Johnson & Wales University Trouble Brews at Starbucks Case Study Analysis Cover Page Title Full Name Course and Section Date Situation Analysis “Sy

Johnson & Wales University Trouble Brews at Starbucks Case Study Analysis Cover Page

Title

Full Name

Course and Section

Date

Situation Analysis

“Synopsis.” Briefly summarize the case in your own words. No more than 2 pages. (worth 10 points)

Environmental Analysis

SWOT Analysis in bullet format. Do not use paragraphs for this section. (worth 25 points)

Internal

Strengths

Weaknesses

External

Opportunities

Threats

Problem Statement

“WHY?” Keep it brief. No more than 20 words. Challenge yourself to be concise. This should be written as a statement, not a question. (worth 10 points)

Development of Alternatives

Your alternatives are derived from the opportunities outlined in your SWOT. Number each alternative—you should provide at least 3—and explain. (worth 25 points)

Evaluation of Alternatives & Recommendations

Evaluate the pros and cons of each alternative. Select the best choice based on the company’s strengths and opportunities. Use outside sources to back up your hypothesis. (worth 20 points)

Recommendation

End this section with an overall recommendation/conclusion. No more than 1 paragraph. (worth 10 points)

Other Pointers for Working on Cases

All cases should be double-spaced with 12-point font.

Cases should include a cover sheet, and sections should be labeled.

Bullet points can help the reader (your professor) to follow your points. Specifically, bullets should be utilized in the SWOT analysis.

Read the case at least 3 times. Yes, 3 times. If you only read it once, you will only be able to detect surface problems. For the exclusive use of T. Hare, 2020.
909A02
TROUBLE BREWS AT STARBUCKS1
Lauranne Buchanan and Carolyn J. Simmons wrote this case solely to provide material for class discussion. The authors do not
intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names
and other identifying information to protect confidentiality.
This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com.
Copyright © 2009, Richard Ivey School of Business Foundation
Version: (A) 2017-05-03
Starbucks was the darling of Wall Street, with a strong balance sheet and double-digit growth since going
public in 1992. By 2007, it had more than 15,000 stores around the world2 and projected that the number
would eventually grow to 40,000 stores, half of them outside the United States.3 But suddenly,
performance slipped so seriously that the board ousted CEO Jim Donald and brought back Howard Schultz
— Starbucks’ visionary leader and CEO from 1987 to 2000 and current chairman and chief global
strategist — to re-take the helm.
Despite the furor, the company was hardly in dire financial straits. In 2007, it had revenues of $9.4 billion,
double-digit earnings growth and 2500 new store openings.4 But its share price had fallen almost 50 per
cent as Wall Street became increasingly worried that the chain had run out of room for further U.S.
expansion. In November, the company reported its first-ever decline in customers’ visits to U.S. stores.5
Insiders and analysts alike questioned whether the brand had been irreparably damaged by a single-minded
focus on growth and short-term profitability at the expense of the brand. It was a fear that Howard Schultz
himself had written about as the “commoditization of the Starbucks experience.”6
THE BEGINNING7
The Starbucks Coffee, Tea, and Spice Company was founded in Seattle in 1971 by Jerry Baldwin, Gordon
Bowker and Zev Siegl, three guys with a passion for dark-roasted, European-style coffee. Coffee, they felt,
was so much more than the bland beverage offered by Folgers and Maxwell House; coffee had rich,
sensuous flavors if roasted and brewed correctly. Their vision was to educate consumers about fine coffees
1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives
presented in this case are not necessarily those of Starbucks or any of its employees.
2
Janet Adamy, “Schultz Takes Over To Try to Perk Up Starbucks,” Wall Street Journal, January 8, 2008, B1.
3
Janet Adamy, “Starbucks Sets Ambitious Goal of 40,000 Stores,” Wall Street Journal, October 6, 2006, B3.
4
Jonathan Birchall and Jenny Wiggins, “The Starbucks Romantic,” Financial Times, January 12, 2008, p. 7.
5
Ibid.
6
Howard Schultz, “The Commoditization of the Starbucks Experience,” Internal E-mail, February 14, 2007,
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html, accessed December 30, 2008.
7
Howard Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997.
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the way a sommelier educates diners about fine wines. To this end, Starbucks sold only dark-roast, wholebean coffee from places like Sumatra, Kenya, Ethiopia and Costa Rica — no ground or prepared coffee.
And it sold only manual coffee pots and equipment needed to grind and brew coffee correctly at home —
no electric coffeemakers that would mask the coffee’s flavor.
The Seattleites successfully developed a devoted, local customer base, but it took Howard Schultz, who
joined the company in 1982, to see the potential for bigger things. Schultz had grown up in the Bayview
Projects, federally subsidized housing in Canarsie, Brooklyn. His father had quit school to help support the
family, served in World War II and worked a series of blue-collar jobs. As Schultz recalls, his father
“never found himself, never had a plan for his life.”8 One of his most vivid childhood memories was when
his father, then a delivery truck driver, broke his foot and couldn’t work. Without health insurance or
worker’s compensation, the family had nothing to fall back on. This childhood event made an indelible
imprint on Schultz, and he became determined to make something of his life. He went to Northern
Michigan University on a football scholarship, where he majored in communications, taking courses in
public speaking, interpersonal communications and business. After a short stint in sales at Xerox, he joined
Hammarplast, a Swedish manufacturer of stylish kitchen equipment and housewares. By the age of 28, he
was promoted to vice-president and general manager.
While at Hammarplast, Schultz noticed that a Seattle retailer with only four stores was buying more of a
particular drip coffeemaker than the department store Macy’s. Curious, he went to Seattle, visited the store
— Starbucks — and was instantly hooked on the “romance” of fine coffee. The owners appreciated his
conversion to the real thing, but they initially rejected his offer to join their crusade, perhaps worrying that
his hard-hitting New York style was unsuited to laid-back West Coast culture and that his ideas for
expansion were incompatible with their mission of enlightenment. It took Schultz more than a year to
convince them, but he finally won the position of Starbucks marketing director.
Schultz’s Vision for Starbucks
Soon after joining Starbucks, Schultz visited Milan for a trade show. There, he saw coffee bars packed
with customers on every block. Baristas and customers were laughing and talking, enjoying the moment
and the espresso together. As Schultz later described it, “It was on that day that I discovered the ritual and
romance of coffee bars in Italy. I saw how popular they were, and how vibrant. Each one had its own
unique character, but there was one common thread: the camaraderie between the customers, who knew
each other well, and the barista, who was performing with flair . . . . ‘This is so powerful!’ I thought. ‘This
is the link.’ The connection to the people who love coffee did not have to take place only in their homes,
where they ground and brewed whole-bean coffee. What we had to do was unlock the romance and
mystery of coffee, firsthand, in coffee bars. The Italians understood the personal relationship that people
could have to coffee, its social aspect. I couldn’t believe that Starbucks was in the coffee business, yet was
overlooking so central an element of it.”9
But his bosses weren’t interested. Cash was tight. Besides, Starbucks was a retailer, not a restaurant or a
bar; serving espresso drinks would put it in the beverage business. When Schultz pressured Baldwin to
expand the Starbucks vision, Baldwin would argue, “Howard, listen to me. It’s just not the right thing to
do. If we focus too much on serving coffee, we’ll become just another restaurant or cafeteria. It may seem
reasonable, each step of the way, but in the end, we’ll lose our coffee roots.”10
8
Ibid., p. 13.
Ibid., pp. 51-52.
10
Ibid., p. 61.
9
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Creating His Own Story
Not willing to abandon his dream, Schultz departed Starbucks and opened Il Giornale, Italian for daily. His
plan was to re-create the Italian espresso bar experience. To his surprise, Starbucks was his first investor,
supplying $150,000. “It isn’t a business we want to go into ourselves,” Baldwin explained, “but we’ll
support you.”11 It was a start, but Schultz needed $1.7 million: $400,000 for the initial store, to demonstrate
the practical operation and consumer appeal of an Italian espresso bar, and $1.3 million for eight additional
espresso bars, to show that the idea would work on a larger scale. In the first year, Schultz spoke to 242
potential investors; 217 said “no.”12 Their arguments became all too familiar: “Coffee is a commodity.”
“Coffee consumption in the U.S. has been trending down since the mid-1960s.” “Coffee shops are
everywhere.” “Americans will never pay $1.50 for a cup of coffee.” Still, he persisted.
By 1987, Schultz had acquired the seed capital and opened three espresso bars. Then, in an unexpected
twist of fate, Starbucks’ owners decided to sell — six stores, the roasting plant and the name. Schultz had
to go for it. He raised four million dollars, acquired Starbucks, adopted its name and began to expand.
Fifteen new stores were opened in fiscal year 1988; 20 in 1989; 30 in 1990; 31 in 1991; and 53 in 1992; all
company-owned.13 Schultz explained, “We’re so fanatical about quality control that we keep coffee in our
hands every step of the way, from raw green beans to the steaming cup. We buy and roast all our own
coffee, and we sell it in company-owned stores.… Why? The answer can be found in the last cup of lousy
coffee you drank. Unlike shoes, or books, or soft drinks, coffee can be ruined at any point from its
production to consumption…. Coffee is a product so perishable that building a business on it is fraught
with peril. The minute we hand our coffee over to someone else, we’re extremely vulnerable to its quality
being compromised.”14
But Starbucks wasn’t just about the coffee. It was also about recreating the Italian coffee bar culture.
Schultz wanted Starbucks to become the “Third Place,” the place between home and work where people
gather, relax and interact with one another. To encourage customers to linger over a cup of coffee,
Starbucks paid a great deal of attention to the details of the store — everything from the layout, to the
furniture, to the music. Even more important were the baristas, whose ability to engage the customer was
the heart of the Starbucks experience. Understanding the difficulty of managing human capital, especially
when two thirds of workers were part-time, Schultz felt he had to make employees “partners” in his vision.
He had to infuse them with the Starbucks culture, reward them with a sense of personal security and give
them a reason to be involved in the success of the business.
To instill the requisite coffee knowledge in recruits, Starbucks developed a 24-hour training program
covering Coffee Knowledge (four hours), Brewing the Perfect Cup (four hours), Customer Service (four
hours) and basic retail skills. To provide personal security, Schultz fought with his board to offer health
insurance to all partners, even the part-timers. “Treat people like family, and they will be loyal and give
their all. Stand by people, and they will stand by you,” he argued. The math made sense; at the time, it cost
$1,500 a year to provide an employee with full benefits, compared with $3,000 to train a new hire. 15
And to increase involvement in the success of the business, he offered Bean Stocks — a pseudo stock
option plan for partners with at least six months at the store.16 As “stock holders,” store partners had an
incentive to participate in decision-making, to suggest cost-cutting measures to increase profitability and to
11
Ibid., p. 66.
Ibid., p. 73.
13
Ibid., p. 114.
14
Ibid., pp. 171-172.
15
Ibid., p. 127.
16
Ibid., p. 134.
12
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help maintain the integrity of the brand. If they felt that management was straying from the Starbucks
vision, they had the right and responsibility to call them on it. The result of these initiatives was a more
satisfied partner base. For baristas, turnover averaged 60 to 65 per cent, compared to 150 to 400 per cent in
the average retail or fast-food chain. For store managers, turnover was around 25 per cent compared to 50
per cent for other retailers.17
Starbucks Goes Public
With just over 100 stores in four states and Vancouver, British Columbia, Starbucks went public in 1992.
Initially priced at $17 a share, the stock jumped to $21 at the opening bell. By the end of the day, the initial
public offering (IPO) had raised $29 million for the company — $5 million more than expected — and
Starbucks’ market capitalization stood at $273 million.18 Being a public company took Starbucks into the
big leagues; it made millions for the believers who invested in the company, provided critical funds for
future expansion and helped attract talented new people.
But Wall Street can be a fickle master. As Schultz described it, “Alongside the exhilaration of being a
public company is the humbling realization, every quarter, every month, and every day, that you’re a
servant to the stock market.… Running a public company is an emotional roller coaster. In the beginning,
you accept the congratulations as if you really deserve them. Then, when the stock price falls, you feel you
have failed. When it bounces back, it leaves you dizzy. At some point, you have to divorce yourself from
the stock price and just focus on running the business.”19
EXPANDING THE BUSINESS MODEL
To satisfy Wall Street and stave off competitive threats, Starbucks made growth its mantra. Starbucks was
in a race to establish national dominance before other emerging specialty coffee bars and yet trying to fly
under the radar of the “big boys” — such as Procter & Gamble, who had purchased Millstone Coffee, the
largest whole-bean supplier to grocers. To grow and claim leadership in the category, Starbucks focused on
a strategy of new products, a stronger connection with customers as the Third Place and expanding store
locations in the United States and abroad.
Developing New Products
One of the first additions to the management team after the company went public was Howard Behar, who
had 25 years of retail experience in the furniture business and in resort development. While many people
inside Starbucks have had a lasting impact on its success, it was Behar who actually changed the way the
company thought. Time and again, he argued that it wasn’t just about the coffee or about the brand, it was
about the customer. Behar’s crusade was not always met with open minds, as Schultz recalled in his book,
Pour Your Heart into It:
Howard had been at Starbucks less than a month when he came to me one day and asked,
“Have you been reading the customer comment cards?”
“Sure,” I said, “I read them. I read them all.”
17
Ibid., p. 128.
Ibid., p. 185.
19
Ibid., pp. 188-189.
18
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“Well,” he replied, “how come you’re not responding?”
“Responding to what?”
“Look at all the people who want nonfat milk.”
“Well,” I explained, “I did a formal tasting a number of times this year of lattes and
cappuccinos made with nonfat milk and they just didn’t taste good.”
“To whom?” Howard was clearly growing impatient with my answers.
“To me…”
“Well, read the customer comment cards. Our customers want nonfat milk! We should
give it to them.”
I answered — and Howard never lets me forget it — “We will never offer nonfat milk. It’s
not who we are.”20
The nonfat milk question led to one of the biggest debates in Starbucks’ history. Coffee purists were
scandalized. Store managers were frustrated — how could they handle more than one type of milk without
slowing store operations? Still Behar persisted, eventually getting Schultz to authorize an in-store test. The
stores didn’t fall apart, customers got what they wanted and Starbucks stopped losing sales to more
accommodating competitors. Nonfat milk was in.
The Frappuccino story is similar. Starbucks management refused to consider a cold blended beverage on
principle — it wasn’t a true coffee drink. This time, it was a couple of store managers in southern
California who took the initiative after seeing their afternoon and evening customers defect to competitors
who offered cooler, more refreshing coffee beverages. They began experimenting with different recipes
and ingredients; they varied the blending time; they changed the ratio of ice to liquid. They tested their
concoction with customers, and again, customers approved. Corporate came around. Within a year of
rolling out Frappuccinos nationally, store sales of Frappuccinos were $52 million, seven per cent of total
annual revenues.21
The success of the Frappuccino inspired more new products, many developed at local stores, then refined
and disseminated nationally by corporate. Seasonal offerings, such as a strawberry and cream Frappuccino
in the summer and gingerbread latte at Christmas, were introduced. Food items, such as cookies and
pastries, began to make their way into the store. “Food is a big part of where we are going…” said Orin
Smith, a member of Starbucks’ senior management team. “It is not going to be a lot of any one thing. It
will be food that makes sense and complements the customers and their choice of beverages.”22 Starbucks
would later introduce cold sandwiches and salads for lunch as well as hot breakfast sandwiches.
As the company became more comfortable in expanding beyond its traditional roots, it developed products
with other companies — a bottled Frappuccino with Pepsi, a coffee-flavored ice cream with Dreyer’s and a
coffee liqueur with Jim Beam. The extensive distribution networks of these companies afforded Starbucks
access to supermarkets and restaurants with their broader customer base. But even in negotiations with
much larger and more experienced partners, Starbucks took care to protect its brand. The partnership with
Pepsi — a company 100 times the size of Starbucks at the time — was a fifty-fifty arrangement, in which
Pepsi ceded Starbucks a high degree of control over its brand equity and product formulas.23
20
Ibid., pp.166-167.
Ibid., pp. 208-209.
22
Sarah E. Lockyer, “Full Steam Ahead,” Nation’s Restaurant News, May 3, 2004, p. 4.
23
Howard Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997, p. 222.
21
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Location, Location, Location
At the same time, Starbucks was adding new stores at a rapid clip. Its sophisticated model for store
expansion was based on a matrix of regional demographic profiles and an analysis of how best to leverage
operational infrastructure. For each region, a large city was targeted to serve as a “hub,” where teams of
professionals could be located to serve as support for new stores. Markets were entered with the goal of
expanding out to 20 or more stores in the first two years. From the core, it branched out to nearby “spoke”
markets, including smaller cities and suburban locations with demographics similar to the typical customer
mix.
Starbucks didn’t advertise when entering a new market; it didn’t have the funds. Instead th…
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