CASE STU The idea was to create a chain of coffeehouses that For his part, Schultz remained the Chairman and Chief Global would become America’s “third place.” At the time, Strategist of the company. However, in 2002, he handed over most Americans had two places in their lives-home day-to-day operations to CEO Orin Smith, a Harvard MBA and work. But I believed that people needed another (1967) who had joined the company in 1990 place, a place where they could go to relax and enjoy others, or just be by themselves. I envisioned a place that would be separate from home or work, a place THE STARBUCKS VALUE that would mean different things to different people. PROPOSITION Schultz, got his chance a few years later when Starbucks Starbucks’ brand strategy was best captured by its “live founders agreed to sell him the company. As soon as coffee mantra, a phrase that reflected the importance Schultz took over, he began opening new stores. The stores sold whole beans and premium-priced coffee beverages by culture alive. From a retail perspective, this meant creating the company attached to keeping the national coffee the cup and catered primarily to affluent, well-educated, an experience around the consumption of coffee, an white-collar patrons (skewed female) between the ages of experience that people could weave into the fabric of their 25 and 44. By 1992, the company had 140 such stores in everyday lives. the Northwest and Chicago and was successfully competing against other small-scale coffee chains such as Gloria Jean’s There were three components to this experiential Coffee Bean and Barnie’s Coffee & Tea. branding strategy. The first component was the coffee That same year, Schultz decided to take the company public itself, Starbucks prided itself on offering what ir believed to be the highest-quality coffee in the world. sourced from As he recalled, many Wall Street types were dubious about Africa, Central and South America, and the Asia-Pacific the idea: “They’d say. “You mean, you’re going to sell coffee region. To enforce its exacting coffee standards, Starbucks for a dollar in a paper cup, with Italian names that no one controlled as much of the supply chain as possible. It in America can say? At a time in America when no one’s worked directly with growers in various countries of origin drinking coffee? And I can get coffee at the local coffee shop to purchase green coffee beans. It oversaw the custom or doughnut shop for 50 cents? Are you kidding me?? roasting process for the company’s various blends and Ignoring the skeptics, Schultz forged ahead with the single-origin coffees. It controlled distribution to retail stores around the world public offering, raising $25 million in the process.
The proceeds allowed Starbucks to open more stores across the The second brand component was service or what the nation, company sometimes referred to as customer intimacy.” Our goal is to create an uplifting experience every time you By mid-2002. Schultz had unequivocally established walk through our door.” explained Jim Alling, Starbucks Starbucks as the dominant specialty-coffee brand in North Senior Vice President of North American retail. “Our most America. Sales had climbed at a compound annual growth loyal customers visit us as often as 18 times a month, rate (CAGR) of 40% since the company went public, and it could be something as simple as recognizing you and net earnings had risen at a CAGR of 50%. The company knowing your drink or customizing your drink just the way was now serving 20 million unique customers in well over 5,000 stores around the globe and was opening an average you like it.” of three new stores a day. (See Exhibits 1-3 for company The third brand component was atmosphere. “People come for financials and store growth over time.) the coffee, explained Day, but the ambience is what makes them want to stay.” For that reason, most Starbucks outlets What made Starbucks’ success even more impressive was had seating areas to encourage lounging and layouts that that the company had spent almost nothing on advertising were designed to provide an upscale yet inviting environment to achieve it. North American marketing consisted primarily for those who wanted to linger. “What we have built has fal of point-of-sale materials and local-store marketing and was universal appeal.” semarked Schulcz. “It’s based on the human far less than the industry average. (Most fast-food chains spirit, it’s based on a sense of community, the need for people had marketing budgets in the 3-6% range.) to come together Exhibit 1: Starbucks’ financials, FY 1998 to FY 2002 in Million ). FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 Revenue 1432 Co-owned North American 1,076.8 1,375,0 1.734.9 2,086.4 2,583.8 Co-owned Int’l (UK, Thailand, Australia) 258 887 209.1 Total company-operated retail 1,102.6 1,423.4 1,8236 2,229.6 2,7929 Specialty operations 206.1 263.4 354.0 419.4 496.0 Net revenues 1.308.7 1.686.8 2,177.6 2.649.0 3.288.9 Cost of goods sold 578.5 747.6 961.9 1.1128 1,350.0 Gross profit 7302 9392 1.215.7 1,536.2 1,9389 Joint-venture income 1.0 32 203 28.6 35.8 Expenses Store operating expense 4185 5436 7049 875,5 1.121.1 Other operating expense 44,5 54.5 78.4 93.3 127.2 Depreciation and amortization expense 725 97.8 1302 1635 205.6 General and admin expense 776 89.7 1102 151.4 2021 Operating expenses 613.1 785.7 1,023.8 1,283.7 1,656.0 Operating profit 1092 156.7 2123 281.1 310.0 Net income 101.7 94.5 181.2 215.1 % Change in monthly comparable store sales North America 5% 6% 9% 5% 7% Consolidated 5% 6% 5% 6% Source: Adapted from company reports and Lehman Brothers, 5 November 2002 Includes income from various joint ventures, including Starbucks’ partnership with the Pepsi-Cola Company to develop and distribute Frappuccino and with Dreyer’s Grand Ice Cream to develop and distribute premium ice creams. Includes only company-operated stores open 13 months or longer. Exhibit 2 Starbucks’ store growth ST FY 2000 FY 2001 FY 2002 CASE 2,975 3,780 4.574 1522 2.038 2.446 2.971 3,496 139 179 530 809 1.078 131 201 525 929 1,312 FY 1998 FY 1999 Total North America 2217 Company-operated Licensed stores Total international Company operated Licensed stores Total stores Source: Company reports Includes kiosks located in grocery stores, book stores, hotels, airports, and so on.
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