Case study – Starbucks – going global fast.
Case study – Starbucks – going global fast
The Starbucks coffee shop on Sixth Avenue and Pine Street in
downtown Seattle sits serene and orderly, as unremarkable as
any other in the chain bought years ago by entrepreneur Howard
Schultz. A few years ago, however, the quiet storefront made front
pages around the world. During the World Trade Organization talks
in November 1999, protesters flooded Seattle’s streets, and among
their targets was Starbucks, a symbol, to them, of free-market capitalism
run amok, another multinational out to blanket the earth.
Amid the crowds of protesters and riot police were black-masked
anarchists who trashed the store, leaving its windows smashed and
its tasteful green-and-white decor smelling of tear gas instead of
espresso. Says an angry Schultz: “It’s hurtful. I think people are
ill-informed. It’s very difficult to protest against a can of Coke, a
bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous
brand and a place where you can go and break a window. You
can’t break a can of Coke.”
The store was quickly repaired, and the protesters scattered to
other cities. Yet, cup by cup, Starbucks really is caffeinating the
world, its green-and-white emblem beckoning to consumers on
three continents. In 1999, Starbucks Corp. had 281 stores abroad.
Today, it has about 7,000—and it’s still in the early stages of a plan to
colonize the globe. If the protesters were wrong in their tactics, they
weren’t wrong about Starbucks’ ambitions. They were just early.
The story of how Schultz & Co. transformed a pedestrian commodity
into an upscale consumer accessory has a fairy-tale quality.
Starbucks grew from 17 coffee shops in Seattle to over 19,000 outlets
in 58 countries. Sales have climbed an average of 20 percent annually
since the company went public, peaking at $10.4 billion in 2008
before falling to $9.8 billion in 2009. Profits bounded ahead an average
of 30 percent per year through 2007, peaking at $673 million,
then dropping to $582 million and $494 million in 2008 and 2009,
respectively. The firm closed 475 stores in the U.S. in 2009 to reduce
costs. But more recently, 2017 revenues rebounded to $22.4 billion
profits with an operating profit of $4.1 billion.
Still, the Starbucks name and image connect with millions of
consumers around the globe. Up until recently, it was one of the
fastest-growing brands in annual BusinessWeek surveys of the top
100 global brands. On Wall Street, Starbucks was one of the last
great growth stories. Its stock, including four splits, soared more
than 2,200 percent over a decade, surpassing Walmart, General
Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total returns.
In 2006 the stock price peaked at over $40, after which it fell to just
$4, and then again rebounded to more than $50 per share.
Schultz’s team is hard-pressed to grind out new profits in a
home market that is quickly becoming saturated. The firm’s 12,000
locations in the United States are mostly in big cities, affluent suburbs,
and shopping malls. In coffee-crazed Seattle, there is a Starbucks
outlet for every 9,400 people, and the company considers
that to be the upper limit of coffee-shop saturation. In Manhattan’s
24 square miles, Starbucks has 124 caf.s, with more on the way.
That’s one for every 12,000 people—meaning that there could be
room for even more stores. Given such concentration, it is likely to
take annual same-store sales increases of 10 percent or more if the
company is going to match its historic overall sales growth. That, as
they might say at Starbucks, is a tall order to fill.
Indeed, the crowding of so many stores so close together has
become a national joke, eliciting quips such as this headline in The
Onion, a satirical publication: “A New Starbucks Opens in Restroom
of Existing Starbucks.” And even the company admits that while
its practice of blanketing an area with stores helps achieve market
dominance, it can cut sales at existing outlets. “We probably selfcannibalize
our stores at a rate of 30 percent a year,” Schultz says.
Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Starbucks is
at a defining point in its growth. It’s reaching a level that makes it
harder and harder to grow, just due to the law of large numbers.”
To duplicate the staggering returns of its first decades, Starbucks
has no choice but to export its concept aggressively. Indeed, some
analysts gave Starbucks only two years at most before it saturates the
U.S. market. The chain now operates more than 7,000 international
outlets, from Beijing to Bristol. That leaves plenty of room to grow.
Most of its planned new stores will be built overseas, representing a
35 percent increase in its foreign base. Most recently, the chain has
opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off
Jakarta. Athens comes next. And within the next year, Starbucks plans
to move into Mexico and Puerto Rico. But global expansion poses
huge risks for Starbucks. For one thing, it makes less money on each
overseas store because most of them are operated with local partners.
While that makes it easier to start up on foreign turf, it reduces the
company’s share of the profits to only 20 percent to 50 percent.
Moreover, Starbucks must cope with some predictable challenges
of becoming a mature company in the United States. After
riding the wave of successful baby boomers through the 1990s, the
company faces an ominously hostile reception from its future consumers,
the twenty- or thirty-somethings. Not only are the activists
among them turned off by the power and image of the well-known
brand, but many others also say that Starbucks’ latte-sipping sophisticates
and piped-in Kenny G music are a real turnoff. They don’t
feel wanted in a place that sells designer coffee at $3 a cup.
Even the thirst of loyalists for high-price coffee cannot be taken
for granted. Starbucks’ growth over the early part of the past decade
coincided with a remarkable surge in the economy. Consumer
spending tanked in the downturn, and those $3 lattes were an easy
place for people on a budget to cut back.
To be sure, Starbucks has a lot going for it as it confronts the challenge
of regaining its fast and steady growth. Nearly free of debt, it
fuels expansion with internal cash flow. And Starbucks can maintain
a tight grip on its image because most stores are company-owned:
There are no franchisees to get sloppy about running things. By
relying on mystique and word of mouth, whether here or overseas,
the company saves a bundle on marketing costs. Starbucks spends
just $30 million annually on advertising, or roughly 1 percent of
revenues, usually just for new flavors of coffee drinks in the summer
and product launches, such as its new in-store web service. Most
consumer companies its size shell out upwards of $300 million per
year. Moreover, Starbucks for the first time faces competition from
large U.S. competitors such as McDonald’s and its new McCaf.s.
Schultz remains the heart and soul of the operation. Raised in
a Brooklyn public-housing project, he found his way to Starbucks,
a tiny chain of Seattle coffee shops, as a marketing executive in the
early 1980s. The name came about when the original owners lookedto Seattle history for inspiration and chose the moniker of an old
mining camp: Starbo. Further refinement led to Starbucks, after the
first mate in Moby Dick, which they felt evoked the seafaring romance
of the early coffee traders (hence the mermaid logo). Schultz got
the idea for the modern Starbucks format while visiting a Milan
coffee bar. He bought out his bosses in 1987 and began expanding.
The company is still capable of designing and opening a store in
16 weeks or less and recouping the initial investment in three years.
The stores may be oases of tranquility, but management’s expansion
tactics are something else. Take what critics call its “predatory real
estate” strategy—paying more than market-rate rents to keep competitors
out of a location. David C. Schomer, owner of Espresso
Vivace in Seattle’s hip Capitol Hill neighborhood, says Starbucks
approached his landlord and offered to pay nearly double the rate
to put a coffee shop in the same building. The landlord stuck with
Schomer, who says: “It’s a little disconcerting to know that someone
is willing to pay twice the going rate.” Another time, Starbucks
and Tully’s Coffee Corp., a Seattle-based coffee chain, were competing
for a space in the city. Starbucks got the lease but vacated the
premises before the term was up. Still, rather than let Tully’s get the
space, Starbucks decided to pay the rent on the empty store so its
competitor could not move in. Schultz makes no apologies for the
hardball tactics. “The real estate business in America is a very, very
tough game,” he says. “It’s not for the faint of heart.”
Still, the company’s strategy could backfire. Not only will
neighborhood activists and local businesses increasingly resent the
tactics, but also customers could grow annoyed over having fewer
choices. Moreover, analysts contend that Starbucks can maintain
about 15 percent square-footage growth in the United States—
equivalent to 550 new stores—for only about two more years. After
that, it will have to depend on overseas growth to maintain an
annual 20 percent revenue growth.
Starbucks was hoping to make up much of that growth with
more sales of food and other noncoffee items but stumbled somewhat.
In the late 1990s, Schultz thought that offering $8 sandwiches,
desserts, and CDs in his stores and selling packaged coffee
in supermarkets would significantly boost sales. The specialty business
now accounts for about 16 percent of sales, but growth has
been less than expected.
What’s more important for the bottom line, though, is that Starbucks
has proven to be highly innovative in the way it sells its main
course: coffee. In 800 locations it has installed automatic espresso
machines to speed up service. And several years ago, it began offering
prepaid Starbucks cards, priced from $5 to $500, which clerks
swipe through a reader to deduct a sale. That, says the company, cuts
transaction times in half. Starbucks has sold $70 million of the cards.
When Starbucks launched Starbucks Express, its boldest experiment
yet, it blended java, web technology, and faster service. At
about 60 stores in the Denver area, customers could pre-order and
prepay for beverages and pastries via phone or on the Starbucks
Express website. They just make the call or click the mouse before
arriving at the store, and their beverage would be waiting—with
their name printed on the cup. The company decided in 2003 that
the innovation had not succeeded and eliminated the service.
And Starbucks continues to try other fundamental store
changes. It announced expansion of a high-speed wireless Internet
service to about 1,200 Starbucks locations in North America and
Europe. Partners in the project—which Starbucks calls the world’s
largest Wi-Fi network—include Mobile International, a wireless subsidiary
of Deutsche Telekom, and Hewlett-Packard. Customers sit
in a store and check e-mail, surf the web, or download multimediapresentations without looking for connections or tripping over
cords. They start with 24 hours of free wireless broadband before
choosing from a variety of monthly subscription plans.
Starbucks executives hope such innovations will help surmount
their toughest challenge in the home market: attracting the next generation
of customers. Younger coffee drinkers already feel uncomfortable
in the stores. The company knows that because it once had
a group of twentysomethings hypnotized for a market study. When
their defenses were down, out came the bad news. “They either can’t
afford to buy coffee at Starbucks, or the only peers they see are those
working behind the counter,” says Mark Barden, who conducted
the research for the Hal Riney & Partners ad agency (now part of
Publicis Worldwide) in San Francisco. One of the recurring themes
the hypnosis brought out was a sense that “people like me aren’t
welcome here except to serve the yuppies,” he says. Then there are
those who just find the whole Starbucks scene a bit pretentious.
Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian
terminology of grande and venti for coffee sizes. She goes to
Dunkin’ Donuts, saying: “Small, medium, and large is fine for me.”
As it expands, Starbucks faces another big risk: that of becoming
a far less special place for its employees. For a company modeled
around enthusiastic service, that could have dire consequences
for both image and sales. During its growth spurt of the mid- to
late-1990s, Starbucks had the lowest employee turnover rate of any
restaurant or fast-food company, largely thanks to its then unheardof
policy of giving health insurance and modest stock options to
part-timers making barely more than minimum wage.
Such perks are no longer enough to keep all the workers
happy. Starbucks’ pay doesn’t come close to matching the workload
it requires, complain some staff. Says Carrie Shay, a former
store manager in West Hollywood, California: “If I were making
a decent living, I’d still be there.” Shay, one of the plaintiffs in the
suit against the company, says she earned $32,000 a year to run a
store with 10 to 15 part-time employees. She hired employees, managed
their schedules, and monitored the store’s weekly profit-andloss
statement. But she also was expected to put in significant time
behind the counter and had to sign an affidavit pledging to work
up to 20 hours of overtime a week without extra pay—a requirement
the company has dropped since the settlement.
For sure, employee discontent is far from the image Starbucks
wants to project of relaxed workers cheerfully making cappuccinos. But
perhaps it is inevitable. The business model calls for lots of low-wage
workers. And the more people who are hired as Starbucks expands,
the less they are apt to feel connected to the original mission of high
service—bantering with customers and treating them like family.
Robert J. Thompson, a professor of popular culture at Syracuse University,
says of Starbucks: “It’s turning out to be one of the great 21st
century American success stories—complete with all the ambiguities.”
Overseas, though, the whole Starbucks package seems new and,
to many young people, still very cool. In Vienna, where Starbucks
had a gala opening for its first Austrian store, Helmut Spudich,
a business editor for the paper Der Standard, predicted that Starbucks
would attract a younger crowd than would the established
caf.s. “The coffeehouses in Vienna are nice, but they are old. Starbucks
is considered hip,” he says.
But if Starbucks can count on its youth appeal to win a welcome in
new markets, such enthusiasm cannot be counted on indefinitely. In
Japan, the company beat even its own bullish expectations, growing to
over 900 stores after opening its first in Tokyo in 1996. Affluent young
Japanese women like Anna Kato, a 22-year-old Toyota Motor Corp.
worker, loved the place. “I don’t care if it costs more, as long as it tastessweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s
Shibuya district. Yet same-store sales growth has fallen in Japan, Starbucks’
top foreign market, as rivals offer similar fare. Meanwhile in
England, Starbucks’ second-biggest overseas market, with over 400
stores, imitators are popping up left and right to steal market share.
Entering other big markets may be tougher yet. The French
seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch,
cofounder of Columbus Cafe, a Starbucks-like chain. But he wonders
if the company can profitably cope with France’s arcane regulations
and generous labor benefits. And in Italy, the epicenter of
European coffee culture, the notion that the locals will abandon
their own 200,000 coffee bars en masse for Starbucks strikes many
as ludicrous. For one, Italian coffee bars prosper by serving food as
well as coffee, an area where Starbucks still struggles. Also, Italian
coffee is cheaper than U.S. java and, say Italian purists, much better.
Americans pay about $1.50 for an espresso. In northern Italy,
the price is 67 cents; in the south, just 55 cents. Schultz insists that
Starbucks eventually will come to Italy. It’ll have a lot to prove when
it does. Carlo Petrini, founder of the antiglobalization movement
Slow Food, sniffs that Starbucks’ “substances served in styrofoam”
won’t cut it. The cups are paper, of course. But the skepticism is real.
As Starbucks spreads out, Schultz will have to be increasingly
sensitive to those cultural challenges. For instance, he flew to Israel
several years ago to meet with then Foreign Secretary Shimon
Peres and other Israeli officials to discuss the Middle East crisis.
He won’t divulge the nature of his discussions. But subsequently,
at a Seattle synagogue, Schultz let the Palestinians have it. With
Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and
Saudi Arabia, he created a mild uproar among Palestinian supporters.
Schultz quickly backpedaled, saying that his words were taken
out of context and asserting that he is “pro-peace” for both sides.
There are plenty more minefields ahead. So far, the Seattle coffee
company has compiled an envious record of growth. But the
giddy buzz of that initial expansion is wearing off. Now, Starbucks
is waking up to the grande challenges faced by any corporation bent
on becoming a global powerhouse.
In a 2005 bid to boost sales in its largest international market,
Starbucks Corp. expanded its business in Japan, beyond caf.s
and into convenience stores, with a line of chilled coffee in plastic
cups. The move gives the Seattle-based company a chance to
grab a chunk of Japan’s $10 billion market for coffee sold in cans,
bottles, or vending machines rather than made-to-order at caf.s. It
is a lucrative but fiercely competitive sector, but Starbucks, which
has become a household name since opening its first Japanese
store, is betting on the power of its brand to propel sales of the new
drinks. Also, introducing tea to the menu in 2015 caused a 7 percent
increase in sales. Stores in Japan now number close to 1,700.
Starbucks is working with Japanese beverage maker and distributor
Suntory Ltd. The “Discoveries” and “Doubleshot” lines are
the company’s first forays into the ready-to-drink market outside
North America, where it sells a line of bottled and canned coffee. It
also underscores Starbucks’ determination to expand its presence
in Asia by catering to local tastes. For instance, the new product
comes in two variations—espresso and latte—that are less sweet
than their U.S. counterparts, as the coffee maker developed them
to suit Asian palates. Starbucks officials said they hope to establish
their product as the premium chilled cup brand, which, at 210 yen
($1.87), will be priced at the upper end of the category.
Starbucks faces steep competition. Japan’s “chilled cup” market
is teeming with rival products, including Starbucks lookalikes. One
of the most popular brands, called Mt. Rainier, is emblazoned witha green circle logo that closely resembles that of Starbucks. Convenience
stores also are packed with canned coffee drinks, including
Coca-Cola Co.’s Georgia brand and brews with extra caffeine or
made with gourmet coffee beans.
Schultz declined to speculate on exactly how much coffee Starbucks
might sell through Japan’s convenience stores. “We wouldn’t
be doing this if it wasn’t important both strategically and economically,”
he said.
The company has no immediate plans to introduce the beverage
in the United States, though it has in the past brought home products
launched in Asia. A green tea frappuccino, first launched in
Asia, was later introduced in the United States and Canada, where
company officials say it was well received.
Starbucks has done well in Japan, although the road hasn’t always
been smooth. After cutting the ribbon on its first Japan store in 1996,
the company began opening stores at a furious pace. New shops
attracted large crowds, but the effect wore off as the market became
saturated. The company returned to profitability, and net profits
jumped more than sixfold to 3.6 billion yen in 2007, declined again to
2.7 billion yen in 2009, and increased again to 6 billion yen by 2013.
In Japan, the firm successfully developed a broader menu for its
stores, including customized products—smaller sandwiches and lesssweet
desserts. The strategy increased same-store sales and overall
profits. The firm also has added 175 new stores since 2006, including
some drive-through service. But McDonald’s also has attacked the
Japanese market with the introduction of its McCaf. coffee shops.
Starbucks opened its first store in Africa in 2016, hoping to tap
into an expanding consumer class, despite an overall weakness in the
economy. It will open up just 12 to 15 stores initially, despite a capacity
on the continent of 150 stores, according to company estimates.
In 2018, China was opening a new store every 15 hours, with 3,000
planned over the next few years. Shanghai now boasts the largest Starbucks
store in the world. Starbucks is pushing “a coffee culture in China
where the reward will be healthy, long-term, profitable growth for decades
to come,” CEO Kevin Johnson said. Meanwhile, in North America,
Starbucks is struggling to maintain growth above inflation rates.
Questions:
- What is the case about?
- What was/were the issue/s or problem/s?
- How did the company solve the problem?
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Case study – Starbucks – going global fast
