STarbucks

Transformation & Renewal

ABSTRACTAn in-depth evaluation of Starbucks, the issues it had and how Howard Schultz led it back to success.

Andres Prieto, Daniel Zamora, Manpreet Matharu, Moazzam Khan, Rafael Gual

Marketing Management

23-6-2016

CONTENTSExecutive Summary......................................................................................................................................................2

BRIEF HISTORY.............................................................................................................................................................3

Starbucks Coffee in Canada.....................................................................................................................3

Who is the Siren?.....................................................................................................................................3

Case Synopsis...............................................................................................................................................................3

STARBUCKS IN ITS EARLY DAYS....................................................................................................................................4

KEY ISSUES...................................................................................................................................................................5

SWOT Analysis.............................................................................................................................................................7

Strengths.................................................................................................................................................7

Weaknesses.............................................................................................................................................7

Opportunities..........................................................................................................................................8

Threats.....................................................................................................................................................9

PORTER'S FIVE FORCES..............................................................................................................................................10

COMPETITIVE RIVALRY: MEDIUM..........................................................................................................10

THREAT OF NEW ENTRANTS: MEDIUM TO LOW...................................................................................10

BARGAINING POWER OF BUYERS: MEDIUM..........................................................................................11

BARGAINING POWER OF SUPPLIERS: MEDIUM TO HIGH......................................................................11

THREAT OF SUBSTITUTE: MEDIUM........................................................................................................12

REVITALIZING STARBUCKS.........................................................................................................................................13

WAY FORWARD (3 initiatives)....................................................................................................................................14

7 BIG MOVES..............................................................................................................................................................15

Steps taken in the retransformation of Starbucks.....................................................................................................16

GETTIN FIT FOR THE FUTURE.....................................................................................................................................19

RECOMMENDATIONS................................................................................................................................................22

1.   Continue with their actual plan:......................................................................................................22

2.      FOCUS ONLY ON GLOBAL PRESENCE:...........................................................................................23

3.      Don’t diversify the product lines and if they do, create new brand name in order to protect Starbucks brand name...........................................................................................................................23

4.     Create private spaces in stores where people can either work or study in order to add value to the customer.........................................................................................................................................24

OUR RECOMMENDATION......................................................................................................................24

Bibliography...............................................................................................................................................................26

Appendix....................................................................................................................................................................27

1

EXECUTIVE SUMMARY

“Success is not sustainable if it’s defined by how big you become. Large numbers that once captivated me – 40,000 stores! – are not what matter. The only number that matters is “One cup. One customer.

One partner. One experience at a time. We had to get back to what mattered the most.” (Onward, page 156)

The above quote appropriately describes the main issue with Starbucks and the belief that Howard Schultz had about Starbucks. In 2007 Howard Schultz realized that he had to regain the position of CEO to save Starbucks from its own impending doom. What he realized was that Starbucks was focusing on the strategy of growth just for the sake of growth and not for any big purpose or goal. This as a result turned things for the worst for Starbucks and it lost sight for what it stood for.

Howard Schultz could not stand by and see, the coffee house that he loved and so deeply believed in get side tracked and lose its essence. After he stepped back up to assume the role of the CEO he carefully crafted and devised a plan for the gradual and eventual cure of Starbucks, bringing it back to its roots, establishing its values and delivering on its Starbucks promise.

The case study showcases clearly the forward thinking of Howard Schultz , his ability to take hard decisions, his amazing belief in the brand Starbucks, his stubbornness to make things right and to ensure the future success of Starbucks.

An in-depth evaluation using two models, SWOT and POTER’s 5 forces, have also been conducted to clearly understand the internal and external forces that were at play. These two models along with the strategies and developments at Starbucks were all combined and evaluated in order to make predictions about Starbucks future strategies.

2

BRIEF HISTORYStarbucks history starts back in 1971 in Seattle, Washington where the first store opened. Jerry Baldwin, Zev Siegl and Gordon Bowker got an idea for a coffee shop from the famous Peet’s Coffee shop at that time. The store in its beginning was mainly focused on selling coffee beans and coffee making equipment rather than the broad menu they have in the present. Ten years after the opening, Howard Schultz was hired as Director of Retail Operations, he started thinking about expanding the market and exploring different ways of selling coffee such as beverages, but those ideas were not very appealing for the owners so he decided to go his own way, starting a chain of coffee bars called Il Giornale back in 1986.

Schultz’s idea that lead him to opened Il Giornale came from a trip he made back in 1983. Howard traveled to Italy and became fascinated with the whole coffee experience he was living. Italian coffee bars and the romance of the entire coffee experience around Italy gave him the big idea. Schultz wanted to bring the Italian coffee experience to the U.S. His main idea at that time was introducing a place for conversation with a sense of community, an alternative place between work and home where people could enjoy a cup of premium coffee. In August 1987, Howard Schultz managed to buy Starbucks from the original owners with all the revenues from his coffee chain Il Giornale.

STARBUCKS COFFEE IN CANADA

The first Starbucks store opened in March 1987 in Vancouver at the famous Seabus Skytrain Station. The store is remembered as the first international location of the coffee chain, and since then Starbucks has grown in more than 1,070 stores across Canada. In 1996, Toronto was chosen as the next step for the massive expansion with five simultaneous openings on the same day. Nowadays, the North American chain has a strong presence in all the Canadian territory, competing with local coffee chains.

WHO IS THE SIREN?

The history behind this important logo comes from 1981, when the company was giving its first steps. In an extensive search for a way to capture the seafaring history of coffee in the region and its seaport roots, there she was an iconic character coming from old marine books popular at that time. A 16th century Norse woodcut of a twin-tailed mermaid or commonly known as a Siren. The founders felt the mermaid transmitted a seductive mystery combined with a nautical theme which represented the brand very well. Over the last 40 years the iconic logo has had many changes but the company says she will always be there, remembering past days and remaining the sight of our heritage.

3

CASE SYNOPSISThe Starbucks case can be divided in two main topics. The first part of the case developed and explained different issues and failures that almost led the coffee giant to its downfall. Everything starts a morning in February 2007 where Howard Schultz was sitting alone in his kitchen table thinking about Starbucks, at this moment it was clear to him that the company he had lead with outstanding revenues for almost two decades was facing large scale threats from outside and inside the organization. Internal management issues, recession and organizational cultural problems were some of the main concerns of Schultz at that moment, so he decided to start taking the necessary actions the get back his company.

The second main topic discussed in this case focused on Schultz’s actions and behavior as a leader in order to face Starbucks problems. This part of the case will explain how Schultz stepped up and showcased his strong leadership skills, guiding Starbucks back to its roots, remembering the core idea of the business and enhancing the existent Starbucks experience. Back in 2007 Howard Schultz returned as the CEO of the company with the strong commitment of restoring Starbucks share value and transform the whole company from inside and outside. Schultz came up with a 7 step plan that appeared to cover every single problem that Starbucks was facing at the time from becoming the undisputed coffee authority, and to deliver a sustainable economic model, this plan seem to have great ideas for the future.

STARBUCKS IN ITS EARLY DAYSSince Starbucks became a public company in 1992 there was an increase in the growth and revenues of Starbucks. The rise in revenues was due to the rapid expansion of stores of Starbucks across major countries. There was a rapid increase in the number of stores in North America.

In 2000, Starbucks opened over 1000 stores and within next six years there were almost 2200 stores. With this rapid expansion of the stores, Starbucks revenues had rose to $7.8 billion in 2006. There was a 22% increase in revenues and 14% rise in net earnings within one year of expansion of stores.1 In early 2007, Starbucks was the largest speciality coffee retailer in the world and the market leader in the young sector.

Top management at Starbucks knew that the company was growing day by day and each week more than 40 million new and repeat customer visited Starbucks.

1 Appendix

4

KEY ISSUES By early 2007 Starbucks was the largest speciality coffee retailer in the world. Net earnings, revenue, market share etc. all showed a positive sign and it was impossible for anyone to say that a problem was brewing inside Starbucks. It was only when Howard Schultz visited one of Starbuck’s coffee retail outlet that he realized that things were going horribly wrong. The first thing he noticed was the smell of burnt cheese that engulfed the coffee house instead of the smell of fresh coffee, second on ordering coffee he was unable to see the barista who was serving him due to the big machines put in place and as a result of this there was no interaction between him and the barista. It was at that very moment that he realized that the Starbucks experience had disappeared, and that the place he was in was no longer the coffee house he had envisioned it to be.

He then decided to look deeper into this and noticed a plethora of problems. Examining the COMPs, which is a comparative evaluation of growth of the same retail outlet year over year, it showed that due to the aggressive expansion of Starbucks the retail stores started cannibalizing each other. The management fueled by the immense success of Starbucks did not notice the decline in growth rate of COMPs to the year prior. Another issue which arose due to the management’s plan of aggressive expansion was that the team in the supply chain department shifted their focus on catering to stocking the new stores rather than making the entire process more efficient and effective which as a result meant the cost of opening a new store to be more in terms of supplying goods and in some cases also leading to the embarrassment of being out of stock to serve.  Schultz, as he put it in his book “Onward”, said that the company was running a race but no longer knew what they were running for.

These internal management issues and their short-sighted goal of expansion lead to problems at Starbucks retail outlets as well.  The retail staff or partners as Howard Schultz addressed them, were not being trained properly. Baristas were prematurely being promoted to managers and experienced managers were shifted to new locations due to store openings. This resulted in having a toll on customer service and coupled with poor internal retail management due to lack of proper automation and equipment (such as laptops, machinery etc.) lead to the loss of Starbucks culture and experience.

Looking at the external success of Starbucks and an increasing demand for coffee other players entered the market to take a piece of the pie. Competition from international chains such as McDonalds, Dunkin Donuts and local coffee houses such as Caribou Coffee and Peet’s Coffee & Tea arose. These companies offered coffee at a rate much cheaper than that of Starbucks. Taking advantage of the problems facing Starbucks and the fall in purchasing power of customers due to the financial recession the market share started shifting in favour of the competition and Starbucks started experiencing lower and lower profit earnings. At one point, even though Starbucks took great care in sourcing and brewing their coffee, the consumers had rated McDonalds Coffee better than that of Starbucks.

5

News of Starbuck’s downfall started emerging on the digital forums, which was a new and rapidly growing platform. Starbucks was not able to respond to those reports or messages simply because Starbucks had no presence on the digital platform other than a very basic website. This website contained product and financial information about Starbucks and nothing else. It was a one way communication platform which did not provide the users the option to talk to the company.

These were major issues being faced by Starbucks, and examining this Howard Schultz saw the inevitable demise of Starbucks if things continued the way it did. Being old fashioned he decided to voice his concern by writing a memo to the current CEO.  

SWOT ANALYSIS

STRENGTHS Strong brand name

- Strong brand recognition and a loyal customer base was one of the reasons of their ongoing success which was helping the company to grow at a rapid rate.

Product - High standards and ethical sourcing (fair trade) of the coffee allowed the company

to deliver a high quality final product.- A range of different products and beverage flavors to fulfill different tastes.- Their premium price was justified by the quality and lifestyle created around the

brand. Organization

- The company granted benefits to their employees that kept them motivated and making them feel valued in comparison with other companies.

- Schultz leadership and entrepreneurial skills were part of the glue that kept the company together.

- The company’s core values were an essential part of their own culture and work ethics.

- They kept a healthy financial situation even in crisis moments like the 2008 recession.

Location- The company would select locations for their branches that where in sync to their

high income target market. - Also their financial situation was favorable enough so as to allow the Company to

open new branches very fast. Service

- They had successfully developed and applied for a number of years the “Starbucks Experience” a concept that was focused on the transmittal of the Company’s core

6

values to their customer service where the main goal was to create a personalized connection that would generate loyalty to the brand.

WEAKNESSES• High prices

- The broader target market of coffee drinkers shrinks to only those who can afford the premium pricing.

• At that moment Starbucks lacked presence in retail stores (coffee, ready to drink beverages etc.).

• Aggressive expansion

- Starbucks strategy required to promote their “partners” faster which resulted in untrained staff at different levels, baristas where being promoted as managers to soon and the new baristas lacked proper training compromising the customer service and the internal culture as they would not share the core values

• No presence in social media

- They only had an informational website this only allowed a one way communication with customers affecting them as they were not fast enough to respond to any rumors or criticism.

• Little advertising

- The firm used to set aside a small budget for marketing reducing their presence in mass media.

• Strong dependence on suppliers

- Their own standards of sourcing Fair Trade coffee and other products reduced their options of suppliers putting in risk their stock of materials.

OPPORTUNITIES• Global expansion was pointing out to growing economies in Asia as the next step

• Introduction of new products and business lines

- The increase of a health conscious society would enable the Company to introduce new beverages like smoothies with natural fruits and a range of herbal Teas

• Technological innovation

7

- Research and development to improve the process of the products like machinery of coffee extractions and also the development of new products like the Starbucks instant coffee VIA

• Coffee market not saturated

- Third wave coffee culture was a trend in line of the Starbucks core values that focused on the sourcing and processing of the products

• Huge amount of data

- Loyalty programs would increase the information about customers behaviour and preferences that would improve the overall quality of the service

THREATS• Increasing competition

- Coffee consumption started as a huge trend leading to aggressive competition offering cheaper prices on coffee beverages from big companies like MacDonald’s and Dunking Donuts.

- Small gourmet coffee shops

• Recession

- The economic landscape was affecting the premium prices of Starbucks as the consumer was leaping over to cheaper options

- The Starbucks stock value was decreasing as a result of the economic issue.

8

PORTER'S FIVE FORCES

COMPETITIVE RIVALRY: MEDIUM

According to the market situation presented in the case, we think that the competition for Starbucks is medium because even though the number of competitors is high, Dunkin´ Donuts, McDonald's, Caribou Coffee and Peet's Coffee & tea, the consumption of coffee is not only dependent on price but also on product differentiation, value addition and customer loyalty.

With this analysis we are able to conclude that the competition did not have enough power to offer the same services as Starbucks did at that time. So, even though there were competitors in the coffee market, the customers were more likely to go to Starbucks.

THREAT OF NEW ENTRANTS: MEDIUM TO LOW

When we were doing the analysis for the threat of new entry, we analyze the market according to the economy at that time and how fast it was growing and from this we suggest that the threat was HIGH, however after the presentation of the case study in class, and with help of the students we realized that the threat at that moment was MEDIUM TO LOW.

9

The reason why we thought that the threat was HIGH, was because the coffee consumption was increasing at a high rate and the sales in US and Canada were increasing pretty fast. For us, that meant that the economic situation and the coffee culture was developed so for any new competitor this environment would be ideal to start a coffee business.

In Class Participation and TEACHER thoughts:

But, going deeper into the situation of the 2008 economic recession this threat was not very high. Any person that wanted to start a business and needed help from a bank was not going to receive any credit to start a business. Banks at that time were trying to collect as much money from credits as possible so the policies of the banks were to cut expenses and credits. Also, for the consumers this had a huge impact. Consumers were not going to be as interested as before in buying an expensive cup of coffee with a bad economic situation. So in conclusion neither investors nor individuals were going to try to open a new Coffee business with a risky economy.

BARGAINING POWER OF BUYERS: MEDIUM

In this case, we think that the power of buyers is Medium because even though the consumers have the ability to substitute some products for others in terms of price, the quality of those replaced products were not the same.

In this case, the authors talk about McDonald's, and how they started competing with Starbucks by lowering the price of the coffee. Although McDonald's prices were lower, the quality of the products and the customer service that the consumers received in Starbucks was better.

In conclusion, the consumers could replace the coffee in terms of price but not in terms of quality and that is why the power is medium.

In Class Participation:Students in class mentioned that one of the big factors that cause the bargaining power ofBuyers to be medium is because Starbucks customers are loyal to the brand.

BARGAINING POWER OF SUPPLIERS: MEDIUM TO HIGH

Because of the high quality of coffee that Starbucks needs, there are just few suppliers in the market that can supply to the company, and those suppliers must have the capacity in their farms to produce that quantity of coffee. Saying that, suppliers have a very big power of bargaining in front of Starbucks.

However, Starbucks orders massive quantities of coffee which counters that bargaining power. Suppliers cannot afford to lose a company such as Starbucks. This view of the market makes the power medium to high.

10

In Class Participation:Some of the points mentioned in class were that...

1. Brand speaks for itself , that means that any supplier would be happy to be working with them

2. Suppliers have strong influence in terms of the Fairtrade. I.e., that Starbucks will just work with Fairtrade policy companies (farms)

THREAT OF SUBSTITUTE: MEDIUM

Nowadays, the consumers are able to prepare coffee easily in their homes with help of coffee machines. In retailers, a lot of brands are selling different kind of coffees (coffee pods, gourmet coffee, etc.) this means that the product itself could be replaced very easy. However, Starbucks business is not just to sell coffee. Starbucks business is to sell the best quality coffee, grown and roasted according to the fair-trade policies and with the best customer service possible, making Starbucks a Coffee experience place.

Having this in mind, consumers cannot find this added value of the brand in their home. Maybe they can substitute some products but they will not be able to substitute the brand experience itself. (Plus some products are really difficult to prepare).In conclusion for us, that's why the threat is medium.

In Class Participation:Some students help us with some thoughts, for example:

1. The threat is High because there are a lot of coffee pods sold by retailers2. Coffee lifestyle. I.e., that some people will buy a coffee in Starbucks just to be seen as a

high income individual

11

REVITALIZING STARBUCKSHoward Schultz after sending his memo to the CEO and waiting for around 6 months noticed that changes were not being implemented to bring back the culture that Starbucks stood for. It was then that he decided to take things into his own hands. It was never his intention to come back as CEO but he couldn't sit back on the sidelines and see the corporation that he loved and adored crumble. He had to strategize a plan of action. He couldn’t just announce that he would be taking over the position of CEO, he needed to think of all the possible outcomes of him coming back to being the CEO and with that a properly laid out action plan to streamline operations and get Starbucks back to what it promised to be.

As a first step he partnered with a consulting agency who helped businesses like Starbucks plan strategies to build solutions to the problems at hand. Together they discussed all the problems at hand, the COMPs, finances etc. During this time Howard Schultz took a trip to Hawaii with his family. It was supposed to be a vacation but not for Howard Schultz. He was busy co-ordinating with his team of trusted executives back at Starbucks and the consulting agency, constantly working on a plan of action. During his time at Hawaii he spent a day with Michael Dell. Michael had gone through the transition of stepping down from the CEO position and then stepping back up again, something that Howard Schultz was looking for advice on.  He shared all the challenges being faced by Starbucks, to this Michael Bell said that three things needed to be done

1. Boosting the moral of the company2. Managing the expectations of wall street3. Navigating the issues of economy and declining consumer confidence

For these three challenges to be addressed the action plan has to revolve around a few critical points. As a first step the Starbucks experience needed to be put back into place. The employees needed to, once again, believe in the organization's goals and what it stood for. This in turn needed to be transferred to the customers as well to regain their confidence. Starbucks had to invest in bringing something new to the customers. They had to innovate and reinvent but keep true to the Starbucks roots.

Second step is to fix internal management issues. Issues dealing with poor supply chain management, to poor long term goals being fixed and most importantly their loss in understanding the true Starbucks experience. All this meant that Howard Schultz would have to make the difficult decision of laying people off and downsizing so as to make operations more transparent within Starbucks.

Lastly and most importantly was to keep the Starbucks culture intact, which meant, no matter what health care and stock benefits would be given to the employees. Starbucks would also continue to source coffee ethically and be actively involved in community service.  

12

13

Stemming out of these points Howard Schultz conceived the three strategic initiatives. 1. To improve the current state of Starbucks in US2. Reignite emotional attachment with the brand3. Make long term changes to the business foundation

It was these three pillars that laid out the foundations for the seven big moves which would provide the roadmap to Starbucks success.

WAY FORWARD (3 INITIATIVES)

When Schultz became CEO of Starbucks he started taking some actions according to the plan and analysis he had conceived in Hawaii.

The first initiative was to “improve the current state of Starbucks, retail business in the United States”2. For Starbucks, the U.S market provided the biggest revenue. In 2007, 70 % of the revenue was from U.S market.

COMPs were showing that sales in some stores were declining due to the cannibalization of new stores with old stores. To address this issue, Schultz decided he would have to close down stores that were not profitable or stores that were declining. He understood that what Starbucks needed was to focus on customer service and quality rather than rapid global expansion.

The second initiative was to “reignite emotional attachment with the Starbucks brand”3. According to the case study, this initiative was more abstract because it included bringing about product innovations and the improvement of the Starbucks experience. The reason why Schultz, decided to work on the experience was because at that moment the competition was giving price added value to the customers, which means that Dunkin Donuts and McDonald's were giving coffee for free to their customers in order to compete against Starbucks. Schultz knew that he couldn´t compete in terms of product price, because Starbucks product is very high quality and could not be seen as cheap coffee.

In order to improve this experience to compete in the market he created personal relationships with baristas, i.e. that the customers were going to be called by their name when the order is ready. Along with this renewal, the initiative included to have seasonal offers, for example in summer Starbucks would have cold coffee. Other important fact within this initiative was to eliminate those products that affect the coffee smell, having in mind that this smell plays an important role in the Starbucks experience.

The third initiative was to “make long-term changes to the foundation of the business”4. For this initiative what Schultz planned to do was to review Starbucks leadership team and the

2 (Citation, page 10 , case study book)3 (Citation, page 10 , case study book)4 (Citation, page 10 , case study book)

14

first step was to eliminate the COO in order to have clear vision of the operations within the company. The next step was to emphasize the transparency among top management. The last step, he would have to ask the top management team to always question the core of the business in order to always be in the same track in terms of new ideas for the business.

7 BIG MOVES

7 big moves are the overall plan of Starbucks for the transformation of company. These are:1. Be the undisputed coffee authority:

The most important thing for Schultz is to be the undisputed coffee authority. To achieve this, there were only two ways i.e. passionate partners and customer-responsive innovations.

2. Engage and inspire partners: The partners of the company i.e. Baristas are the most important aspect of transformation. Starbucks planned to focus more on the training, career development and opportunities of partners.

3. Ignite the emotional attachment with customers: Starbucks put the focus of partners towards “Starbucks Experience”. This experience can be achieved only by “addressing their needs” and “providing value in a manner congruent with the brand” along with royalty operational excellence.

4. Ethical sourcing leader: Starbucks wants to link its profits with social and environmental responsibility. To involve themselves in fair trade the company did partnership with non-profit conservation International since 1998.

5. Expand its global presence: Through its worldwide presence, Starbucks want localisation of the stores across the world. To achieve this, they are focusing on connectivity of their stores with the culture and community of local people. They are providing in store localised facilities via. Art, music and décor etc.

6. Creating innovative growth platforms: To inculcate innovative growth among the stores, Starbucks is focusing on expanding its area of operation through high quality and complementary offers like tea, cold beverages etc.

7. A sustainable economic model: For the sustainable economic model they want to reorganize their operations in terms of cost, quality and speed. This can be possible through closure of stores which are not profitable.

15

STEPS TAKEN IN THE RETRANSFORMATION OF STARBUCKS After returning from Hawaii and constructing a proper plan of action Howard Schultz invited the top executives over to his place for an important announcement. They were all told about this meeting in confidence and were not informed of its agenda. All the invitees, minus one, had assembled at his place patiently waiting for what was to come their way. It was there that Howard Schultz announced his return to the position of CEO. As far as for Jim the current CEO, Howard Schultz sat down with him before meeting with the executives to inform him of the tough decision.

The first plan of action of Howard Schultz as the new CEO was to organize a conference so as to boost morale and inform every one of the changes that were about to come. He invited 3 team members to present consumer responsive strategic innovations.

The first innovation was the introduction of Mastrena espresso machine. This machine’s main purpose was to return the romance and theater of coffee making and secondly to increase interaction between the barista and the customer as this machine sat lower compared to the existing one. Second was to improve the quality, standard and consistency of the brewing system to French pressed. For this they went into a partnership with a company that would provide them with the Clover brewing system. Lastly as their coffee taste was labeled as “burnt” instead of “bold” and rated lower than coffee served at McDonalds, they invested in researching for a better brewing method code named “consistent brew”. After conducting various taste tests it was the 19th consistent brew that was selected and named after the first Starbucks coffee place “Pike place Roast Coffee”. Lastly Howard Schultz also announced his interest and investment into developing the Starbucks first instant coffee (which previously was put aside by the executives.) The instant coffee was introduced in 2009 under the name “Starbucks VIA” and had earned $100 million in revenues in the first 10 months of its introduction.

As a second step Howard Schultz needed to bring back the Starbucks experience. To do this he needed to move away from the previously formulated goal of rapid expansion and retrain the partners. There was only one efficient and effective way of doing this. That was to shut down 7,000 Starbucks stores, all at once, for retraining. On Feb 26, 2008 at 5PM all of Starbucks retail outlets read one sign

“We’re taking time to perfect our art of espresso.Great espresso requires practice. That’s why we’re dedicating ourselves to honing our craft.”

This was immediately picked up by the press and whether or not it was a PR or publicity stunt is another topic to debate over. DVDs were sent to each and every Starbucks retail outlet which showcased the art of making the perfect cup of coffee, the honey like flow that espresso needed to have and other such Starbucks experience that were needed to revitalize the outlet.

16

Along with retraining the cannibalization effect of Starbucks had to be bought to a halt. For this the tough decision of closing down stores and laying partners off had to be taken. 340 store openings for that year were halted and 600 stores were set out for closure which meant the elimination of 1,100 non-store positions and 550 in-store positions.

Immediately after this he put a stop to the financial evaluation of stores i.e. COMPs. The stakeholders were not happy with this decision as they no longer had data to evaluate the performance of the retail stores. Schultz justified this decision by saying that the COMPs was not an accurate source of measurement as it did not include Starbucks being sold in malls etc. The explanation he gave was not necessarily the one he believed in. His actual reason for eliminating COMPs was that it only focused on sales and due to this customer service was suffering, also managers were using other means such as selling teddy bears in store to get the sales numbers up.

The second controversial decision he made was to stop the serving of food at Starbucks, which was a major profit making unit. He did this so as to stop the smell of burnt cheese throughout the retail store and replace it with the smell of fresh coffee, which is the way it was supposed to be. Previously Starbucks had tried various methods to eliminate or reduce the smell of cheese all the way from installing vents and fans to instructing baristas to clean the microwaves often to investing in researching recipes that would reduce the smell but none of this worked.

On October 8th of 2008 Howard Schultz organized a 3 day leadership conference for the partners, in order to motivate them and immerse them in the “art of coffee” In the conference they had various games and activities all revolving around coffee and how coffee made them feel. As part of the activity 10,000 partners had come together to give something back to the community. An ideology that Starbucks firmly believed in. As the conference was held in New Orleans, a city which was still recovering from the devastation caused by “Hurricane Katrina” the partners came together to help rebuild the city as a demonstration of its mission and values which was considered a historical event for Starbucks.

During this conference new technologies were introduced so as to streamline store operations and make work more effective and efficient. Laptops were given for stores new point of sale systems were put in place and web based labour scheduling tools were established. One of the main reasons for this automation was due to the events that took place during August 2008 where the Starbucks supply chain had failed to deliver goods and the retailers were operating without beverages. The operations were so out of place that they were able to make only 35% of their delivers and it was this automation coupled with the closure of stores, retraining of staff and making operations transparent that finally helped increase the items delivered to 90% by 2011.  

During 2008 Howard Schultz in his personal life and otherwise noticed that people around him, including his daughters, were getting increasing active in the digital space. Schultz being an old fashioned man who liked to ink his thoughts found it a bit difficult to cope up

17

with this new space. He noticed many consumers were trying to interact with Starbucks via this platform, in a good way or bad was a different issue, but Starbucks had no way of responding. Realizing that the future was in the digital space he hired a couple of experts to launch and monitor the various social media platforms.

Towards the end of 2008 in December Starbucks had its biennial analyst conference. The sole purpose of this conference was for Howard Schultz to show the results of the improvements he claimed to bring about at the time he regained the position of CEO. This conference made Howard Schultz incredibly nervous but once he stood there in front of thousands of stakeholders he knew what to say. He was going to be honest.

He started off by stating the obvious which was that Starbucks was still not in a favorable financial position and that operations were still bad but changes were beginning to make an impact.  Costs of operations were reducing due to the closure of store and automation. New revenue opportunities presented itself at home and in single serve coffee markets. Towards the end of his speech he knew that the people in the crowd were with him due to the applause he received.

18

GETTIN FIT FOR THE FUTURESince Schultz was elected again as CEO of Starbucks, he knew that the company should think about their future and how to be a profitable company without losing their core values. At the beginning, Schultz recognized that Starbucks lacked digital platforms to reply and contact all the customers’ inquiries, doubts, or complains. In 2008, Starbucks had just a primitive website and non-social media presence.

During the trip were Schultz met with Dell in Hawaii, Dell showed him his new website: IdeaStorm.com, basically what this website does is to allow the customers to be part of the company by giving them the power to propose new ideas for them. Having this in mind, Schultz wanted to do the same for Starbucks, so he started renewing the website and also he included a section called MyStarbucksidea. With this new change, the company was going to be able to have a closer relation with their customers and also let them be part of the company.

By February 2009, Starbucks had incorporated 25 of the most popular ideas given by customer in 2008. By 2010, Starbucks incorporated 100 ideas and by 2013 MyStarbucksidea generated more than 150,000 ideas and out of those, Starbucks incorporated 277. Analyzing this success, we can see how important it is for the companies to listen to their customers, before 2008 the communication between customers and Starbucks was unilateral, and after 2008 became bilateral. This new relation between both parties became an essential part of the new Starbucks experience.

Part of the Future of Starbucks was also to include something called Starbucks Rewards. This initiative started through MyStarbucksidea. As soon as Starbucks executives realized that customers were looking for value in the form of loyalty rewards, they launched the project.

The project consists of free beverages, cup refills and custom extras for the coffee such as a variety of flavored syrups and soy milk. The target customer for this program was people that did not come as often to Starbucks so the idea with this incentive was to make them come more often to stores.

Other important factors in this renewal was to start using Social media as a voice of the company. One of the main reasons to start using this platforms was because Starbucks was receiving critics and they were not able to reply to them. This was a big issue at that time because if Starbucks failed to communicate their story, social media and bloggers were going to communicate a bad one.

There was one situation where London´s sun published a story about Starbucks wasting drinking water. The social media made it easy for the transmission of the message through the Internet and it became a bad viral message. This affected customer confidence in the

19

brand generating a decrease in sales. This was the moment when Schultz start working on the social media presence.

In mid-2008, Chris Bruzzo and his team opened the official Starbucks Facebook and Twitter accounts. The first phase of the Facebook account was to penetrate the market and to reach a large quantity of fans. Within months Starbucks became the first company to reach 1 million Facebook fans and by 2010, that number climbed to 27 million.

Along with Facebook and Twitter, Starbucks opened Instagram, Pinterest and Google + accounts and by 2012, Starbucks was the top company on Foursquare.

INTERNATIONAL EXPANSION

Starbucks opened its first store outside North America back in 1996. This important event happened in Tokyo, Japan. After this, 12 years later Starbucks has expanded its presence in over 48 countries with more than 5,113 stores. The international market represents 20% of Starbucks total revenue and still growing. Beside the transformation process Starbucks was facing at the moment, Schultz was also focused on keeping up with international expansion strategies with a different approach directed to discipline and customer understanding. Starbucks did not want to be seen as the global brand that is just focused on numbers and stores. As a new expansion approach they wanted to get involved deeply in the culture and the understanding of the different customer needs in those foreign markets. China and India at that moment were the regions that promised the largest opportunities.

CHINAThe first Chinese Starbucks store opened in Beijing in 1999, and over the next ten years the Chinese market have had a significant growth with more than 365 coffee stores around China. The main strategy used by Starbucks in order to conquer the Chinese market can be described as “holistic” in the sense that Chinese market have to be treated with highly disciplined and extreme respect with a strong attachment to Chinese roots, in order to meet customer needs. Starbucks believed that the best way to approach such a big market is to consider a way to give back.

At this point it is important to highlight the social connection between Starbucks and China. The company at the time they were entering the market, they started working in the Yunnan Province with projects such as a Starbucks Farmer Support Center among others. This kind of projects were focused on helping local farmers to produce Arabic coffee among other incentives to improve labor conditions. In conclusion, Starbucks success can be credited to store partners. They were responsible for creating a unique experience aligned with the company values. The board of directors allowed partners to translate the company values in something meaningful for Chinese customers. At this point, the experience between customers and baristas become something extremely important for the company, believing that this relationship will enhance the Starbucks experience for Chinese customers.

INDIA

20

India being recognized as the world's fifth-largest coffee exporter in 2011 was a fact that Starbucks consider before starting operation in this country. The first coffee shop opened in Mumbai in 2012 facing a culture that was not used to coffee. Tea was the local beverage but the coffee culture was increasing at that time. In early 2012, Starbucks announced an alliance with Indian’s Tata Group as a strategy to penetrate the market. Tata was offering a complete list of opportunities in order to build a strong brand inside the country. A 50-50 joint venture with Tata Global Beverage make things possible, and in October 19, 2012 the first Starbucks coffee shop was operating without any problems. The first Starbucks store had in its menu different kind of local beverages and food. Indian Espresso Roast, tandoori paneer rolls and croissants made with cardamom were part of and an important plan to enhance the customer experience and boost the brand’s name in India.

21

RECOMMENDATIONS

1.   CONTINUE WITH THEIR ACTUAL PLAN:At present, Starbucks is focusing on the global presence through the expansion of their stores across China and India. They have already entered both the markets but they are struggling to settle in these markets. The market situation of China is far better than India. In China, there are 365 stores. The “holistic” approach of Starbucks to provide localisation among stores. On the other hand, in India, instead of tea being the most popular beverage Starbucks is making its own presence in market. They are providing the local food among their menu.

We selected this as our first recommendation because apart from the global expansion Starbucks still need to develop themselves in these countries. They have to focus on the digital innovation and try to improve the services in these countries. In the big moves, the company wants to become ethical sourcing leader, so to achieve this also they should be focusing on the corporate social responsibility.

PROS:• It will help to increase the brand recognition across the world.• There will be cut in the cost and it will be eco- friendly by focusing on the CSR• Digital development with the help of social media will result to more presence of

brand

CONS:The problem with the expansion in other countries is that every country has

different culture and taste. So, Starbucks might face these problems while expanding. Even they have to incorporate the country culture of taste and habits along with their experience.

22

2.      FOCUS ONLY ON GLOBAL PRESENCE:The second alternative suggested by our group is that they should go for the expansion across the world where they don’t have a single store of Starbucks. As of Starbucks international presence, there are 5500 coffeehouses in 50 countries5. So, there is a need of increase the presence of Starbucks. The case study shows that during the crisis and the transformation in 2008 led to closure of many stores across different countries but as now they have fully recovered, they should go for expansion across world.

We selected this as a recommendation based upon the success and the values that Starbucks want to provide its customers. Also, the demand for the coffee is increasing all over the world. People are adapting to the café culture so there is a need of Starbucks available to them.

PROS: With the expansion across world will help Starbucks to reach new and different

markets. It will help to expand the brand recognition of Starbucks

CONS: During expansion in other countries there are chances that Starbucks will lose

control over the operations of their stores in those countries. Lower margins over the transition Economic and Political regulations will have an impact over the entry of the

Starbucks. The rule and regulations will deter the operations of Starbucks.

3.      DON’T DIVERSIFY THE PRODUCT LINES AND IF THEY DO, CREATE NEW BRAND NAME IN ORDER TO PROTECT STARBUCKS BRAND NAMEIn this, we suggest that Starbucks should only focus on the coffee business. They should not go for expanding their business in different product lines. Once Starbucks started going the sandwiches along with coffee, but ultimately they lost the core value of the Starbucks. Howard Schultz felt that Starbucks should focus only on the core essence of the store and the purpose for which they were started.  The expansion of product line viz. Starbucks evening will dilute the actual brand image of the Starbucks.

After the study of case and realising the Starbucks actual values and the motive/ message that Howard Schultz want to convey we felt that Starbucks should stay only with the present products. In case they want to expand their business in different product lines, they should do under different brand name. The reason behind this is that whenever we hear of Starbucks the first thing that came in our mind is coffee. So, with different products like Starbucks evenings, non-alcoholic beer will result to dilution of brand image.

PROS:5 (stores, n.d.)

23

Starbucks having product lines with different brand name will have no effect on the actual brand image of Starbucks.

The thinking of Howard Schultz is to keep the core values of the business intact with the stores. So, if they have different product line with different brand then they could focus more on their core business that is coffee.

With different brand name they can freely enter any market which will not affect their original brand

CONS: They might lose their potential customers by not having the actual experience of

Starbucks. The connection of Starbucks with the people will be lost. The creation of different brand name would cause a negative perception of

Starbucks in the mind of people.

4.     CREATE PRIVATE SPACES IN STORES WHERE PEOPLE CAN EITHER WORK OR STUDY IN ORDER TO ADD VALUE TO THE CUSTOMERThe motive behind is the same motive that Schultz have when he started Starbucks that is to create an environment where people can feel localisation, and ultimate “Starbucks experience” by having aim of one cup, one person and one neighbourhood at a time. As we discussed this suggestion in the class, with the help of students, it came to notice that there are some places where Starbucks is providing private rooms to students and businessman so that they can held their personal meeting without any objection and as long as they want along with the Starbucks taste.

PROS: The private rooms will give customers their own space which will ultimately attract

more customers and it will create value. There will be increase in profits with the rose in the number of customers. Starbucks will enhance their Starbucks experience.

CONS: The already established stores don’t have space to expand for the study rooms Renovation of stores will incur huge investments Consumers will find out difficult to relate Starbucks spaces with professional

business environment

OUR RECOMMENDATION

After discussing all the pros and cons of the solutions provided by us and a deep discussion with the class, we felt that Starbucks should go for setting up private rooms for the students and business people. Since start, Starbucks had keep the aim in their mind that is to provide “Starbucks Experience” to their customers. They want pure localisation and

24

healthy neighbourhood in their stores. Thus, to encourage this more the only way is to have private rooms for groups.

Also, the Starbucks have started “Starbucks evening” as to invite more variety of customers and the name has evenings for two reasons - the first is that they are providing wine as their product and secondly it is for people to stay long till the evening in the stores.

There were many other suggestions provided by the class which are as:1. Express Line that is through Apps, pay from phone etc.2. They should work more on how to retain more customers3. Expand Starbucks product line4. Make the casual drinkers to their regular drinkers5. Start providing coffee pods6. There should be facility if any customer visit their store at any place and they buy a

mug for souvenir then they should have a free coffee

25

Bibliography

closed, s. (n.d.). Retrieved from https://www.youtube.com/watch?v=fcLLc3Ic5kA

closure, s. (n.d.). Retrieved from https://www.youtube.com/watch?v=OGjVpf8bdcg

culture, c. (n.d.). Retrieved from https://www.youtube.com/watch?v=-oXDiZ42zvs

dick, m. (n.d.). Retrieved from https://en.wikipedia.org/wiki/Moby-Dick

Heritage. (n.d.). Retrieved from http://www.starbucks.ca/about-us/our-heritage

history of starbucks. (n.d.). Retrieved from http://www.coffee.org/History-of-Starbucks

logo, S. (2015, november 11). Retrieved from http://www.collective-evolution.com/2015/11/11/starbucks-cup-controversy-the-hidden-meaning-of-the-starbucks-logo/

meaning of starbucks. (n.d.). Retrieved from https://answers.yahoo.com/question/index?qid=20070503144731AAcHHVe

Siren. (2011, January 5). Retrieved from http://www.starbucks.com/blog/so-who-is-the-siren

spiritual crisis. (n.d.). Retrieved from https://www.youtube.com/watch?v=NpYcr-LNIV4

starbucks. (n.d.). Retrieved from https://www.youtube.com/watch?v=ftKnSdaxez0

starbucks, s. o. (2011, january 5). Retrieved from https://www.quora.com/What-is-the-meaning-and-story-behind-the-Starbucks-logo

26

Appendix

27