Case study – Starbucks – going global fast

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.


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Case study – Starbucks – going global fast

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