What were the main reasons for Starbucks success?

Mistakes which other companies did - and Starbucks not:
-companies didn?t rise enough money to finance growth
-companies franchised too early and too widely
-companies lost control of quality
-companies didn?t invest in systems and processes
-companies hired inexperienced people or the wrong
people
-companies were so eager to grow that they picked the
wrong real estate locations.
-companies didn?t have the discipline to walk away from a
site if they couldn?t make the economics work.
-All of them lost money, they didn?t use their years of
losses to build a strong foundation for growth.
You can?t create a world-class enterprise without investing it.

Leseprobe

The Starbucks

Corporation:

past, present and future

Research Paper

Ambai-AMBAI University Online

American Management and Business

Administration Institute - AMBAI

MBA Master of Business Administration Study

Name: Thomas Strutzmann

Date: April 2005

Table of contents

1. Background ... 3

2. Mail order ... 7

3. Growing strategy ... 7

4. "Flavorlock"- bags ... 8

5. People ... 8

6. Going public ... 9

7. Growing in U.S. and International ... 9

8. Connecting with the customer... 12

9. Key Development... 13

10. Suppliers as Partners ... 14

11. Situational Analysis... 15

14. Coffee Tree - Starbucks Company Tree... 18

15. Financial Highlights ... 19

16. Stores opened at year end 2004:... 20

17. The Coffee Industry ... 22

19. The firm's value chain: ... 27

20. Starbuck Haters ... 29

21. Summary ... 32

22. Future ... 36

23. Annex: ... 37

24. Picture Index ... 44

25. Literature List ... 45

Background

Page

3/45

1. Background

Starbucks is the child of two parents:

1.) original Starbucks founded in 1971

2.) Vision and values which Howard Schultz brought to the company

Fig. 1: Howard Schultz / Source: Seattle Weekly

Starbucks Cooperation is a Seattle, Washington based coffee company.

The spiritual grandfather of Starbucks is Alfred Peet a Dutchman who introduced

America to dark roasted coffees. 1966 he opened a small store Peet's Coffee and

Tea on Vine Street in Berkley. 1970 he opened a coffee store in Seattle.

Starbucks was opened in April1971 from three Seattle entrepreneurs Jerry Baldwin

(English Teacher), Zev Siegel (history teacher) and Gordon Bowker (writer).

Starbucks doors were opened with thirty different varieties of coffee beans they had

coffee beans from all over the world, like Sumatra, Kenya, Ethiopia, Costa Rica, a.s.o.

The three entrepreneurs were no typical businessmen they loved coffee and tea and

wanted Seattle to have access to the best. None of them aspired to build a business

empire. Their prime product was the selling of whole bean coffee in one Seattle store

Pike Place Market.

All three learned from master Alfred Peet in Berkley about coffee roasting. The roast

was what differentiated Starbucks from others they called it "The Full City Roast"

(now called "The Starbucks Roast).

Schultz's way to Starbucks

After his college degree at Michigan college in 1975 Schultz worked for Xerox as a

salesman in New York and afterwards -1979 - he worked for Hammerplast a Swedish

company with an office in North Carolina. He sold components for kitchen and furniture.

He went back to New York as a vice president and general manager of Hammerplast.

Schultz's adventure started in 1981 when he traveled from New York to Seattle to

check out a popular coffee bean store called Starbucks that had been buying many of

Hammerplast's Swedish drip coffeemakers he was selling.

At that time - 1981 - retail merchandising manager was Linda Grossman she met

Schultz and introduced him to the owners of the company Gerald Baldwin and Gordon

Italian Espresso

Page 4/45

Bowker. The third partner Zev Siegel sold out of the company in 1980 - for him there

came a silent partner named Steve Donovan.

Schultz was very impressed with the owners' dedication to educating the public about

the wonders of coffee connoisseurship - and he wanted to be a part of that company.

It took Schultz a year to convince Jerry Baldwin to hire him in 1982 for managing retail

and marketing parts.

In between the business had grown into five stores selling the coffee beans, a roasting

facility, and a wholesale business for local restaurants.

Italian espresso

1983 Schultz attended an international housewares show. He discovered the ritual and

the romance of coffee bars in Italy. He recognized that coffee is an integral part of the

culture in Italy Italians start their day at an espresso bar and later in the day return with

their friends. Schultz also found out that Starbucks sold great coffee beans, but didn't

serve coffee by the cup.

The Italians had turned the drinking of coffee into a symphony, and it felt right.

This also Schultz wanted to do at Starbucks, he brought this new ideas to the owners,

but was turned down.

In April 1984 Jerry Baldwin agreed to test an espresso bar when Starbucks opened its

sixth store.

Also in 1984 Starbucks bought Peet's Coffee and Tea. At this time Peet's Coffee and

Tea had around the same size as Starbucks five locations.

After this deal the company was now so heavily leveraged that there was no money

available for growth or innovation.

But Schultz wanted to grow faster with the Italian concept he had seen at his trip to Italy.

So in late 1985 Schultz left Starbucks to start own company a coffee-bar-enterprise

with the name "Il Giornale" (pronounced: ill jor-nahl-ee).

The first surprise for Schultz after leaving Starbucks was that Jerry Baldwin invested

$150k of Starbucks money. The reason was that it wasn't a business where Starbucks

wanted to go but supported Schultz with his idea.

Gordon Bowker and Schultz visited nearly 500 espresso bars in Milan and Verona

looking for investments in coffee bars in US.

They started the first store running in April 1986, but Schultz was still looking for

investors.

Harold Gorlick out of the heating and plumbing business invested $200k the biggest

single check which was done.

At that time it was very difficult to get investors, because all were investing in proprietary

ideas or technology. If you hold a patent to your product so much the better

biotechnology, software or telecommunications.

Il Giornale didn't fit in any of these paradigms. But coffee was the second most widely

traded commodity in the world, after oil. But nobody wanted to invest.

There was only one last chance the three business leaders Jack Benaroya, Herman

Sarkowsky and Sam Stroum locally they were titians who had developed some of the

tallest buildings - most successful residential complexes and sturdiest businesses in

Seattle.

They were ready to invest a lot of money, but with some stiff demands lower price and

options and board seats. They invested $750k. Steve Sarkowsky Herman's son

became a director.

Combining Starbucks and Il Giornale

Page 5/45

Café Allegro was a prototype for what Starbucks later became Dave Olson and Schultz

agreed to work together. Today Dave is senior vice president for coffee at Starbucks.

He helped shape its values, bringing a strong romantic love for coffee, unshakable

integrity, disarming honesty and an insistence on authenticity in every aspect of the

business. Dave is a rock part of the foundation of the company.

The plan was to open 75 stores in 5 years in North America, with stores in every major

city.

The first Il Giornale store opened in April 8

,1986 nearly 300 customers visited the

store over time per day.

At the beginning a lot of mistakes were made Schultz and Dave accepted the fact that

they had to adapt the store to customer's needs, like adding chairs and varying the

music. Within 6 month more than 1.000 customers were served a day.

The second store was opened after six month after the first at Seattle Trust Tower at

Second and Madison Third store. After that they went international in Vancover, British

Columbia - Sea Bus Terminal opened in April 1987.

By mid 1987 sales were around $500k a year for each store.

In 1987 Starbucks (Jerry Baldwin and Gordon Bowker) decided to sell the Seattle

stores, the roasting plant and the name Starbucks, keeping only the Peet's assests.

Schultz new he had to buy Starbucks, he needed to find $4 million to by Starbucks.

One of Schultz' investors wanted to buy Starbucks alone, without Schultz.

Now Schultz had to handle, he felt like as though his life had ended.

Within Schultz & Co managed to raise the $ 3.8 million they needed to buy Starbucks.

By August 1987 Starbucks belonged to Schultz as a new owner and CEO.

Combining Starbucks and Il Giornale

After buying Starbucks Schultz told people his vision of building a national company.

Morale at Starbucks was terrible at that time. The only way to win the confidence of

Starbucks employees was to be honest with them, to share future plans and exitements

with them, and then to follow through and keep the word, delivering exactly what

promised.

Starbucks management (4 persons) now had to figure out not only how to merge Il

Giornale and Starbucks, but also how to open 125 new stores in five years as

promised to investors:

- 15 stores first year

- 20 stores second year

- 25 stores third year

- 30 stores fourth year

- 35 stores fifth year

Estimated sales was around $60 million looked good on paper.

So the first thing was that Schultz needed to hire experienced managers, and take steps

immediately to win over the support and enthusiasm of Starbucks' people.

Ron Lawrence had to close the offering, merge the financial records of Starbucks and Il

Giornale put a new computer system in place, switch accounting systems and conduct

a fiscal year end audit .

Lawrence Maltz invested in Starbucks and joined the company as executive vice

president in Nov.1987. He was in charge of operations, finance and human resources.

Combining Starbucks and Il Giornale

Page 6/45

He was 15 years older than Schultz and had 20 years experience in business, including

eight years as president of a profitable public beverage company.

Schultz handled expansion, real estate, design, marketing, merchandising and investor

relations. He wanted to create a brand name respected for the best in coffee and well-

run company admired for its corporate responsibility.

Schultz wanted to elevate the enterprise to a higher standard, to make their people

proud of working for a company that cared for them and gave back to their community

not only measured in stores.

Schultz went back to Terry Heckler, who had helped with the name Starbucks years

before. One corporate name is needed the name Il Giornale is hard to write, spell and

pronounce. People find it obscure.

Starbucks in contrast has magic. It piques curiosity to mail order it was from the

beginning be known across America.

Finally Heckler opted to use Starbucks a name people could relate to, would provide

enormous equity.

In December 1987 there were new stores prepared to open in Chicago and Vancouver.

With this openings also the initial doubts which some employees had began to fade

and trust began to build.

Daryl Moore a college student had started at Starbucks 1981 as a part-time-clerk in the

Bellevue store voted against unionization in 1985. Daryl didn't see the need for a

union as long as Starbucks managers were responsive to employee concerns.

He wrote a letter and carried it to many stores in person to get signatures of people who

no longer wished to be represented by the union.

The outcome of Daryl's efforts were that the union no longer represented the store

employees.

For five years, from 1987 to 1992 Starbucks remained a privately held company.

The target was to built up a strong home base in Seattle with expanding to Portland and

Vancouver.

The first store in Chicago opened in Oct.1987 near the corner of West Jackson and

Van Buren, one block from Sears Tower.

Over the next six month three more stores were opened in that area. But over two years

tens of thousands of dollars were lost in Chicago, because the business was not

running. Chicago was different of the climate and behavioral of the people.

Until 1990 after Howard Behar was hired to run the retail operations - Chicago began

to turn the corner. The solution included hiring experienced managers and raising the

prices they charged, to reflect higher rents and labor costs.

Today Starbucks has become so much a part of the landscape and culture of Chicago

that a lot of residents think it's a local company.

As promised to investors on the base of eleven stores, following stores were opened:

- 15 stores in fiscal 1988

- 20 stores in 1989

- 30 stores in 1990

- 32 stores in 1991 and

- 53 in 1992

Store openings

Page 7/45

If we compare the promised data to the real data - in real it was much better as

promised to the investors.

Store openings promised-real 1988-1992

year

stores

promised

real

1988

1989

1990

1991

1992

Fig. 2: Store openings promised / Source: T.Strutzmann

But with greater visibility, Schultz became increasingly afraid of waking up sleeping

giants the big packaged food companies. If they had begun to sell speciality coffee

early on, they could have wiped Starbucks out.

But with every growing and new market entering it get harder and harder for them to

displace Starbucks.

The competitive strategy was to win customers by offering the best coffee and

customers service and an inviting atmosphere.

2. Mail order

Starbucks had started serving customers by mail in the mid-1970s. At first just mailed

out a simple brochure listing products.

In 1988 the first catalogue was developed and began expanding mail-order base to

targeted demographic groups. In 1990 in a small phone and computer system was

invested to set up their 800 number.

By 1991 Starbucks had ventured into the mail-order catalogue business, licensed

airport stores, expanded into California, and had just over 100 retail stores.

3. Growing strategy

By late 1989 it was clear that Starbucks had to reach outside Seattle for institutional

investors, which meant approaching the venture capital community. As the chairman of

a company that had recently gone public, Jeff Brotman had the connections and the

credibility to make contracts for us.

Starbuck's board remained stable for six years, adding only two inside directors.

As Starbucks expanded into more markets, they needed someone familiar with the

process of opening and running many retail stores at once.

They hired Howard Behar for that job, a man who had 25 years of retail background in

the furniture business and at Thousands Trails, an outdoor resort developer.

In 1990 as Starbucks prepared for more sophisticated financing, they began scouting for

a chief financial officer with broad experience. It was Orin Smith they hired, he had

managed far larger and more complex organizations than Starbucks. He had worked as

udget director for the State of Washington for five years and before that for Deloitte and

Touche for 13 years.

People Page

8/45

By 1990 the Starbucks management team worked so close together that people called

them H

0 for Howard, Howard and Orin. They stood for the vision, the soul and the

fiscal responsibility.

In Oct.1990 Schultz could report to the board that Starbucks had achieved the first

profitable year. 1991 sales shot up 84 percent and the company turned profitable.

By 1991 Starbucks was ready for the next big market entry California, later Los

Angeles and 1992 San Francisco.

With all this new stores the distance to the roasting facility was getting bigger and bigger

and the flavour of the coffee beans was getting lost.

4. "Flavorlock"- bags

This was the reason why Starbucks started to use "Flavorlock"- bags, a kind of vacuum

packing with a one way valve to allow carbon dioxide gases to escape without allowing

harmful air and moisture in. This was a key decision that made expansion strategy

feasible. It meant no need to build a roasting plant in every city in which Starbucks

entered.

5. People

"Treat people like family, and they will be loyal and give their all. Stand by people and

they will stand by you" It's the oldest formula in business, but by the late 1980s it

seemed to be forgotten.

Starbucks began offering full health benefits to all part-timers in late 1988. They offer

health-care coverage to all employees who have terminal illnesses, paying medical

costs in full from time they are not able to work, until they are covered by government

programs, usually 29 months.

In April 1994 President Clinton invited Schultz to Washington D.C., for a one-to-one

meeting in the Oval Office. Schultz should tell him about Starbucks' health-care

program.

Also a Mission-Review-system was set up in 1990 and is still in place today.

Every employee in each store would be given a postcard-sized comment card and

encouraged to report to the Mission Review team if they saw a decision that did not

support Starbucks Mission Statement.

Any employee, anywhere, can make a suggestion or report an action that seems

contradictory to our purpose a relevant manager will respond within two weeks.

Employee as a partner

With the introduction of the so called Bean stock a stock option plan which turned

every employee of Starbucks into a partner.

In May 1991 the plan of "Bean Stock" was presented to the board.

Over 700 employees got granted stock options when Starbucks was still private.

Using the word "employees" was stopped they called all people now "partner".

Everyone is eligible for stock options as soon as he or she has been with Starbucks for

six month even part-timers qualify.

Going Public

Page 9/45

6. Going public

The company went public in June 26

, 1992, trading on the Nasdaq under the symbol

SBUX implemented an IPO for 2.1 million shares at $17 a share, raising $28 million in

net proceeds to further fuel the company's expansion.

Starbucks' initial public offering of common stock in June 1992 turned into one of the

most successful IPOs of the year.

After initial public offering, Starbucks continued to grow in terms of store development

and new enterprises. When Starbucks went public it had 165 stores.

Within five years the number of Starbucks stores grew tenfold, with locations in US,

Japan and Singapore.

7. Growing in U.S. and International

Expansion in terms of stores as well as concept has been a key element of Starbucks'

success in the past decade. Stores have sprouted up in San Diego, Denver,

Minneapolis, Boston, Atlanta and most everywhere in between. One intersection in

Vancouver, B.C. boasts two stores kitty-corner from each other. You can find Starbucks

at Nordstrom, Barnes and Noble and even Chicago's Wrigley Field.

Yes, Starbucks is everywhere. And it's more than just coffee these days. You can still

get a cappuccino or a caffe latte at Starbucks, but you can also have a mini-shopping

spree while you sip. Over two dozen varietals and blends are available for purchase,

bearing exotic names like Costa Rica Tres Rios and Ethiopia Yergacheffe.

Furthermore since the company owned its stores, it did not have to worry about

answering to unhappy franchisees about the closeness of some of its locations.

By 1996, Starbucks had more than 1,000 stores in the U.S.

That same year, Starbucks initiated its global expansions, opening its first international

store in Tokyo Japan, as already mentioned before. The success of Starbucks in a

country where green tea was the national drink indicated the concept could work in

other cultures as well. By 2002, Starbucks had stores on four continents.

At the end of fiscal 2001, profits had grown 32 percent to $181.2 million on sales of

$2.6 billion, from profits of $94.6 million on sales of $2.2 billion in 2000.

Company-operated retail stores accounted for approximately 84 percent of net revenues

in 2001, with the balance coming from Starbuck's specialty operations, which include

business alliances, international retail store licensing, grocery channel licensing,

warehouse club accounts, direct-to-consumer joint ventures, and other initiatives.

By early 2002, Starbucks was serving an average of 18 million customers a week

worldwide, and new stores were opening daily.

Ende der Leseprobe aus 45 Seiten - nach oben

Details

Titel: The Starbucks Corporation: past, present and future
Hochschule: American Management and Business Administration Institute
Note: 1
Autor: DI Dr Thomas Strutzmann (Autor:in)
Erscheinungsjahr: 2005
Seiten: 45
Katalognummer: V186060
ISBN (eBook): 9783656999386
ISBN (Buch): 9783867468350
Sprache: Englisch
Schlagworte: starbucks corporation

Arbeit zitieren: DI Dr Thomas Strutzmann (Autor:in), 2005, The Starbucks Corporation: past, present and future , München, GRIN Verlag, https://www.grin.com/document/186060

The Starbucks Corporation: past, present and future

Leseprobe

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