Starbucks Onward Summary

Awake as usual at 4:00 a.m., Starbucks CEO Howard Schultz sipped a cup of Tribute Blend coffee as he reviewed the galley proofs for his latest memoir—Onward: How Starbucks Fought for Its Life without Losing Its Soul. The quiet surroundings gave him an opportunity to reflect on the remarkable ride that had brought him and Starbucks to January 2011, the beginning of the company’s fortieth year.

During those four decades, Starbucks had grown from a single location in Seattle, Washington, to a multibillion-dollar enterprise that operated more than 17,000 retail stores in fifty countries. Originally selling only coffee beans and ground coffee, it had added to its offerings prepared coffee, Italian-style espresso beverages, cold blended drinks,

food items, premium teas, and beverage-related accessories and equipment. Outside of its retail stores, consumers could purchase Starbucks-branded beans, instant coffee, tea, and ready-to-drink beverages in tens of thousands of grocery and mass merchandise stores around the world.1 As he reviewed the company’s many successes, Schultz remembered the words he had spoken to Starbucks’ partners just days before as they celebrated their best holiday season ever: “We have won in many ways, but I feel it’s so important to remind us all of how fleeting success and winning can be.”2

History
When Starbucks was founded in 1971, coffee consumption in the United States had been on the decline for nearly a decade (Exhibit 1). Most American coffee drinkers drank home-brewed Folgers, Maxwell House, or Nescafé—grocery store brands of light roast coffee with the smooth flavor generally preferred by Americans. Away from home, they ordered coffee with a meal at a diner or restaurant, or on the go from a fast food outlet, convenience store, or gas station. However, in a few neighborhoods in San Francisco and New York, small local coffeehouses and specialty coffee roasters such as Peet’s had recently been established. Starbucks was created in this mold with the aim to roast and sell great coffee.

1
2

Starbucks Coffee Company, Investor Relations “Overview,” http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome. Claire Cain Miller, “A Changed Starbucks. A Changed C.E.O.,” New York Times, March 12, 2011.

©2012 by the Kellogg School of Management at Northwestern University. This case was prepared by Greg Merkley ’84 under the supervision of Professors Craig Garthwaite, Meghan Busse, and Jennifer Brown. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [e-mail]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise— without the permission of the Kellogg School of Management.

This document is authorized for use only by Mingyu Jin in Strategic Management. SP 2015 taught by Stewart, University of Denver from March 2015 to June 2015.

For the exclusive use of M. Jin, 2015.
STARBUCKS: A STORY OF GROWTH

KEL665

By 1982, Starbucks had five retail outlets that sold beans and supplies for brewing coffee at home, but not prepared beverages.

It also had a roasting facility and a wholesale business. This growth attracted the attention of Schultz, then the vice president of the American subsidiary of Hammarplast, a Swedish housewares company that made plastic cone coffee filters for home coffee brewing. Schultz went to Seattle to find out why a small company called Starbucks ordered more of these filters than any other customer. He liked what he found and joined Starbucks later that year as director of retail operations.

During a business trip to Milan, Italy, the following year, Schultz was struck by the city’s ubiquitous espresso bars. The bars served well-prepared espresso and brewed coffee and were important places for conversation and socializing. Schultz realized that America lacked similar places offering high-quality coffee in a comfortable setting for meeting and relaxing. He left Milan with a determination to create such an establishment in America. Schultz later dubbed this “the third place” beyond home and work, a term he borrowed from The Great, Good Place, a book in which sociologist Ray Oldenburg laments the decline of traditional American community meeting places like country stores and soda

fountains.3

Starbucks’ management, however, was not receptive to the idea of selling prepared drinks, turning Schultz down with the explanation that getting into the “restaurant business” would distract the company from its core assets and activities: roasting and selling coffee beans. In 1986 Schultz left Starbucks to open Il Giornale, a café selling espresso, espresso-based drinks such as cappuccino, and food items, in addition to whole-bean coffee. Il Giornale attracted 1,000 daily customers within six months, prompting Schultz to open two more locations. Despite his success, Schultz faced skepticism from investors—when he was trying to raise $1.25 million to fund his expansion, Schultz was turned down by 217 of the 242 potential investors he approached, many of whom expressed concern that he had no patent on his dark roast, no special access to coffee beans, and no way to prevent someone else from imitating his concept.4 In 1987 Il Giornale acquired Starbucks, including its retail outlets, coffee roasting facilities, and wholesale operation. Schultz rebranded the existing stores with the Starbucks name. The first Il Giornale had been a virtual copy of a Milanese espresso bar, complete with bow-tied waiters, a stand-up coffee bar, and sleek European furniture. By contrast, the new Starbucks-branded locations were decorated in earth tones with overstuffed chairs, wood floors, and cozy fireplaces that encouraged patrons to linger and relax.5

Starbucks coffee was different from the coffee most Americans were used to consuming. In addition to being much more expensive, Starbucks coffee had a taste unlike typical American coffee. Starbucks roasted its beans in its own carefully controlled facility, where they were given a robust European-style flavor derisively called “Charbucks” by some,6 and then shipped them whole to its stores where they were ground immediately before brewing to ensure maximum

3
Ray Oldenburg, The Great Good Place: Cafes, Coffee Shops, Bookstores, Bars, Hair Salons, and Other Hangouts at the Heart of a Community, 3rd ed.

(Cambridge, MA: Da Capo Press, 1999).

4

Arthur Thompson and John Gamble, “Starbucks Case Study,” McGraw Hill, http://www.mhhe.com/business/management/ thompson/11e/case/starbucks.html.

5

Bryant Simon, Everything But the Coffee: Learning about America from Starbucks (Berkeley, CA: University of California Press, 2009), 11.

6

Ibid., 50.

2

KELLOGG SCHOOL OF MANAGEMENT

This document is authorized for use only by Mingyu Jin in Strategic Management. SP 2015 taught by Stewart, University of Denver from March 2015 to June 2015.

For the exclusive use of M. Jin, 2015.

KEL665

STARBUCKS: A STORY OF GROWTH

freshness, flavor, and aroma. Starbucks espresso drinks were also prepared in a different way: a barista, a master of both the art and science of coffee production, “pulled” shots of espresso by hand using a La Marzocco machine, steamed milk to just the right temperature, and scooped elegant dollops of foam for cappuccinos, all while chatting with customers about the different varieties of Starbucks

coffee.7

In a nod to the heart of coffee culture, Starbucks invented a quasi-Italian lingo for its drink sizes (short, tall, grande, and venti) and the drinks themselves (e.g., Caramel Macchiato and Frappuccino). No matter how a customer ordered, counter clerks were trained to repeat the order using the correct terms in the Starbucks-specified order. Their tone was described as “not one of rebuke, but nevertheless most customers learn to avoid the implied correction by stating their order in the way that helps Starbucks’s operations. . . . Indeed, for some customers, getting the order right is an aspiration, a small victory on the way to the office.”8 By 1996, the Starbucks mermaid logo appeared on more than 1,000 stores. Starbucks selected its locations carefully, targeting areas with large numbers of wealthy and highly educated professional workers. These were the new American elite—dubbed “bobos” (bourgeois bohemians) by commentator David Brooks—who used consumption as a way to distinguish themselves from the less enlightened masses.9

Soon, more and more American consumers aspired to emulate the coffee drinkers that were first attracted to Starbucks. “Customers believed that their grande lattes demonstrated that they were better than others—cooler, richer, and more sophisticated. As long as they could get all of this for the price of a cup of coffee, even an inflated one, they eagerly handed over their money, three and four dollars at a clip.”10 As Roly Morris, one of the team that helped bring Starbucks to Canada, observed, “We’re offering a lifestyle product . . . that transcends the usual barrier. Maybe you can’t swing a Beamer [BMW] . . . but most people can treat themselves to a great cup of coffee.”11

Starbucks Expands (1996–2006)
Beginning in 1996 Starbucks embarked on a significant wave of growth by concurrently executing two initiatives: (1) selling Starbucks products through mass distribution channels, and (2) dramatically expanding its retail footprint. Schultz played an important role in both initiatives, first as CEO until 2000, and thereafter as chairman and chief global strategist.