Starbucks – 2007

Abstract

This case describes the financial and non-financial performance of Starbucks, a large organisation provided as on 2007. Howard Schultz, the promoter and chairman of the corporation is disturbed by the decline in the performance of Starbucks, especially the dilution of customer experience. He is required to analyse what happened and adopt a course of action to strengthen Starbucks' performance vis a vis competitive attacks. The participants are required to analyse the situation, generate options for Starbucks and make recommendations for the future, including whether Jim Donald, the current incumbent, needs to be retained as the CEO of Starbucks.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

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Resources

Exhibit: 1

“Starbucks Chairman warns of the “Commoditization of the Starbucks Experience”

From: Howard Schultz

Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time

To: Jim Donald

Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra Taylor

Subject: The Commoditization of the Starbucks Experience

As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts with you.

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the effect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma—perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighbourhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don't have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self-induced, that has led to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

I have said for 20 years that our success is not an entitlement and now it's proving to be a reality. Let's be smarter about how we are spending our time, money and resources. Let's get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.

Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.

Onward…

Source: http://starbucksgossip.typepad.com//2007/02/starbucks_chair_2.html accessed on December 24, 2012.

Exhibit: 2a

Growth of Stores

US

INTERNATIONAL

TOTAL

Year

Company-operated Stores

Licensed Stores

Company-operated Stores

Licensed Stores

Total Stores Opened

Total Stores

Earlier

116

116

1992

42

1

6

0

49

165

1993

86

8

13

0

107

272

1994

120

14

18

1

153

425

1995

205

23

24

0

252

677

1996

264

22

46

6

338

1,015

1997

305

14

65

13

397

1,412

1998

324

33

80

37

474

1,886

1999

390

42

79

101

612

2,498

2000

391

342

113

157

1,003

3,501

2001

504

268

158

278

1,208

4,709

2002

507

264

125

281

1,177

5,886

2003

578

389

140

232

1,339

7,225

2004

521

417

164

242

1,344

8,569

2005

580

596

189

307

1,672

10,241

2006

810

733

246

410

2,199

12,440

2007

1,065

723

297

486

2,571

15,011

Source: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTI0MjY4fENoaWxkSUQ9LTF8VHlwZT0z&t=1 accessed on December 24, 2012.

Exhibit: 2b

Starbucks Stores in 2007

Asia Pacific

Europe/Middle East/Africa

The US

Japan

722

Turkey

82

United States

3,891

South Korea

215

Spain

68

Canada

234

China

212

Greece

64

Mexico

159

Taiwan

209

Saudi Arabia

58

Other

26

Philippines

119

Kuwait

49

Malaysia

92

United Arab Emirates

47

Indonesia

58

France

37

New Zealand

45

Switzerland

35

Other

84

Total

1,672

Total

524

Total

4,310

Source: Starbucks Annual Report, 2007.

Exhibit: 3

Financial Performance

As of and for the Fiscal Year Ended

Sept 30, 2007

Oct 1, 2006

Oct 2, 2005

Oct 3, 2004

Sept 28, 2003

Sept 29, 2002

Sept 30, 2001

Oct 1, 2000

Oct 3,1999

Sept 27,1998

(52 wks)

(52 wks)

(52 wks)

(53 wks)

(52 wks)

(52 wks)

(52 wks)

(52 wks)

(53 wks)

(52 wks)

Results of Operations

Net revenues:

Company-operated retail (in $)

7,998

6,583

5,392

4,457

3,450

2,792

2,229

1,823

1,423

$1,102

Specialty:

Licensing

1,026

861

673

566

410

312

241

189

Foodservice and other

387

343

304

271

216

184

179

165

Total specialty

1,413

1,204

977

837

626

496

419

354

263

206

Total net revenues (in $)

9,411

7,787

6,369

5,294

4,076

3,289

2,649

2,178

1,686

1,308

-

8

Operating income

1,054

894

781

606

421

316

280

212

156

109

Internet-related investment losses

3

59

-

-

Gain on sale of investment

13

-

-

Earnings before cumulative effect of change in accounting principle

673

581

494

389

265

Net earnings (in $)

673

564

494

389

265

212

180

94

101

$68

Balance Sheet

Working capital (deficit) (in $)

−459

−406

−18

605

336

310

148

146

135

$157

Total assets

5,344

4,429

3,514

3,386

2,776

2,214

1,783

1,435

1,252

992

Long-term debt (including current portion)

551

3

4

4

5

5

6

7

7

2

Short-term borrowings

710

700

277

Shareholders' equity (in $)

2,284

2,229

2,090

2,470

2,069

1,723

1,374

1,148

961

$794

Store Information

Percentage change in comparable store sales 1

United States (in %)

4

7

9

11

9

7

5

9

6

5

International (in %)

7

8

6

6

7

1

3

12

20

28

Consolidated (in %)

5

7

8

10

8

6

5

9

6

5

Note: 1. ‘Comparable store sales' is a commonly used measure for retail stores. It is the amount of revenue generated in the current year relative to previous year. For more details see http://www.investopedia.com/terms/c/comparable-store-sales.asp

Source: Starbucks Annual Reports (various years).

Exhibit: 4

Source: https://www.msu.edu/∼howardp/coffee.html accessed on December 24, 2012.

Figure

Exhibit: 5

Source: Google Finance, accessed on December 24, 2012.

Figure

Exhibit: 6

Figure

Source: <http://www.accuval.net/insights/industryinsights/detail.php?ID=101> accessed on December 24, 2012

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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