Starbucks Case Study

Introduction

Starbucks share price and market valuation declined steadily from 2006 to 2008 even though revenue and earnings continued to show year on year growth. This case study analyzes the reason for Howard Schultz’s concern with the company’s performance over that period and subsequent transformation agenda of the Starbucks Coffee Company and its applicability to Sears.

Seeds of a Crisis

Starbucks Revenue had grown consistently year on year through domestically and internationally expansion up until 2008, however declining comp store sales and investor confidence were showed signs of distress. (Exhibit 2)

Starbucks decline attributable to external and internal pressures

Starbucks share price declined 75% between from 2006 to 2008. The share price performed worse than the Nasdaq, and McDonald's Corp, its closest competitor, had been climbing steadily in value over the same period (Exhibit 1). Starbucks beta of 0.76 indicates that its stock performance should be less volatile than the market. The graph shows that while Starbucks was impacted by the macroeconomic conditions, there were other fundamental issues at play that were making it more sensitive to the market. McDonald's was also outperforming Starbucks and the market over the same period.

Failure to recognize growing competitive threats

Starbucks’ leadership did not recognize the growing competitive threats that they were facing for several reasons, including their belief that they were superior to their competition; this belief could be attributed to following achievements: 1) Revenues increasing at an annual growth rate of 36% since the company went public in 1992 2) Opened over 12,000 stores in under a decade 3) Stock market capitalization reflecting a rise from $300 million in June 1992, to almost $29 billion in June 2006 and 4) Sheer age of the company's existence (nearly 35 years).(Koehn et al. 3,5) With Starbucks’ extremely rapid growth and success, it is believed that leadership in the company was too caught in the moment to really analyze the competition surrounding them. When McDonald’s and Dunkin’ Donuts were making their big push to enter the coffee market, Starbucks found no reason to take them seriously as their direct competition because they believed that the product they served was inimitable, compared to what they had to offer. In contrast, Consumer Reports test proved that this was not the case; McDonald’s coffee was actually “very well-received by consumers” and beat out both Starbucks and Dunkin’ Donuts.(Koehn et al. 7) Starbucks did not react or recognize their competition until it was too late. Once the competition was recognized, Starbucks had already been faced with the issue that their sales had been declining rapidly. Dunkin’ Donuts and McDonald’s were targeting Starbucks directly with marketing hits right in Starbucks’ home town of Seattle; a McDonald’s billboard read, “Four Bucks is Dumb” and McDonald’s website “unsnobbycoffee.com”.(Koehn et al. 7) Schultz admitted, “We had never had much competition, everything we did more or less worked.”(Koehn et al. 7) Once Starbucks realized their growing competitive threat, they knew they had to act or else they would be in serious trouble both financially and competitively. Schultz’s approach to fighting this battle was to return to the beginning roots of the company when they “were fighting for survival, doing whatever [they] had to do.”(Koehn et al. 7)

Economic Turmoil

The economy was in turmoil in 2008. Large financial institutions collapsed, prices on everyday items such as oil and milk were rising, and the unemployment rate was averaging at an astonishing 5.8% (Exhibit 3). For distressed consumers, average income was declining and they became more conscious of spending. With less disposable income, consumers constrained their discretionary spending (Koehn et al. 19) This affected Starbucks since their entire brand was a luxury commodity. Schultz believed consumers would pay more for the experience of the brand and the ambiance. The competition was using a cost focus strategy while Starbucks was continuing with a Differentiation strategy. This strategy allowed low cost competitors to appeal to consumers by targeting Starbucks’ luxury status. Dunkin’ Donuts took aim at Starbucks’ jargon while McDonald’s targeted their prices.

Transformation and Renewal

Important Components of the Transformation

Many components went into the transformation of Starbucks throughout the mid-2000s. Some of the most important components included the strategically positioned leaders, the drive and ability of Starbucks to pursue innovation, and the ability of the CEO and leadership team to clearly and effectively communicate their vision, mission and goals. These components were the most impactful based on the seven “Big Moves” the company was striving toward, as seen in exhibit 9 within the case. All of these initiatives involved innovation and communication from the top-down.

Strategically positioning leaders is one of the most critical components of the Starbucks’ transformation. The organization needed a leadership team that was on-board with what the company was striving to accomplish. The necessary message, motivation and goals to transform Starbucks would not have been effectively communicated down to the lower levels of the organization without having the appropriate individuals in the right positions of leadership.

Starbucks’ desire and ability to pursue innovation also played an important role in their transformation. In order for Starbucks to survive in the 21st century, it had to pursue innovation, but this did not mean it had to stray from its core values. Starbucks managed to incorporate new products and digitalize as a company without losing sight of the core company values. It managed to create a new type of home brew, the Instabrew. The Instabrew appealed to a different market than that of the typical Starbucks day-to-day consumer, it instead appealed to customers who are “simply too busy to stop at Starbucks store.” (Koehn et al. 25) Even though the Instabrew coffee was a household quick-serve coffee beverage, it still held the Starbucks name which was associated with luxury and class. Starbucks also digitalized by creating apps, social media pages, developing rewards systems and soliciting for customer feedback on a website. All of these digital innovations turned out to be successful and important to the transformation of Starbucks. The first 24 hours that the “My Starbucks Idea” site launched, users posted over 7,000 ideas. On top of that,