The Starbucks coffee shop on Sixth Avenue and Pine Street in down Seattle sits serene and orderly, as unremarkable as any other in the chain bought 15 years ago by entrepreneur Howard Schultz. A little less than three years ago, however, the quiet storefront made front pages around the world. During the world Trade Organization talks in November,1999,protester flooded Seattle’s streets, and among their targets was Starbucks, a symbol, to them, of free-market capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters and riot police were black-masked anarchists who trashed the store, leaving its windows smashed and its tasteful green-and-white décor smelling of tear gas instead of espresso. Says an angry Schulz: ”It’s hurtful. I think people are ill-informed. It’s very difficult to protest against a can of Coke , a bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous brand and a place where you can go and break a window. You can’t break a can of Coke.”
The store was quickly repaired, and the protesters have scattered to other cities. Yet cup by cup, Starbucks really is coffee in the world, its green-and-white emblem beckoning to consumers on three continents. In 1999, Starbucks Corp. had 281 stores abroad. Today, it has about 1,200—and it’s still in the early stages of a plan to colonize the globe. If the protesters were wrong in their tactics, they weren’t wrong about Starbucks’ ambitions. They were just early.
The story of how Schultz & Co. transformed a pedestrian commodity into an upscale consumer accessory has a fairy-tale quality. Starbucks has grown from 17 coffee shops in Seattle 15 years ago, to $ 2.6 billion in 28 countries. Sales have climbed an average of 30 percent per year, hitting $ 181.2 million last year. AND the momentum continues. In the first three quarters of this fiscal year, sales climbed 24 percent, year to year, to $ 2.4 billion, while profits, excluding onetime charges and capital gains, rose 25 percent, to $ 159.5 million.
Moreover, the Starbucks name and image connect with millions of consumers around the globe. It was one of the fastest-growing brands in a Business Week survey of the top 100 global brands published August 5.At a time when one corporate star after another has crashed to earth, brought down by revelations of earnings misstatements, executive greed, or worse, Starbucks hasn’t faltered. The company confidently predicts up to 25 percent annual sales and earnings growth this year. On Wall Street, Starbucks is the last great growth story. Its stock, including four splits ,has soared more than 2,200 percent over the past decade, surpassing Wal-Mart, General Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total return. Now at $ 21, it is hovering near its all-time high of $ 23 in July, before the overall market drop.
And after a slowdown last fall and winter, when consumers seemed to draw inward after September 11, Starbucks is rocketing ahead once again. Sales in stores open at least 13 months grew by 6 percent in the 43 weeks through Tuly28, and the company predicts monthly same-store sales gains as high as 7 percent through the end of this fiscal year. That’s below the 9 percent growth rate in 2000, but investors seem encouraged. ”We’re going to see a lot more growth,” says Jerome A. Castellini, president of Chicago-base Castle Ark Management, which controls about 300,000 Starbucks shares. “The stock is on a run.”
But how long can that run last? Already, Schultz’s team is hard-pressed to grind out new profits in a home market that is quickly becoming saturated. Amazingly, with 4,247 stores scattered across the United States and Canada, there are still eight states in the United States with no Starbucks stores. Frappuccofree cities include Butte, Mont, and Fargo, N. D. But big cities, affluent suburbs, and shopping malls are full to the brim. In coffee-crazed Seattle, there is a Starbucks outlet for every 9,400 people, and the company considers that the upper limit of coffee shop saturation. In Manhattan’s 24 square miles, Starbucks has 124 Cafas, with four more on the way this yeas. That’s one for every 12,000 people—meaning that there could be room for even more stores. Given such concentration, it is likely to take annual same-store sales increases of 10 percent or more if the company is going to match its historic overall sales growth. That, as they might say at Starbucks, is a tall order to fill.
Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication:” A New Starbucks Opens in Restroom of Existing Starbucks.’’ And even the company admits that while its practice of blanketing an area with stores helps achieve market dominance, it can cut sales at existing outlets.” We probably self-cannibalize our stores at a rate of 30 percent a year,” Schultz says. Adds Lchman Brothers Inc. analyst Mitchell Speiser:” Starbucks is at a defining point in its growth. It’s reaching a level that makes it harder and harder to grow, just due to the law of large numbers.”
To duplicate the staggering return of its first decade, Starbucks has no choice but to export its concept aggressively. Indeed, some analysts give Starbucks only two years at most before it saturates the U.S. market. The chain now operates 1,200 international outlets, from Beijing to Bristol. That leaves plenty of room to grow. Indeed, about 400 of its planned 1,200 new stores this year will be built overseas, representing a 35 percent increase in its foreign base. Starbucks expects to double the number of its stores worldwide, to 10,000 in three years. During the past 12 months, the chain has opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off Jakarta. Athens comes next. And within the next year, Starbucks plans to move into Mexico and Puerto Rico. But global expansion poses huge risks for Starbucks. for one thing, it easier to start up on foreign turf, it reduces the company’s share of the profits to only 20 percent to 50 percent.
Moreover, Starbucks must cope with some predictable challenges of becoming a mature company in the United States. After riding the wave of successful baby boomers through the‘90s, the company faces an ominously hostile reception from its future consumers, the twenty or thirty something of Generation X: Not only are the activists among them turned off by the power and image of the well-known brand, but many others say that Starbucks latte-sipping sophisticates and piped-in Kenny G music are a real turn-off . They don’t feel wanted in a place that sells designer coffee at $ 3 a cup.
In early August, Starbucks launched Starbucks Express, its boldest experiment yet, which blends java, Web technology, and faster service. At about 60 stores in the Denver area, customers can pre-order and prepay for beverages and pastries via phone or on the Starbucks Express website. They just make the call or click the mouse before arriving at the store, and their beverage will be waiting—with their name printed on the cup. The company will decide in January on a national launch.
And Starbucks is bent on even more fundamental store changes. On August , it announced expansion of a high-speed wireless Internet service to about 1,200 Starbucks locations in North America and Europe. Partners in the project—which Starbucks calls the world’s largest Wi-Fi network—include Mobile International, a wireless subsidiary of Deutsche Telecom, and Hewlett-Packard. Customers sit in a store and check e-mail, surf the Web, or download multimedia presentations without looking for connections or tripping over cords. They start with 24 hours of free wireless broadband before choosing from a variety of monthly subscription plans.
Starbucks executives hope such innovations will help surmount their toughest challenge in the home market: attracting the next generation of customers. Younger coffee drinkers already feel uncomfortable in the stores. The company knows that because it once had a group of twenty something’s hypnotized for a market study. When their defenses were down, out came the had nes. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Braden, who conducted the research for the Hal Rainey & Partners ad agency (now part of Public’s Worldwide) insane Francisco. One of the recurring themes the hypnosis brought out was a sense that “people like me aren’t welcome here except to serve the yuppies,” he says. Then there are those who just find the whole Starbucks scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian terminology of grandee and venting for coffee sizes. She goes to Dunkin’ Donuts, saying:“Small, medium, and large is fine for me.”
As it expands, Starbucks faces another big risk: that of becoming a far less special place for its employees. For a company modeled around enthusiastic service, that could have dire consequences for both image and sales. During its growth spurt of the mid-to-late-1990s, Starbucks had lowest employee turnover rate of any restaurant or fast-food company, largely thanks to its then unheard of policy of giving health insurance and modest stock options to part-timers making barely more than minimum wage
Such perks are no longer enough to keep all the workers happy. Starbucks’ pay doesn’t come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former store manager in West Hollywood, Calif:“If I were making a decent living, I’d still be there.” Shay, one of the plaintiffs in the suit against the company, says she earned $ 32,000 a year to run a store with 10to 15 part-time employees. She hired employees, managed their schedules, and monitored the store’s weekly profit-and-loss statement. But she was also expected to put in significant time behind the counter and had to sign an affidavit pledging to work up to 20 hours of overtime a week without extra pay—a requirement the company has dropped since the settlement, Smith says that Starbucks offers better pay, benefits, and training than comparable companies, while it encourages promotions from within.
For sure, employee discontent is far from the image Starbucks wants to project of relaxed workers cheerfully making cappuccinos. But perhaps it is inevitable. The business model calls for lots of low. And the more people who are hired as Starbucks expert the less they are apt to feel connected to the original mission of high service—bantering with customers and treating them like family. Robert J Thompson, a professor of popular culture at Syracuse University, says of Starbucks:“It’s turning out to be one of the great twenty-first century American success stories—complete with all the ambiguities.”
Overseas, though, the whole with Starbucks package seems new and, to many young people, still very cool. In Vienna, where Starbucks had a gala opening for its first Austrian store last December, Helmut Spudich, a business editor for the paper Der. Standard predicted that Starbucks would attract a younger crowd than the established cafes.“The coffeehouses in Vienna are nice, but they are old. Starbucks is considered hip,” he says.
But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on indefinitely. In Japan, the company beat even its own bullish expectations, growing to 368 stores after opening its first in Tokyo in 1996. Affluent young Japanese women like Anna Kato, a 22-year-old Toyota Motor Corp. worker, loved the place.“I don’t care if it costs more, as long as it tastes sweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s Shibuya district. Yet same-store sales growth has fallen in the past 10 months in Japan, Starbucks’ top foreign market, as rivals offer similar fare. Add to that the depressed economy, and Starbucks Japan seems to be losing steam. Although it forecasts a 30 percent gain in net profit, to $ 8 million, same-store sales are down 14 percent for the year ended in June. Meanwhile in England, Starbucks’ second-biggest over-seas market, with 310 stores, imitators are popping up left and right to steal market share.
Entering other big markets may be tougher yet. The French seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch, cofounder of Columbus Café, a Starbucks-like chain. But he wonders if the company can profitably cope with France’s arcane regulations and generous labor benefits. And in Italy, the epicenter of European coffee culture, the notion that the locals will abandon their own 200,000 coffee bars en masse for Starbucks strikes many as ludicrous. For one, Italian coffee bars prosper by serving food as well as coffee, an area where Starbucks still struggles. Also, Italian coffee is cheaper than U.S. java and, say Italian purists, much better. Americans pay about $ 1.50 for an espresso. In northern Italy, the price is 67 cent; in the south, just 55 cents. Schultz insists that Starbucks will eventually come to Italy. It’ll have a lot to prove when it does. Carlo Perini founder of the ant globalization movement Slow Food, sniffs that Starbucks’ “substances served in Styrofoam” won’t cut it. The cups are paper, of course. But the skepticism is real.
As Starbucks spreads out., Schultz will have to be increasingly sensitive to those cultural challenges. In December, for instance, he flew to Israel to meet with Foreign Secretary Shimon Peres and other Israeli officials to discuss the Middle East crisis. He won’t divulge the nature of his discussions. But subsequently, at a Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and Saudi Arabia, he created a mild uproar among Palestinian supporters .Schulz quickly backpedaled, saying that his words were taken out of context and asserting that he is “pro-peace” for both sides.
There are plenty more minefields ahead. So far, the Seattle coffee company has compiled an envious record of growth. But the giddy buzz of that initial expansion is wearing off.
Now StarBucks is waking up to the grand challenges faced by any corporation bent on becoming a global powerhouse.
Profit at Starbucks Coffee Japan fell 70 percent in the first
nine months of the year because of growing competition from rival coffee chains. Sales at stores open more than one year fell 16 percent. The firm expects a loss for the year.
QUESTIONS
As a guide, use Exhibit 1.2 and its description in Chapter 1, and do the following:
1. Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets.
2. What are the major sources of risk facing the company and discuss potential solutions.
3. Critique Starbucks’ overall corporate strategy.
4. Flow might Starbucks improve profitability in Japan ?
Visit WWW.starbucks.com for more information.
Sources: Stanley Holmes, Drake Bennett, Kate Carlisle, and Chester Dawson, “Planet Starbucks: To Keep Up the Growth IT Must Go Global Quickly,” Business Week, December 9,2002,pp 100—110. Reprinted by permission of Businesss week; and Ken Betson, “Japan: Starbucks Profit Falls,” New York Times, February 20,2003,p.1
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