MGMT 613 Final Paper

Section 1 East, Group 8

Word Count: 7,755 (main section, excludes Executive Summary, Exhibits, and References)

Starbucks Corporation Analysis Executive Summary

Beginning with one store forty years ago, Starbucks has grown to a globally-recognized name with

18,000 stores in over 60 countries. Enjoying the first mover advantage in its specialty coffee shop niche,

supported by complementarities in its activity system, the firm has a dominant position within its industry.

In examining the business model, this paper discusses the threats of substitutes, new entrants, and

competitors, while highlighting low buyer and supplier power in the industry. Additionally, the company

also uses ASA and the Founders Blueprint to support its human and social capital strategies. Leveraging

the CAGE framework for its global expansions, Starbucks brought the gourmet interactive coffee

experience across the world. This paper will analyze how the firm popularized the third space in East

Asia and how the aggregation-adaptation components of AAA were used in global expansion. Looking

forward, competitor intensity, customer engagement, and market saturation pressure Starbucks to continue

innovating, although the corporation is expected to maintain a strong footing as it invests in new

technologies, channels, products, and markets.

Introduction
Brief History

Starbucks (also the Company) first started its business as Starbucks Coffee, Tea, and Spice in

Seattles Pike Place Market in 1971 by three partners Jerry Baldwin, Zev Siegal and Gordon Bowker,

The trio focused the companys business of selling coffee beans and equipment to customers and

restaurants. In 1982, Howard Mark Schultz joined the company as director of retail operations and

marketing. On one of his buying trips to Italy in 1983, Schultz came to appreciate the espresso bar and

cafe culture of Italy, concluding that, People come together every single day and in many cases they

dont even know each others names. In Italy, coffee is the conduit to the social experience. With his

experience in Italy, he returned to Seattle and suggested that the company gets into coffee and espresso

drinks business, but the partners did not want to divert their focus away from their core venture. Schultz

left the company and started Il Giornale in 1985, which two years later acquired Starbucks. Today

Starbucks has grown into the largest coffee house in the world with over $13B in revenue, employing

over 160,000 people who work in 18,000 stores in over 60 countries of the world.

Product Offering

Starbucks products today can be broadly classified into specialty coffee, non-caffeinated and

caffeinated beverages, merchandise, and fresh food and snacks. Its coffee portfolio boasts over 30 blends

and singleorigin premium coffees, while its beverage products include freshbrewed coffee, hot and iced

espresso beverages, Frappuccino and noncoffee blended beverages, such as smoothies and teas. The

merchandise products, introduced to further develop the customer loyalty and encourage impulse

purchases in the store, include coffee and teabrewing equipment, mugs, packaged goods, music, books

and specialty gifts items. In the efforts to keep the customers in its stores for longer periods of time,

Starbucks also introduced fresh food offerings, which include baked pastries, sandwiches, salads, oatmeal,

yogurt parfaits and fruit cups. Starbucks also has a number of brands in its portfolio that it has either
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acquired or introduced over time. These products include pre-packaged Starbucks Coffee, Seattles Best

Coffee, Tazo Tea, La Boulange and Torrefazione Italia Coffee.

Positioning and Strategy

The Companys mission in its own words is to inspire and nurture the human spirit one person,

one cup and one neighborhood at a time. As the Company grew its operations, its objective was to

maintain Starbucks mission and grow its standing as one of the most recognized and respected brands in

the world through disciplined expansion of their store base, and continued introduction of new products.

Starbucks coffee sells at a relatively higher price compared to other competitors. Starbucks claims

that the higher prices are due to the high quality Arabica coffee beans it uses in its beverages that are more

expensive, but produce richer and better tasting cup of coffee. The consistency and high quality of its

products, as well as dedication to customer service have generated significant following and customer

loyalty and have played a significant role in its success, especially in the early days.

As the product, however, became more ubiquitous and competition in specialty coffee market

increased significantly, the Company has been emphasizing constant product and technology innovation,

extensive personnel training, generous benefits packages, partner relationships, and global environmental

and social responsibility as major differentiating factors from its competition.

Analyzing the Strategic Framework- Porters Five Forces

The industry that Starbucks operates in can be Porters Five Forces
Power of Buyers Low
defined as primarily specialty coffee and snack shops in the Power of Suppliers Low
Power of Substitutes High
United States. According to IBIS report, this industry has
Threat of New Entrants High
generated over $29 billion in revenue in 2012, with Power of Competitors High

projected annual growth rate of slightly below 4% over the next five years. It is clear that Starbucks

operates in a rather mature industry, which is defined by stable revenues, but limited growth

opportunities.
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Power of Buyers: Buyers in this industry are every day coffee shoppers, who have very limited power

over the Company as individuals, but do have some influence as a collective. Beverage prices have very

low price elasticity given the ubiquity of the product in the market and low switching costs for the buyers.

The Company acknowledges these characteristics of the market by rarely raising prices on its products,

and when it does, typically feeling the necessity to explain the reason behind the price jump to prevent

any backlash. The industry is also highly susceptible to economic cycles, as can be seen from the

industry performance in 2009, when the industry revenue dropped by almost 8% (IBIS, 2013); with

significant overhead that Starbucks has in the form of lease commitments for its locations, the Company

has to be conscious about the buyer dynamics as a whole, even though no single individual buyer has

significant influence.

Power of Suppliers: In our analysis we concluded

that no single supplier has a significant power over

the Company, given well diversified supplier base

for all of its products and services. While its

natural to assume that coffee costs are a significant

factor in the Companys operations, they only

represent about 17% of the Companys Cost of Goods Sold (COGS) and 7% of its total revenue

(Deutsche Bank, 2012), posing some, but not a significant risk to the Companys performance. To further

diversify its suppliers, Starbucks spreads its purchasing across multiple coffee farms, to ensure that no

single supplier has any leverage over the Company. In addition, Starbucks uses hedging strategies, often

locking in on prices of the high quality Arabica coffee to ensure stable prices and supply a year ahead.

Starbucks still purchases big amounts of its coffee through multi-year, private contracts that often pay

higher price than the commodity markets, in order to support its long-term relationships with its vendors

and ensure it gets the quality beans (Economics of Coffee, Wikipedia, 2013). The Company provides

farmers with significant support in their activities through six Farmer Support Centers established around

the world that promote Fair Trade farming and ensure high quality standards for the product. As a result

suppliers grow highly dependent on the Companys support and high volumes; situation is further

exacerbated by farmers inability to integrate forward into the supply chain due to the lack of roasting or

retailing capabilities.

Occupancy is surprisingly the biggest cost component for the Company, representing 25% of its

COGS. Starbucks model often targets prime real estate locations within densely populated areas, which

tend to be more expensive. Real estate owners value Starbucks stores due to high foot traffic they tend to

attract, which in turn attracts other retailers to the location, greatly benefiting the real estate owners

(WSJ.com, October 13, 2008). Starbucks, keenly aware of this dynamic, is often able to negotiate better

deals for themselves. For example, according to Bloomberg, in 2009, when the company was

experiencing 6% decline in topline, Starbucks demanded 20-25% rent decreases from its landlords or

threatened to close down its locations. Many landlords complied weary of how store closures would

impact their other tenants in those locations.

Power of Substitutes: The number of substitutes available in this market is significant. Alternatives to

specialty coffee depend on the broadness of the market definition and can include anything from home

brewed or office brewed coffees, that tend to be relatively cheap or free, but inferior alternatives, to other

caffeinated beverages like teas, energy drinks, and Coke or Pepsi sodas. If we were to look at the industry

as a broader beverage marketplace, then we would likely include other products like water, juices, ice

teas, etc., which are gaining ground as healthier alternatives, as consumers are becoming more health

conscious.

The public awareness about negative impact of caffeinated and sugary drinks has been escalating

in the past few years, which has lead Starbucks to increasingly include such beverage alternatives to its

menus. For example, one of the recent Starbucks product innovations is flavored soluble Starbucks

Refreshers, prominently displayed on their home page, as a lightly caffeinated pick-me-ups. The power

of substitutes is also often magnified in economic recessions, when people look to cut down on spending

and specialty coffee beverages tend to get replaced by cheaper alternatives.

Threat of New Entrants: Barriers into coffee industry are very low, with minimal capital requirements,

which results in significant threat of new entrants. According to the Bellissimo Coffee Infogroup, a

specialty coffee industry consultant, the average cost of starting a coffee shop in the US ranges anywhere

between $40,000 for a small kiosk to $400,000 for a larger, sit-down store. With a lot of the equipment

available under longer term lease options, new entrants can spread their entry costs over longer periods of

time, decreasing initial capital requirements even further. Some regulatory aspects associated with the

food safety regulation and minimum wage requirements increase the barriers slightly, but not enough to

create a significant issue.

The barriers are even lower for established quick service and full service restaurants, which can

leverage the costs of offering the specialty coffee over already established overhead, with their

incremental costs limited to acquisition of the coffee making equipment, ingredients and trained labor.

It is worth pointing out however, that Starbucks does focus its stores primarily on central highly

populated locations, which tend to be more expensive and harder to obtain, slightly increasing barriers for

smaller competitors, who may not have enough buying power for those prime real estate locations.

Power of Competition: Perhaps the power that influences the industry the most, especially in the last

decade, has been the power of rivalry. Starbucks has a clear first mover advantage in this market. Not

because the Company was the first coffee shop in the US, but because they were the first ones to take the

specialty coffee beverage offering to the next level. They made the coffee ordering an interactive and

very consistent experience, and popularized the third space concept around the country a third place

away from home and work, where people can spend time meeting people, working, or relaxing.

Starbucks took the concept nationwide and its success in specialty coffee market and its attractive margins

attracted significant attention not only among new entrants, but also among well-established chains that

looked for other ways to leverage economies of scale by offering more products to their customer base.

According to IBIS report there are 40,054 coffee shops in the US today and this number is

increasing at a rate of 2.3% per year. The industry consists of new regional players such as Coffee Bean

& Tea Leaf and Peets Coffee and Tea in the West, Caribou Coffee and Panera in the Midwest, and Tim

Hortons on East of the United States. In addition, large national quick service restaurants, such as

McDonalds and Dunkin Donuts have initiated very

aggressive campaign into specialty coffee industry, targeting

customers who want an espresso fix, without paying too

much. While not directly competitive with Starbucks

customized coffee experience, McDonalds expanded

aggressively, introducing McCafe concept in 2008 and today having over 1,600 of these locations around

the world (McDonalds, 10-K, 2012).

While the competition is clearly increasing, Starbucks has carved out a solid niche through its interactive

customizable and consistent coffee experience, focused largely on convenient, centrally located stores and

constant product innovation (VIA water soluble drink) and process improvement (Clover machines). In

addition, being the first mover into American specialty coffee market, Starbucks has a very strong brand

awareness, that not only supports its existing stores, but also ensures success of its licensing ventures.

Starbucks Activity Map

In light of increasing competition and awareness about healthier substitutes, it is very important

for Starbucks to show clear differentiation from its competitors to ensure long lasting competitive

advantage. Our team put together the Companys activity map to identify complementary activities that

highlight its core competencies within its segment. The Starbucks activity system (Exhibit 1) contains

four key themes that are interconnected by a multitude of supporting actions.

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Experience Not Just Coffee

One of the keys to the Companys success is the goal of providing an experience to its customers,

and not just coffee. Ordering a beverage in Starbucks is a highly interactive experience, where customers

can customize their drinks and are able to create up to 20,000 different variations to match their specific

preference a service no other specialty coffee shop is able to match today. It also took its stores beyond

the concept of the simple coffee shop, introducing the concept of a third space, packing its stores with

home-like features. This ranges from simple elements such as free water and comfortable seating to

details such as cleaner restrooms, along with high-quality toilet paper to project an image of comfort. The

new concept has clearly created a following not only among its customers but also among competition.

Satisfied Partners

Supporting the experience element of Starbucks business model, partners the Starbucks term for

employees are provided with great benefits, extensive training, and wide array of career opportunities.

In 1988, the Company began offering full health benefits to eligible full and parttime employees.

Starbucks maintains that it is one of the only retailers to offer a stock program that includes part-time

employees. In addition, special compensation packages (called YSB for Your Special Blend), further

emphasize the importance the Company places on its staff. While these perks clearly increase the

expenses for Starbucks vs. its competition, the turnover rates of 12% in 2011, remain significantly below

the industry averages in the fast food industry (140% in 2011) (CNNMoney.com, 100 Best Companies to

Work For in 2012).

Global Brand and Responsible Corporation

Brand is another core aspect to the Companys activity map. As Starbucks expanded from Seattle,

WA to the rest of the world, it worked hard to build a solid reputation for itself. Leveraging social media

and other online platforms, the Company sought consumer feedback and worked to communicate its

products and visions to a wide range of audiences. In establishing a globally recognized brand, it has

taken on social responsibility tasks. Starbucks ensures ethical sourcing of the high quality coffee through

responsible purchasing practices, supporting farmer loans and forest conservation programs. In addition,

Starbucks has a goal of ensuring that all their cups will be made from 100% recyclable or reusable

materials by 2015.

Human Capital Strategy

Achieving highly trained, satisfied partners is one of the main pillars on Starbucks activity map

because Starbucks employees are central to the success of its business. So central, in fact, that reforming

the workforce was one of CEO Howard Schultzs primary strategies in recovering from Starbucks

financial downturn experienced between 2006 and 2009 (see Exhibit 2). Schultz felt the Company was

losing focus on the Starbucks mission and neighborhood coffee shop experience and tied it to rewarding

the wrong things (Case: On the Folly of Rewarding A, While Hoping for B). They had been praising

factors like speed of service, rather than keeping focus on the customer and the quality of the product,

during a time of growth and intense pressure to maintain annual revenue and profit increases of at least 20

percent. Schultz took a $6M hit in one day to close every Starbucks store, retrain all 115,000 employees,

and reestablish the correct focus areas.

Starbucks employees directly contribute to the companys success because they are the

personification of the Starbucks mission: to inspire and nurture the human spirit one person, one cup

and one neighborhood at a time through its coffee, partners, customers, stores, neighborhood, and

shareholders. A true example of Founders blueprint, Schultzs vision for Starbucks is to be a people

company serving coffee, and not the other way around, and for Starbucks to be defined by those who

wear the green apron and what they stand for.

By living out the Starbucks mission statement with passion, partners impact ROIC via the following:

1. Contributing to the success of the third place concept

Through their impact on ambiance and customers comfort and desire to stay
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Maintaining the small neighborhood coffee shop feel despite being a large corporate retail

chain

2. Increasing customer satisfaction and willingness to pay

Through engaging interaction/customer relations, positive attitudes, and effective customer

issue resolution, Starbucks offers an increased value proposition as compared to

competitors.

Highly trained baristas deliver consistent service and correct product orders even with a

high degree of beverage customization

While Starbucks is creating organic, fair trade coffee, Schultz believes that people come

into the store for a different reason: The human, emotional experience our people create is

why customers come in its more than just for a cup of coffee.

3. Transforming the workplace

Partners transform the work environment and attract more like-minded people because

they buy into the mission statement.

Starbucks has built and maintained a committed, inspired workforce by keeping its mission statement at

the heart of its human capital strategy, including partner recruiting, selection, training, career

development, rewards, and benefits.

Mission and Culture

Were called partners, because its not just a job, its our passion. Together, we embrace diversity to

create a place where each of us can be ourselves. We always treat each other with respect and dignity.

And we hold each other to that standard.

The mission statement instills a culture of respect and positive interactions; it provides the opportunity for

partners to be part of something bigger, ultimately increasing job satisfaction by allowing them to:

o Grow as a person, in your career, and in your community

o Live the Starbucks mission

o Be a leader

o Become your personal best

o Be connected to something bigger

o Be meaningful to the world, and

o Be recognized for all of it

Attraction, Selection, and Attrition (ASA)

As evident by Starbucks mission statement, Howard Schultz is a believer in the concept from the

case study The People Make the Place. Rather than hire capable candidates and try to influence their

attitudes with the Starbucks environment, Starbucks attracts and recruits happy, passionate people who

innately contribute to the positivity of the environment from day one. They filter out candidates who are

not passionate about the mission statement.

Starbucks attracts these employees by living out its mission statement and building a reputation of

providing high job satisfaction/career opportunities, valuing and recognizing partners, giving back

through community service, ethically sourcing high quality ingredients, holding its company/partners to

high standards, and doing business with corporate responsibility. The selling points of Starbucks work

environment are driven by Schultzs belief that people are hungry to find a place that provides a positive,

authentic experience, allows them to be part of something bigger, and allows them their own unique place

there (Founders Blue Print).

Starbucks places heavy influence on recruiting each time it opens stores in a new market. It sends

a Star team of experienced managers and baristas from existing stores to the area to lead the store-opening

effort and to conduct one-on-one training following the Company's formal classes and basic orientation

sessions. Of the pool of qualified candidates, Starbucks only selects employees who are able to trust one

another, who leave their egos at the door, and those who understand that success needs to be shared.

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Additionally, they specifically exclude people who do a good job of managing up, but not managing

down. Attrition associated with employee misfits is welcomed as Schultz believes that success depends

on attrition of those who dont believe in the Starbucks dream.

Training

Starbucks training is a key tool in achieving excellent customer service, developing relationships

with customers, and developing knowledgeable, efficient baristas who serve high quality drinks with a

negligible margin of error. Starbucks training is so thorough and comprehensive that some colleges offer

college credit for select Starbucks classes. Starbucks U covers a broader scope than that of its competitors

and provides personal life value to employees. Every barista/partner receives 24 hours of training during

their first two weeks of employment, which thoroughly covers not only the details of how to brew a

perfect cup of coffee, but also in some cases provides partners with the life skills that families, schools,

and communities have failed to provide. Emotional control, will power, and conflict management are all

integral to their curriculum. Each partner writes out specific plans to handle angry customers during

critical moments, or inflection points, a practice that helps employees with overall interpersonal

effectiveness on and off the job. Other key training principles:

1. The LATTE principal teaches partners to Listen to the complaining customer, Acknowledge

the problem, Take action to resolve it, Thank the customer for bringing the situation to the

partners attention, and Encourage the customer to return.

2. The Star Skills, three guidelines for on-the-job interpersonal relations: Maintain and enhance

self-esteem, Listen and acknowledge, Ask for help.

3. The Five Ways of Being: Be Welcoming, Involved, Knowledgeable, Genuine, Considerate

Management trainees attended classes for 8 to 12 weeks and take a deeper dive into 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

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managers with on-site experience. One of their major objectives was to ingrain the company's values,

principles, and culture and to impart their knowledge about coffee and their passion about Starbucks.

Benefits

Starbucks benefits are highly impacted by the Founders blueprint as Schultz grew up without

health insurance and commits to taking exceptionally good care of his employees. Consequently,

Starbucks was the first U.S. company to offer comprehensive health care coverage as well as stock

options to part time workers. Starbucks provides higher than industry average benefits to its employees

and dependents, including:

Benefits packages for employees that work 20+ hrs/week (Your Special Blend)

Stock options (through Bean Stock) of up to 14% of gross pay

401k (Future Roast) matching for employee contributions, adding from 25% to 150% of the first

4% of pay, depending on length of service

Adoption assistance and health coverage for employees and dependents

Starbucks U offers discounts and savings on textbooks, tuition, technology, etc.

30% in store discount

One free pound of coffee/box of k-cup packs, or tea each week

Even during a time of financial crisis, Starbucks did not leave its people behind while striving to

be successful, which involved keeping 401k, cash bonuses, and benefits. We will never and I mean

never turn our backs on our employees, says Schultz. Even when times were tough, the Company

wasnt willing to get cheaper coffee or cut health care benefits for each Starbucks employee to cut coffee

prices.

As recently as August 2013, Starbucks continues to exhibit the same behavior. In the face of

upcoming government health care changes, media is covering large companies such as UPS and Papa

Johns Pizza who are pre-emptively cutting health care coverage to employees. Shultz responded that

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although benefits cost the company more than it pays for coffee ($300M in 2010), benefits will remain a

cornerstone of the company's compensation for its 160,000 employees, even though it could be more

expensive next year due to ObamaCare's "unintended consequences." Shultz stated, "I don't believe

that...the health care law should be a reason or a motivation to cut benefits for either the employee or

spouses," Schultz said. "An investment in your people is an investment in shareholder value."

Human Capital Strategy Conclusion

Starbucks Human Capital Strategy exhibits a high degree of complementarity between its mission

statement/culture and many of its other activities, including recruiting, training, and benefits, all of which

build an exceptional workforce that contributes to the Starbucks experience and ultimately, ROIC. The

mission statement underpins all other activities and as those activities help to build the desired workforce,

the partners reinforce the mission and culture even further.

In short, Starbucks investment in human capital has paid big dividends. Starbucks creates a

workforce that is inspired, engaged, customer focused, and most importantly, happy to come to work each

day. Starbucks consistently makes CNNs list of 100 best companies to work for, with an 82% job

satisfaction rate according to a Hewitt Associates Starbucks partner, as compared to a 50% satisfaction

rate for all other employers.. It achieves a 12% voluntary turnover rate, which is extremely low compared

to the fast food industry average of 140%. High retention keeps training costs low, employee ownership

high, and results in over 75% of management being promoted from within the company.

After its retraining in 2008, coupled with strategic decisions to close underperforming stores,

Starbucks forthcoming performance in 3Q2009 marked its first earning growth since 1Q2008. The

company earned $152M, compared to its loss of nearly $7M the prior year. After living with the choice

to make 401-k plans discretionary instead of automatic, in light of a weak economy, Starbucks was once

again able to match 401k contributions for employees. In 2010, the revenues increased to a record $10.7B

and its operating income increased from $562M to $1.4B. With financial success partly correlated to

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Starbucks refocus on its environment through its employees, it is safe to say that at Starbucks, the people

really do make the place.

Scale and Scope-The International Organization

Starbucks today, has over 18,000 store locations around the world. These stores operate in 3

geographic segments: Americas-US, Canada, Mexico & Latin America; EMEA-Europe, Middle East,

Africa; and CAP-China & Asia Pacific.

Americas % EMEA % CAP % Total %

Company
7,857 61% 882 47% 666 20% 9,405 52%
Operated Stores
Licensed Stores 5,046 39% 987 53% 2,628 80% 8,661 48%
Total 12,903 100% 1,869 100% 3,294 100% 18,066 100%

The first wave of expansion focused on regions with similar administrative and economic

dimensions. As noted by the CAGE framework, culture, administration, geography, and economy are

important considerations for entering a new market. After significant expansion within North America,

which clearly posed strategic sense given related culture, proximity of geography, similar governments,

and strong relative economies, Starbucks chose to expand to Japan and Singapore in 1996. While these

two Asian countries seem far in geographic distance, their economies are strong and their cultures are

fairly westernized. Both nations also rank highly in the World Banks index of ease of starting a business.

As the Company continued opening stores in the Philippines, England, Malaysia, New Zealand, Taiwan,

and Thailand, trade-offs are very clear between stable economies and conducive business environments

with coffee culture and geographic distance. As further analysis indicates, though, geographic distance to

the USA is not a critical factor in the Companys expansion strategy, as the Starbucks supply chain is

spread throughout the world and do not rely on any particular geography for any particular item.

Additionally, while many regions seem culturally different from the USA or the Italian coffee lounge that

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Starbucks hopes to emulate, the populace of those regions also exhibit strong curiosity towards coffee and

adoration of the western culture.

The AAA framework helps explain how Starbucks international uses adaptation- to localize

operations in the focal countries and grows the business in those marketplaces. In addition, aggregation

helps Starbucks tailor its Operating Segments to gain economies in scale across the global markets

Operating Segments & Market Business Units

Over time the contribution of international markets has grown within Starbucks. The International

division is organized under three Operating segments -The Americas, EMEA & CAP each headed by a

leader who is part of the Executive Officers group.

Each country operation, called a Market Business Unit (MBU), is then in turn headed by a local

country leadership team. The aggregation in this structure happens through consolidation of MBU into

three operating segments. Through this set-up, the organization drives the standardization in terms of

processes improvement initiatives like lean, training of front line baristas and customer service that helps

deliver the Starbucks experience.

The adaptation framework in turn drives the individual product offerings that might be modified to

reflect the local tastes along with the experience that drives market demand. The challenges for the

business come from fine line between decisions/extent of localization versus decisions/extent of

standardization.

Modes of Entry

Starbuckss approach to international markets has been a combination through both Company

Owned and Licensed Stores (Exhibit 3).

Company Operated Stores: They are typically located in high foot traffic and high visibility locations.

The localization of these stores through adaptation facilitates the location of these stores in a variety of

settings including retail, office buildings, and university campuses. The stores reflect the local
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environment along with driving the Starbucks cultural experience that crosses all markets. Selective

expansion of drive thru stores is also under way. These stores were established through wholly owned

subsidiaries in the respective markets & Starbucks builds customer loyalty by engaging with the local

community to drive a sense of belonging.

Licensed Stores: This is a dominant strategy in many countries especially in the CAP and EMEA market

places. Expertise of the local partners is leveraged through sharing of operating and store development

experience. Most licensees are prominent retailers and, in many instances, the only access to desirable

retail space. The in-depth market knowledge of the local partners help drive the business. These partners

are trained on the standard operating procedures developed by Starbucks, which are the same ones

followed by employees in the Company-owned stores. Royalty and license fees drive additional revenue

generation for Starbucks.

Joint Venture: This approach used in many markets in the CAP, EMEA and the Americas. It allows

Starbucks to play a role in the management of the foreign operations. Non-equity joint ventures, where

the host country partner has a majority stake seems a common approach, which is driven by the local

country rules, where that is the only preferred approach. This approach has its advantages in terms of

sharing responsibilities, costs and risks, but comes with the disadvantage of not being able to engage in

strategic coordination.

Product and Process

Aggregation-Adaptation extends to the product offerings in the stores. Starbucks buys green

bean coffee from around the world in accordance with exacting standards. This process extends to

roasting and packaging along with the global distribution of coffee used in the operations. The

procurement process is centrally managed and is based on both a fixed price and price to be fixed

purchase commitment that is based on future coffee price commodity contracts.

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To facilitate leadership in the coffee space, Starbucks runs Farmer Support Centers in 6 countries

(aggregation-adaptation strategy). These centers are staffed with agronomists and experts who work

with local coffee growers to promote best farming practices that improve yields and quality.

In addition, the adaptation- aggregation approach extends to several other products like milk, food

products such as pastries and sandwiches, paper plastic cups, cutlery, et cetera. The approach here is to

aggregate purchases through central organization that support the retail outlets while maintaining some

degree of localization with the sourcing agents to promote supply side scale and to reduce distribution

costs.

Aggregation of Product and Service Innovation

Continuous product innovation was a driving force at Starbucks on both the service side as well as

the product side. These innovations were driven through the centralized R&D facilities which would

create new products that followed a 12-18 month development cycle. Product formulations, focus groups,

in store experiments and market tests were all part of the standardized implementation plan. Focus was

placed on customer acceptance along with partner acceptance. The Frappuccino line of products that

were rolled out along with local adaptations were examples of this product innovation culture

Service Innovations included technology and process focused initiatives like the loyalty cards,

leveraging the social media frameworks, managing service cycle times through lean initiatives and

making the stores wireless by offering high speed internet connections. These initiatives were developed

in centralized operation hubs and would then be rolled out in phases across the international operations.

China Asia Pacific Market (CAP)

The Asia Pacific market represents a key opportunity for growth for Starbucks. As the market in

the US started to slow down, Starbucks started exploring opportunities in the international market space

in the early 90s. Japan was the first international market in the region for Starbucks and since then has

expanded into several other countries like China, Taiwan, Vietnam, Malaysia, and India. The region
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spent over $9.3B in coffee drinking recent years and this number is up by about 66% from 5 years ago.

As the region adapts from a primarily tea drinking culture, the opportunities for Starbucks are plentiful.

This paper will focus on Japan, Taiwan, and China in analyzing CAP operations.

Japan Marketplace

Japan possessed several key attributes that made an expansion apparent. While not a traditionally

coffee culture, its westernization has been demonstrated in that its post-war government supports

democracy and its economy has been globalized beyond that of many other nations. Given that,

Ghemawats CAGE framework asserts that the C, A, and E components are all great fits. While

geographic distance seems far from Seattle, Starbucks has a global network of supplies already, and

additionally, Japan is in fact quite close to Seattle when compared to other countries with comparable

cultural, administrative, and economic factors. Thus, Starbucks entered into a joint venture with a Sazaby

Inc to open stores in Japan in 1996. This allowed Starbucks to have a stake and play a role in managing

the operations in Japan. With this being the first clear move in the International arena along with being

the first entry point into the Asian market Starbucks felt that a local partners knowledge of the market

would help grow the business.

Adaptation

The stores are created to celebrate the design and experience of traditional Japanese Ichi-go-ichi-

e service spirit (one time one meeting). The store features locally relevant simple design solutions which

include cues from traditional tea houses and parts of green garden. These stores have local and

contemporary Japanese art that reflect the Japanese culture.

In addition, the menu features several indigenous cultural and culinary touches. Listening to it

local partner Sazaby Inc, Starbucks introduced Green Tea Frappuccino. This product was launched to

leverage the Japanese coffee drinking habits and soon became a popular product. In addition the Asian

culture has a tendency to have some snacks as they drink coffee and hence Starbucks introduced curry

18

puffs and meat buns in the Asian marketplace. To attract young women and give the young crowd a

flavor of the American culture the stores were 1,200-1,500 sq. ft. and were kept non-smoking. While the

Japanese culture in general has an affinity for smoking, this attempt by Starbucks to stick to its approach

of non-smoking served as a differentiator in attracting a young customer audience that was trying to

distance itself from the ill effects of smoking.

The stores also introduced products such as rice and salmon wraps, white peach muffins that

helped grow the traffic and retain the customers by providing food in addition to beverages. Extensive

training was provided to baristas in the stores to be able to greet and engage with the local customers, by

familiarizing them with the local culture.

Taiwan-(The Greater China Market Place)

With several expansions in Asia, Starbucks opened stores in Taiwan through a joint venture with

Uni-President. In 1998, the Taiwanese economy was doing relatively well and the elected government

supported business ventures. As with many other Asian cultures, though, the conversion of tea to the

acceptance of coffee is key to success. Despite cultural challenges, Starbucks did not view Taiwans

cultural differences as a unique challenge from its other expansions. The firm maintained a reliable brand

and the locals exhibited curiosity to western culture and coffee in general. The Starbucks strategy of

being the thirdspace worked well for customers who want to explore western culture since those

customers would not want to purchase to-go. Moreover, the western brand of Starbucks gave it an

advantage since customers who wanted exposure to western drinks were more inclined to do business

with western brands as well. As with the situation with many other countries, patronizing Starbucks

could also be seen as being in upper society, and this especially appealed to the growing middle class who

wanted to spend money on leisure enjoyment.

The Starbucks expansion into Taiwan did not just result in a successful franchise locally. The

company wanted to build a drink that contains tea elements and introduced the green tea Frappuccino.

19

Growing popularity of that drink elevated it to become the first product that was not created by Starbucks

America.

Adaptation in Taiwan

The partnership with the President Chain Store Corporation helped leverage the local marketplace

by engaging the existing clientele and customer groups from across the chain. Key Initiatives included

The rolling out several training programs and developing new brewing standards to meet the local

tastes.

Development of loyalty programs in the President Chain Store that could be redeemed at Starbucks

chain

Coupon programs that enabled existing customers to bring in friends for a free cup of coffee over

weekends

Buy one - get one free type local programs at the stores

These adaptation initiatives have led to growth in the Taiwan market and today Starbucks operates over

200 stores in this greater China area.

China CAGE & Mode of Entry

The first Starbucks store located in mainland China was opened in Beijing in January 1999

through a licensing agreement with Mei Da Coffee Co. Ltd. After 2001 when China embraced the WTO

regulations, many western food companies like KFC, Pizza Hut entered the market. This started to create

a change in peoples taste and slowly the market proved more conducive to the entry of western

companies. Since then, the interest in and appreciation of high-quality Arabica coffee, personalized

handcrafted beverages and the unique Starbucks Experience offered in Starbucks locations in China has

grown rapidly among Chinese consumers

20

With the goal of turning China into its second Timeline of Starbucks' Expansion in China
Year City
largest market, the company set out to target the 1999 Beijing
2000 Shanghai, Hong Kong
young, urban consumers. While the Taiwan expansion 2002 Macau, Shenzhen
2003 Ningbo, Nanjing
included administrative and economic similarities 2004 Guangzhou, Changzhou
2005 Qingdao, Dalian, Chengdu
2006 Chongqing, Tianji, Xian
between Taiwan and the US, an expansion into China 2008 Wuhan
2010 Fuzhou, Jinan, Xiamen
proves much different. The Chinese government Wenzhou, Jinhua, Kunming, Xuzhou, Hefei, Haimen,
2011 Nantong, Taizhou, Langfang, Zhengzhou, Harbin,
ranks roughly halfway through the World Banks ease Xiangtan, Tangshan, Weifang
Baoding, Nanchang, Huaian, Nanning, Quanzhou,
2012
of doing business report. Geographically, China is Qidong
2013 Changchun, Taizhou, Hainan, Taiyuan, Anshan

nearly halfway across the globe from the US, but as shown through its other expansions, pure geographic

distance has not inhibited the firm from expanding in the past. In fact, with so much presence in Asia

already, an expansion into China does not pose raw geographic challenges. On the other hand,

administrative challenges exist and intellectual property protections are questionable. Economically,

China is less modernized than its other expansions, such as Japan, Singapore, and Taiwan. Many citizens

live in poverty, and back in 1999, China was only slowly growing. Even culturally, China is the least

westernized out of these previous Asia expansions.

However, Starbucks has found success in its licensee, joint venture, and eventually sole ownership

models by tackling several key factors. Despite challenges in all components of the CAGE framework,

Starbucks focused on a key consumer segment. The China in 1999 was going through a period of

unprecedented growth. The new generation of city dwellers grew up adoring western culture. In contrast,

crowded cities also meant small living areas and noisy streets. Starbucks leveraged cultural and economic

opportunities to target urban consumers who desired clean, peaceful environments that also mimicked

westernization. In finding a population that has the desire to enjoy the Starbucks culture, the firm located

opportunities despite a culturally dissimilar country. Next, Chinas per capita income has remained near

$5,000 even after significant growths in economy. While that precluded the majority of the population

21

from being able to afford such a luxury, Starbucks realized that dense population centers meant enough

customers existed to support its mode of business. Similar to Taiwan and in contrast to the US, many of

Starbuckss visitors go to escape from the urban streets, and they often go to have meetings or to date,

thereby increasing the value of the internal ambiance more so than realized in the US. Lastly, the

government also showed unexpected support for the company. As the Chinese government ventured to

make the country seem more westernized, Starbucks became viewed as an opportunity of demonstrating

the modernization of China. Thus, examples exist where local governments invited Starbucks to open

stores in order to be seen as a sign of growth in the local communities.

As with many other international markets, in China the primary mode of entry had regulatory

requirements for a local partner. With more than 700 stores in China today, the plan for Starbucks is to

double that number by 2015.

Adaptation in the Chinese Market

A traditional tea drinking nation, China started to embrace coffee in the late 80s. The growing

wealth in the marketplace created a demand for gourmet coffee, not just the instant coffee variety.

Starbucks tapped into the market by integrating the western products through localization and adaptation.

As Howard Schultz told McKinsey Quarterly, if the Chinese consumers prefer black sesame... rather...

than blueberry, then learning from Starbuckss hubris of the past, when [it] thought, [it is] going to

change behavior. Well, no, [it is] not going to change behavior. The stores were designed to reflect the

dcor and space requirements that were prevalent in the Chinese culture. The objective was to create an

environment where customers can work outside of their house/office. Many of the stores are built to

create the home away from home experience and some of the local stores are over 3,800 sq. ft. concept

stores

Starbucks has been successful in introducing and developing a unique coffeehouse experience in

Greater China. The company shares its coffee passion and expertise with customers in China by

22

encouraging them to sample, savor and enjoy its premium coffee. The human connection has been and

continues to be a hallmark of Starbucks, with partners (employees) working to strengthen that relationship

within and outside Starbucks stores by participating in programs such as the Green Long March Chinas

largest youth conservation movement.

Product Innovations included the November 2007 Starbucks introduction of the Starbucks

bottled Frappuccino coffee drinks to Chinese consumers, extending the signature Starbucks Experience

beyond Starbucks stores by making it easier for consumers to enjoy the taste they love at home, at work,

or on the go.

Adaptation through Social Responsibility

The connection that Starbucks establishes with the communities in which it operates extends

beyond the daily interactions between barista and customer and is part of the Starbucks Shared Planet

commitment to community involvement. Education and the environment continue to be two focus areas

for Starbucks. The company announced a 34.17 million RMB (US$5 million) grant to the Starbucks

China Education Project. Additionally, Starbucks donated 4.1 million RMB (US$600,000) to the China

Women Development Foundation, supporting a program aimed at helping Chinese women obtain access

to clean drinking water. In January 2009, Starbucks allocates 5 million RMB (US$730,000) from the

Starbucks China Education Project to the Chengdu Education Foundation, to sustain teachers and their

students in provinces deeply impacted by the 2008 Sichuan earthquake.

In alliance with the American Red Cross, International Red Cross and the Red Crescent

(supporting the Red Cross Society of China), The Starbucks Foundation has provided $250,000 for

immediate humanitarian and long-term recovery efforts since the 2008 Sichuan earthquake. These types

of initiatives have continued in other areas where a portion of the revenue generated from the stores goes

towards irrigation efforts, community development efforts and general people/society upliftment efforts in

the local markets it serves.

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Conclusion
Starbucks Position in the Industry

The specialty coffee and snacks industry which Starbucks operates in is a mature industry with

limited buyer and supplier power. The number of substitutes available in this market is significant, while

the barriers into coffee industry are low, with minimal capital requirements, which results in quite

significant threat of new entrants.

The power of rivalry has had the most influence the industry especially in the last decade but

Starbucks has maintained its first mover advantage by making coffee ordering an interactive and

consistent experience and also popularized the third space concept. With the increasing competition

and awareness about healthier substitutes, Starbucks has differentiated itself from its competitors to

ensure long lasting strategic advantage through a number of complementary activities that highlight its

core competencies within its segment.

Starbucks Decline and Return of Schultz

After Schultz transitioned into less active role of a chairman in 2000, the Companys stock

suffered about 25% decline in its share price which was largely attributed to loss of focus on the

Starbucks experience and an excess focus on growth. In five years, the Company almost tripled the

number of stores worldwide, from 5,886 in 2002 to 15,011 in 2007. In 2008, Schultz returned as the CEO

in an effort to revive the company. He felt the company has lost the warm neighborhood coffee shop feel

and was rewarding the wrong things.

As part of its recovery plan, Starbucks shut down unprofitable stores in the US and accelerated the

expansion overseas. It also closed all of its stores for 3.5 hours to retrain its baristas and reemphasize the

customer service and quality. Throughout its recovery, Starbucks stayed true to its values and did not cut

employee benefits, such as 401k, cash bonuses, and health benefits. By the end of Q3, 2009, Starbucks

marked its first earnings growth since Q1, 2008. The Company earned $152M, compared to its loss of
24

nearly $7M the prior year and by the end of 2010, increased its revenues to a record $10.7B and doubled

its operating income. This return to profitability could be partly attributed to its refocus on its people,

training and the refocus on the founders blueprint of the Company.

Going Forward

Starbucks plans to continue investing in stores, both domestically and abroad. In order to maintain

its competitive advantage, Starbucks will emphasize continued investment in technology and product

innovation. With the goal of leveraging the existing Starbucks distribution channel to increase the dollars

spent per customer, Starbucks will focus on new product introductions like VIA soluble drinks, K-cups

(for Keurig machines), etc. Technological and operational initiatives include Square mobile payment,

loyalty cards, leveraging of the social media frameworks, and managing service cycle times through lean

initiatives. Schultz in his interview to Fast Company in June 2013 said that he would rather be first, than

perfect.

As the US market slows down, the Company is refocusing its growth initiatives on international

markets. With its three-region (Americas, EMEA and CAP) operating model, Starbucks leverages its

economies of scale in those regions, while adapting to the local tastes. The CAGE framework constitutes

a major basis for entering a new market primarily through Company Licensed Stores. The Asia Pacific

market represents a key opportunity for growth for Starbucks in the future. With continued international

growth in its future, Starbucks will be challenged to keep the small coffee shop feel on an even larger

scale. However, if past performance is an indicator, Schultz and his team have the strategic insight and

managerial prowess to pull it off.

25

Exhibits

Exhibit 1

26

Exhibit 2

Starbucks stock performance to peers

Exhibit 3

Selective markets and their corresponding entry strategy

Market Country Modes of Entry Partner Name

Americas Canada Wholly Owned Subsidiary Starbucks Canada
CAP Japan Joint Venture Sazaby Inc
CAP New Zealand Licensee Restaurant Brands
EMEA Germany Joint Venture Karstadt Qualle AG
Americas Mexico Joint Venture SC de Mexico
EMEA Switzerland Licensee Bon Appetit Group
EMEA Spain Joint Venture Grupo Vips

27

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