CASE 36 Starbucks Coffee Company Starbucks is the leading retailer of specialty coffee beverages and beans and related

food and merchandise. Its annual sales are over were 6.! billion" with a profit over #!! million. Starbucks owns and operates more than 6"6!! retail stores and has licensed an additional 3"$!! airport and shopping center stores in #% countries. &he average Starbucks customer visits the store %' times a month( %! percent visit twice a day. In addition to its direct retailing activities" Starbucks has formed strategic alliances with )reyer*s +rand Ice Cream" ,raft -oods" .arnes / 0oble .ooksellers" 1im .eam" 2nited Airlines" and 3epsiCo to e4pand its product and distribution portfolios. 5oward Schult6" chairman and CE7" and his senior management team were focusing on how to sustain its phenomenal growth and maintain Starbucks* market leadership position. The Coffee Market &he commercial market for coffee began in A) %!!! when Arab traders brought the coffee tree from its native Ethiopia to the 8iddle East. 7ver the ne4t 9!! years" coffee drinking spread through the Arab world and was eventually introduced in Europe in the %:!!s by Italian traders. .y %6:!" coffee houses emerged as popular meeting places in England and -rance. ;ell<known public figures would fre=uent >ondon coffee houses to discuss political and literary issues. Coffee consumption flourished in the mid<twentieth century" aided by developments in manufacturing and cultivation. .y %?#!" large coffee processors such as 0estl@ A5ills .ros. brandB" ,raft +eneral -oods A8a4well 5ouseB" and 3rocter / +amble A-olgersB developed instant and decaffeinated coffee varieties in addition to their staple regular ground. Supermarkets emerged as the primary distribution channel for traditional coffee sales. In the late %?'!s" per capita coffee consumption fell slowly and steadily as consumers turned to soft drinks" bottled water" Cuices" and iced teas. &he three maCor manufacturersD3rocter / +amble" 0estl@" and ,raftDfought for market share in a stagnant market. All of the maCor coffee brands were unprofitable. In an effort to regain profitability" the maCors decreased their historically high e4penditures on image advertising" increased the use of robusta beans Aas opposed to high<=uality arabica beansB to further reduce costs" and converted from %6<ounce cans to %3<ounce cans" claiming that the contents produced the same amount of coffee. Coupons and in<store promotions dominated manufacturer marketing plans as price warfare continued. The Starbucks Coffee Company: Background Inspiration for the present Starbucks concept came to 5oward Schult6 when he went to Italy on a buying trip in %?'3. ;hile wandering through the ancient pia66as of 8ilan" Schult6 took particular note of the many cheerful espresso bars and cafes he passed. Italians" he felt" had captured the true romance of the beverage. Coffee drinking was an integral part of the Italian culture. Italians started their day at the espresso bar and returned there later on. E&here*s such a strong sense of community in those coffee bars"F

he mused. E3eople come together every single day and in many cases they don*t even know each other*s names. In Italy" coffee is the conduit to the social e4perience.F Schult6 reali6ed that Americans lacked the opportunity to savor a good cup of coffee while engaging in good conversation in a rela4ed atmosphere. 5e returned to the 2nited States convinced that Americans would find the Italian coffee house culture attractive. In %?'$" Schult6 bought Starbucks. Retail Offering Starbucks offers more than a cup of coffee. &he G3 of marketing" elaboratesH 7ur product is not Cust that which resides in the cup. &he product is the store and the service you get in the store. ;e need to help people appreciate at a higher level why that coffee break feels the way it does" why it*s worth the time it takes to prepare a good cup of coffee. I like to think that Starbucks is not so much food for thought" but brewed for thought. Coffee has for centuries been for thought. I have sometimes thought to myself" E+et out of this chair. Iou hit the wall.F It*s that private time for me between 9 and 3 p.m. when I walk down the Commons area here and make myself an Americano and think something through. I think that*s maybe what Starbucks has to offer peopleH that safe harbor" that place to kind of make sense of the world. In the long run" what distinguishes us from our competitors" what is the most enduring competitive advantage we have" is that we are able to give our customers an e4perience at the store level...better than any competitor out there" even the small ones. Starbucks should be a place" an e4perience" tied up in inspired thought. Although designs vary in any particular store to match the local market" the typical Starbucks store works around a planned mi4 of organic and manufactured componentsH light wood tones at the counters and signage areas" brown bags" polished dark marble countertops" glass shelves" thin modern white track lighting" and pure white cups. Even the logo delivers the double organicJmodern messageH &he Starbucks icon is earthy looking" yet rendered in a modern abstract form" in black and white with a band of color around the center only. &he colors of the lamps" walls" and tables mimic coffee tones" from green Araw beansB to light and darker browns. Special package and cup designs are coordinated to create livelier" more colorful tones around holidays. Starbucks also keeps its look lively with rotating in<store variations based on timely themes. Starbucks stores are spacious so that customers can wander around the store" drinking their coffee and considering the purchase of coffee paraphernalia ranging from coffee beans to brushes for cleaning coffee grinders to %"!!! home cappuccino machines. Starbucks also sells e4clusive C)s. -or e4ample" it sold $$:"!!! copies of Kay CharlesL M+enius >oves CompanyM C) and %%:"!!! units of ColdplayLs MN/I"M two of more than three do6en compact discs offered for ' to %:.?: each Although coffee beverages are standardi6ed across outlets" food offerings vary from store to store. Starbucks has strict =uality standards. -or e4ample" espresso is brewed precisely %' to 93 seconds and thrown away if it is not served within %! seconds of brewing. Coffee beans are donated to charities if they are still in the store seven days after coming out of their vacuum<sealed packs. )rip coffee is thrown away if it is not served within an

hour of making it. &hroughout the store" there e4ists a keen attention to aromaH Employees are not allowed to wear colognes" stores use no scented cleaning products" and smoking is verboten. Human Resource Management &he company" recogni6ing that its frontline employees are critical to providing Ethe perfect cup"F has built an organi6ational culture based on two principlesH A%B strict standards for how coffee should be prepared and delivered to customers and A9B a laid< back" supportive" and empowering attitude toward its employees. All new hires" referred to as partners" go through a 9#<hour training program that instills a sense of purpose" commitment" and enthusiasm for the Cob. 0ew employees are treated with the dignity and respect that goes along with their title as baristas AItalian for bartenderB. &o emphasi6e their responsibility in pleasing customers" baristas are presented with scenarios describing customers complaining about beans that were ground incorrectly. &he preferred response" baristas learn" is to replace the beans on the spot without checking with the manager or =uestioning the complaint. .aristas learn to customi6e each espresso drink" e4plain the origins of different coffees" and claim to be able to distinguish Sumatran from Ethiopian coffees by the way it Eflows over the tongue.F Starbucks*s Coffee 8aster program teaches the staff how to discern the subtleties of regional flavor. +raduates Athere are now 9:"!!!B earn a special black apron and an insignia on their business cards. &he highlight is the Mcupping ceremony"M a tasting ritual traditionally used by coffee traders. After the grounds have steeped in boiling water" tasters McrestM the mi4ture" 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 ,enyan coffeeLs McitrusyM notes or the MmushroomyM flavor of a Sumatran blend. If the ritual reminds you of a wine tasting" thatLs intentional. Schult6 has long wanted to emulate the wine business. 5olding on to their motivated" well<trained employees is important" so all are eligible for health benefits and a stock option plan called E.ean Stock.F Each employee is awarded stock options worth %9 percent of his or her annual base pay. AStarbucks now allows options at %# percent of base pay in light of Egood profits.FB Employees are also given a free pound of coffee each week and a 3! percent discount on all retail offerings. .aristas know about and are encouraged to apply for promotion to store management positions. Every =uarter the company has open meetings at which company news" corporate values" and financial performance data are presented and discussed. )ue to the training" empowerment" benefits" and growth opportunities" Starbucks* turnover is only $! percent" considerably less than the %:! to 9!! percent turnover at other firms in the food service business. E;e treat our employees like true partners and our customers like stars"F comments Schult6. Location Strategy Starbucks* retail e4pansion strategy was se=uential" based on con=uering one area of a city or region at a time. Centrali6ed cities served as hubs or regional centers for rollout e4pansion into nearby markets Ae.g." Chicago as a hub for the 8idwestB. EClusteringF was also central to the strategyDmaCor markets were saturated with stores

before new markets were entered. -or e4ample" there were over %!! Starbucks outlets in the Seattle area before the company e4panded to a new region. 5aving several stores in close pro4imity to one another generally increased overall revenues" though slowed growth in comparable store sales in saturated markets suggested sales came at the e4pense of some cannibali6ation of e4isting businesses. &raffic was the maCor determinant in selecting cities and locations. E;e want to be in highly visible locations"F senior G3 of real estate e4plains" Ewith access to customers that value =uality and great coffee. Iou want a store in the path of people*s weekly shopping e4perience" their route to work" their way home from a movie. Iou want to be America*s porch that no longer e4ists.F Supply Chain In the %??!*s" the specialty coffee market e4perienced substantial growth" driven largely by the coffee<drinking habits of college graduates and young professionals. ;hile retailers like Starbucks benefited from this growth" coffee growers and supplies did not. &here was a worldwide over supply of lower<grade coffee beans. Although Starbucks purchased the highest =uality" Arabica beans and paid premium prices" all growers suffered from the over supply. Even though Starbucks dominated the specialty coffee industry" it did not use its purchasing power to negotiate lower prices from growers and suppliers and s=uee6e their profits. Instead" the company decided to use it market power to implement social change within its supply chain. It partnered with Conservation International" an environmental nonprofit organi6ation" to develop C.A.-.E. ACoffee and -armer E=uityB 3ractices. Some of Starbucks* obCectives of C.A.-.E. 3ractices wereH %. .uild mutually beneficial relationships with coffee growers and suppliers. 9. Increase economic" social" and environmental sustainability in the industry including conservation and biodiversity. 3. 3rovide economics incentives for suppliers who adhere to C.A.-.E. standards #. 3romote transparency and economic fairness within the supply chain. &he C.A.-.E. 3ractices were a minimum set of re=uirements" including coffee =uality" social issues" and economic transparency" that growers and suppliers had to be met in order to be considered a source for coffee beans. Economic transparency meant that a supplier had to disclose the amount of money that was ultimately paid to growers. All suppliers were evaluated not Cust on their performance" but also on their supply networks of farms. -armers were rewarded for coffee growing and processing practices that contributed positively to the conservation of soil" water" energy" and biological diversity" and had minimal impact on the environment. Also" C.A.-.E. 3ractices encouraged farmers and others to make sure that workers* wages and safety met or e4ceeded the minimum re=uirements under local and national laws. Suppliers scoring on the independently assessed C.A.-.E. 3ractices were paid a price premium and received the largest orders. Starbucks has a goal to buy the maCority of its beans from suppliers meeting the C.A.-.E. standards. ro!th Strategies

In addition to offering store in over #! countries" Starbucks has taken other opportunities to capitali6e on the company*s strong brand name. Frappuccino. &he -rappuccino beverage is a sweet" cold" creamy drink that combines milk" coffee" and ice. &he product was very successful when introduced to caf@s in %??:" so Starbucks entered a Coint venture with 3epsiCo to bottle a ready<to<drink AK&)B version. -rappuccino coffee drinks come in si4 varieties A8ocha" )ecaf 8ocha" Ganilla" Coffee" Caramel" and 8ocha >iteB and are available at convenience or grocery stores. MAZAGRAN. 8AOA+KA0 is a carbonated coffee K&) beverage. &he product is manufactured" bottled" and distributed by 3epsiCo" but Starbucks shared in the K/) and set flavor standards. Dreyers Grand Ice Cream. )reyer*s +rand Ice Cream agreed to produce a line of premium ice cream products flavored with Starbucks coffee. &he first products in this line" five coffee<flavored gourmet ice creams" were sold under the Starbucks name and distributed through supermarket outlets. Starbucks ice cream is the leading brand of gourmet coffee ice cream on the market. &he ice cream is available in the following flavorsH 1ava Chip .ig" 8ud 3ie" Coffee Almond -udge" Coffee -udge .rownie" >ow -at >atte" Classic Coffee" and Caramel Cappuccino Swirl. -ro6en -rappuccino ice cream bar novelties are available in three varietiesH 8ocha" 1ava -udge" and Caffe Ganilla. raft and supermar!ets. &hrough an agreement with ,raft" the company also sells its branded coffee beans through supermarkets" which command '! percent of all coffee sales and generate nearly 3 billion in sales annually. &he company designed a line of specialty coffees Cust for supermarkets and opened Starbucks< operated kiosks in selected grocery chains. ,raft manages all distribution" marketing" advertising" and promotions for Starbucks* whole bean and ground coffee in grocery and mass<merchandise stores. .y the end of fiscal year 9!!%" the company*s whole bean and ground coffees were available throughout the 2nited States in appro4imately %'"!!! supermarkets. "im #eam. &hrough a partnership with 1im .eam" a Starbucks coffee li=ueur was developed. Several alternative channels had already been established" including the sale of whole beans through 0ordstrom department stores and the sale of coffee by the cup in the caf@s of .arnes / 0oble bookstores. Additional channels under consideration or in place include distribution through service providers like 5olland America Cruise >ines" 2nited Airlines" and Sheraton and ;estin 5otels. Changing Customer Base As Starbucks grew" its customer base evolved. Starbucks* historical customer profileDthe affluent" well educated" white<collar female between the ages of 9# and ## Dhad e4panded. -or e4ample" about half of the stores in southern California had large numbers of 5ispanic customers. 0ewer customers tended to be younger" less well< educated" and in a lower income bracket than Starbucks* more established customers. &hese newer customers were more interested in convenience and than the e4perience. &o

improve the perceived service" especially the time to place an order and receive the coffee" Starbucks starting installing automatic e4presso machines in its stores.

)ISC2SSI70 P2ES&I70S %. ;hat is Starbucks* retail strategyQ ;hat is its target market" and how does it try to develop an advantage over its competitionQ 9. )escribe Starbucks* retail mi4H location" merchandise assortment" pricing" advertising and promotion" store design and visual merchandising" customer service" and personal selling. 5ow does its retail mi4 support its strategyQ 3. ;hat factors in the environment provided the opportunity for Starbucks to develop a new" successful retail chainQ ;hat demand and supply conditions prevailed in the 2.S. coffee market when 5oward Schult6 purchased Starbucks in %?'$Q ;hat insight did Schult6 have that other players in the coffee market did not possessQ #. ;hat were the principal drivers behind Starbucks* success in the marketplaceQ ;hat does the Starbucks brand mean to consumersQ 5ow have the growth opportunities that Starbucks has pursued affected the value of its brand nameQ :. ;hat are the maCor challenges facing Starbucks as it goes forwardQ Is the brand advantage sustainable going forwardQ Can Starbucks defend its position against other specialty coffee retailersQ SourceH &his case was written by .arton ;eit6" 2niversity of -lorida