TROUBLE BREWS AT STARBUCKS1
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Starbucks was the darling of Wall Street, with a strong balance sheet and double-digit growth since going
public in 1992. By 2007, it had more than 15,000 stores around the world2 and projected that the number
would eventually grow to 40,000 stores, half of them outside the United States.3 But suddenly,
performance slipped so seriously that the board ousted CEO Jim Donald and brought back Howard
Schultz — Starbucks’ visionary leader and CEO from 1987 to 2000 and current chairman and chief global
strategist — to re-take the helm.
Despite the furor, the company was hardly in dire financial straits. In 2007, it had revenues of $9.4
billion, double-digit earnings growth and 2500 new store openings.4 But its share price had fallen almost
50 per cent as Wall Street became increasingly worried that the chain had run out of room for further U.S.
expansion. In November, the company reported its first-ever decline in customers’ visits to U.S. stores.5
Insiders and analysts alike questioned whether the brand had been irreparably damaged by a singleminded focus on growth and short-term profitability at the expense of the brand. It was a fear that Howard
Schultz himself had written about as the “commoditization of the Starbucks experience.”6
The Starbucks Coffee, Tea, and Spice Company was founded in Seattle in 1971 by Jerry Baldwin,
Gordon Bowker and Zev Siegl, three guys with a passion for dark-roasted, European-style coffee. Coffee,
they felt, was so much more than the bland beverage offered by Folgers and Maxwell House; coffee had
rich, sensuous flavors if roasted and brewed correctly. Their vision was to educate consumers about fine
case has been written on the basis of published sources only. Consequently, the interpretation and
perspectives presented in this case are not necessarily those of Starbucks or any of its employees.
2 Janet Adamy, “Schultz Takes Over To Try to Perk Up Starbucks,” Wall Street Journal, January 8, 2008, B1.
3 Janet Adamy, “Starbucks Sets Ambitious Goal of 40,000 Stores,” Wall Street Journal, October 6, 2006, B3.
Birchall and Jenny Wiggins, “The Starbucks Romantic,” Financial Times, January 12, 2008, p. 7. 5 Ibid.
Schultz, “The Commoditization of the Starbucks Experience,” Internal E-mail, February 14, 2007,
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html, accessed December 30, 2008.
Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997.
Page 2 9B09A002
the way a sommelier educates diners about fine wines. To this end, Starbucks sold only dark-roast, wholebean coffee from places like Sumatra, Kenya, Ethiopia and Costa Rica — no ground or prepared coffee.
And it sold only manual coffee pots and equipment needed to grind and brew coffee correctly at home —
no electric coffeemakers that would mask the coffee’s flavor.
The Seattleites successfully developed a devoted, local customer base, but it took Howard Schultz, who
joined the company in 1982, to see the potential for bigger things. Schultz had grown up in the Bayview
Projects, federally subsidized housing in Canarsie, Brooklyn. His father had quit school to help support
the family, served in World War II and worked a series of blue-collar jobs. As Schultz recalls, his father
“never found himself, never had a plan for his life.”8 One of his most vivid childhood memories was when
his father, then a delivery truck driver, broke his foot and couldn’t work. Without health insurance or
worker’s compensation, the family had nothing to fall back on. This childhood event made an indelible
imprint on Schultz, and he became determined to make something of his life. He went to Northern
Michigan University on a football scholarship, where he majored in communications, taking courses in
public speaking, interpersonal communications and business. After a short stint in sales at Xerox, he
joined Hammarplast, a Swedish manufacturer of stylish kitchen equipment and housewares. By the age of
28, he was promoted to vice-president and general manager.
While at Hammarplast, Schultz noticed that a Seattle retailer with only four stores was buying more of a
particular drip coffeemaker than the department store Macy’s. Curious, he went to Seattle, visited the
store — Starbucks — and was instantly hooked on the “romance” of fine coffee. The owners appreciated
his conversion to the real thing, but they initially rejected his offer to join their crusade, perhaps worrying
that his hard-hitting New York style was unsuited to laid-back West Coast culture and that his ideas for
expansion were incompatible with their mission of enlightenment. It took Schultz more than a year to
convince them, but he finally won the position of Starbucks marketing director.
Schultz’s Vision for Starbucks
Soon after joining Starbucks, Schultz visited Milan for a trade show. There, he saw coffee bars packed
with customers on every block. Baristas and customers were laughing and talking, enjoying the moment
and the espresso together. As Schultz later described it, “It was on that day that I discovered the ritual and
romance of coffee bars in Italy. I saw how popular they were, and how vibrant. Each one had its own
unique character, but there was one common thread: the camaraderie between the customers, who knew
each other well, and the barista, who was performing with flair . . . . ‘This is so powerful!’ I thought.
‘This is the link.’ The connection to the people who love coffee did not have to take place only in their
homes, where they ground and brewed whole-bean coffee. What we had to do was unlock the romance
and mystery of coffee, firsthand, in coffee bars. The Italians understood the personal relationship that
people could have to coffee, its social aspect. I couldn’t believe that Starbucks was in the coffee business,
yet was overlooking so central an element of it.”9
But his bosses weren’t interested. Cash was tight. Besides, Starbucks was a retailer, not a restaurant or a
bar; serving espresso drinks would put it in the beverage business. When Schultz pressured Baldwin to
expand the Starbucks vision, Baldwin would argue, “Howard, listen to me. It’s just not the right thing to
do. If we focus too much on serving coffee, we’ll become just another restaurant or cafeteria. It may seem
reasonable, each step of the way, but in the end, we’ll lose our coffee roots.”10
pp. 51-52. 10 Ibid., p. 61.
Page 3 9B09A002 Creating His Own Story
Not willing to abandon his dream, Schultz departed Starbucks and opened Il Giornale, Italian for daily.
His plan was to re-create the Italian espresso bar experience. To his surprise, Starbucks was his first
investor, supplying $150,000. “It isn’t a business we want to go into ourselves,” Baldwin explained, “but
we’ll support you.”11 It was a start, but Schultz needed $1.7 million: $400,000 for the initial store, to
demonstrate the practical operation and consumer appeal of an Italian espresso bar, and $1.3 million for
eight additional espresso bars, to show that the idea would work on a larger scale. In the first year, Schultz
spoke to 242 potential investors; 217 said “no.”12 Their arguments became all too familiar: “Coffee is a
commodity.” “Coffee consumption in the U.S. has been trending down since the mid-1960s.” “Coffee
shops are everywhere.” “Americans will never pay $1.50 for a cup of coffee.” Still, he persisted.
By 1987, Schultz had acquired the seed capital and opened three espresso bars. Then, in an unexpected
twist of fate, Starbucks’ owners decided to sell — six stores, the roasting plant and the name. Schultz had
to go for it. He raised four million dollars, acquired Starbucks, adopted its name and began to expand.
Fifteen new stores were opened in fiscal year 1988; 20 in 1989; 30 in 1990; 31 in 1991; and 53 in 1992;
all company-owned.13 Schultz explained, “We’re so fanatical about quality control that we keep coffee in
our hands every step of the way, from raw green beans to the steaming cup. We buy and roast all our own
coffee, and we sell it in company-owned stores.... Why? The answer can be found in the last cup of lousy
coffee you drank. Unlike shoes, or books, or soft drinks, coffee can be ruined at any point from its
production to consumption.... Coffee is a product so perishable that building a business on it is fraught
with peril. The minute we hand our coffee over to someone else, we’re extremely vulnerable to its quality
But Starbucks wasn’t just about the coffee. It was also about recreating the Italian coffee bar culture.
Schultz wanted Starbucks to become the “Third Place,” the place between home and work where people
gather, relax and interact with one another. To encourage customers to linger over a cup of coffee,
Starbucks paid a great deal of attention to the details of the store — everything from the layout, to the
furniture, to the music. Even more important were the baristas, whose ability to engage the customer was
the heart of the Starbucks experience. Understanding the difficulty of managing human capital, especially
when two thirds of workers were part-time, Schultz felt he had to make employees “partners” in his
vision. He had to infuse them with the Starbucks culture, reward them with a sense of personal security
and give them a reason to be involved in the success of the business.
To instill the requisite coffee knowledge in recruits, Starbucks developed a 24-hour training program
covering Coffee Knowledge (four hours), Brewing the Perfect Cup (four hours), Customer Service (four
hours) and basic retail skills. To provide personal security, Schultz fought with his board to offer health
insurance to all partners, even the part-timers. “Treat people like family, and they will be loyal and give
their all. Stand by people, and they will stand by you,” he argued. The math made sense; at the time, it
cost $1,500 a year to provide an employee with full benefits, compared with $3,000 to train a new hire. 15
And to increase involvement in the success of the business, he offered Bean Stocks — a pseudo stock
option plan for partners with at least six months at the store.16 As “stock holders,” store partners had an
incentive to participate in decision-making, to suggest cost-cutting measures to increase profitability and
13 Ibid., p. 114.
14 Ibid., pp. 171-172. 15 Ibid., p. 127.
Page 4 9B09A002
help maintain the integrity of the brand. If they felt that management was straying from the Starbucks
vision, they had the right and responsibility to call them on it. The result of these initiatives was a more
satisfied partner base. For baristas, turnover averaged 60 to 65 per cent, compared to 150 to 400 per cent
in the average retail or fast-food chain. For store managers, turnover was around 25 per cent compared to
50 per cent for other retailers.17
Starbucks Goes Public
With just over 100 stores in four states and Vancouver, British Columbia, Starbucks went public in 1992.
Initially priced at $17 a share, the stock jumped to $21 at the opening bell. By the end of the day, the
initial public offering (IPO) had raised $29 million for the company — $5 million more than expected —
and Starbucks’ market capitalization stood at $273 million.18 Being a public company took Starbucks into
the big leagues; it made millions for the believers who invested in the company, provided critical funds
for future expansion and helped attract talented new people.
But Wall Street can be a fickle master. As Schultz described it, “Alongside the exhilaration of being a
public company is the humbling realization, every quarter, every month, and every day, that you’re a
servant to the stock market.... Running a public company is an emotional roller coaster. In the beginning,
you accept the congratulations as if you really deserve them. Then, when the stock price falls, you feel
you have failed. When it bounces back, it leaves you dizzy. At some point, you have to divorce yourself
from the stock price and just focus on running the business.”19
EXPANDING THE BUSINESS MODEL
To satisfy Wall Street and stave off competitive threats, Starbucks made growth its mantra. Starbucks was
in a race to establish national dominance before other emerging specialty coffee bars and yet trying to fly
under the radar of the “big boys” — such as Procter & Gamble, who had purchased Millstone Coffee, the
largest whole-bean supplier to grocers. To grow and claim leadership in the category, Starbucks focused
on a strategy of new products, a stronger connection with customers as the Third Place and expanding
store locations in the United States and abroad.
Developing New Products
One of the first additions to the management team after the company went public was Howard Behar,
who had 25 years of retail experience in the furniture business and in resort development. While many
people inside Starbucks have had a lasting impact on its success, it was Behar who actually changed the
way the company thought. Time and again, he argued that it wasn’t just about the coffee or about the
brand, it was about the customer. Behar’s crusade was not always met with open minds, as Schultz
recalled in his book, Pour Your Heart into It:
Howard had been at Starbucks less than a month when he came to me one day and asked, “Have you been
reading the customer comment cards?”
“Sure,” I said, “I read them. I read them all.”
19 Ibid., pp. 188-189.
“Well,” he replied, “how come you’re not responding?”
“Responding to what?”
“Look at all the people who want nonfat milk.”
“Well,” I explained, “I did a formal tasting a number of times this year of lattes and cappuccinos made
with nonfat milk and they just didn’t taste good.”
“To whom?” Howard was clearly growing impatient with my answers. “To me...”
“Well, read the customer comment cards. Our customers want nonfat milk! We should give it to them.”
I answered — and Howard never lets me forget it — “We will never offer nonfat milk. It’s not who we
The nonfat milk question led to one of the biggest debates in Starbucks’ history. Coffee purists were
scandalized. Store managers were frustrated — how could they handle more than one type of milk
without slowing store operations? Still Behar persisted, eventually getting Schultz to authorize an in-store
test. The stores didn’t fall apart, customers got what they wanted and Starbucks stopped losing sales to
more accommodating competitors. Nonfat milk was in.
The Frappuccino story is similar. Starbucks management refused to consider a cold blended beverage on
principle — it wasn’t a true coffee drink. This time, it was a couple of store managers in southern
California who took the initiative after seeing their afternoon and evening customers defect to competitors
who offered cooler, more refreshing coffee beverages. They began experimenting with different recipes
and ingredients; they varied the blending time; they changed the ratio of ice to liquid. They tested their
concoction with customers, and again, customers approved. Corporate came around. Within a year of
rolling out Frappuccinos nationally, store sales of Frappuccinos were $52 million, seven per cent of total
The success of the Frappuccino inspired more new products, many developed at local stores, then refined
and disseminated nationally by corporate. Seasonal offerings, such as a strawberry and cream
Frappuccino in the summer and gingerbread latte at Christmas, were introduced. Food items, such as
cookies and pastries, began to make their way into the store. “Food is a big part of where we are going...”
said Orin Smith, a member of Starbucks’ senior management team. “It is not going to be a lot of any one
thing. It will be food that makes sense and complements the customers and their choice of beverages.”22
Starbucks would later introduce cold sandwiches and salads for lunch as well as hot breakfast sandwiches.
As the company became more comfortable in expanding beyond its traditional roots, it developed
products with other companies — a bottled Frappuccino with Pepsi, a coffee-flavored ice cream with
Dreyer’s and a coffee liqueur with Jim Beam. The extensive distribution networks of these companies
afforded Starbucks access to supermarkets and restaurants with their broader customer base. But even in
negotiations with much larger and more experienced partners, Starbucks took care to protect its brand.
The partnership with Pepsi — a company 100 times the size of Starbucks at the time — was a fifty-fifty
arrangement, in which Pepsi ceded Starbucks a high degree of control over its brand equity and product
22 Sarah E. Lockyer, “Full Steam Ahead,” Nation’s Restaurant News, May 3, 2004, p. 4.
Jones Yang, Pour Your Heart Into It, 1997, p. 222.
Schultz and Dori
Page 6 9B09A002 Location, Location, Location
At the same time, Starbucks was adding new stores at a rapid clip. Its sophisticated model for store
expansion was based on a matrix of regional demographic profiles and an analysis of how best to leverage
operational infrastructure. For each region, a large city was targeted to serve as a “hub,” where teams of
professionals could be located to serve as support for new stores. Markets were entered with the goal of
expanding out to 20 or more stores in the first two years. From the core, it branched out to nearby “spoke”
markets, including smaller cities and suburban locations with demographics similar to the typical
Starbucks didn’t advertise when entering a new market; it didn’t have the funds. Instead the store devised
a grassroots campaign, beginning with the selection of a highly visible location — such as DuPont Circle
in Washington, D.C., or Astor Place in New York — for the flagship store. Artwork was designed to
celebrate each city’s personality, and it was used on commuter mugs and T-shirts. In each market,
Starbucks planned at least one big community event to celebrate its arrival, with the proceeds going to a
local charity. Local “ambassadors” were recruited from new partners and from customers whose names
were part of Starbucks’ database of catalog customers. They were given tickets to the grand-opening
event and two free-drink coupons with a note asking them to “Share Starbucks with a Friend.”24
As Starbucks expanded its business, the company sometimes perplexed onlookers with its store
placement strategy, for stores were oftentimes opened across the street from one another. But Starbucks
had learned that nearby stores didn’t necessarily hurt one another’s sales and in fact could actually help.
Early on, it had opened a large store 30 yards from a tiny but top-performing store tucked in a building
that was to be closed for remodeling. To the company’s amazement, the two stores not only coexisted;
they thrived. Dense store placement became the model for store location throughout the country — with
similar, profitable results.25 (Coca-Cola and PepsiCo Inc. have experienced similar results in placing a
new vending machine next to an existing one; initially, sales of the first one drop but rebound quickly as
more customers drink more soft drinks.)
When Starbucks entered new markets, these store clusters acted as billboards, creating awareness. And as
demand grew, clustered stores helped to manage store traffic, particularly in the crucial hours before 10
a.m. when as much as 60 per cent of a store’s sales occur.26 During this period, it’s not uncommon for
customers who perceive the wait time to be too long — due to long lines, parking difficulties or any other
problem — to leave without their coffee. More stores meant a better chance for customers to find a short
line or empty parking space, and for Starbucks to capture the sale.
The ubiquity of the stores also helped drive sales throughout the day. “Where a lot of our growth is, is
driving that incremental cup that someone may not have planned to buy,” said Doug Satzman, a director
of new store development in California. Standing on the corner of Mission and Fourth Streets in San
Francisco — where there is a Starbucks on three of the four street corners — Satzman explained: “If
you’re over here [referring to the Metreon, an entertainment mall on his right] you are not likely to cross
the street. If you’re in the hotel, you might be going to the right to Market Street” to the shopping area. 27
The people in the complex on the third corner might not bother to go outside at all. But with a store on
each corner, it was easy to grab a cup of Starbucks from any direction.
ElBoghdady, “Pouring It On,” The Washington Post, August 25, 2002, H1. 26 Barbara Kiviat, “The Big Gulp at
Starbucks,” Time, December 18, 2006, p. 124. 27 “Why Did Starbucks Cross the Road?” Wall Street Journal, April 3,
Page 7 9B09A002
Once the company realized that convenience drove sales, it was only a matter of time until the company
added drive-through service. Initially targeted to parents with young children, the drive-through windows
quickly became a hit with a broader market, resulting in average annual sales of around $1.3 million —
compared to $1 million at stores without a window.28 The downside of the drive-through locations was the
cost of real estate and additional partners needed to operate the window. In addition, the bottlenecks in the
drive-through could be far worse than those in the store, even though the average time to serve customers
was about the same. “In the store, it’s an issue of queuing — someone can have a complex order and step
aside while it’s being made,” said John Glass, an industry analyst with CIBC World Markets.29 But a
drive- through customer could not step aside, and all the cars behind that customer could do was wait. To
address these problems, baristas’ headphones were set to “ding” when a car pulled into the drive-through
chute and a digital timer measured service times. The stores also added order confirmation screens to
improve order accuracy and additional pastry racks to reduce time to serve.
To add new locations in areas otherwise inaccessible to the chain, Starbucks ventured into licensing.
Airports were a natural venue for Starbucks, but all U.S. airport retail locations were run by
concessionaires — in the case of food and beverages, Host Marriott. Licensing went against the chain’s
belief that it needed to control the customer’s experience, but the additional exposure seemed worth the
risk. Initially, the Host Marriott venues did not fully meet Schultz’s expectations, but the partners
cooperated to make the relationship work. Licensing, Schultz found, was like a marriage: “Whether it
works is a matter of whom you choose as a partner, the amount of due diligence you do beforehand, and
how things go during the courtship. If you jump in with little preparation, you risk setting yourself up for
Following the success of its relationship with Host Marriott, Starbucks initiated partnerships with retailers
such as Safeway and Barnes & Noble. These licensing agreements created greater customer convenience
in established markets, but they also gave Starbucks a way of entering new markets when it could not
afford to build company-owned stores. Licensees agreed to build in-store coffee bars at their own expense
and to provide the employees who operated the counter. Starbucks trained the baristas and the drinks were
prepared with Starbucks ingredients and recipes. In selecting licensees, Starbucks carefully considered
whether the image and goals of the licensee would be consistent with those of Starbucks. Target made the
cut; Wal-Mart didn’t.
Connecting with Customers
To create the sense of community that is central to the Third Place, Starbucks added music, books and
movies to its product mix. “The overall strategy is to build Starbucks into a destination,” explained
Kenneth Lombard, then president of Starbucks Entertainment.31 “We know there are going to be endless
opportunities as this strategy continues to grow, and we’re going to look at each and every opportunity.”32
Added Schultz, “Starbucks isn’t an entertainment company. But we want to have an entertainment
strategy that supports the foundation of the coffee experience that our customers have come to expect and
Gray, “Fill ‘er Up — with Latte,” Wall Street Journal, January 6, 2006, A9.
Schultz and Dori Jones Yang, Pour Your Heart Into It, 1997, p. 174.
Ariana Cha, “DVDs and Fries,” The Washington Post, August 28, 2005, A1.
32 Steven Gray and Kate Kelly, “Starbucks Plans to Make Debut in Movie Business,” Wall Street Journal, January 12,
Page 8 9B09A002
Hear the Music
Music had always been a part of the Starbucks environment, with stores playing primarily jazz and
classical instrumentals, and eventually adding jazz vocals to the mix. Time and again, customers asked
Starbucks where they could buy what they heard there. So when Schultz stumbled upon a music store
called Hear Music in the Stanford Shopping Center in California, he was intrigued. At Hear Music,
customers could come in, listen to any one of more than 150,000 titles and create a custom mixed CD
complete with personalized title, liner notes and artwork on the disc and jacket in just five minutes. Even
more impressive were the people, who were as knowledgeable and passionate about music as Schultz was
about coffee. It was clear that their vision for Hear Music was similar to his vision for Starbucks. “When I
think about the average music-shopping experience, what I would call the sense of romance about music
is gone,” Schultz recalled. “But when I saw Hear Music that first time, it was clear that they had cracked
the code on the sense of discovery that music should have.”34 He was so impressed he bought the
Soon after, Starbucks began offering compilations from Hear Music in its stores, launching a popular
series of CDs called “Artist’s Choice.” The series included musicians as diverse as Yo-Yo Ma, Tony
Bennett, Lucinda Williams and the Rolling Stones, all sharing their favorite songs. But the breakout
success for Starbucks came when Hear Music co-produced and distributed Ray Charles’ posthumously
released album Genius Loves Company, a collection of duets between Charles and performers such as
Norah Jones, James Taylor and B.B. King. The CD — boosted by the biographical film Ray and the
artist’s death — sold nearly three million copies, a quarter of those through Starbucks; no new Ray
Charles release had come close to that level in years.35 To make the success of the store’s investment even
sweeter, the CD won eight Grammy awards.
Starbucks’ success with CDs — at a time when veteran music retailers like Tower Records were filing for
bankruptcy — did not escape the attention of the recording industry. With guaranteed in-store play and a
built-in distribution network of thousands of outlets, recording companies began to compete fiercely to
supply one of the handful of CDs sold at any given time in Starbucks stores. Heritage artists such as
Carole King, James Taylor, Paul McCartney and Joni Mitchell signed exclusive deals for the initial
distribution of new recordings. And Starbucks helped introduce little known groups, such as the rock
band Antigone Rising, and international artists, such as Italian pop singer Zucchero. Concord Records
President Glen Barros said he turned to Starbucks for the final say on whether to sign a new singer: “If
they’ll be our partner, we’ll do it.” Added another record-label executive, Starbucks is the “new cute girl
that everyone wants to take to the dance.”36
From offering CDs, Starbucks began to experiment with in-store personalized CDs. It introduced kiosks
called Media Bars that let customers listen to music and create their own digital compilations while sitting
in comfortable lounge chairs waiting for their latte. The bill — 99 cents a song — was paid with a
Starbucks card or credit card.37 “Our customers respond to music,” said Anne Saunders, then senior vicepresident of marketing. “Part of why they come is as an entertainment destination, for a respite, a break
with friends, as a place for community gathering. The idea for the music service is very grounded in why
people come to Starbucks.”38
Overholt, “Listening to Starbucks,” Fast Company, July 2004, p. 50.
Gray and Ethan Smith, “New Grind: At Starbucks, a Blend of Coffee and Music Creates a Potent Mix,” Wall
Street Journal, July 19, 2005, A1.
Homes, “First the Music, Then the Coffee,” November 22, 2004, p. 66.
Overholt, “Listening to Starbucks,” Fast Company, July 2004, p. 50.
Page 9 9B09A002
The Readers’ Corner
In an early misstep, Starbucks offered a literary magazine called Joe — it lasted only six months before
Schultz decided, based on slow sales, that the product “didn’t add any value.”39 But with its success in the
music arena, Starbucks began to think about how it might extend its entertainment platform. The store
chose Mitch Albom’s For One More Day as its first book. To kick off sales and spark a community-wide
dialogue, 25 Starbucks stores around the country offered discussion groups of the book, complete with
free coffee. Publishers looked on with interest. “One of the big problems in the book industry is that
outside of Oprah, there’s no really widely accepted authority to recommend books,” said Laurence
Kirshbaum, founder of LJK Literary Management agency. Starbucks was beginning to see itself as that
authority. “Customers say one of the reasons they come [to Starbucks] is because they can discover new
things — a new coffee from Rwanda, a new food item. So extending that sense of discovery into
entertainment is very natural for us. That’s all part of the Starbucks experience,” said Saunders.40
And On to the Red Carpet
In 2006, Starbucks took the leap from music into movies through a promotional deal with Lions Gate
Entertainment for Akeelah and the Bee. The movie was about an 11-year-old African-American girl from
south Los Angeles who discovered a passion for words and, with the help of her teacher, reached the
National Spelling Bee. Because of its largely African-American cast and urban setting, Lions Gate feared
that the movie would only appeal to a narrow audience. A connection with Starbucks would guarantee
broader exposure as well as provide an endorsement for the movie. As Jon Feltheimer, CEO of Lions
Gate, saw it, “[Starbucks] is a company with a pristine brand putting their brand on the line and saying,
‘You should go to this movie.’”41
Starbucks promoted the film aggressively, putting movie-related trivia games on its chalk boards and
coffee-cup sleeves, as well as distributing the soundtrack. It held advance screenings for its baristas and
holders of Starbucks cards. “The baristas want to tell their customers about the things they get excited
about, and we’re convinced this movie is going to be one of those things,” said Anne Saunders, who had
been promoted to Starbucks’ senior vice-president for global brand strategy and communications. For its
part, the deal included an undisclosed share of the movie’s box-office proceeds. It also gave Starbucks an
opportunity to broaden the use of its in-store Wi-Fi network by running trailers for the movie. “We’ve
known for quite some time that the Wi-Fi opportunity in our stores [is] the perfect place for shorts,
documentaries and other things that wouldn’t be seen on the big screen,” Schultz said.42 The box office
receipts, however, were disappointing.
Starbucks tried again the next year with a nature documentary, Arctic Tale, from Paramount Classics and
National Geographic Films. The film was about a walrus pup and a polar bear who grew up and found
their frozen environment melting beneath them. This time, in-store promotions were supplemented with
Starbucks-hosted discussions on climate change.43 “We introduced Arctic Tale to our customers because
we want to spark a dialogue about environmental issues,” Lombard said. “The coffeehouse is a great
place to inspire such discussion. There is no more important issue facing our planet today than climate
change.” Starbucks’ promotion was an “avenue to get people of all ages to talk . . . and hopefully be
inspired to be a
Dominus, “The Starbucks Aesthetic,” New York Times, October 22, 2006, p. 1.
Gray and Kate Kelly, “Starbucks Plans to Make Debut in Movie Business,” Wall Street Journal, January 12,
43 Janet Adamy, “Starbucks Sticks with Film-Promotion Plan,” Wall Street Journal, June 28, 2007, B2.
Page 10 9B09A002
part of the solution.”44 Box office sales for “Arctic Tale” were again disappointing and failed to leverage
Starbucks’ “voice as a cultural arbiter.”45 But both Paramount and National Geographic Films executives
said they were pleased with the Starbucks effort. “They were great partners and awesome to work with,”
said a National Geographic executive. “They did everything they said they would do. I’d work with them
again in a heartbeat.”46
Starbucks began its expansion outside North America in 1995 with a partnership with SAZABY Inc. to
open Starbucks coffeehouses in Japan. Skeptics initially doubted whether the Starbucks formula would
play in countries that did not have a coffee culture. But since that time, Starbucks has invaded nearly
every corner of the world — either through its “living-room-in-a-coffee-house” format or through its
“corners” concept or through mini-outlets placed in airline offices, sports stadiums, airports, hotels and
bookshops. By 2008, Starbucks had 4500 locations in 43 countries outside the United States.47 Its
overseas menus were anchored by the same lattes, cappuccinos and drip coffees as in the United States,
with some modification for local tastes. In Athens, for example, local patrons find a thick layer of fine
residue at the bottom of their coffee, and in the United Kingdom, customers can have a cheese and
marmite sandwich. (Marmite is a black yeast spread favored only by the British and a few of its former
colonies.) For the most part, the formula has worked. Even in the United Kingdom, where high tea is
sacrosanct and a “nice cuppa tea” is the remedy for almost anything, Starbucks was thriving. In London,
there were more Starbucks locations than in New York City. 48
Overall, the expense of building stores and other infrastructure in overseas locations meant that Starbucks
global operations were not yet a major contributor to the company’s bottom line. In addition, there have
been challenges; the most public of these was Starbucks’ withdrawal from the historical grounds of the
Forbidden City in China after a ground swell of negative public opinion developed. Starbucks also
delayed its entry into India and Russia, a move that some have said put Starbucks at a disadvantage. Such
delays gave local competitors time to prepare for the onslaught and move into prime locations. And real
estate prices continued to rise while the company waited.49
But Starbucks executives stressed that the chain was welcomed in the overwhelming majority of places it
opened. “What we’ve found everywhere we’ve opened is we become a landmark overnight,” said Martin
Coles, president of Starbucks Coffee International. And, he continued, “We do not spend a great deal of
time focusing on our competition.”50 In fact, Starbucks insisted that competition brought out the best in
the company and helped grow the overall coffee market.
A PERFECT STORM
By 2007, Starbucks had become one of the most widely recognized and admired global brands.
Consistent with Schultz’s memory of espresso bars on every corner in Milan and with his belief that a
Graser, “Rough Start for Starbucks,” Variety.com, August 23, 2007,
45 Janet Adamy, “Starbucks Sticks with Film-Promotion Plan,” Wall Street Journal, June 28, 2007, B2.
“Rough Start for Starbucks,” Variety.com, August 23, 2007,
47 Janet Adamy, “Starbucks Brews Growth Abroad,” Wall Street Journal, June 12, 2008, B2.
49 Janet Adamy, “From Seattle, with Lattes,” Wall Street Journal, August 31, 2007, B1.
Page 11 9B09A002
must grow robustly to please Wall Street, Starbucks seemed to be everywhere. But growth had had
unintended consequences. And Starbucks was about to be challenged by a shifting competitive
environment and a difficult economy.
Incremental Decisions and Unintended Consequences
From the very beginning, Starbucks had added stores at a rapid pace, so it surprised many analysts when
the company announced in 2004 that it intended to double its pace of expansion. To meet this promise to
Wall Street, “there was a little bit of a frenzy to get locations open,” recalled Matt Dougherty, a real estate
broker with Nevada Commercial. A Florida broker who worked with Starbucks agreed, “We pumped it
up, we accelerated, but when you do that you sacrifice real estate. There was a disconnect somewhere in
Seattle between those decisions and what the reality was on the ground. The opportunity was not always
there.”51 Other analysts suggested that the company — swayed by the perks offered by landlords eager to
bring Starbucks’ cachet to their neighborhoods — simply ignored its own winning store location
The net results of expansion were a larger customer base and a changed profile for the “average”
Starbucks customer. In 2000, about three per cent of Starbucks customers were between the ages of 18
and 24; 16 per cent were people of color; 78 per cent had college degrees, and the average annual income
was $81,000. By 2005, 13 per cent of customers were between 18 and 24; 37 per cent were people of
color; 56 per cent were college graduates, and the average income was $55,000.53
In addition, the increased accessibility of Starbucks — through store openings as well as licensees — had
also changed consumers’ perceptions of Starbucks. The store wasn’t so much a destination or the Third
Place as it was an “affordable luxury” — a little treat to get the morning started or a pick-me-up in the
afternoon. Customer behavior reflected this as well, with 80 per cent of orders being consumed outside
At the same time, the increasing number of drive-through windows and in-store food items took
Starbucks a step closer to fast food, which led to an internal rift between headquarters and store
personnel. Store managers without drive-through windows felt their sales were being cannibalized by
locations offering greater access, while managers of drive-through locations had more difficulty in
generating impulse purchases for whole-bean coffee, CDs and other merchandise. Baristas resented
having to cross-sell food items, a fast-food tactic. And even customers complained that cooking odors
from hot breakfast sandwiches changed the “Starbucks experience.” As noted by Jim Romenesko on
Starbucks Gossip, an online Internet site not affiliated with the company, “If I go in there first thing in the
morning, it smells like McDonald’s, not a coffee shop.”55
Efforts to increase operational efficiencies also affected the customer experience. To reduce wait time,
Starbucks brought in the Verismo 801 automated espresso machines, which dispensed hot espresso at the
touch of a button and allowed baristas to make drinks 40 per cent faster, but the machines were so tall that
customers could no longer see the coffee being made or interact with the barista. The adoption of
Flavorlock sealed bags of pre-ground coffee eliminated the step of grinding the coffee, but the stores lost
Stone, “The Empire of Excess,” New York Times, July 4, 2008.
Bordeaux, “Is It Possible to Grow Too Fast?” July 9, 2008, Growthink Blog, www.growthink.com/content/itpossible-grow-too-fast.
53 Steven Gray and Ethan Smith, “New Grind: At Starbucks, a Blend of Coffee and Music Creates a Potent Mix,” Wall
Street Journal, July 19, 2005, A1.
54 Janet Adamy, “McDonald’s Takes on a Weakened Starbucks,” Wall Street Journal, January 7, 2008, A1.
55 Barbara Kiviat, “Wake Up and Sell the Coffee,” Time, April 7, 2008, p. 46.
Page 12 9B09A002
the aroma of freshly ground coffee. And in an effort to reduce maintenance costs, stores were reconfigured with fewer comfy chairs and less carpeting — making Starbucks a less inviting place in which
to linger over a cup of coffee.56
By February 2007, Schultz was questioning whether the company was on the right path. The product mix
— which included non-coffee drinks, food items, music, books, movies and even teddy bears — had
expanded tremendously; locations — both company-owned and licensees — seemed to be everywhere. In
a memo to the company’s top execs, Schultz wrote, “...we have had to make a series of decisions that, in
retrospect, have led to the watering down of the Starbucks experience, and, what some might call the
commoditization of our brand.”57 The company, he lamented, had lost the “romance and theatre” of
coffee- making with its meteoric expansion.
For years, the line between retailers of brewed coffee had been clearly defined. Starbucks, with its $3-plus
espresso-based drinks, was in a different league from Dunkin’ Donuts and McDonald’s. One Starbucks
marketing executive went so far as to characterize the competition as “selling hot, brown liquid
masquerading as coffee.” 58 But by mid-decade, their parallel worlds began to collide. Starbucks, with its
drive-through window, was beginning to look a lot more like a fast-food restaurant. Dunkin’ Donuts and
McDonald’s, seeing the profits in specialty coffee, began their own efforts to join the high-end coffee
market. As Jon Luther, chief executive of Dunkin’ Donuts’ parent company, the U.K. group Allied
Domecq PLC, said, “Espresso has become mainstream in America. And who does mainstream better than
Dunkin’ Donuts was the largest seller in America of regular, non-flavored, brewed coffee through fast
food outlets. Its stores were found throughout the United States, with the largest concentration in the
Northeast, many in blue-collar neighborhoods. The chain rolled out its line of espresso drinks in 2003,
claiming it could deliver its Italian brews “faster, cheaper, and simpler”: faster, by working with a Swiss
equipment manufacturer to provide real espresso and fresh steamed milk in less than a minute; cheaper,
by offering drinks at prices 20 per cent lower than Starbucks; and simpler, by communicating in plain
English, labeling its coffee sizes as “small,” “medium” and “large,” rather than the “tall,” “grande” and
“venti” preferred by Starbucks. In doing so, the chain hoped to “democratize” the espresso drink or as one
billboard read: “Latte for Every Tom, Dick and Lucciano.”
Not all Dunkin’ Donuts regulars were impressed. Pat Kelly, a 26-year-old Boston police recruit who
drank Dunkin’ Donuts coffee daily, refused to try the new Dunkin’ products. The only guy among his
buddies to try a latte “got a razzing” he said. “I’m not really a latte sort of guy. Those are yuppie drinks.”
But some of Starbucks’ yuppies took notice. Kathleen Brown, a 30-year-old Boston lawyer, used to treat
herself to a $4 Starbucks Caramel Macchiato but switched to Dunkin’ Donuts. “I can order a plain
medium caramel latte and not deal with all that fancy stuff,” she said.60 The fact that it also costs less just
made it that much sweeter.
Schultz, “The Commoditization of the Starbucks Experience,” Internal E-mail, February 14, 2007,
58 Janet Adamy, “McDonald’s Takes on a Weakened Starbucks,” Wall Street Journal, January 7, 2008, A1. 59
Deborah Ball and Shirley Leung, “Latte Versus Latte,” Wall Street Journal, February 10, 2004, B1.
Page 13 9B09A002
McDonald’s was slower to get into high-end specialty coffee. But this changed in 2004 when its share of
breakfast traffic slipped 1.6 per cent — in large part due to declining coffee sales; coffee, it seems, drives
consumers’ choice of breakfast sandwiches, not the other way around. And McDonald’s coffee sales had
dropped 36 per cent over the past decade, while Dunkin’ Donuts’ and Starbucks’ sales were growing.61
To remedy the situation, McDonald’s management moved to overhaul the stores. It developed a “Plan to
Win,” which emphasized a shift “from growing by being bigger to growing by being better.” 62 The stores
would be refurbished — replacing molded plastic booths with oversized chairs, changing to softer
lighting and repainting the restaurants with muted tones instead of the bright colors previously used.
Wireless Internet was added. “We began to realize that we could definitely sell coffee in this
environment,” said Don Thompson, president of the chain’s U.S. business.63
In 2006, McDonald’s changed its drip coffee to a stronger blend and began marketing it as “premium”
roast — which Consumer Reports rated “better” than Starbucks. Emboldened, the company developed an
espresso line of drinks under the name McCafe. Like Dunkin’ Donuts, it used a more automated process
than Starbucks; instead of steaming milk in pitchers and then combining it with the espresso, McDonald’s
used a single machine to make all the components of each drink. And the McDonald’s added flavors were
limited to vanilla, caramel and mocha, significantly fewer than the thousands of combinations offered by
Starbucks. Prices were also lower — $1.99 to $3.29 — $0.60 to $0.80 less than Starbucks.64
It’s the Economy!
In 2007, the U.S. economy was hit with increasing prices. A barrel of oil almost doubled in price,65 and
gasoline prices climbed from around $2.00 to $3.00 a gallon.66 Starbucks, like many retailers, felt
consumers’ pain. “They finally got to the point where their customer base was so broad it wasn’t
recession- proof,” according to Joseph Buckley of a major investment bank and brokerage firm.67 And as
gas prices continued to rise all across the United States, the $3.50 average price of a cup of Starbucks
coffee now stood in direct competition with the less discretionary gallon of gas, a crucial comparison
when consumers’ budgets were already pinched.
As if that were not enough, the economy was further hit by the fallout of the sub-prime mortgage lending
crisis. Because Starbucks had expanded in the South and in Southern California, regions hit hard by the
housing crisis, many new stores performed below expectation. In some cases, store locations had been
chosen because the population was projected to grow rapidly with new development; that development
did not occur and so the expected sales did not materialize.68 In other cases, the population was there, but
sales were not.
Gray and Deborah Ball, “McDonald’s Sees Rivals Bite Into Breakfast,” Wall Street Journal, April 8, 2005,
B1. 62 Neil Buckley, “McDonald’s Returns to Profit after Revamp Restaurants,” Financial Times, January 2004, p. 21.
63 Janet Adamy, “McDonald’s Takes on a Weakened Starbucks,” Wall Street Journal, January 7, 2008, A1.
United States Spot Price FOB Weighted by Estimated Import Volume (Dollars per Barrel)
Kiviat, “Wake Up and Sell the Coffee,” Time, April 7, 2008, p. 46.
Stone, “Lax Real Estate Decisions Hurt Starbucks,” New York Times, July 4, 2008.
Page 14 9B09A002 THE FALL FROM GRACE
Confirmation of trouble within Starbucks came in 2007 when the company experienced two quarters of
flat growth in same-store sales, then reported its first ever decline in the fourth quarter. Same-store sales
— a measure of sales in locations open at least a year — had hovered in the mid-single-digit range all
year, after years of growing at a high single-digit or double-digit rate each quarter.69
To beat the economic woes being touted daily in the national press, CEO Jim Donald reacted by tinkering
with lower-priced product offerings. Starbucks began testing a $1 coffee and free refills on traditionalbrewed coffee to attract the price-conscious consumers amid a weak economy. At $1, Starbucks would
undercut the price of competitors such as McDonald’s and Dunkin’ Donuts. Although most sit-down
restaurants top off customers’ coffee free of charge, fast-food convenience restaurants have traditionally
stayed away from the practice.
And during the 2007 holiday season, Starbucks ran its first national television campaign — something
that Wall Street had long advocated it was time to do. The ads used “animatics” — a crisper, lesscartoonish form of animation. In one TV spot, a bearded skier and a reindeer are stuck in a ski lift and the
skier offers the reindeer a cup of Starbucks coffee. Ideas for future advertising efforts were decidedly
more edgy. One proposed campaign showed Americans discussing issues of importance to them — such
as the war in Iraq and health care or even pop culture — and depicted Starbucks as the “living room” of
the national conversation. The images would shift from inside a Starbucks store to pictures of an
American soldier or, on the lighter side, Britney Spears on the day she shaved her head.70
But by the end of 2007, Starbucks’ stock had lost much of its luster. In early January, the company’s
share price was $18, down from $35 the previous year. Deciding that it was time to act, on January 7,
2008, the board brought back Howard Schultz as CEO. And Schultz came back determined to restore
Starbucks’ cachet as a premier brand: “I came back because it’s personal; I came back because I love this
company and our people and feel a deep sense of responsibility to 200,000 people and their families.”71
Investors hailed his resumption of the CEO position, hoping that, like Steve Jobs’s homecoming to Apple
in 1997, it would portend a return to healthier days. But many analysts warned that investors should not
expect an immediate reversal of company fortunes. “Many [investors] don’t realize how long it can take
to right the ship and how rocky the sailing can be during that time. Companies like Gap Inc. and Home
Depot Inc. have spent several years trying to get back on track after losing their way.”72
Schultz himself recognized that it would not be a quick fix and that choices would not be easy. In
comments to the press, he warned, “We want to have the courage to do the things that support the core
purpose and the reason for being and not veer off and get caught up in chasing revenue, because longterm value for the shareholder can only be created if you create long-term value for the customer and your
people. We have to get back to what we do.” 73
Adamy, “Schultz Takes Over to Try to Perk Up Starbucks,” Wall Street Journal, January 8, 2008, B1.
Kang, Janet Adamy and Suzanne Vrancia, “TV Campaign Is Culture Shift for Starbucks,” Wall Street
Journal, November 17, 2007, A1.
71 Barbara Kiviat, “Wake Up and Sell the Coffee,” Time, April 7, 2008, p. 46.
72 Janet Adamy, “With Starbucks, Investors Need Patience,” Wall Street Journal, February 2, 2008, B1.
73 Barbara Kiviat, “Wake Up and Sell the Coffee,” Time, April 7, 2008, p. 46.
Case Grading Expectations
EXECUTIVE SUMMARY The executive summary is designed for the executive who wants an
understanding of an issue, an analysis and recommendation, but without all the analysis detail.
Executive summaries are often the first few pages of a comprehensive analysis, they are normally two
pages, and they should never exceed three pages (plus any attachments).
SITUATION ANALYSIS The introduction is a brief, one-paragraph description of the major issues
presented in the case. This should include any economic, political, market or competitive issues. It may
include organizational issues, technical issues, financial issues, ethical issues, policy considerations, etc.
International Journal of Case Method Research & Application (2006) XIX, 2 157 P
ENVIRONMENTAL ANALYSIS The environmental analysis is an analysis of critical internal and external
issues that bear most significantly on the case. These issues may be related to a department, company,
market, country, product, competitor, company policy, industry, etc.
PROBLEM STATEMENT The problem statement is a specific statement of the problem or issue, usually
not to exceed two sentences. Remember that this is not a question nor a direction to proceed; it is only
a statement of the problem.
ALTERNATIVE STRATEGIES Alternative strategies are possible alternative solutions to solve the problem.
These should be specific and distinct from one another. Briefly note advantages and disadvantages of
each possible alternative. One of the most useful purposes of this section is to demonstrate that you
have not overlooked any obvious alternatives.
RECOMMENDATION(S) The recommendation is an explanation of your specific recommended
strategy(ies), why you selected that particular one and how it solves the problem. It might include an
appropriate financial analysis. Be sure your recommended strategy can be supported with available
How to analyze a case
All cases must follow this format. Teams of 3-4 people will be used for case analysis.
Full Names of all group members (put in alpha order)
Course & Section i.e., Mon/Wed.
Situation Analysis “Synopsis” – briefly summarize the case in your own words –
No more than 2 pages (worth 10 points)
SWOT Analysis – in bullet format (worth 25 points)
Problem Statement “WHY?” Keep it brief…no more than 20 words. Challenge
yourself to be concise but brief. This should be written as a statement not a
question. (worth 10 points)
Development of Alternatives – at least 3. Your alternatives are derived from
your opportunities outlined in your SWOT. (worth 25 points). Number each
alternative and explain.
Evaluation of Alternatives & Recommendations – Evaluate each alternative
using the pros and cons of each choice. Use outside sources to back up your
hypothesis. Select the best choice based on the company’s strengths and
opportunities. (Worth 20 points)
Recommendation: End this section with an overall recommendation/conclusion –
no more than 1 paragraph. (worth 10 points)
Other pointers for working on your cases….
• All cases are typed, contain a cover sheet, sections are labeled and are double spaced
and printed in a 12-point font. Don’t forget bullet points can help the reader
(professor) to follow your points. Bullets should be utilized in the SWOT analysis. Do
NOT use paragraphs for this section.
• Suggested Reading – Read the case at least 3 times. Yes, 3 times. If you only read it
once, you will only be able to detect surface problems.
• Each group member receives the same grade.
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