographic and Political

UNITED STATES LOCATIONS

50 states, plus the District of Columbia

5,668 Company-operated coffeehouses

3,168 licensed locations

INTERNATIONAL LOCATIONS

36 countries outside of the United States

Companyoperated: 1,434 coffeehouses, including Australia, Canada, Chile, China, Germany, Ireland, Singapore, Southern China, Thailand, the United Kingdom and Puerto Rico

JOINT VENTURE AND LICENSED LOCATIONS

2,170 in Austria, Bahamas, Bahrain, Beijing, Canada, Cyprus, France, Greece, Hong Kong, Indonesia, Japan, Jordan, Kuwait, Lebanon, Macau S.A.R., Malaysia, Mexico, New Zealand, Oman, People’s Republic of China (Shanghai/Eastern China), Peru, Philippines, Qatar, Saudi Arabia, South Korea, Spain, Switzerland, Taiwan, Turkey, and United Arab Emirates

Source: www.starbucks.com 

China and Starbucks

¬†¬†¬†¬† China looms as the most populous country in the world, with a population estimated at 1.3 billion, it is a fertile marketplace to exploit if the obstacles to gaining a corporate foothold can be overcome. ¬†¬†According to Adamy (2006), ‚ÄúThe Seattle company aims to one day have thousands of stores here, eventually making China its largest market outside the U.S.‚Ä̬† (par. 3).

¬†¬†¬†¬† However, Chinese consumers are demanding and somewhat xenophobic when it comes to acceptance of new products.¬† ¬†Adamy (2006) says ‚ÄúStarbucks faces a big obstacle at it goes after the market here.¬† Most of China‚Äôs 1.3 billion people don‚Äôt care for the chain‚Äôs signature product.¬† In tea-drinking China, coffee has such a narrow following that until recently, many Starbucks here didn‚Äôt brew drip coffee unless a customer ordered it.‚Ä̬† (par. 4).

¬†¬†¬†¬† The first Starbucks opening in China startled the world, even if they were not able to sell four-dollar cups of coffee to bicycle riding laborers. ¬†¬†Starbucks realized they had to adapt to the differences in consumer tastes in China, as some of their corporate predecessors, like KFC, had already done.¬† According to Adamy (2006), ‚ÄúSome of the most successful Western companies pushing into China have tailored their products to suit locals.¬† Yum Brands, Inc, owner of KFC, the largest restaurant chain in China, is starting a Chinese fast-food chain to sell noodles and rice.¬† General Motors Corp. has restyled a Cadillac for China.‚Ä̬† (par. 9).¬† Similarly, Starbucks has made a number of changes with regard to its Chinese stores.¬† Although the drink menu is still predominantly comprised of coffee-based beverages, it also features teas, mooncakes, and other traditional Chinese foods.

¬†¬†¬†¬† However, Starbucks has not decreased prices by much, counting on affluent young workers to keep their stores afloat.¬† ¬†Adamy states that ‚ÄúStarbucks is betting that a new generation of Chinese with growing spending power and an appetite for high-status brands will flock to its stores because Starbucks embodies China‚Äôs new sophistication.‚Ä̬† (par. 5).¬† Adamy goes on to say that in spite of much lower incomes in China, Starbucks does not plan on lowering prices precipitously.¬† ‚ÄúWhether Starbucks succeeds in China will also be an important barometer of social and economic change.¬† A 480-milliliter latte‚ÄĒwhat Starbucks calls a ‚Äúgrande‚ÄĚ‚ÄĒcosts about $3.50 in Shanghai, a luxury considering the average income in this city is about $3800 a year.¬† Despite the steep price, Starbucks‚Äô ability to charge a premium has been a critical component of the chain‚Äôs overall success.¬† Rather than lower drink prices, then, executives say they are considering making certain food items less expensive as a way to attract more customers.‚Ä̬† (par. 10).

     Some price adjustments were necessary, but surely enough the Chinese were soon imbibing the Starbucks brand of coffee.    Starbucks strives to respect the local cultural heritage in China, making Starbucks somewhat of a chameleon, willing to transform itself according to its surroundings.  For example, Starbucks officials worked closely with the Forbidden City Museum authorities in respecting the historical relevance of a site’s location.  Such sensitivity goes a long way in solidifying business relationships overseas, where cultures often collide.

Starbucks in Italy

¬†¬†¬† ¬†¬†According to Schultz (1999), the coffee drinking experience has deep roots, especially in Europe, and particularly in Italy, where coffee is king.¬†¬† ‚ÄúCoffee and coffeehouses have been a meaningful part of community life for centuries, in Europe, as well as in America.‚Ä̬† (p 24).¬†¬† Schultz was impressed by the romantic atmosphere in Italian coffee shops, and wanted to recreate it, make it even better.¬† ‚ÄúBut I felt the unexpressed demand for romance and community.¬† The Italians had turned the drinking of coffee into a symphony, and it felt right.‚Ä̬† (p. 53).

     For many Italians, coffee is not just a side drink, but also the most important drink.   According to Michael Specter (1998), Italy is a nation of espresso drinkers, so Starbucks had to adjust to this, my making the tiny cup of espresso their primary offering here.     Specter (1998) says that Italians consume thirty-eight million  cups of espresso each day.     Italy, he goes on to say, boasts over one hundred fifty thousand coffee bars, as Italians call them.   Starbucks thus faced stiff competition when they first came to Italy.

     Starbucks has gained a strong foothold in Italy by being sensitive in the cultural differences between Italians and Americans when it comes to coffee drinking habits (Yong-shik, 2001).  In this case, it means pumping out mostly espressos in smaller cups, and increasing the amount of table space, as Italians seem to prefer drinking and socializing. 

Starbucks in Israel

     Of course, not all venues Starbucks has ventured into have been successful.  Israel, for example, provides such an example.   According to a Starbucks press (2003), “Starbucks

Coffee International, a wholly owned subsidiary of Starbucks Coffee Company (Nasdaq¬† SBUX) and the Delek Group of Israel have mutually agreed to end their joint venture in Israel.‚Ä̬† (par 2).¬†¬† The company attributed it to ‚Äúoperational challenges.‚Ä̬† (par 3).

¬†¬†¬†¬† Mark McKeon, President of Starbucks International for Europe, Middle East and Africa, says, ‚ÄúFollowing months of serious discussions and market reviews with the Delek Group, we came to this amicable and mutual decision.¬† Our commitment in the market continues to be strong and long-term and we will return at an appropriate time.‚Ä̬† (par. 4).

Starbucks’ Overseas Expansion in a Frenzy

¬†¬†¬†¬† ¬†¬†Too far too fast?¬† From Zurich to Tel Aviv, Starbucks’ overseas expansion has come with a price.¬† Now operating in thirty countries beyond the U.S. and Canada, Starbucks caf√©s have encountered a host of problems, from high start-up costs to stiff competition, and in many cases, resistance to the Starbucks experience. ¬†While it has scored big in the U.S. as a hip purveyor of premium coffee, Starbucks abroad has had more difficulty selling such an expensive drink. ¬†Starbucks’ 1,532 overseas stores account for 23% of its stores, yet only 9% of sales. (Business Week, 2003).¬†¬† In other words, the domestic operations are subsidizing foreign operations.¬† How long the company will tolerate this before shuttering many foreign stores is not clear.

¬†¬†¬†¬† Schultz (1999) remains optimistic regarding overseas expansion.¬† ‚ÄúAlmost everywhere we open a store, we add value to the community.¬† Our stores become an instant gathering spot, a Third Place that draws people together.‚Ä̬† (p. 281).

Starbucks Stock Prices for the Past Year

Form 10-Q for STARBUCKS CORP

9-Feb-2007 

Quarterly Report

¬†¬†¬†¬† In licensed retail operations, Starbucks shares operating and store development experience to help licensees improve the profitability of existing stores and build new ones.¬† The company’s strategy is toselectively increase its equity stake in licensed international operations as these markets develop. ¬†In October 2006, Starbucks purchased a 90% stake in its previously licensed operations in Beijing and Tianjin, China.
Total net revenues for the 13-week period ended December 31, 2006 was up 22% compared to the same period for the previous fiscal year.  The increase could be attributed to sales growth in pre-existing stores, sales in newly opened, primarily domestic locations, and to growth in ancillary business operations.  The company expects consolidated total net revenue growth of approximately 20% in fiscal 2007, consistent with its three-to five-year revenue growth target.  (Starbucks website, 2007)

The International operating segment (“International”) sells coffee and other beverages, whole bean coffees, complementary food, coffee brewing equipment and merchandise through company-operated retail stores in Canada, the United Kingdom, China, Thailand, Australia, Germany, Singapore, Puerto Rico, Chile, and Ireland. ¬†Specialty operations of International include retail store licensing operations in more than twenty-five other countries and food service accounts in Canada and the United Kingdom.¬† The International store base is increasing rapidly, while domestic sales continue to show a robust growth.¬† During the quarter ending December 31, 2006, Starbucks International opened its first stores in Brazil and Egypt. ¬†Many of the International operations are in early stages of development that require a more extensive support organization– relative to the current levels of revenue and operating income–than in the United States. ¬†This continuing investment is part of the company’s long-term, balanced plan for profitable growth. ¬†International total net revenues increased 32% to $405 million for the 13 weeks ended December 31, 2006, compared to $306 million for the corresponding period of fiscal 2006.¬† (Starbucks Official Website, 2007).

¬†¬†¬†¬† According to CNBC (2006), Starbucks‚Äô first quarter earnings rose a staggering 18%, surpassing analysts’ estimates.¬† This was in spite of expense increases due to expansion, rising payroll, and rent.¬†¬† During this quarter, Starbucks opened an average of eight stores per day, fueling growth.¬† The company also added many food items to the menu, as well as new items, such as gift cards.¬†¬† Starbucks‚Äô shares rose 1% after the announcement.

     According to Reuters (2006), estimated net income for the fiscal first quarter was $205 million, or $0.26 per share.  In the same period last year, Starbucks earned $174 million, or $0.22 per share.

     Moreover, according to CNBC (2007), total revenue rose 21% to $2.36 billion.  Wall Street was expecting revenue of about $2.35 billion, according to Reuters (2007). Starbucks said it opened a record 728 locations during the first quarter of the current fiscal year.  The company plans to open 2,400 coffee shops for fiscal 2008., up from 2,190 for the previous fiscal year.    Chief Executive Jim Donald said that even though store openings are at record levels, the company would be able to keep increasing new store growth beyond 2007.  Starbucks said it still expects to earn between $0.87 and $0.89 per share for the year.    The company expects same-store sales to rise between three and seven percent this year and forecasts overall revenue growth of about 20%.

 Starbucks income statement, highlighting gross sales and the cost of doing business to generate net income are depicted in Table 2, below.  Starbucks’ revenues derive from food and drink sales and miscellaneous items..  The bottom line in any business is not the revenue, but net profit or loss.  The data below shows steadily rising profit margins and efficiency between 2004 and 2006

                                   Table 2:  Starbucks Income Statement 

View: Annual Data | Quarterly Data All numbers in thousands

PERIOD ENDING 1-Oct-06 2-Oct-05 3-Oct-04
Total Revenue 7,786,942   6,369,300   5,294,247  
Cost of Revenue 3,178,791 2,605,212 2,191,440
 
Gross Profit 4,608,151   3,764,088   3,102,807  
 
  Operating Expenses
  Research Development
  Selling General and Administrative 3,420,925 2,720,049 2,266,109
  Non Recurring (76,745) (60,657)
  Others 387,211 340,169 289,182
   
  Total Operating Expenses  
   
   
Operating Income or Loss 800,015¬†¬† 780,615¬†¬† 608,173¬†¬†  
   
  Income from Continuing Operations  
  Total Other Income/Expenses Net 12,291 15,829 14,140  
  Earnings Before Interest And Taxes 906,243 796,444 622,313  
  Interest Expense  
  Income Before Tax 906,243 796,444 622,313  
  Income Tax Expense 324,770 301,977 231,754  
  Minority Interest  
   
  Net Income From Continuing Ops 581,473 494,467 390,559  
   
  Non-recurring Events  
  Discontinued Operations  
  Extraordinary Items  
  Effect Of Accounting Changes (17,214)  
  Other Items  
   
   
Net Income 564,259¬†¬† 494,467¬†¬† 390,559¬†¬†  
Preferred Stock And Other Adjustments  
   
Net Income Applicable To Common Shares $564,259¬†¬† $494,467¬†¬† $390,559¬†¬†  

Source: Yahoo Finance

    Company income is directly related to the marketing and sales efforts of executives.  Starbucks bases bonuses for many of its officers on monetary performance goals.  What follows is an executive management plan directed to all of Starbucks’ shareholders for the purposes of providing incentive for meeting company fiscal goals:

The material terms of the Objective Performance Goals under this Executive Management Bonus Plan (the “Plan”) will be submitted to the shareholders of Starbucks Corporation (“Starbucks” or the “Company”) on March 21 2007.¬† Shareholder approval of the Plan is required in order for the bonuses paid upon achievement of the Objective Performance Goals to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code (Starbucks, 2006).

Competitors

¬†¬†¬†¬† Starbucks’ closest competitor, Second Cup (a Canadian franchisor with stores primarily in Canada), is less than one-third its size.¬† Second Cup owns Gloria Jeans, a franchisor of specialty coffees, with stores located primarily in malls throughout the United States. ¬†No other rival has as many as 250 stores, according to Forbes (2007), but there are at least twenty small local and regional chains that aspire to grow into rivals of Starbucks, most notably New World Coffee, Coffee People, Coffee Station, Java Centrale, and Caribou Coffee

      Table 3 shows a fiscal comparison between Starbucks and other big players in the gourmet coffee industry.   Starbucks compares very favorably with its major competitors.  Starbucks is an $8 billion behemoth with a gross operating margin of nearly 60%..  Compared to the industry average, this number is astounding.

                                               Table 3:  Starbucks v. Competitors

DIRECT COMPETITOR COMPARISON  

 

  SBUX Pvt1 THI Industry
Market Cap: 24.96B N/A 5.90B N/A
Employ­ees: 145,800 9531 N/A 1.86K
Qtrly Rev Growth (yoy): 21.80% N/A 15.50% 0.00%
Revenue (ttm): 8.21B 517.00M1 1.42B N/A
Gross Margin (ttm): 58.76% N/A 27.64% 35.42%
EBITDA (ttm): 1.36B N/A 377.14M N/A
Oper Margins (ttm): 10.24% N/A 20.73% 4.64%
Net Income (ttm): 612.27M N/A 221.50M 56.11M
EPS (ttm): 0.753 N/A 1.195 0.75
P/E (ttm): 43.77 N/A 25.80 N/A
PEG (5 yr expected): 1.60 N/A 1.67 N/A
P/S (ttm): 3.04 N/A 4.17 N/A

 

Pvt1 = Dunkin’ Brands, Inc. (privately held)
THI = Tim Hortons Inc.
Industry = Specialty Eateries
1 = As of 2005

Yahoo! finance

                                                           The Four P’s of Marketing

Product

¬†¬†¬†¬† Starbucks Corporation purchases and roasts high quality whole bean coffees from different parts of the world that would adhere to their high quality standards for coffee beans.¬† However, this is just the main entr√©e into consumers‚Äô wallets.¬† In most Starbucks coffee shops, they offer freshly rich-brewed coffees, Italian-style espresso beverages, cold blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, premium teas and some compact discs that contain Starbucks‚Äė choice of music.¬† They also sell consumable products in grocery and convenience stores, drinks¬† like bottled Frappuccino¬ģ and Starbucks DoubleShot‚ĄĘ coffee drinks and a line of premium ice creams. ¬†(Starbucks website, 2007)

     Product availability varies from country to country, from store to store.  Larger stores usually carry a broader selection of whole bean coffees, package sizes, foods, and coffee-making accessories.

     New products are constantly being introduced.  For instance, music CDs are now being sold by the millions, and an entire 60-person department now overseas the music selections being marketed.

Place

¬†¬†¬†¬† Starbucks is a global brand, with establishments around the world.¬† ¬†Coffee is an international drink, and combined with a corporate willingness to blend into whatever culture they find themselves in, Starbucks will continue to expand overseas.¬† No venue seems too far away for the corporate leadership in Seattle to consider. Their locations do not need high traffic to drive customers to their stores, because many people visit as an end in itself, to participate in the ‚ÄúStarbucks experience.‚Ä̬† Whatever Starbucks lacks, if anything, is compensated by a company commitment to creating that comfortable venue ‚Äď the magical Third Place.

¬†¬†¬†¬† Starbucks‚Äô stores are furnished for relaxation, including comfortable leather couches.¬†¬† Servers are trained to say yes to customer requests, whenever possible.¬† According to Moore (2006), ‚ÄúIts in-store experience became Starbucks‚Äô primary marketing tool.¬† Everything about the Starbucks experience marketed the Starbucks business.‚Ä̬† (p. 8).¬†¬†

Price

     Starbucks’ coffee beans are carefully chosen to meet high-quality standards.  Usually, premium brands correlate with higher prices, and Starbucks is no exception..  Not everybody can afford a four-dollar cup of coffee, but the company counts on enough well-heeled customers to keep the corporate engines running.     And in spite of the criticism the company receives regarding exorbitant prices, a large cup of drip coffee is still cheaper at Starbucks than at Dunkin Donuts. 

Promotion

    Starbucks has chosen to introduce and promote innovative products, not just the same tiresome flavors and styles of coffee.  Starbucks merged with Pepsico and Dreyer’s to sell bottled Frappuccino coffee beverages and ice cream in supermarkets.  The company makes and sells teas produced by its wholly owned subsidiary, Tazo Tea Company..

     As a progressive company of the 21st century, Starbucks is committed to offering  wireless internet access to as many customers as possible.  (Starbucks website, 2007). The company tries to maintain a nice balance between comfort and work efficiency so their clients can enjoy a few $4 cups of coffee while checking emails or surfing the internet.

     Many of Starbucks’ promotions involve the participation of other companies.  This company is also actively participating in environmental campaigns.  Starbucks has made the environment its main civic concern and volunteers in a plethora of environmental awareness programs around the world.   (Starbucks website, 2007) .

¬†¬†¬†¬† Starbucks minimizes advertising costs by preferring instead the tried-and-true method of word-of-mouth.¬† This keeps their profit margins high.¬† ¬†Such a strategy has helped keep their stock price relatively high.¬† According to Moore (2006), ‚ÄúStarbucks¬† has learned the most effective way to spend its marketing dollars is not on making funnier television commercials, but rather on making better customer experiences.‚Ä̬† (p. 10).

SWOT Analysis

Strengths

  • International Brand ‚Äď Starbucks‚Äô global dominance is recognized by their competitors. Its name carries the cachet of excellence in the coffee industry.¬† When people think coffee, a large number of people think Starbucks next, and such brand name recognition is something the company now shares with other corporate lions like Coca-Cola, McDonalds, and Nike.¬† Some business analysts rate the Starbucks brand name as among the most valued in the world today.¬† (Forbes, 2007)
  • Innovative Company ‚Äď Starbucks recognizes the importance of this factor in their business strategies, grading excellently in the area of creative business practices.
  • Great company to work for–Starbucks is one of the Fortune Top 100 Companies to Work For in 2005. (Fortune, 2006). ¬†¬†The company values the importance of their employees, without whom they could not sell a single cup of coffee.¬† They reward their workers more than the normal amount in today‚Äôs business world.¬† For instance, even part-time workers receive company health insurance benefits.
  • Company philosophy–The Company has strong ethical values and an ethical mission statement– a pledge to honesty and civic involvement, as well as environmental awareness. ‚ÄúStarbucks is committed to a role of environmental leadership in all facets of our business.‚Ä̬† (Starbucks, 2007)¬† They have come to understand that no business exists in a vacuum, and that the environment is the responsibility of everyone.¬†

Weaknesses

  • High price ‚Äď Starbucks coffee is more expensive than most, too expensive for many consumers.
  • Competition among themselves ‚Äď Some Starbucks stores compete with each other when they are located too close to each other, resulting in lost customers for each outlet.. Such inauspicious planning can cause the company to assume unnecessary expenses for two stores producing one profit.

Opportunities

  • Joint Ventures/Mergers ‚ÄďStarbucks has merged with other companies to launch new products. For instance, in some eateries, a Hewlett-Packard CD burner has been installed to let their customers create their own music.¬† Additionally, Starbucks is working with T-Mobile to set up wireless internet access.¬†¬† According to Ciccone (2004), ‚Äúo The T-Mobile HotSpot service at Starbucks is proving to be very successful.¬† With millions of customer accesses since the August, 2002 launch, customers are finding that Starbucks is a great place to stay connected to e-mail or the Web while they‚Äôre away from home or the office.¬† Internal research indicates that T-Mobile HotSpot subscribers visit Starbucks more often‚ÄĒan average of eight times a month—and spend more time in the stores‚ÄĒthe average connection lasts approximately one hour.‚Ä̬† (par. 4)
  • Global Brand ‚Äď New global business opportunities present themselves to Starbucks constantly. There is still lots of room for global expansion, but Starbucks is aware that their overseas establishments have been subsidized by domestic operations. ¬†¬†Nevertheless, the Starbucks mermaid is now a recognized symbol around the world.

 Threats

  • Coffee Bean Price ‚Äď Coffee is an agricultural commodity, like wheat or soybeans; the price depends on a host of uncontrollable factors, like weather, the cost of oil for transport, even taxes. Because of such variance, it is not possible to keep the price of coffee perfectly steady.¬† For instance, in 1997, the price of coffee beans doubled, due to adverse weather conditions.¬† ¬†Starbucks has weathered a number of precipitous price increases in its history, and according to Schultz (1999), they have helped the company grow.¬† ‚ÄúIt may sound trite, but I believe that managing through the coffee crisis made Starbucks a better company.¬† It made us more aware of our vulnerabilities, and it forced us to develop skills.‚Ä̬† (p. 241).
  • Competitors ‚Äď How long will Starbucks maintain its status as the number one purveyor of gourmet coffee? This is anybody‚Äôs guess, but as long as the company¬† continues to show discrimination in its coffee purchases, concern for the comfort of their customers, and civic-mindedness toward the world-at-large, it will probably ¬†be a long time until Starbucks is unseated as number one in this business.¬†

Conclusion

     Starbucks has changed they way people enjoy coffee.  It is not simply the aroma and taste people savor, but more importantly, the feelings and emotions that accompany the coffee drinking experience.  The experience is about sipping freshly brewed coffee and chatting with our friends or perhaps sometimes by being alone, thinking or surfing the internet.  Not only has Starbucks established its brand, but it has also given us an alternative way to enjoy coffee.  This new way of life, this Third Place, draws more consumers than ever before.

     The ride to the top of this niche market was not without difficulty, but Starbucks was able to overcome its obstacles and prevail.  The Starbucks Corporation has re-invented the concept of gourmet coffee drinking as a way of life.  With recent medical studies touting coffee as a healthy drink laced with anti-oxidants, there seems to be a lot more here than just corporate hype.

     Starbucks has created tens of thousands of jobs in the United States and abroad, and most people who work at Starbucks seem to be satisfied with working there.   The company has consistently placed high in studies of worker satisfaction.

¬†¬†¬†¬† The company faces obstacles and challenges, according to the Starbucks Union, which is growing in numbers, in spite of company opposition.¬†¬† Suppliers of Starbucks coffee beans, in places like Ethiopia and Vietnam, are demanding higher prices for their products.¬†¬† Workers are complaining about low starting salaries, and in some cases, salary caps.¬† Health benefits are too limited‚ÄĒfamily deductibles can rise to $25,000 per year– to suit many workers.¬† Workers are demanding regular hours that they can count on to support their families.

     Some communities have offered stiff resistance to Starbucks’ entrance.

     All in all, however, Starbucks has overcome many adversities, and will probably continue to do so.  Business analysts have generally agreed that this is a successful, well-managed company.  According to Mitchell (2006), the success of Starbucks is due to their ability to provide enhanced customer experiences, motivate employees, stimulate business growth, and retain customer loyalty.

     There is more to life than coffee, of course.  Starbucks is committed to giving customers a superb cup of coffee in comfort, at a relatively high price, leaving room for plenty of profit for shareholders.  Other businesses should scrutinize the Starbucks model of success, or they will be trampled by the businesses that do.

References

Anonymous author, (2006), “Company Fact Sheet-August 2006.‚Ä̬† Retrieved, February 11, 2007 from:¬† www.starbucks.com

Anonymous author, ‚ÄúThe History of Coffee.‚Ä̬† Retrieved, February 11, 2007 from ¬†¬†¬†¬†¬†¬†¬†¬† www.telusplanet.net .

Anonymous author, (2007), Starbucks Union Website, retrieved from

            http://www.starbucksunion.org/node/1182, February 11, 2007.

Adamy, Janet, (2006), ‚ÄúStarbucks bets on China‚Äôs new social mobility,‚ÄĚ The Wall ¬†¬†¬†¬†¬†¬†¬†¬†¬† Street ¬† Journal, November 29, 2006.

,Bock, Wally, (2002), ¬†‚ÄúStarbucks‚Äô Voyage to Success,‚ÄĚ Retrieved from ¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† http://www.mondaymemo.net/020923feature.htm, February 10, 2007.

Choe, Y.¬† ‚ÄúDoes Going Global Mean Americanization?‚Ä̬† The Korea Herald, September 28, 2001.

Ciccone, David, (2004), ‚ÄúStarbucks builds continued success with T-Mobile HotSpot‚ÄĒthe nation‚Äôs largest commercial wi-fi network,‚ÄĚ July 6, 2004, retrieved from http://mobilitytoday.com/news.php?n=003902&p=iPAQ_tmobile_partnership,¬† February 11, 2007.

Colvin, G. (2006, January).  The 100 Best Companies to Work For 2006.  Fortune Magazine, (153), 46-58

Daniels, C. “Mr. Coffee The man behind the $4.75 Frappuccino makes the 500,” Fortune, April 14, 2003.

Gray, Stephen, and Smith, Ethan, (2006), ‚ÄúCoffee and Music Create a Potent Mix¬† at Starbucks,‚ÄĚ The Wall Street Journal, July 19, 2005.

Haig, W.L. (1997).  The Power of Logos: How to Create Effective Company Logos.  Wiley, 1997.

Segil, L. (2004).  Starbucks Measuring the Value of Partnering: How to Use Metrics to Plan, Develop, and Implement Successful Alliances.  AMACOM, 2004.

Holmes, S., Kunii, I., Ewing, J., and Capell, K (2003),. “For Starbucks, there’s no place like home,” Business Week, June 9, 2003.

Mitchell, Joseph A., (2006), The Starbucks Experience:  5  Principles for Turning Ordinary into Extraordinary, McGraw-Hill, 2006.

Moore, John, (2006), Tribal Knowledge:  Business Wisdom Brewed from the Grounds of Starbucks Corporate Culture, Kaplan Business, 2006.

Principles.  (2006). In Merriam-Webster online dictionary. Retrieved, February 11, 2007 from: http://www.m-w.com/dictionary/principles

Schultz, Howard and Yang, Dori Jones, Pour Your Heart Into It:  How Starbucks Built a Company One Cup at a Time, Hyperion, 1999.

Specter, Michael.¬† (1998). ‚ÄúCoffeclash.‚Ä̬† The New Yorker.¬† October19, 1998.

‚ÄúStarbucks Income Statement.‚Ä̬† Retrieved, February 11, 2007 from: www.yahoo.finance.com

‚ÄúStarbucks Quarterly Report.‚Ä̬† Retrieved, February 11, 2007 from: www.yahoo.finance.com

Starbucks Press Release, March 31, 2003, retrieved from

            http://www.boycottwatch.org/misc/starbucks1.htm, February 11, 2006.

Starbucks Official Website, (2007) retrieved from

            http://www.starbucks.com, February 11, 2006.

Thompson, J & Strickland, L.  (1999). Strategic Management, Concepts and Cases McGraw Hill, Chicago, IL

Yammarino, Y, (2006). Organizational Structure.  Elsevier 2006.“

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