Starbucks Consulting Case

StarbucksReturning to the Starbucks Experience

Student International Business Council

Student International Business CouncilUniversity of Notre Dame

Deloitte ConsultingApril 11th, 2008

1. Summary of Issues 2. Financials 3. Current Operations 4. The Experience 5. Competitive Environment 6. Current Operation Problems 7. Schultz’s Vision 8. Plan to Achieve the Vision

Agenda

• Purveyor of premium coffee and handcrafted specialty beverages• Purchase from sustainable farms & oversee roast

• Enhancing coffee experience with Italian style brewing & increasing offering with joint ventures

• Retailing of specialty goods to have farther reach

• “We aren’t in the coffee business, serving people. We are in the people business, serving coffee” - Howard Schultz

Business Model

• The experience that makes Starbucks unique has taken a back seat to efficiency and overexpansion

• There has been a loss of focus on their target market and Schultz’ vision

• Costs and expenses are rising, cutting into the bottom line

• Revenues growth is slowing

Current Situation

• Increase revenue• More licensed branches abroad• Focus on specialty drinks

• Decrease cost • Remove unnecessary products• Slow domestic expansions• Decrease costs on particular non-drink items

• Enhance experience • In store attractions and focus on customer

Plan of Implementation

Agenda

• 1,065 store increase in the United States from 2006-2007

• 277 store increase internationally 2006-2007• Expenses increased significantly from

2005-2007• Earnings have peaked • Net Operating Income is increasing at a

decreasing rate

Recent News

Source: Starbucks’ 10-K

High-Level Financials

Dollars (in millions)

FYO,2007 FYO, 2006 FYO, 2005 FYO, 2004 FYO, 2003

Total Revenue

$9,411 $7,787 $6,369 $5,294 $4,076

Operating Income

$1,053 $893 $780 $606 $421

Net Earnings $672 $564 $494 $389 $265

Source: Yahoo Finance

Key FinancialsYear 2007 2006 2005 2004 2003 2002 2001 2000

Revenue (in Millions)

$9411.5 $7786.9 $6369.3 $5294.3 $4075.5 $3288.9 $2649.0 $2169.2

% increase in revenue

17.26 18.2 16.88 23.02 19.3 19.46 18.11 22.54

Costs of goods

(in Millions)

$3999.1 $3178.8 $2605.2 $2198.7 $1685.9 $1350.0 $1112.8 $953.6

% increase cost of goods

20.51 18.04 15.6 23.32 19.92 17.57 14.31 22.29

Results of Operations

• Revenues are increasing, but expenses as a percentage of revenue are increasing a well. This takes away from the bottom line, net operating income.

2007 2006 2005

Revenues $9.4 billion

$7.8 billion

$6.4 billion

Expenses

(% of Revenue)

89.9% 89.7% 88.9%

Earnings

(% of Revenue)

7.1% 7.2% 7.8%

Slowing Revenue, Increasing Cost

• Percentage increase in revenue is strong from year to year until 2005 where it plummets.

• Cost percent increase remains the same until 2005, then begins to increase.

• Stock price peaks from 2005-2006, then drops.

Source: Yahoo Finance

Percentage change in comparable store sales (%)

2007 2006 2005 2004 2003

United States 4 7 9 11 9

International 7 8 6 6 7

Consolidated 5 7 8 10 8

Same-Store Sales Growth

• Domestically, the sales growth is increasing at a decreasing rate. Internationally, it is steady.

Growth Trends 2006-2007

• International licensed stores appears to garner the greatest revenues.

% Growth in Net Revenue

% Growth in Licensed Stores

Domestic 17% 6%

International 25% 13%

2007 2006 2005

Revenue-D

Licensing-D

Licensing-int

Revenue-int

Domestic vs. International

International Stores

2007 2006 % Change

Licensing Income:

$220.8 million $186 million 18.7%

Total Sales $625 million $824.5 million 31.9

Net Operating Income

$138 million $108 million 27

Agenda

• 1971- First store opens in Seattle• 1982- Howard Schultz joins as director of retail

operations and marketing• 2 years later 1st Starbucks Café Latte served

• 1987-Schultz’s Il Giomale acquires Starbucks, becomes Starbucks Corporation

• 2000- Schultz becomes chairman/chief global strategist & Orin Smith becomes new CEO

• 2007- Schultz returns as CEO in an attempt to renew the company’s focus on customer experience and innovation.

History

• Establish Starbucks as the premier purveyor of the finest coffee in the world, while maintaining uncompromising principles as we grow

• Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee

• Develop enthusiastically satisfied customers all of the time

• Recognize that profitability is essential to future success

Mission Statement

Schultz’s Memo, April 2007

• Starbucks primarily relies on its brand name and image to sell coffee

• Starbucks links its name with quality• Expect that customers will pay more for

quality• Customer focused marketing strategy: Young

urban middle-class; Students between the age of 15 and 35 and Professionals

• The entire process should be an experience rather than simply picking up coffee

Initial Starbucks’ Operations

• “The Third Place” (between home and work)• Launched their first TV campaign last winter• Marketing in-store: ambiance, music playing,

seating, friendly people• iTunes and Starbucks entertainment.

Customers can receive free songs in the store. They can also purchase songs playing at store on apple products.

Marketing the Experience

Agenda

Starbucks Experience

• Store (Experience)• Warm atmosphere with brown and green toned

interior• Ambiance includes music, comfortable seating for

work or socializing, and friendly employees• Mix between classic and modern• Fixed temperature• Specific method of taking orders• Coffee aroma

In-Store Experience

Starbucks Experience

• Menu (Product)• Latin America, Africa/Arabia, Asia/Pacific, Dark

Roast Blends, Multi-Region Blends• Espresso, Frappuccino, Macchiato• Teas• Classic Favorites

The menu is diverse enough to appeal to a variety of tastes, even though each location is consistent in its look and feel.

Product Experience

• Starbucks offers luxury that is readily available.• Daily coffee without losing the indulgence of the

experience.• Ambiance, music playing, seating, friendly people.

• Customers experience personal service.• Only automated task should be the printing of a

receipt.• Employees know what regular customers want.• Grinding coffee in front of the customer.

Summary: The Experience

Agenda

• Coffee is a 34 billion dollar industry in the United States

• The coffee industry currently exceeds $70 billion annually, with over 400 billion cups consumed each year

• Coffee, as a product, is actually the 2nd highest traded commodity globally, falling only shortly behind oil

Source: Eimports.com, Packagedfoods, Boresha.com, Yahoo Finance

Coffee Demographics

Competitors• Caribou Coffee is the second largest gourmet

coffee chain

• McDonalds provides an easy and accessible option for cheaper coffee

• Dunkin’ Donuts is the largest coffee and baked goods chain in the world

Primary Competitors

Cariboucoffee.com, Dunkindonuts.com

• Caribou Coffee is the second largest gourmet coffeehouse operator (484 coffeehouses, including 52 franchised locations)

• Caribou Coffee offers its customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products

• Caribou Coffee also sells products to club stores, grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and other commercial customers.

• Coffee comes from the finest Arabica beans• Amenities include free WiFi, meeting rooms, and drive thrus

Source: cariboucoffee.com

Caribou Coffee

• Offers low priced Premium Roast Coffee made from 100% Arabica beans and three flavors of iced coffee in over 9,000 stores

• McDonalds- plans to add Starbucks-style coffee bars to nearly 14,000 of its American restaurants, drinks are estimated to be roughly $.50 less than Starbucks pricing

• In 2007, began introducing McCafe concept restaurants in select locations in the US with comfy couches, cappuccinos and pastries

• Consumer Reports rated McDonalds coffee more highly than that offered by Starbucks

Sources: moneycentral.com

McDonald’s

30Source: PRNewswire via COMTEX, www.dunkindonuts.com

• Dunkin' Donuts (the largest coffee and baked goods chain) sells more hot regular coffee, iced coffee, donuts, and bagels than any other quick service shop in America.

• They are known for simplicity and their unique orange and red cups

• 100% Arabic coffee beans (flavorful, smooth & mellow)

• Espresso, frappuccino, and iced coffee also available

Dunkin’ Donuts

• McDonalds • Premium Roast was voted better tasting than Starbucks or

Dunkin Donuts• McDonalds have more drive-thrus than any competitor• McDonalds does not rely on coffee sales to support their

business, allowing them to jump into the coffee industry sell coffee with a much lower profit margin

• Dunkin Donuts offers cheaper coffee than Starbucks along with a large selection of baked goods

• Caribou’s stores are larger, and usually in prime locations• Cheaper, more available, basic coffee has led to customers

substitute away from Starbucks

Source: Consumer Reports, Belfast Telegraph 2.2.07

Advantages of the Competition

Agenda

The Loss of the Experience

• Starbucks interactive cup brewer for small-businesses detracts from “The Third Place”

• Selling in grocery stores diverts attention from the stores

• Brand recognition can be tied to the grocery store and not the actual Starbucks store

• Prepackaged products inhibit the incentive to make a trip to the store

Source: Business Week 2-19-08

Losing the Experience

Problems Inhibiting the Experience

• Change to automatic espresso machines when Schultz was gone

• Baristas were no longer required to hand-make many drinks

• Less emphasis on personal interaction between baristas and customers

• The present stores lack the influence from the original inspiration of the Pike’s Place location

• As a result, customers are no longer inclined to stay and enjoy the experience

Losing the In-Store Experience

• The average number of transactions per US location fell 1% in the last quarter of 2007

• The brand is starting to lose its reputation as a quality, worthwhile experience• Higher prices• Less interaction with the barista• Less personal attention• Starbucks commercializing their brand in

grocery stores.

Source: Business Week 2-19-08 and PR Week 2-15-08Student International Business Council

Losing Reputation

Agenda

• Starbucks has been a company that relies on their reputation• Quality• Availability

• The brand speaks for itself• The Starbucks experience and numerous

locations allow customers to indulge anywhere, anytime

Foundational Values

• Howard Schultz’ s strategy:– Slow down US store expansion– Close under-performing stores

• closing 100 stores

– “Spruce up” existing stores– Introduce new products (Pike Place Roast)

Source: Business Week 2-19-08 and 3-10-08

Recovery Strategy

• New Expresso Machines to better view the barista & barista training.

• Free WiFi through AT&T• Bought Coffee Equipment Co. and Clover Brewing

System• Discontinuance of warm breakfast.• Starbucks Artisan chocolate.• National Training Day - 2/26/08• Made Fortune 100 Best Companies to Work for in

2008• “Skinny” drinks

Innovations post-Schultz Return

Agenda

1. Shifting the focus of operations back to Starbucks’ target market

2. Renewing the commitment to Schultz’ vision

3. Regaining “The Experience” and ensuring Starbucks is “The Third Place” between home and work

Moving Forward

• Revamp the experience of “The Third Place” and improve the quality of personal service to encourage customers to return to Starbucks

• Increase revenues by maintaining the “Starbucks Experience,” which adds value to the coffee and justifies the higher price

• Focus on premium products (specifically specialty drinks unique to Starbucks)

• International expansion of licensed stores adds to the bottom line

• Revamping Starbucks quality standards

• New quality standards for freshness, hand-scooping, and smaller brewed coffee batches with no more than 30-minute hold times

• The introduction of Pike Place Roast

Quality Improvements

• Partners• Choose employees who will implement

Starbucks’ core values and who are highly knowledgeable about coffee and its production

• Spend more money and time on training employees

• Hire fewer part time workers

Experience Improvements

• Store Environment• Offer free taste testing on select nights for the coffees

and the higher-priced specialty drinks• Have live music and readings on select nights• Use La Marzocca machines as opposed to automated

espresso machines in order to engage the customer in the drink making experience

• Brew coffee in-store to regain the aroma• Remove Tip Jars• Emphasizing the coffeehouse as a gathering place

Sprucing up “The Third Place”

• Reduce spending on materials from unnecessary/unpopular products

• Seek to cut costs from straws, recyclable cups, napkins, shot glasses (glass to metal/plastic), etc

• Eliminate the 25 cent discount for bringing reusable cups.• Digitize process of information management (store orders

placed to suppliers)• Curve domestic expansion that contributes to increasing

costs.• Cut down on seasonal gifts (Advent tree).• Decrease spending on print-media advertising as well as

the seasonal TV ad campaign

Decreasing Costs

• Improve quality and experience to prevent customers from pulling away from Starbucks.

• To counter cheaper prices of competitors, match the perceived value of Starbuck’s coffee with the high price.

• Ensure that customers are paying for a premium coffee and that their experience will draw them back to Starbucks in the future.

Increasing Revenues

Short-Term Expansion Timeline

2007 2008 2009

Followed by a 25% increase in 2009. (About 840 stores opened)

We propose a 20% increase in 2008. (About 560 stores opened)

There was a 13% increase in the international growth rate of licensed stores

Decrease to 1% growth in 2008 (About 490 stores opened)

Decrease the growth of domestic licensed stores to 2% growth in 2008 (About 820 stores opened)

This will help decrease expenses domestically.

Questions?

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