STANFORD

GRADUATE SCHOOL OF BUSINESS

STARBUCKS: A GLOBAL WORK-IN-PROGRESS
INTRODUCTION
The 2007-2009 period was one of much re-evaluation within the senior management ranks of
Starbucks. In February 2007, Howard Schultz, chairman and founder of Starbucks, e-mailed a memo
to then CEO Jim Donald, in which he expressed concems about what he perceived was a "watering
down of the Starbucks experience" (see Exhibit 1). On January 7, 2008, Shultz, who served as CEO
from 1987 to 2000, announced that he was returning "as chief executive officer for the long term" and
that "Jim Donald is leaving the company" (see Exhibit 2). On March 3, 2008, Lanni Skinner resigned
as president ofStarbucks' United States business after less than a
year in the post. On July 8, 2008, Schultz announced "the difficult, but necessaty decision to close
approximately 600 underperforming U.S. company-operated stores," (see Exhibit 3). On July 29,
2008, Starbucks mmounced that it was closing 61 of its 84 Australian stores (all company-owned).
Starbucks' press statement indicated that the decision to close the 61 "underperforming" locations was
made to "concentrate its attention and resources on profitable growth, operational efficiencies, and an
enhanced experience for customers and partners (employees) globally." On July 30, Starbucks
repmted "for the 13-week period that ended June 29, 2008 ... a net loss of $6.7 million compared to
net income of $158.3 million for the same period a year ago. Restructuring charges of $167.7 million
[in tbe 13-week period ending June 29, 2008] are comprised of asset impairments for the
approximately 600 underperforming company-operated stores in the U.S. market."
The closing of600 U.S. company-operated stores and 61 Australian company-owned stores raised the
issue ofStarbucks' global strategy. Its entry into international markets had been delayed. From its fust
store opening in Seattle in 1971, it reached 11 stores by 1987. In the 1987 to 1995 period, it expanded
to 676 stores, all within the U.S. or Vancouver, Canada. It was not
This case was prepared by Professors Antonio Davila (lESE), George Foster (Stanford University), and Ning Jia
(Tsinghua University). It draws on an earlier case co-written with Anne Somjen and Corinne Putt.
Copyright 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights rese1wd. To order
copies or request permission to reproduce materials, e-mail the Case Writing Office at: cwo@gsb.stanford.edu or
write: Case Writing Office, Stmiford Graduate School of Business, 518 Memorial Way. Stmiford University, Stmiford,
CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system. used in a spreadsheet,
or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or othenvise -
without the penn iss ion of the Stanford Graduate School of Business.
p. 2
'
until 1996 that Starbucks started a rollout into international markets. By the end of fiscal 2008,
Starbucks had 5,113 of its 16,680 stores (30.65 percent) outside the U.S.A.
Profitability per revenue dollar for the U.S. exceeded profitability outside the U.S. for each year
geographical segment data had been disclosed (since 2002).
Table 1: Results for the Operating Ineome to Net Revenue- (01/NR%)
Year United States- 01/NR% Intemational- 01/NR%
2004 2005 2006 2007 2008 15.56% 16.04 15.50 14.69 5.86% 8.07 8.40 8.68 6.14
(before restrncturing 9.37 6.70 5.23
changes) 2008 (after
restmcturing changes)
The above 2008 results also highlight the declining profitability in both U.S. and international
markets.
Many external observers viewed Starbucks as at a crossroad inmid-2009. The problems that surfaced
in both the U.S. and many other countries in 2007 and the first half of 2008 had been exacerbated by
the global economic downturn, starting in the latter part of 2008. This global economic downtum
added an extra dimension to the debate on Starbucks' global initiatives. There were the ever-present
issues of whether and where to further expand its global presence, and the mode of expansion. Should
the emphasis be on increasing expansion in existing countries or expanding the number of countries?
What role should the lower profitability to date of non-U.S. markets play in any decisions? How
should any new strategic initiatives to address the changed post-2008 economic enviromnent be
tailored to different parts of the Starbucks global footprint? There were also issues related to the
appropriate mix of company-owned versus licensed stores in both U.S. and non-U.S. markets.
All store openings up to 1991 were company-owned stores in U.S.A. and Canada. Starbucks used
licensed stores as a way to further its growth starting in 1992. Its intemational store expansion stmied
in 1996 with licensed international stores and in 1998 with company-owned intemational stores.
(Exhibit 4 presents selected financials for Starbucks covering 1987 onwards. Exhibit 5 presents store
information covering 1987 onwards.)
Over time, Starbucks has used the phrase "intemational" in either of two ways- (a) all non-U.S.A. stores, or (b) all
non-U.S.A. and non-Canadian stores. Unless clear or specified, this case adopts the (a) interpretation. Starbucks
switching back and forth between (a) and (b) arises, in part, due to its early regional expansion from its Seattle base
including Vancouver, Canada.
p.3
COMPANY BACKGROUND
Starbucks was founded in 1971 by Jeny Baldwin, Zev Ziegler and Gordon Bowker-three men from
Seattle who loved coffee, and wanted to be able to offer the same high-quality experience to Seattle
coffee drinkers as Peel's Coffee provided to San Francisco Bay Area residents. Fittingly, they named
their company after another coffee lover: Starbuck, the first mate in Herman Melvill's novel Moby
Dick.
The first Starbucks sold primarily whole bean roasted Arabica coffee, tea, spices and some gourmet
kitchen supplies. Since the founders had been longstanding, loyal mail-order customers of Peel's
Coffee, Alfred Peel agreed to sell coffee to Starbucks under the caveat that as soon as they "got too
'
big, they would have to roast their own." After a decade there were four Starbucks stores bringing
great coffee to the Seattle area. Baldwin frequently reminded customers and employees, "We don't
manage the business to maximize anything except the quality of the coffee."
Howard Schultz joined Starbucks in 1984 as director of operations and marketing and brought a new
4
vision to the company. The former vice president and general manager of Hammerplast, a Swedish
home wares company, Schultz was intrigued by the success of the small company. He convinced the
owners, who were looking for a manager, that he should be the one to run Starbucks' day-to-day
operations. After a trip to Milan, Italy in 1983, Schultz perceived what was absent from the North
American landscape-"The Italian coffee bar ... the extension of people's front porch; the third
place." He reh1rned home to Seattle convinced that Starbucks should fill this void for its customers.
Schultz faced considerable resistance to this concept from the founders. They thought that serving
espresso beverages and brewed coffee was more of a restaurant concept than a notion that fit with
their idea of a Starbucks store. In 1985 Schultz left Starbucks to pursue his vision, stmiing up an
espresso bar called II Giornale, which proved to be a tremendous success. By 1987, he was operating
three such cafes. In the ve1y same year, Bowker and Baldwin, frustrated by quality problems in their
Starbucks stores, were looking to sell Starbucks (Ziegler had sold his interest in 1980). II Giornale
acquired the assets and the name "Starbucks Coffee Company" and became the Starbucks
Corporation.
Schultz hired Howard Behar to the position of director of stores and together the two began a rapid
expansion, believing that the only way to stave off competition was to build recognition. A key part of
this was building more stores. The company had enonnous needs for cash and was unprofitable for
'
the first three years. This initial period of expansion was undertaken solely through organic growth. In
a commodity market, Starbucks sought to differentiate itself by building a strong brand and a unique
culh1re-a distinctive customer experience. Schultz believed that the only way to ensure success was
to maintain full control of the customer experience by building only company-owned stores, which
required access to a tremendous
'
Starbucks Coffee Company and Intemational Expansion (A), Stanford University, 1999.
'
Howard Schultz, Pour Your Heart Juto It, Chapter 2, 1997.
'
Starbucks Timeline and Histmy, Starbucks Coffee,
'
Starbucks Coffee Company and Intemational Expansion (A), op. cit.
amount of capital not to mention talented people. In 1992, Starbucks became a publicly traded company,
raising the necessmy capital to fund its continued expansion.
THE COMPANY TODAY
The Starbucks of the early twenty-first century purchased and roasted high-quality whole bean coffees
and sold them, along with fresh, rich-brewed coffees and Italian-style espresso beverages, primarily
through company-operated and licensed retail stores. With an objective of establishing Starbucks as
the most recognized and respected brand of coffee in the world, the company planned to continue rapid
expansion in its retail operations, to grow its direct response and specialty sales operations, and to
pursue other opportunities to leverage and grow the Starbucks brand.
The average Starbucks offered regular or decaffeinated coffee beverages, changing "coffees of the
day," and a broad selection of Italian-style espresso beverages, as well as distinctively packaged,
freshly roasted whole bean coffees, a selection of fresh pastries and other food items, sodas, juices,
tea, and coffee-related hardware products and equipment. Beginning in 2007, Starbucks continued to
extend its food offerings, including warm breakfast sandwiches, an expanded pastry and dessert
'
selection as well as prepackaged lunches. Despite this broad product range, Starbucks was focused on
selling "the finest whole bean coffees and coffee beverages." To maintain control of quality and to
ensure compliance with its rigorous standards, Starbucks was vertically integrated, controlling its
coffee sourcing, roasting, and distribution through its retail stores.
Starbucks stores were typically clustered in high-traffic, high-visibility locations in each market. They
could be found in a variety of settings, including office buildings, retail centers, kiosks, airport
terminals, and university campuses. In choosing its retail locations, Starbucks looked for stores that
were convenient for pedestrian street traffic. Location was important not only to drive customers but
for marketing purposes. Starbucks prefened to establish a local "buzz" for its stores through word of
mouth rather than media advertising-each store was an advertisement for the company, the
'
distinctive store design and colors sparking consumer interest and raising brand awareness.
Product Supply
The supply and price of green coffee (the particular variety used by Starbucks) were subject to
significant volatility. Although most coffee traded in the commodity market, the special type of high-
quality coffee purchased by Starbucks traded on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and
price could be affected by multiple factors in the producing countries, including weather, political and
economic conditions.
Starbucks regularly negotiated fixed-price purchase commitments to secure an adequate supply of
quality green coffee and to bring greater certainty to the cost of sales in future periods .

uStarbucks lntToduces Hot Breakfast Sandwiches/' NACS Online, January 11, 2007,
http://www nacsonline.comiNACS/News/Daily News Archives/January2007/Pages/nd0lll075.aspx.
,
The Age, December 5, 2000.
p. 5
Exporters of high-quality coffee had generally been anxious to become Starbucks suppliers because
Starbucks purchased more high-quality coffee than anyone else in the world. This desirability of the
Starbucks contract allowed the company to enforce its stringent selection processes, sampling each
shipment of coffee multiple times to ensure quality standards. At every stage of sampling, Starbucks
reserved the right to reject the coffee if it did not meet its quality standards.
Competition
Starbucks competed directly against specialty retailers, specialty coffees sold at retail through
supermarkets, and a growing number of specialty coffee stores; as well as coffee sold in restaurant
beverage outlets, and a growing number of espresso stands, carts, and stores. Competition in the
beverage market was generally fragmented. Starbucks historically believed that its customers chose
among retailers primarily on the basis of quality and convenience, and, to a lesser extent, on price.
This position in more recent years had come under re-evaluation. On the one hand, many observers
believed thai its growing list of competitors had reduced the actual (and perceived) quality differential.
In addition, a growing number of consumers were becoming considerably more price conscious in
their repeat purchase decisions of consumer products.
Human Resources
Culture is of utmost importance to the Starbucks formula of high-quality products and service in a
pleasant setting-what they termed the "third place" customer experience. "We believe more
strongly than ever that at the heart of our continuing success lie the company's two cornerstones,
'
coffee and our people." One observer noted that "Starbucks is clearly a brand reputation rather than a
product reputation ... every contact with the customer is a test of that brand contract. How are you
"
treated in the store, and even after the sale?"
From the outset Starbucks wanted to recognize the service that the frontline employees gave the
"
company by breaking away from industty norms of low pay and few benefits. All 'partners'
(baristas), irrespective of whether they were full-time or part-time employees, received stock options,
healthcare benefits, and an allotment of free coffee per week. Schultz explained, "We had to link
shareholder value to the reward system of our employees." The CEO and the barista had the same
"
health benefits, retirement plans, and share in stock options. The only difference was the amount of
..
salaty and options. Starbucks was viewed as imwvative in its employee relations and it maintained
open cmmnunications with its entire staff .

Starbucks, Richard lvey School of Business, The University ofWestem Ontario, 1999.
'
Starbucks' President Howard Schultz and COO Orin Smith (from 1996 Annual Report).
"
Lany Light, president and CEO of Arcature, a branding consultancy, "Differentiating in an Overbranded World,"
Discount Store News, New York, Sep 7, 1998.
"
The company addresses all employees as partners.
"
At the time, giving stock to employees of a retail company was so novel that Starbucks had to ask the pem1ission
of the SEC to develop their Beau Stock stock option program
"
Starbucks maintains several stock option plans under which it can grant incentive stock options and
stock options to employees, consultants and directors .
..
Howard Behar, class lecture, Stanford University, May 1998.
"
p. 6
STARBUCKS GROWTH MODES
Starbucks pursued growth through three key avenues: expanding existing product lines and
distribution chatmels, increasing domestic penetration of stores, and international expansion.
The pursuit of growth in the fonn of increased product range and distribution channels potentially
strayed from Starbucks' core value propositions of providing the highest-quality coffee in a familiar
and comfortable "third place" setting. While such a divergence could lead to dilution of its brand
image, it also had the potential of generating increased revenues approached appropriately.
Unfortunately, when Starbucks decided to increase its food offerings prior to 2003, it did not meet
customers' high expectations. As a result, Star bucks pulled many of the food products from its
shelves. In 2007, Starbucks again decided to expand its food offerings, but this time with a focus on
quality that would hopefully satisfy customer expectations. The expanded selection included warm
breakfast sandwiches, a wider variety of pastries and desserts, as well as prepackaged lunches. Again,
concerns arose over the quality of the food and the odor from that food (especially breakfast items).
Starbucks was solely focused on domestic growth up to 1996, especially in targeted geographic areas
within the United States and Canada. By 1997, Starbucks was established in only 34 of the 50 states
and its stores were heavily concentrated on the West Coast.
Begitming in the mid 1990s, Starbucks entered international arenas (see Exhibit 5 for a timeline of
Starbucks international expansion). The company offered the same basic coffee menu ittternationally
as it did in its U.S. stores, and the names of items were held consistent around the world. However, the
range of food products and coffee accessories stocked in stores varied somewhat according to local
"
customs and tastes. (Exhibits 6 and 7 provide consumption infonnation for selected countries around
the globe.)
STARBUCKS' EXISTING GROWTH CHOICE MODES
In considering how to grow theit' chain of specialty coffee stores, Starbucks used a combination of
organic growth, acquisition, joint venture and franchise.
Organic Growth- United States
Starbucks' expansion within the U.S. relied on an organic growth model. As Starbucks was offering
U.S. consumers a relatively new value proposition, it was unable to fuel its expansion with acquisitions
and had to build its empit'e store by store. Because the key to success was managing and growing the
Starbucks brand, strong centralization became essential to maintaining unifonn practices t1noughout
the growing number of Starbucks stores. By 1991, Starbucks had 105 stores. With the help of
additional funds raised through an initial public offering in 1992, Starbucks could be found in 725
U.S./Canadian locations by 1995. From 1996 to 2008, Starbucks' company-operated U.S./Canadian
stores grew from 926 to 7,969, while its licensed U.S./Canadian stores grew from 75 to 4,560. The
July 8, 2008 announcement that Starbucks would be closing 600 underperfonning company-operating
stores was the first systematic setback of its organic growth itt the U.S. (see Exhibit 3).
"
"Launching Starbucks in Japan," Seattle Times, Monday 29 July 1996.
p. 7
Joint Venture- Japan
With the exception of Canada (considered by Starbucks to be a part of its North American region),
the Joint Venture in Japan was Starbucks' first international foray. As Howard Behar stated, "With
over half of the world population living within five and a half hours from Singapore, it made a lot of
sense to focus on the Asia Pacific region." At the time of the venture, Japan had the second-largest
"
economy in the world and was consistently among the top five coffee importers in the world. (See
Exhibit 6 -8 for worldwide coffee consumption.) With an attractive market and a preexisting taste for
coffee, Japan was selected as the logical enhy point for the region. Starbucks set itself a large goal in
establishing its Japanese presence. "The greatest thing that could happen is that someone in Japan
would think that Starbucks stmted in Japan." Yet at the same time "American customers will feel
"
right at home in our Japanese stores."
Starbucks' management debated at length about the right way to enter the Japanese market. Their
concems centered on Starbucks' lack of local knowledge and human resources to build the Japanese
business quickly enough. Starbucks was acutely aware that there were significant market differences
between Japan and the U.S., and that it was inexperienced in navigating these waters. Operating costs
were predicted to be double those ofN01th America, and Starbucks would have to pay to ship coffee
to Japan fiom its roasting facility in Kent (near Seattle). In addition, retail space in Tokyo was two to
three times as expensive as in Seattle. Just finding rental space in such a populous city might prove to
be a tremendous challenge. Starbucks concluded they needed to fonn an alliance with a local group
that had experience with complex operations and real estate.
Wonied about loss of control and insufficient knowledge transfer to leam from the experience if they
licensed the operations, Starbucks contracted an investment bank to search for suitable partners. So
critical were consistency of values, culture and community development goals between Starbucks and
any future partner that, after an extended search, all of the shortlisted candidates were deemed
"
unsuitable. Reluctant to back away from the opp01tnnity, Starbucks approached Sazaby Inc.,
operators of upscale retail and restaurant chains, whose president had approached Starbucks years
earlier about the potential to open Starbucks stores in Japan. Starbucks and Sazaby signed a 50:50 joint
venture agreement. The two companies were equally represented on the board of directors of
Starbucks Coffee Japan (the incorporated company resulting from the venture). Starbucks was the
sole decision-making power in matters relating to brand, product line advertising and corporate
communications, while decisions about real estate, operational issues and human resources were
Sazaby's province.
Once launched, Japan boasted the single largest number of Starbucks stores outside North America. In
2008 there were 814 stores in Japan (all "licensed stores"), compared to 664 (all "company-operated
stores"), in the United Kingdom, the country with the next-highest number of stores.
"
17
lnternational Coffee Organization.
Howard Behar, fonner president of Starbucks Intemational.
'"
Kathy Lindemann, vice president of operations, Starbucks Coffee International.
p.B
Acquisition - The United Kingdom
Unlike its expansion into Asia and (later) the Middle East, in the U.K. Starbucks chose to acquire
rather thau pattner in a joint venture or licensing agreement. Starbucks entered the U.K. market in
May 1998 through the acquisition of the Seattle Coffee Company. This fast-growing chain was
modeled on Starbucks' own style of operations. Through this purchase, Starbucks acquired 56 retail
units. By the end of2000, this had grown to 156 units and by the end of2008, 664 units.
In mid-to-late 1997, as Starbucks began to contemplate the first steps into Europe, the U.K. was
already experiencing its first exposure to the specialty coffee chain. The Seattle Coffee Company had
begun to open retail units in major urban centers and was expanding rapidly. With the possibility that
the lucrative U.K. coffee chain market could become crowded with competitors within a short space of
time, Starbucks moved quickly to secure a major presence. The culture, language, legal environment,
management practices and labor economics in the U.K. were considered sufficiently similar to those
that Starbucks management aheady faced in the U.S. that a 100 percent-owned U.K. subsidiary could
be successfully established from the outset. Starbucks chose Seattle Coffee Company as its acquisition
target because of its focus, its relatively small valuation, and its established retail units.
Licensing- e.g. China
Starbucks entered many intemationalmarkets through minority share licensing agreements with
high-quality, experienced local pmtners to minimize market en!ly risks. Under these agreements the
local pattners absorbed the capital costs (real estate, store constmction) of bringing the Starbucks
brand abroad. This eliminated substantial general and administrative expenses for Starbucks and
enabled it to establish a presence in foreign markets much more quickly than if Starbucks had to invest
"
its own capital and absorb start-up losses.
Risk was a big consideration when Starbucks chose to enter the Chinese market. While offering high-
volume opportunities in an untapped coffee market, China's culture and politics posed significant
problems for intemational companies. Precedent did not bode well for the company. In April 2000,
Beijing city authorities ordered Kentucky Fried Chicken to close its store in Beihai Park (a scenic
"
imperial garden near the Forbidden City) when its lease expired in 2002. McDonald's had removed its
"
golden arches from outlets near Tianamnen Square.
According to Chen Junqui, an official of the palace museum, "It's about a certain conflict and
misunderstanding between China and the West." China appeared to hold an ambiguous attitude about
. growing Westem economic and culh1ral influence. While Communist officials ranted at what they
called decadent Western culture and "hegemonism" in world affairs, younger Chinese either craved
Westem brand names and visas or did not understand what the fuss was about when Western brands
"
sought to begin operations in the Chinese market.
"
"
"Starbucks Corporation: Think Coffee, Not Intemet," JP Morgan, June 1999.
"
"Tempest in a Coffee Cup," ABC News, 29 November 2000.
"McDonald's to Move Beijing Restaurant," The New York Times, December 2, 1996,
http://www nytimes.com/ J 996/ J 2/02/business/mcdonald-s-to-movc-bei Hug-restaurant .html.
"
"Starbucks Brews Stonn in China's Forbidden City," CNN News, December 11 2000.
p. 9
Another key concern regarding operations in China was recmiting the right staff, with demand for
managers far outshipping supply. "Focusing on the development of employees so that they can
deliver [the Starbucks experience that the brand is famous for] is our priority now," explained
Lawrence Maltz, the head of Starbucks' Chinese operations. Sending recruits to the U.S. for training
was helping to attract qualified individuals to Starbucks. Catherina Chau, deputy general manager of
Beijing Mei Da Coffee Co., explained that "the success of the Starbucks brand in the U.S. strengthens
trainees' confidence in the company." Uniformity of customer experience and coffee quality drove the
Starbucks brand, so failure to recmit staff who could maintain these key criteria would not only mean
failure for the Chinese retail outlets but could harm the company's consumer image globally.
The early expansion into China was via licensed stores-9 in 1999 and 28 in 2000. Starbucks
stmck a deal with Beijing Mei Da Coffee Co. to open Starbncks franchise coffee shops, starting in the
"
Chinese capital.
Reliance on the licensing model for China was being reduced over time. After attending a June 2006
"
"Investor Meeting," Bear Steams reported the following:
"
Starbucks is clearly targeting a much greater presence iu China and has shown and
expressed a desire to pursue a company-operated business model, as opposed to
proceeding with a heavy .licensing emphasis as a way of managing the
development of this market that has potential to be as significant as the U.S. market on
a long term basis. The company has already increased its equity ownership in its
Southern China business to 51 percent with agreements in place for that stake to
become 70 percent if certain developments occur. Starbucks has also raised its stake in
the Shanghai market from 5 percent to 50 percent and has an option to buy a 50 percent
stake in Beijiug, a market in which it cunently has no ownership percentage. The
company noted that in the past[,] discussions around 50 percent buy-in options have led
to an even greater investment in some markets and in some cases to a l 00 percent
buyout. In addition, there are regions in China not covered in any existing licensing
agreement that can be pursued as company markets.
Meanwhile, Starbucks is building a China iufrastructure to develop the market. In
China, the average ticket is in line with Starbucks check across the rest of the world;
transaction counts are significantly lower than average; but operating costs, especially
labor, are also significantly lower so stores are profitable. China is currently profitable
for Starbucks but as the licensed business model transitions into a higher equity stake
model, the business may lapse into losing money stah1s as infrastruch1re commensurate
with the market opportunity is put into place. We were reminded that the larger the
market potential, the longer it can take to become profitable because of spending
against that potential. China is an important part of
Joatme Lee-Young, "Delivering Starbucks to China," The Asian Wall Sheet Joumal Weekly, 1998,
faqs.org/abstracts/Business-intemational/Delivering-Starbucks-to-China-China-shouldnt-abandon-big-
projects html.
"
ustarbucks Corp.,
11
Bear Steams, June 7, 2006.
the company's long term plans but is not being counted on as a contributor to eamings in the
next several years.
By 2008, there were 178 company-operated stores and 269 licensed stores in China. In 2005, 6
Southern China stores switched from licensed status to company-operated status. In 2007, 61 Beijing
stores switched from licensed status to company-operated status.
Geographic Disclosures
Starbucks began expanding intemationally in 1996 with stores in Japan, and continued in 1997 with stores in
Singapore. (Exhibit 4shows revenue disclosures for United States and International (non-U.S.) starting in
1997.) Profitability disclosures for United States and International started in 2002. Prior to 2008, relative
profitability in its intemationalmarkets was considerably below that of the U.S. market. In 2008, the
profitability difference between these two geographic segments was much reduced (largely due to the marked
reduction in U.S. profitability).
GLOBAL CHALLENGES
In the United States, Starbuck's was the first company to introduce the "third place" concept. This was not the
case in many international markets, where competitors were already established. This intense competition
resulted in less traction for Starbucks in some intemational markets, where it was forced to push harder to
compete with the existing players rather than being the first mover, as it was in the U.S. In Japan, Starbucks
was initially a huge success and became profitable two years earlier than anticipated. However, just two years
after Starbucks Japan had tumed profitable, it announced a $3.9 million loss in what was at the time its second-
largest market. Although initially Japanese coffee drinkers flocked to Starbucks due to their intrigue with U.S.
brands, later they began turning their attention to other coffee houses where the flavor better matched their
"
tastes.
Starbucks' mode of entry caused additional challenges. Many of Starbucks' international operations
were through joint ventures. Although this provided Starbucks with local knowledge about the market
and a low-risk ently into unproven tenit01y,joint ventures did not always reap the anticipated rewards.
"
Starbucks found it difficult to control the costs in a joint venture, often resulting in lower profitability.
Starbucks generally set up joint ventures with less than 20 percent ownership, reserving the option to
purchase up to 50 percent of the venture at a pre-agreed valuation. In countries with higher
profitability, Starbucks usually opted for this higher ownership percentage. In countries where
profitability was lower, such as Gennany, Austria, and Switzerland, Starbucks purchased additional
ownership either because the pattner wanted out of the business or Starbucks represented a small
portion of a larger company that was stmggling with its core product.
"
"For Starbucks, There's No Place Like Home," Business Week, June 9, 2003.
"
Ibid.
p. II
GOING FORWARD
Observers continued to focus on the economic viability of Starbucks' stores, in both the U.S. and
internationally, before the company reached "market saturation." The culture at Starbucks, however,
did not accept "numerical limits" on size or types of activities. Starbucks sought to increase both its
top and bottom lines while deciding whether and how to enter additional markets, especially several
with very large total coffee consumption (see Exhibit 8). A significant portion of its growth would
come from its international operations.
Starbucks' 2004 enhy to France (sixth-highest total coffee consumption in the world) was late relative
to other European countries whose populations consume less coffee (in absolute amounts). As of
2008, Starbucks had not yet entered Italy, which boasted the fifth-highest coffee consumption in the
world and a reputation for quality brews. Indeed, Italy was the country that gave Schultz the notion of
a "third place." Brazil was another high coffee consumption counhy where Starbucks had yet to enter
the marketplace. At end of its first decade on the global stage, Starbucks' global rollout was a "work-
in-progress" with many decisions still to be made.
The July 2008 decisions by Starbucks to close 600 U.S. company-owned stores and 61 Australian
company-owned stores added further grist to the debate over the relative merits of further U.S. vs.
intemational expansion. Jim Donald, the former CEO fired in 2007, reflected that "my worst decision
"
was not investing earlier in international." The slowing of Starbucks' revenue growth had sizable
implications for its market capitalization. On July 24, 2006 it had a market capitalization of $26.99
billion. By June 8, 2009 its market capitalization had declined to $11.19 billion (see Exhibit 9).
The concern about market saturation raised the question of whether the Starbucks branded store
concept (and associated Starbucks branded products) should be its only platform for future growth.
Many new beverage concept stores had emerged (such as Jamba Juice, Juice It Up, Maui Wowi, and
Smoothie King). Starbucks had attempted to meet this broadening consumer demand by increasing
beverage and other options within its own "coffee-branded" stores concept. An alternative approach
was for Starbucks to introduce other "branded store concepts" as additional growth platforms. Such an
approach would be a major departure from the single-brand model strategy on which Starbucks had
always relied.
A March 18, 2009 Starbucks' press release included the following report related to its March 2009
"
Atmual Meeting of Shareholders:
"
Howard Schultz, Chairman President and CEO, outlined the company's strategy to
grow for the long term.
"Despite the challenging economic environment, Starbucks is profitable, has a strong
balance sheet and generates solid cash from operations," said Schultz. "Our
Patricia Sellers, "Lessons of the Fall," Fortune, May 29, 2008,
http://moncy.cnn.com/2008/05/27/magazinesifortunc/lcssons fall sellers. fortune/index htm.
"
"Starbncks Details Strategy for Profitable Growth," Starbucks press release, March 18, 2009,
http://news.starbucks.com/article _ display.cfm ?article i d ~ 184.
customers' connection with, and trust in the Starbucks brand remains at a high level.
We are laser-focused on delivering the finest quality coffee and getting the customer
experience right evety time."
"We've also been putting our feet into the shoes of our customers and are responding
directly to their needs," said Schultz. "Our customers are telling us they want value
and quality and we will deliver that in a way that is both meaningful to them and
authentic to Starbucks."
During the Annual Meeting, Troy Alstead, Executive Vice President, Chief Financial
Officer and Chief Administrative Officer, underscored the company's strong financial
position and outlined a two-fold growth strategy for the company.
Starbucks has focused its attention on increasing profits in existing stores by:
Aligning the company's cost structure to its cu11'ent business strategy with a
plmmed $500 million structural expense reduction in fiscal 2009;
Improving operational efficiencies and making technology investments;
Meeting customers' needs for value and quality; and
Investing in the tools and training store managers need.
The company is also making strategic investments in key initiatives by:
p. 12
Entering the $17 billion instant coffee market earlier this month with the launch
of Starbucks VIA TM Ready Brew instant coffee;
Growing its consumer products, licensed stores and foodservice channels;
Focusing on disciplined global store expansion in key markets.
"Our customers like the changes we've been making, even as the economic
environment is impacting the way customers interact with companies and brands," said
Schultz. "The health of the company, the continued relevance of the brand and our
disciplined go-forward plan make us optimistic about Starbucks' future."
A high level of optimism was a hallmark of much of Schultz's leadership at Starbucks. Some
observers began to questions the practicality of such optimism. The phrase "the age of thrift" was
being used by business observers to describe a post-2008 economy where many consumers in key
"
sectors shuggled to balance the value of their purchases with reduced and limited disposable income.
How Starbucks navigated this new era around the globe would determine its ongoing position as a
leading global consumer brand.
"
"The New Age of Thrift," Get Rich Slowly, May 4, 2009, http://www.getrichslowly.org/blog/2009/05/04/thenew-
age-of-thriftl.
IB74 Starbucks: A Global Work-/11-Progress p.l3
Exhibit 1
Starbucks 2007- Internal Memo
Starbucks' chairman warns of "the commoditization of the Starbucks experience"
Starbucks chairman Howard Schultz wrote this to CEO Jim Donald earlier this month. The
memo's authenticity has been confirmed by Starbucks.
From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald
Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin
Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra Taylor
Subject: The Commoditization of the Starbucks Experience
As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts
with you.
Over the past ten years, in order to achieve the growth, development, and scale necessary to go
from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of
decisions that, in retrospect, have led to the watering down of the Starbucks experience, and,
what some might call the commoditization of our brand.
Many of these decisions were probably right at the time, and on their own merit would not have
created the dilution of the experience; but in this case, the sum is much greater and,
unfortunately, much more damaging than the individual pieces. For example, when we went to
automatic espresso machines, we solved a major problem in terms of speed of service and
efficiency. At the same time, we overlooked the fact that we would remove much of the romance
and theatre that was in play with the use of the La Marzocca machines. This specific decision
became even more damaging when the height of the machines, which are now in thousands of
stores, blocked the visual sight line the customer previously had to watch the drink being made,
and for the intimate experience with the barista. This, coupled with the need for fresh roasted
coffee in every North America city and every international market, moved us toward the decision
and the need for flavor locked packaging. Again, the right decision at the right time, and once
again I believe we overlooked the cause and the (e]ffect of flavor lock in our stores. We achieved
fresh roasted bagged coffee, but at what cost? The loss of aroma - perhaps the most powerful
non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins
and grinding it fresh in front of the customer, and once again stripping the store of tradition and
our heritage? Then we moved to store design. Clearly we have had to streamline store design to
gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that
would satisfy the financial side of our business. However, one of the results has been stores that
no longer have the soul of the past and reflect a chain of stores vs. the wann feeling of a
neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting
the passion our partners feel about our coffee. In fact, I am not sure people today even know we
are roasting coffee. You certainly can't get the message from being in our stores. The
merchandise, more art than science, is far removed from being the merchant that I believe we can
IB74 Starbucks: A Global Work-/11-Progress
Exhibit 1 (continued)
Starbucks 2007 - Internal Memo
p.I4
be and certainly at a minimum should support the foundation of our coffee heritage. Some stores
don't have coffee grinders, French presses from Bodum, or even coffee filters.
Now that I have provided you with a list of some of the underlying issues that I believe we need
to solve, let me say at the outset that we have all been part of these decisions. I take full
responsibility myself, but we desperately need to look into the mirror and realizeit's time to get
back to the core and make the changes necessary to evoke the heritage, the tradition, and the
passion that we all have for the true Starbucks experience. While the current state of affairs for
the most part is self induced, that has led to competitors of all kinds, small and large coffee
companies, fast food operators, and mom and pops, to position themselves in a way that creates
awareness, trial and loyalty of people who previously have been Starbucks customers. This must
be eradicated.
I have said for 20 years that our success is not an entitlement and now it's proving to be a reality.
Let's be smarter about how we are spending our time, money and resources. Let's get back to the
core. Push for innovation and do the things necessary to once again differentiate Starbucks from
all others. We source and buy the highest quality coffee. We have built the most trusted brand in
coffee in the world, and we have an enormous responsibility to both the people who have come
before us and the 150,000 partners and their families who are relying on our stewardship.
Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and
commitment, we would not be where we are today.
Onward ...
Source: All exhibits are l ' ! i ~ by Starbucks Coffee unless otherwise noted.
IB74 Starbucks: A Global Work-/11-Progress
Exhibit 2
Starbucks 2008- January 7, 2008 Press Release
SEATTLE; January 7, 2008
Howard Schultz Transformation Agenda Communication #1
Letter To: All Partners
From: Howard Schultz
p.l5
Twenty-five years ago, I walked into Starbucks' ftrst store in Seattle's Pike Place Market, and from
that day forward we have taken the road less traveled. Working with an exceptional group of people
and summoning all the courage we could muster, we created a new kind of place - one that served
the kind of coffee that most people had never tasted, an environment that didn't look like any other
store, and hiring people who were fanatically passionate about coffee and celebrated their interaction
with customers. To do this, we focused every ounce of our beings on creativity and innovation.
Over the years, together we have built one of the most recognized and respected brands in the world.
When we went public in June 1992, we had 119 stores. We now have more than 15,000 stores and a
significant and growing presence in 43 countries, serving 50 million customers a week. These
customers have placed their trust in us, and for them and for each other we need to ensure that our
future is as exciting as our past.
If we take an honest look at Starbucks today, then we know that we are emerging from a period in
which we invested in infrastructure ahead of the growth curve. Although necessary, it led to
bureaucracy. We will now shift our emphasis back onto customer-facing initiatives, better aligning
our back-end costs with our business model. We are fortunate, though, that the challenge we face is
one of our own making. Because of this, we know what needs to be done to ensure our long-term
future success around the world.
Transforming the Starbucks Experience .
The Board decided that I should lead this transformation. Given this, effective immediately, in
addition to my existing role as chairman, I have returned as chief executive offlcer for the long term.
Jim Donald is leaving the Company. I want to pay tribute to Jim's leadership. He was a passionate
and tireless advocate for Starbucks, and his contribution to our company cannot be overstated.
Looking ahead, the reality we face is both challenging and exciting. It's challenging because there
are no overnight fixes. Rather, our success will come in the rigorous execution of several new
strategic initiatives - that capitalize on our heritage to drive our successful future. And our reality is
exciting because there is so much opportunity ahead for Starbucks.
Our new transformation agenda includes:
- Improving the current state of the U.S. business: by giving our store partners better training and
tools, launching new products - some of which will have an impact as significant as Frappuccino
products and the Starbucks Card - and introducing new concepts in store design, among other
enhancements to the Starbucks Experience. At the same time, we will slow the pace of our U.S.
store openings and close a number of underperforming locations, so we can renew our attention on
store-level unit economics and be laser-focused on flawless execution.
IB74 Starbucks: A Global Work-/11-Progress
Exhibit 2 (continued)
Starbucks 2008 - Press Release
.. p.l6
-Re-igniting our emotional attachment with our customers by restoring the connection our customers
have with you, our coffee, our brand, and our stores. Unlike many other places that sell coffee,
Starbucks built the equity of our brand through the Starbucks Experience. It comes to life every day
in the relationship our people have with our customers. By focusing again on the Starbucks
Experience, we will create a renewed level of meaningful differentiation and separation in the market
between us and others who are attempting to sell coffee.
- Building for the long term, which has two distinct pieces: re-aligning Starbucks organization and
streamlining the management of the organization to better support customer-focused initiatives by
ensuring our support and planning functions - from back-end IT systems to store operations - are
most effectively dedicated to the customer experience. This will help us to make smarter decisions
about new products and initiatives and bring them to market more quickly than ever in our past.
- Expanding our presence around the world, by building a profitable business outside the U.S., and
capitalizing on the enormous, untapped potential for our brand. We will redeploy a portion of the
capital originally earmarked for U.S. store growth to the international business. Though we have
5,000 international stores today, we are just at the beginning.
Taken together, these initiatives will help drive our enduring success. And they will come with
changes in our organization ... some big and some small. I will be decisive in making them. Right
now, I can tell you they will include a realigmnent of our leadership structure, as well as a series of
actions to reduce costs and reallocate resources to customer-focused initiatives. But even as we
execute this transformation, there are certain integral aspects of our company that will not change at
all. These include our commitment to treating each other with respect and dignity, providing health
care and Bean Stock for all of our eligible full- and part-time partners, and our commitment to our
community efforts, our ethical sourcing practices and encouraging our coffee suppliers to participate
in our CAFE practices program in our origin countries.
Stay Tuned
I know that you may have a number of questions. Attached is a brief Question and Answer
document that answers some of them. And you have my commitment that there will be more
information to come over the next few weeks and I will keep you informed. Specifically, I will be
meeting with the leadership of the Company in the near future to discuss our transformation agenda,
and in the coming weeks we will communicate these details with you, including your role in it.
In the meantime, I want to thank you for your dedication to Starbucks and for your commitment to
earning the trust of our customers every day. Our success is up to us. We know what we need to do
to win, and we will do it.
Onward,
Howard
IB74 Starbucks: A Global Work-In-Progress
Dear Partners,
Exhibit 3
Starbucks 2008- July 8, 2008 Press Release
SEA TILE; July 8, 2008
A Message from Howard
p. 17
As you are all aware, last week we made the difficult, but necessary decision to close
approximately 600 underperforming U.S. company-operated stores. Poor real estate decisions
that were made, coupled with a very troubled economy, convinced us that these stores would not
reach acceptable levels of profitability.
With any decision of this magnitude, I want to be sure that our partners, customers and
shareholders understand the reasons for the decision and how we will move forward. While the
past few months have been difficult for our partners, we have a very clear strategy and we are
extremely optimistic about our go-forward plans.
We cannot allow others to define who we are. And, I believe it will continue to be important for
me and the leadership team to engage directly and consistently with you as we chart the course
forward. To enhance communications, we will take several steps over the next few weeks to
ensure that everyone is operating with the same information and we are going to do our best to
be as proactive as possible.
With regard to the store closings, they are necessary to position us for future growth, both in the
U.S. and globally. We have been criticized by some observers for not publicizing the complete
list of store closures at the time of the announcement. Out of respect, we felt that it was
important to first inform our partners in the stores t a r g e t ~ d for closure. We plan to complete this
communication by mid-July and soon after we will post the first 50 store closings on the
Starbucks Store Portal, Partner Portal and Starbucks.com.
The balance of the impacted stores have closing dates that will be staggered over the next several
months. Each month, after a 30-day closing notice has been communicated to all affected
partners, we will post a list of the stores that are scheduled to close. As we stated last week, we
are also taking significant steps to place as many affected partners as possible into available
positions at nearby stores. We are so proud of the contributions you make everyday and I can't
stress enough this decision in no way reflects the exceptional service our partners in these stores
have consistently delivered. We believe that if we can reassign these partners, we will also be
delivering on our promise to customers to elevate the experience, with knowledgeable and
passionate partners.
We are focused on strengthening the foundation of our core business. At the same time, we are
pleased with the progress we have made, which includes offerings to improve the overall
customer experience. There are many exciting products and innovations that we will be offering
over the coming weeks and months.
IB74 Starbucks: A Global Work-Ill-Progress
Exhibit 3 (continued)
Starbucks 2008 - Press Release
p.l8
We have always aspired to be a relevant part of the daily lives of our customers, a trusted brand
and a place for people to enjoy the best coffee in the world, served by our passionate
partners. We must hold true to who we are and have always been, and ensure that our customer's
experience is the best of what we have to offer ... the highest quality coffee in the world, and the
best people, who deliver our unique Starbucks Experience.
Your continued commitment, support, energy and hard work are truly valued and critical to the
path forward. There is a great quote from the German writer Goethe that has irispired me over the
years: "At the moment of commitment, the entire universe conspires to ensure your success." I
believe that our focus on delivering a better customer experience will guide us through this tough
time. And, I am confident that the best days of Starbucks are ahead of us.
Thank you for all you do for our company.
Onward,
Howard