Last year, I wrote to you that the company's improved operational foundation, invigorated innovative muscle, and heightened customer relevance presented us with an opportunity to build a different kind of organization. One that would leverage and extend our strengths both inside and outside our stores. I am pleased to report that in fiscal 2011 we delivered.
Howard Schultz, Starbucks Chair, FY2011 Annual Report -- Welcoming Message
Starbucks is often thought of as a nearly flawless company. Few customers worry about its survival and they continue to love what it is trying to do (Malkin 2007). This seems to be the case even when its record suggests it is going through some very challenging times -- thought to be related to its loss of individualized customer attention (Kwok and Rabe, n.d.). Starbucks, it seems, simply learned from early on how to ride the wave of innovation!
Why this happens is most likely related to the fact that the company did something, on a very large scale, that few others had been able to do: It used the momentum of its early start-up opportunity to put within reach of a very desirable target group of buyers something that literally gave them a taste of the world of delicious possibilities. Or put another way, it quite literally gave a well-off buyer base a menu of the world's coffees and let them enjoy that adventure for just a few dollars more. Little did they likely know that what they were doing was putting before their core consumers a very taste of a global adventure that would still take some time to come online; and, of course, it seldom hurts to be the first one in this type of line.
When Starbucks opened in 1971 in Pike's Place, a tourist hot-spot in Seattle, WA, it was basically just a regular local coffee shop. However, its founder and still CEO, Howard Schultz, had dreams of it being more than a retail coffee place. He envisioned it as a location where the aroma and engagement was as much about theatre and romance; a big dream that one might arguably say gave it an international flare (Kwok and Rabe 2). This perspective allowed the company to very quickly reach out and gain a foothold in a massively large number of places -- something that previously only companies like McDonald's had been able to do. It was finding that it was in fact almost being pushed to ride the wave of technology that was just getting started in shrinking the world and dangling before relatively well-to-do people the chance to have a taste of what might be coming. Starbucks, one could say, was beginning what would become a rather routine journey to the global financial gym that would eventually allow it to be a hot example of what can happen when a simply business seizes the benefits of a truly "invigorated innovative muscle" (Starbucks Annual Report,2011).
Saying this is not to suggest that technology made Starbucks. Not until later would technology become a much more desirable and proud element of its financial expansions, as discussed below. It did benefit from using contemporary coffee production and barista equipment from the beginning, of course, but it was the fact that it put rather unusual coffees of the world into reach that made the buying experience romantic and appealing. By allowing people to readily get their hands on a cup of African, Caribbean, Asian or other "exotic" coffees, however, Starbucks was maybe more than it even realized personifying the technological revolution that was otherwise just getting under way. Personalized computing was literally starting to hit home as Microsoft and later Apple, other Pacific Northwestern innovators, were making it such that the Internet was a real form of usable connectivity.
But from a business perspective, this was not the only wave of excitement. Starbucks was finding that it was well placed to be a draw for investors who were just beginning to be told that they wanted to keep a look out for companies or ideas that could be built into an innovation process (Trott 2005). Starbucks was perfect in that it was tastefully worldly and because it was set on keeping its customers by treating them in a very individualized way -- something that the Starbucks model and its barista operations seemed to reinforce. The fact that its early success was showing that it had an average consumer income base of over $90,000 (which has now dropped to below $80,000) (Kwok and Rabe 5) very likely added further fuel to the investment fire in that these were the exact consumers who would become upwardly and mobility-connected to a powerful middle-class future that rewarded extravagant spending (Trott 11).
A key necessity for any successful business adventure rests with its ability to prove that it can earn money. Starbucks demonstrated had to achieve this, which it did early on. Within its first 30 years, the company had grown to the point of having approximately 15,000 national and international locations. But to undertake growth at this rate it also had to sacrifice some of its fiscal magic, its fidelity (Maney 2009): it began to rely more on standardization (Kwok and Rabe 5). The company opted to become more uniform in its production processes and was failing to continue to invest in its innovative elements that people favored. And the results were predictable: the company began to pay the price with a loss of innovation investment appeal.
In 2006 and 2007 -- the very period when the current economic meltdown was taking hold -- Starbucks' financial structure was starting to falter. A performance comparison chart for this period, which can be seen as Attachment 2, indicates how a $100 investment in 2006 would have resulted in an ownership value of just $76.95 in 2007, which was just the beginning of a continued downfall. It would not be until 2010 and into the most current of years (2011) that it would return to its former achievements wherein a similar $100 investment might be worth its return. A look at other 2011 indicators likewise shows how encouraging was their return to stronger footings that were themselves tied to understanding their place in the game of innovations. Attachment 1, for example, demonstrates remarkable operating revenue increases (toping $11.7 billion) that reflect increased comparable store sales growth (a 1% increase over 2010). The company's willingness to invest in its core operations and investor earnings likewise suggest that it has healthy advancements that indicate a return to core structural concentrations. Starbucks pulled back in 2010 and 2011 to cut out poor performing sites, as is was known, but doing so has not fundamentally changed the way its consumers seem to be responding, given their other efforts. Said Schulz of the latest performance: "By leveraging efficiencies and tightly managing spend[ing], we flowed sales increases through to the bottom line, setting new records for operating income of $1.7 billion, up 22%, as well as for [a] consolidated operating margin, which was 14.8%, up 150 basis points from last year" (Starbucks Annual Report, 2011).
Money, however, is only one element. Starbucks is successful as a perceived (and real) model of small-business innovation (small in the sense of its locations not being large retail entities) because it has a solid foundation other in consumer competencies. Among its most notable are the following, many of which have been pointed out in the 2011 Annual Report:
Quality of Service: The individualized barista services of Starbucks are, of course, legendary and something that its competitors have a difficult time challenging. Schultz recognized this from their earliest operations and has continued to make sure that services revolve around this concept, even as new products (such as more frozen drinks and prepackaged foods) take on a larger visibility.
Employee Care: The Company started by offering even part-time employees' ownership and health and wellness benefits, and even today employees have stock (partnership) options. Starbucks was one of the first of such businesses to offer these benefits and it continues to sustain this element. It is hard to argue with a company that added over 1,500 new jobs last year and that plans to increase that to 12,000 in 2012. In addition, the company has made a notable movement to help other small businesses in their communities as well. This Create Jobs for USA initiative is part of a larger investment of millions of dollars in local economic stimulation, and something that will likely pay off other returns in the future.
Cross & New Product Introductions: This is by far one of the most critical of directives of the company, and one of the reasons why it garners a great deal of attention in the current financial. Here is Schultz's summary of what is underway:
Among our most significant moves in 2011 was transitioning our packaged coffee business in-house to a direct distribution model, allowing us to take control of our powerful relationship with grocery, drugstore, club…