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The Starbuck Model and How the Company Became a Global Brand

Paper type: Essay
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Starbucks was founded in 1971 selling whole bean coffee and started as a coffee bar in 1987. Today, there are over 14,000 stores with about 9,000 being in the United States. As Starbucks Corporation, it has ventured to partnerships with other companies such as Kraft Foods Inc., Dryer’s Grand Ice Cream, Inc. and Apple Computer Inc. to deliver a wider range of products to further increase its sales of coffee.

A public company, it has achieved a 7 percent rise in same-store sales as of fiscal year 2006 continuing the notable increases of 8 percent and 11 percent in sales for years 2004 and 2005, respectively.

These have been going on since its first decade. Revenue generated by Starbucks’ stores around the world jumped 21 percent to $2.01 billion from $1.66 billion last year. With this, Starbucks aims to be the premier purveyor of coffee in the world at the same time maintaining its uncompromising principles. It has built a unique culture offering the best coffee and quality service a global brand can give

INTRODUCTION

Coffee is a beverage produced from roasted beans.

Associated with religion and mystical powers, it was first discovered in Ethiopia and the country of Yemen used to be the only source (Pendergrast, 1999). Its cultivation started on the 15th century and now ranks second as the most traded commodity. Coffee is enjoyed by millions of people around the globe. It used to be consumed hot and enjoyed mostly by old folks, now it can be taken cold and considered as daily requirement among the youth. Starbucks capitalizes on this by selling exceptional coffee drinks and dark-roasted coffee beans.

History

Starbucks is considered as the leading retailer, roaster and brand of specialty coffee in the world but it was not always so. Starbucks used to only sell whole bean coffee. The first store was in Seattle’s Pike Place Market owned then by three academic-entrepreneurs, Jerry  Baldwin, Zev Siegl, and Gordon Bowker. The name Starbucks was after the coffee loving first mate in the novel Moby Dick. In 1982, with five stores, a roasting facility and a wholesale business selling coffee to restaurants, they met and recruited Howard Schultz, VP of U.S. operations for Hammarplast, a Swedish house wares company, who was marketing coffeemakers to Starbucks. He joined Starbucks as manager of retail sales and marketing (Kotha and Glassman, 2003).

Starbucks concentrated on selling fine Arabica coffee and only after Howard Schultz visited Italy for coffee wares buying trip did the idea of a coffee bar came in. While in Italy, Schultz noticed that people converge in espresso shops and are served by baristas or bartenders much like in the usual bars serving alcoholic beverages. Service was personal and the atmosphere was warm and from that point on he decided that Starbucks would follow suit.

He had so many plans and sold his idea to the three partners but unfortunately he was discouraged as they feared that the business would go in another direction, they did not want to venture into restaurant business. Undaunted, Schultz look for investors and founded himself his own business called Il Giornale (pronounced ill jor-nahl-ee ) Coffee Company. It became a hit and when the three Starbucks partner decided to sell their own business Howard Schultz acquired it and became the newly-named Starbucks Corporation first president and CEO (Thompson and Gamble, 1997).

Evolution

Basing on Starbucks large following, Howard Schultz dreamed of putting a store in every neighborhood in America. He believed that Starbucks has a big chance of earning large profits and focused on growth and expansion. At first, the company suffered losses due to overhead and expansion costs but Schultz held on to his conviction not to sacrifice integrity and values for short-term profit. And it paid off.

Selling coffee drinks and whole bean coffee, in 1988, Starbucks introduced mail-order catalog servicing all 50 states. In 1991, it started one of its numerous team ups with other companies by establishing a relationship with CARE, the international and development organization. Also the same year, it began offering stock options to its part-time employee, the first company to do so (Kotha and Glassman, 2003).

In 1992, Starbucks completed its initial public offering with common stock being traded in NASDAQ National Market under the training symbol “SBUX.” From this time to 1994 it has been forming partnerships and licensing agreements and in 1995, it totally immersed itself into its patrons needs by selling compact discs based on popular in-house music program. A decision spurned by the comment cards signed by costumers. Later on they acquired Hear Music, a San Francisco-based music company and made business with Apple Computer Inc. With the iTunes business, Starbucks is earning money when the truth is there was no capital cost for the partnership. It gets royalties for every songs sold on its stores.

1996 is a milestone year for the company as it opened stores in Japan, Hawaii and Singapore under the management of Starbucks Coffee International. Opening a store in Japan was well-opposed by their consultants but the company was able to prove wrong the predictions and actually started a trend there (Thompson and Gamble, 1997). It is hard to  miss Japanese in busy streets sipping from their Starbucks coffee cup. This same year, Starbucks Ice Cream becomes the number one brand of coffee ice cream in partnership with Dryer’s Grand Ice Cream, Inc and began selling bottled version of Starbucks Frappuccino with Pepsi-Cola Company.

In 1998, Starbucks began acquiring other coffee businesses and tried out new coffeehouse concepts. The next year, it has acquired Tazo, a Portland, Oregon and begun selling tea and has begun promoting environmentally sound methods of growing coffee and establishing conservation efforts, a gesture of their strong commitment to corporate responsibility.

A bold move also was dipping a hand in the Chinese consumer population by opening a store there. The previous year, they established The Starbucks Foundation, a local literacy program benefiting neighborhood where Starbucks has stores Participation in wireless connection came about in 2001 offering wireless internet service on its coffeehouses. About the same time, The Starbucks Foundation also began handing out grants to schools and community based organizations across North America (Kotha and Glassman, 2003).

As it has been, entering partnerships left and right, one of the most significant must be the signing of memorandum of understanding with the Fairtrade Labelling Organizations (FLO) enabling the company to sell Fair Trade Certified coffee in the countries where it does business. This happened year 2002 when Starbucks also published its first Social Responsibility Annual Report and celebrated its 10th year anniversary of being a public company.

Throughout the years since the Starbucks Corporation birth, and except for the first three years when it suffered projected losses, it has continually been expanding and acquiring licenses to operate in airports, banks ( Wells Fargo Bank), hotels like the Marriott, Sheraton, and Westin (now Starwood), specialty stores and supermarkets. Of course, it also won notable bids for giant airlines like United Airlines and Canadian Airlines for them to serve Starbucks coffee in their planes. Carts were also put in hospitals and post offices.

All of these are done with simultaneously building stores in North America and other countries. European expansion became a reality when it opened a store in Switzerland in 2001 and the years after that in other European countries. Its projection of 10,000 stores by 2005 was boldly raised to 40,000. Right now, there are over 14,000 stores with about 9,000 being in the United States.

DISCUSSION
Key Events

Starbucks evolution from a mere whole bean coffee seller to a commercial giant is truly remarkable. Howard Schultz did not only realize his grand plans of expansion for Starbucks but also made Starbucks name a common name. Because of his enterprise coffee drinking has been made a culture.

One of the wisest moves of Starbucks Corporation is the establishment of the relationship with other businesses. Establishing operations in bookstores like Barnes & Noble is a good one. Book lovers get to enjoy steaming coffee in the midst of their real passion, book reading. It is so normal but before Starbucks, coffee drinking has been never been like that. Getting to enjoy coffee at the same time do what you always want to do. Even Nordstrom’s patrons get a dose of Starbucks experience, a blend made especially for them (Thompson and Gamble, 1997).

There are other partnerships some of which were briefly mentioned in this text and some are not but aside from the mail catalog service, Fair Trade agreement and immersing itself to music the most notable move must be the public offering. Going public like in most company has been a great move for Starbucks Corporation. With it, it is able to realize  expansion without giving in to franchising. Being a public company made Howard Schultz goal a reality and on top of that Starbucks Corporation never relied on debts. Another character only Starbucks possesses.

Key Elements

Special mention is the valuable management team recruited throughout the years. Key persons helped mold Starbucks to what it is today. They are from other similar industries who shared common passion for great coffee and excellent service. According to Thompson and Gamble, 1997, the four key executives during the company’s formative years are Howard Schultz, Dave Olsen, Howard Behar, and Orin Smith who contributed the most to defining and shaping the company’s values, principles, and culture.

As the company grew, additional executives were added in marketing, store supervision, specialty sales, human resources, finance, and information systems. Schultz also took attention to add new people to Starbucks’ board of directors who had experience growing a retail chain and who could add valuable perspectives. As of 2002, Starbucks Top Management Team only includes Schultz and Smith with the addition of Peter Maslen who served as CEO since June 2000, Jim Donald who takes care of Starbucks North America licensed stores and business alliances, Michael Casey who is the chief administrative officer and Eduardo Garcia, the executive vice president. Howard Schultz is now holding the title chief global strategist.

Another is the way Starbucks Corporation deal with their employees. Starbucks is supportive and encourages employee participation in decision making by creating an open atmosphere for idea exchange. Before it has been a standard practice to give employees freedom in their work, Starbucks has been implementing this laid back attitude. Also, offering stock options to their employees is a sound management decision as it makes the employee care more about the company. Employees at Starbucks have a comprehensive health care plan.

Howard Schultz was even invited by former President Bill Clinton to  discuss their health program. Notice the way Starbucks employee radiates confidence and warmth when you enter a Starbucks store. One can sense that they take pride in their job. That is the product of Schultz emphasis on caring for their employees.

He said that his father was abused by employers going from job to job without or little benefits from that he vowed that he will never do that to his own. Because of this, overall turnover of Starbucks employee is lower compared that of other fast food chains. Annual barista turnover of the company is 60 percent compared to the 140 percent of others. Starbucks also observes or moves for proper treatment of people who in any way is connected to their business like coffee growers and the like. Starbucks discourages child labor.

Amazing also is their coffee, the way they acquire their coffee and its roasting. This is actually one of their best kept secret, the core of the business. Starbucks has a master procurer of coffee who scours the mountains of the world for best coffee. He or she travels regularly to supply the company needs and when not traveling, roasting facilities are toured for tasting and evaluation.

Starbucks buys only the best there is and it ensures that only the highest quality coffee beans are used. “We have coffees from Latin America, Africa and the Pacific. The climate, geography and growing conditions of a region will give a coffee its own distinctive flavor. For example, coffee from Africa will typically display a sparkling citrus flavor whilst coffees from Sumatra have earthy herbal notes,” (Starbucks Coffee Company UK home page).

Coffee bean roasting is an art at Starbucks where carefully picked and trained roasters take charge of the process. The coffee is roasted in a powerful gas oven for 12 to 15 minutes and it is deemed ready through usage of senses of smell and hearing. Coffee beans pop when they are cooked. In addition, beans are subjected to a blood-cell analysis to test the perfection of its color. Computers are also used to judge the quality of the beans and if a batch fails the tests, a whole batch is discarded. That is how Starbucks prepare the coffee.

Others

Note should be given to the commitment of Starbucks Corporation to social responsibility. With partnerships non-government organizations and establishment of The Starbucks Foundation, the company is able to share its earnings to the community it has operations on and to other areas.

As mentioned, Starbucks has been giving out grants across North America. It also conducts book drives and shares its core values to surrounding communities by being a good place to play, meet and relax. Starbucks is proud to point out that they support communities where their products originate like the coffee growing areas by promoting sustainability and buying the coffee at a high price (Starbucks Corporation home page). These ensures the continual production of coffee by the growing farmers at the same time maintain the quality of the coffee to be harvested.

Another is their commitment to environment safety. Starbucks promote recycling and proper waste management and has actually an Environmental Mission Statement, “understanding of environmental issues and sharing information with our partners; developing innovative and flexible solutions to bring about change; striving to buy, sell, and use environmentally safe products; recognizing that fiscal responsibility is essential to our environmental future; instilling environmental responsibility as a corporate value; measuring and monitoring our progress for each project, and; encouraging all partners to share in our mission.”

Of course, Starbucks believe in treating people with respect and dignity as reflected on its treatment of its employees.

Starbucks Model

What sets Starbucks apart from their competition, the market and the whole business  community as well is their strategy of establishing their business. It is called the Starbucks Model.  In adherence to Schultz goal: “Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining, uncompromising principles as we grow,” Starbucks management has come up with a blanket approach. Multiple stores are set up in area even if can cause a low profit from any of the other stores. Competition is built among the same location stores in a way and this concept is welcomed by Schultz.

As Fortune and BusinessWeek note, this scheme is very profitable for Starbucks because it cuts down delivery and marketing expenses, shorten lines in individual stores and increases foot traffic for all the stores in an area. Through this, Starbucks can dominate a market easily. Truly, it is always so. It was said that around 20 million people buy a cup of coffee from Starbucks every week and even in a down economy store traffic has risen between 6 percent to 8 percent (Kotha and Glassman, 2003).

But Schultz is quick to point out that Starbucks do not aim to hurt the competition and as a matter of fact local competition benefits from the expansion. He stressed that they never undercut their prices and thus does not shake the pricing structure of a given marketplace. What is more is that coffee industry as a whole benefits from this because as new people are exposed to Starbucks experience coffee drinkers increase in number.

What is more amazing in this strategy is that they never spend too much on advertising compared to their competitors that spend 10 percent on revenues compared to theirs of only 1 percent. Starbucks main advertisement is their coffee cup, a coffee-cup-to- coffee-cup philosophy.

Much like the word-of-the-mouth advertising, the best and most effective of them all. In relation to this, previous statements convey that their other advertisement capital is in their coffeehouses. They focus their spending on the stores interior and furniture because the coffee shops are the main attractor of customers. The first three years of a store spells its success in an area thus, during the first three years Starbucks focuses in designing and renovating their stores to satisfy and further attract customers and it really works.

Furthermore, recognize that people tend to retain what they normally see. Advertising thrives in that theory. Whatever an individual mostly sees, that individual is more likely to retain that image and it is translated to income for products. In this aspect Starbucks benefits very much. The blanket approach is working because people always see a store of Starbucks and if they ignore the first one they will likely stop at the next. Subconsciously, Starbucks presence is ingrained in consumers. Now, that is sound advertising without the extra cost. The Starbucks Model is a brilliant strategy where one move works two ways, to generate more income at the same time boost that flow of income with its own style of advertising.

Included in the Starbuck Model approach are the key elements mentioned above.

International Expansion

Normally, a business will reflect an increase in revenues after capital recovery as brands and products are patronized by consumers. Starbucks anticipating a reflection of slow growth after the impressive first decade of the company, Howard Schultz turned his attention to other sight, business analysts claim (Kotha and Glassman, 2003). To imitate the American success the same strategy is to be repeated in other areas, literally other shores for a continual reflection of growth.

In 1995, Starbucks Coffee International Inc. was established to handle businesses  outside North America. This includes development of new strategies, forming beneficial  alliances, planning and operations, logistics and other business related tasks. Starbucks approach in starting a new business or store in a foreign land is by way of inviting and selecting local partners.

This is done to decrease work in dealing with local rules and regulations not to mention to have an initial advantage in establishing the business, a ready knowledge of an area. This expansion is criticized by analyst stating that with this, profits are decreased in favor of the local partners. Instead of generating a full profit the income is divided usually with only 20 to 50 percent of the profit going to Starbucks Corporation. This paper must say that that is expected More partners, more division in profits.

The goal of Howard Schultz is make the name Starbucks a global name, a global brand so if the company has to cut its income so be it so as long they are not losing money. International expansion meets that goal and one must sacrifice one thing to gain another. In the long run Starbucks will eventually recover unearned profits because Shultz and his team are banking that consumers will prefer their brand over others. Simply put, greed is not practiced in Starbucks as long as its goals are achieved. That is the main idea for expansion, the goal of Starbucks to be a global brand, the preferred brand along with the aim to duplicate its first success.

Key expansions were the establishing of stores in China, the big consumer population other than the United States and in the European Continent where local coffee shops thrives. Of course, credit must be given to ht first international business in Japan where Starbucks is a smashing success.

Globalization

Globalization like any new concept naturally has resistance. Starbucks Corporation like any other multinational companies is not free from anti-globalization sentiments.  One of the problems facing Starbucks Corporation is the unfair focus it is receiving from  anti-globalization activist. In a past protest rally in November 1999 when the World Trade  Organization (WTO) held a conference in downtown Seattle, thousands of protesters gathered  to oppose the WTO. Starbucks is one of the target companies. BusinessWeek reported that a  store was attacked and vandalized. The windows were broken and tear gas replaced the smell  of the coffee. Physical violence against stores and possibly managers or employees is one negative impact of globalization with anti-globalization sentiments abounding.

Another related negative impact is the convenience of Starbucks to be attacked. Going back to the same incident in 1999, there were comments released that famous brands such as Starbucks is prone to criticism and harassment as association is necessary for activist to make their points. It is convenient to set Starbucks an example to drive ideas home. Of course, not to mention that a Starbucks store damaged can get a threat or message across than a crushed can of, say, Coke. One of course is the discrepancy and stark contrast between acquisition cost of coffee and the price of a cup.

When Starbucks opened a store in Mexico, critics noted the ten-fold difference on the buying price from farmers compared to the actual Starbucks coffee price. In this aspect Starbucks cannot deny the inflated difference. A global brand definitely has a global price regardless of the origin of the raw materials. What is bad for the company image is that anti-globalization activists will capitalize on this fact to magnify the so-called greed of companies such as Starbucks. Further, they can imply that Starbucks is abusive and opportunistic like the rest of the global brands.

SUMMARY AND RECOMMENDATION

Business is business. When Howard Schultz decided to imitate the Italian way of drinking coffee, he was not just interested in immersing their American counterparts in the same culture. He was also churning the probable earnings is in his mind. Actually, Starbucks Corporation is one of the most envied accounts in the world today. Its beginnings and successes is one of the most admired especially in the business world. Not so many companies has achieved their success as much as Starbucks did as this  company started a trend and a cult-like following. Starbucks is deemed to be the Nike or Coca-Cola of the coffee industry (Thompson and Gamble, 1997).

The company is impressive on its continual search for success. It constantly develops new ideas for its customer and one cannot blame an individual if he or she keeps coming back for a Starbucks Mocha latte or a Strawberry Frappuccino. Starbucks gives excellent service which has been an inspiration of other coffee business and other industry as well. Schultz and his top management team have really raised coffee experience into a new level.

Like in every business, it is not impossible to suffer losses in the future when an unexpected economy comes crashing down or when, according to coffee business analysts, the market is saturated by the Starbucks experience. Starbucks will be wise to continue its quest for improvement and retain its solid values.

More focus on customers is necessary. With competition springing from all direction it is only necessary to maintain the feeling of satisfaction a Starbucks store can give. People love to be served and pampered. Consumers loved to be wooed. This is where Starbucks really excel in. The ambient surroundings, plush yet comfortable interiors and ever-attentive, always accommodating baristas set the proper mood for coffee gulping. Starbucks must maintain this atmosphere and in the years to come they must be able to update their interior with the latest trend without sacrificing the cozy mood.

In relation to this, Starbucks must perpetually add zest to their stores as this attracts the young. We cannot deny the fact that the average spending of teenagers and young adults has dramatically increased over the years with more freedom in financial terms is achieved by youth, a product of globalization. We can say that to continually sail smoothly in this thing called globalization , a business must always keep an eye to the whims of the key spenders.

Starbucks is originally patronized by people on the go. While taking care of the young market, the company must not neglect this set of costumers. These include the average employees to the hard-core executives. Convenience must be guarded by Starbucks Corporation in their offerings even in the simplest details such as spill-free coffee cups and holders. Pastries must be always fresh or should be able to maintain their freshness even after travel. These seemingly irrelevant details are what actually endeared customers to the brand. By maintaining these and others and improving brand quality Starbucks can keep customers hooked.

Another recommendation is to continue acquiring selling rights. Competitive marketing and distribution is the common practice nowadays and Starbucks Corporation must not rest on its laurels. It must aggressively pursue coffee-related ventures that would boost their coffee sales.

No need to expound on is the continued support on its employees who are also the partners in ay business and the Starbucks way of searching for the best coffee.Coffee has always been a favorite beverage and this commodity will continue to dictate world market and consumption in the years to come. No artificial concoction can ever replace this wonder as coffee is meant to be enjoyed and savored at its best. This is where Starbucks Corporation succeeded. It was able to bring out the weakness of coffee lovers to their caprice and at the same time capitalize on this tradition as it marketed the Starbucks experience. Included in this paper are Starbucks Corporation financial data.

REFERENCES

ADAMY, J (2006). Eyeing a Billion Tea Drinkers, Starbucks Pours It On in China The Wall Street Journal p. A1 ISBN 0-7868-6315-3.

KOTHA, S. and D. GLASSMAN. 2003. Starbucks Corporation: Competing in a Global Market. University of Washington Business School

PENDERGRAST, M. (1999), Uncommon Grounds: The History of Coffee and How It Transformed Our World, New York: Basic Books, pp. 374, ISBN 0465054676

THOMPSON, A and J.E. GAMBLE. 1997. Starbucks Corporation: A Case Study
McGraw-Hill College Division
http://www.mhhe.com/business/management/thompson/11e/case/starbucks.html

Starbucks Corporation UK. 2007. http://starbucks.co.uk/en-GB/

Hoovers. 2007. http://www.hoovers.com/starbucks/–ID__15745,period

Starbucks home page http://www.starbucks.com

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The Starbuck Model and How the Company Became a Global Brand. (2017, Mar 21). Retrieved from https://studymoose.com/the-starbuck-model-and-how-the-company-became-a-global-brand-essay

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