I.

INTRODUCTION

Starbucks was founded by Jerry Baldwin, Gordon Bowker, and Zev Siegel, opening its

first physical store in 1971 across the street from the historic Pike Place Market in Seattle.They

invested and borrowed some money to open the first store in Seattle and named itPequod after

a wailing ship in Herman Melville’s American classic, Moby Dick. But the name was a peculiar

one and after a series of discussion, they change it into Starbuck, chief mate on the Pequod.

Alfred Peet, a coffee-roasting entrepreneur, was a major inspiration to the founders of

Starbucks. Peet was a Dutch immigrant who had begun importing fine Arabica coffees into the

United States during the 1950s. In 1966 he opened a small store, Peet’s Coffee and Tea, in

Berkeley, California, that specialized in importing first-rate coffees and teas. Peet’s success

encouraged the Starbucks founders to base their business model on selling high-quality coffee

beans and equipment, and Peet became the initial supplier of green coffee beans to Starbucks.

The partners then purchased a used roaster from Holland, and Baldwin and Bowker

experimented with Alfred Peet’s roasting techniques to create their own blends and flavours.

By the early 1980s, Starbucks had opened four stores in Seattle that stood out from the

competitors with their top-quality fresh-roasted coffees. In 1980, Siegel decided to pursue other

interests and left the two remaining partners, with Baldwin assuming the role of company

president.

In 1981 Howard Schultz, a sales representative for Hammarplast, a Swedish company that

made kitchen equipment and housewares from which Starbucks bought drip-coffee makers,

noticed how large the company’s orders were, which prompted him to pay it a visit. Schultz was

so impressed that he decided to pursue a career at Starbucks, and he was hired as the director

of retail operations and marketing in 1982. Schultz noticed that first-time customers sometimes

felt uneasy in the stores because of their lack of knowledge about fine coffees, so he worked

with store employees on developing customer-friendly sales skills and produced brochures that

made it easy for customers to learn about the company’s products.

 Schultz’s biggest idea for the future of Starbucks came during the spring of 1983 when the

company sent him to Milan to attend an international housewares show. While in Italy, he was

impressed with the country’s cafés, and he thought of doing something similar in Starbucks.

However, Baldwin and Bowker were not enthusiastic about Schultz’s idea, as they did not want

Starbucks to deviate much from its traditional model of business. They wanted Starbucks to

remain strictly a coffee and equipment seller and not turn into a café that served espressos and

cappuccinos. After that, Schultz left Starbucks in 1985 and started his own coffee chain called Il

Giornale, which was an immediate success, quickly expanding into multiple cities.

In March 1987 Baldwin and Bowker decided to sell Starbucks, and Schultz was quick to

purchase the company. He combined all his operations under the Starbucks brand and

committed to the café concept for the business, with additional sales of beans, equipment, and

other items in Starbucks stores. The company entered into a meteoric period of expansion that

continued after the company went public in 1992. Starbucks soon became the largest coffee-

house chain in the world. By the early 21st century, Starbucks had a presence in dozens of

countries around the globe and operated over 20,000 stores.

December 4, 1997, the Philippines had its first taste of the Starbucks Experience with its

very first branch at the 6750 Ayala Building in Makati City. Starbucks has since won the hearts

of the Filipinos.The opening of the 6750 Ayala store marked an important milestone in our

history – the Philippines became the third market to open outside North America.

The tradition of warm hospitality, constant need for connection, and love for coffee – these are

the qualities that make Starbucks Coffee and the Filipino people a great culture fit.
 II. PROBLEM IDENTIFICATION

Commoditization of the Starbucks Experience

 No relationship between customers and baristas

 Customers no longer have the in-store experience

 Loss of coffee aroma

 Loss of warm feeling in the store

Economic Decline / Increasing Competition

 Recession (due to McDonalds McCafe release in 2007)

 Rapid increase of other specialty coffee

Example: McDonald’s, Dunkin Donuts, Caribou Coffee, Costa Coffee

Poor Operations

 Mismanagement of supply chain and lack of discipline

 Rapid Expansion

o Lack of control over store increase that leads to Market Saturation and Self-

Cannibalism

o Inexperienced baristas

o Poor store locations

o Loss of focus on core values

Increasing Prices

 Higher cost of beans is equal to higher labor cost, and these costs were passing on to its

customers.
III. ANALYSIS

IV. ALTERNATIVE COURSE OF ACTION

V. RECOMMENDATION
Summarized Annual Income Report

Starbucks

OCT 1 2017 OCT 2 2016 %Change

(52 Weeks ended) (53 weeks ended)
Net Revenues:
Company Operated Stores $ 17,650.7 $ 16,844.1 4.8%

Licensed Stores 2,355.0 2,154.2 9.3

CPG Food Services and other 2,381.1 2,317.6 2.7

Total Net Revenues: $ 22,386.8 $ 21,315.9 5.0 %

Total net revenues increased $1.1 billion, or 5%, over fiscal 2016, primarily driven by
increased revenues from company operated stores ($807 million). The growth in company-
operated store revenues was primarily driven by incremental revenues from 768 net new
Starbucks® company-operated store openings over the past 12 months ($869 million) and a 3%
increase in comparable store sales ($496 million), attributable to a 3% increase in average
ticket. Partially offsetting these incremental revenues was the absence of the 53rd week ($324
million), the absence of sales from the conversion of certain company operated stores to
licensed stores ($121 million) and the impact of unfavourable foreign currency translation ($70
million). Licensed store revenue growth also contributed to the increase in total net revenue
($201 million), primarily due to increased product sales to and royalty revenues from our
licensees ($260 million), largely due to the opening of 1,552 net new Starbucks® licensed
stores and improved comparable store sales, partially offset by the absence of the 53rd week
($41 million) and unfavourable foreign currency translation ($27 million). CPG, foodservice and
other revenues increased $64 million, driven by increased sales through our international
channels, primarily associated with our European and North American regions ($35 million),
increased sales of U.S. packaged coffee ($32 million), foodservice ($30 million) and premium
single-serve products ($23 million). Increased sales were partially offset by the absence of the
53rd week ($47 million) and an unfavourable revenue deduction adjustment pertaining to
periods prior to fiscal 2017 ($13 million).
China/Asia Pacific

OCT 1 OCT 2
2017 2016
Oct 1, 2017 Oct 2 2016
As % of Asia Pacific/China
Total Net Revenue

Net Revenues:
Company Operated $ $ 89.7% 89.8 %
Stores 2,906.0 2,640.4

Licensed Stores 327.4 292.3 10.1 9.9

CPG Food Services and 6.8 0.2 0.2

other 6.1

Total Net Revenues: $ $ 2938.8 100.0 % 100.0%

3,240.2

China/Asia Pacific total net revenues for fiscal 2016 increased $543 million, or 23% due
to increased revenues from company-operated stores (contributing $513 million). The increase
in company-operated store revenues was primarily due to the opening of 359 net new company-
operated stores over the past 12 months ($246 million) and incremental revenues from the
impact of our ownership in Starbucks Japan ($105 million). Also contributing was a 3% increase
in comparable store sales ($61 million), the impact of the extra week in fiscal 2016 ($52 million)
and favourable foreign currency translation ($49 million). Licensed store revenues increased
$28 million, primarily due to increased product sales to and royalty revenues from licensees
($47 million), resulting from the opening of 622 net new licensed store openings over the past
12 months, partially offset by unfavourable foreign currency translation ($15 million) and a
decrease in licensed store revenues resulting from the impact of our ownership change in
Starbucks Japan ($6 million).
VI. REFERENCES

Bondarenko, P. (n.d.). Starbucks – American Company.Encyclopaedia Britannica.

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