Zakharushkina.weebly.com



By Elena Zakharushkina and Daniil Muravskiy

Group #5 report

STARBUCKS

1. History of the company

Starbucks Coffee Company was founded in 1971, opening its first store in Seattle’s Pike Place Market. Starbucks was named after the first mate in Herman Melville’s Moby Dick, is the world’s leading retailer, roaster and brand of specialty coffee with millions of customer visits per week at stores in North America, Europe, Middle East, Latin America and the Pacific Rim.

When Howard Schultz first joined the company in the early 1980s, Starbucks was already a highly respected local roaster and retailer of whole bean and ground coffees. A business trip to Italy opened Schultz’s eyes to the rich tradition of the espresso beverage.

Espresso drinks became an essential element of Schultz’s vision. He purchased Starbucks with the support of local investors in 1987. In addition to well-situated stores, Starbucks sells coffee, tea, food and entertainment products through its specialty operations.

Starbucks stores may be found in urban and suburban areas, as well as many rural communities worldwide. An expanded number of Drive Thru and Off-Highway stores also provide a convenient alternative for our customers.

In addition to their company-operated stores, Starbucks works with certain carefully chosen businesses to operate licensed stores in a variety of venues. Since 1991 Starbucks® coffee has been available at licensed airport stores and travel plazas operated by HMSHost in the U.S. Licensed and Foodservice stores can also be found on college campuses through licensing agreements with Aramark, Sodexho and Compass. Thanks to these licensing agreements, customers can enjoy their Starbucks in select supermarkets, hotels and military bases throughout North America, and in foodservice venues around the world.

Coffee aficionados can also find Starbucks® coffee in a variety of places, including United Airlines, Horizon Air, Seattle’s Key Arena and Safeco Field, Chicago’s Wrigley Field, University of Washington athletic venues, the Experience Music Project interactive museum, Hyatt Hotels, Barnes & Noble bookstores in the U.S. and Chapters and Indigo bookstores in Canada.

In addition to quality coffee, Starbucks features a variety of hand-crafted beverages, Tazo® teas, Ethos™ water, pastries and, in some markets, a selection of sandwiches and salads. Starbucks merchandise includes exclusive espresso machines and coffee brewers, unique confections and other coffee- and tea-related items.

Starbucks Entertainment™ selects the finest in music, books and film to offer Starbucks customers the opportunity to discover quality entertainment in a fun and convenient way as part of their daily coffee routines. Starbucks Entertainment has made a transformative impact on the entertainment industry through its innovative relationships with music labels, publishers and filmmakers; and its breakthrough Starbucks Hear Music™ Coffeehouses in Santa Monica, San Antonio, Miami and Bellevue, Washington.

Starbucks Entertainment selections can be purchased at Starbucks stores in select markets worldwide, and online at hearmusic. Starbucks Entertainment has also teamed with Apple to create a Starbucks Entertainment area on the iTunes store in the U.S., and to offer the exclusive “Now Playing” feature on the iTunes® Wi-Fi Music Store at select Starbucks coffeehouses in the U.S., which enables customers to instantly preview, purchase, and download the music playing overhead in the store.

Starbucks early success in grocery led to the test sale of coffee in Portland, Ore., supermarkets in 1996 and Chicago in 1997. In 1998 Starbucks and Kraft Foods, Inc. entered into a licensing agreement to accelerate the growth of Starbucks® coffee in grocery channels in the U.S. The arrangement draws on Kraft’s extensive knowledge of selling, marketing and distributing packaged foods directly to grocery customers. Today Starbucks® coffee is available to customers in many major grocery stores across North America and the U.K.

In 2000 Howard Schultz transitions from chairman and chief executive officer to chairman and chief global strategist to come back in 2007 and announce a renewed focus on customer experience and innovation, when the Starbucks store total at fiscal year end was 15,756.

2. Milestones of their success

They say that Starbucks’ coffee tastes better – might that be the secret of Starbucks’ success?

Starbucks indeed offers coffee lovers a selection of coffees from around the world. It is said that their coffee buyers personally travel to the coffeegrowing regions of Latin America, Africa/Arabia and Asia/Pacific to select the highest-quality arabica beans. Once these quality beans arrive at one of the company’s four roasting facilities, Starbucks professional roasters pursue the art of creating the rich signature Starbucks Roast™. This dark roast is not just a color; it is the cumulative result of expert roasters knowing coffee and bringing balance to all of its flavor attributes.

In that case brewing Starbucks coffee at home should be the same as enjoying it the original shop, but for some reasons coffee in the coffee shop does taste better, but not for the reasons one might expect. Research from another coffee maker, Nespresso, shows that 60% of sensory experience of drinking espresso comes from the retail environment!

“You get more than the finest coffee when you visit a Starbucks—you get great people, first-rate music and a comfortable and upbeat meeting place,” says Howard Schultz. “We establish the value of buying a product at Starbucks by our uncompromising quality and by building a personal relationship with each of our customers. Starbucks is rekindling America’s love affair with coffee, bringing romance and fresh flavor back to the brew.”

This way according to Schultz one of the keys to the phenomenal success of Starbucks has been that its stores offer a consistent and appealing sensory experience.

Having investigated Starbucks' recent scandal concerning baristas suing their employers for that the tips they earn are shared between them and the shift supervisors, we’ve came up with amazingly big amount of comments from Star backs’ of the next consistence: “I wish to support a leader like Howard Schultz that acts responsibly when it comes to taking care of his employees (i.e. he ensures that everyone making as little as $20,000 annually receives health care)”. That and other factors made us suggest that Starbucks’ has another crucial secret Ingredient of their success, which is the Coffee chain chairman Howard Schultz’.

If you read Howard Schultz's story, this is not someone that came from being fed with a silver spoon. His desire to have his own business came first from seeing his father injured, unemployed, without unemployment or health benefits, and struggling to pay the bills and keep his family fed. Howard grew up in the Bronx and not from some privileged upbringing. Later in life, his competitiveness found its way to college football. He almost lost his bid for his business when a venture capitalist wanted the business for him. They say, most employees just sing the praises of the company. How many employees do you know where you can walk into a business, regardless of location, and not hear something they hate about their jobs?

Schultz is described as fiercely passionate about what he does. But yet he understands that his passion is not only about the coffee. He sells much more. While Schultz loves coffee, he's passionate about creating a workplace that treats people with dignity and respect. That's the message he conveys consistently to employees, customers, and investors.

Carmine Gallo, a Business Week reviewer states that Shultz’ powerful communication skills define a leader who knows not only what he stands for, but also the values he promotes, and who knows how to make an emotional connection with his listeners.

Once again, Schultz’ secret for success was not only in that he gave people good coffee of great variety, though it was also, indeed, a great achievement. Starbucks became a symbol of democratic cafés in America for the new generation of customers – intelligent, fashionable people with good taste. These customers expect to get respect when they come to Starbucks and they can appreciate good service. As Schultz once replied, Starbucks business is not in filling the customers stomachs but in filling their souls.

From his trip to Italy Schultz managed to bring the concept of “the third home”– a place where a person could take a rest from his family and work routines. When they come to Starbucks, people want to relax, chat with their friends, read a newspaper or a book. It is there where lovers arrange dates and the students come to study as if to a library. They say that Joan Rolling started to write “Harry Potter” that way in Starbucks also.

In Starbucks they started to pay attention to the music from the very beginning, playing quiet classical or jazz songs. When the customers started to take interest in the records Starbucks started selling discs with this music. Since not so long ago they also allowed internet Wi-Fi connections in the café’s for laptops or installed PCs with internet connections for clients.

And if you want, you may just take out a sandwich and a glass of coffee and then run on your business like the heroin of “The Devil wares Prada”.

Starbucks’ good will is actually being proved in actions. In the service sector the salaries are usually quite low and Starbucks is not an exception in this case. Nevertheless every employee in Starbucks even if he doesn’t work full-time gets facilities. One of the most important and costly ones is the full medical insurance, probably the most generous one in all corporative America. It covers doctor’s visits and treatments (dentist and oculist services included), medical examinations, life insurance and disability pensions.

Putting Starbuck on its feet in 2000 Howard Shultz transitions from chairman and chief executive officer. Instead he worked on company’s strategy and meanwhile wanted to try himself in new business projects. For instance he recalled his old sport affection and bought “Seattle supersonics” basketball team, which he resold with large revenue four years after. Romance and humanistic attitude to his staff never conflicted with his business instincts and the desire of revenue. Companies revenue reflected good on Shultz own finances, which Forbes evaluated as 1,1 milliard dollars. It seemed that until recently things were going great for the company as well: the profits for 2007 achieved 9,4 million dollars and the revenue has increased on 10%, 2,500 new cafés opened that year.

3. review of the present situation

Starbucks corp.

2401 Utah Avenue South

Seattle, WA 98134

United States

phone: 206-447-1575

fax: 206-682-7570

Howard Schultz, Chairman, President and CEO

Martin Coles, President, Starbucks International

Peter Bocian, Chief Financial Officer

Starbucks corporation engages in the purchase, roasting, and sale of whole bean coffees worldwide. It offers brewed coffees, Italian-style espresso beverages, cold blended beverages, various complementary food items, coffee-related accessories and equipment, a selection of premium teas, and a line of compact discs, through its retail stores. The company also sells and licenses its trademark through other channels. In addition, Starbucks corporation produces and sells ready-to-drink beverages, which include bottled beverages and espresso drinks, and a line of ice creams. Its brand portfolio includes superpremium Tazo teas, Starbucks hear music compact discs, Seattle’s best coffee, and Torrefazione Italia coffee.

Last year in November first time in the history of Starbucks month’s attendance in the United States fall competition from the side of the cheaper coffee in McDonald’s had occurred. The price for Starbucks’ stocks went down - during 12 months it became almost one half of the price it used to be and the investors get afraid that Starbucks potential in US had come to its limit.

In this difficult situation Howard was summoned back to the CEO position in January in order to prevent the possible crises and to give the company back its lost good image. He didn’t need time to find out the cause for he already knew the reason, which he stated himself in an open email to Starbucks management a year ago concerning the lost of the spirit of Starbucks and ways it might be saved. Back then he suggested reducing the height of coffee machines so that the customers could see how it is made and get rid of the hermetic package of the coffee for the lost of the famous aroma that used to attract people so much.

Howard is willing to concretize his plan of actions in the closest time while some measures were already taken. For instance, none of the three top managers of the company will get premiums for the last year. In some cafés in Seattle they already put an experiment of selling a cup of coffee for a single dollar (twice as less than usual). The expansion of Starbucks in the United States is currently stopped and many shops are closing. The most attractive territories for expansion now are China, South-East Asia, Eastern Europe and Russia.

Last autumn Russia had become the 43-th country where Starbucks had opened its shop. The first two Starbucks are situated in Moscow and it is as the rumors say just the beginning. There are about 15 000 Starbucks outside the US already and it is plan to triple that number in the long run.

As Starbucks moves from fiscal 2008, a year of significant transition for the company, it is well positioned to deliver in fiscal 2009 with the following foundational planks in place:

* A re-architected cost structure to allow for long-term operating margin expansion

* A healthier store portfolio achieved through closure of underperforming stores

* A stronger value and rewards platform - consistent with Starbucks premium brand

* A renewed emphasis and investment around coffee leadership

* A galvanized company with a common purpose

"With a re-architected cost structure at the close of fiscal 2008, we began the new fiscal year with a healthier store portfolio that will allow for operating margin expansion," commented Howard Schultz, chairman, president and CEO. "Despite a global economic environment which shows no immediate signs of improvement, the steps we took in FY08 position us to deliver EPS growth in FY09."

Fourth Quarter Fiscal 2008 Summary

Consolidated net revenues increased 3 percent to $2.5 billion for the fourth quarter of 2008, compared to $2.4 billion for the fourth quarter of 2007. For the 13-week period ended September 28, 2008, Starbucks reported net income of $5.4 million, which included $105.1 million of restructuring charges and other transformation strategy costs. Net income was $158.5 million for the same period a year ago. Earnings per share (EPS) for the quarter was $0.01, compared to $0.21 per share earned in the prior year period. The company estimates that restructuring charges and costs associated with the execution of its transformation agenda impacted fourth quarter 2008 EPS by approximately $0.09 per share. The majority of these costs consist of charges associated with company actions announced in July of 2008 to close approximately 600 company-operated stores in the U.S. and 61 company-operated stores in Australia, and reduce approximately 1,000 open and filled positions within its leadership structure and non-store organization. Excluding the restructuring charges and other transformation costs, fourth-quarter fiscal 2008 non-GAAP net income was $71.0 million and non-GAAP EPS for fiscal fourth quarter 2008 was $0.10 per share.

Fiscal 2008 - Year in Review

For fiscal 2008, consolidated net revenues increased 10 percent to $10.4 billion, compared to $9.4 billion for fiscal 2007. Company-operated retail revenues in fiscal 2008 rose 10 percent to $8.8 billion from $8.0 billion in fiscal 2007, due to the opening of 681 net new company-operated stores, offset by a 3 percent decline in comparable store sales for the 12-month period. The weakness in consolidated comparable store sales was driven by the U.S. segment, which posted comparable store sales of negative 5 percent. Partially offsetting this was positive 2 percent comparable store sales in the International segment for the year. Specialty revenues grew 14 percent for the year to $1.6 billion from $1.4 billion in fiscal 2007.

Operating income for fiscal 2008 decreased to $504 million, compared to $1.1 billion for fiscal 2007. Operating margin contracted 630 basis points to 4.9 percent of total net revenues for the full year ended September 28, 2008, from 11.2 percent for the same period a year ago. Margin compression was primarily due to lower revenues; in addition, restructuring charges associated with the store closures and right-sizing of the business and support organization accounted for approximately 40 percent of the decrease. Excluding restructuring charges and other transformation strategy costs, non-GAAP operating margin for fiscal year 2008 was 8.1 percent.

Net earnings totaled $315.5 million for fiscal 2008, versus $672.6 million in fiscal 2007, while EPS for the year was $0.43, compared to EPS of $0.87 in fiscal 2007. For the full year 2008, restructuring charges and other transformation costs impacted EPS by approximately $0.28 per share. Excluding these charges, non-GAAP EPS for fiscal year 2008 was $0.71 per share.

4. competitors

The main competitors of the Starbucks corporation operate within different markets. The first in terms of coffee houses competition is McDonald’s that has recently introduced McCafé with an espresso-based menu that includes cappuccinos, lattes, mochas, iced lattes and iced cappuccinos. It's available at the drive-through or the regular food counter of stand-alone stores.

McDonald's Corporation (NYSE: MCD) is the world's largest chain of fast food restaurants, serving nearly 47 million customers daily. McDonald's primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes and desserts. More recently, it has begun to offer salads, wraps and fruit. Many McDonald's restaurants have included a playground for children and advertising geared toward children, and some have been redesigned in a more 'natural' style, with a particular emphasis on comfort: introducing lounge areas and fireplaces, and eliminating hard plastic chairs and tables.

McDonald's revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.

To accommodate the current trend for high quality coffee and the popularity of coffee shops in general, McDonald's introduced McCafés. The McCafé concept is a café-style accompaniment to McDonald's restaurants. McCafé is a concept of McDonald's Australia, starting with Melbourne in 1993. Today, most McDonald's in Australia have McCafés located within the existing McDonald's restaurant. As of the end of 2003 there were over 600 McCafés worldwide.

Here are the examples of several Starbucks’ competitors’ strategies that lead them to compete successfully.

Green Mountain Coffee Roasters began as a small Vermont cafe and has stayed true to its organic roots while growing into a booming wholesaler with more than 8,000 accounts, including the Newman's Own brand of organic coffees. Green Mountain's sales of its organic lines were up 51 percent in 2005. The company has also focused on its office business, which now accounts for about a third of its sales. (HQ: Waterbury, VT, Year founded: 1981, 2005 revenue: $162 million)

Coffee Bean & Tea Leaf is known for its extensive selection of coffees and teas, as well as its reputation for innovation: The company invented the ice-blended coffee drink and popularized the chai latte. Coffee Bean has also made a push overseas, finding niches in Starbucks-free markets such as Israel. With nearly all of its drinks certified as kosher, the company has opened several locations in that country. (2005 Revenue: $150 million)

Despite Starbucks's invasion of its home turf in London, Costa Coffee is outsmarting its rival in India. The company cracked the subcontinent by teaming up with a local businessman and adapting its menu to Indian tastes. Costa plans to add up to 300 Indian outlets by 2010. It has been in the Middle East since the late 1990s and is due to open the first of more than 300 stores in China next year. (2005 revenue: $270 million)

Peet's strength is the taste of its coffee, which appeals to java connoisseurs. The company roasts its beans in small batches, replaces brewed coffee every 30 minutes, and never resteams milk. "Peetniks" often drink Peet's at home too, and about half the company's sales come from whole beans, which carry higher margins. Peet's beans are also sold in more than 4,000 grocery stores. (2005 revenue: $175 million)

Caribou's cafes feature mountain-lodge-style decor with exposed beam ceilings, leather chairs, and roaring fireplaces. Add in framed photos of the adventure-loving founders and you get a vibe that's neatly summed up in the company's motto, "Life is short. Stay awake for it." Frontier and Maxjet airlines serve Caribou coffee, and the company recently inked a deal with Life Time Fitness. (2005 revenue: $198 million).

5. future

According to some forecasts the future of the company seems to be not so prosperous as some of the periods of its history were. The first reason for this is the rise of the main competitors, such as McDonald’s that began to provide their customers with premium coffee for lower prices in comparison with Starbucks. Another issue is the enormous number of the Starbucks’ stores. In Manhattan, for example, there are 185 stores, eight per square mile.

As an analysis by Harvard Business School pointed out, Starbucks was guilty of too much expansion. ‘To grow, Starbucks increasingly appealed to grab-and-go customers for whom service meant speed of order delivery rather than recognition by and conversation with a barista,’ it argued.

One more problem was identified by Howard Schultz himself: ‘Stores no longer have the soul of the past and reflect a chain of stores versus the warm feeling of a neighbourhood store.’ And there’s no reason to be surprised. As far as the company becomes truly global and giant it is hard to do.

Rather like McDonald’s, a company it increasingly resembles, Starbucks has been revamping its menu. It has just introduced fruit smoothies in the US and will roll them out around the world. Earlier this year it closed its entire American chain for part of a day to retrain staff in the craft of coffee making. It is trying to get back to the idea of a personally created coffee, delivered with a shot of friendly conversation. Most mega-corporations sell on price, convenience or innovation: they don’t try to sell on service for the simple reason that they know they are not much good at it. As it became bigger, it became soulless (speaking about coffee house). And that was always going to be its downfall in the end.

For Starbucks, there may be a darker possibility as well. If coffee is a bull-market drink, then it may well deflate along with the financial markets. The credit crunch has, quite simply, blown the cappuccino froth off a global brand that perfectly encapsulated the easy-money, easy-living era.

There’s one more point provided by a survey conducted by the financial firm Morgan Stanley & Co.'s survey of 2,500 coffee drinkers found that nearly one third of existing Starbucks customers have cut back on their number of visits in the latest three months while just 17 percent of McDonald's guests and 18 percent of Dunkin Donuts coffee customers are visiting those chains less often.

Of the Starbucks customers cutting back on frequency, 84 percent blamed economic pressures, Morgan Stanley said. When asked what would increase their visits to Starbucks, 65 percent said lower prices would.

Recent weeks have seen a host of problems for Starbucks. Over the last 12 months its stock dropped 50 percent, the first sustained fall in company history. In the first quarter of 2008, its sales declined, also a company first. It will close 100 underperforming stores and cut its domestic expansion plans by 30 percent. After hyping its entry into the hot-food market with (inedible) breakfast sandwiches, Starbucks recently announced that the little hockey pucks were coming off the menu. And the company just lost a lawsuit that will force them to pay employees more than $100 million in back tips.

But there’s an interesting direction of Starbucks development. In September PepsiCo Inc., Unilever and Starbucks Coffee Co. inked a licensing agreement for the manufacturing, marketing and distribution of the coffeehouse chain's superpremium Tazo Tea ready-to-drink beverages in the United States and Canada. The agreement includes iced teas, juiced teas and herbal infusions.

What we witness now (in terms of financial decline) could just be a kind of corrective to a coffee bubble. We’ve got at least two examples of such a corrective which took place in 1982 and 1991, so we can wait for another rise of the company’s development.

6. articles review

The set of articles dedicated to the Starbucks issue could be divided into two major categories which represent the opposing views on the Starbucks’ future. Optimists advocate the future prosperity of the corporation and state that Starbucks will continue its domination on the coffee shop market and will maintain the position of the most innovative actor of the market. Pessimists, in contrary, argue that the best periods of the company are in the past and the future will not be that bright.

The first point of view is based on the recognition that Starbucks is the rare company that created and now sustains an industry, for example, opening space for small businesses rather than squeezing them out. From the authors’ point of view, that's pretty interesting. And Starbucks may be even more interesting for another reason: Its difficulties may be predictive.

As the author of one of the recent Duror Mirror’s articles argues, it could be that the company was mismanaged into the current decline (which is evident from the financial report). It also could be that we are witnessing a corrective to a coffee bubble. Or it could be that "affordable luxury" companies such as Starbucks are the canary in the economic coal mine and the harbinger of a downturn more serious than the mini-recessions of '82 and '91.

According to such an approach the company that experienced the rise from a small coffee shop in the early 1980s to a 15,000-store mastodon that does $1 billion of business a year from Frappuccinos alone could not retreat from the market due to some disastrous situation.

But there is still space for pessimism that comes from a presumption that the industry of coffee shops is declining.

The coffee house was meant to be small, local and intimate, the author of a Market Leader article argues. Trying to take it global may well have been an absurdly over-ambitious idea in he first place. As it became bigger, it became soulless. And that was always going to be its downfall in the end.

Such approach forecasts that for Starbucks there may be a darker possibility: if coffee is a bull-market drink, then it may well deflate along with the financial markets. The credit crunch has, quite simply, blown the cappuccino froth off a global brand that perfectly encapsulated the easy-money, easy-living era.

But what is really important for us in such an approach is that the advocates of it do not reject the outstanding role of Starbucks in the development of the industry itself and the cultural impact of such development.

Much is connected with the brand itself. It is old enough but its age (as far as it only increases its popularity) doesn’t harm the company somehow and gives a huge amount of opportunities to sell completely different products within coffee shops.

7. OUR OPINION

Starbucks is an icon of the American and international business. Probably it is the main symbol of the American culture, American talent to mix up ideas. In the beginning of its development as a small coffee shop in Seattle Howard Schultz decided to combine the phenomenon of fast-food restaurant typical for American people with a European coffee shop taking Italian experience as an example. Such bisociation became, in our opinion, the main recipe for the Starbuck’s success. But that was only the first step in long and very rich history of innovations that were making American-style coffee shop truly a “third place”.

Starbucks tried really hard to win the audience. The list of the innovations introduced by the company is really huge. The biggest effort of the recent time was the introduction of an “open innovation system” (let’s call it this way) that allows consumers to share their ideas, gain some ratings of them and what is more important get them implemented. Everything is about a web-service with an access from the Starbucks’ web-site that provides you with all of the necessary tools for sharing, voting and observing. According to the number of ideas which is dozens of thousands the system is working.

The main problem of Starbucks by now is the number of the stores all over the world which is huge. The globalization process has lead to one unavoidable issue which is the loss of special atmosphere that was the real pride of the company. But still Starbucks is a company of an icon status and its successful performance depends much on the innovative strategy of the company.

Actually if we try to compare the prices of those of the competitors we’ll get no optimistic result. But it is not the 7-dollars’ coffee-cup that made the Starbucks corporation one of the most famous global companies. It invented new way of coffee drinking (not only in the US but in Latin America as well, as there had been no coffee consuming culture before the company came), it invented new beverages to be sold in bottles in supermarkets; it introduced new habits and new lifestyle. And for Starbucks itself innovation is a lifestyle.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download