Starbucks : Renewal and Transformation Harvard Case Study

Starbucks Renewal

1. What were the most important factors behind Starbucks’ decline in 2007 and 2008? How much of this did Schultz see in 2007? In 2008? Which factors were less obvious?

2. What were the most important aspects of Starbucks’ transformation? Why did these

matter to the survival and transformation of the company? How generalizable are such

initiatives in the broader context of business turnarounds?

3. What do you think Schultz means when he says that Starbucks is “redefining the role of

a for-profit company? What do you make of Schultz’s take on corporate responsibility and its impact on the bottom line?

Type of Case: Evaluation

Problem:

-Main problem is lost the brand and the reputation that starbucks had because of streamlining processes

- lost the overall ambiance and the feel of an authentic coffeehouse due to the implementation of automatic espresso machines (efficiency for signature ambiance)

- the need for fresh roasted coffee lead to flavour locked packages (fresh ingredients for the loss of aroma (primary feel for the customer))

- the standardization of all locations have led to the loss of the feeling of the neighbourhood coffee house

• Wants to innovate and differentiate starbucks from all other coffee houses

Outside concepts that can be applied:

STP (analyze the opportunities)

4 Ps (Implement the positioning)

Look for opportunities (Consumer, competition, company)

Qualitative Data:

• CEO was aware of the internal and external threats
• Inspired by his trip to Milan to enhance and mimic the coffee experience in Seattle
• Schultz found the success of the merchant was dependent on their ability to tell a story. What people sense when they walk into a space, guides their feelings to entice them to purchase whatever the seller has to offer
• Schultz found that many connections within the store were not authentic rather it was robotic
• The smell of burnt cheese from ovens overpowered the smell of coffee
• Stores were running out of ingredients → leading to potential issues
• He noticed many managers weren’t personally invested in their work, or proud of what they’re doing.  A handful were concerned about their gross margins than with the company’s core values
• Realized that the company was poorly unequipped to respond, in the digital realm, the company didn’t have outlets and capabilities to say why it was so special
• Some features of starbucks include:  passion for great coffee and a rewarding experience around the beverage, its commitment to partners in the form of health-care and Bean Stock (stock- based) benefits, and its support of localized, sustainable coffee farming around the world
• His question in 2003 was “could we get big and stay small?”

Quantitative data:

• 2006, revenue climbed to $7.8 billion (22% increase from 2005)
• opened 1200 stores within 6 years
• Early 2007, starbucks was the largest coffee retailer in the world (market leader in the young sector)
• Threat came from declining same-store sales, the newer locations were increasing sales compared to the older locations
• Used “comps” to measure within retail business, a strong measure means stores were expanding organically and business is being generated. A negative measure indicated that the newer stores were cannibalizing existing ones
• Same store sales were in the positive metric in 2006, but was much lower than the rates in 2005 (8%) and 2004 (10%)
• Q2 of 2008, earnings were down 28% to $109 million, and global operating income fell to $178 million
• Within a week of the July 1 announcement, Starbucks stock had fallen to $14.95, a 52-week low. Third-quarter results for the period ending June 29, 2008 were also disappointing. Starbucks reported a net loss of $6.7 million for the thirteen-week period, a steep fall from $158.3 million in net income a year earlier.199 Same-store sales were down 4% from Q2 the prior year, and earnings per share fell to negative $.01 from $.21, year over year
• September 28, 2008 saw profits plummet 97%, from $158.5 million in Q4 2007 to $5.4 million; for the fiscal year, net earnings were down 53 percent to $316 million
• Q4 Comp-store sales were negative 7 percent, similar to other struggling retailers’ numbers, and the outlook for 2009 was grim
• During the second quarter, we began to see signs of traction from the cost reduction and customer-facing initiatives we’ve undertaken over the past year,” by the close of Q2 2009, Starbucks stock was down 31% from a year earlier, to $11.77
• Though lower than the $10.4 billion for the 2008 financial year, operating margin for 2009 was up 1.1% year over year to 9.2%
• In Q1 2010, Starbucks posted revenues of $2.7 billion. Along the way, customers loaded a total of $1.6 billion onto Starbucks Cards, and the company’s share price rose to $25.94, up from $19.83 at the close of 2009
• Since 2010, the company had achieved four straight years of record annual revenues, and 2014 was on track to be equally successful. In January, Starbucks reported its highest-ever quarterly revenues of $4.2 billion, and record earnings per share of $0.71. Its share price was $78.57, and its market cap was $59.4 billion

SEEDS OF CRISIS

• Growth continued and in fiscal 2005, opened 1600 net new stores (on average 4 a day)
• Expanded internationally to open up to 4,327 stores from 2000-2007
• Providing to their internal partners was crucial, and also justified the expansion of the multiple stores to provide solid job and career opportunities in addition to increasing demand for coffee → mentioned difficult to maintain close relationships with partners and customers as it was expanding

Increasing Competition

• In 1990s interested in the demand side shifted to organic produce, fine wines, Arabica coffee
• Per capita income was rising (many can afford the small luxuries)
• Direct competitors were: Caribou Coffee, and Peet’s coffee & tea
• Dunkin’ Donuts stepped in and created coffee and marketed the products as “espresso oppression and the tyranny of long waits, high prices and confusing sizes
• McDonald’s introduced McCafe in 1993 in Australia and expanded → emphasizing cheaper coffee

TRANSFORMATION

• In 2007 gross margin declined from 59.2 (2006) to 57.5 (2007)
• The reason was the number of transactions per store rose 1% year after year in comparison to 2006 when it was 5%
• Same store comps grew 5% over 2006, the smallest increase in 5 years
• Stock prices declined by 40% to $23.39
• Schultz decided to return as CEO in 2008, and decided to create a transformation agenda inspired by Dell
• Dedicated himself to invest in innovation and reinvention, and not to blame anyone for the slide in sales
• Decided to take the offense position and communicate as to why starbucks was so special : “Behind every cup of Starbucks is the world’s highest-quality, ethically sourced coffee beans; baristas with health-care coverage and stock in the company; farmers who are treated fairly and humanely; a mission to treat all people with respect and dignity; and passionate coffee experts whose knowledge about coffee cannot be matched by any other coffee company”
• Established 3 initiatives:

• Most crucial: US business provided 70% of revenues, and its operations were slipping in comparison to international locations
• To deepen customers emotional attachment to starbucks (personal relationships with baristas, featured seasonal offerings, to the stores aroma)
• Reengineering of starbucks organizational structure

• Repositioned all the senior leadership in 2008
• Temporarily stopped reporting on same-store comps to refocus on the core values and mission
• Economic recession was looming in 2008
• Identified 7 big major moves:

1. Be the undisputed coffee authority. (needs partner to share their passion and pride, and second customer responsive innovations)
2. Engage and inspire our partners.
3. Ignite the emotional attachment with our customers.
4. Expand our global presence—while making each store the heart of a local neighborhood.
5. Be a leader in ethical sourcing and environmental impact.
6. Creative innovative growth platforms worthy of our coffee.
7. Deliver a sustainable economic model.

• Be the undisputed coffee authority was crucial, in which to engage and inspire partner, starbucks was committed to deepening it’s training and career development opportunities
• To reignite the emotional attachment with customers, proposed to put them back to the center of needs, and provide value by rewarding their loyalty
• Ethical sourcing leader = Since 1998, Starbucks had partnered with the non-profit Conservation International to promote coffee production practices that helped to preserve biodiversity, maintain healthy ecosystems, and support economic and social development in coffee production. The partnership underscored the company’s commitment to the idea that their long-term success was linked to that of the millions of farmers who grew and supplied Starbucks® coffee
• Expand global presence = connecting individual stores to the communities and cultures they served through art, music and décor
• As for creating innovative growth platforms = expand the brand’s reach by bringing high-quality, complementary offerings such as tea, cold beverages and instant coffee to market via retail and grocery channels
• Sustainable economic model = eorganize operations to support quality, speed and cost management
• Introduced 3 initiatives: the MastrenaTM espresso maker, Clover® Brewing System, and Pike Place® Roast coffee
• The Mastrena provided the solution to replace the automatic espresso machines to create unique cups for the customers while they can look at their drink being prepared
• Clover brewing system was the coffee equipment company, that was acquired to elevate the quality of standard brewed coffee to French pressed
• Pike Place roast was set to achieve consistent brew ( became the largest selling whole bean coffee)
• Came through with internal innovation of the BBCB (Failed attempt of JAWS) became the base for the famous Frappuccinos

Going Deeper

• Explosive growth masked the financial and organizational weaknesses. For example, as Schultz dug into the unit economics of the business, he was surprised to discover that hundreds of stores were missing the 2:1 sales-to- investment ratio that justified their operation
• On July 1, 2008, Starbucks announced it would close 600 stores. For Schultz, the worst consequence was the upheaval it would cause for partners. He remained committed to transitioning those he could, and “took solace in the fact that as many as 70 percent of field and store partners could likely remain with Starbucks
• He and his team were faced with the reality that, in order for the company to survive, they would have to layoff partners in non-store positions. All agreed that Starbucks “had no choice but to decisively pull tens of millions of dollars of permanent costs out of the business. And that meant reducing our workforce
• On July 29, 2008, Schultz and his management team announced the elimination of 1,000 non-store positions; 550 employees were asked to leave. Of those, roughly 180 worked in the greater Seattle area, the majority in Starbucks support center

Reengaging partners and management

• Schultz identified two tactical measures he deemed critical to partner reengagement and the company’s health more generally. The first was nationwide barista-retraining. The second was Starbucks Leadership Conference in New Orleans scheduled for October 2008
• the “art of coffee” would not, by itself, save Starbucks. “Unless we rallied our store managers around our new mission and taught them how to more profitably operate their stores, our company would drown, I was sure of it,” Schultz recalled
• areas of the city hardest hit by Hurricane Katrina, and took part in community service projects. They cleaned storm drains, constructed playgrounds, painted murals, restored homes and schools, and landscaped public and private grounds. They worked with local nonprofit and community building organizations to put in more than 54,000 hours of work, and invested more than $1 million in neighborhood projects. It was the largest concentration of community investment New Orleans had seen since Katrina
• During the conference, Starbucks introduced new technologies that would streamline store operations, including laptops for each store, a new point of sale system in all company-operated stores in the United States and Canada, mobile devices for district managers, and a new web-based labor scheduling tool.
• Partners also participated in educational programs designed to help them focus once more on Starbucks core offering — the customer experience of great coffee.247 An elaborate pavilion housed a “walking history” of coffee, from trees to a working roaster, and partners wrote about their commitment to their jobs and to Starbucks on a commitment wall

Operational close-up

• Needed to establish between the declining sales due to recession and operational ineffectiveness
• Cliff Burrows embarked on fieldwork to improve store-level operations with an eye to capturing missed revenue opportunities, reducing waste, managing inventory more efficiently, and improving the customer experience
• was so busy keeping up with the company’s explosive growth...that it did not have the time to properly invest in the discipline and competency that building a world-class supply chain requires
• A close look at three years’ supply chain spending revealed that costs and revenues had grown at the same rate. Without economies of scale, the day-to-day expenses of running the supply chain were increasing at a “runaway” rate of $100 million per year
• Set eyes on improving in store operations, which included the following: First, partners and managers had “never experienced transformational turnaround.” Second, many partners did not have business skills or experience. Third, managers needed to be retrained, and store operations had to be more disciplined
• One of the most important innovations was the September 2009 launch of Starbucks VIA® Ready Brew instant coffee
• first year, Starbucks VIA® Ready Brew instant coffee sales proved Schultz right. Revenues from the product reached $100M in the United States in its first 10 months on the market.284 Relative to most product introductions, this was a major success

Getting fit for the future

Digital Revolution

• By February 2009, Starbucks had incorporated roughly 25 of the most popular ideas of 2008, including eliminating store receipts for purchases under $25 to reduce paper waste
• customers connected not only around great coffee, but also around an experience of Starbucks more generally, would go on to become an increasingly critical element of Starbucks digital strategy. Before then, however, My Starbucks Idea would influence another substantial contribution to the company’s transformation: loyalty rewards.

Starbucks rewards

• The company’s summer “Treat Receipt” program invited any customer who made a purchase in the morning to return after 2:00 p.m. for a $2 Grande cold beverage. Originally piloted only in select cities, cross-country requests for Treat Receipts began to appear on My Starbucks Idea. A national rollout of the program helped mitigate “afternoon slowdown” across the boar
• Introduction of mobile app led to increase of sales

Social Media

• By 2012, Starbucks was the top company on Foursquare
• From My Starbucks Idea to loyalty rewards, mobile apps and social media, virtually all elements of Starbucks post-transformation “digital flywheel” had converged to comprise a coherent and singular space in which customers could share moments with Starbucks

International Expansion

• By late 2008, with 5,113 company-owned and licensed stores in 48 countries outside the United States, Starbucks international business accounted for 20% of its total $10.4 billion in revenue
• In 2014: Americas; Europe, the Middle East and Africa (EMEA); and China and Asia Pacific (CAP)
• China had long promised tremendous opportunity for Starbucks retail and CPG businesses. The company opened its first store in Beijing in 1999, and over the next ten years grew to 365 stores in mainland China
• Yunnan Province, for example, Starbucks committed to work with the Yunnan Academy of Agricultural Science and People’s Government of Pu’er City to assist local farmers in developing high-quality arabica coffee
• Starbucks leadership and its Chinese partners expected both acreage and bean production in Yunnan to increase four- to five-fold between 2010 and 2020
• In 2014, 15 years after Starbucks first entered the Chinese market, there were over 1,100 stores in 68 cities on China’s mainland
• In early 2012, the company announced an alliance with India’s Tata Group
• By March 2014, Starbucks had 40 stores in four major Indian cities, employing nearly 1,000 partners
• Together, Starbucks, Tata, and Tata’s Karnataka-based Coorg Foundation supported the expansion of “Swastha,” an education and rehabilitation center for children with special needs in the village of Coorg
• 14 countries, including Vietnam, was Starbucks fastest growing region with revenues increasing 24% year over year.

Stretching the brand, deepening channels

• Schultz and his team rolled out a line of packaged Seattle’s Best Coffee, and distinguished the line in the $3.6 billion market with a unique “Level System
• In line with the strategy that the Seattle’s Best Coffee brand represented a less expensive alternative to Starbucks, the company priced the product lower than Starbucks-brand beans, but higher than the industry’s “conventional brands
• In addition to establishing a presence in grocery and retail chains such as Safeway, Kroger, and Target, Starbucks expanded its foodservice business in the travel, hospitality and education sectors. Schultz cited “broad-based revenue growth in [the] Global CPG group”
• In November 2011, for example, the Seattle-based company purchased specialty cold-pressed juice maker Evolution Fresh. The company’s High Pressure Processing technology had helped create a unique line of Ready to Drink (RTD) beverages in the $1.6 billion super-premium juice industry. Through the acquisition of Evolution Fresh, Starbucks could claim ownership of a revolutionary new product in a growing market segment = shifting focus into the larger health and wellness sector
• In July 2013, paired with Paris-based “Danone” to readily have Greek yogurt available to complement the health and wellness approach
• Starbucks second post-transformation acquisition of the San Francisco-based La Boulange bakery in 2012 for $100 million promised to shift customers’ opinion of Starbucks food offerings. Announcing the acquisition in a press release, Starbucks enjoined its customers to “start thinking of Starbucks for great food,” and the message took hold
• Starbucks acquisition of Teavana Holdings in December 2012 for $616 million was its third post- transformation acquisition, its largest to date, and marked a significant move in the $90 billion global tea market

STARBUCKS CLASS REVIEW