Case 1 Starbucks in 2004. Driving for Global Dominance e. 69 Scenes from Starbucks Stores C-24 Cases in Crafting and Executing Strategy into common stock in 1997. Over the next seven and cold espresso drinks, and hot and iced teas. In ad- years, strong internal cash flows allowed Starbucks to dition, customers could choose from a wide selection finance virtually all of its store expansion with inter- of fresh-roasted whole-bean coffees (which could be nal funds; the company had less than $6 million in ground or not on the premises for take-home in long-term debt on its balance sheet despite having in- distinctive packages), fresh pastries, juices, coffee- vested some $1.3 billion in facilities and equipment. making equipment, coffee mugs and other acces- sories, and music CDs. From time to time, stores ran special promotions touting Starbucks' special Christ- Store Ambience mas Blend coffee, shade-grown coffee from Mexico, Starbucks' management viewed each store as a bill- organically grown coffees, and various rare and exotic board for the company and as a contributor to build- coffees from across the world. In 2003, Starbucks be- ing the company's brand and image. Each detail was gan offering customers a choice of using its exclusive scrutinized to enhance the mood and ambience of Silk soymilk, specifically designed to accentuate its the store, to make sure everything signaled "best of handcrafted beverages using espresso roast coffee and class" and reflected the personality of the commu- Tazo Chai teas; the organic, kosher soymilk appealed nity and the neighborhood. The thesis was "Every- to some customers as a substitute for milk or skim thing matters." The company went to great lengths to milk in various coffee and tea beverages. make sure that the store fixtures, the merchandise The company's retail sales mix in 2002 was 77 displays, the colors, the artwork, the banners, the percent beverages, 13 percent food items, 6 percent music, and the aromas all blended to create a consis- whole-bean coffees, and 4 percent coffee-making tent, inviting, stimulating environment that evoked equipment and acces~ories.~~The product mix in the romance of coffee, that signaled the company's each store varied according to the size and location passion for coffee, and that rewarded customers with of each outlet. Larger stores carried a greater variety ceremony, stories, and surprise. Starbucks was rec- of whole coffee beans, gourmet food items, teas, cof- ognized for its sensitivity to neighborhood conserva- fee mugs, coffee grinders, coffee-making equipment, tion with Scenic America's award for excellent filters, storage containers, and other accessories. design and "sensitive reuse of spaces within cities." Smaller stores and kiosks typically sold a full line of To try to keep the coffee aromas in the stores coffee beverages, a limited selection of whole-bean pure, Starbucks banned smoking and asked employ- coffees, and a few hardware items. ees to refrain from wearing perfumes or colognes. The idea for selling music CDs (which, in some Prepared foods were kept covered so that customers cases, were special compilations that had been put to- would smell coffee only. Colorful banners and gether for Starbucks to use as store background mu- posters kept the look of Starbucks stores fresh and in sic) originated with a Starbucks store manager who season. Company designers came up with artwork had worked in the music industry and selected the for commuter mugs and T-shirts in different cities new "tape of the month" Starbucks played as back- that were in keeping with each city's personality ground in its stores. The manager had gotten compli- (peach-shaped coffee mugs for Atlanta, pictures of ments from customers wanting to buy the music they Paul Revere for Boston and the Statue of Liberty for heard and suggested to senior executives that there New York). To make sure that Starbucks stores mea- was a market for the company's music tapes. Re- sured up to standards, the company used "mystery search through two years of comment cards turned up shoppers" who posed as customers and rated each hundreds asking Starbucks to sell the music it played location on a number of criteria. in its stores. The Starbucks CDs, initially created from the Capitol Records library, proved a significant seller and addition to the product line; some of the CDs were specific collections designed to tie in with THE PRODUCT LINE AT new blends of coffee that the company was promot- STARBUCKS ing. In 2000, Starbucks acquired Hear Music, a San Francisco-based company, to give it added capabiW Starbucks stores offered a choice of regular or decaf- in enhancing its music CD offerings. feinated coffee beverages, a special "coffee of the day," an assortment of made-to-order Italian-style hot 23Starbucksfiscal 2002 annual report, p. 15. Case 1 Starbucks in 2004: Driving for Global Dominance C-25 In 2003, in an average week, about 22 million coffee drinks in a bottle or can. Howard Schultz saw customers patronized Starbucks stores in North this as a major paradigm shift with the potential to America, up from about 5 million in 1998. Stores cause Starbucks' business to evolve in heretofore did about half of their business by 11:00 AM. Loyal unimaginable directions; he thought it was time to ,-ustomers patronized a Starbucks store 15 to 20 look for ways to move Starbucks out into more main- times a month, spending perhaps $50-$75 monthly. stream markets. Cold coffee products had historically Some Starbucks fanatics came in daily. Baristas be- met with poor market reception, except in Japan, came familiar with regular customers, learning their where there was an $8 billion market for ready-to- names and their favorite drinks. Christine Nagy, a drink coffee-based beverages. Nonetheless, Schultz field director for Oracle Corporation in Palo Alto, was hoping the partners would hit on a new product ~alifornia,told a Wall Street Journal reporter, "For to exploit a good-tasting coffee extract that had been me, it's a daily necessity or I start getting with- developed by Starbucks' recently appointed director drawal~."~~Her standard order was a custom drink: a of research and development. The joint venture's first decaf grande nonfat no-whip no-foam extra-cocoa new product, Mazagran, a lightly flavored carbonated mocha; when the barista saw her come through the coffee drink, was a failure; a market test in southern door, Nagy told the reporter, "They just say 'We California showed that some people liked it and some need a Christine here.' " Since its inception in 2001, hated it. While people were willing to try it the first 20 million Starbucks customers had purchased the time, partly because the Starbucks name was on the reloadable Starbucks Card that allowed them to pay label, repeat sales proved disappointing. for their purchases with a quick swipe at the cash Despite the clash of cultures and the different register and also to earn and redeem rewards. motivations of PepsiCo and Starbucks, the partner- In the fall of 2003 Starbucks, in partnership with ship held together because of the good working rela- Bank One, introduced the Duetto Visa card, which tionship that evolved between Howard Schultz and added Visa card functionality to the reloadable Star- Pepsi's senior executives. Then Schultz, at a meeting bucks Cards. By charging purchases to the Visa ac- to discuss the future of Mazagran, suggested, "Why count of their Duetto card anywhere Visa credit not develop a bottled version of Frappuccin~?"~~ cards were accepted, cardholders earned 1 percent Starbucks had come up with the new cold coffee back in Duetto Dollars, which were automatically drink in the summer of 1995, and it had proved to be loaded on their Starbucks Card account after each a big hot-weather seller; Pepsi executives were en- billing cycle. Duetto Dollars could be used to pur- thusiastic. After months of experimentation, the joint chase beverages, food, and store merchandise at any venture product research team came up with a shelf- Starbucks location. The Duetto card was the latest in stable version of Frappuccino that tasted quite good. an ongoing effort by Starbucks' management to in- It was tested in West Coast supermarkets in the sum- troduce new products and experiences for customers mer of 1996; sales ran 10 times over projections, that belonged exclusively to Starbucks; senior exec- with 70 percent being repeat sales. Sales of Frappuc- utives drummed the importance of always being cino reached $125 million in 1997 and achieved na- open to reinventing the Starbucks experience. tional supermarket penetration of 80 percent. SOfar, Starbucks had spent very little money on Starbucks' management believed that the market for advertising, preferring instead to build the brand cup Frappuccino would ultimately exceed $1 billion. by cup with customers and depend on word of mouth In October 1995 Starbucks partnered with and the appeal of its storefronts. Dreyer's Grand Ice Cream to supply coffee extract for a new line of coffee ice cream made and distributed Joint Ventures by Dreyer's under the Starbucks brand. The new line, featuring such flavors as Dark Roast Expresso Swirl, In 1994, after months of meetings and experimenta- JavaChip, Vanilla Mochachip, Biscotti Bliss, and tion, PepsiCo and Starbucks entered into a joint ven- Caffe Almond Fudge, hit supermarket shelves in ture to create new coffee-related products for mass April 1996, and by July 1996 Starbucks coffee- distribution through Pepsi channels, including cold flavored ice cream was the best-selling super- premium brand in the coffee segment. In 1997, two 2"avid Bank, "Starbucks Faces Growing Competition: Its Own Stores," The W~alallStreet Journal, January 2 1, 1997, p.