Case Study - Planet Starbucks(2)

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Transcript of Case Study - Planet Starbucks(2)

TB0153April 28, 2003

Planet Starbucks (B): Caffeinating the WorldTen years ago, we had 125 stores and 2000 employees. [Today,] we have 60,000 people working in 28 markets outside North America, serving approximately 20 million customers a week. Our core customer is coming in about 18 times a month. With the majority of adults around the world drinking two cups of coffee a day and with Starbucks having less than 7% share of total coffee consumption in the U.S. and less than 1% worldwide, these are the early days for the growth and development of the company. Weve got a model that has been well tested from market to market. Q&A With Starbucks Howard Schultz BusinessWeek Online, September 9, 2002

Peter Maslen, President of Starbucks International, had just returned from Greece where the company had opened its first caf in downtown Athens. He had logged thousands of miles over the past few years shuttling from country to country extending the boundaries of the Starbucks empire. In anticipation of stagnating growth in North America, the company had embarked on a global expansion strategy with the objective of becoming a great, enduring company with the most recognized and respected brand in the world. Starting with Japan in 1995, the company had blazed through several key markets in Asia and Europe. The company looked to move into more of the emerging world, including Latin America. While much of the developed world had been conqueredor at least attackednew growth potential had shifted to the less-developed regions. Although the company had already established beachheads in several emerging markets, many believed that the infrastructure and disposable income in these regions would present forbidding obstacles for Starbucks expansion strategies. As Peter Maslen sipped his cup of steaming espresso, his mind wandered to the challenges his company faced in global markets. Did it make sense for Starbucks to continue expanding globally at such a breakneck pace? Would the firm be able to meet the markets insatiable appetite for earnings growth with its ventures into European and emerging markets?

HistoryStarbucks was founded in Seattle by Gerald Baldwin, Gordon Bowker and Ziev Siegl in 1971 as a gourmet coffee bean roaster and distributor. In 1982 Howard Schultz joined the company as a member of their marketing team. After a visit to Italy for a trade show, Schultz urged the partners to consider opening espresso bars in conjunction with their coffee sales. In 1984 Starbucks opened its first espresso bar in a small corner of the companys downtown Seattle Starbucks store, to rave reviews. Although Schultz urged the company to expand the espresso bar line, the controlling partners, now Baldwin and Bowker, were unwilling to enter what they considered the fast food business, wishing to focus on the coffee roasting niche market.Copyright 2003 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Professors Michael Moffett and Kannan Ramaswamy for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. This case draws upon information presented in Planet Starbucks (A) by the same authors.

Howard Schultz then left Starbucks, and with the financial backing of his former partners, opened Il Giornale in 1985, an espresso bar that sold coffee and assorted coffee beverages made exclusively with Starbucks beans. Two years later, Schultz bought the former Seattle Starbucks company, six stores and roasting plant, for $3.8 million from Baldwin (who wished to focus on managing Peets Coffee) and Bowker (who wished to cash out of the business). Schultz now was in control of Starbucks, and with new investors, began building a global business which reached sales of $3.28 billion by 2002 and was acclaimed one of the top 100 growing global brands.

The Starbucks ExperienceHoward Schultzs dream was to take the concept of the Milan espresso bar to every corner of every city block in the world. Captivated by the sense of community and neighborliness that he had seen in the cafes in Milan, Schultz wanted to transplant a similar ambience into each Starbucks store. This desire originated in the very first coffee experience that Schultz had in Milan. While attending a housewares show in the city of over a thousand cafes, Schultz was quite impressed by the way in which the baristas (coffee brewers) prepared a cup of espresso. It was pure theater to see a barista move effortlessly as he ground the beans, pulled the espresso, and steamed the milk, seemingly at the same time and all the while carrying on a conversation with the customer. It was precisely this experience that Schultz wanted to bring to each of the Starbucks cafes. He envisioned each caf as a gathering place for neighbors and friends or a place of quiet contemplation and perhaps even a neighborhood office for the work a day customer who might stop by to catch up on work and a steaming espresso at the same time. The Starbucks caf was indeed a destination. The Starbucks Experience had been designed to be pleasant, uplifting and diverse.1 Experience and ambience were central to the Starbucks strategy. As Schultz observed,We certainly dont ignore the product, but it is something we always knew we had and a lot of others didnt. But we built the business through experience, not through the product. Schultz Caffeinated Crusade, Brandweek, July 5, 1999 I tried to build an environment and a place that could provide our customers with an oasis, a Third place away from home or work, that would exceed their expectations. M. Pendergrast, The Starbucks Experience Going Global, Tea and Coffee Trade Journal, Vol. 174, Issue 2, Feb. 20, 2002

The cafs exuded a sense of chic and featured comfortable seating, sometimes even sofas, a selection of leading newspapers and magazines including Starbucks own in-house weekly, and the strong aroma of rich coffee wafting through. In addition to a broad selection of coffee and Italian style espressos, the cafes offered several blends of special teas, localized pastries, and coffee brewing equipment. The stores themselves were designed to be bold and striking in their color palettes, often using primary colors. The ambience of the cafes was accentuated by piping selected music to complement the atmosphere of warmth and comfort. Employees were trained to not only provide advice on coffee selection and appropriateness to potential customer needs, but to engage the customer.

Location, Location, LocationThe company displayed remarkable business savvy in choosing its locations. It focused on spots that provided ready access to consumer foot traffic, typically in densely populated neighborhoods. Stores were located in such a way to blanket a neighborhood and often several stores competed for patronage on the very same street. Starbucks had however been both admired and criticized for these marketswarming expansion techniques that were used to proliferate within defined market locales. This approach to first-mover advantage in a market space gave Starbucks sufficient time to establish itself while holding competitors at bay. The downside however was the cannibalization of revenues across stores1

Schultz Caffeinated Crusade, Brandweek, July 5, 1999.TB0153

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located in close proximity to one another. Between 1995 and 1998 Starbucks had averaged $0.69 million per store per year. Beginning in 1999, this revenue per store value had continuously declined, falling to $0.56 million per store in 2002. The company had leveraged multiple channels to sell its coffees and related products. Its wares were available through mini-Starbucks cafes located within grocery stores, at airports, on all United Airlines flights, and in Barnes and Noble bookstores. Its roasted coffee beans, and ice cream products were sold through both specialty and mass-market retail grocery chains. It entered several distribution agreements with well established companies such as Kraft Foods for distribution of coffee related products. Despite these systematic attempts to proliferate through multiple channels and multiple locations, sales in North America had shown signs of slowing. It was against this backdrop that Starbucks started looking East.

The World Market For CoffeeCoffee was the second most widely traded commodity in the world behind crude oil. Despite this pride of place amongst commodities, most of the worlds coffee was grown in small farms encompassing just a few acres. Like most commodity products, the prices for green beans (unroasted coffee) fluctuates wildly with changes in demand and supply which in turn is driven by growing conditions. Latin America, Central America, East Africa, and parts of Indonesia and Vietnam were the leading coffee growing regions. The price of coffee in 2002 reached record lows of $0.42 per pound for robusta grade, the lowest price in a century. The robusta grade was considered an inferior grade of coffee with a fairly high level of bitterness. The arabica grade was the premium coffee and commanded a price premium typically about $0.20 per poundover robusta. Arabica was much more aromatic and full flavored and preferred by coffee connoisseurs worldwide. Starbucks exclusively used arabica beans in its cafes. The market for coffee was decidedly global. Most of the intermediate buyers were large transnational packaged foods companies. The top four firmsNestl (Switzerland), Kraft Foods (USA), Proctor & Gamble (USA), and Sara Lee (USA) collectively purchased roughly 50% of the coffee produced globally. Given their product mix and development of new roasting techniques, many of these buyers were able to make do with robusta grade. Buyers such as Starbucks, and its Italian competitor Illy, however, specialized in gourmet coffees which accounted for only about 10% of global c