Added Instruction (2020-02-06)

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6-1Introduction

Howard Schultz joined Starbucks in 1982 as director of retail operations and marketing. Returning from a trip to Milan, Italy, with its 1,500 coffee bars, Schultz recognized an opportunity to develop a similar retail coffee bar culture in Seattle.

In 1985 the company tested the first downtown Seattle coffeehouse, served the first Starbucks café latté, and introduced its Christmas Blend. Since then, Starbucks expanded across the United States and around the world, now operating over 25,000 stores in 75 countries. The company serves 90 million customers and has revenues of approximately $21.3 billion a year. It is the largest coffeehouse company in the world.

Starbucks locates its retail stores in high-traffic, high-visibility locations. The stores are designed to provide an inviting coffee bar environment that is an important part of the Starbucks product and experience. It was the intention of Howard Schulz to make Starbucks into “the third place” for consumers to frequent, after home and work. Because the company is flexible regarding size and format, it locates stores in or near a variety of settings, including office buildings, bookstores, and university campuses. It can situate retail stores in select rural and off-highway locations to serve a broader array of customers outside major metropolitan markets and further expand brand awareness.

In addition to selling products through retail outlets, Starbucks sells coffee and tea products and licenses its trademark through other channels and partners. For instance, its Frappuccino coffee drinks, Starbucks Doubleshot espresso drinks, super-premium ice creams, and VIA coffees can be purchased in grocery stores and through retailers like Walmart and Target. Starbucks partnered with Courtesy Products to create single-cup Starbucks packets marketed toward hotel rooms. Starbucks also partnered with Green Mountain Coffee Roasters to introduce Starbucks-branded coffee and tea pods to the market. These pods target consumers who own Keurig single-cup brewing machines. Although the two businesses would normally be rivals, this partnership was beneficial for both Green Mountain and Starbucks. Since Green Mountain owns Keurig’s single-serve machines, the partnership enabled Starbucks to access this technology to market a new product. Green Mountain benefited because the partnership generated new users of Keurig single-cup brewing machines attracted to the Starbucks name.

This partnership between Green Mountain and Starbucks did not stop Starbucks from launching its own line of single-serve machines. In 2012 Starbucks introduced its Verismo 580 Brewer that allows consumers to brew a cup of Starbucks coffee in their own homes. The coffee has the strong, bold flavor of a cup purchased in any Starbucks retail location. Starbucks also introduced the Verismo® Milk Frother to allow customers to whisk milk and make lattes. The company continues to innovate with its single-serve machines; its newer Verismo® V Brewer, for instance, makes it possible for users to brew both coffee and espresso shots. Not to be outdone, Green Mountain released another type of single-serve coffee brewer called the Rivo. The race to conquer the single-serve coffee market is intensifying between the two companies.

A common criticism of Starbucks is the company’s strategy for location and expansion. Its “clustering” strategy, placing a Starbucks literally on every corner in some cases, forced many smaller coffee shops out of business. This strategy dominated for most of the 1990s and 2000s and Starbucks became the butt of jokes. Many people began to wonder whether two Starbucks directly across the street from each other were really needed. The last recession brought a change in policy, however. Starbucks pulled back on expansion, closed hundreds of stores around the United States, and focused more on international markets. Now Starbucks is beginning to focus on U.S. expansion once more.

At the end of 2014, Starbucks opened a 15,000 square foot Starbucks Reserve Roastery and Tasting Room in Seattle, a place where coffee is roasted, bagged, sold, and shipped internationally. Equipped with a Coffee Library and Coffee Experience Bar, the roastery is intended to redefine the coffee retail experience for customers. Among the coffees roasted at the roaster are small-lot coffees called Starbucks Reserve®. These types of coffees come from unique parts of the world and are only available in small batches. Out of 250,000 cups of coffee evaluated in Starbuck’s tasting room each year, only 1 percent are selected to become a Starbucks Reserve coffee. Starbucks Reserve has become so popular that the company announced it would open 1,000 Reserve stores and 20–30 roasteries in the coming years.

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6-4aEnvironment

In 1992, long before it became trendy to be “green,” Starbucks developed an environmental mission statement to clearly articulate the company’s environmental priorities and goals. This initiative created the Environmental Starbucks Coffee Company Affairs team, the purpose of which was to develop environmentally responsible policies and minimize the company’s “footprint.” As part of this effort, Starbucks began using environmental purchasing guidelines to reduce waste through recycling, conserving energy, and educating partners through the company’s “Green Team” initiatives. Concerned stakeholders can now track the company’s progress through its website that clearly outlines its environmental goals and how Starbucks fares in living up to those goals.

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6-4bEmployees

Growing up poor with a father whose life was nearly ruined by an unsympathetic employer who did not offer health benefits, Howard Schultz always considered the creation of a good work environment a top priority. He believes companies should value their workers. When forming Starbucks, he decided to build a company that provided opportunities his father did not have. The result is one of the best health care programs in the coffee shop industry. Schultz’s key to maintaining a strong business is developing a shared vision among employees as well as an environment to which they can actively contribute. Understanding how vital employees are, Schultz is the first to admit his company centers on personal interactions: “We are not in the coffee business serving people, but in the people business serving coffee.” Approximately 48 percent of vice presidents of the company are women and 15 percent are minorities. The firm developed a goal to increase the percentage of top leaders who are women or minorities to 50 percent by 2020.

However, being a great employer does take its toll on the company. In 2008 Starbucks closed 10 percent of stores in order to continue to provide employees with health insurance. This decision, based on its guiding principle of “people first, profits last,” shows how much the company values its employees. Employees also have an opportunity to join the Starbucks stock-sharing program called Bean Stock. They have generated $1 billion in financial gains through stock options. In 2015 Starbucks gave employees a raise and increased starting pay rates across the country.

Starbucks is committed toward the well-being of its employees—both physically and intellectually. As a way to improve employee health, Starbucks established a program for employees called “Thrive Wellness” that offers various resources aimed at assisting employees in incorporating wellness into their lives. The program offers resources such as smoking cessation, weight loss, and exercise. Starbucks also estimates that 70 percent of employees are either currently in college or desire to earn a degree. The aforementioned partnership with ASU provides this opportunity as students can choose from 40 programs online or in person. More than 2,000 employees applied to the program when it was initially launched. The rising cost of education is an important issue that CEO Howard Schultz wants to help alleviate.

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6-4cSuppliers

Even though it is one of the largest coffee brands in the world, Starbucks maintains a good reputation for social responsibility and business ethics throughout the international community of coffee growers. It builds positive relationships with small coffee suppliers while also working with governments and nonprofits wherever it operates. Starbucks practices conservation as well as Starbucks Coffee and Farmer Equity Practices (C.A.F.E.), a set of socially responsible coffee-buying guidelines that ensure preferential buying status for participants that receive high scores in best practices. Starbucks pays coffee farmers premium prices to help them make profits and support their families. More than 99 percent of total coffee purchases are C.A.F.E. verified.

The company is also involved in social development programs, investing in programs to build schools and health clinics, as well as other projects that benefit coffee-growing communities. Starbucks collaborates directly with some of its growers through seven Farmer Support Centers, located in Asia, Africa, and Latin America. Farmer Support Centers provide technical support and training to ensure high-quality coffee into the future. It is a major purchaser of Fair Trade Certified, shade-grown, and certified organic beans that further support environmental and economic efforts. In 2013 Starbucks bought its first coffee farm, located in Costa Rica. The purchase was one step toward the company’s goal of increasing its ethically sourced coffee to 100 percent.

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6-4dCustomers

Strengthening its brand and customer satisfaction is more important than ever as Starbucks seeks to regroup after the latest recession forced the company to rethink its strategy. Starbucks refocused the brand by upgrading its coffee-brewing machines, introducing new food and drink items for health- and budget-conscious consumers, and refocusing on its core product. Recognizing the concern over the obesity epidemic, Starbucks ensures that its grab-and-go lunch items are under 500 calories. The company focuses more on the quality of the coffee, the atmosphere of the coffee shops, and the overall Starbucks experience, rather than continuing its rapid expansion of stores and products. Enhancing the customer experience in its stores became a high priority. As a way to encourage people to relax and spend time there, Starbucks offers free wireless Internet access in all its U.S. stores.

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6-5Brand Evolution

Although Starbucks achieved massive success in the last four decades, the company realizes it must modify its brand to appeal to changing consumer tastes. All established companies, no matter how successful, must learn to adapt their products and image to appeal to the shifting demands of their target markets. Starbucks is no exception. The company is associated with premium coffee beverages, an association that served it well over the years. However, as competition in specialty coffee drinks increases, Starbucks recognized the need to expand its brand in the eyes of consumers.

One way it is doing this is through adopting more products. In addition to coffee, Starbucks stores sell coffee accessories, teas, muffins, CDs, water, grab-and-go products, Starbuck Petites, upscale food items, hand-crafted sodas called Fizzios, as well as wine and beer in select locations. Food sales make up 20 percent of company revenue. The rise in coffee prices has created an opportunity for expansion into consumer packaged goods that will protect Starbucks against the risks of relying solely on coffee. In order to remain competitive, Starbucks made a series of acquisitions to increase the value of its brand, including Bay Bread (a small artisan bakery), Evolution Fresh (a juice brand), and Teavana (a tea brand). This allowed Starbucks to offer high quality breakfast sandwiches as well as Paninis and wraps for lunch. In 2017 Starbucks increased its menu and coffee options with items such as soups and its first gluten-free sandwich. It intends to use its expanded menu to help increase revenue growth by 10 percent over a five-year period.

To symbolize this shift into the consumer packaged goods business, Starbucks gave its logo a new look. Previously, the company’s circular logo featured a mermaid with the words “Starbucks Coffee” encircling it. In 2011 Starbucks removed the words and enlarged the mermaid to signal to consumers that Starbucks is more than just the average coffee retailer.

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6-6Success and Challenges

For decades Starbucks revolutionized our leisure time. Starbucks is the most prominent brand of high-end coffee in the world but also one of the defining brands of our time. In most large cities, it is impossible to walk more than a few blocks without seeing the familiar mermaid logo.

In the past few decades, Starbucks achieved amazing levels of growth, creating financial success for shareholders. The company’s reputation is built on product quality, stakeholder concern, and a balanced approach to all of its business activities. Of course, Starbucks does receive criticism for putting other coffee shops out of business and creating a uniform retail culture in many cities. Yet the company excels in its relationships with its employees and is a role model for the fast-food industry in employee benefits. In addition, in an age of shifts in supply chain power, Starbucks is as concerned about its suppliers and meeting their needs as it is about any other primary stakeholder.

In spite of its efforts to support sustainability and maintain high ethical standards, Starbucks garnered harsh criticism in the past on issues such as a lack of fair trade coffee, hormone-added milk, and Howard Schultz’s alleged financial links to the Israeli government. In an attempt to counter these criticisms, in 2002 Starbucks began offering Fair Trade Certified coffee, a menu item that was quickly made permanent. Approximately 99 percent of coffee in the United States is ethically sourced currently.

Starting in late 2008, Starbucks had something new to worry about. A global recession caused the market to bottom out for expensive coffee drinks. The company responded by slowing its global growth plans after years of expanding at a nonstop pace and instead refocused on strengthening its brand, satisfying customers, and building consumer loyalty. After Starbucks stock started to plummet, Howard Schultz returned as CEO to return the company to its former glory.

Schultz was successful, and Starbucks rebounded from the effects of the recession. The company is once again looking toward possibilities in international markets. This represents both new opportunities and challenges. When attempting to break into the U.K. market, for instance, Starbucks met with serious resistance. Realizing the homogenization of its stores did not work as well in the United Kingdom, Starbucks began to remodel its stores so they took on a more local feel. At the end of 2012, Starbucks came under public scrutiny for allegedly not paying taxes for the last 14 of the 15 years it was established in the United Kingdom. A protest group called UK Uncut began “sitting in” at the stores, encouraging coffee drinkers to buy their coffee elsewhere. Starbucks claims it did not pay taxes because it did not make a profit. However, the company said it would stop using certain accounting techniques that showed their profits overseas. Starbucks also agreed to pay 20 million pounds over the next two years, whether or not it makes a profit.

Starbucks is rapidly expanding in China, and the country is set to become the company’s second largest market behind the United States. Starbucks effectively overcame obstacles in tapping into the Chinese market and adapted its strategy to attract Chinese consumers. After the 2007 closure of the retail operation in the Forbidden City, resulting from cultural concerns of the presence of a Western staple in a sacred area, Starbucks became more sensitive to the specific needs and nuances of the country. Through educating Chinese consumers on coffee (because the beverage is not largely consumed there), they are now drinking as much coffee as Americans.

Political concerns have also become a challenge for Starbucks. After President Donald Trump’s executive order to put a hold on allowing refugees into the United States from seven majority-Muslim nations, Starbucks announced its intention to hire 10,000 refugees over the next five years. Although many consumers supported the company’s efforts, others believed the chain was making a political statement and called for a boycott of the brand. The company faced a backlash through social media, and investors became concerned that the decision might tarnish the Starbucks brand and lower sales. A YouGov brand survey indicated that consumer feelings toward the brand dropped immediately after the announcement. Starbucks claims that this decline in brand equity is not substantiated. It also reiterated its intent to hire more veterans over the next decade to provide them and their families with an opportunity to transition back into the workforce.

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