Case Study

Schultz relinquished his position as Starbucks' CEO in 2000, while retaining his role as chairman. By 2007, even before the financial crisis had struck, problems were becoming apparent. In 2007, growth of samestore sales slowed dramatically and, during 2007-2008, profits slumped. After reaching a peak of $40 in October 2006, the share price declined by more than 75% over the next two years. Amidst increasing concern that the quest for rapid growth had compromised Starbucks' core values, Schultz returned as CEO at the beginning of 2008. Schultz's turnaround strategy comprised retrenchment and rebuilding. Planned new US store openings were cut back; 600 stores in the US were closed along with most stores in Australia. Companywide cost cutting measures were implemented and almost 6000 employees lost their jobs. Rebuilding comprised reaffirming Starbucks' values and business principles and reconnecting with its customers. Schultz reviewed operating practices to examine their consistency with the Starbucks' Experience and its reformulated mission statement: 'to inspire and nurture the human spirit - one person, one cup and one neighbourhood at a time'. Key changes included a return to 'handmade' coffee - replacing automated espresso machines with machines requiring individual cups from freshly ground beans - and revision of Starbucks' food menu, including withdrawing toasted breakfast sandwiches, whose aromas masked that of the coffee. Starbucks increased its commitment to corporate social responsibility.

Reconnecting with customers involved Schulz in worldwide travel to meet with Starbucks' employees ('partners') in concert halls and theatres to remind them of Starbucks' values, to reignite their drive and enthusiasm and to recount inspiring tales of the 'humanity of Starbucks'.37It also involved extensive use of social media and mobile technology. Facebook offered a key platform for building loyalty and community among customers. Starbucks pioneered mobile payments - using its partnership with Square to introduce credit and debit payments by cell phone.

Rekindling growth

Once Starbucks had stabilized, Schultz returned to the quest for growth - however, in contrast to 2000-2007, growth would be 'disciplined'. Revenue growth was sought in two main areas: the grocery trade and international markets.

In the grocery trade, Starbucks head of Channel Development and Emerging Brands anticipated that sales of Starbucks' products through thousands of supermarkets and other food retailers would 'eventually rival Starbucks retail store portfolio in terms of size and profitability'. A range of new products would augment established products, such as Starbucks and Seattle Best ground and whole bean coffees and Tazo Teas. A major new product was the Via, a new type of instant coffee, launched in February 2009 at $2.95 for a pack of three individual servings. Via used a patented process to 'absolutely replicate the taste of Starbucks coffee'. It achieved sales of over $100m in its first year.

A key feature of Starbucks' strategy for the grocery trade was to use its own coffee houses to introduce new products and then to roll them out to other retailers. In relation to Via, Schultz explained: 'If we took Via and we put it into grocery stores and it sat on a shelf, it would have died. But we can integrate Via into the emotional connection we have with our customers in our stores. We did that for six to eight months and succeeded well beyond expectations in our stores. And as a result of that, we had a very easy time convincing the trade, because they wanted it so badly.'38

In relation to international markets, Schultz viewed emerging markets as a huge opportunity for Starbucks. While Starbucks had struggled in some welldeveloped coffee markets - in Australia and the UK strong competition made profits elusive - in emerging markets it pioneered a novel caf experience that appealed to the Westernized tastes of the emerging middle classes. China and India were Starbucks' primary targets. China would have 1500 stores in 70 cities by 2015 and would be Starbucks' biggest market after the US. In India, a 50/50 joint venture with Tata Group was building a national chain of Starbucks coffee houses beginning in Mumbai, Delhi, Pune and Bangalore.

In addition, Starbucks diversified its range of retail outlets.39During 2011-2012, it acquired premium juice maker Evolution Fresh, teashop chain Teavana and the California bakery chain La Boulange.

The future

During fiscal years 2014 and 2015, Starbucks looked set to continue its impressive growth. Analysts expected average annual revenue growth of 11% and earnings growth of 14%. Yet, despite acclaim for Schultz's remarkable success in restoring Starbucks' profitability and growth, doubts remained as to the longterm sustainability of its performance. Starbucks faced competition from multiple sources. Starbucks' success had spawned many imitators - both independent coffee houses and chains. In addition to speciality coffee houses, most catering establishments in the US, whether restaurants or fastfood chains, served coffee as part of a broader menu of food and beverages. Increasingly, these chains - notably McDonald's with its McCafs - were competing directly with Starbucks by adding premium coffee drinks to their menus. Starbucks also faced competition from premium coffee roasters such as the Italian firms Illycaff, Lavazza and Segafredo Zanetti, all of which were expanding their retail coffee houses. The gourmet coffee market was also seeing a revolution in homebrewed coffee: sales of espresso coffee makers (which used highly pressurized hot water) had grown rapidly - especially singleserve coffee pod systems pioneered by Nestl's Nespresso subsidiary.

Some commentators wondered whether Schultz's multiple initiatives risked repeating the errors of the past by losing focus on Starbuck's core identity and foundations of its competitive advantage. Did diversification into tea, juices, instant coffee and sales through the grocery trade fit with Starbucks' mission and capabilities?

Questions

1.Conduct a stakeholder analysis for Starbucks, based on the information available from the case study.

2.Identify a strategic capability which will help Starbucks to achieve a competitive advantage through an internal analysis.

3.Advise Mr. Schultz on whether and how Starbucks should amend its strategy to remain successful.

4.What is Starbucks global strategy? Apply Porter's National Diamond Framework to identify Starbucks comparative advantage.