Starbucks Word Version

STARBUCKS: MANAGING A HIGH GROWTH BRAND1 INTRODUCTION In less than a decade, Starbucks was transformed from a fledgling whole-bean coffee retail chain into a globally recognized brand. From its IPO in 1992 to 2006, Starbucks grew to more than 10,500 stores located throughout North America, Latin America, the Pacific Rim, Europe, and the Middle East. Growth of the corporation’s coffee retail business continued at the rapid pace of three store openings a day on average. With over 35 million customers each week, Starbucks recorded revenues of $6.4 billion in 2005 (see Exhibit 1 for revenue growth data). Moreover, joint ventures with some of the nation’s strongest corporations, including Pepsi, Kraft, Dryer’s, and Capitol Records, allowed Starbucks to launch a lucrative consumer products division to complement its cafe business. Licensing partnerships with other companies such as United Airlines, ITT Sheraton, and Host Marriott further added to the growth of the Starbucks brand. Indeed, Starbucks rose to become one of the most impressive high-growth brands of the 1990s and early twenty-first century. Despite this remarkable growth, some questioned whether Starbucks began to lose focus as the company strove to constantly reinvent itself. Critics wondered if perhaps the brand grew too quickly to remain focused on its core values and business objectives. When James Donald took over as the company’s third CEO in 2005, Starbucks had expanded its offerings to diverse interests such as credit cards, liquor, music, and was looking into the film industry. As the company added more components of a ―lifestyle‖ brand to complement its core coffee offering, it needed to be careful that the coffeehouse concept responsible for its success retained its appeal with consumers. COMPANY BACKGROUND American coffee consumption had been on the decline for more than a decade when Seattle entrepreneurs Jerry Baldwin, Gordon Bowker, and Zev Siegl opened the first Starbucks in Seattle’s Pike Place Market in 1971. By the 1970s, the country’s major coffee brands were engaged in a bitter price war that forced them to use cheaper beans in their blends to reduce costs, resulting in a dramatic decline in the quality of America’s most popular coffees. Accompanying this decline in quality was a decline in coffee consumption, which had peaked at 3.1 cups per day in 1961. As Americans gradually became disenchanted with the store brands, java enthusiasts—concentrated primarily on the West Coast—began experimenting with the finer coffees of Europe that offered richer, fuller flavors. To harness the potential of the gourmet coffee trend in the Seattle area, the founders of Starbucks experimented with the new concept of a store dedicated to selling only the finest whole-bean coffee and coffee brewing equipment. At the time, Starbucks coffee was not brewed in-store, but rather by consumers themselves after they took the whole beans or grounds home. This emphasis on quality whole-bean coffee retail was fairly unique; only a handful of American cities had stores like Starbucks up to that point. Such a store would satisfy the demand of Seattle’s gourmet coffee enthusiasts for high-quality coffee products that could previously only be obtained through catalogs from companies in Europe. Starbucks also sought to convert Seattleites who had never experienced gourmet coffee to break away from traditional brands and integrate the finer European coffee blends into their daily lives. 1 of 21| P a g e From the start, Starbucks placed quality as its top priority. The Starbucks founders recognized that if they wanted to enhance Seattle’s appreciation for fine coffee, they had to provide the best ingredients and brewing equipment to ensure that customers had the most enjoyable coffee experiences possible. The Starbucks management dedicated a great deal of their time and financial resources to establishing strong relationships with coffee growers from around the world. To distinguish their coffee from the bland and tasteless store brands, Starbucks only purchased Arabica beans from a carefully selected network of suppliers across the globe; including places like Sumatra, Kenya, Ethiopia, and Costa Rica. Arabica beans were selected because the bean’s chemistry could withstand high roasting temperatures, resulting in a richer flavor. Starbucks also sought vendors who sold products that would protect, and even enhance, the Arabica’s flavor. This required the formation of partnerships across the globe with coffee brewing equipment suppliers who provided products that captured the essence of the coffee brewing tradition. Simplicity was valued over advanced technology because the machines Europeans and others had been using to brew coffee for centuries often proved the most effective in delivering the richest flavors. Starbucks Reinvented It was not until Howard Schultz, current Chairman and Chief Global Strategist of Starbucks, came to the company in 1982 that a vision for expanding the scope and reach of the Starbucks brand came under serious consideration. Schultz realized the powerful business opportunities that lay ahead of the company if he could preserve Starbucks’ core values while exposing a wider range of people to the brand. The fledgling company had seen great success in converting its small group of loyal Seattle customers into coffee enthusiasts, but Schultz recognized that the conservative business plans of early Starbucks management hindered the company from reaching other potential coffee lovers. Schultz saw that the next logical step for Starbucks was to begin serving freshly brewed coffee by the cup in every store. This realization came to Schultz following a trip to Italy, where he witnessed the bustling café culture where people stopped to socialize at various points throughout the day, always with a fresh cappuccino or espresso in hand. He reasoned that Americans would embrace the concept of consuming fresh coffee in a sociable coffeehouse atmosphere. Transforming Starbucks from a coffee retailer into a café business resulted in several important competitive advantages. First, it increased quality control because the coffee was brewed by its own knowledgeable employees. Second, Starbucks captured the business of Seattle’s business community who loved high quality coffee, but had hectic schedules. Starbucks made enjoying good coffee convenient, thereby enabling the entire community to enjoy all the brand had to offer. Lastly, incorporating a coffee service aspect into the business differentiated Starbucks from its coffee retail competitors, who were quickly growing in Seattle and in other major American cities. With the coffeehouse model as the primary focus of the company’s retailored business plan, Schultz began to concentrate on reshaping Starbucks’ brand identity. As the company entered a period of explosive growth through market expansion it needed a reinvented image that captured the elegance of European coffeehouse culture, but was familiar enough to appeal to a broad range of Americans. Schultz’s previous coffeehouse, Il Giornale, had acquired Starbucks in 1987, but Schultz recognized that keeping the Starbucks name was pivotal to the brand’s success. It was already familiar to Seattleites, patrons of the nationwide mail order business and was more memorable than Il Giornale. The name was inspired by Starbuck, a deckhand in the classic American novel Moby Dick. For this reason, the logo included an image of a mermaid done in a woodcutting style. The Starbucks name 2 of 21| P a g e captured all the aspects of Schultz’s innovative coffeehouse concept; it was bold yet not overwhelming, mysterious yet not foreign, and romantic yet not impractical. Creating a Look Starbucks needed to shape the look and feel of the environment of its stores to reflect the synergy of Italian elegance and American informality that Schultz envisioned for his unique coffeehouse model. First, the original Starbucks logo was updated to appear more contemporary and the color was changed from the original earthen brown to the green used by Il Giornale. Next, each of the original Starbucks stores was redesigned so that they echoed the romantic atmosphere of Italian coffee bars. Rich browns in the wooden fixtures and vibrant green logos on the detailing and packaging formed the primary color scheme of Starbucks store design. This palate was selected to represent the company’s emphasis on European romance and elegance coupled with casual American warmth. In addition to selling only ―best-of-class‖ coffee, Starbucks worked to fill its stores with only the highest quality of everything—from the coffee-making equipment to the fixtures and furnishings to the music and artwork. In Schultz’s words, each Starbucks store ―is carefully designed to enhance the quality of everything the customers see, touch, hear, smell or taste.‖2 Schultz envisioned that the Starbucks store would become a ―personal treat‖ for its customers, whether they saw it as a convenient stop on the way to work, a refreshing break in their day or a place to relax at night. Starbucks was to be, for its clientele, a ―Third Place,‖ a comfortable, sociable gathering spot bridging the workplace and the home. Designing a warm, inviting environment was essential to Schultz’s objective of making Starbucks symbolize not just a coffeehouse, but a pleasurable coffee-centered experience. Investing Ahead of the Growth Curve This focus on developing creative solutions for solidifying a rich brand identity comple- mented the Starbucks executive team’s philosophy of ―investing ahead of the growth curve.‖3 Constant reinvention—critical to developing a healthy Starbucks brand—could only be accomplished by making fundamental changes to the structure of Starbucks management and by investing in innovation. As Schultz assumed the role of CEO of the new Starbucks, he recognized that although he possessed keen entrepreneurial skills and vision to lead Starbucks in this period of immense growth and brand redevelopment, he would also need the support of experienced professionals to set his vision into motion.

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