STRATEGIC MANAGEMENT A COFFEE REVOLUTION

– BUSINESS STRATEGY
DEEPAK SOMAYA
Spread of coffeehouse culture
in the United States (late 1980s
onwards)

Starbucks • Specialty coffee becomes an

“affordable luxury”
Corporation • In popular culture: TV serial
“Friends”
• Exported internationally
The Central Perk set from Friends
(Warby 2013 / CC BY 2.0)

STARBUCKS HISTORY STARBUCKS HISTORY

Starbucks made coffeehouses a • In 1987, Starbucks was sold to

scalable business 1 2 Schultz and merged with Il
Giornale, with a total of 11 stores
• In 1971, begins by selling roasted
in Seattle and Vancouver
whole coffee beans in Seattle
• Starbucks began a rapid
• Howard Schultz joins Starbucks
expansion of coffeehouses, and
in 1982, visits Italy in 1983,
by 2018 had grown to over or
founds Il Giornale coffeehouses
29,324 stores globally in 2018
(inspired by Italian expresso
(see Exhibit 1)
bars) STARBUCKS COFFEE COMPANY - True North Blend™ Blonde Roast
(Hao Xing 2015 / CC BY 2.0)
Howard Schultz (Sillygwailo 2007 /CC BY 2.5)

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HIGH QUALITY SPECIALTY COFFEE
Starbucks sources largely
Arabica beans from around the
world
• Relationships with brokers and
growers ensures access to
quality coffee beans
– Claims 99% of its coffee is
“ethically sourced” 3
• Multiple quality checks
conducted before and during
shipment
HIGH QUALITY SPECIALTY COFFEE
Custom roasting of beans 4
• Blending of beans from different
sources
• Art and science 5: in addition to
trained roasters, Starbucks has
encoded roasting recipes into the
software of automated roasting
Coffee Beans (Claire Gribbin 2007 / CC BY
2.0) machines Starbucks roasting
(Miley 2015 / CC BY-SA 2.0)

HIGH QUALITY SPECIALTY COFFEE A THIRD PLACE

• Starbucks emerged from the U.S. west-coast Italian-style dark
roasting tradition
• Starbucks takes several steps to prevent oxidation of roasted
beans (which results in substantial loss of flavor):
• Rapid distribution
• Vacuum-packed bags
• Coffee ground (as needed) in stores 6
Schultz conceived of Starbucks as a “third place,” in addition to
home and work
• Infused with the aroma of coffee, with welcoming lounge seating and
laid back ambience
• Consumers often “hang out” in the coffeehouse, socialize, do their
work, browse the (free) internet, and even conduct business meetings
• “What we have built has universal appeal. It's based on the human
spirit, it's based on a sense of community, the need for people to come
together.” 7 - Howard Schultz

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A THIRD PLACE
Real Estate Operations
• When Starbucks rapidly
expanded into markets across
the U.S., it often saturated
these markets
– Sometimes two or three
Starbucks stores were
located on the same block
or intersection
A THIRD PLACE
Real Estate Operations
• Starbucks developed different store layout styles to fit different
types of available real estate
• The company owns all its stores and does not franchise (except
for its Seattle’s Best stores, and a few franchises in Europe
• Also sells Starbucks coffee through licensed stores and
foodservice companies 8
Starbucks Mall Store
(Bargainmoose 2015 / CC BY 2.0)

CONSUMER PRODUCTS CONSUMER PRODUCTS

In addition to serving customers in its coffeehouses, Starbucks Channels:
does a thriving business in consumer products sold through • Direct – Starbucks coffeehouses
multiple channels, by leveraging its strong coffee brand and online shopping
• Retail – Initially distributed
Products: through an alliance with Kraft
• Bagged whole bean and roasted coffees, Coffee pods (Verismo® & Foods, which has now been
K-Cup®), Via® instant coffee, bagged tea (TAZO® and Teavana®), discontinued 10
bottled and canned drinks, equipment and drinkware • Bottling – Frappucino and other
drinks are distributed through an
alliance with Pepsico
Starbucks Doubleshot Energy + Coffee Energy Drink (Mocha,
Vanilla and Coffee) (Theimpulsivebuy 2008 / CC BY-SA 2.0)

3
RETAIL OPERATIONS RETAIL OPERATIONS
There are many components to the successful operation of There are many components to
Starbucks’ coffeehouses the successful operation of
Starbucks’ coffeehouses
• Personalization: Starbucks seeks to create “customer intimacy”
• Other beverages: Tea and other
by encouraging employees to learn the names of customers, beverages
knowing their preferred drink, customizing drinks for them, etc. • Food offerings: Breakfast foods,
• Novelty and variety: Starbucks has innovated a number of sandwiches, and pastries/cakes
unique and signature drinks (e.g. pumpkin spiced latte) are also served
• Experimented with beer and
wine in evenings

HUMAN CAPITAL MANAGEMENT HUMAN CAPITAL MANAGEMENT

• Barista and manager stability

• Starbucks calls all its
considered critical for smooth
employees “partners”
operations and customer
• Baristas are hourly waged service
and the frontline interface with
• Benefits like health insurance,
customers, taking orders and
retirement, stock options, free
making drinks
coffee and college education
support
Employees work inside the Starbucks at the Taj Mahal
Source: Starbucks. Palace hotel in south Mumbai, India.
(HAO XING 2000 / CC BY 2.0)

4
HUMAN CAPITAL MANAGEMENT COMPETITORS

• Frequently promotes individuals from within its ranks to store
managers and beyond
• All managers undergo barista training to gain first-hand
knowledge of store operations
• Very low rate of barista turnover relative to other coffeehouses
• Repeatedly featured as one of the best places to work 11 12
• In addition to benefits and work conditions, employees also
cite the company’s vision and values as positive aspects of
their jobs 13
Most full-blown coffeehouse competitors are small. Some
potential competitors:
• Caribou Coffee, Peet’s Coffee, Panera, Illy (Italy, Europe),
Costa Coffee (U.K.), Caffè Nero (U.K.), Gloria Jean’s
(Australia)
• Starbucks operates over 10 times the stores of its nearest
competitor (Costa Coffee)

COMPETITORS STARBUCKS’ ROASTERY AND RESERVE BAR

Value priced competitors • Schlutz had said opening new luxury

• McDonald’s McCafe, shops would offset the drop in foot traffic to
Dunkin Donuts, and regular Starbucks cafes, which coincided
with the rise of online shopping 13
others.
• Under Mr. Schultz’s vision, Starbucks
Reserve cafes would brew more expensive
coffee using the latest techniques, serve
artisanal baked goods and mixed cocktails Starbucks Reserve Roastery NYC
14 Source: Starbucks / http://tinyurl.com/rz7z2gu

Competitor – Second Cup

(Elliott Brown 2015 / CC BY-NC-SA 2.0)

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KEVIN JOHNSON NEW CEO RECENT UPDATES

Howard Schultz to step down as CEO in 2017 • Uber Eats Pilot Partnership (2018), now available in a total of 16 major U.S.
handing the keys over to current CEO Kevin markets … to expand nationally in 202017
Johnson15 16

• Starbucks and Nestlé’s establish strategic partnership and form the Global Coffee
• Schlutz to serve as executive chairman, this
Alliance (2018) to expand the global reach of Starbucks brands in Consumer
time focusing on Starbucks’ Roastery and
Packaged Goods (CPG) and Foodservice segments, specifically in the premium
Reserve Bar expansion
segment 18
• Three months after Johnson became CEO,
Johnson announced to close 379 Teavana • Starbucks and Nestlé expand Global Coffee Alliance to China (2019)
stores in malls because of underperformance
Kevin Johnson, CEO
Source: Starbucks / http://tinyurl.com/tzbggtv

EXHIBIT 1 EXHIBIT 2
Growth in Starbucks’ Stores (2003-2018) Starbucks’ Revenues and Income

In 2013, Starbucks settled with

Kraft for $2.8 Bn. to end
disputes over their distribution
agreement

Source: Morningstar
(http://financials.morningstar.co
Source: Starbucks, m/ratios/r.html?t=SBUX)
Statista.com

6
REFERENCES
[1] https://en.wikipedia.org/wiki/Starbucks
[2] http://www.encyclopedia.com/topic/Starbucks_Corp.aspx
[3] http://dailycoffeenews.com/2015/05/15/starbucks-claims-99-ethically-sourced-coffee-but-
what-does-that-even-mean/
[4] https://www.quora.com/How-does-Starbucks-ensure-a-consistent-taste-profile-for-their-
coffee-nationwide-and-over-the-years
[5] http://www.roastmagazine.com/resources/Articles/Roast_MayJun12_RoastingScience.pdf
[6] https://www.theguardian.com/business/2008/mar/20/starbucks.useconomy
[7] http://community.seattletimes.nwsource.com/archive/?date=20020626&slug=starbucks26
[8] http://www.starbucks.com/business
REFERENCES
[17] https://stories.starbucks.com/stories/2019/starbucks-delivers-expands-to-more-us-
markets/
[18] https://stories.starbucks.com/press/2018/starbucks-and-nestle-form-global-coffee-alliance/
[19] https://www.shrm.org/hrdisciplines/employeerelations/articles/pages/starbucks-work-
environment.aspx
[20] https://www-statista-com.proxy2.library.illinois.edu/statistics/218360/number-of-starbucks-
stores-in-the-us/
REFERENCES
[9] http://store.starbucks.com/coffee/
[10] http://www.bloomberg.com/news/articles/2013-11-12/starbucks-to-pay-2-76-billion-to-
settle-grocery-dispute
[11] https://www.glassdoor.com/Best-Places-to-Work-2014-LST_KQ0,24.htm
[12] http://www.msn.com/en-us/money/companies/americas-25-best-companies-to-work-
for/ar-BBlT81p
[13] https://www.marketwatch.com/story/starbucks-ceo-reining-in-predecessors-ambitions-
2019-01-07
[14] https://www.wsj.com/articles/starbucks-ceo-kevin-johnson-reins-in-predecessors-
ambitions-im-not-howard-11546857001
[15] https://www.cnbc.com/2018/06/04/howard-schultz-architect-of-modern-starbucks-to-step-
down-as-executive-chair-and-from-the-board.html
[16] https://money.cnn.com/2017/07/27/investing/teavana-stores-closing-starbucks/index.html
REFERENCES
Additional Relevant Links:
• Bargainmoose [Screen name]. (2015). Starbucks Mall Store Canada [Online image].
Retrieved from https://www.flickr.com/photos/31954284@N07/16896499441
• Brown, E. (2015). Second Cup Coffee Company, Betfred The Bonus King & Costa Coffee
[Online image]. Retrieved from https://www.flickr.com/photos/ell-r-brown/22687758020
• Gribbin, C. (2007). Starbucks Bean [Online image]. Retrieved from
https://en.wikipedia.org/wiki/File:Starbucks_coffee_beans.jpg
• Miley, M. (2015). Starbucks roasting [Online image]. Retrieved from
https://www.flickr.com/photos/mike_miley/23198726316
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REFERENCES
• Sillygwailo. (2007). Starbucks Chairman Howard Schultz talks to the media at the
Vancouver Waterfront Station location, celebrating 20 years of Starbucks in British
Columbia. [Online image]. Retrieved from https://en.wikipedia.org/wiki/File:Howard-Schultz-
Starbucks_(cropped).jpg
• Starbucks https://stories.starbucks.com/leadership/kevin-johnson/
• Xing, H. (2000). Employees work inside the Starbucks at the Taj Mahal Palace hotel in
south Mumbai, India. [Online image]. Retrieved from https://flic.kr/p/qRp9i6
• Xing, H. (2015). STARBUCKS COFFEE COMPANY - True North Blend™ Blonde Roast
[Online image]. Retrieved from
https://www.flickr.com/photos/130000572@N03/16285653016
• Theimpulsivebuy. (2008). Starbucks Doubleshot Energy + Coffee Energy Drink (Mocha,
Vanilla and Coffee). [Online image]. Retrieved from https://flic.kr/p/aRb5qF
• Warby, W. (2013). The Central Park set from Friends on the Warner Bros. Studio VIP Tour
in Los Angeles, California. [Online image]. Retrieved from https://flic.kr/p/fFYbzJ