ICMR Center for Management Research

Starbucks' Australian Experience

This case was written by Shinjini Basu, under the direction of Debaprafim Purkayasfha, ICMR Center for Management Research. It was compiled from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.
O 2009 ICMR Center for Management Research

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Starbucks' Australian Experience

"We have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbuch experience and what some might call the commoditization of our brand. "

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- Howard Schultz, Chairman, President, and CEO, Starbucks Coffee Company, in a

company memo to top execs on February 14,2007

"Part of the problem is that Starbucks' original business model just doesn't translate across markets. Starbucks original success had a lot to do with the fact that it introduced European cofee culture to a market that didn 't have this tradition. Australia has a fantastic and rich coffee culture and companies like Starbucks really struggle to compete with that.

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Nick Wailes, Associate Professor, expert in strategic management in the Faculty of Economics and Business at the University of Sydney, in 2008

STARBUCKS: DOWN UNDER?

On July 29, 2008, Starbucks Coffee International, a subsidiary of Starbucks Corporation (Starbucks), Seattle, USA, one of the largest coffee chains in the world, announced its plans to close down 6 l of its 84 stores in Australia by August 3, 2008. As a result, 685 'partners' would lose their jobs. The company also announced that with effect from September 1, 2008, Jason Ball, store development manager, Starbucks Australia, would take up the responsibility of Managing Director. According to the company, this step toward streamlining its business in Australia was a part of the multi-faceted 'transformation strategy' to bring the company back on track, taken up by founder Howard Schultz (Schultz). Schultz resumed the responsibility of CEO of Starbucks on January 7,2008, after a break of eight years from the day-to-day operations of the coffee chain. Commenting on the closures, Schultz said, "While this decision represents business challenges unique to the Australian market, it in no way reflects the strong state of Starbucks business in countries outside of the United ~ t a t e s . " ~ The strategy in Australia entailed closure of 'underperforming' stores and focusing on three metropolitan cities: Brisbane, Melbourne, and Sydney and their surrounding region^.^ This announcement followed the unprecedented event Starbucks recorded a net loss of US$6.7 million for the quarter ended June 29, 200s5, with earning per share (EPS) being US$O.OI (Refer to Exhibit I for the company's consolidated unaudited earnings statement for the quarter ended June 29,2008, and also for the year ended June 29,2008). There was simultaneously a drop in traffic in US stores, another first in the company's history. Comparable-store sales, an important measure of performance for the company, also dropped during the period. For the same 13-week period in 2007, the company recorded a net income of
"Executive Leaves at Starbucks," \nv\~.vmsd.com, August I, 2008. Daniel Palmer, "Starbucks: What Went Wrong?" \+?n\~.ausfoodnews.corn.au, July 31, 2008. "Starbucks Restructures Australian Operations to Position Business for Long-Tern1 Growth," ~w\\~.starbucks.com, July 29, 2008. ""Starbucks Iicstruclures Australian Operations to Position Business Sor Long-'l'erm Ciro\vth," \\~\v\\~.slarbucks.com, July 29. 2008. Starbucks has adopted a fiscal year which ends on the Sunday nearest to Septe~nber in a ycar 30
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US$158.3 million with an EPS of US$ 0.21.' his loss was attributed by the company mainly to exceptional costs that would be incurred in the closure of under-performing stores in the US and Australia. Earlier, on July 1,2008, Schultz announced that 600 company-operated stores in the US would be closed down in the latter part of financial year (FY) 2008 and the beginning of FY 2009, affecting 12,000 jobs. Many analysts felt that Starbucks' partial retreat from Australia was due to its inability to comprehend the Australian customer and the intricacies of the Australian culture. Australia already had a strong and sophisticated coffee culture, some aspects of which posed some serious challenges to Starbucks' business model. "If you look back to the '90s, Starbucks was a cultural phenomenon worldwide. In America, Starbucks was an icon ... Towns would want to have a Starbucks. Australia was never like that. We were curious about it. We'd read about it; it was something to try, but once tried I don't know that it offered a particularly fantastic or unique experience that wasn't offered by other chains,"' said a Melbourne-based consumer psychologist, Michael Edwardson. Another factor which probably forced the company to rethink its position in Australia and close the majority of stores operating across the country in mid-2008 was economic in nature, analysts said. Projected economic upheavals in the American and Europcan markets and also in the Australian market sparked cautious buying patterns among consumers and premium coffee was among the first concessions made to cope with the dwindling dollar value. What made the Australia case unique was that although there was a general decline in market conditions with rising inflation rates (affecting fuel and milk prices) and reduced consumer spending trends worldwide during this time, other than Australia, according to Schultz, "...there are no other international markets that need to be addressed in this manner".8 (Refer to Exhibit I1 for a comparison of planned number of stores to be opened in international market and the actual number opened in 200 1 through 2007).

BACKGROUND NOTE
At the time of its founding, Starbucks was quite different from what it is today. English teacher Jerry Baldwin (Baldwin), teacher in history Zev Siegel (Siegel), and a writer Gordon Bowker (Bowker) shared the same fascination for exotic coffee and tea. Inspired by Alfred Peet (owner of Peet's Coffee and Tea in California), a connoisseur of fine tea and coffee, the trio opened their first store in 1971. It was a small store in Pike Place Market in Seattle, USA, and it was called Starbucks Coffee, Tea, and Spice. The name was inspired by the Moby-Dick character Starbuck who was a mate on a ship named ~ e q u o dIn~about a decade since its inception, that is, by the . beginning of 1980, the venture had grown to four stores in Seattle. In 1981, as the vice president and general manager of the US operations for Hammarplast AB, a Swedish company that made chic kitchen equipment and houseware, Schultz visited Seattle. The intention of this visit was to find out more about a client (which happened to be Starbucks Coffee, Tea, and Spice) as they were placing very large orders for a particular type of coffee-inaker. The first meeting between Schultz, Baldwin, and Bowker (Siegel had by then moved on to pursue other interests) took place at the Pike Place office of Starbucks. Schultz was overwhelmed by the passion and knowledge with which the Starbuck business was being operated. In explaining their
"Starbucks Takes Significant Actions to Position the Company for 2009 and Reports Third Quarter Fiscal 2008 Resultst" http://investor.starbucks.com, July 3 1 , 2008. Phil Mercer, "Australian Coffee Drinkers Prefer Quality over Starbucks' Quantity," www.thenational.ae, August 4, 2008. "Starbucks Restructures Australian Operations to Position Business for Long-Tern1 Growth," \ \ w . s t a r b ~ ~ c k s . c o m , July 29,2008. Howard Schultz; Dori Jones Yang, Polrr I'ozir F1eat.t 11710If: Hoiv Starblicks Builf a Co,r?,uatqj Ot7e C ~ i p a Titwe a/ (Hyperion. 1997).

business philosophy, Baldwin told Schultz, "We don't manage the business to maximize anything other than the quality of the coffee."" Fine-quality, fresh-roasted, whole-bean coffee was Starbucks' USP along with an unswerving passion to educate its clientele to appreciate premium coffee. A quality product and word-of-mouth (WOM) marketing helped develop patrons who enjoyed a sense of discovery and excitement. In September 1982, Schultz took on the role of director of retail operations and marketing at Starbucks. He saw huge potential for Starbucks as a premium cafe chain spread across and beyond the US. In 1983, while on a business trip to Milan, Italy, he came across the Italian espresso bar, felt the 'theater' in its operations, and the camaraderie and vibrancy which existed between the barista" and the customer. Schultz was convinced that Starbucks could be a pioneer of this experience in the American market. According to analysts, this proved to be the turning point in the company's path to phenomenal success. All along, Starbucks had been offering roasted coffee beans and coffee equipment to its customers. Baldwin was against the idea of getting into the beverage segment. However, Schultz managed to overcome immense resistance and test his idea of selling freshly brewed beverages in April 1984 in the corner of a new store in Seattle. In spite of commendable test results, Baldwin refused to backtrack from his stance that they were essentially coffee roasters. He eventually agreed to the setting up of espresso machines at two of the stores. In the latter part of 1985, Schultz left Starbucks to set up I1 Giornale Coffee Company (I1 Giornale) coffee bar venture of his own. The first store came up in April 1986 and by mid-1987, there were three I1 Giornale stores, adding up to annual sales of US$1.5 million. 1 Giornale acquired 1 Starbucks in March 1987 and the combined enterprise was christened Starbucks Corporation. A new store format was developed which was a combination of a retail coffee-bean store and an espresso caf6. Fresh espresso beverages, cold blended beverages, a wide range of whole-bean coffees, food items complementing the Starbucks coffee, and other merchandise related to coffee were retailed through these stores. (Refer to Exhibit 111 for Starbucks' product line.)
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Along with commendable growth in the US market, the company set foot in international markets in 1996 with a joint venture with Sazaby Inc. in Japan. It went on to open stores in Hawaii, Singapore, the Philippines, 'l'aiwan, Thailand, New Zealand, Malaysia, the UK, China, Kuwait, Korea, and Lebanon. By the 1990s, Starbucks had become a worldwide cultural phenomenon, thanks primarily to its aggressive organic expansion. It focused on blanketing existing and new locations with stores which were visible and easily accessible to the consumer, even if that meant having multiple stores on the same street. This the company did through company-operated stores and through specialty operations which included licensed stores and joint venture partnerships. Other channels which the company adopted were mail-order business and institutional foodservice companies that catered to accounts in the industrial, educational, and healthcare organizations. It also had arrangements with hotels, airlines, grocery chains, and restaurants.12 In 2000, Starbucks opened stores in Dubai, Hong Kong, Shanghai, Qatar, Bahrain, Saudi Arabia, and Australia with its total location count going up to 3,501.'~(Refer to Exhibit IV for Starbucks' critical success factors for its international operations).
Arthur A. Thompson; John E.Gamble, "Starbucks Corporation," www.rnhhe.condbusiness/mai~agen~ent/thompson/I l e/case/starbucks.ht~nl. A barista is a trained expert in the art of coffee-making and has extensive luiowledge in coffee blends, varieties, growing-regions, equipments, etc. Starbucks segregated its operations into three operating segments: United States (US), International (I) and Global Consun~erProducts Group (CPG). Under the US and I segments, the company reported operations of companyoperated retail stores and certain components of Specialty Operations (SO). In the US segment were included licensed retail stores, foodservice accounts, and other operations related to the main business of the company. Specialty operations in the 'I' segment include retail store licensing operations in over 30 countries and foodservice accounts in Canada and the UK. The 'CPG' segment reports Starbucks' grocery and warehouse club business along with branded products' global operations. ~ v ~ v ~ v . ~ t a r b ~ ~ k ~ . ~ 0 1 i 1 / a I ~ o 1 1 t u ~Octobcr e l i 1 e a s p / t i ~ ~ ~ 2004.

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As of 2008, the total store count in the U.S. market was 11,570 compared to 10,684 at the close of the FY 2007. In the international markets14, the store count was 4,978 at the end of the third quarter of 2008 compared to 4,101 at the end of 2007.'~(Refer to Exhibit V for a comparison of number of Starbucks stores under each format as of FY ended 2007.) The company's international total net revenues increased by 24 percent to US$535.6 million for the quarter ended June 29, 2008. In the same quarter, while the net growth in number of stores in the US market was 886, that in the international markets was 651. This growth was in spite of the large number of closures announced with respect to the Australian and US markets.

STARBUCKS IN THE LAND OF THE KANGAROO Entry & Expansion

Starbucks entered Australia through its wholly-owned subsidiaries Starbucks Capital Asset Leasing Company, LLC and Starbucks Coffee Company (Australia) Pty. Ltd. (a joint venture '~ between Markus ~ o f e r (Hofer) and Starbucks Coffee International). Company owned and operated retail stores were opened in quick succession. According to Hofer in 2001, Starbucks' timing of the Australian entry was appropriate. Spurred by the economic development in Australia, the burgeoning middle class was moving toward the cafe culture (away from alcoholic drinks because of Australian government laws like the one against drunken driving) along with the rich who were already well into it.I7 Starbucks began selling its espressos, frappuccinos, and filtered coffee in Australia on July 17, 2000. This was the same year in which Schultz went from being Chairman and CEO of the company to Chairman and Chief Global Strategist. Starbucks' first store in Australia was opened in Sydney's Central Business District (CBD). By this time, there were coffee stores at most street corners in the island continent with customers who understood and appreciated good coffee and for whom coffee-drinking was a daily ritual (Refer to Exhibit VI for an overview of the advent and status of coffee culture in Australia). There was dissent from most quarters to Starbucks' entry as it was felt that Starbucks' philosophy did not fit in with the Australian palate. In 2002, the company announced that it did not expect to break even for 'another three to five years'.'8 Despite the lukewarm welcome, by 2003, there were 40 Starbucks stores in Australia, 2 stores having opened in 2000, 16 in 2001, 25 in 2002, and 7 in 2003, net of store closures. These stores, in many cases, were located in areas already well-served by independent local cafes - e.g. Lygon streetig.The head office ('Support Center' in Starbucks parlance) in Australia was located at Frenchs Forest, New South Wales. In August 2004, however, it was reported that Starbucks was facing difficulties in the Australian cafe market. Three of its then about 40 stores closed down during the year, one each in Melbourne (South Yarra), Brisbane (Edwards Street), and Sydney (Borders skygarden12'. This was when Gloria ~ e a n s(it ' was opening its 200th store), ~ c ~ a fand ~ ~ , ~ e Coffee were doing reasonably
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Starbucks does not provide geographic breakdowns for revenues on the public domain. "Starbucks Takes Significant Actions to Position the Con~panyfor 2009 and Reports Third Quarter Fiscal 2008 Results," http://investor.starbucks.com, July 30,2008. Markus Hofer was an Australian businessman who joined with Starbucks international to set up the chain in Australia. He became the Managing Director for Starbucks in Australia. In 2002, he resigned and sold back his stake in the company. "Aussie Baristas Take Sweet Revenge." ~vww,rnonstersandcritics.com, August 21. 2008. "Starbucks Keeps Pouring Till Results Filter Through," Atrstrnlian Business Intelligence, l~ttp://findarticles.com, February, 2002. Please refer to Exhibit Vl for the significance o f Lygon Street. Julinn Lee, "Starbucks Adds Shop Closu~es thc Esperience." w\v\v.smh.com.au, August 26,2004. lo Gloria Jeans is a caft chain launched in Australia in 1995. McCafe, launched in Melbourne, Australia, is owned and operated by Mc Donalti's.

well and growing steadily.24Responding to the closure report, a blogger wrote "It seems obvious to me that the only problems Starbucks are experiencing here (Australia) is one of poor marketing based on even worse market research. Most of the Australian population today are not looking for an American cup of coffee, merely a well-made, comparitably priced cup. If Starbucks wishes to continue operations in Australia they have to focus on identifying what Australian consumers want, not what Starbucks can deliver. A homogenous marketing strategy will not work, even in ~~ two countries that appear to be as similar as the US and ~ u s t r a l i a . "However, the company continued to open stores without making any notable modification in its strategies in Australia. Christine Day, Managing Director of Starbucks Coffee, Australia, commenting on the closures, said, "We regularly review our portfolio of store locations to ensure we best meet the needs of our consumers. Starbucks is strongly committed to the Australian market and we'll continue to open new stores on a 'one cup at a time' basis."26 The company went on to open 14 more stores in 2005 (Refer to Figure I for the growth of store numbers in Australia: 2000-2007).

Figure I Growth in Number of Starbucks' Stores in Australia: FY 2000 - 2007

Source: Starbuch Annual Reports

Promotion of Starbucks in Australia

The Starbucks brand was intended to be an "affordable luxury" - the customer was offered specialty coffee in a special ambience which was available at a premium price. In-store, Starbucks attempted to maintain the same kind and level of experience that its customers, world-wide enjoyed. Positioned as 'the third place'27 these stores were designed to serve as a comfortable place where people could spend time between home and work. Most Starbucks stores were 'No Smoking' areas although the seating space outside a store could be used for smoking. Like elsewhere in the world, Starbucks Australia employees were called partners, and they, along with eligible family members, were provided full medical, dental, and vision insurance along with disability insurance. A partner was eligible for such benefits as long as he or she worked for at least 240 hours (1 8.5 hours a week) in a quarter. These efforts made the company one of the best places to work for.
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Coffee Club was launched in 1989 in Brisbane, Australia. As of year 2008, it had expanded to a chain of about 220 outlets in Australia & New Zealand. Julian Lee, "Starbucks Adds Shop Closures to the Experience," www.s~nh.com.au,August 26,2004. "Starb~lcksStruggling in Australia?http://starbucksgossip.typepad.com, 25 August, 2004. Julia11Lee, "Starbucks Adds Shop Closures to the Experience," www.smh.com.au, August 26, 2004. Ray Oldenburg. an urban sociologist had said in the American contest. "Most needed are those 'third places' which more than informal public lend a public balance to the increased privatization of home life. Third places are nothi~lg gathering places. The phrase 'third places' derives from considering our homes to be the 'first' places in our lives. and our work places the 'second'." (Source: ~vww.co.cal.md.~1s/assets/I'la~i~gZo1iing/7'ownCente~~s/I'lannersPressArticl~.~1dt~)

When Starbucks was launched in Sydney, there were no significant advertising campaigns to support the launch. The company adopted experiential marketing2' as opposed to traditional printlmedia advertising to promote its brand. Holly Gray (Gray), national marketing director, Starbucks Australia, said, "The way we have built the brand here in Australia and how we will continue to build the brand here is through word of mouth or an experiential marketing approach.. ...Word of mouth is obviously only received through existing customer loyalty and so that's where we really rely on our stores to create those relationships with customers who in turn will tell their friends and families about tarb bucks."^^ This was characteristic of Starbucks - a company which depended on customer loyalty and 'WOM' as strategic marketing tools customers driven by a special 'experience' would advocate the experience to their family, peers, friends, etc. The company used tactics like dropping pamphlets in letterboxes which announced a store-opening, bringing out an article featuring a specific Starbucks barista in local newspapers, etc. Under Charlie Baker, the global retail specialist who was appointed as managing director of Starbucks Australia in March 2003, the company's corporate social responsibility initiatives became p r o n o ~ n c e d 'Giving Back' was an initiative which entailed granting a work-day off .~~ annually to all partners, to be used for charitable work of their choice, as for instance, Planet ~ r k ~ ' programs. There was a Green Team within Starbucks Australia consisting of 12 members who were entrusted with planning and implementing ways and means to contribute positively toward environmental su~tainability.~~ In September 2003, the company launched its first print advertisement campaign which was to be executed in a series of three stories and was conceptualized by Reed Miltiades Kaye, an advertising agency based in Sydney. The first story portrayed the relationship between a Mexican and coffee farmer, Conservation ~nternational~~, Starbucks. The second featured Starbucks' passion for the right espresso, and the third portrayed the special experience that the customer could expect in a Starbucks store. During the Christmas holiday season of 2006 (November through December), the company launched two campaigns in Australia's main cities titled 'Starbucks Parking Angels' and 'Red Cups on As part of the Parking Angels campaign, parking meters in Melbourne were filled as a surprise gift during the busy shopping period. The launch of the Starbucks signature Red Cup marked the start of the holiday season globally in November every year. In the 'Red Cups on Cars' campaign, representatives of Starbucks drove cars with the Starbucks holiday Red Cup magnetically attached on top of them, in Sydney and Brisbane. Unassuming onlookers who tried to warn the car drivers that they had left their coffee cup on top of the car were gifted a Starbucks Commenting on these campaigns, Gray said,
Experiential marketing is a strategy which complements or, in some cases, substitutes traditional marketing techniques. Through this strategy, an iniage is created of a product or service offering. This image aims at attracting the five senses - touch, taste, smell, sight, and sound. Such encompassing of the senses makes an individual's encounter with the offering difficult to forget or ignore. Helshe is then inspired to act by buying the offering and also by recommending the product or service to people helshe knows through word of mouth. This phenomenon spreads on to influence others and significantly adds to the image of the product in the market, thereby increasing sales. 29 Helen Withycombe, ''In the Spotlight: Starbucks," www.marketingmag.co~n.au, March 10, 2007. 30 "Starbucks Australia Appoints Ex-Nike Vice President," www.bandt.com.au? March 12, 2003. 3 1 Planet Ark is a non-profit organization started by Pat Cash, the Australian tennis player, in June 1991. It is wellknow~.n its recycling campaigns which included the National Recycling Week in Australia. A number of celebrities for like Pierce Brosnan, Kylie Minogue, Nicole Kidman, and Tom Cruise have actively participated in its campaigns at various points o f tin~e. 32 "Making Corporate Social Responsibility Work: Starbucks Australia's Charlie Baker," CEOFor~umGroup, ~v~nv.ceoforum.com.au/article-detail.cfin?cid=G32GG j3 Co~lservatioli International, founded in 1987, is a US-based not for profit organization which aims at protecting the Earth's environ~nent,both on and olf land especially in the developing nations ol'the world. 3"~elen Withyconlbe. "In the Spotlight: Starbucks." \\~\v\v.~iiarketi~~gliiag.coni.au, 10, 2007. Mal.cIi ' 5 "Starbucks CofTee," B&T, w\\w.bandt.coni.au, Deccrnber 14, 2006

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"Celebrating Christmas traditions is at the heart of the Starbucks brand experience and provides the perfect opportunity for introducing new and existing custolners to the Starbucks holiday offering".36 Analysts felt that despite these efforts, the company was not able to win over the Australian customer. Undaunted, the company expanded aggressively and had 87 stores in Sydney, Brisbane, the Gold Coast, the Sunshine Coast, Canberra, Melbourne, South Australia, and Tasmania in 2007.

Strategic Retreat
With its assertive expansion strategy in Australia, according to analysts, Starbucks had become a symbol of Americanization and commercialization. The fact that it was available everywhere was one of the causes behind the fall of its premium image. This fall was evident from the diminishing traffic in its stores and the preference among the people for indigenous cafes. Turnover reduced in other markets as well although the reasons may not have been exactly the same as in Australia. In February 2007, an internal memorandum (titled 'Commoditization of the Starbucks brand') issued by Schultz was disclosed on the public domain. It said, "(Starbucks) Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store ... I'm not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores... at a minimum (we) should support the foundation of our coffee heritage."37938 This memo made it clear that Schultz was not ignorant of the falling value of the Starbucks brand. Analysts opined that the Seattle startup (Starbucks) had grown too fast for its own good without taking into account the intricacies of the markets in which it had spread itself. In March 2007, the annual 'Starbucks Coffee Break' was launched in Australia and in a few other international markets. During the 'Coffee Break' period, for two hours in the morning, customers across the country were invited for a complementary tall (350 ml) cup of coffee.39 On January 7, 2008, Schultz re-assumed the position of CEO in the company. He declared his intention to rejuvenate the Starbucks brand world-wide by going back to its roots and re-building the link between the customer and the brand. This, he said, he would do through numerous groundbreaking 'transformation strategies'. On July 29, 2008, the closure of "61 under-performing stores" in Australia was announced, displacing 685 partners. The closures were in Australian Capital Territory (ACT), New South Wales (NSW), Queensland (QLD), South Australia (SA), Tasmania (TAS), and Victoria (VIC). (Refer to Exhibit VII for a list of closures issued by Starbucks). This decision, according to the company, was taken after considering all alternative options to revive its position in the island-continent. Schultz said, "In January 2008, we developed strategies to transform the company for the future. Now, we are well into the implementation phase of transforming Starbucks and we believe that this difficult, yet necessary, decision to close stores in Australia will help support the continued growth of our international business.. .,740 This drastic step came as a bolt from the blue for the company's Australia11 partners. The move was all the more unexpected as it came from a company known for its employee-friendly management practices. Although the company attributed the closures to non-performance, the general feeling alnong analysts was that Starbucks had undertaken a hyper-aggressive growth strategy which had resulted in cannibalization of sales alnong its own stores without really adding to revenues. The company attempted to combine a premium-priced product with convenience and ease of availability by opening stores within close proximity of each other. The two objectives contradicted each other and diluted the value of the brand. The Starbucks offering had become too
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'' LLStarbuck~ Cllairrnan Warns of the Commoditization of the Starbucks Experience,"

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"Starbucks Coffee," B&T. www.bandt.corn.au. December 14, 2006.

11ttp://starbucksgossip.typepad.com, February 23, 2007. John Quelch, "How Starbucks' Growth Destroyed Brand Value." http://discussionleader.hbsp.com, July 2, 2008. Nicole Weston, .'Starbucks Coffee Break.'bwww.slast~food.com. March 5. 2007. "Starbucks Restruct~~res Australian Operations to Position Business for Long-Term Gro\+.tll." \\~\~v.starbucks.corn, July 29, 2008.

standardized for Australians who understood good coffee and also had a sophisticated coffee culture. John Quelch, professor at Harvard Business School, wrote, "Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special."41 According to Jeremy Jenkins, a cafe proprietor in Melbourne, the situation was not the same in Australia as in the U.S. He said, "People come in our cafe because they know us and they know they'll get good coffee, we're part of the local community. Starbucks is a McDonald's coffee experience. It's (Starbucks) not about the quality of the coffee; it's about convenience and location."42

WHAT WENT WRONG IN THE AUSTRALIAN BREW?

Starbucks became the 'third place'43 for Americans who got hooked to the unique blend of dark roasted Arabica coffee beans freshly brewed and served as an "affordable luxury" in an ambience very similar to the Italian espresso cafe. It was a new experience for the Americans who were used to the 'on-the-go' instant coffee taste. Spurred by this success, the company began its expansion drive in the Asia-Pacific Rim region. It was yet to set foot in the European markets when it entered Australia in 2000. It had successfully ventured., into Japan, Singapore, China, Taiwan, the Philippines, Thailand, Malaysia, and South Korea, and three countries in the Middle East, all of which were traditionally tea drinking countries. ~ l t h o u ~ahmajor success in its home country and ' in most of the markets it ventured abroad through the 1990s, Starbucks failed to create the same enchantrtient in the Australian market largely due to its inability to understand the Australian consumer and culture, according to analysts.

Growth Strategy
Starbucks entered the Australian market at a time when it did not have much experience operating in a traditional coffee drinking country. Starting with two stores in Sydney in 2000, it went up to 40 by 2003 and to 87 in 2007. The breakneck speed at which it grew was considered by many as an imposition on the Australian market rather than organic growth (as that in the US). It was opined that the stores did not come up because the company was earning huge revenues or were operating beyond capacity. They came up only as a blanketing strategy, that is, to establish a presence and command recognition in the minds of the Australian customer. Stores came up both in big cities and in small towns - at times there were even two stores on the same street, saturating the market with the company's presence. The green logo could be seen everywhere - which was more a characteristic of a 'grab and go' fast food joint than a specialty coffee bar (as Starbucks positioned itself). (Refer to Exhibit VIII for the Starbucks logo). The ubiquity of its presence diluted its image and eliminated the exclusivity of the brand, according to experts. There was ambiguity in Starbucks' brand positioning in Australia, they said. Elitist coffee connoisseurs avoided visiting the stores as they considered them too commonplace. The commoner who merely wanted a good cup of coffee in a relaxed environ preferred the familiarity of the local independent cafe compared to the American coffee chain. For the passer-by who wanted to drink coffee while on the move there were the McCafes and Gloria Jeans which provided a much cheaper option. Moreover, many felt that the local brews were much better than those offered by tar bucks.^^ Analysts felt that by opening so many stores the company had actually cannibalized its own clientele. Michael Polonsky, Professor in Marketing, Deakin University, said, "Starbucks had attempted the Coca-Cola strategy of being available wherever people looked ....But it was its market saturation that was its undoing."45
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John Quelcli. "Starbucks' Lessons for Premium Brands," http://libswk.hbs.edu, July 9, 2008. cc Coffee Culture Grinds Starbucks' Australian Operation," l~ttp://au.news.yalioo.com, August 3, 2008. Starbucks aimed to become the third place for its clientele - between workplace and honie - where they could relax, socialize, andlor work. "Australian C o f t r : Culluse Grinds Starbucks' Profit," \\?vw.taipeitimes.com, August 4. 2008. De\\,i Cooke. "American coffer: culture gets roasted," hllp://w~vw.tlieage.co~ii~a~ional/a~iierica~-cofke-cult~~regets-roasted-2008080 I -3olt.html?page=2, August 02,2008.

Commoditization and Standardization

'Tall' (12 fl oz = approx. 350 ml), 'Venti' (20 fl oz = approx. 590 ml), and 'Grande' (16 fl oz = approx. 475 ml), 'Short' (8 fl oz = approx. 235 n ~ l were ~names of serving sizes in Starbucks ) ~ lingo and were used in almost all stores across countries. The coffee chain standardized its offering to the customer - a similarly designed store providing similar products and services - so that customers, wherever they were, would associate the green logo with the same unique 'experience' which, presumably, would elevate them to an elite status in society. In doing so, the company achieved an inexpensive technique (compared to competitors) of fitting a set of standard parts having a consistent color scheme, viz. sale counters, condiment bars, merchandise wall bays, murals (artwork by John Lavin of Lavin & Stacey ~ e s i g n ~Espresso Machine stations, etc. ~), irrespective of the size or location of the store. However, it also resulted in the stores being described as 'sterile, cookie-cutter' and without any warmth. The Starbucks experience metamorphosed into a corporate chain selling a number of standardized products. The original experience (inspired by the Italian cafe) was a lot to do with the barista establishing a relationship with the customer but with so many products to churn out there was hardly any opportunity for small talk. Unlike in the US where speed and efficiency of operations was important, in Australia, this streamlined experience was a major contributor to the failure of the company. With a mature taste for specialty coffee, the Australians preferred the laidback ambience of the local cafe where the barista knew their names and their favorite brews. (Refer to Exhibit IX for an indication of the coffee lingo used in Australia.) Nick Wailes, Associate Professor, expert in strategic management in the Faculty of Economics and Business at the University of Sydney, in 2008 said, "The coffee experience is two things. Firstly, it's the product and the taste and secondly the place and the service. It's much easier for the local store to differentiate itself as being local whereas Starbucks had this slightly schizophrenic positioning where it wanted to be the global, local store."48 Andrew Bolt, a blogger, commented, "Our coffee culture has two elements fatal to Starbucks. First, influenced by the Italians and Greeks in particular, we like our coffees stronger and straighter. Second, coffee for us is as much about relationships as a product. Which means boutique beats supermarket every time."49

International & Home-grown Competitors

Cut-throat competition from indigenous cafes and other multinational coffee chains prevented Starbucks from acquiring a sizeable share of the Australian market. McDonald's had entered Australia much earlier than Starbucks. In 1993, the fast food giant launched the McCafe chain in Melbourne and later spread widely to other international markets. To compete with Starbucks, the chain improved the quality of its drip coffeeS0and also refurbished its store-interiors. McCafe offered European espresso coffee, lattes, smoothies, iced coffee, sweet tea, and specialty confectionaries and more importantly, it did so at a price significantly lower than Starbucks. The chain did not serve as many variants as Starbucks. Another important player in the Australian market was Gloria Jean's Coffee. Originally a coffee shop in Chicago, it was launched in Australia in 1995 through Jireh International Pty Ltd. Jireh International became the owner of the Gloria Jeans brand and was authorized to sell franchise rights in Australia and other countries. Hudson's
46

47
48

49
50

ww.starbucks.con~~retaiI/nutrition~beverage~detail.asp. Lavin & Stacey is a design house based in Seattle who call themselves 'visual problem-solvers' and cater to interior space design requirements of individual and corporate clients. Starbucks is a major client. Phil Mercer, "Australian Coffee Drinkers Prefer Quality over Starbucks' Quantity," w\r.thenational.ae, August 4, 2008. Andrew Bolt, "Coffee is too Social a Drink for Starbucks," heraldsun.con~.au,http:llblogs.news.con~.ai~, 30, July 2008. Coffee is broadly brewed in two ways - drip and espresso. 111 drip coftee, tlie coffee is extracted gradually (say, 5 minutes) through a gravity drip (e.g. paper lilter), Espresso coffee is brc~vedusing immense force for a short time (say 20 - 30 seconds).

Coffee (Hudson's), a local player which was set to offer significant competition, was planning to start its chain of stores in Australia in August 2008. On the Starbucks closures, Mark Hawthorne (Hawthorne), founder of Hudson's said, "... as an Australian coffee company we have had continued growth from the support of our local franchises and c~mmunities".~' According to Hawthorne, Hudson's and Starbucks had very different missions - Starbucks focused on capturing and dominating the market by way of brand recall and recognition; Hudson's had a more restrained approach whereby it emphasized on relationship-building with internal and external stakeholders through mutual support. Along with the big names were a multitude of local cafks selling freshly brewed beverages made from home-grown and roasted beans across the country. Cafe Hernandez (1972), Toby's Estate (1998), and Single Origin Roasters were such indigenous cafks in Sydney. They had a loyal clientele who enjoyed their cup of coffee prepared by their favorite barista, in small, boutique-style outlets with a comfortable laid-back ambience. The hallowed areas of Norton Street, Sydney, and Lygon Street, Melbourne, with their dense population of independent cafks, boasted of the unique coffee culture embedded in the island-continent.

Store Format
As opposed to the licensed store format which Starbucks adopted in its home-country (in addition to the company-owned format) and in many of its foreign markets, in Australia it opted for the company-owned retail store format. Under the licensed store format, Starbucks granted a license to local, experienced (in a similar business) individuals or organizations who were able to provide the company with useful and exhaustive know-how of the locale's market characteristics, including real estate facts. The licensee partner had the responsibility of providing information on potentially lucrative store locations. In exchange for the license to sell Starbucks coffee, tea, and related merchandize under the Starbucks name, the licensee paid license fees and royalties, irrespective of the revenues generated at the store. Starbucks provided the employees of the licensed stores with detailed operational procedures and extensive training in line with the company-operated stores. Some experts felt that using solely the company-owned and operated format in Australia may have been a mistake on Starbucks' part. The island-continent had an existing coffee culture which the Australians were proud of. It may have been a better strategy to enter Australia through licensees who were experienced and knowledgeable in the minutiae of the market. This strategy would have enabled better positioning of the Starbucks brand, they said.

Population Density
Australia had a population of 21,007,310 (estimated as of July 2 0 0 8 ) ~comprising a white ~ population of 92 percent, Asian 7 percent, and aboriginal and others 1 percent. It had a population density of 3 persons per square kilometer, which was one of the lowest in the world (compared to 16 in Eastern Europe, 169 in Western Europe, 54 in Northern Europe, 132 in East Asia (which ~ includes China & Japan), 31 in the US, and 21 in South ~ m e r i c a ) . 'Also, most of the population was concentrated in the south-east, east, and the south-west of Australia (the Australian Capital Territory having the highest density of population) - wherein, again the larger proportion of population was residing in the metropolitan cities of Canberra, Melbourne, Brisbane, and Sydney. (Refer to Exhibit X for an indication of region-specific population density in Australia). John Culver, Starbucks Asia Pacific President, said of the July 2008 closures, "Stores in secondary locations failed to generate enough foot traffic to sustain the stores. The future for Starbucks Australia will be about refocusing on the high traffic CBD stores."54

51 52

"
4 '

"Starbucks Cuts 61 Local Stores," Btisiness Specfafor,~~ww.businessspectator.com.au, 30,2008. July "The World Factbook: Australia." Central Intelligence Agency, w\nv.cia.go\;, last updated September 4, 2008 "World Population Datasheet 2007." ww~v.scribd.comldoc/326077/World-Population-Datasl~eet-2007. "Starbucks Cuts 6 I Local Stores," Busitiess Speclnlot., www.businessspectator.com.au. July 30,2008.

11

While the company retained 10 stores in New South Wales, 8 in Queensland, and 5 in Victoria, it withdrew totally from the Australian Capital Territory (ACT) which includes Canberra, a city with a very high population density (Refer to Exhibit XI for a list of post-closure locations in Australia). According to David Rumbens, Director of Access Economics, one of Australia's foremost private forecasters, consumer spending (inflation-adjusted) had declined in the Australian Capital Territory in the quarter ended September 2007 while in the rest of mainland Australia, it had seen a robust growth.55 In a state-wise study carried out by the Australian Bureau of Statistics, it was seen that the state final demand56 in ACT grew by 1.3 percent in the year to June 2008. The domestic final demand (country average) showed a 5.2 percent growth with New South Wales having grown by 4.3 percent, Queensland by 7 percent, and Victoria by 4.2 percent.57 Another interesting fact to note, in this regard, was that the capital city of Canberra had the highest per capita proportion of restaurants in Australia.

ECONOMIC FORCES PUSH STARBUCKS FARTHER DOWN

In September 2008, it was reported that in the quarter ended June 2008, Australia's economy had grown at its slowest in over three years.5gHousehold consumption dropped by 0.1 percent in the same quarter, compared to a growth of 1.1 percent on an average in the last fiscal. Since 1993, this result was said to be the worst.59As America and the rest of the world struggled in the backdrop of the sub-prime fallout60,Australia, for a long time, was only troubled by the lack of sufficient manpower to keep up with demand. After years of commendable growth, in 2008, the Australian economy started to demonstrate signs of having fallen prey to the global economic downturn which had the US at the center-stage. Households in Australia, typically characterized by a high debt-to-income ratio, were in a situation of high inflation rate coupled with sagging economic growth. Rising petroleum prices had a ripple effect on the prices of most consumer-goods, especially food prices, which were also affected by intense drought conditions in the country. The economy was faced with a booin in migration into the country6' but a decline in building activity which resulted in a housing affordability crisis fuelled by a global credit During such tiines of economic decline, one of the main sectors affected is that of restaurants and cafes. According to experts, sales in this sector are dependent on household discretionary income64 to a great extent. Discretionary income is a function of growth in employment conditions, wage

56

57

5B

59

60

6'

62

64

State Final Demand (SFD), an important measure of economic activity, is an estimate of the level of spending in the local economy which is reported based on level of consumption of goods and services, and capital investment. Australian National Accounts: State Final Demand (SFD), June Quarter 2008, www.treasury.act.gov.au/snapshot/SFD.pdf. Wayne Cole, "Australia Econon~y Slows as Consumers Cut Back," http://in.reuters.com, September 3,2008. Wayne Cole, "Update I: Australia Economy Slows as Consumers Cut Back," http://in.reuters.com, September 3, 2008. The sub-prime mortgage crisis was a continuing condition in the US (which began approxi~nately 2005) which had in its adverse effect in the global credit and banking system. The condition was triggered by some banks abusing the existing laws whereby they needed to check credit history of the borrower before granting them a loan. Bypassing these laws, loans were granted to people with vague or no income documentation and doubtful credit histories and those who had been rejected loans by the prime financial institutions. Michael P e r ~ y"Australia Struggles with Needs of its Surging Population," w v . i h t . c o m , October 2,2008. , Jacob Greber, "Australia Home-Lending G I Q M ~ I Slows to Weakest Pace in 22 Years," www.bloomberg.con~, September 30, 2008. "A~~straliaii Foodservice Industry to Continue Growing: BIS Shrapnel's Survey," www.ferret.com.au, December 18, 2007. Discretionary income is that portion of an individual's disposable income that is left for spending. investing, or saving after having incurred necessary expenses for h o d , shelter, and clothing. If not invested or saved, this amount is normally used for non-essential items like luxu~ygoods and services. Income - Taxes = Disposable Income; Disposable Income - Necessary Expenses = Discretionar)) Income.

increases which outdo prevailing inflationary trends, and variations in tax and mortgage interest payments. In Australia, with declining discretionary income leading to lower consumer demand, a vicious circle of weaker performance of retail businesses; less investment in business; falling employment rates; and in turn, lower consumer demand came into play. Australia's leading furniture and electronics retailer, Harvey Norman Holdings Ltd., reported a slowing sales growth in the 12 months ended June 30,2008, due to tightened spending trends on luxury goods like sofas and electronic items. Quantas Airways, based in Australia, stated in July 2008 that it may have to .~~ cut 4 percent of its w ~ r k f o r c e Starbucks was also said to have been a victim of this economic condition, both in the US and in Australia. For a company operating in the consumer-goods sector, a cutback on investment was a common reaction to the economic slump. Commenting on the company's store closures in Australia and the US as an initiative to get back on track, Schultz said: "Starbucks coffee and premium coffee experience has, over time, been an affordable luxury. And at this time, it isn't for some people."66

OUTLOOK
Starbucks, like most companies, faced difficulties in the international markets that it entered. While in China and Japan it had to compete against the well-entrenched tea-drinking tradition, in ~ r a n c e ~ ' was the sophisticated coffee culture which proved a challenge for the company. In it 2004, KarstadtQuelle, Starbucks' joint venture partner in Germany, decided to sell off its 82 percent stake to s tar bucks.^^ However, Starbucks was not alone in facing such problems. In 2006, Wal-Mart Stores Inc., the American retail chain, had to withdraw from South Korea and Germany because of being unable to adapt its 'warehouse-style' to the culture and environment in these host c~untries.~~ Starbucks, recognized globally as a lifestyle brand or even a status brand, elicited both derision and wow, over the years. After years of remarkable growth, the company came to a point where it lost its premier position and began to lose ground to competitors. The novelty of Starbucks was said to have worn off and, customers were not ready to pay a price premium for the coffee or experience which they no longer found special. Also, analysts felt that the Starbucks brand had lost authenticity - the brand image had moved away from its original purpose, thereby diluting the promise of quality made to the customer. Erosion of the brand was accompanied by tightened spending among customers. Apprehensive of the effects of the financial crisis in the US, people did not want to splurge on luxuries like specialty coffee. Although the company blamed the rising fuel and food prices for its deteriorating performance, Schultz recognized and accepted the fact that the problem was actually inside his company. He acknowledged that some decisions taken at varied points of time to solve specific problems had taken the company away from its core objective. When he took up position as the CEO, second time round, he took it upon himself to steer Starbucks back to its roots by taking some drastic measures. Experts opined that in Australia, Starbucks had failed to pay heed to the cultural nuances which characterized the Australian coffee market. According to Michael Edwardson, a Melbourne-based consumer psychologist, "It (Starbucks coffee) was maybe too standardized. Early on, it was unique and different, but as it became a global chain restaurant the standardization made it lose some of
65

"
68
G9

GG

Jacob Greber, "Australia Home-Lending Growth Slows to Weakest Pace in 22 Years," www.bIoornberg.com, September 30,2008. "Starbucks Responds to Slowing Market," w~v.reportbuyer.corn.August 7, 2008. Starbucks opened its first store ill France in 2004. Petra Kappl, "World Business Briefing / Europe: Gerlnany: Starbucks Venture to End," New 1'or.k T i ~ ~ i e s , Iittp:llquery.nytir11es.c01113, November 23, 2004. On incurring huge losses in 2005, in May 2006, Wal-Mart withdrew tkom the South Korea after selling all its stores to Shinsegae, a leading discount chain in South Korca, for US$882 million. In July 2006. Wal-Mart withd~-e\v fiom Germany, also because oi'losses, alter selling its stores to Metro AG.

that coolness and edginess. It was quickly copied and lost its luster."70 The closures in Australia may have been a step toward consolidating presence in a market where most of the stores were failing to generate traffic. By moving out of the secondary locations and concentrating on the big cities, the company may have aimed at mitigating unnecessary costs of operating non-performing stores. Another objective of these closures may. have been to keep a low profile in a market in which Starbucks had failed to gather sufficient momentum. The company may have intended to earn time to analyze the market and re-enter it differently. Alternatively, Starbucks may have merely decided to opt out of the Australian market but was doing so in a phased manner. The timing of the Australia closures coincided with declining home country performance. The company claimed that there was tremendous scope to grow in the international market. In Starbucks' future plans for expansion, emerging markets like China, India, Brazil, and Russia (commonly referred to as the BRIC countries) occupied an important place. It also planned to enhance its presence in Europe in a big way. In September 2008, the company announced the opening of its first store in Portugal. While Starbucks was to continue its expansion drive in the markets outside the US and aimed at opening 825 and 900 stores net of closures internationally in 2008 and 2009 respectively7', it cut its new US net store openings target for 2008 to 1,175 from 1,600. The company forecast in 2008 that by 201 1, it would have more than 40 percent of its outlets outside the US with foreign openings of 3,500 planned for the three-year period.72 Fuelling its growth and revenue figures from the international markets was a good strategy to cushion its fall in the US during times of financial slump. However, some analysts felt that this strategy would prove successful only if the company concentrated on analyzing each market carefully before venturing into it. Adapting to the specific culture, sentiments, and preferences of foreign markets was a necessary change from the Starbucks philosophy of providing the same experience to coffeedrinkers world-wide, they said.

70

71

72

Phil Mercer, "Australian Coffee Drinkers Prefer Quality over Starbucks' Quantity", www.thenational.ae, August 4, 2008. "Starbucks Takes Significant Actions to Position the Company for 2009 and Reports Third Quarter Fiscal 2005 Results," I1tlp:1/investor.slarbucks.com, July 30, 2008. Carol Matlack, "Shrinking at Home, Expanding Abroad - Will Global Growth Help Starbucks?' w\~~v.businesswveek.com. 2, 2008. July

Exhibit I Condensed Consolidated Unaudited Statements of Earnings1 (Loss) of Starbucks Corporation

13 weeks ended 39 weeks ended

(In US$, Million) Net Revenues: Company-operated Retail Specialty: Licensing Foodservice & other

June 29, 2008

July 1, 2007

June 29, 2008

6,674.6

July 1, 2007

2,180.2

2,010.8

28 1.3 112.5 393.8 254.9 93.6 860.5 332.5

743.6 286.7

1.030.3 1 1,193.0 2,359.3 7,867.6 6,970.6

Total Net Revenues (A) Cost uf sales including occupancy costs Store operating expenses Other operating expenses Depreciation and amortization expenses General and administrative expenses Restructuring charges Total operating expenses (B) Income from equity investees (C) Operating incomel(1oss) D = [(A) (B) + (C)1 Interest income and other, net (E) Interest expense (F) Earningsl(1oss) before income taxes G = [(D) + (E) - (F)] Income taxes (H) Net earnings/(loss) (I)= (G) - (H)
Source:
H~IOHJ.~ta~~bz~cks.corn

2,574.0

139.8 116.1

119.4 121.3

411.1 359.6

343.0 365.9

2,624.6 29.0 (21.6) 0.9 12.5 (33.2) 26.5 (6.7)

2,138.6 24.5 245.2 8.6 10.8 243 84.7 158.3

7,455.0 77.1 489.7 11.8 40.8 460.7 150.6 310.1

6,234.2 69.5 805.9 28.1 24.5 809.5 295.4 514.1

Exhibit I1 Comparison of Planned Against Actual Company-Owned Store Openings in the International Market

V1

L Q

cn , ,
0

Year Planned

'Actual

Conzpiledfiom various sources

Exhibit I11 Starbucks' Retail Product Line Product

Beverages Food Coffee-making equipment and other merchandise Whole bean coffees

September 30,
75% 17% 5% 3%

October 1,
77% 15% 5% 3%

October 2,
77% 15%
4% 4%

Source: http://nredia.corporate-ir..net/media_files/irol/99/99518/200710K.pdf

Exhibit IV Starbucks' Critical Success Factors in International Operations

Psychologist Joseph Michelli (in his book The Starbucks Experience, Five Principles for Turning Ordinary into Extraordinary) wrote - "Whether it's brewing coffee, designing software, or mopping floors, a commitment to Surprise and Delight literally transforms the very nature of ~ o r k . " ' Starbucks was conceptualized as a brand which would transform the American coffee ~ experience into an extraordinary experience inspired by the aura of the European coffee houses. The company also experienced significant success in its international operations. All Starbucks stores worldwide were designed to emanate an ambience which would provide "an authentic coffee experience". The store ambience was to reflect the passion that the company felt for coffee. Starbucks did not believe in advertising overtly but considered each store to be a contributor to the brand image - color scheme, fixtures, merchandize, aroma, etc. were strictly monitored to give a consistent experience - even though each store was unique in its own way. Grand Cafes, drive-through windows, and special seating areas were among the efforts taken to cater to special needs of specific communities and neighborhoods in various countries. In-house designers and architects armed with a centralized store development process ensured that minutest details were looked into at every store - at a reasonable cost. The employees were specially trained so that they could provide the customer with the distinctive Starbucks experience. According to analysts, Starbucks' success in its international operations was due to its ability to: Identify the demand for gourmet coffee and penetrate international markets on a continuous basis Evaluate real estate options and take apt decisions thereby maximizing brand image, visibility, and customer traffic according to the company's policy of blanketing busy locations with numerous stores Sustain profitable expansion plans through a balanced and appropriate portfolio of company-owned, joint venture, and partnership arrangements Recognize consumer preferences in each location and modify product offering accordingly Effectively and efficiently set up stores internationally which emanate an authentic coffee experience and reflect the company's passion for coffee Disseminate its corporate culture to each partner in every international location Convert partners to stakeholders in business by emphasizing empowerment, entrepreneurship, quality, and service as key elements for partners Establish a strong bond between the partners and customers and offer a personalized experience at all stores Continue corporate social responsibility initiatives through procurement and sale of Fair Trade Certified coffee and through encouragement of 'best practices for coffee cultivation methods' and thereby conserve the environment through its alliance with Conservation International.
Cot7tpiledfiont var.iozis sozrt.ces

I
'

73

Joseph A. Michelli, The Slnrbzicks E.~pe/.ie/7ce, five Pri/ici/~les Tzrr17itlgOrdii7n/:\,ii7lo E.~/rcrordinn,:l(McGrawfor H i l l 1'1~olkssional.2007)

Exhibit V Comparison of Store Formats Based on Numbers as of FY End 2007

Number of Licensed Stores by Region and Location

Number of Company Operated Retail Stores

Net Stores Opened During the FY 2007
I I

Stores Open as of September 30,2007 6,793

I

United States

1,065

1 International:
I

I
I

Canada

88

596

Source: Starbucks Annual Report 2007

Exhibit VI Australia & Coffee

Australia, a market geographically almost the same size as the US, has a population size of less than a tenth of that of the US. Among the indigenous population there are about 600 clan groups with different sets of culture, values, and beliefs unique to each. A permanent European settlement began in 1788 with the establishment of New South Wales, a colonial territory under the British Crown. Spurred by a government sponsored pro-immigration policy to diffuse a severe labor crunch, the country saw a blitz of migrants, especially after the World War I1 (since 1945). The migrants were mainly of British origin and also from other European countries like Italy, Greece, Lebanon, and Turkey because of Australia's discriminatory policy against entry of non-whites. After the nullification of this policy, in 1973, immigrants started arriving from the Asian countries too in large numbers. According to estimates by the Australian Bureau of Statistics (ABS), as of January 2007, 23.6 percent of the Australian population were born outside the country, of which, 33.3 percent were born in the UK and Ireland and 17.7 percent in Southern and Eastern Europe. Driven by multifarious traditions and cuisines, Australia became a collage of varied cultures. According to Barry Urquhart, a retail consultant in Perth: "We have the most cosmopolitan society in the world. We have over 235 ethnicities speaking over 270 languages and dialects, so companies are not dealing with one monolithic bloc. It's unique and consequently you have to recognize that and service differing needs." Imbibing a strong appreciation for quality coffee was attributed to this diverse influence. Coffee plants were initially brought to Sydney by the First Fleet (transporting convicts) in 1788 along with the first settlers to Australia. However, it was only with the post World War I1 European immigrants that sophisticated espresso coffee was introduced to the Australians. As these people settled in the big Australian cities, they took along with them the demand for espresso-style coffees. This demand along with the effect of preparations for the Melbourne Olyinpics held in 1956, led to the opening of a large number of espresso cafes. The first espresso machines were imported by the migrant Italian community members to serve authentic Italian espresso to the Olyinpic team from I~ome (Italy). T11e Australian climate was ideal for coffee to be leisurely sipped at cafe tables lined up on the street-sides. Gradually, a strong coffee drinking culture was established, leading to the ievelopment of a connoisseur's taste for pren~iumcoffee. Coffee shops were frequented by the

younger generation as a place to socialize in the evenings - away from home and work while the older generation spent time during the day meeting friends and neighbors while sipping coffee. Over time, the Australian palate evolved and there was a significant increase in the number of specialist coffee shops. These shops offered a good view along with fine quality coffee served in a sophisticated ambience - while educating customers about the varieties of coffee based on geography, roast, and brew. Lygon Street was the first suburb in Melbourne to endorse outdoor eating. It was identified by its numerous Italian restaurants and cafks and had stretches of tables and chairs lined up along the footpaths. Although made popular by students of Melbourne University, it soon became class defining for business executives to frequent the cafks and restaurants here. With the maturing of the Australian coffee market, enjoying good coffee at home became fashionable (in contrast to the US where most people have filter coffee at home). A number of barista training schools were established and coffee awareness programs were held periodically to nurture and enhance the thriving and rising interest in coffee. Rocks Aroma Festival: This is a one-day celebration of coffee held in Sydney in July each year. Historical Coffee Trek: This takes the participant through Melbourne's coffee legacy. Visits to indigenous cafks, roasting houses, and learning to roast and extract coffee, coffee appreciation classes, etc. are part of this trek. Toby's Estate Espresso School: This is located in the Woolloomooloo district of Sydney and provides various levels of training in the art of making and appreciating coffee.
Compiledfrom various sources.

Exhibit VII List of 61 Closure Locations in Australia in 2008

State Location

Australian Capital Territory

Brand Depot, Canberra Center, Canberra City, Gungahlin

Carlingford Court, Charlestown, Chatswood, Darlinghurst, Erina Fair, Glendale, Harbourside, Hornsby, Lavington, Liverpool, Macarthur Square, Macquarie Centre, Martin Place, Miranda, Neutral Bay, Parramatta 2, Penrith, Port Macquarie, Roselands, Shellharbour, St James, Tuggerah, Victoria Cross, Wynyard

Queensland
I

South Australia Tasmania

I Morayfieid, Noosa Civic, Pacific Fair, Peninsula Fair, Sunshine Plaza I Colonnades, Glenelg, Rundle Mall
Hobart 160 Queen S t , 440 Collins St., Ballarat, Brimbank, DFO Moorabbin, Eastland, Forest Hill, Galleria, Highpoint, Karingal, Knox City, Lygon St., Melbourne Airport, Terminal 2, Port Me1bourne, Southland, Waterfront City, Wyndhain.

Burleigh Heads, Cavil1 Avenue, Helensvale,

~
I

, Victoria

Exhibit VIII The Starbucks Logo

Source: www. starbucks. cam

Exhibit IX Coffee Lingo in Australia

Name
1

Description

Flat white Short black Long black Skinny cap Latte Skinny decaf 1atte Double shot soy latte Babycino

1 This is the same as a cappuccino but without the froth or chocolate on top.
This is an espresso shot. This is an espresso shot with added hot water. This is a cappuccino made with skim milk, rather than full cream milk. This is an espresso shot with lots of hot milk. This is a latte which is low on fat and caffeine. This is double strength coffee which uses soy milk instead of cow's milk. This is only the frothy milk and has no coffee. It is served in an espresso cup and is usually ordered for children.
"

Source: "Aztstralia's Coffee Czlltzlre. http://microsite,nzherald.co.nz/myatwtralia/index.cfn1?t~id=227.

Exhibit X Indicative Region-Specific Population Density in Australia StateITerritory Population Density (people per square km.)
138.2
I

/
Territory New South Wales Queensland South Australia Tasmania Victoria Western Australia

1 Australian Capital

8.5 2.3

1.6
7.1

22.1 0.8

,
1

Australia

2.6

Source: < h ~ t p : / / ~ ~abs.gov.azr/~~vebsitedbs/cashonze. c9a3d36edfdO~256acbOOI ~viv. nsf/5I 18404/ccecb5 7cd6ca04aec a257305002e3e86!0penDocun1ent>

Exhibit XI List of 23 Post-Closure Locations in Australia State New South Wales (10 stores) Location

( Sydney: Cockle Bay

Sydney: Hyde Park

I sydney;~ueen Victoria
Sydney: Transport House Westmead: Westmead Childrens Hospital

1
1

Queensland (8 stores)

Brisbane: Myer Centre Brisbane: Queen Street Brisbane: Queens Plaza

i

I
I

Broadbeach: Broadbeach

1 Surf Parade

I
Victoria (5 stores)

1
I

Mooloolaba Renaissance

I
I

I Hawthorn
Melbourne: City Square Melbourne: DFO Spencer Street

1 Melbourne: Midtown Bourke

References & Suggested Readings:

I . Michael Perry, "Australia Struggles with Needs of its Surging Population," www.iht.com, October 2, 2008. 2. Wayne Cole, "Australia Economy Slows as Consumers Cut Back," http://in.reuters.com, September 3, 2008. 3. Jacob Greber, "Australia Home-Lending Growth Slows to Weakest Pace in 22 Years," www.bloomberg.com, September 30,2008. 4. "Aussie Baristas Take Sweet Revenge," www.monstersandcritics.com, August 21, 2008. 5. "Starbucks Responds to Slowing Market," www.reportbuyer.com, August 7,2008. 6. "Australian Coffee Culture Grinds Starbucks' Profit," www.taipeitimes.com, August 4,2008. 7. Phil Mercer, "Australian Coffee Drinkers Prefer Quality over Starbucks' Quantity," www.thenational.ae, August 4, 2008. 8. "Coffee Culture Grinds Starbucks' Australian Operation," http://au.news.yahoo.com, August 3,2008. 9. Dewi Cooke, "Amcrican Coffee Culture Gets Roasted," l~ttp://www.lheage.com.au, August 2, 2008. 10. "Executive Leaves a t Starbucks," www.vmsd.com, August 1,2008. 11. Daniel Palmer, "Starbucks: What Went Wrong?" www.ausfoodnews.com.au, July 31, 2008. 12. "Starbucks Cuts 61 Local Stores," Business Spectator, www.businessspectator.com.au, July 30, 2008. "Coffee is too Social a Drink for Starbucks," 13. Andrew Bolt, http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/2008/07/P15/, July 30, 2008. 14. John Quelch, "Starbucks' Lessons for Premium Brands," http://hbswk.hbs.edu, July 9, 2008. 15. Carol Matlack, "Shrinking at Home, Expanding Abroad - Will Global Growth Help Starbucks?" www.businessweek.com, July 2,2008. 16. John Quelch, "How Starbucks' Growth Destroyed Brand Value," http://discussionleader.hbsp.com, July 2, 2008. 17. "Australian Foodservice Industry to Continue Growing: BIS Shrapnel's Survey," www.ferret.com.au, December 18, 2007. 18. Helen Withycombe, "In the Spotlight: Starbucks," www.marketingmag.com.au, March 10, 2007. 19. Nicole Weston, "Starbucks Coffee Brealr," www.slashfood.com, March 5, 2007. 20. "Starbucks Chairman Warns of the Commoditization of the Starbucks Experience," 11ttp://starbucksgossip.typepad.coin, February 23, 2007. 21. "Starbucks Coffee," BbT, www.bandt.com.au, December 14, 2006. 22. Petra Kappl, "World Business Briefing ) Europe: Germany: Starbucks Venture to End," New York Times, 11ttp://query.nytimes.com3, November 23, 2004. 23. Julian Lee, "Starbucks Adds Shop Closures to the Experience," ~~ww.smli.co~n.au, August 26,2004.

24. "Starbucks Australia Appoints Ex-Nike Vice President," www.bandt.com.au, March 12, 2003. "Starbucks Keeps Pouring Till Results Filter Through," Australian Business Intelligence, http://findarticles.com, February, 2002. 26. Howard Schultz; Dori Jones Yang, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time (Hyperion, 1997). 27. Arthur A. Thompson; John E.Gamble, "Starbucks Corporation," www.mhhe.com/business/management/thompson/l 1e/case/starbucks.html. 25. 28. "Making Corporate Social Responsibility Work: Starbucks Australia's Charlie Baker," CEOForumGroup, www.ceoforum.com.au/article-detail.cfm?cid=6326. 29. www.co.cal.md.us/assets/Planning~Zoning/TownCenters/PlannersPressArticle.pdf
3 1. www. starbucks.com