Case Study / Analysis of Starbucks Corporation

Uploaded by TonyMontana on Jul 11, 2005

CASE ANALYSIS FOR STARBUCKS CORPORATION
I. Case Profile/ Company History
Three Seattle entrepreneurs started the Starbucks Corporation in 1971. Their prime
product was the selling of whole bean coffee in one Seattle store. By 1982, this
business had grown tremendously into five stores selling the coffee beans, a roasting
facility, and a wholesale business for local restaurants. Howard Schultz, a marketer,
was recruited to be the manager of retail and marketing. He brought new ideas to the
owners, but was turned down. Schultz in turn opened his own coffee bar in 1986
based on Italian coffee cafes, selling brewed Starbucks coffee. By 1987, Schultz had
expanded to three coffee bars and bought Starbucks from the original owners for $4
million. He changed the name of his coffee bars from Il Giornale to Starbucks. His
intention for the company was to grow slowly with a very solid foundation. He wanted
to create a top-notch management by wooing top executives from other well-known
corporations. For the first two years, Starbucks losses doubled as overhead and
operating expenses increased with Starbucks' expansion. Schultz stood his ground
and did not sacrifice long term integrity and values for short-term profit. By 1991,
Starbucks' sales increased by 84% and the company was out of debt. Starbucks grew
to 26 stores by 1988. By 1996 it grew to 870 stores with plans to open 2000 stores by
the year 2000.
II. Situational Analysis
Strategic Analysis
Business Level-Strategy:
The business strategy of Starbucks' is identical to the corporate level strategy since
the company is a single business company, focusing on only coffee-related products
and retail stores.
Corporate Level-Strategy:
Starbucks corporate strategy has been to establish itself as the premier purveyor of
the finest coffee in the world, while maintaining their uncompromised principles as the
grow. The firm principles of the company are seen with its maintenance of a great and

proven work environment for every staff member in its retail stores. It upholds
diversity and promises the highest standards for its products. The company satisfies
customers and gives back to the community and the environment. Also, Starbucks
persists to be profitable and it is. They live by a strict, slow growth policy completely
dominating a market before setting its sights further abroad. This strategy has gained
them the advantage of being one of the fastest growing companies in the country.
Structure and Control Systems:
Starbucks believes that their employees are one of their important assets in that their
only sustainable advantage is the quality of their workforce. They have accomplished
building a national retail company by creating pride in the labor produced through an
empowering corporate culture, exceptional employee benefits, and employee stock
ownership programs. The culture towards employees is laid back and supportive.
Employees are empowered by management to make decisions without management
referral and are encouraged to think of themselves as a part of the business.
Management stands behind these decisions. Starbucks has avoided a hierarchical
organizational structure and has no formal organizational chart. The company has
both functional and product based divisions. There is some overlap in these divisions
with some employees reporting to two division heads.
III. SWOT Analysis
Starbucks has become a well-known company for selling the highest quality coffee
beans and best tasting coffee products. It was one of the first companies to realize
that the real money to be made was in beverage retailing, not just coffee beans.
Starbucks created a coffee for the coffee connoisseurs and go to great lengths to
acquire only the highest quality of coffee beans. They have set new precedence by
outbidding the European buyers for an exclusive crop of coffee beans, which
produces one of the best coffees in the world. Roasters of Starbucks coffees are
extensively trained for one year. Starbucks has the distinction of being the public's
educator on Expresso. They have also recently started to expand to packaged and
prepared tea in response to the growing demand for this product. There are no other
national coffee bar competitors in the same scale as Starbucks. Starbucks is the only
competitor in the coffee bar market that has a recognized brand image. The
difference between Starbucks and other coffeehouses is that they own all their stores
and do not franchise. Starbucks stores operates in most metropolitan areas of the
United States and also has a direct mail business to serve customers in every state.
They have introduced gourmet flavored decaffeinated coffees as well as specialty
flavors and whole bean coffees for the faithful coffee drinkers. They have also added

light lunch fare to their menu. Starbucks had recently expanded its emphasis
internationally. There are opportunities waiting in possible joint ventures with other
corporations to design new product associations with Starbucks' coffee.
Although Starbucks has enjoyed tremendous success in the past few years, there are
a few obstacles looming. Since the popularity of the coffee house idea has grown,
some cities wish to issue regulations on the coffeehouses due to complaints of late
night patrons becoming uncontrollable. The cost of coffee beans is expected to rise in
the future due to lower supply, which may tighten the margins on coffee merchants.
The higher costs have cut into markets, which have heightened the competition in a
crowded market. There is an enthusiasm of health consciousness growing in the
United States. People are cutting down on caffeine but the consumption of
decaffeinated coffee has not seen an increase. Although Starbucks does not have
major national competitors, they do have regional ones. Tourists become confused
when ordering, since they cannot simply order a cup of coffee. Although Starbucks is
interested in gaining recognition and growth in Europe, they will not be pioneers in the
European coffee market as they were in the United States.
Internal Strengths and Weaknesses
Strengths Weaknesses
Brand name recognition Non-pioneer in global market
Quality Products Narrow Product line
Potential Internal Strengths Complicated Products
Good Marketing Skills
Well Developed Corporate strategy
Location
Visionary leader
Distribution
Manufacturing competencies

Exclusive marketing rights

Environmental Opportunities and Threats
Opportunities Threats
Expand into Foreign Markets Change in consumer tastes
Widen Product Range City regulations
Diversify into new Growth Businesses Increase in domestic competition
Apply brand name capital in new areas Changes in economic factors
Downturn in economy
IV. Recommendation Analysis
Starbucks has become a great successful company in the coffee bean and beverage
business and its strategy has been very effective. From the beginning, Schultz, the
company's owner, has professed a strict, slow growing policy. He feels it is also
important to keep all the stores company owned to improve and grow the business
further. To further grow, Starbucks will need to expand further in other areas of the
United States as well as internationally. Future joint ventures will expand the products
into grocery and convenience store shelves through bottled beverages and ice cream
flavors. Other joint ventures will allow further expansion into the brewery business,
which will produce beer with Starbucks' coffee beans. Other partnerships will bring
new products for Starbucks, such as jazz CDs, and tandem units with bagel bakeries.
As the company expands, the culture and corporate strategy must be maintained for
success. This will ensure the health of the organization throughout any future
expansion.
ADDITIONAL:
ADDITIONAL RESEARCH:
Wake up and smell the coffee -- Starbucks is everywhere. The US's #1 specialty
coffee retailer, Starbucks operates nearly 4,000 coffee shops in a variety of locations
(office buildings, shopping centers, airport terminals, supermarkets) in some 20
countries worldwide. Starbucks sells coffee drinks and beans, pastries, and other

food items and beverages, as well as mugs, coffeemakers, coffee grinders, and
storage containers. The company also sells its beans to restaurants, businesses,
airlines, and hotels, and it offers mail-order and online catalogs. Starbucks has
expanded into coffee ice cream (with Dreyer's) and makes Frappuccino, a bottled
coffee drink (with PepsiCo).
Starbucks Corporation
NASD : SBUX
Sector: Consumer/Non-Cyclical
Industry: Food Processing
STARBUCKS BUSINESS SUMMARY
Starbucks Corporation purchases and roasts high quality whole bean coffees and
sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages,
cold blended beverages, a variety of pastries and confections, coffee-related
accessories and equipment, and a line of premium teas, primarily through its
Company-operated retail stores. In addition to sales through its Company-operated
retail stores, Starbucks sells coffee and tea products through other channels of
distribution (specialty operations). Starbucks, through its joint venture partnerships,
also produces and sells bottled Frappuccino coffee drink and a line of premium ice
creams. The Company's objective is to establish Starbucks as the most recognized
and respected brand in the world.
Company-Operated Retail Stores
As of the fiscal year ended October 1, 2000, Starbucks had 2,619 Company-operated
stores in 34 states, the District of Columbia and five Canadian provinces (which
comprise the Company-operated North American retail operations), as well as the
United Kingdom, Thailand and Australia (which comprise the Company-operated
international retail operations). Company-operated retail stores accounted for
approximately 84% of net revenues during fiscal 2000. All Starbucks stores offer a
choice of regular and decaffeinated coffee beverages, including at least one "coffee of
the day," a broad selection of Italian-style espresso beverages, cold blended
beverages, a selection of teas and distinctively packaged, roasted whole bean
coffees. Starbucks stores also offer a selection of fresh pastries and other food items,
sodas, juices, and coffee-making equipment and accessories.

Each Starbucks store varies its product mix depending upon the size of the store and
its location. Larger stores carry a broad selection of the Company's whole bean
coffees in various sizes and types of packaging, as well as an assortment of coffee
and espresso-making equipment and accessories such as coffee grinders, coffee
makers, espresso machines, coffee filters, storage containers, travel tumblers and
mugs. Smaller Starbucks stores and kiosks typically sell a full line of coffee
beverages, a more limited selection of whole bean coffees and a few accessories
such as travel tumblers and logo mugs. Approximately 15% of Starbucks stores carry
a selection of "grab and go" sandwiches and salads. During fiscal 2000, the
Company's retail sales mix by product type was approximately 73% handcrafted
beverages, 14% food items, 8% whole bean coffees, and 5% coffee-making
equipment and accessories.
Specialty Operations
Starbucks specialty operations strive to develop the Starbucks brand outside the
Company-operated retail store environment through a number of channels. Starbucks
specialty operations include retail store licensing agreements, wholesale accounts,
grocery channel licensing agreements and joint ventures. Starbucks specialty
operations also include direct-to-consumer marketing channels. In certain licensing
situations, the licensee is a joint venture in which Starbucks has an equity ownership
interest. During fiscal 2000, specialty revenues (which include royalties and fees from
licensees as well as product sales) accounted for approximately 16% of the
Company's net revenues.
Although the Company does not generally relinquish operational control of its retail
stores in North America, in situations in which a master concessionaire or another
company controls or can provide improved access to desirable retail space, the
Company may consider licensing its operations. As part of these arrangements,
Starbucks receives license fees and royalties and sells coffee and related products
for resale in the licensed locations. Employees working in the licensed locations must
follow Starbucks detailed store-operating procedures and attend training classes
similar to those given to Starbucks store managers and employees. As of October 1,
2000, the Company had 530 licensed stores in continental North America.
Starbucks retail stores located outside of North America, the United Kingdom,
Thailand and Australia are operated through a number of joint venture and licensing
arrangements with prominent retailers. During fiscal 2000, the Company expanded its
international presence by opening 184 new international licensed stores, including the

first stores in Lebanon, the United Arab Emirates, Qatar, Hong Kong and Shanghai. At
fiscal year end, the Company had 154 stores in Japan, 47 in Taiwan, 28 in China, 28
in Singapore, 27 in the Philippines, 20 in Hawaii, 15 in New Zealand, 14 in Malaysia,
six in South Korea, five in the United Arab Emirates, four in Kuwait, three in Lebanon,
and one in Qatar.
Starbucks also sells whole bean and ground coffees to several types of wholesale
accounts, including office coffee distributors and institutional foodservice
management companies that service business, industry, education and healthcare
accounts, and hotels, airlines and restaurants. In fiscal 1998, Starbucks entered into a
long-term licensing agreement with Kraft Foods, Inc. to accelerate the growth of the
Starbucks brand into the grocery channel in the United States. Pursuant to such
agreement, Kraft manages all distribution, marketing, advertising and promotions for
Starbucks whole bean and ground coffee in grocery, warehouse club and mass
merchandise stores. By the end of fiscal 2000, the Company's whole bean and
ground coffees were available throughout the United States in approximately 16,000
supermarkets.
The Company has two non-retail domestic 50-50 joint ventures. The North American
Coffee Partnership, a joint venture with the Pepsi-Cola Company, a division of
PepsiCo, Inc. , was formed in fiscal 1994 to develop and distribute ready-to-drink
coffee-based products. By the end of fiscal 2000, the joint venture was distributing
bottled Frappuccino coffee drink to approximately 250,000 supermarkets,
convenience and drug stores and other locations throughout the United States and
Canada. The Company formed a joint venture with Dreyer's Grand Ice Cream, Inc. in
fiscal 1996 to develop and distribute Starbucks premium coffee ice creams. By the
end of fiscal 2000, the joint venture was distributing a variety of ice cream and novelty
products to over 21,000 supermarkets throughout the United States.
The Company makes fresh Starbucks coffee and coffee-related products conveniently
available via mail order and on-line. Starbucks publishes and distributes a mail order
catalog that offers its coffees, certain food items and select coffee-making equipment
and accessories, and the Company maintains a web site at www.starbucks. com with
an on-line store that allows customers to browse for and purchase coffee, gifts and
other items via the Internet. The Company believes that its direct-to-consumer
operations support its retail store expansion into new markets and reinforce brand
recognition in existing markets.
INDUSTRY FINANCIAL SUMMARY

SBUX purchases, roasts and sells high quality whole bean coffees, rich-brewed
coffees, Italian-style espresso beverages, cold blended beverages and a variety of
pastries. For the 26 weeks ended 4/1/01, net sales rose 25% to $1.30 billion. Net
income rose 40% to $81.2 million. Revenues reflect the opening of new retail stores
and higher comparable store sales. Net income also reflects a higher gross margin
due to an increase in sales prices.

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