Starbucks make its bucks in India?
Introduction
Starbucks is one of the great retailing stories that have made history by making exceptional coffee drinks, selling dark-roasted coffee beans and coffee making equipment that allows customers to brew an exceptional cup of coffee at home.
As on August 25 2004, the company had 8337 stores worldwide. The total includes 5945 US coffee shops and 2392 international units (see Exhibit 1). The company has been showing consistent double-digit growth. Its sales increased from USD 1687 million in 1999 to USD4076 million in the year ending September 30 2003. Its free cash flow has increased from USD 72 million to USD 209 million in the same period.
Mission and Vision Statement of Starbucks
Howard Schultz, at the age of 34 became Starbucks’ president and CEO in 1987. During these early building years Howard Schultz and other Starbucks’ senior executives worked to instill some key values and guiding principles into Starbucks’ culture. The resulting vision and mission statement appears in Exhibit 3. The statement provides guidelines to Starbucks’ entire team on company values and principles vis-a`-vis product quality and delivery, value for money in context to high pricing of the entire product range, by providing the ‘ experience’ and not just plain coffee.
During a business visit to Milan, Italy, Schultz learned and realized that Starbucks needed to serve fresh brewed coffee, espresso and cappuccino in its stores (in addition to beans and coffee equipment). Furthermore going to Starbucks should be an experience; a special treat and the stores should be a special place to meet friends and visit. In the other words re-creating the Italian coffee bar culture in the US could be Starbucks’ differentiating factor.
After taking over Starbucks in March 1987, Schultz initiated a number of changes like
· To symbolize the merging of the two companies and the two cultures, a new logo was created that melded the Starbucks and 11 Giornale logos.
· The Starbucks’ stores were equipped with espresso machines remodeled to look more Italian than Old World nautical.
· 11 Giornale green replaced the traditional Starbucks brown. The result was a new type of store- a cross between a retail coffee- bean store and an espresso bar/café- that became Starbucks’ signature format in the 1990s.
Expansion of Starbucks within America
From the outset, the strategy was to open only company-owned stores, franchising was avoided so as to keep the company in full control of the quality of its products and the character and location of its stores. Schultz’ strategy was to make Starbucks a great place to work. This was one of the cornerstones of Howard Schultz’ strategy on market development and product differentiation. Being in a premium product segment, Starbucks’ success was heavily dependent on customers having a very positive experience in its stores.
Employee recruitment, Development and training
· Schultz’ strategy on employee recruitment and training was and continues to be a key differentiating factor for the company. Starting in late 1988, part-timer working 20 or more hours per week was offered the same health coverage as full time employees.
· In 1991 the company offered a stock option plan for all employees. Starbucks dropped the term employee and started referring to its entire people as partners because everyone including part-timers working at least 20 hours per week was eligible for stock options after six months.
· Subsequently in 1995, Starbucks implemented an employee stock purchase plan. Furthermore, Schultz laid emphasis on executive and staff training and over the years, the following have become standard practices at Starbucks.
· Every partner/barista (Italian for bartender) hired for a retail job in a Starbucks’ store receives at least 24 hours training in the first two to four weeks.
· The training includes classes of coffee history; drink preparation, coffee knowledge (four hours), and customer service (four hours) and retail skill plus a four-hour workshop called ‘ Brewing the Perfect Cup’.
· Baristas are trained in using the cash register, weighing beans, opening the bag properly, capturing the beans without spilling them on the floor, holding the bag in a way that keeps air from being trapped inside and affixing labels on the package exactly one-half inch over the Starbucks logo.
· Beverage preparation occupied even more training time, involving such activities as grinding the beans, steaming milk, learning to pull perfect (18-to-23- second) shots of espresso, memorizing the recipes of all the different drinks, practicing making the different drinks and learning how to make drinks to customer specifications.
· There were sessions on how to clean milk wand on the espresso machine, explain the Italian drink to customers, sell an expensive home espresso machine, make eye-contact with customers and take personal responsibility for the cleanliness of the coffee bins.
· Everyone was drilled in the Star skills, three guidelines for on-the-job interpersonal relations: 1) Maintain and enhance self esteem; 2) Listen and acknowledge; and 3) Ask for help.
· Management trainees attended classes from 8 to 12 weeks. Their training went much deeper, covering not only the information impacted to baristas but also the details of store operations, practices and procedures as set forth in the company’s operating manual, information systems and the basics of managing people.
· Starbucks’ trainers were all store managers and district managers with one site experience.
· Each time Starbucks opened stores in a new market; it undertook a major recruiting effort. Eight to ten weeks before opening, the company placed ads to hire baristas begin their training.
· Classes cover everything from coffee history to a seven- hour workshop called “ Brewing the Perfect Cup at Home’.
Market Penetration, Store Location and Expansion Strategy for Starbucks
Schultz’ market penetration, store location and expansion strategy for Starbucks is also worth examining. Starbucks has a geographic expansion strategy that targets areas with favorable demographic profiles and could serviced and supported by the company’s operations infrastructure. For each targeted region, Starbucks selects a large city to serve as a ‘ hub’; teams of professionals were located to in hub cities to support the goal of opening 20 or more stores in the hub. Once stores have blanketed the hub, additional stores are opened in smaller; surrounding ‘ spoke’ areas in the region. To oversee the expansion process, Starbucks creates zones vice presidents to direct the development of each region and to implant the Starbucks culture in the newly opened stores. The entire new zone vice presidents Starbucks recruited came with extensive operating and marketing experience in chain- store retailing.
Starbucks’ went for a unique approach to location selection policy vis-à-vis stores.
Fortune notes:
The strategy is simple: Blanket an area completely, even if the stores cannibalize one another’s business… The Starbucks- everywhere approach cuts down on delivery and management costs, shortens customer lines at individual stores, and increases foot traffic for all the stores in an area. Business week adds: Clustering stores increases total revenue and market share, (CEO) Orion Smith argues, even when individual stores poach on each other’s sales. The strategy works, he says, because of Starbucks size. It is large enough to absorb losses at existing stores as new ones open up, and soon overall sales grow beyond they would have with just one store.
Store Location, Design, Planning and construction for Starbucks
Schultz’ chooses store location, design, planning and construction as a crucial penetration, promotion and pricing strategy. Starbucks management looks upon each store as a billboard for the company and as a contributor to building the company’s brand and image. Most stores ranged in size from 1000 to 1500 sq feet and were located in office buildings, neighborhood-shopping areas convenient to pedestrian foot traffic. Only a select few were in suburban malls.
A ‘ stores of the future’ project team was formed in 1995 to raise Starbucks’ store design to a still higher level and come up with the next generation of Starbucks stores. Schultz and Olsen met with the project team early on to present their vision for what a Starbucks stores should be like- it would be an authentic coffee experience that conveyed the artistry of espresso making, a place to think and imagine, a spot where people could gather and talk over a great cup of coffee, a comforting refuge that provide a sense of community, a third place for people to congregate beyond work and home, a place that welcomed people and rewarded them for coming, and a layout that could accommodate both fast service and quiet moments.
Starbucks’ Product line
Starbucks stores offer a choice of regular or decaffeinated coffee beverage, a special ‘ coffee of the day’ and a broad selection of Italian-style espresso drinks. In addition, customers can choose from a wide selection of fresh roasted whole bean coffees (which could be ground on the premises and carried home in distinctive packages), a selection of fresh pastries and other food items, sodas, juices, teas, and coffee related hardware and equipment.
In recent years, the company has began selling special jazz and CDs, which in some cases are special compilations that had been put together for Starbucks to use as store background music.
The complete Menu of the Starbucks product range appears as Exhibit 4.
Top management Team played a major role in company’s growth and diversification plans. Schultz continued to strengthen Starbucks top management team, hiring people with extensive experience in managing and expanding retail chains. Orin Smith, who had an MBA from Harvard and 13 years’ experience at Deloitte and Touché, was brought in as chief financial officer in 1990 and then promoted to president and chief operating officer in 1994.
Mail Order sales as a market penetration and product promotion tool
In 1988, Starbucks developed its first catalog and began expanding its mail order base to targeted demographic groups. As time went on , the cities and neighborhoods in which the company’s mail order customers were located became one of the beacons used to decide where to open new stores. Starbucks management believed that its direct-response marketing effort helped pave way for all retail expansion into new markets and reinforced brand recognition in existing markets.
Co-branding, joint ventures and licensing arrangements
For co-branding, joint ventures and licensing arrangements, PepsiCo, Dreyer’s Grand Ice Cream, Marriott Host International Aramark Food Services, Horizon Airlines and United Airlines Nordstrom’s, Barnes & Noble bookstores, Wells Fargo Bank, Chapters, Costco warehouse club stores have been hugely successful and strategic to company’s market penetration, diversification and product promotion strategy. Starbucks receives a license fee and royalty on sales at these locations and supplies the coffee for resale in the licensed locations.
International diversification, penetration and expansion strategy
Starbucks created a new subsidiary, Starbucks Coffee International (SCI), to orchestrate overseas expansion and began to build the Starbucks brand name globally via licensees. Starbucks’ first non-North American store was opened in 1996 in Tokyo.
According to US news and World report: when venturing overseas, there is a Starbucks way. The company finds local business partners in most foreign markets… It tests each country with a handful of stores in trendy districts, using experienced Starbucks’ managers. It sends local baristas to Seattle for 13 weeks of training. Then it starts opening stores by the dozen. Its coffee lineup doesn’t vary, but Starbucks does adapt its food to local tastes. In Britain it won an award for mince pie. In Asia, it offers curry puffs and meat buns. Although Starbucks is committed to owning its Northern American stores, it has sought partners for much of its overseas expansion.
According to Howard Schultz, first, we look for extremely visible sites in well-trafficked areas and focus on three major factors: demographics, brand potential and financials. Second we categorize sites on an A to D scale. “A” sites are ‘signature’ sites that are qualitatively superior to all other sites within the area ( an area within which Starbucks chooses to locate one store). We rarely take a “C” or a “D” store. Third. We ask our international market business unit (MBU) to send to send in the ‘site’ submittal package with quantitative and qualitative measures, such as how the site meets Starbucks’ established criteria and the partner’s agreed-upon criteria. This package is reviewed by a number of functional units – operations, finance, and real estate- within the international Group. Fourth, we move into the design phase, which is done in Seattle using information provided by the partner. Next, we negotiate the lease with the landlord and initiate the construction when the appropriate permits are obtained. Finally, we turn over the store to operations. The whole process takes about 13-16 weeks from start to finish.
Exhibit 5 provides the list of countries where Starbucks has a presence. But a global company is not without risks. As Business Week points: ‘Global expansion poses huge risks for Starbucks. For one thing, it makes less money on each overseas store because local partners operate most of them. While that makes it easier to start up on foreign turf, it reduces the company’s share of the profits from only 20% to 50%’.