Starbucks Wars:How McDonald’s and Starbucks Defined Their IndustryBy Rick Kowalski

One can learn quite a bit about where the coffee house business is headed by studying how the quick serve restaurant (QSR) industry has evolved. Rick Kowalski concludes his franchise series on how coffee houses are moving through this evolution much quicker than the QSR business, although the process is not without some similar growing pains.

One fact resonates above all others from QSR evolution: QSR brands that clung to their original positioning have grown into strong competitors. The chains that lost their original positioning found themselves in a steep sales decline that some were able to reverse and others were not.

One very common way that chains lose their positioning is to add a vast new array of products to their menus. Menu proliferation was a ‘buzz-word’ in the ‘80s. QSR chains were throwing every new product they could find at their customers without a thought of how it would affect their market position. This almost ruined chains like Jack-in-the-Box and Carl’s Jr., and even McDonald’s has fallen victim at times to this failed strategy.

Starbucks Captures Breakfast Recently, Starbucks announced its intention to launch breakfast products. Could this be a natural extension to their morning coffee business, adding value to the Starbucks enterprise? It definitely makes intuitive sense to leverage Starbucks’ morning customer traffic and expand on it by offering food items appealing to that part of the day. Or, is this the beginning of Starbucks menu proliferation initiative that will lead to an erosion of its customer base?

Will breakfast items, coffee makers, teabags, plastic cups, mints and music all begin to erode Starbucks position as the leader in specialty coffee?

Will we be able to find everything from laxatives to frozen waffles in the Starbucks of the future?

And, is Starbucks in danger of aggressively trying to evolve into all things for all people at the ultimate cost of its core business-specialty coffee?

QSR vs. Today’s Coffee House Other complicating factors in this interesting evolution are the differences between QSRs and coffee houses. The significant differences between a traditional QSR (McDonald’s, Burger King, etc.) and a coffee house include service, menu, marketing and product. These differences are important, yet one difference not yet discussed is the need for that “third place” between home and work. Starbucks founder Howard Schultz had it right when he talked about Starbucks filling this “small luxury” need.

The coffee house is a warm comfortable place where people can go when they want to escape work, and either can’t go home or don’t want to. QSRs haven’t done a great job in filling this need. Their design/décor has been more inclined towards durability and ease of cleaning, supported by colors, seating and hurried atmosphere that turns tables quickly. Their products are targeted towards meal occasions, not spending discretional time reading, socializing or working.

Enter the Starbucks wars. Seeing the ease of entry, fierce loyalty of great coffee, and the handsome profit margin, QSRs are rushing to develop specialty coffee programs in an effort to capture more shares with better coffee blends.

Dunkin’ Not in Third Place The anomaly to this discussion is of course, Dunkin’ Donuts. Dunkin’ is a strong regional coffee competitor in the northeastern U.S. The typical Dunkin’ customer is also a heavy QSR user, but they are also a heavy coffee drinker. Coffee sales at a typical Dunkin’ in the Northeast will represent 65% or more of total sales. Donuts are something that Dunkin’ franchisees wish they didn’t have to mess around with. They have found that pouring coffee is a much easier and more profitable business.

Dunkin’ is clearly a QSR, but is also positioned in coffee. Yet, they don’t really fit into that “third place” definition. Dunkin’ users are much more inclined to ‘grab and go’ rather than sit and chat. The typical Dunkin’ Donuts store design is not necessarily inviting or warm and welcoming. Promotional posters hyping new products and washable surfaces in the dining areas are the company’s rule. How will the Dunkin’ brand play in markets where a “third place” defines the coffee house?

Dunkin’ management has publicly stated they want to expand towards the west coast. They want a piece of the 18% gain in share that coffee competitors captured last year, as reported by the National Restaurant Association. The challenge this Dunkin’ brand will face is whether customers west of the Mississippi will recognize the chain as a great place for donuts (and maybe other fast options) or a coffee place. This is important because the Dunkin’ business model turns on its ability to sell significant amounts of coffee. Supporting the expansion of the Dunkin’ brand solely on donuts and breakfast sandwiches will be difficult, especially since they use franchising as their method of expansion.

Will Dunkin’ management fundamentally change the way the store looks and acts in order to put the brand in the “third place” arena, and if they do, will customers buy it?

Dunkin’ may also be answering the siren’s song of more menu appeal (a.k.a. menu proliferation) by adding Supreme Omelet sandwiches and lunch items that help bolster their weaker day part. With the hiring of a top-notch executive chef to develop new menu items, as well as a team of culinary experts and a multi-million dollar test kitchen, the research and development effort at Dunkin’ is a well-oiled machine.

Dunkin’s product development efforts appear to be targeted towards the McDonald’s customer rather than the more upscale Starbucks customer.

Starbucks is also adding more SKUs with retail merchandise, so while Dunkin beats a path to the McDonald’s customer, Starbucks is apparently looking to take share from big box retailers, QSR and the Internet! Starbucks aspirations are very big, indeed.

While Dunkin’ and Starbucks slug it out for more market share, traditional coffee house brands continue their gains with more distribution and friendlier, more comfortable environments. It’s A Grind and Diedrich’s, for example, provide a very inviting and coffee-focused atmosphere, perfect for socializing and relaxing. These brands that cultivate an inviting atmosphere and continue to focus on coffee as a complex beverage with a variety of flavors appeal to the customer who isn’t interested in a QSR environment or the products they serve.

Three Categories Emerge As the big players and other brands continue their evolution, the following three primary market segments appear to be emerging in the coffee house industry:

1. The Starbucks segment. This segment is defined by the largesse of the Starbucks brand and all that goes with it. Its direction is flowing towards more products that continue to drive same store sales growth. The relative price/value position vs. coffee house competitors is high.

2. Dunkin’ takes charge of the second segment with a more “everyman” approach to coffee. This segment walks and talks much more like QSR than does the Starbucks segment. Its relative price/value position vs. competitors is in the lower-middle area. However, there is no real credible competition in the donut segment. Products and prices are below Starbucks, and this concept is positioned fairly well if economic times become difficult. Merchandise is not part of the product mix at Dunkin partly because of its market position, and partly because its franchise business model would not tolerate it.

3. Experiential marketing chains and independents. This segment is being defined by quality and customer service, driving higher end coffee house players such as It’s A Grind, Caribou Coffee, Diedrich’s Coffee and a handful of other chains, as well as many independents, from coast to coast. Products and atmosphere are clearly a cut above Starbucks, and several levels above Dunkin’. Customers tend to be upper income professionals or someone looking for more than a hot cup of drip coffee to grab and go. This segment treats coffee as a rare commodity with mysterious origins and political ramifications. The atmosphere of the coffee house is closer to a club hangout for movie stars like the Pure or Rain in Las Vegas, or the SkyBar in Hollywood. The relative price/value position vs. competitors is only slightly higher than Starbucks.

Other segments may emerge as this industry continues its evolution and the current leaders may inadvertently re-position their brands in a way that enhances value or erodes it. One thing is for sure, however, the coffee house industry is evolving in a similar way as the QSR industry, but at a much faster rate. Being a student of past QSR successes and failures could help coffee house brands avoid serious pitfalls.

ABOUT THE AUTHOR: Rick Kowalski is vice president of operations for It’s A Grind (IAG Coffee Franchisee LLC), based in Long Beach, California. He has an extensive foodservice background, including notable brands such as KFC, Hilton Hotels and Dunkin’ brands

Reference: http://www.teaandcoffee.net/1106/retail.htm

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Company Profile© 2010 STARBUCKS COFFEE COMPANY. ALL RIGHTS RESERVED. www.starbucks.comThe Starbucks StoryOur story began in 1971. Back then we were a roaster and retailer of whole bean and ground coffee, teaand spices with a single store in Seattle’s Pike Place Market.Today, we are privileged to welcome millions of customers through our doors every day, in more than16,000 locations in over 50 countries.FolkloreStarbucks is named after the first mate in Herman Melville’s Moby Dick. Our logo is also inspired by thesea – featuring a twin-tailed siren from Greek mythology.Starbucks MissionOur mission is to inspire and nurture the human spirit – one person, one cup, and one neighborhood ata time.Our CoffeeWe’ve always believed in serving the best coffee possible. It’s our goal for all of our coffee to be grownunder the highest standards of quality, using ethical trading and responsible growing practices. Our coffeebuyers personally travel to coffee farms in Latin America, Africa and Asia to select the highest qualityarabica beans. Once these quality beans arrive at our roasting plants, Starbucks experts bring out thebalance and rich flavor of the beans through the signature Starbucks Roast™.Our StoresOur stores are a welcoming third place for meeting friends and family, enjoying a quiet moment alone witha book or simply finding a familiar place in a new city.Total stores 16,706 (as of Dec. 27, 2009)8,850 Company-operated stores.7,856 Licensed stores.Operating in more than 50 countriesArgentina, Aruba , Australia, Austria, Bahamas, Bahrain, Belgium, Brazil, Bulgaria, Canada, Chile, China,Cyprus, Czech Republic, Denmark, Egypt, France, Germany, Greece, Hong Kong, Indonesia, Ireland,Japan, Jordan, Korea, Kuwait, Lebanon, Malaysia, Mexico, New Zealand, Netherlands, Northern Ireland,Oman, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Saudi Arabia, Scotland, Singapore,Spain, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, United States and Wales.page 2 of 3

Company Profile© 2010 STARBUCKS COFFEE COMPANY. ALL RIGHTS RESERVED. www.starbucks.comOur PartnersWe offer the finest coffees in the world, grown, prepared and served by the finest people. Our employees,who we call partners, are at the heart of the Starbucks Experience.Our store partners are committed to coffee knowledge, product expertise and customer service.We believe in treating our partners with respect and dignity. We are proud to offer two landmark programsfor our partners: comprehensive health coverage for eligible full- and part-time partners and equity in thecompany in the form of stock options.

Our ProductsCoffeeMore than 30 blends and single-origin premium arabica coffees.Handcrafted BeveragesFresh-brewed coffee, hot and iced espresso beverages, coffee and non-coffee blended beverages,Vivanno™ smoothies and Tazo® teas.MerchandiseHome espresso machines, coffee brewers and grinders, coffee mugs and accessories, packaged goods,music, books and gift items.Fresh FoodBaked pastries, sandwiches, salads, oatmeal, yogurt parfaits and fruit cups.Consumer ProductsVIA™ Ready Brew coffee, bottled Starbucks Frappuccino® beverages, Starbucks Discoveries® chilled cupcoffee (in Japan, Taiwan and Korea), Starbucks DoubleShot® espresso drinks, Starbucks® Iced Coffee,whole bean coffee and Tazo® teas at grocery and a line of super-premium ice creams.Brand PortfolioTazo tea, Ethos water, Seattle’s Best Coffee and Torrefazione Italia Coffee.page 3 of 3

Company Profile© 2010 STARBUCKS COFFEE COMPANY. ALL RIGHTS RESERVED. www.starbucks.comInvestor Information• Starbucks went public on June 26, 1992 at a price of $17 per share (or $0.53 per share,adjusted for subsequent stock splits) and closed trading that first day at $21.50 per share.• Starbucks was incorporated under the laws of the State of Washington,in Olympia, Washington, on November 4, 1985.• Starbucks Corporation’s common stock is listed on NASDAQ, under the trading symbol SBUX.

Being A Responsible CompanyWe are committed to doing business responsibly and conducting ourselves in ways that earn the trustand respect of our customers, partners and neighbors. We call this Starbucks™ Shared Planet™ – ourcommitment to doing business responsibly. Within this, we have identified three areas of focus: ethicalsourcing, environmental stewardship and community involvement.Ethical SourcingWe’ve developed strong, long-term relationships with farmers all over the world that help ensure we areable to buy the high-quality coffee our customers expect from us. It’s our goal that by 2015, all of ourcoffee will be grown using ethical trading and responsible growing practices.Environmental StewardshipWe share our customers’ commitment to the environment. And we believe in the importance of caring forour planet and encouraging others to do the same. It is our goal that by 2015, 100% of our cups will bereusable or recyclable. We will also work to significantly reduce our environmental footprint through energyand water conservation, recycling and green construction.Community InvolvementFrom the neighborhoods where our stores are located to the ones where our coffee is grown – we believe inbeing involved in the communities we’re a part of. Bringing people together, inspiring change and makinga difference in people’s lives – it’s all part of being a good neighbor. By 2015, we plan to contribute onemillion volunteer hours each year to our communities.Website: www.starbucks.com

Starbucks Company Timeline© 2010 Starbucks Coffee Company. All Rights Reserved. www.starbucks.com1971Starbucks opens first store in Seattle’s Pike Place Market.1982Howard Schultz joins Starbucks as director of retail operationsand marketing.1983Howard travels to Italy, where he’s impressed with thepopularity of espresso bars in Milan. He sees the potential todevelop a similar coffeehouse culture in Seattle.1984Howard convinces the founders of Starbucks to test thecoffeehouse concept in downtown Seattle, where the firstStarbucks® Caffè Latte is served.1987Starbucks opens first stores outside of Seattle area in Chicagoand Vancouver, B.C.1988

Offers full health benefits to full- and part-time employees.1991Becomes the first privately owned U.S. company to offer astock option program that includes part-time employees.1992Completes initial public offering (IPO), with common stockbeing traded on the Nasdaq National Market under the tradingsymbol “SBUX.”1995Begins serving Frappuccino® blended beverages.1996Joins with Pepsi-Cola North America to begin selling bottledFrappuccino® coffee drink – our first ready-to-drink beverage.Opens first store outside of North America in Japan.1997Establishes The Starbucks Foundation, benefiting localcommunities.1998Acquires Tazo, a tea company based in Portland, Ore.1999Partners with Conservation International to promoteenvironmentally responsible methods of growing coffee.2001Introduces coffee-sourcing guidelines developed inpartnership with Conservation International.Introduces the Starbucks Card.2002Starbucks enters into licensing agreements with national FairTrade organizations to sell Fair Trade Certified™ coffee in thecountries where Starbucks does business.2004Opens first Starbucks Farmer Support Center in San Jose,Costa Rica.Introduces Starbucks Coffee Master Program to provideStarbucks partners with an opportunity to learn more aboutthe world of coffee, and share their passion with customersand partners.2008Announces a renewed focus on customer experienceand innovation.Acquires Coffee Equipment Company and its revolutionaryClover® Brewing System.2009Launches innovative VIA™ Ready Brew coffee.Opens Farmer Support Center in Kigali, Rwanda.Becomes the world’s largest buyer of Fair Trade Certified™coffee.

Catching the Starbucks FeverStarbucks History

Starbucks opened operations in Seattle's Pike Place Markets in 1971 with the future aim of providing coffee to a number of restaurants and surrounding bars. With the recruitment of Howard Schultz who led the marketing and retail efforts of Starbucks in 1982, the company took a change in direction through the views of Schultz, who after visiting Italy tried to adapt the same principles in order to a strong bar culture. Schultz then utilized Starbucks ability to provide quality coffee beans and opened up a new store called Il Giornale, which brewed coffee from these particular beans. By 1987, Il Giornale had decided to take over the assets of Starbucks and also, further changed its name to Starbucks Corporation. By the end of the year, Starbucks had increased the number of stores to 17 and furthered its location span by entering Chicago and Vancouver.

In 1990, the company took further steps forward with expansion of the Seattle headquarters and an increase in resources with the opening of a new roasting plant. Relationships and other ventures also took off during the early nineties as the company looked to development organizations to further its progress. By 1995, the company really established its name with the opening of the 676th store as well as increasing the products in store with the addition of compact discs a result of a previously popular experiment with �in-house' music. In 1996, the company kept on stretching its reach by entering into the market of Japan, Singapore and Hawaii. This was achieved through joint ventures including the one formed with Sazaby Inc., which pushed through the development of coffee houses in Japan. By the year 2000, things had progressed so far that 3,300 stores were already opened, the company had ventured into countries ranging from England to Australia and a website was created to keep up operations with the latest technology (starbucks.com).

The current international situation for Starbucks seems to be an emerging part of their business and the reorganization of this is proved by their aim to become a leading global company through making a difference in peoples lives all around the world (http://www.starbucks.com). This goal is quite close to being achieved as proved the Starbucks current locations in international markets and the successfulness of these ventures. The current countries in which Starbucks are located in are: Australia, Bahrain, Canada, Hong Kong, Israel, Japan, Kuwait, Lebanon, Malaysia, New Zealand, Oman, Peoples Republic of China, Philippines, Qatar, Saudi Arabia, Singapore, South Korea, Switzerland, Taiwan, Thailand, Untied Arab Emirates, United Kingdom, and the United States. (starbucks.com)

Overall, the aim of becoming a worldwide global brand seems to be working in favor of the company and is helping it to attract the attention of many major companies who would like to share a partnership (starbucks.com). This is all positive news for the company because it provides a strong basis for future development of international markets, which further strengthens the mission to become one of the leading specialty coffee retailers in the world. In addition to the fact that Starbucks has already successfully opened around 3,500 stores, the �push' to achieve their goal is proved more than ever by the aim to open at least 650 stores just in Europe by the year 2003. It's these types of goals which prove the potential of this brand to become so popular and well known, that it would be as recognizable as major names such as McDonalds and Coca-Cola.

Vision

As stated on the website, the company's vision is to �establish Starbucks as the most recognized and respected brand in the world.'

This is a fitting vision because it is a broad comprehensive picture of what the company wants Starbucks to become. We will examine the vision using four components. First the vision is built on a foundation of the organizations core values. Starbucks only uses the finest coffee beans when brewing its variety of blends and therefore wants to be looked at with the respect of a company that uses and provides the best. Secondly, the company desires a top of the mind recognition. Starbucks not only wants consumers to remember who it is, but think about Starbucks first, having a shining image. Third is a summary of

what the organization does. Starbucks is lacking in this component because it fails to provide a statement announcing what exactly what business Starbucks is in. It assumes that as a recognized brand it does not need to specify what business the company is in. The mission statement in the next section provides a much better description of this component. Finally, the vision states broad goals of what the company could be. Starbucks wants to be the most recognized and most respected brand in the world. The most recognized and the most respected are the two broad areas of this statement. Ideally the two mean number one, or above all others, but there is no numeric goal, or timeline for this objective.

The overall company operations are based around purchasing and roasting high-quality whole bean coffees and selling them along with fresh, rich-brewed, Italian style espresso beverages, a variety of pastries and confections, coffee-related accessories and equipment. This is achieved through the huge number of company operated retail stores, a specialty sales group, supermarkets, a direct response business and also on the World Wide Web at the Starbucks.com website (starbucks.com). The attainment of this goal is boosted by the rapid expansion of new retail stores, in addition to the development of many new opportunities in terms of products and distribution channels.

Mission

The mission of Starbucks is to establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. None of this success would have been possible without a set of goals that the company aimed to achieve and a set of principles, which governed the decision making process.

Starbucks has a clear set of guidelines which has to be followed and uses these as a direction tool for the future of the business. Traditionally, the guidelines would more appropriately be connected to the vision, however the company has set them with the mission statement.

The six principles of Starbucks are stated as (starbucks.com):

Provide a great work environment and treat each other with respect and dignity. Embrace diversity as an essential component in the way we do business.

Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to our communities and our environment.

Recognize that profitability is essential to our future success.

Application of these principles can be used as a guideline for all employees from managers to workers to aim to achieve the company's goals, while maintaining a certain type of standard. This mission statement along with the set of guidelines provides a focus for employees as they make strategic

decisions. It not only supports the employees, but supports the customers as well, making a note that they should satisfied all of the time. The mission shows alignment with the vision by stating how the company plans to reach the broad goals set by the vision statement. Another supporting sentence in the mission statement is that the company apply the highest standards of excellence to the purchasing, roasting and fresh delivery of its coffee. This statement supports the idea that Starbucks uses the best available resources to give it a recognized and respected name.

Timeline

Overview

We will take the company timeline and strategic decisions portion in two main sections. The first is when Starbucks was a Private Company, from its inception in 1971, to it's initial public offering in 1992. Then we will discuss some of the major actions of the publicly held company from 1992 to present. We believe that there since the beginning, Starbucks strategy has been one of growth. They have demonstrated all dimensions of a growth strategy: Internationalization in expanding into new countries and the global market. It has shown concentration in being creative and relying on it's core competency of making high quality coffee and coffee equipment to develop new products and markets. Horizontal Integration has been evident in the many strategic acquisitions, partnerships, and joint ventures. Vertical Integration has been another key success factor as Starbucks Corporation has integrated backwards in opening coffee roasting plants, and forwards in controlling the distribution of it's many products. This growth has taken it from a single store in Pikes Place Market in Seattle, to a worldwide company with sales of over $2.1 Billion and operations in almost thirty countries, in just 21 short years (fortune.com).

Private Company

1971: Starbucks began when three friends-English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon Bowker�opened a store called Starbucks Coffee, Tea, and Spice in the touristy Pikes Place Market in Seattle (Thompson). The three original partners each invested about $6,350 in the store, and believed they build a client base in the Seattle area. This was a strategic decision because each they saw an opportunity in the fine coffee market, as they saw another similar store have success in the San Francisco Bay area. (Thompson) The store sold coffee beans, and high quality coffee making equipment. The owners prided themselves on their knowledge of coffee bean and of educating customers about the benefits of dark roasting coffee. (Thompson) 1972: after the success of the first store, a second Starbucks was opened in Seattle (Thompson).

September 1982: Howard Schultz, current chairman of Starbucks, was hired to manage retail sales and marketing (Business & Company, 2002). After meeting with the owners early in 1982, Schultz was taken in by Starbucks commitment to quality and of educating customers of the benefits of slow roasting dark coffee beans. By this time Starbucks had expanded to operating five stores, and a small coffee bean toasting facility. (Business & Company, 2002)

1983: After visiting Milan, and seeing that the vast quantity of coffee and expresso bars, Schutlz realizes that Starbucks should be selling expresso, cappuccino, and fresh brewed coffee, as well as selling coffee beans and high quality coffee equipment (Thompson). He was met with resistance as the owners did not want Starbucks to sell beverages (Business & Company).

April 1984: Schultz finally convinced the owners to open a sixth "test" store in Seattle area. (starbucks.com) It was an Expresso Bar that was designed to sell coffee, expresso, and capuccinno, and the store had immediate success (Thompson).

April 1986: Schultz left Starbucks to fulfill his idea of building expresso bars around the Seattle area and opens II Giornale. (Thompson) In a year and half two more II Giornale expresso bars would be opened, all serving Starbucks coffee. (starbucks.com) March 1987: II Giornale, and Howard Schultz acquired Starbucks for $3.84 million. (Thompson) They acquired the Starbucks name, roasting plant, stores, etc. The new name of the company would be Starbucks Corporation, and Howard Schultz was the new CEO. Schultz has a strategic vision of Starbucks becoming a national company. His goal was to open 125 stores in the next five years. Schultz had already demonstrated his corporate vision and growth strategy with II Giornale, now he was horizontally integrating in the Seattle market by acquiring Starbucks. This would be the first major acquisition in Starbucks history.

Between 1987 through 1990 Starbucks entered new markets, and continued to grow. Schultz announced a five-year growth plan to build 125 new stores. (Thompson) At the end of 1987, there were 17 Starbucks locations, and by 1990 there were 84 (starbucks.com) During this four year growth phase Starbucks entered the markets of Chicago, Vancouver, and Portland. (starbucks.com) In 1988 the company started a mail order catalog for it's fine dark roasted coffee beans and high quality coffee equipment (Business & Company, 2002).

1991: Schultz makes Starbucks, "the first privately held company to establish an employee stock option program that included part-timers." (Business & Company, 2002). Schultz had a business strategy to retain high quality employees by making Starbucks a great place to work. He referred to every employee as a "partner" in the company (Thompson).

1991 - Starbucks Company entered next big market, California. Management believed this would be a favorable market because of it's "trendy" nature (Thompson). 1992 - Starbucks had opened 150 new stores between the five-year period of 1987-1992, 25 more than the original plan (Thompson). This was a tribute to the high sales and success that Starbucks was having throughout it's markets. People were associating Starbucks with high quality coffee and it was becoming a very social atmospheres.

Public Company

June 1992 - Starbucks Company was very successful after its initial public offering on the NASDAQ exchange (Thompson). 1993 - during this year Starbucks opened in the Washington, D.C. market,

opened its second roasting plant, and began it's long-term relationship with Barnes & Noble, Inc. to sell coffee products at its bookstores (Business & Company, 2002) (starbucks.com).

1994-1995 - these years represent more growth and partnerships, including an acquisition of The Coffee Connection, Inc. for $23 million (Business & Company, 2002). During these years Starbucks penetrated the approximately 15 more markets (cities) in the United States (starbucks.com). It also formed a strategic alliance with PepsiCo, the North American Coffee Partnership, to manufacture and distribute coffee drinks. This strategic decision turned out very lucrative as Frappuccino�, an iced coffee drink, has had an incredible amount of success in grocery and convenience stores. Starbucks also opened two more major accounts; Sheraton Hotels, and United Airlines (starbucks.com)

1996 - Starbucks Coffee International, a subsidiary of Starbucks Corporation, formed a joint venture with SAZABY Inc., a Japanese corporation, to bring Starbucks into Japan in 1995 and in 1996 it opened it's first international location in Tokyo, Japan. This marked the beginning of its International growth, which would see locations in Singapore at the end of 1996; Taiwan, Thailand, New Zealand and Malaysia by 1998; China, Lebanon, and South Korea by 1999; and Spain, Puerto Rico, and San Juan by end of 2002 (Business Wire) (starbucks.com) By 2002, Starbucks had locations in almost thirty countries (starbucks.com). Also in 1996 Starbucks formed an alliance with Dreyers Ice Cream to introduce coffee ice cream products, which, according to starbucks.com, became the "number one brand of coffee ice cream in the United States." By 1996 there were 1,015 Starbucks locations (starbucks.com) 1998 - Starbuck acquired the Seattle Coffee Company, located in the United Kingdom and comprised of 56 locations, for over US$60 million (BBC News Online, 1998). This is the beginning of Starbuck's president's goal of opening 500 stores in Europe by 2003. (BBC News Online, 1998)

1999 - There were two major events during 1999. The first was the acquisition of Tazo�, a tea company. (Business & Company, 2002) The second was a long-term contract with Albertson's supermarkets (Albertson's,1999). In this deal more than 100 Starbucks Coffee bars would be opened in Albertson's grocery stores in the U.S. This was also a strategy by Starbucks to introduce Frappuccino�, Tazo� tea, and other merchandise to new markets across the Midwest, where Albertson's is centralized (Albertson's, 1999).

2000- During 2000, approximately 1,865 Starbucks locations were opened in the United States and abroad (starbucks.com). In addition, Starbucks entered into a contract with Host Marriott International, as this continued their growth into the hotel industry (starbucks.com).

2001- This year represented another year of substantial location growth, with over 1,400 new locations, bringing the total amount to 4,709. In addition Starbucks Japan, Ltd, ("Starbucks Japan") saw the opening of it's 300th Japanese location after winning immense popularity in Japan and financial success after it's Initial Public Offering on Nasdaq Japan September of 2001 (starbucks.com) (Business Wire).

2002- This year Starbucks continues to break through into new markets in new countries. In March of

2002 Starbucks celebrated it's first store opening in Spain, and announced plans to open hundreds of new stores internationally (Puget, 2002). Starbucks Size

Starbucks is a global corporation with 4,709 total locations in the United States and worldwide (starbucks.com). With operations in almost thirty countries, such as the United States, Australia, Germany, United Kingdom, and Qatar, to name a few, they reported revenues of over $2.64 Billion in 2001 (Starbucks Corporation). The company reported total assets of $1.851 billion in 2001. Starbucks continues to grow at a rapid pace, with plans to open over 600 locations in Europe alone by 2003 (starbucks.com). Starbucks has quickly become well established in the United States having locations in every major city. Starbucks employed over 59,000 people during 2001, with a employment growth rate of 24% (fortune.com).

Starbucks Scope

Starbucks Corporation competes in the global arena. As previously mentioned in this case study, it has operations in almost thirty countries, most prominently in the United States. Starbucks has used high quality coffee as it's core competency, and is currently in many different markets. These include ice cream, supermarket coffee beans, restaurants, coffee bars, coffee brewing equipment, coffee flavored drinks, tea's, and also books and compact discs. Starbucks sells its product through many avenues, including Starbucks Coffee locations, mail-order catalogs, and its website starbucks.com.

Starbucks Financial Performance

During the fiscal year ending September, 2001, reported revenues were $2.649 Billion. This was over $500 million higher than the previous year. Reported gross profit increased over $100million from 2000 to $581 million. Starbucks reported 2001 Operating Income of $252.5million, and Total Net Income $181.2 million, both figures increasing substantially from the previous year (Starbucks Corporation).

Starbucks Corporation has quite a few very strong financial ratios, which we will now look at. The P/E ratio (profit/earnings) in 2001 was 49.08, which is far superior to the Industry average of 27.58 (Ratio, 2002). Starbucks EPS, earnings per share, of 81.79 is over five times higher than the industry average of 12.67 (Ratio, 2002). The quick ratio, which relates total current liabilities to cash, marketable securities, and receivables of 1.48 is a strong figure. Starbucks Corporation's Current Ratio of 0.91 is stronger than the industry average of 0.56. As the Current Ratio is the company's current assets / current liabilities, this indicates that Starbucks Corporation has the ability to satisfy it's current liabilities with it's current assets, and with the ratio of 0.91 it is a signal of financial strength. Some other ratios found from Multex.com include a Return on Assets of 11.31, a Return on Investment of 14.52, and a Return on Equity of 14.86. Starbucks ROA, and ROI are both stronger the industry average, but the ROE is slightly weaker than the industry average of 17.80. Inventory Turnover ratio is 11.48, which indicates that Starbucks Corporations inventory is highly liquid, and its operating cycles are very healthy (Ratio, 2002). This ratio is one more strong measure that Starbucks is a corporation that has exhibited strong financial

performance.

Starbucks Nonfinancial Performance

Starbucks Corporation was voted by Fortune Magazine as one of the Top 100 Best Companies to Work For in 2002, ranked number 58 to be exact (fortune.com). As of 12/1/2001 Starbucks Coffee has 51,914 employees in the United States, and 7,627 employees outside of the U.S. (fortune.com). Starbucks Corporation created 12,650 new jobs in 2001 from a pool of over 720,000 applicants, with a 24% Job Growth Rate (fortune.com). 26% of it's workforce is made up of minorities (non-Caucasion), and 60% of it is made up of women (fortune.com). Starbucks Corporation chairman Howard Schultz believes that Starbucks should be a great place to work, and should treat every one of their employees as partners. Some examples of his good faith have been employee stock options plans, and health coverage that allow any employee, part-time or full-time, to benefit from. The plans have succeeded in having a low voluntary employee turnover rate in 2000 of 23% (fortune.com).

Product Usage Rate

Usage Rate: The usage rate varies according to each type of product. In terms of coffee, the average usage rate for coffee drinkers is around three cups per day. It should be mentioned that every person has their own personal amount of coffee needed each day and so, it is hard to base this fact as a general description but on average, regular coffee drinkers would consume about two-three cups a day. In terms of the other food & beverage products, it would be fair to base the usage rate on the number of coffees that are consumed during the day. Once again, it is important to state that each person has their own personal amounts but usually those that purchase a drink of coffee would probably purchase a biscuit or chocolate. Other products such as coffee related equipment would only be purchased once in a while or when they were needed. Music would be purchased on a personal basis depending on if the consumers like the music available.

Performance / Need Analysis

Consumers, especially those who are working, have the need to go straight into the store and straight out as quickly as possible. This is a major objective because the quicker the service is, the more satisfied customers will be. This is proved by the take-away nature of Starbucks and its catering facilities for the working class.

In terms of actual coffee products, consumers are in need of having high quality coffee variations made up from high quality coffee beans (http://www.coffee.com.au/coffee_robusta.htm). Consumers are appealed to by those companies who deal with the roasting and brewing of high quality coffees. Starbucks proves this point because it only purchases and roasts high quality whole coffee beans as well as adapting them into a number of different coffee variations.

Consumers in addition to high quality coffee want to be able to taste many types of coffee variations. It

is vitally important that those more popular coffee products are available to consumers while other variations are introduced on an occasional basis. Within in this, it is necessary to make sure that the coffees are made of high quality beans and meet the requirements of consumers. These requirements include thick, uniform cream at the top of Espressos, strong flavor that is maintained and that the freshness of the beverage stays longer while undesirable flavors are minimized (http://www.coffee.com.au/coffee_freshness.htm). Basically, the less these requirements are met, the less appealing coffee will be to consumers. Starbucks meets these requirements through providing many variations of coffee in order to satisfy as many people as possible. Examples include the walnut flavor of Colombia Narino Supremo, the creamy sweet Caf� Verona and the smooth, buttery Sulawesi (http://www.starbucks.com/shop/product.asp). The fact that Starbucks is mainly associated with coffee, some consumers who don't drink coffee will be less attracted by the store. Many consumers who don't drink coffee usually drink something similar like tea. With Starbucks, the acquirement of the Portland (USA) based Tazo� Tea Company has allowed the product offerings to be expanded even further. Tazo� Tea provides a number of premium teas as well as herbal teas, in addition to tea accessories and gift packs. This was a useful acquisition by Starbucks because it allowed them to better meet the requirements of even more consumers and therefore, expanded the attractiveness of the store on a whole new level.

Through the selling of coffee-related products such as brewing equipment and accessories, many consumers can enjoy high quality coffee at home rather than traveling out of their way. The equipment available includes Expresso machines, stainless steel coffee filters, and Starbucks cleaner and canisters. This is another example of how Starbucks is meeting the needs of current customers as well as increasing its attractiveness to potential customers. In addition to meeting those beverage needs of consumers, sometimes there is the need to have an assortment of small foods that are quick to consume and easy to carry. This is sometimes the case when people are looking for a quick snack to have along with their drink. Starbucks has met this requirement through providing a number of chocolate variations like gift boxes and chocolate bars while also offering sweets such as after-coffee mints and lollipops. The benefits of this are further increased by the fact that sometimes these chocolates can complement a coffee and therefore, when one is bought, the other one also has a greater chance of being purchased.

There are also less important needs that if required can sometimes bring about potential success. These needs are often apart of the whole experience and include things like music. Starbucks meets the need of consumers by another acquirement, this time it's the music company, Hear Music. The connection here is that customers can purchase music through Starbucks as a result of the agreement with Hear Music. Throughout the world, many caf�'s have some type of music playing the background and this is a key identification feature that further expands the experience. Hear Music provides Starbucks with a number of songs that are played throughout the day and this is quite an attraction for customers as proved by their constant questioning of what song is playing (http://www.starbucks.com/hearmusic/product.asp). Further, Hear Music provides Starbucks with a number of compilation albums as well as favorites in order to make customers feel more at home.

Strengths and Weaknesses

Operations

Starbucks specialty operations strive to develop the Starbucks brand outside the Company-operated retail store environment though a number of channels. By establishing relationships with well-known third parties that share their values and commitment to quality, Starbucks is able to reach customers where they work, shop, and travel. These relationships take various forms, including grocery channel licensing agreements, warehouse club accounts, international retail store licensing agreements, direct-to-consumer market channels, joint ventures and more. Although Starbucks does not usually outsource operational control of its retail stores in North America, in situations where another company can provide improved access to desirable retail space, the Company licenses its operations. Starbucks has a long-term licensing agreement with Kraft Foods, Inc. to market and distribute Starbucks whole bean and ground coffees in the grocery channel in the United States. Kraft manages all distribution, marketing, advertising and promotions for this particular product. The Company has two non-retail domestic 50-50 joint ventures. This includes one with PepsiCo, Inc. who develops and distributes ready-to-drink coffee-based products. Also, they have a joint venture with Dreyer's Grand Ice Cream, Inc. to develop and distribute Starbucks premium coffee ice creams. Starbucks also makes their coffee and coffee-related products available via mail order and online. For the most part, Starbucks is vertically integrated, controlling its coffee sourcing, roasting, and distribution through its retail stores. Score: +2

Marketing and Sales

One of the main strengths of Starbucks over the years has been their tireless effort to make their product an uplifting part of people's daily lives. Starbucks' strategy for expanding its specialty operations is to reach customers where they work, travel, shop, and dine by establishing relationships with prominent third parties who share their values and commitment to quality. Starbucks has carried out their strategy by moving distribution into grocery stores, convenience stores, department stores, movie theatres, businesses, airports, schools, and homes. Starbucks has shown to use less of traditional advertising; instead relying more on its image advertising, such as movie and television placement, in order to promote the success of the business. Score: +2

Customer Service

One of Starbuck's primary objectives is to provide a superior level of customer service. One of their guiding principles in their mission statement states, "Develop enthusiastically satisfied customers all of the time". In building customer loyalty, not only does Starbucks offer high levels of customer service, but they also strive to educate customers about coffee quality. There is an information section in each store that provides customers a good resource for becoming more knowledgeable about the world of coffee.

Starbucks also publishes and distributes a mail order catalog and a catalog of business gifts that offer coffees, certain food items and select coffee-making equipment and accessories. The company has several other initiatives to enhance the customers' experience at Starbucks retail stores. For example, the Company is currently in the process of implementing wireless Internet access in its stores. Starbucks does provide a "comment card" on their web site that allows customers to give constant feedback about their experiences or concerns they may have. This is used as a means of improving the business where necessary. Score: +2

Procurement

Starbucks depends upon both its outside brokers and its direct contact with exporters for the supply of green coffee. Coffee sought by Starbucks tends to trade on a negotiated basis, usually quite a bit higher in price compared to their competitors. Supply and price can be affected by many factors in the producing countries, such as weather, political, and economic conditions. To reduce the risks associated with the unpredictability of coffee price and supply, Starbucks enters into long-term fixed price contracts with its suppliers to ensure an adequate supply of quality green coffee over extended periods of time. Starbucks is confident with such relationships and believes the risks of non-delivery on such purchase commitments are remote. Starbucks believes how they choose partners is critical to their success and have listed a few criteria:

Shared values and corporate culture Strong multi-unit retail/restaurant experience

Dedicated human resources

Commitment to customer service

Quality image

Creative ability, local knowledge and brand-building skills

Strong financial resources

During the past year Starbucks has been developing a new set of coffee sourcing guidelines. These sourcing guidelines are a flexible point system that rewards performance in sustainable categories with financial incentives. Ultimately, those who qualify for 100 points will be granted preferred supplier status with the Company's coffee buyers. Score: +1

Technological Development

Starbucks is continuously searching for ways to better a customers' experience. With the introduction of the Starbucks Card for example, the Company has created the opportunity to improve customer service, shorten lines and make a customer's visit at Starbucks quicker and more convenient.

Score: +1

Human Resource Management

Starbucks realizes that one of their most valuable resources are their employees. The first guiding principle in their mission statement even addresses the Company's belief towards employees: "Provide a great work environment and treat each other with respect and dignity". Management understands that their employees play a major role in the growth of the company. All employees at Starbucks are referred to as "partners", no matter what job position they occupy. The Company's cultural values gives employees a sense of meaning to their work even if it is just pouring a cup of coffee. Each partner (even part-time employees) is eligible to receive health care, participate in the Bean Stock program, and get a free pound of coffee each week. Under the Bean Stock program, employees are offered stock below the fair market value several times a year. Starbucks' employees also participate in a 401(k) profit sharing plan. Starbucks believes they are in the coffee business as well as the "people development" business. Each employee is required to complete an extensive training program that includes product expertise, a commitment to customer service, and well-developed interpersonal skills. Professional coffee bartenders for Starbucks complete up to 24 hours of training before entering their assigned store. This training gives them knowledge to answer any questions about coffee or the Company, and the knowledge to arrange sample tastings and demonstrations with any of the equipment in the store. While the industry turnover rate is about 400 percent, Starbucks maintains a turnover rate of only 50 percent. Due to this low turnover, Starbucks has lowered their training time and costs. Additionally, Starbucks is proud to note that it was again rated as on of the best companies to work for by Fortune magazine. Score: +2

Firm Infrastructure

Starbucks has proved to be a leader in identifying market trends and positioning themselves accordingly. For example, before the recent economic slowdown, management noticed a decrease in traffic. Rather than pull back from their expansion strategy, Starbucks launched a series of small adjustments to improve efficiency, and continue with their plans.

Starbucks strives to offer an environmentally safe product, as it believes that the welfare of people, plant and product are linked. Starbucks prides itself on being a "good citizen" locally and in the international scene. They make significant contributions to local charities that focus on children, the environment, the homeless, and AIDS research/support. Stated in the Starbucks Environmental Mission Statement; "Starbucks is committed to a role of environmental leadership in all facets of our business. We fulfill this mission by a commitment to:

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 friendly 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

Encouraging all partners to share in our mission"

Score: +3

Production-Operations

Starbucks stores are typically clustered in high-traffic, high-visibility location in each market. Stores vary in size, with an average of approximately 1,500 square feet. Since the Company is able to vary the size of its stores, Starbucks stores are located in a variety of settings, including office buildings, downtown and suburban retail centers, airport terminals, and kiosks located usually in building lobbies. Whatever location the Company chooses to be in, its focus will be on attracting high pedestrian street traffic. The product mix in each store varies depending on the size and location of the store. Starbucks takes great care in picking the right location. Analyst Mitchell Speiser says that, "while chains like McDonalds and Wendy's routinely shutter 50 to 100 restaurants a year, Starbucks has closed only a small number of outlets in its 30-year history". Starbucks has focused on improving efficiency and increasing its gross profit margins. Milk, for example, is the second most expensive product after coffee beans. Where Starbucks once had 65 different milk suppliers in the U.S., they now have fewer than 25. Without a doubt, this efficiency gain has saved them a lot of money. Score: +3

Marketing

Starbucks is the leading specialty coffee retailer in the nation, with over 5,000 locations in 22 international markets. Starbucks positions their products on a relatively simple plane. They focus on quality and experience, rather than price. A comparison of specialty drinks with its competitors reveals very minor differences. Starbucks' image is one of the key elements to their success. The company has realized that people don't only come for the coffee; they come for the atmosphere. People socialize, read, study, or just enjoy the music while drinking their coffee. Knowing this, Coffee shops try to make their stores unique in some way or another that will create an appealing atmosphere. Starbucks has less of a distinct setting for their locations; instead, they focus on having plenty of comfortable seating so that people feel welcome to stay longer than they might have planned. Starbucks also positions each store individually according to the specific location it is in. This flexibility has attributed to the great success of the Company in the past decade. Another important part of Starbucks' positioning is that they are environmentally friendly. While other retailers position themselves in similar ways, no one focuses to the extent that Starbucks has. Consumers seem to respond to environmentally friendly companies who seem to truly care about the future of the world.

Advertising strategies used by Starbucks has also been a key success factor. Starbucks has found more success advertising on a local level rather than to the nation as a whole. The Company advertises a lot through print mediums, as Starbucks' target market tends to be educated people who do more reading than the average person. Score: +3

Research and Development

Starbucks's organizational culture is one of innovation and creativity. This is evident through the continuous developments of new and exciting products. Whether it's the new 4-cup thermal coffeemaker recently introduced to the market, or the Starbucks �DoubleShot' Espresso beverage, Starbucks seems to be the market leader when it comes to new products and ideas. In November 2001, the Company introduced the �Starbucks Card', which is a stored-value card that can be loaded and re-loaded in denominations up to $500. The Starbucks Card is a wonderful convenience tool for customers that can serve as great gifts, and reduces time spent at the cash register. This contributes to the overall enhancement of the customer's experience. Starbucks is extremely pleased with the ongoing positive customer response to the Starbucks Card. It is through the introduction of new products and the development of new distribution channels that Starbucks focuses on their Company's goal of becoming the most recognized and respected brand in the world. Starbucks is one of the fastest growing companies in the U.S.; from just 17 coffee shops in 1987 to over 5,000 today. Future plans include opening at least 1,200 new stores during 2002 and by 2005, to have over 10,000 stores worldwide. Score: +2

Financial and Accounting

Financially, Starbucks has had solid earnings and return. Despite still following a �fast-growth' strategy, the Company has managed to continue healthy operations while generating enough public funds to finance store expansion. For the first quarter of fiscal 2002, Starbucks reported record revenues and earnings. These consolidated net revenues are an increase of 21 percent to $805 million from $667 million for the first quarter of fiscal 2001. Starbucks expects full-year revenues to grow approximately 20 percent in fiscal 2002. Starbucks ended last year with more than $300 million in cash and virtually no debt. Score: +2

Management

Starbucks firmly believes that their employees are one of their important assets and that it's through their high quality workforce, that they are able to maintain a competitive advantage. They have successfully built a nation wide Retail Company by creating pride in the labor force produced through an empowering corporate culture; exceptional employee benefits, and employee stock ownership programs. Employees are empowered by management to make decisions without having to first report to management, and are encouraged to think for themselves as an entity of the business. The culture

towards employees can be described as �relaxed' and supportive. Starbucks has avoided a hierarchical organization structure and has no formal organizational chart. It is evident that employees at Starbucks share common goals. An employee was quoted as saying; "We all have this common belief in the product we sell". Score: +3

Information Systems-Information Technology

Starbucks deploys Blue Martini's order management system to its retailers and channel partners. The system provides Starbucks with the ability to centrally manage and deliver contract-based products and pricing in different languages for its global distribution. Score: +1

Summary of Scores

Overall, Starbucks seems to be a strong, well-established, and well-rounded company. As the industry leader, they have built a strong brand image that has helped them to gain a considerable greater share of the market in comparison to their competitors. Management has shown to have the ability to foresee market trends and changes in consumer behaviors. Management has also created a corporate culture that promotes high productivity levels by their competent employees. Financially, Starbucks is stable despite its rapid and continuous growth strategies. The Company has done well to establish reliable, long-term relationships with suppliers. For the most part, as individual scores indicate, Starbucks is fairly to very capable in most areas of its business. In areas where they do perhaps lack expertise, skills, or competencies, they have formed strategic alliances with companies that can be more efficient and effective.

Value Chain Activities +13 of a total +21

Internal Audit +13 of a total +18

Total +26 of a total +39

Stock Prices

Chart One: Starbucks vs. Industry

This Chart compares Starbuck's stock to the Special Eateries Industry average. As depicted by the graph, Starbuck's has been a defining force in the industry, as the industry average follows the exact same pattern/line, just slightly below Starbucks, for the past five years.

(Source: hoovers.com)

Chart Two: Starbucks vs. Competition

This Chart Compares Starbucks with three major competitors in the market. NWCI - New World Coffee Inc. DDRX - Diedrich Coffee, Inc. GMRC - Green Manhattan Coffee Inc.

Because of the diversity of Starbucks competition, in the past three years the stocks do not seem to be a parallel population to each other. In specific, Green Manhattan stock peaked the highest of the four around one year ago. Starbucks Corporation stock has been on a steady and consistent rise for the past five years, and Diedrich Coffee, Inc., possibly because of the increased market share competition put on by Starbucks Corporation and Green Manhattan Inc, has seen a steady drop in stock prices over the past two years.

(Source: hoovers.com)

Chart Three: Starbucks vs. Dow Jones

This graph charts Starbucks Corporation versus the Dow Jones Industrial Average over the past five years. We chose this average because we feel it best represents the restaurant industry that Starbucks is a member. This is reflected by some of the similar upward and downward movements of both lines in the graph. Overall Starbucks Corporation stock has been consistently higher than the Dow Jones, and has grown in price at a higher rate than the average.

(Source: hoovers.com)

Opportunities and Threats

Economic Forces

Economic factors are an important aspects that concern the nature and direction of the economy in which a firm operates. Since the relative affluence of various market segments will affect the consumption patterns, companies must take this into consideration when planning its strategy. In periods of normal price variation, the demand for coffee is price inelastic. However, when coffee prices show big increases, consumers tend to reduce their consumption commensurately.

The Company's net revenues increased from $1.3 billion in fiscal 1998 to $1.7 billion in fiscal 1999, due primarily to the Company's store expansion program and comparable store sales increases. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as store concentration has increased. However, management believes such cannibalization has been justified by the incremental sales and return on new store investments. This cannibalization, as well as increased competition and other factors, may continue to put downward pressure on the Company's comparable store sales growth in future periods. (starbucks.com) Score -1

Sociological Forces

As a result of Starbucks closely following their objectives, the company has installed a list of principles that further outline the company's willingness to make sure that its affect on the environment is as positive as possible. These principles are stated as (starbucks.com):

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 friendly 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.

Encouraging all partners to share in our mission.

The importance of these guidelines is further illustrated by the company's mission to show leadership towards environmental issues. This can only be seen as a positive for the image of the company and shows that they are willing to utilize their resources in order to more than satisfy requirements. In addition to this, Starbucks doesn't just rest on its laurels, it demonstrates it through participating and organizing activities such as neighborhood clean-ups and walk-a-thons. Once again, the company's image is strengthened by its actions and shows that it is able to actively contribute with the right focus behind its activities. Further examples of the company's actions towards environmental friendliness include the recycling and reusing of resources in order to enhance the lives of people around the world (http://www.starbucks.com). Policies that also have been implemented are the buying policies, which only allow the company to purchase from those other businesses (suppliers) who follow the same

environmental strategy as Starbucks. This illustrates the integrity of the company as they can sometimes sacrifice opportunities if they don't follow what the company stands for. In addition to waste reduction, Starbucks also aims to reduce energy usage and once again, demonstrates this by doing energy audits and then using the results to change store design or procedures so that they save as much energy as possible. Lastly, to integrate these policies to new employees, Starbucks has employed the services of a few partners which congregate together to create a �Green Team,' which installs the environmental views into trainees as well as coming up with inventive ways of helping the environment. Score: +3

Demographic Factors

Starbucks originated in the United States, which is the sector we will be examining for demographics. According to the CIA World Factbook, the population of the U.S. as of July 2001 was estimated at 278,058,88 (CIA). Population facts are important to Starbucks because they can give Starbucks valuable statistics, such as US population base per Starbucks store. People ages 15-64 make up the largest percentage of the population, and therefore will have greater control of the market than any other sector (CIA). This implies that the most important target market for Starbucks are people within this age group. The two largest ethnic groups in the U.S. are white 83.5% and black 12.4. The ethnic background is important to a company because it influences tastes, trends, perceptions, values and beliefs of an individual. Estimated GDP in 2000 was $9.963 trillion (CIA). GDP real growth rate was 5% (CIA). The growth rate of GDP suggests that the economy is growing, and therefore there is opportunity for Starbucks to expand business. A very large per capita purchasing power parity of $36,200 suggests that Americans have the opportunity to buy specialty coffee drinks from an expensive, quality-intensive organization such as Starbucks (CIA). An inflation rate in consumer prices in the year 2000 of 3.4% is a high inflation rate. This suggests that the economy could be heading towards recession. During a recession, it could be expected that consumers would spend less on premium luxury items such as Starbucks' coffee. Score +2

Legal / Political Forces

Right now, Starbucks has two class action suits pending since 2001. The lawsuits entitled Carr vs. Starbucks and Sheilds vs. Starbucks are challenging the status of Starbucks California store managers and assistant managers as exempt employees under California wage and hour laws. Starbuck's is denying all liabilities in these cases, however; the company has agreed to the settlement in order to take care of all of the plaintiffs' claims without having to get involved in any protracted litigation.

Starbucks also only imports all their coffee beans, so possible threats could include a change in import laws. A change in the status quo as far as imports go could greatly affect numerous areas of production for the company. For example, if it costs more to import or the process is made more difficult the result could ultimately be a change in price, which would affect the level of consumption for Starbucks coffees. (starbucks.com):

Score -2

Summary of Scores

The Economic Force was scored as a -1 due to the fact that an increase in coffee prices does affect the level of consumption of the good. Economic factors, such as price, raises pose to be a threat, however it is a minor threat considering that Starbucks has established its customer base. It is apparent that an increase in price might affect consumer behavior, but it will not drastically change consumer habits. The technological sector was scored as a +3. The reasoning behind that is that new technological changes that Starbucks is undergoing poses to help open the door for new products by improvements being made in marketing and manufacturing techniques. Also the changes will assist in improvements in existing products. The technological improvements, advancements, and innovations create a great deal of opportunity for the organization by staying ahead of what competition is doing. In the Sociological sector, Starbucks was given a +3. Justification for this score is that Starbucks has created an image of being environmentally friendly. This is a strong opportunity to build on the organization's market share because the company can attract more consumers from its competition because of its strong reputation. Starbucks scored a +2 in the Demographic sector primarily because the U.S population is growing, with an increasing GDP and large per-capita purchasing power. Starbucks must be weary of a high inflation rate, as this could suggest recession. Porters Five Forces

Current Competitive Force

Porter's first force that Porter describes is current rivalry among existing firms. In the specialty eateries industry, Starbucks' current and direct U.S competitors are Diedrich Coffee, Seattle's Best Coffee, and Einstein/Noah Bagel Corporation (hoovers.com). The competition, however, is not equally balanced. Diedrich Coffee operates 370 coffeehouses in 37 states and 11 countries (hoovers.com). Seattle's Best Coffee operates 160 coffee cafes and 20 Italian coffee cafes in 17 states and 8 countries (hoovers.com). Einstein/Noah Bagel Corporation operates 460 bagel cafes in the U.S (hoovers.com). Starbucks has 4,709 locations in over 20 countries (hoovers.com). It is clear that Starbucks has few major competitors, and the competition has nowhere Starbucks' volume of operations. Starbucks is the leading retailer, roaster and brand of specialty coffee in the world. Smaller competitors, however, pose potential threats to the company. For example, the average Starbucks location draws on a population base of 200,000 (msn.com). In San Francisco and Seattle, Starbucks draws on population bases between 17,000 and 19,000 (msn.com). In cities where Starbucks does not draw on small population bases, smaller competitors can attract some of Starbucks' 200,000 person population base. A slowing industry market growth is another threat facing Starbucks. According to the market research firm Allegra, compound market growth between 1997 and 2001 was 57% (hoovers.com). From 2002 to December 2004, the market it estimated to grow 14%. (hoovers.com). Competitors are selling similar products, including specialty coffees as well as high quality foods. In this slowing market, competition is high. Score: -2

Threat of Potential Entrants

Porter's next force is the threat of Potential Entrants. Starbucks, being the world leader in its industry, has controlled access to distribution channels. Starbucks has exhibited this control over distribution channels by setting guidelines for their suppliers to follow. These guidelines will be discussed in more detail in the discussion of the industry bargaining power of suppliers. Starbucks is Fortune's number one most admired company in the food industry (fortune.com). One of their key attributes to success is innovation, where Fortune ranks Starbucks number one in the industry (fortune.com). Starbucks is constantly innovating and showing strong product differentiation in their industry. The industry, following Starbucks' lead, is becoming more differentiated. For example, five months after Starbucks introduced a prepaid Starbucks debit card, Seattle's Best launched its version of the marketing product (hoovers.com). This industry differentiation is an opportunity for Starbucks, and a threat to potential entrants. Statistics have shown the industry to be slowing down, therefore making competition high and the threat of new entrants low. Some believe, however, that there is a different kind of potential entry threat. Ted R. Lingle, executive director of the Specialty Coffee Association of America, believes that national food servers like McDonalds and Denny's could create strong coffee menus and become "the strongest competitor for Starbucks' business." (msn.com). Score: -3

Bargaining Power of Buyers

Porter's next force is Bargaining Power of Buyers. Starbucks' customers are the buyers. The Preferred Office Coffee Provider is a plan developed by Starbucks in which companies can buy the ingredients and tools necessary to brew "the perfect cup of Starbucks Coffee," in large quantities for their offices (starbucks.com). This is the only opportunity found in Starbucks.com for a customer to buy large quantities of their products. Starbucks' typical customer buys small quantities of their products. Products purchased at Starbucks are highly differentiated and unique. From personal experience, we know that there is an enormous selection of coffees at a Starbucks' coffee shop. At Starbucks.com, it is possible to buy a large number of products, from coffees, ice cream and Frapuccino� , to music and coffee mugs. This is an opportunity for Starbucks. Customers will face no switching costs in switching premium coffee suppliers from Starbucks, to, for example, Seattle's Best. This is a threat to Starbucks. Another threat to Starbucks is that their customers have the ability to brew their own coffee. Starbucks has tried to offset this threat by offering Preferred Office Coffee Providers as well as directions on how to make the perfect cup of Starbucks Coffee at home, called the "Four Fundamentals of Coffee" (starbucks.com). The perfect cup of Starbucks Coffee includes, of course, Starbucks' ingredients! It is clear that Starbucks customers have some bargaining power in the industry. Score: -2

Bargaining Power of Suppliers

Porter's fourth industry force is bargaining power of suppliers. Coffee is the world's second largest traded commodity (Bruce). South and Central America produce the majority of coffee traded in the

world. Starbucks depends upon both outside brokers and direct contact with exporters for the supply of green coffee (Bruce). The supply of coffee is affected by weather conditions, and the health of coffee trees. According to the article "Coffee Industry to Adopt New Pricing Plans," the major players in the coffee industry have seen profits decline because of over-crowding of the market (Brains Trust). An over-crowded market will give the coffee suppliers bargaining power. According to a 1996 Starbucks Case Profile, the price of the coffee bean could rise in the future due to lower supply, and heightened demand. For the industry, these are alarming threats. The quality of coffee sought by Starbucks is very high, and Starbucks has traditionally paid premium prices for its green coffee, at least $1.20 per pound (starbucks.com). There are no substitute products for the coffee beans Starbucks must buy. This is a potential threat to the company. Starbucks, however, has exhibited how little control its suppliers might actually have. In 2001, Starbucks announced new coffee purchasing guidelines, developed in partnership with The Center for Environmental Leadership in Business (starbucks.com). These guidelines are based on the following four criteria: Quality baselines, social conditions, environmental concerns, and economic issues. Only suppliers who can meet Starbucks' coffee standards will be able to supply the giant company. The supplying industry to Starbucks, therefore, has few companies. This is a potential threat. Starbucks will offset this threat by paying a premium of up to ten cents per pound of coffee to vendors based on how well their coffee meets Starbucks' standards (starbucks.com). Glenn Prickett, executive director of the Center for Environmental Leadership in Business, said, "With these guidelines, Starbucks is taking a leadership role in addressing the environmental and social issues surrounding the global coffee industry." Starbucks has a degree of control over its suppliers in an industry where it is possible for suppliers of premium coffees to have an enormous amount of bargaining power. Score: -2

Threat of Substitute Products

In the premium foods and coffees industry, there are substitute products. According to Mary Coulter, the best way to evaluate this threat is to ask whether other industries can satisfy the customer need that this industry is satisfying (Coulter). Other beverage industries can satisfy the customer's need for a drink, and other food industries can satisfy the customer's need to eat. There are obviously good substitutes to Starbucks' products. This is why image is very important for Starbucks, as well as the company's ability to innovate and differentiate. Starbucks has added a line of tea, Taza teas, to their menus, and will be adding beer to their menus in the future. The article "Hot Prospects," notes Starbucks fashionable image. "Frapuccinos are a kind of badge; People like to be seen with them," said the author (hoovers.com). There is a large threat of substitute products in a food and drink industry. Starbucks has created an image, and has differentiated so that many of their substitute products are part of the company. At a Starbucks coffee shop, a customer can eat ice cream, and drink a Pepsi, while his friend drinks tea while eating a pastry. Score: -3

Summary of Scores

It is necessary to understand that Starbucks Corporation is the world leader in their industry. The scores,

generally low, reflect this leadership position. Starbucks has found ways to minimize the threats in each industry force. The company's size offsets many of the threats of competition. Starbucks' ability to innovate and differentiate has minimized the risk of potential entrants. Efforts to integrate Starbucks into the home have minimized threats of customer bargaining power. Starbucks has offset the potentially high bargaining power of its suppliers by issuing coffee guidelines, and paying premium prices for suppliers who can meet these guidelines. This is why the highest score was negative three. We gave a score of negative three to the threat of substitute products because Starbucks is in a food and drink industry, and in this industry, there are many good substitute products. A score of negative two means that Starbucks should be weary of the threats in their specific environment, and continue to find ways to exploit its opportunities, and minimize its threats.

Issues and Recommendations Facing Starbucks

Corporate Strategic Questions

What measures can Starbucks take to ensure that their brand image and reputation for quality is not tarnished while implementing a growth strategy?

Starbucks has, and will continue to have, a major corporate growth strategy. As corporations grow there can be a tendency to focus too heavily on increasing output and locations, and less focus on quality and brand image. Starbucks needs to stay with its values and ideals that have made it successful. Those ideals are a great place for employees to work, which creates happy, productive employees with low turnover, which has a direct impact on the customer's experience and satisfaction. Also a commitment to quality cannot be sacrificed as Starbucks locations will likely double in the next five years. If Starbucks can keep a consistent atmosphere that combined with consistent, excellent quality coffee products, they can ensure their brand image and reputation.

How does Starbucks corporate decision of not franchising affect its business? What would be the advantages and disadvantages of franchising for Starbucks?

In general, franchising shifts the financial risk from the corporation to an individual. So an advantage of Starbucks franchising would be to open hundreds of new stores with less risk to the company, and make profits in doing so. In addition Starbucks would have less research and development costs because the franchisee would have greater knowledge of the local market in terms of demographics, psychographics, geographic, and local/state/country regulations. The disadvantages of franchising are that Starbucks would give up a certain amount of control over the store, and the way it operates. Despite the high amount of rules and regulations that Starbucks would hypothetically have in place for a franchisee, the each store would be run slightly different. If Starbucks franchised, there is the risk of different stores deleting some of the menu to it's standards, and picking and choosing what products (music, coffee equipment, books) to make available for the customers. By keeping all stores corporately owned Starbucks can control and monitor all location's operations and ensure a high employee and customer relations through consistent management, store operation, and location environments.

What will Starbucks do once the International growth strategy has become saturated, that is, once Starbucks has penetrated all foreseeable worldwide markets?

Starbucks has the potential for finding a new type of growth strategy once the International growth strategy is no longer beneficial. We believe that in this case Starbucks will need to concentrate on its core competency, high quality coffee products, and use a Concentration growth strategy. Starbucks will stay in the same industry, so the two main sub-strategies would be Product Development, and Product-Market Diversification. It is important to understand this in the Product Development phase they would need to focus solely on making their existing products better. The company could demonstrate Product Market Diversification through research and development, and creativity. The company could be extra sensitive to changes in customer tastes, and the external environment. In doing so Starbucks could quickly react to environmental changes and make sure to entice as many people as possible into their stores. For example, Starbucks could start a line children's fruit drinks and "yummy" milkshakes which would help bring families into the store. This way the mothers and fathers could go to Starbucks and get their favorite coffee drink while making their children happy.

Competitive Strategic Questions

The biggest threat to Starbucks right now, some believe, is that national food servers such as McDonalds and Denny's could create high quality coffee menus. What could Starbucks do to counter-act this?

In order to compete against this possible market threat, Starbucks must push to be the first mover. Starbucks must constantly innovate new products to stay ahead of such competitive tactics. If they have any chance of stopping the companies from being the innovator, it can do so by being the innovator itself. Starbucks needs to be extremely aware of what is going on in the competitive markets. A way they could fight this type of competition is by entering into agreements, long-term contracts, with the food service companies that they are competing against. This way their coffee would be sold at these outlets, rather than competitors, and they would gain access to a new market and increase sales while decreasing competition. This option would have a chance of harming the companies' brand image and reputation for quality and its coffee drinking atmosphere. This would, of course, take much top management debate that would be a "last resort" in the case of an extreme competitive threat. If, for example, McDonalds entered into a coffee agreement with Diedrich Coffee, Starbucks could respond by acquiring Diedrich Coffee. Through acquisition Starbucks would ultimately gain a greater market share, salvage its brand image and decrease the threat of competition. Another possibility would be for Starbucks to create a subsidiary that specializes in catering to the food service industry. This would be another way for Starbucks to compete without the risk of damaging its reputation and brand image.

Could Starbucks gain a significant amount of market share by entering the markets of less populated cities in the United States, contradicting its current strategy of only entering markets with high population and affluence?

We believe that Starbucks would gain a considerable amount of market share if it entered into markets with less population, and affluence. Starbucks has a reputation throughout the United States, and we think that this image will carry through and make certain profitability and increased market share in smaller markets. We will demonstrate this opinion by using Springfield, Missouri as an example. Springfield does not have a Starbucks coffee, yet it the third largest city in Missouri. According to business4springfield.com, Springfield has a population of over 300,000 people, a population growth of 2.3% and a workforce of over 180,000 people. Most people from Springfield are very much aware of Starbucks, which is located in Kansas City and St. Louis. In Springfield, Starbucks would be forced to compete against Churchills Coffee, which is well established in the area. Starbucks could use many tactics to overcome this competition and gain the Springfield market share in the high quality coffee industry. Some tactics include building many locations combined with a heavy marketing campaign to draw customers from Churchill's. Another option could be to use Starbucks incredible purchasing power to acquire Churchill's. This also goes along with its growth strategy and history of acquiring its competition.

Our main point is Starbucks reputation precedes itself. It has shown to be successful in every new market penetration, and to move into smaller city markets would be no different.

Functional Strategic Questions

Starbucks Corporation continues to grow, and has goals of greater international expansion. For example, The company plans on opening 500 stores in Europe by 2003 (BBC News Online, 1998). Starbucks plans on opening hundreds of new stores internationally, as well as continuing to grow in the United States. Research has shown that industry growth rate is slowing. Threats loom from the Starbucks' general and specific environment. How can Starbucks continue to be the world leader in their industry? This large question can be partially answered by answering future functional strategy questions. Functional strategies, according to Mary Coulter, are the short term goal-directed decisions and actions of the organization's various functional units, which include production and operations, marketing, and financial/accounting (Coulter).

In the face of an uncertain future, what kind of Research and Development emphasis and timing should Starbucks employ in order to facilitate its continuing expansion?

Starbucks is ranked as Fortune's #1 most innovative company in the food services industry. Starbucks has differentiated its product lines to include teas, sodas, ice creams, foods, etc.Starbucks organizational culture is one of innovation and creativity. The company has been a first mover into the market with products such as the Starbucks Card, or the �DoubleShot' Espresso beverage.

Starbuck's Research and Development should emphasize product development. Product differentiation has proven an excellent defense to threats such as bargaining power of buyers. Developing new products will offset potential risks. For example, if the prices of coffee beans rise dramatically, Starbucks will be able to use sales from its diverse array of products to soften the blow of reduced coffee sales. An

R&D emphasis on product development is often synonymous with company growth, and company growth will continue to be a major corporate strategy of Starbucks.

Starbucks should continue to be a first mover into markets with new products and ideas. An advantage of being a first mover into a market, according to Mary Coulter, is a reputation for being innovative and an industry leader. Image will be very important to Starbucks' international marketing strategies. Starbucks image will be crucial if the company does not want to become a commodity. Being a first mover of new products into new international markets will be an excellent way for Starbucks to build customer loyalty and uphold its image as an innovative company.

Should Starbuck's employees continue to be Starbuck's most important asset? Should Starbucks change its HRM style in its international markets?

Reference: http://www.academicmind.com/unpublishedpapers/business/marketing/2002-04-000aag-catching-the-starbucks-fever.html