Starbucks Global Strategy: History, Model & Expansion

Founding and History of Starbucks

Seattle entrepreneurs Jerry Baldwin, Zev Siegl, and Gordon Bowker founded Starbucks in 1971, locating their coffee importing business in Seattle's Pike Place Market. The founders were content to grow the coffee importer to five stores in the metro Seattle area and were gradually becoming known in the coffee industry. Through these industry associations they met Howard Schultz, who would eventually buy the chain and transform its business model.

Schultz was passionate about introducing retailing concepts he had originally discovered during a trip to Milan, Italy. Immediately after returning from Italy, he launched what would become the prototypical Starbucks store — combining a meeting-place ambience with a welcoming atmosphere where friends could catch up while enjoying a quality cup of coffee. He called these locations Giornale. As a result of their success, Schultz purchased the Starbucks store chain in 1982 for $4 million. As part of his retailing strategy, he also began providing coffee to restaurants and espresso bars that same year.

Throughout the late 1980s, Starbucks completed its first geographic expansions to Chicago and Vancouver, and created its own product catalog. Schultz has long been known for his focus on the socially responsible aspects of Starbucks. In 1991, he initiated a relationship with CARE, an international humanitarian organization, and introduced the CARE coffee sampler. In 1992, Starbucks completed its IPO on the NASDAQ National Market.

The first half of the 1990s were years invested in the development of retail locations throughout the United States, including the sale of music through retail storefronts in 1996. That same year, Starbucks opened locations in Japan, Hawaii, and Singapore. Within two years the company launched stores in Taiwan, Thailand, New Zealand, and Malaysia. In the 1999–2000 timeframe, Starbucks Coffee International opened new retail locations in China, Kuwait, Korea, and Lebanon. During this global expansion phase, Starbucks partnered with the Delek Group to open retail locations throughout the Middle East, including Israel.

During the 2000–2003 timeframe, global expansion continued with locations added in Paris, more retailing alliances formed globally and within the United States — including a partnership with Albertson's — and a more concentrated focus on acquisitions. More recently, the company pursued several acquisitions and joint ventures for entry into foreign markets, including a series of research efforts to determine how best to enter the Indian market. Starbucks also moved into music recording through a joint venture with Concord Music Group to create the record label Hear Music, announced in March 2007, with an initial focus on internationally known artists — beginning with Paul McCartney.

Key Events in Starbucks' Growth

Several pivotal moments in the history of Starbucks transformed the company from a coffee importer into a global retailer. The first is clearly the insights gained by Schultz during his trip to Milan, Italy — specifically the retailing concept of a meeting-place atmosphere where friends could gather, drink coffee, relax, listen to music, and enjoy pastries. This vision was foundational to the limited geographical growth of the mid-1980s and the immediate development of retail channels for the coffee itself.

Another pivotal event was the development and launch of the first international stores in 1995, in conjunction with SAZABY International, specifically to develop coffeehouses in Japan. This initiative also fueled the development of Starbucks Coffee International, which served as the catalyst for the company's global growth into Europe and throughout Asia.

The company's acquisition history has also solidified its growth. In 1999, the acquisition of Tazo, a premium tea provider, and Pasqua, a specialty coffee roaster, gave Starbucks additional support for its product development strategies. In 1998, Starbucks acquired the Seattle Coffee Company (SCC) for its supply chain, products, and 70 company-operated stores along with 76 franchises. More recently, Starbucks announced the acquisition of Ethos Water in 2005, a privately held bottled water company based in Santa Monica, California.

Continuing its acquisition pace, the company acquired full ownership of Coffee Partners Hawaii — the joint-venture company operating its retail stores in Hawaii — in 2006. Throughout that year, the company also worked to acquire Café del Caribe, the joint-venture company operating its retail stores in Puerto Rico and throughout the Caribbean. Also in 2006, H&Q Asia Pacific was acquired, a transaction that enabled 60 Starbucks retail stores in Beijing and Tianjin to be licensed under Chinese law. Starbucks launched operations in Brazil in December 2006 by opening two stores in São Paulo. Entry into India had not yet occurred but was clearly imminent, most likely to be handled through one or more joint ventures — as evidenced by the H&Q Asia Pacific acquisition model used to gain rapid access to Chinese retailing locations.

The Starbucks Business Model

The Starbucks model is designed to capitalize on creating and sustaining a strong local presence in communities, and on clustering stores for logistics and replenishment efficiencies while simultaneously strengthening the brand. Starbucks clusters stores so closely together that there is often a 30% cannibalization rate — and this is intentional. Internal studies have shown that clustering significantly reduces restocking and delivery costs. In addition, a store cluster with a 30% cannibalization overlap is comparable to blanketing an entire metro area with advertising. Because Starbucks spends less than 1% of sales on advertising, the clustering and concentration of stores increases top-of-mind awareness among coffee drinkers in each market. Store clustering also leads to greater levels of customer loyalty and retention. As noted in industry research, on an average week 20 million people buy a cup of coffee at Starbucks, with the average customer making a purchase 18 times per month.

At a foundational level, the Starbucks model rests on several key factors. First, the company's coffee expertise is exceptional, reflected in a supply chain that sources high-grade arabica beans from coffee-growing regions of Latin America, Africa/Arabia, and Asia/Pacific. As of late 2007, Starbucks offered 27 core coffees and 10 promotional blends (e.g., Christmas Blend) in its retail outlets. New product development is one of Starbucks' core strengths — the Frappuccino being a prime example (Plog, 2005). This expertise has led to multiple coffee-based drink platforms, including cold-blended drinks, mainstream brewed coffee, hot espresso beverages, espresso-based drinks, and regionalized drink platforms. Baristas undergo intensive training to learn how to customize these drinks and to embody the values that define Starbucks culture.

A second foundational element is the ability to quickly innovate and develop new drinks. In the 2005–2006 timeframe alone, Starbucks launched 22 new beverages (Plog, 2005). The company also relies heavily on innovation during holiday periods, with seasonal offerings including Pumpkin Spice Latte, Cinnamon Dolce Latte, Green Tea Frappuccino blended crème, Banana Frappuccino blended beverage, and Frappuccino juice blends.

A third foundational element is the ability to establish and maintain a "Third Place Experience" — precisely the vision Schultz had for the company after visiting Italy. The company uses this term to define how customers rely on the Starbucks coffeehouse concept as a "third" gathering place outside of work and home. The Third Place Experience is built upon a variety of coffee and complementary products, high-quality customer service from knowledgeable employees, and an appealing environment (Fowler, 2003). Management at Starbucks views the third-place experience as critical for growth in China and other geographies, believing that consumers across cultures seek a "third place" — and that this is one of the major global drivers of Starbucks' growth. The concept also holds particular potential among teens and young adults, for whom stores provide a safe social space.

A fourth foundational element is the strength and ubiquity of the Starbucks brand globally. Through the combination of high-quality coffee and tea beverages with the third-place concept, Starbucks has generated strong customer loyalty and word-of-mouth. It is common to hear students mention meeting at a local Starbucks for study groups or project work — a reflection of how deeply embedded the brand has become in daily social life.

In summary, the Starbucks model is strengthened by the company's coffee expertise, impressive new product development record, and the positioning of its locations as "third places" where friends can meet and enjoy coffee and pastries. Underpinning all of these elements is the strength of the Starbucks brand itself.

The key issues and decisions behind Starbucks' move to go international centered first on market growth and expansion, followed by the opportunity to grow its retail presence closer to its suppliers. Starbucks deserves much credit for its ethical approach to managing its supply chain, a point addressed in detail below. The company has also developed considerable expertise in managing joint ventures to gain entry into new markets — a skill set demonstrated clearly by the series of acquisitions made in 2006.