Starbucks Corporation is a leading American multinational company based in Seattle, Washington. It is a coffee and coffee house chain with more than 16,000 Starbucks outlets all over the world. Around 70 percent of the outlets are located in the United States and the balance 30 percent are spread over more than 40 countries in the world. The company buys roasts and sells whole bean specialty coffees and coffee drinks through its stores. It also markets boxed tea, baked goods, Frappuccino beverages, smoothies and merchandise. Starbucks has revolutionized the way coffee is consumed throughout the world in general and America in particular. In a span of three decades Starbucks Corporation has risen from a very humble beginning to be one of the successful American Corporations. It has spread its brand across the globe in league with other iconic American corporations like McDonald’s and Disney. It has also succeeded in making to the list of Fortune’s 100 best companies to work for in a very short time.
The company has a current strength of 172,000 full time and part time employees throughout the world. The revenues for the company crossed 9.4 billion USD in the year 2007. The company has seen phenomenal growth since 1992 with its net revenues growing annually at the compounded rate of 20 percent and net earnings growing at the compounded rate of 30 percent annually. However the greatest achievement of the company is that, it is recognized as a responsible corporate citizen in the world and has remained untouched by unethical scandals that have affected a number of American corporate giants recently. Howard Schultz is the Chairman and Jim Donald is the President and Chief executive officer of Starbucks Corporation. The company has set a long term target to establish 40,000 Starbucks stores across the globe.
History and Evolution of Starbucks Corporation
Starbucks Corporation which rose rapidly to become one of the leading multinationals of the United States had a humble beginning. It was founded in 1971 by Jerry Baldwin, Zev Siegl and Gordan Booker in Seattle, Washington and began as an importer and seller of fine coffee. In the span of a decade it grew into a thriving business with five stores and a roasting facility selling to both consumers and the local restaurants. The founders recruited Howard Schultz who was working for a Swedish kitchenware manufacturer as Director of retail sales and operations in 1982. This was the first step taken by the company towards professionalizing its operations.
Howard Schultz identified a great business idea on his visit to Milan, Italy in 1983. He was impressed by the culture and popularity of the espresso coffees bars in Milan and was convinced of the potential for replicating the business model in US. The business idea was however rejected by the owners of the company as they were not interested in expanding on their coffee bean business. Schultz was confident that Americans would pay a premium to consume coffee in a pleasant place and so quit his job and opened his first espresso bar in Seattle in 1985 to serve Starbucks coffee and then expanded to three more stores after the initial success. Howard Schultz raised $ 4 Million and purchased Starbucks from the founders in 1987 to give birth to the Starbucks chain which quickly expanded its stores to Chicago and Vancouver, B.C. Under the leadership of Howard Schultz Starbucks Corporation become the fastest growing retail store of all time. Having been convinced of the potential for Starbucks stores in every American neighborhood the company set on a rapid expansion plan. By the end of 1991 the company had its own stores at 116 locations including those in Portland and Oregon. It also opened its first licensed store at Sea-Tac International Airport, in Los Angeles.
Starbucks went public in the year 1992 through an initial public offer at USD 17 a share and expanded its business farther to 425 locations throughout the US by 1994. The year 1995 was an important year for the company. It started selling merchandise through its stores in the form of Music CDs. It also entered the business to business market in a big way by bagging a contract with United Airlines to serve Frappuccino blended beverages to the customers of United Airlines and also entered into a contract with Canadian bookstore Chapters Inc. The number of stores had increase to 676 by the end of the year.
To take advantage of the huge potential for Starbucks in the international markets the company established Starbucks Coffee International a wholly owned subsidiary in 1995. This subsidiary worked aggressively and by the following year had opened its locations in Japan, Hawaii and Singapore. The company extended its fast growing brand to related products by entering into joint ventures with the concerned companies. In 1996 it introduced Starbucks ice creams in the US to great success in association with Dreyer. It also started selling bottled coffee beverages in association with PepsiCo in the US. In the same year it crossed an important mile stone of establishing 1000 company stores.
After achieving financial success the company also began its journey towards being a responsible corporate citizen. In 1997 it established the Starbucks Foundation to manage its social responsibility initiatives. The foundation initiated and supported the local literacy programs in community neighborhoods where Starbucks coffee houses operated and started promoting environmentally sound methods of growing coffee in association with Conservation International. The company ventured into major acquisitions to fuel growth and massive brand extension plans in the late 90s. It acquired Pasqua Inc. a San Francisco retailer and Seattle Coffee Company in the UK with more than 60 retails locations. Starbucks introduced blended juice tea under its brand in the US. With tremendous growth in the organized retailing sector the company entered into a licensing agreement with Kraft Foods Inc. to distribute its brands through grocery stores in the US and with Albertsons Inc. to open 100 Starbucks coffee houses in their supermarkets. To leverage the advantages of rapid growth in Information Technology the company launched its website www.starbucks.com in 1998. By the end of the century the company had increased its locations to 2135 around the world.
The turn of the century saw further growth of Starbucks Corporation both financially and as a good corporate citizen. To further boost its B2B business it entered into agreements with Host Marriott International and Hyatt Hotels Corporation to open coffee houses in select properties. It entered into agreement with TransFair USA to buy and sell Fair Trade certified coffee. It developed and introduced the coffee sourcing guidelines in association with the center for environmental leadership in business and contributed generously to literacy programs, support for the development of coffee farmer and September 11th fund. The company published its first Corporate Social Responsibility Annual report in 2002 to highlight its contributions as a responsible corporate citizen. By the end of 2002 the company had opened coffee houses in 5688 locations in the US and other countries like Japan, China, and other far eastern countries. Locations were also opened in most of the European, Asian and other Middle Eastern countries making Starbucks Corporation a truly global American MNC.
In the last five years the company has reinforced its commitment to social responsibility by committing funds to America SCORES to inspire teamwork and performance amongst at risk children in urban public schools and affordable credit facilities to coffee farmers in source countries. It has also actively promoted the need for environmental awareness to its customer through its stores. It has introduced Tazo Tea and Frappuccino ice blended beverages in all its coffee houses that today stand at more than 16,000 locations in more than 40 countries throughout the globe. From being a small retailer of imported coffee beans Starbucks Corporation has grown into a huge multinational corporation with annual revenues of over 9.4 billion USD under the dynamic leadership of Howard Schultz who has ensured that the company is dedicated to provide a heritage of rich coffee, a great coffeehouse experience to every customer and a deep social responsibility towards the society.
Key Events in Starbucks History
There are a number of key events in the fabulous journey of Starbucks Corporation from its inception in 1971 to the present. The first important event of course is the birth of Starbucks in 1971 as a retailer of fine quality imported coffee beans. The next significant event is the recruitment of the great visionary leader Howard Schultz as the director of retail sales and operation. The most significant event for the company was the visit of Howard Schultz to Italy where the business idea of a chain of coffeehouses was sown in his mind after observing the romantic ambience of espresso coffee bars in Italy. This was accompanied by the establishment of the first coffee bar in 1985 in Seattle. The defining moment however is the purchase of Starbucks by Howard Schultz in the year 1987 that paved the way for shaping the company in its present form as a leading chain of coffee houses. Another key event of significance is the transformation of Starbucks into a Public Limited Company in 1992 that resulted in its growth at a staggering pace and helped it gain competitive advantage. The establishment of Starbucks Coffee International as a separate subsidiary to lead the growth of the company in the international markets is also a key milestone in the history of the company as it enabled the company to build its brand equity in the international markets.
The establishment of the Starbucks Foundation in 1997 was also a significant event in the company’s history as it was a response to the need for the company to be socially responsible to ensure its long term success. The growth and evolution of the company as a deeply socially responsible company can be attributed to this event. The entry of the company into business markets by associating with major airlines and hotel chains has contributed greatly to the growth of the company. The expansion of the Starbucks brand in 1996 through the introduction of Starbucks ice creams in association with Dreyer and Juice Tea are also events of significance for the company. A very key event in the history of the company is the publication of its first Corporate Social Responsibility Annual Report in 2002. This has strongly communicated to all stake holders the importance attached by Starbucks Corporation to being a socially responsible and ethical company. This has protected the company from difficulties faced by some major American Corporations because of the unethical practices and behavior of their executives. These are some of the events that have played a key role in the history of Starbucks Corporation.
The Starbucks Model
The rapid growth and tremendous success of Starbucks Corporation can be attributed largely to its successful business model. The model has enabled the management of the company to understand its strengths and weaknesses and to formulate and implement strategies to leverage its strengths to take advantage of the opportunities. The well defined mission statement of the company and the explicitly stated six guiding principles has provided a framework for effective strategic management. The company mission statement is “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining uncompromising principles as we grow” (Hill, 2007). This clearly defined mission forms the foundation on which the Starbucks model has evolved and ensured sustained competitive advantage for the company.
Rapid Growth: Under the leadership of Howard Schultz Starbucks became the fastest growing retail company, growing faster than even McDonalds. The company employed a growth strategy where it would locate a potential market and establish a series of company owned coffee houses in close proximity to one another in quick succession. Though this cluster approach resulted in the eating up of sales of one another it ensured that business remained with the company. Once the stores were established in close proximity it resulted in drastic reduction in logistics and management costs and increased customer service thus increasing profitability of all stores in the long run. This has ensured steady increase of footfalls in Starbucks stores. The rapid expansion of stores in a given market has encouraged coffee consumption and increased the overall market potential for all competitors thus contributing to the growth of the sector and at the same time contributed to the enhancement of the brand equity of Starbucks in the long term.
Quality of Raw Materials: The quality of the coffee is mainly defined by the quality of coffee beans used in making it. The Starbucks model ensures the procurement of the finest quality beans in the world as it has shifted the focus of coffee beans from being viewed as a commodity to that of a differentiated product. It has invested a large amount of resources to develop great relationships with growers in different countries and paid the growers a premium price to ensure that it is able to procure the finest quality coffee beans to make and offer the best coffee to its customers.
Quality of the Process: The process of roasting the coffee beans to the optimum requirement plays a very crucial role in ensuring the quality of the coffee made. Starbucks has skillfully blended human art and technology in the roasting process. The highly skilled and trained roasters at Starbucks use the expertise of their sight, smell and hearing and also the support of high tech computers and blood cell analyzers to ensure the optimum roasting process so that the roasted coffee beans can help make the best coffee in the world.
Perfect Ambience: Right from the inception the core of Starbucks model is not to sell a great quality coffee but to provide a romantic experience to its customers while consuming the best coffee in the world. To ensure great service experience to the consumers the physical evidence plays an important role (Kotler & Armstrong, 2006). To provide the romantic atmosphere the stores are well lighted and tastefully decorated by art and wood work and supported by light music playing in the background. The customers consider Starbucks coffee house as the ‘Third Place”, the first place being home and the second place being the place of their work. This feeling is the result of the coffee house ambience that creates a cozy environment where every customer feels comfortable, safe and has a feeling that he or she belongs to the place while buying world quality coffee, pastries, books and music. To ensure location convenience the stores are mostly located in malls, grocery stores and busy street corners to enable maximum possible foot falls into the stores.
People: The people component of the service marketing mix is very important in providing high quality service (Zeithaml & Bitner, 2000). The ‘people’ that is the employees of Starbucks at all level play a crucial role to achieve and maintain its ultimate goal of providing its customers the service of a great romantic experience for consuming the best coffee in the world. The Starbucks model has been able to create an excellent organization culture to attract and nurture talent. The model has been so successful in this area that it consistently finds its place in Fortune’s 100 best companies to work for even today. Chairman, Howard Schultz honestly believes that Starbucks has risen to such great heights in a short time mainly because of the value system inculcated in the company and that employee satisfaction is a key to growth and competitive advantage.
The Starbucks model has created a culture that has resulted in a partnership approach between employees and the company. The employees are encouraged to think of themselves as business partners and take pride in the company. The organization culture motivates the employees through empowerment, and encouragement for creative thinking and employee participation. The company provides equal opportunity for employment irrespective of race, nationality, gender, religion, age, disability marital status r sexual orientation. The company pays excellent salaries and provides generous benefits to its employees irrespective of whether they are part time or full time. The benefits include comprehensive medical facilities including mental health, insurance, dependency coverage including same sex partners, employee assistance program and a savings plan. The benefits also include paid holidays and all expenses paid vacations. Another very important benefit given to both full time and part time employees is the employee stock option plan that was first offered by the company in 1991 before it went public making it the first privately owned company in the US to offer a stock option program to its employees. A thorough training is given to employees to ensure optimum customer satisfaction. Each employee undergoes comprehensive training for a minimum of twenty four hours. The training covers every aspect of the business including brewing a cup of perfect coffee. The company has gone a step further and ensures that the concern for employees is encouraged even amongst its innumerable suppliers all over the globe.
To maintain this excellent organizational culture on a sustainable basis the company conducts regular audits. Every eighteen months employees are asked to fill out a partner view survey online. Though the survey is voluntary, participation in the survey is more than 90 percent because the feedback is used to improve upon the culture. The efforts put in by the company have resulted in the recruitment and selection of talented and skilful people who are adaptable, self motivated, passionate, creative and team players. The employee turnover at Starbucks is much lower than the industry average, as the level of employee loyalty is considerably higher. The culture has ensured a high quality workforce that is very attentive to the customer and has contributed greatly to the sustainable competitive advantage of the company.
Brand Extensions: To leverage its high brand equity Starbucks Corporation has pursued a number of successful brand extensions as a part of its strategy for growth. In 1995 the company expanded in the tea segment because tea was more profitable to sell and there was a growing demand for tea houses and packaged tea. This was further supported by the acquisition of the popular tea brand Tezo in 1999. The company successfully extended the Starbucks brand in the ice cream market in association with Dreyer, the bottled beverages market in association with PepsiCo and in the carbonated coffee drink market. The brand was also extended to music CDs, credit cards of Visa Corporation and a magazine publication in association with Time.
Channels of Distribution: Though standalone stores owned by the company in the US and franchises in the international markets are the major channel of distribution for Starbucks, it has also used other channels where required to fuel growth. It has entered into agreements to supply its products to customers of major airlines and hotel chains. It has also set up cafes and carts in malls, hospitals, airports, banks, office buildings and shopping centers. It has supplied Starbucks coffee to millions of employees in thousands of offices in the US through the office supplier, Associated Services. Another channel of distribution used by the company to distribute coffee throughout the US is grocery stores for which it entered into an agreement with Kraft Foods Inc. The multiple distribution channels adopted have been successful in bringing products and services of the company to the target customers in the most effective manner.
Corporate Social Responsibility: The activities undertaken by Starbucks to be socially responsible and minimize its environmental footprints have also contributed to the phenomenal success of the company. The commitment of the company towards ethical sourcing of the best quality coffee beans, education to farmers with respect to the best coffee farming practices and the support provided to them in all the source countries have won the support of this critical stakeholder. The company through the Starbucks Foundation has contributed significantly to the societal and community issues. It has also undertaken a number of activities to decrease its carbon emissions to minimize its environmental foot prints. The company is very transparent in sharing the issues and challenges faced by it in being socially responsible to all its stakeholders through publication of its Annual Corporate Social Responsibility Report. In this way every component of the Starbucks model has contributed significantly to the phenomenal growth of the brand equity and the financial performance of the company both in the US and other locations in the international markets spread though out the world.
The potential demand for a great experience in consuming premium coffee in overseas markets and the increasing saturation of the American markets motivated Starbucks to look at the promising international markets. The consolidation of big players in the US coffee market and slowdown in the growth of sales and profitability of Starbucks were reasons for the company to decide to go international. In 1995 the company set up Starbucks Coffee International Inc., a separate subsidiary to concentrate on the overseas expansion plans. It now has three regional offices and 180 experienced multinational and multilingual managers around the world.
Though all the Starbucks stores in the US are company owned the international expansion of stores is mainly through partnerships. The overseas partner is chosen with care and is from the country where the company is planning to expand. The local partner should have the relevant financial strength, experience, and passion, commitment and value systems to be a good corporate citizen. The partner should have the skill and experience to pick potential store sites, submit them to Starbucks for approval and guidance, readied for operations and launched in a span of 13-16 weeks. The expansion strategy decision for the international markets is to test each country with a few stores in critical locations, to build the brand and then rapidly grow on the success. For every Starbucks store the baristas are local employees who undergo rigorous training at the company headquarters at Seattle before they start work. The menu of coffee being offered by the company is the same in all the stores around the world. However the food being offered is customized to local tastes. The ambience though similar in all the stores in the world is blended with the local architecture. The non-smoking policy of the company is strictly implemented in all the stores around the globe. The company initiated its international expansion plans in Japan. Though it was advised to change its international business model by a reputed consulting agency while entering Japan it went ahead with the traditional model successfully. Today Starbucks has more than 3000 stores spread over more than 40 countries in the world.
Problems of Globalization
Globalization has been termed as “A great transformation in world history is creating a new economic, social and political order” (Farrel, 1994). The strategies adopted by the company to go global have been very successful in establishing Starbucks as a global brand. The name and the image of Starbucks connect beautifully with millions of customers around the globe. However the company has faced a number of problems in its successful globalization initiatives. The success of Starbucks as a global brand similar to other prominent global brands like McDonald’s, Pepsi, Coke and Nike, has made it synonymous with globalization. The activists of anti-globalization symbolize these brands with the negative effects of the globalization phenomenon. They link Starbucks and other similar global brands as representing organizations that have brought great sufferings to third world countries in which they operate. They are believed to have exploited the resources, increased unemployment, changed the cropping pattern adversely and devastated the environment of such countries. The most negative element of the success of Starbucks as a global brand is that the company stores are vulnerable and attacked by anti-globalization activists whenever they feel the need to draw the attention of the world to the perils of globalization.
The company is accused of exploitation in its efforts to globalize rapidly. For example when it opened a store in Sheraton Hotel in Mexico, a coffee bean sourcing country, it was accused by activists of exploiting the poor coffee farmers by paying them very low price for their produce but charging a very high price for the coffee. Another negative element faced by Starbucks in its globalization effort is the mixing up of global issues with the local issues of a given location neighborhood. Such situations are referred to as community pushback situations. For example the high profile residents of a Primrose Hill, a London suburb, successfully opposed a Starbucks store in their neighborhood because it would disturb their environment. The residents were strongly supported by the media because of their high profile nature. The media highlighted on an anti-globalization element accusing the company of exploiting coffee growers and thus mixing it up with the local issues. Starbucks finally withdrew from the location in respect of the local community feelings. Similarly when Starbucks opened a small store in the forbidden city of Beijing in China on the invitation of local authorities it faced a lot of opposition. The American company was accused by the local media and later by the American media of being insensitive to the local culture and imposing the mass market American coffee culture on it. However as there was no reaction from the local community the company continued with the store.
The other problems faced by the company in its globalization effort is the threat of duplicators, that is local competitors who were replicating the company stores at a fraction of the costs and so also the law and order situations in a given neighborhood of a country. For example when Starbucks proposed to open a store on the main street of a posh neighborhood of Rio de Janeiro in Brazil there were genuine concerns about the rising levels of violence and street crime in the major cities of Brazil. Finally the growing anti American feeling amongst a number of countries around the globe specially the Middle Eastern and Asian countries is another negative element faced by Starbucks because the image of the company and the brand is closely associated with capitalism and the American way of life.
The Road Ahead
The growing uncertainty of the American Economy in particular and the global economy in general may put on hold the prolific growth and expansion that Starbucks Corporation has witnessed since the early 1990s. There may be an immediate need for the company to refocus on some of the elements of the Starbucks model and make strategic changes in its business approach over the next three to five years to achieve sustainable growth for the company. The Rapid growth experienced by the company both in the international and domestic markets has put tremendous pressure on maintaining the excellent culture of Starbucks that has contributed greatly to this phenomenal growth. The rapid growth of the company has resulted in the automation of a number of processes. For example the automatic espresso machines increased the speed of service but reduced the romantic and intimate experience of watching the drink being actually made; the customers are no longer exposed to the art of coffee making. To bring about efficiency in design the Starbuck stores have become standardized throughout the world resulting in a sterile feeling bereft of warmth. The company should revert back to the earlier service process and support the foundation of its coffee making heritage to bring back the romance of the experience as it was the basic reason why the customer had been attracted to the store in the first place. This will enable the company to gain a sustainable competitive advantage. The menu of the coffee being offered is fairly standardized in Starbucks stores all over the world. However the habit of coffee drinking varies from country to country and region to region. In some countries the way in which coffee is consumed is ingrained in the local culture. The company should provide a range of coffee more customized and sensitive to local needs and culture while maintaining the unique romantic coffee drinking experience of Starbucks.
In its quest for rapid growth some of the Starbucks stores may have become unsustainable for business. It is crucial for the company to identify such stores and close them down to ensure the overall profitability of the stores. The company should go for the growth in selective locations both in the US and overseas because of the meltdown in the US and global economies. However it should leverage its financial strength to buy properties in prime locations throughout the world to take advantage of the falling real estate prices. Such properties can be used to open stores when there is a recovery from the economic slowdown. The company can also identify new geographic locations in the world like India which are the new emerging economies that have potential for the company. The company should strengthen its social responsibility initiatives especially in the war ravaged countries to create an image of a corporate with a concern for human life. This will be of great benefit when the company goes for expansion in new untapped global markets. The company has thus far refrained itself from aggressively communicating about itself relying more on word of mouth advertising to build its brand. It should now go for massive advertising campaign to communicate to the world that it is a responsible global citizen that is more sensitive to the changes across the world.
Starbucks Corporation has evolved and grown to become a truly great American multinational with enormous brand equity throughout the world. The stupendous growth of the company in a short period of time can be attributed to a number of factors. The company has been lead successfully by a great visionary leader Mr. Howard Schultz who has guided the company in developing and implementing a business model that has helped the company attain sustainable competitive advantage. The company needs to refocus its strategies to face the meltdown in the global economic situation and emerge stronger.
Farrel, Christopher. (1994, November), The Triple Revolution, Business Week, special Bonus
Hill, Charles, W. (2007), International Business: Competing in the global Marketplace,
The McGraw-Hill Companies.
Kotler, Philip, & Armstrong, Gary. (2006), Principles of marketing, London: Pearson Education
Zeithaml, Valarie, A. and Bitner, Mary, J. (2000), Services Marketing, The McGraw-Hill
Starbucks Corporation. Retrieved December 19, 2008, from www.starbucks.com