Starbucks Coffee Company: Business Model & Strategy Analysis

Introduction and Company Overview

Starbucks was founded in 1971 and was named after the first mate in Herman Melville's Moby Dick. The first store was opened at Seattle's Pike Place Market by its three original owners: Gordon Bowker, Jerry Baldwin, and Zev Siegl. Starbucks' mission is to be "an inspiration as well as a nurturing force for the human spirit." The company roasts and sells high-quality coffee beans, which are also used in making Italian-style espresso beverages. In addition to coffee, the stores sell equipment and accessories associated with coffee preparation, along with pastries and other food items that complement coffee. The vast majority of these products are sold through company-operated retail stores. The company's overarching objective is to make Starbucks the most respected and popular brand in the world (Nielsen & Mortensen, 2008).

Starbucks is widely regarded as one of the largest coffeehouse companies in the world. Its stores maintain a coffeehouse-style atmosphere, complete with Wi-Fi and comfortable seating. Starbucks also grants licenses for its stores; however, these licenses are issued only to other businesses, not to individuals. For example, Starbucks has licensed stores to Barnes & Noble Booksellers in the United States. In some of these establishments, the atmosphere closely resembles that of a standard Starbucks location, while others feature only counters for selling pastries and coffee. Approximately 90% of the company's revenue comes from Starbucks-operated stores. The company's main headquarters is located near the site where the very first store opened on March 30, 1971 (Mallernee, 2010).

A significant shift in the company's direction occurred when then-CEO Howard Schultz traveled to Italy and decided to adapt the bar culture he observed there to Starbucks outlets. He subsequently opened a new store called Giornale, which leveraged Starbucks' ability to supply quality coffee beans. In 1987, Giornale acquired the assets of Starbucks for $3.8 million and renamed the business Starbucks Corporation. At the time of writing, Starbucks operated approximately 17,133 stores across roughly 49 countries, including 11,068 in the United States, around 1,000 in Canada, and more than 800 in Japan (Mallernee, 2010).

Ethical and Social Responsibilities

Starbucks believes it is important for businesses to impact the communities in which they operate in a positive manner. The trust and respect of its neighbors, customers, and partners are of central importance to the company. Starbucks continually works to earn and maintain this respect by behaving responsibly and pursuing practices it believes are better for both people and the planet. The company implements a number of principles in pursuit of its mission, including efforts to understand environmental problems, to sell, buy, and use environmentally friendly products, and to share relevant information with its partners. Starbucks has also adopted purchasing policies that prioritize suppliers who adhere to environmentally responsible practices (Mallernee, 2010).

In 2006, Starbucks formalized its business practice ethics in a manual titled "Standards of Business Conduct." This manual serves as a guide for employees — referred to internally as "partners" — who interact with customers and suppliers on a daily basis (Mallernee, 2010).

The company also developed the "Starbucks Information Security Standards," which governs the management of information and technology within the organization. In addition, the "Starbucks Privacy Statement" was created to guide management in handling private information about the firm. In 2010, Starbucks was recognized for its ethical practices, being noted as a company that not only articulates a strong vision and mission but also implements them in its day-to-day operations (Mallernee, 2010).

Ideation refers to the process of generating, developing, and communicating new ideas. An idea is considered the most fundamental unit of thought and may be abstract, visual, or concrete. In a business context, ideation is pursued for the sake of creating value — through improvements to existing products, the introduction of new services, or cost reductions (Geereddy, 2012). The original owner of Starbucks, along with Jed Baldwin, purchased Peet's Coffee in 1984. Although coffee sales in the United States were declining during the 1980s, the specialty coffee segment grew substantially: by 1989, specialty coffee held a 10% market share, up from just 3% in 1983 (Nielsen & Mortensen, 2008).

At the time of its initial public offering (IPO) in 1992, Starbucks operated 140 outlets generating total revenues of US$73.5 million, compared to US$1.3 million in 1987. The company's market value stood at US$271 million, and Starbucks raised US$25 million by selling 12% of the company (Nielsen & Mortensen, 2008). By July 2013, Starbucks' mobile app was responsible for more than 10% of all in-store purchases. The "Tweet-a-Coffee" promotion, launched in October 2013, also relied on the mobile platform. Research conducted after the campaign found that it generated US$180,000 in purchases from 27,000 participants (Mallernee, 2010).

Growth and Global Expansion

In 1996, Starbucks opened its first location outside of North America, in Tokyo, Japan. In 1998, the company entered the UK market through the acquisition of 56 stores from the UK-based Seattle Coffee Company — which was subsequently rebranded as Starbucks — for a total of US$83 million. Mexico City received its first Starbucks in 2002. Around the same time, Starbucks experimented with a restaurant chain concept called Circadia in the San Francisco Bay Area; these establishments were later converted into standard Starbucks cafés (Nielsen & Mortensen, 2008).

In October 2002, Starbucks established a coffee trading company in Lausanne, Switzerland, responsible for managing the company's green coffee purchases. In April 2003, Starbucks acquired Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises for $72 million. Although the deal brought only 150 additional store locations, the wholesale business acquired was considered far more valuable, according to the Seattle Post-Intelligencer (Nielsen & Mortensen, 2008).

In 2006, Starbucks' rival Diedrich Coffee announced that it would sell the majority of its retail stores to Starbucks. Diedrich Coffee and Coffee People locations were subsequently converted to Starbucks, though Portland Airport's Coffee People locations were excluded from the deal (Nielsen & Mortensen, 2008).

Starbucks also launched a website called My Starbucks Idea to collect suggestions and feedback from customers. In May 2008, the company introduced a loyalty program for registered Starbucks Card users, offering benefits such as free Wi-Fi and free refills on brewed drip tea or coffee (Kotler & Armstrong, 2013). On November 14, 2012, Starbucks announced the acquisition of Teavana for US$620 million (Kotler & Armstrong, 2013).

Starbucks continued its international expansion in 2008 by opening outlets in Argentina, Brazil, Belgium, Bulgaria, the Czech Republic, and Portugal. Expansion into Scandinavia and further into Europe followed in 2009, with continued growth into new markets throughout 2010. In December 2010, Starbucks opened its first outlet at sea, in collaboration with Royal Caribbean International, aboard the Allure of the Seas — Royal Caribbean's second-largest ship and the second-largest cruise ship in the world at the time (Kotler & Armstrong, 2013).

In February 2011, Starbucks began selling its roasts through Norwegian food shops. The first Starbucks airport store in Norway opened in 2012 at Oslo Lufthavn Gardermoen. In 2011, Starbucks opened a store at Beijing Capital International Airport's Terminal 3, bringing the total number of Starbucks locations in China to 500. The company announced plans to expand its Chinese store count to approximately 1,500 by 2015 (Retail and Consumer, 2011).

In August 2013, Starbucks opened its first outlet inside Dansk Supermarked, the largest retail company in Denmark. Later that year, CEO Howard Schultz announced plans to open Starbucks locations in Colombia, with the first store planned for Bogotá in 2014 and a further 50 stores scheduled to open across major Colombian cities over a five-year period (Mallernee, 2010). Schultz added that Starbucks would work in collaboration with the Colombian government and USAID to "enable the local coffee growers to be able to get better produce by sharing their own knowledge of coffee with the farmers" (Kotler & Armstrong, 2013).

Not all international ventures were successful. In 2003, Starbucks closed all six of its stores in Israel due to strong local competition, a difficult business environment, and ongoing operational challenges. In 2007, a Starbucks outlet located within a historic imperial palace in China was closed following sustained public objection from Chinese citizens who felt an American chain was encroaching on their cultural heritage. The company also announced the closure of 600 underperforming company-owned stores and scaled back its expansion plans in response to uncertain economic conditions (Nielsen & Mortensen, 2008).

In July 2008, Starbucks eliminated approximately 1,000 non-retail positions as part of a broader effort to restore profitability and reinvigorate the brand. These layoffs effectively brought the rapid expansion phase that had begun in the 1990s to a halt (Nielsen & Mortensen, 2008).

Conclusion and New Knowledge Initiatives

The key challenges facing Starbucks include heightened competition from retailers with comparable or identical concepts — such as NWC and Timothy's — as well as limited experience in operating within price-sensitive markets. Starbucks is well positioned to defend its market share against these competitors, thanks to the wide-ranging brand-building initiatives it has implemented over the years. Beyond its direct retail operations, Starbucks has established distribution partnerships with ice cream brands such as Dreyer's Grand, music labels such as Capitol Records, booksellers such as Barnes & Noble, soft drink companies such as Pepsi-Cola, and retailers such as Nordstrom, all of which have broadened its product portfolio and distribution reach (Gilbert, 2008; Warrington, 2012).

Whether competitors can match Starbucks — given its experience as the pioneering leader in the specialty coffee market, and the retail ecosystem it has built over decades — remains to be seen (Kotler & Armstrong, 2013; Warrington, 2012). One foreseeable risk for Starbucks stems from broader economic conditions. The company has limited experience operating through a prolonged economic downturn, and the premium nature of its retail offering could become unaffordable for a segment of its regular customers during a recession (Gilbert, 2008; Warrington, 2012).

Situation: Starbucks identified a need to train its Office Coffee Experts in detailed knowledge about coffee and related background information, and required a rapid, scalable method to deliver this training.

Solution: An online educational portal was developed with the assistance of Knowledge Anywhere. Through this portal, employees could access information on the installation of brewing equipment at customer premises and complete Coffee 101 courses. The portal also features interactive narration and role-playing videos to deepen employee knowledge, along with quizzes that each team member must complete following each training session, with results visible on individual member profiles.

Results: The Starbucks Office Coffee Manager portal has become a significant tool for employee onboarding and knowledge retention. A culture of friendly competition has emerged among managers and team members around quiz scores, further reinforcing learning and improving overall staff knowledge (Bussing-Burks, 2009).