CASE 34 Starbucks’ Retail Strategy Since its early days in the 1980s, Starbucks has been the leading retailer of specialty coffee and beans and related food and merchandise. Its most recent annual revenues were $9.8 billion from 8,832 company-owned stores and 7,803 licensed stores in airports and shopping centers in the United States and in 50 countries across the world. Worldwide, the company employs 142,000 people. Designed to provide a community gathering place and social experience as well as a premium cup of coffee or hot or cold beverage, the brand intentionally mimics the cafés of Italy. In addition to its direct retailing activities, Starbucks has formed strategic alliances with Unilever, Kraft Foods, and PepsiCo to expand its product and distribution portfolios. Starbucks coffee beans, ice cream, and ready-to- drink (RTD) beverages appear on supermarket and warehouse club shelves. The company promotes sustainable best practices for quality and yield among its suppliers, boasts relatively low staff turnover, and encourages customer loyalty through its Starbucks Card program, Starbucks’ licensed retail store operations include the Starbucks and Seattle’s Best Coffee brands. In addition to having store locations in more than 50 countries, Starbucks licenses the right to produce its products both in the United States and abroad through several partnerships. These include the North American Coffee Partnership, a joint venture with PepsiCo, Inc,jomanufacture and market RTD beverages, such asbottled Frappuccino, in the United States and anada; a licensing agreement with Unilever for nucks’ superpremium ice-cream products in ¢ United States; a licensing agreement with partnership formed by Unilever and Tazo fea RTD beverages in the United States; and jensing agreements for the manufacturing, arketing, and distribution of Starbucks jscoveries and Starbucks DoubleShot in an and Korea. Starbucks sells its branded ee beans in 39,000 supermarkets and mass- chandise stores domestically and abroad ugh an agreement with Kraft and has a ership with Jim Beam through which it loped a coffe liqueur Several altemative channels include the sale whole beans through Nordstrom department es and coffee by the cup in cafés in Bares Noble bookstores. Additional channels Jude distribution through service providers fe Holland America Cruise Lines, United irlines, and Sheraton and Westin Hotels. Starbucks was nearly synonymous. with ium coffee beverages and seemed to be on unstoppable growth trajectory until Howard tz, the company’s founder, chairperson, CEO, left his daily leadership role to ome owner of the Seattle Supersonics ultz soon realized his move was a mistake both himself and Starbucks. Store traffic falling forthe first time in U.S, stores, and petition from premium brands and mass- ct coffee vendors gnawed at Starbucks’ rket share. In addition, the economy had red. In 2008, Schultz retumed to the pany’s helm, reawakening the vision of the bucks brand and initiating a transformation ss that involved cost reductions, quality Wvements in every aspect of the company’s rations, and a renewed commitment to Cases 735 providing a unique customer experience. Two years later, despite the still-sluggish economy, Starbucks is once again on a profitable path. THE COFFEE MARKET ‘The commercial market for coffee began in AD 1000 when Arab traders brought the coffee tree from its native Ethiopia to the Middle East. Over the next 200 years, coffee drinking spread throughout the Arab world and was eventually introduced in Europe in the 1500s by Italian traders. By 1650, coffeehouses emerged as popular meeting places in England and France. Well-known public figures frequented London coffeehouses to discuss political and literary issues. Coffee consumption flourished in the mid-20th century, aided by developments in manufacturing and cultivation. By 1940, large coffee processors such as Nestlé (Hills Bros. brand), Kraft General Foods (Maxwell House), and Procter & Gamble (Folgers) developed instant and decaffeinated coffee varieties in addition to their staple regular ground. Supermarkets emerged as the primary distribution channel for traditional coffe sales. In the late 1980s, per-capita coffee con- sumption fell slowly and steadily as consum- ers turned to soft drinks, bottled water, juices, and iced teas. The three major manufactur ers—Procter & Gamble, Nestlé, and Kraft- fought for market share in a stagnant market, All the major coffee brands were unprofitable. In an effort to regain profitability, the majors decreased their historically high expenditures ‘on image advertising, increased the use of ro- busta coffee beans (as opposed to high-quality Arabica beans) to reduce costs, and converted from 16-ounce to 13-ounce cans, claiming735 Cases to manufacture and market RTD beverages, such as bottled Frappuccino, in the United States and ‘Canada; a licensing agreement with Unilever for Starbucks’ superpremium ice-cream products in the United States; a licensing agreement with a partnership formed by Unilever and Tazo ‘Tea RTD beverages in the United States; and licensing agreements for the manufacturing, marketing, and distribution of Starbucks Discoveries and Starbucks DoubleShot in Japan and Korea. Starbucks sells its branded coffee beans in 39,000 supermarkets and mass- merchandise stores domestically and abroad through an agreement with Kraft and has a partnership with Jim Beam through which it developed a coffee liqueur. Several alternative channels include the sale of whole beans through Nordstrom department stores and coffee by the cup in cafés in Barnes & Noble bookstores. Additional channels include distribution through service providers like Holland America Cruise Lines, United Airlines, and Sheraton and Westin Hotels. Starbucks was nearly synonymous with premium coffee beverages and seemed to be on an unstoppable growth trajectory until Howard. Schultz, the company’s founder, chairperson, and CEO, left his daily leadership role to become owner of the Seattle Supersonics. Schultz soon realized his move was a mistake for both himself and Starbucks. Store traffic ‘was falling for the first time in U.S. stores, and competition from premium brands and mass- market coffee vendors gnawed at Starbucks’ market share. In addition, the economy had soured. In 2008, Schultz returned to the company’s helm, reawakening the vision of the Starbucks brand and initiating a transformation process that involved cost reductions, quality improvements in every aspect of the company’s ‘operations, and a renewed commitment to providing a unique customer experience. Two years later, despite the stll-sluggish economy, Starbucks is once again on a profitable path. THE COFFEE MARKET ‘The commercial market for coffee began in AD 1000 when Arab traders brought the coffee tree from its native Ethiopia to the Middle East ‘Over the next 200 years, coffee drinking spread throughout the Arab world and was eventually introduced in Europe in the 1500s by Italian traders. By 1650, coffeehouses emerged as popular meeting places in England and France, ‘Well-known public figures frequented London coffechouses to discuss polit issues. Coffee consumption flout mid-20th century, aided by developments in manufacturing and cultivation. By 1940, large coffee processors such as Nestié (Hills Bros. brand), Kraft General Foods (Maxwell House), and Procter & Gamble (Folgers) developed instant and decaffeinated coffee varieties in addition to their staple regular round, Supermarkets emerged as the primary distribution channel for traditional coffee sales. In the late 1980s, per-capita coffee con- sumption fell slowly and steadily as consum- ers tured to soft drinks, bottled water, juices, and iced teas. The three major manufactur- ers—Procter & Gamble, Nestlé, and Kraft— fought for market share in a stagnant market. Alll the major coffee brands were unprofitable. In an effort to regain profitability, the majors decreased their historically high expenditures ‘on image advertising, increased the use of ro- busta coffee beans (as opposed to high-quality ‘Arabica beans) to reduce costs, “aid converted from 16-ounce to. 13-ounce cans, claiming736 Renling Management that the contents produced the same amount of coffe. Coupons and in-store promotions dominated manufacturer marketing plans as the price war continued. THE STARBUCKS COFFEE COMPANY: BACKGROUND Inspiration for the present Starbucks concept ‘came to Howard Schultz when he went to Italy ‘on a buying trip in 1983. While wandering through the ancient piazzas of Milan, Schultz took particular note of the many cheerful espresso bars and cafés he passed. Italians, he felt, had captured the true romance of the beverage. Coffee drinking was an integral part of the Italian culture, but Americans lacked the opportunity to savor a good cup of coffee while engaging in good conversation in a relaxed atmosphere. He retuned to the United States convinced that Americans would find the Italian coffeehouse culture attractive. In 1987, Schultz bought Starbucks. RETAIL OFFERING Starbucks offers more than a cup of coffee it offers an experience that includes the beverage, the store, the service, and an opportunity to take a break from life’s hectic pace to relax with friends or mull over a thorny problem. In short, Starbucks offers the coffee experience Schultz imported from abroad. Although designs vary in any particular store to match the local market, the typical Starbucks store works around a planned mix of organic and manufactured components: 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 organic/modern message: The Starbucks icon is carthy-looking yet rendered in a moden abstract form, in black and white with 4 bané of color around the center only. The colors o the lamps, walls, and tables mimic coffee tones from green (raw beans) to light and dark ‘browns, Special package and cup designs ar coordinated to create livelier, more colorfil tones around holidays. Starbucks also keep its look lively with rotating in-store variation based on timely themes. 1 Starbucks stores are spacious so customers can read in overstuffed chairs, gat around tables, or wander around the store wi drinking their coffee. Stores sell pasti breakfast sandwiches, and lunch offer as well as coffee paraphernalia ranging coffee beans and mugs to French presses home cappuccino machines. Although € beverages are standardized across outlets, offerings vary from store to store. Starbucks also has strict quality stand For example, espresso is brewed precisely to 23 seconds and thrown away if not s within 10 seconds of brewing, Coffee beans donated to charities if they are still in the seven days after coming out of theit v sealed packs. Drip coffee is thrown if it is not served within an hour of it. Throughout the store, there exists a attention to aroma: Employees are not all to wear colognes, stores use no scented cl products, and smoking is verboten. HUMAN RESOURCE MANAGEMENT ‘The company, recognizing that its employees are critical to providing “the cup,” has built an organizatigial culture ‘on two principles: (1) strict standards f coffee should be prepared and deliv customers and (2) a laid-back, supportive,empowering attitude toward its employees. As part of his recovery strategy, Schultz shared his vision with the entire workforce through memos designed to both lead and inspire. He also rolled out new training to encourage store partners, or employees, to improve service, beverage quality, and store appearance. All new hires go through an initial 24- hour training program that instills 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 bartenders). 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 lear, is to replace the beans on the spot without checking with the manager cor questioning the complaint. Baristas lear to customize each espresso drink, explain the origins of different coffees, and distinguish Sumatran from Ethiopian coffees. Holding on to its motivated, well-trained employees is important, so all partners are cligible for health benefits and a stock option plan called Bean Stock. Baristas know about and are encouraged to apply for promotions 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. Duc to the training, empowerment, benefits, ‘and growth opportunities, Starbucks’ tumover is ‘only 70 percent. This total is considerably less than the 150 to 200 percent turnover at other firms in the food service business. LOCATION STRATEGY Traffic is the major determinant in selecting cities and locations for retail stores. Because Starbucks can tailor the size and format of its Cues 737 stores to the surrounding community, stores can be located in nearly any high-traffic, high- Visibility location, including college campuses, office buildings, downtown or suburban settings, and rural or off-highway locations. The company operates approximately 2,650 drive-thru locations and continues to expand development of these businesses. Starbucks’ retail expansion strategy has historically been based on conquering one area of a city or region at a time. Centralized cities served as hubs or regional centers for rollout ‘expansions into nearby markets (e.g., Chicago as a hub for the Midwest). “Clustering” was also key to its location strategy. Major markets. were saturated with stores before new markets, were entered, For example, there were over 100 Starbucks in the Seattle area before the ‘company expanded to a new region, Having many stores in close proximity to one another generally increased overall revenues. However, comparable store sales growth eventually slowed due to cannibalization. Inresponse tothe increasing competition and dropping traffic, Schultz and his management team elected to close 800 underperforming stores in the United States and 100 intemational stores. However the fundamental strategy for new store openings remains the same, SUPPLY CHAIN In the 1990s, the specialty coffee market experienced substantial growth, driven largely by the coffee-drinking habits of college graduates and young professionals. While retailers like Starbucks benefited from this growth, coffee growers and suppliers did not, due to the worldwide oversupply of lower-grade coffee beans. Although Starbucks promised the highest-quality Arabica beans and paid premium prices, all growers suffered from the oversupply. Even though Starbucks dominated738__Reniling Management the specialty coffee industry, it did not use its purchasing power to negotiate lower prices from growers and suppliers and squeeze their profits Instead, the company decided to use its market power to implement social change within its supply chain, It partnered with Conservation International, an. environmental nonprofit organization, to develop CAFE (Coffee and Farmer Equity) practices. These practices are designed to build relationships beneficial to growers and suppliers; increase economic, social, and environmental sustainability; and promote transparency and economic faimess within the supply chain. Economic incentives ‘encourage supplierstoadhereto these standards. ‘The CAFE practices further encouraged farmers to ensure their workers’ wages and safety standards met or exceeded the minimum requirements established under local and national laws. Suppliers that scored well on the independently assessed CAFE practices received a price premium and the largest orders. Starbucks’ ultimate goal is to buy the ‘majority of its beans from suppliers that meet CAFE standards, ‘The company also operates Farmer Support Centers in Costa Rica and Rwanda. These cen- ters, staffed by agronomists and sustainability experts, provide information and implementa- tion support for sustainable best practices for quality and yield to coffee farmers GROWTH STRATEGIES With the company back on solid footing, executives are planning controlled growth internationally of both retail and licensed stores, and selective development of new distribution channels. The company will focus initially on ‘growth in markets where the brand already has a strong presence, but itis also viewing China as potentially the largest market for Starbucks outside the United States Innovative products that improve the customer experience will fuel growth, as will new products introduced in the grocery channel. Among recent in-store innovations are new food and beverage pairings and discount offerings, healthier food choices, and the launch of VIA Ready Brew, an instant coffee that meets Starbucks standards. Executives describe VIA as an important new growth platform and a significant innovation in instant coffee, a market worth $21 billion globally. To ensure strategies appeal to its target ‘market, Starbucks engages consumers through social media and the company’s My Starbucks Idea Web sites. New iPhone applications launched by the company help customers locate stores, search for nutrition information, and reload Starbucks Cards. CHANGING CUSTOMER BASE As Starbucks grew, its customer base evolved. Starbucks’ historical customer profile— affluent, well-educated, white-collar women between the ages of 24 and 44 years— ‘expanded. For example, about half ofthe stores, in southern California welcome large numbers of Hispanic customers. Newer customers tended to be younger, less well educated, and in a lower income bracket than Starbucks’ more established customers. These newer customers were more interested in convenience than the ‘experience, so Starbucks installed automatic espresso machines in its stores. But as mass- market vendors like MeDonald’s and Dunkin’ Donuts improved their coffee offerings and touted their lower prices and premium bilinds like Peet's threatened Starbucks’ dominance, the company realized that its drive towardconvenience was commoditizing the Starbucks experience. Returning to the company core values and guiding principles, including quality beverages and customer service, has been fundamental to reversing the company’s slide. THE TRANSFORMATION JOURNEY Schultz’s campaign to restore Starbucks to preeminence involved a rigorous and disciplined review of all aspects ofthe business, with. special attention paid to operational efficiency from the beginning of the supply chain to the barista at the counter. One result ‘was trimming $580 million in costs from the business. But another was investing in the company’s core values, including a significant sum spent to bring Starbucks employees to a city hit by hurricane Katrina. The staff spent their time there as volunteers, fixing up houses and cleaning roads. The project, says Schultz, reminded staff of the company’s commitment to being an important part of the community and helped reinstall company values. The ‘company also invested in technology and tools that increase the speed and lower the cost of bringing new products and strategies to market and better staff training to improve the customer experience. While the recession lingers and no retailer can afford to be complacent, Starbucks has managed an impressive recovery that solidifies, its unique image in a competitive market. Schultz insists on taking responsibility for past errors and on remembering the lessons learned. Nevertheless, Starbucks” resurrection acts as, an illustration of how a corporation can be tumed around by aligning employees behind a provocative vision that is backed by careful strategy.