Maggie Jones

MGT 590

Module 8
Page 1

Starbucks' Strategy and Internal Initiatives to Return to Profitable Growth

Executive Summary
Inspired by the success of Peets Coffee and Tea in Berkeley, California, three
academics opened Starbucks Coffee, Team, and Spice in Seattle in 1971.Focusing on retail of
quality whole beans and coffee products, the store was consistently profitable and, by 1980,
had four locations in the Seattle area. In 1981, Howard Schultz, vice president and general
manager of U.S. operations for a Swedish maker of coffee and kitchen equipment, visited
Starbucks and was immediately struck by the business philosophy and opportunity. For over a
year Schultz petitioned for a position at Starbucks and was finally hired in September 1982.
Schultzs vision for Starbucks as a global chain of coffee bars conflicted with the
owners desire to retain a retail focus and, in 1986, Schultz struck out on his own and founded
Il Giornale Coffee Company. The following year, Schultz acquired Starbucks for $3.8 million
dollars when the owners decided to focus their attention on running Peets Coffee, which they
had acquired in 1984, and became the companys first CEO.
By April 2010, Starbucks had become the worlds premier roaster and retailer of
specialty coffees, with 8,812 company-owned stores and 7,852 licensed stores in more than 50
countries. Schultz stepped down as CEO in 2000 but, in 2008, declining stock prices, eroding
customer traffic,and perceived dilution of the Starbucks brand caused the Board of Directors to
ask Schultz to return to his role as CEO and lead a major restructuring and revitalization
initiative. Between 2008 and 2010, Schulz drove a transformation of the Starbucks strategy in
order to return the company to profitable growth. i

Maggie Jones
MGT 590

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Analysis
Starbucks strategy is primarily one of differentiation. Since its beginnings at the Pikes
Place store, the company has distinguished itself through a focus on quality and customer
engagement. Schultz has persisted in that core sensibility while remaining flexible and agile
enough to respond to the changing market conditions. The Starbucks strategy has evolved over
the past decades without compromising the companys core values.
Since his experience in Italy, Schultzs vision for Il Giornale and later Starbucks was a
nationwide chain of Italian-style espresso bars that would provide a gathering place for the
community. Coffee drinks were seen as the primary revenue producers although beans and
coffee-making equipment would also be sold. Over the years, the strategy has evolved and
expanded to include new product offerings and markets including agreements with restaurants,
airlines and hotels to serve Starbucks coffee; a joint venture with Pepsi to sell ready-to-drink
coffee drinks in super markets; a partnership with Dreyers Grand Ice Cream to sell Starbucks
branded coffee flavors; a partnership with Apple iTunes to sell music selections; an agreement
with Kraft to sell packaged coffees in grocery stores; and countless others.
While the company was originally opposed to franchising and wanted only companyowned stores, licensing is now a critical element of the expansion strategy. Similarly, while the
original focus was on national expansion, the strategy has evolved to include multi-national and
global growth. Following the declining customer traffic and stock price under CEO Jim Donald,
Schultz drastically diverged from Donalds strategy of rapid store expansion and even began
closing underperforming stores. Clearly, the willingness to make strategic adjustments has
helped the company retain a competitive advantage in a turbulent economy.

Maggie Jones
MGT 590

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Five Forces Analysis

Buyer Bargaining Power and Price Sensitivity is moderately high as coffee shop
beverages are a luxury item and not a necessity. During lean times, these drinks are often one of
the first items cut from consumers budgets as evidenced by the reduced sales seen following the
recent financial downturn. Additionally, consumers currently have many options for on-the go
and coffee shop beverages including McDonalds, Peets, Tullys, The CoffeeBean and Tea Leaf,
and countless local shops.
Supplier Bargaining Power is moderately low. Because coffee is a commodity, its
expected that suppliers compete primarily on price. However, suppliers gain some bargaining
power through differentiation through quality, organic certification, fair trade certification, etc.
Threat of New Entrantsis moderate as there are low barriers to entry for the local coffee
house. However, barriers to entry at the national or global level are high and require significant
capital for expansion.
Threat of Substitutesis high as there are many alternatives to coffee house drinks
including home brew, tea, soda, energy drinks, and other ready-to-drink packaged beverages
available at super markets, convenience stores, and other restaurants. There is a threat of
substitution for the third place atmosphere of the coffee shop from parks and other community
spaces.
Industry Rivalry is strongas a myriad of national and international chains compete with
local coffee shops and restaurants for consumer beverage dollars. Rivals compete on price,
product selection, location, and experience. Very low customer switching costs make product
differentiation critical.

Maggie Jones
MGT 590

Module 8
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Evaluation
Schultzs transformation strategy for Starbucks is excellent as evidenced by 2010
financial results. While its often too easy to focus solely on financial metrics at the expense of
less quantifiable indicators, Schultzs emphasis on maintaining a strong employee relationships
and social responsibility initiatives will help to ensure that the brand will continue to represent
quality and sustainability in the future. Preserving the strong brand identity is important to
future growth from the perspective of both store expansion and the development of new
partnerships and product lines.
Schultz has proven himself to be a strong strategic leader and his long-term vision for
Starbucks will ensure that, as the economy improves, Starbucks will be well-positioned to take
advantage of increased consumer spending. Additionally, his commitment to employee wellbeing will reduce turnover and related expenses when the U.S. job market improves. By slowing
the companys rapid expansion under Donald, Schultz has increased its sustainability.

Recommendations
It is recommended that Starbucks continue to follow Schulzs current strategy for a return
to profitable growth. While the closing of underperforming company-operated stores and slowed
pace of new store openings in 2008 and 2010 have helped transform the company, Starbucks
should now become more aggressive in opening stores overseas most notably in
China.However, Starbucks shouldnt feel compelled to pursue Donalds goal of opening 40,000
stores in the near to mid-term.
Rather, the company should continue to peruse cost-cutting strategies such as right-sizing
of organizational support-staff, implementation of cost-saving technology, and renewed emphasis

Maggie Jones
MGT 590

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on best practices sharing across all stores. In the face of involuntary turnover, its especially
critical that Schultz continue to focus on employee morale and motivation. The companys
commitment to its partners has been a major contributing factor to tis success to date and those
core ideals must not be forgotten.
Schultz is advised to continue his commitment to renewing the companys soul of the
past to restore and even improve the customer experience at every store. Continuing training
for baristas, new store designs, and a focus on original values will not only help to differentiate
Starbucks from an increasing number of competitors but will also help restore the brand prestige
upon which so many of the companys partnerships depend. With a renewed focus on quality
perception and brand prestige, Starbucks must continue to innovate new product offerings and
enter new market segments in order to achieve long-term, sustainable growth.

Case Update
Starbucks enjoyed notable improvements and growth in fiscal year 2011. Net revenues,
store sales, operating income, operating margin, and earnings per diluted share all reached the
highest levels in the past four years. Net revenues were the highest reported in the history of the
company - $11.7 billion versus $10.7 billion in 2010. Sales growth for company-owned stores
open 13 months or longer reached 8% versus 7% the previous year and -3% and -6 in 2008 and
2009, respectively. In 2011 Starbucks opened 899 new stores across the world including the first
in El Salvador, Guatemala, and the Netherlands. At the end of the year, Starbucks had more than
17,000 stores in 55 countries. The company is still targeting China as a second home market and
there are currently more than 500 stores across 44 Chinese cities. In 2012, Starbucks plans to
open 800 net new stores including 150 in China and the first location in India. The company

Maggie Jones
MGT 590
added more than 3,700 net new jobs in 2011 and plans to add another 12,500 in 2012. Howard
Schultz remains committed to the companys core ideals and future growth. ii

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iThompson, Arthur A. and Shah, Amit J. Starbucks Strategy and Internal Initiatives to Return to
Profitable Growth. (2010). Crafting and Executing Strategy: The Quest for Competitive Advantage.
New York, NY. McGraw Hill Irwin.
iiFiscal Year 2011 Annual Report. Starbucks Corporation. Retrieved 26 February
2012 from http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irolreportsAnnual.