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A final case study and strategic plan is due the last class session. Focus of the Final Case Study and Strategic PlanRead the Starbuvks Global Quest 2006: Is the Best Yet to Come? case provided in the Course Materials section. From the perspective of an executive with the firm, prepare a 10-12 page, three-year strategic management proposal to Starbuck’s managing board of directors. Your proposal must be future-oriented and include an economic assessment, marketing assessment plan, a financial plan, an organizational structure recommendation, and supporting rationale. Use non-course materials to support your contentions and incorporate pro-rata financial statements and supporting documentation. Use APA style and submit your proposal to the instructor by the last day of class.Writing the Final Case Study and Strategic PlanThe Final Case Study and Strategic Plan:
Must be 10-12 double-spaced pages in length and formatted according to APA style as outlined in the approved
APA style guide. Must include a cover page that includes: – Title of paper – Student’s name – Course name and number – Instructor’s name – Date submitted
Must include an introductory paragraph with a succinct thesis statement.
Must address the topic of the paper with critical thought.
Must conclude with a restatement of the thesis and a conclusion paragraph.
Must use at least five professional resources, including a minimum of two from ProQuest.
Must use APA style as outlined in the approved APA style guide to document all sources.
Must include, on the final page, a Reference Page that is completed according to APA style as outlined in the approved APA style guide.
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
C-468
Case 29
Starbucks’ Global Quest in
2006: Is the Best Yet to Come?
Amit J. Shah
Frostburg State University
expected to have 15,000 Starbucks stores open world-
wide going into 2006. Believing that the scope of
Starbucks’ long-term opportunity had been under-
estimated, Schultz had recently increased the targeted
number of stores from 25,000 to 30,000 worldwide
by 2013, at least half of which were to be outside the
United States.2 He noted that Starbucks had only an
overall 7 percent share of the coffee-drinking market
in the United States and perhaps a 1 percent share
internationally. According to Schultz, “That still
leaves lots of room for growth. Internationally, we are
still in our infancy.”3 Although coffee consumption
worldwide was stagnant, coffee was still the second-
most-consumed beverage in the world, trailing only
water.4
Starbucks reported revenues in fiscal 2005 of
$6.4 billion, up 205 percent from $2.1 billion in fiscal
2000; after-tax profits in 2005 were $494.5 million,
an increase of 423 percent from the company’s fiscal
2000 net earnings of $94.6 million.
COMPANY BACKGROUND
Starbucks got its start in 1971 when three academ-
ics, English teacher Jerry Baldwin, history teacher
Zev Siegel, and writer Gordon Bowker—all coffee
aficionados—opened Starbucks Coffee, Tea, and
Spice in touristy Pikes Place Market in Seattle. The
three partners shared a love for fine coffees and ex-
otic teas and believed they could build a clientele
in Seattle that would appreciate the best coffees and
I
n early 2006, Howard Schultz, Starbucks’ founder,
chairman of the board, and global strategist,
could look with satisfaction on the company’s
phenomenal growth and market success. Since 1987,
Starbucks had transformed itself from a modest
nine-store operation in the Pacific Northwest into
a powerhouse multinational enterprise with 10,241
store locations, including some 2,900 stores in 30
foreign countries (see Exhibit 1). During Starbucks’
early years when coffee was a 50-cent morning
habit at local diners and fast-food establishments,
skeptics had ridiculed the notion of $3 coffee as a
yuppie fad. But the popularity of Starbucks’ Italian-
style coffees, espresso beverages, teas, pastries, and
confections had made Starbucks one of the great
retailing stories of recent history and the world’s
biggest specialty coffee chain. In 2003, Starbucks
made the Fortune 500, prompting Schultz to remark,
“It would be arrogant to sit here and say that 10 years
ago we thought we would be on the Fortune 500. But
we dreamed from day one and we dreamed big.”1
Having positioned Starbucks as the dominant
retailer, roaster, and brand of specialty coffees and
coffee drinks in North America and spawned the crea-
tion of the specialty coffee industry, management’s
long-term objective was now to establish Starbucks
as the most recognized and respected brand in the
world. New stores were being opened at the rate
of roughly 32 per week in 2005, and management
Arthur A. Thompson
The University of Alabama
Thomas F. Hawk
Frostburg State University
Copyright © 2006 by Amit J. Shah, Arthur A. Thompson, and Thomas
F. Hawk.
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Exhibit 1 Number of Starbucks Store Locations Worldwide, 1987–2005
Fiscal Year
Number of Store Locations
at End of Fiscal Year Fiscal Year
Number of Store Locations at End
of Fiscal Year
1987 17 1997 1,412
1988 33 1998 1,886
1989 55 1999 2,135
1990 84 2000 3,501
1991 116 2001 4,709
1992 165 2002 5,886
1993 272 2003 7,225
1994 425 2004 8,569
1995 676 2005 10,241
1996 1,015
Asia-Pacific Europe–Middle East–Africa Americas
Japan 572 Spain 39 United States 2,435
China 185 Saudi Arabia 38 Canada 118
Taiwan 153 Greece 38 Mexico 60
South Korea 133 United Arab Emirates 37 Hawaii 51
Philippines 83 Kuwait 32 Puerto Rico 11
Malaysia 62 Turkey 24 Peru 6
New Zealand 41 Switzerland 21 The Bahamas 2
Indonesia 32 France 16 2,683
1,261 Lebanon 10
Austria 9
Qatar 8
Bahrain 8
Cyprus 7
Oman 4
Jordan 4
United Kingdom 2
297
Licensed Locations of Starbucks Stores, 2005
Source: 2005 10-K report.
teas, much like what had already emerged in the San
Francisco Bay area. They each invested $1,350 and
borrowed another $5,000 from a bank to open the
Pikes Place store. The inspiration and mentor for the
Starbucks venture in Seattle was a Dutch immigrant
named Alfred Peet, who had opened Peet’s Coffee
and Tea, in Berkeley, California, in 1966. Peet’s store
specialized in importing fine coffees and teas and
dark-roasting its own beans the European way to
bring out the full flavors. Customers were encour-
aged to learn how to grind the beans and make their
own freshly brewed coffee at home. Baldwin, Siegel,
and Bowker were well acquainted with Peet’s exper-
tise, having visited his store on numerous occasions
and listened to him expound on quality coffees and
the importance of proper bean-roasting techniques.
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-469
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
The Pikes Place store featured modest, hand-
built, classic nautical fixtures. One wall was devoted
to whole-bean coffees, while another had shelves
of coffee products. The store did not offer fresh-
brewed coffee by the cup, but tasting samples were
sometimes available. Initially, Siegel was the only
paid employee. He wore a grocer’s apron, scooped
out beans for customers, extolled the virtues of
fine, dark-roasted coffees, and functioned as the
partnership’s retail expert. The other two partners
kept their day jobs but came by at lunch or after
work to help out. During the start-up period, Baldwin
kept the books and developed a growing knowledge
of coffee; Bowker served as the “magic, mystery,
and romance man.”5 The store was an immediate
success, with sales exceeding expectations, partly
because of interest stirred by a favorable article
in the Seattle Times. For most of the first year,
Starbucks ordered its coffee-bean supplies from
Peet’s, but then the partners purchased a used
roaster from Holland, set up roasting operations in
a nearby ramshackle building, and developed their
own blends and flavors.
By the early 1980s, the company had four Star-
bucks stores in the Seattle area and had been profit-
able every year since opening its doors. But then Zev
Siegel experienced burnout and left the company
to pursue other interests. Jerry Baldwin took over
day-to-day management of the company and func-
tioned as chief executive officer; Gordon Bowker re-
mained involved as an owner but devoted most of his
time to his advertising and design firm, a weekly news-
paper he had founded, and a microbrewery that he was
launching known as the Redhook Ale Brewery.
Howard Schultz Enters
the Picture
In 1981, Howard Schultz, vice president and general
manager of U.S. operations for a Swedish maker
of stylish kitchen equipment and coffeemakers,
decided to pay Starbucks a visit—he was curious
about why Starbucks was selling so many of his
company’s products. The morning after his arrival in
Seattle, he was escorted to the Pikes Place store by
Linda Grossman, the retail merchandising manager
for Starbucks. A solo violinist was playing Mozart at
the door (his violin case open for donations). Schultz
was immediately taken by the powerful and pleasing
aroma of the coffees, the wall displaying coffee
beans, and the rows of coffeemakers on the shelves.
As he talked with the clerk behind the counter, the
clerk scooped out some Sumatran coffee beans,
ground them, put the grounds in a cone filter, poured
hot water over the cone, and shortly handed Schultz
a porcelain mug filled with freshly brewed coffee.
After only taking three sips of the brew, Schultz was
hooked. He began asking the clerk and Grossman
questions about the company, about coffees from
different parts of the world, and about the different
ways of roasting coffee.
A bit later, he was introduced to Jerry Baldwin
and Gordon Bowker, whose offices overlooked the
com-pany’s coffee-roasting operation. Schultz was
struck by their knowledge about coffee, their com-
mitment to providing customers with quality coffees,
and their passion for educating customers about the
merits of dark-roasted coffees. Baldwin told Schultz,
“We don’t manage the business to maximize anything
other than the quality of the coffee.”6 The company
purchased only the finest arabica coffees and put
them through a meticulous dark-roasting process to
bring out their full flavors. Baldwin explained that
the cheap robusta coffees used in supermarket blends
burned when subjected to dark roasting. He also noted
that the makers of supermarket blends preferred light-
er roasts, which allowed higher yields (the longer a
coffee was roasted, the more weight it lost).
Schultz was also struck by the business phi-
losophy of the two partners. It was clear that Star-
bucks stood not just for good coffee but also for the
dark-roasted flavor profiles that the founders were pas-
sionate about. Top-quality, fresh-roasted, whole-bean
coffee was the company’s differentiating feature and
a bedrock value. It was also clear to Schultz that Star-
bucks was strongly committed to educating its cus-
tomers to appreciate the qualities of fine coffees. The
company depended mainly on word of mouth to get
more people into its stores, then built customer loyalty
cup by cup as buyers gained a sense of discovery and
excitement about the taste of fine coffee.
On his trip back to New York the next day, Howard
Schultz could not stop thinking about Starbucks and
what it would be like to be a part of the Starbucks
enterprise. Schultz recalled, “There was something
magic about it, a passion and authenticity I had never
experienced in business.”7 The appeal of living in
the Seattle area was another strong plus. By the time
he landed at Kennedy Airport, he knew in his heart
C-470 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
he wanted to go to work for Starbucks. At the first
opportunity, Schultz asked Baldwin whether there
was any way he could fit into Starbucks. While Schultz
and Baldwin had established an easy, comfortable
personal rapport, it still took a year, numerous
meetings at which Schultz presented his ideas, and a
lot of convincing to get Baldwin, Bowker, and their
silent partner from San Francisco to agree to hire
him. Schultz pursued a job at Starbucks far more
vigorously than Starbucks pursued hiring Schultz.
There was some nervousness about bringing in an
outsider, especially a high-powered New Yorker who
had not grown up with the values of the company.
Nonetheless, Schultz continued to press his ideas
about the tremendous potential of expanding the
Starbucks enterprise outside Seattle and exposing
people all over America to Starbucks coffee. He
argued that there had to be more than just the few
thousand coffee lovers in Seattle who would enjoy
the company’s products.
At a meeting with the three owners in San
Francisco in the spring of 1982, Schultz once again
presented his ideas and vision for opening Starbucks
stores across the United States and Canada. He
thought the meeting went well and flew back to
New York, believing a job offer was in the bag.
However, the next day Jerry Baldwin called Schultz
and indicated that the owners had decided against
hiring him because geographic expansion was too
risky and they did not share Schultz’s vision for
Starbucks. Schultz was despondent, seeing his
dreams of being a part of Starbucks’ future go up
in smoke. Still, he believed so deeply in Starbucks’
potential that he decided to make a last-ditch appeal;
he called Baldwin back the next day and made an
impassioned, reasoned case for why the decision was
a mistake. Baldwin agreed to reconsider. The next
morning Baldwin called Schultz and told him the
job of heading marketing and overseeing the retail
stores was his. In September 1982, Howard Schultz
took over his new responsibilities at Starbucks.
Starbucks and Howard Schultz:
The 1982–1985 Period
In his first few months at Starbucks, Howard Schultz
spent most of his waking hours in the four Seattle
stores—working behind the counters, tasting dif-
ferent kinds of coffee, talking with customers,
getting to know store personnel, and learning the
retail aspects of the coffee business. By December,
Jerry Baldwin concluded that Schultz was ready for
the final part of his training, that of actually roasting
the coffee. Schultz spent a week getting an education
about the colors of different coffee beans, listening
for the telltale second pop of the beans during
the roasting process, learning to taste the subtle
differences among Baldwin and Bowker’s various
roasts, and familiarizing himself with the roasting
techniques for different beans.
Schultz made a point of acclimating himself
to the informal dress code at Starbucks, gaining
credibility and building trust with colleagues, and
making the transition from the high-energy, coat-
and-tie style of New York to the more casual, low-
key ambience of the Pacific Northwest (see Exhibit
2 for a rundown on Howard Schultz’s background).
Schultz made real headway in gaining the acceptance
and respect of company personnel while working
at the Pikes Place store one day during the busy
Christmas season that first year. The store was packed
and Schultz was behind the counter ringing up sales
of coffee when someone shouted that a shopper
had just headed out the door with some stuff—two
expensive coffeemakers it turned out, one in each
hand. Without thinking, Schultz leaped over the
counter and chased the thief up the cobblestone street
outside the store, yelling, “Drop that stuff! Drop it!”
The thief was startled enough to drop both pieces
and run away. Howard picked up the merchandise
and returned to the store, holding the coffeemakers
up like trophies. Everyone applauded. When Schultz
returned to his office later that afternoon, his staff
had strung up a banner that read: “Make my day.”8
Schultz was overflowing with ideas for the com-
pany. Early on, he noticed that first-time customers
sometimes felt uneasy in the stores because of their
lack of knowledge about fine coffees and because
store employees sometimes came across as a little
arrogant or superior to coffee novices. Schultz
worked with store employees on customer-friendly
sales skills and developed brochures that made
it easy for customers to learn about fine coffees.
However, Schultz’s biggest inspiration and vision
for Starbucks’ future came during the spring of 1983
when the company sent him to Milan, Italy, to attend
an international housewares show. While walking
from his hotel to the convention center, he spotted
an espresso bar and went inside to look around.
The cashier beside the door nodded and smiled. The
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-471
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Exhibit 2 Biographical Sketch of Howard Schultz
• His parents both came from working-class families residing in Brooklyn, New York, for two generations. Neither
completed high school.
• He grew up in a government-subsidized housing project in Brooklyn, was the oldest of three children, played
sports with the neighborhood kids and developed a passion for baseball, and became a die-hard Yankees fan.
• His father was a blue-collar factory worker and taxicab driver who held many low-wage, no-benefi ts jobs; his
mother remained home to take care of the children during their preschool years, then worked as an offi ce
receptionist. The family was hard pressed to make ends meet.
• He had a number of jobs as a teenager—paper route, counter job at luncheonette, an after-school job in the
garment district in Manhattan, a summer job steaming yarn at a knit factory. He always gave part of his earnings
to his mother to help with family expenses.
• He saw success in sports as his way to escape life in the projects; he played quarterback on the high school
football team.
• He was offered a scholarship to play football at Northern Michigan University (the only offer he got) and he took
it. When his parents drove him to the campus to begin the fall term, it was his first trip outside New York. It turned
out that he didn’t have enough talent to play football, but he got loans and worked at several jobs to keep himself
in school. He majored in communications, took a few business courses on the side, and graduated in 1975 with a
B average—the first person in his family to graduate from college.
• He went to work for a ski lodge in Michigan after graduation, then left to go back to New York, landing a sales
job at Xerox Corporation. He left Xerox to work for Swedish coffee-equipment maker Hammarplast, U.S.A.,
becoming vice president and general manager in charge of U.S. operations and managing 20 independent sales
representatives.
• He married Sheri Kersch in July 1982 and later became the father of two children.
• His father contracted lung cancer in 1982 at age 60 and died in 1988, leaving his mother with no pension, no life
insurance, and no savings.
• He became a principal owner of Seattle SuperSonics NBA team in 2001 and also a principal owner of Seattle
Storm of WNBA.
• He owned about 32 million shares of Starbucks worth about $950 million in December 2005.
Source: Howard Schultz and Dori Jones Yang, Pour Your Heart Into It (New York: Hyperion, 1997).
barista behind the counter greeted Howard cheerfully
and moved gracefully to pull a shot of espresso for
one customer and handcraft a foamy cappuccino for
another, all the while conversing merrily with those
standing at the counter. Schultz thought the barista’s
performance was “great theater.” Just down the way
on a side street, he entered in an even more crowded
espresso bar where the barista, whom he surmised
to be the owner, was greeting customers by name;
people were laughing and talking in an atmosphere
that plainly was comfortable and familiar. In the next
few blocks, he saw two more espresso bars. That
afternoon, when the trade show concluded for the
day, Schultz walked the streets of Milan to explore
more espresso bars. Some were stylish and upscale;
others attracted a blue-collar clientele. Most had few
chairs, and it was common for Italian opera to be
playing in the background. What struck Schultz was
how popular and vibrant the Italian coffee bars were.
Energy levels were typically high, and they seemed
to function as an integral community gathering place.
Each one had its own unique character, but they all
had a barista who performed with flair and maintained
a camaraderie with the customers.
Schultz remained in Milan for a week, explor-
ing coffee bars and learning as much as he could
about the Italian passion for coffee drinks. Schultz
was particularly struck by the fact that there were
1,500 coffee bars in Milan, a city about the size of
Philadelphia, and a total of 200,000 in all of Italy. In
one bar, he heard a customer order a caffe latte and
decided to try one himself—the barista made a shot
of espresso, steamed a frothy pitcher of milk, poured
the two together in a cup, and put a dollop of foam
on the top. Schultz liked it immediately, concluding
that lattes should be a feature item on any coffee bar
menu even though none of the coffee experts he had
talked to had ever mentioned them.
C-472 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Schultz’s 1983 trip to Milan produced a rev-
elation: The Starbucks stores in Seattle completely
missed the point. There was much more to the coffee
business than just selling beans and getting people
to appreciate grinding their own beans and brewing
fine coffee in their homes. What Starbucks needed
to do was serve fresh-brewed coffee, espressos, and
cappuccinos in its stores (in addition to beans and
coffee equipment) and try to create an American
version of the Italian coffee bar culture. Going to
Starbucks should be an experience, a special treat,
a place to meet friends and visit. Re-creating the au-
thentic Italian coffee bar culture in the United States
could be Starbucks’ differentiating factor.
Schultz Becomes Frustrated
On Howard Schultz’s return from Italy, he shared
his revelation and ideas for modifying the format of
Starbucks’ stores with Jerry Baldwin and Gordon
Bowker. But instead of winning their approval for
trying out some of his ideas, Schultz encountered
strong resistance. They argued that Starbucks was a
retailer, not a restaurant or coffee bar. They feared
that serving drinks would put them in the beverage
business and diminish the integrity of Starbucks’
mission as a purveyor of fine coffees. They pointed
out that Starbucks had been profitable every year
and there was no reason to rock the boat in a
small, private company like Starbucks. But a more
pressing reason not to pursue Schultz’s coffee bar
concept emerged shortly—Baldwin and Bowker
were excited by an opportunity to purchase Peet’s
Coffee and Tea. The acquisition was finalized in
early 1984, and to fund it Starbucks had to take
on considerable debt, leaving little in the way of
financial flexibility to support Schultz’s ideas for
entering the beverage part of the coffee business or
expanding the number of Starbucks stores. For most
of 1984, Starbucks managers were dividing their
time between operations in Seattle and the Peet’s
enterprise in San Francisco. Schultz found himself
in San Francisco every other week supervising the
marketing and operations of the five Peet stores.
Starbucks employees began to feel neglected and, in
one quarter, did not receive their usual bonus due
to tight financial conditions. Employee discontent
escalated to the point where a union election was
called. The union won by three votes. Baldwin was
shocked at the results, concluding that employees
no longer trusted him. In the months that followed,
he began to spend more of his energy on Peet’s
operation in San Francisco.
It took Howard Schultz nearly a year to con-
vince Jerry Baldwin to let him test an espresso bar.
Baldwin relented when Starbucks opened its sixth
store in April 1984. It was the first store designed
to sell beverages, and it was the first store located
in downtown Seattle. Schultz asked for a 1,500-
square-foot space to set up a full-scale Italian-style
espresso bar, but Jerry agreed to allocating only
300 square feet in a corner of the new store. As a
deliberate experiment to see what would happen, the
store opened with no fanfare. By closing time on
the first day, some 400 customers had been served,
well above the 250-customer average of Starbucks’
best-performing stores. Within two months the
store was serving 800 customers per day. The two
baristas could not keep up with orders during the
early-morning hours, resulting in lines outside the
door onto the sidewalk. Most of the business was at
the espresso counter, while sales at the regular retail
counter were only adequate.
Schultz was elated at the test results, expecting
that Jerry’s doubts about entering the beverage
side of the business would be dispelled and that he
would gain approval to pursue the opportunity to
take Starbucks to a new level. Every day he went
into Baldwin’s office to show him the sales figures
and customer counts at the new downtown store.
But Baldwin was not comfortable with the success
of the new store, believing that it felt wrong and
that espresso drinks were a distraction from the
core business of marketing fine arabica coffees at
retail. Baldwin rebelled at the thought that people
would see Starbucks as a place to get a quick cup
of coffee to go. He adamantly told Schultz, “We’re
coffee roasters. I don’t want to be in the restaurant
business . . . Besides, we’re too deeply in debt to
consider pursuing this idea.”9 While he didn’t deny
that the experiment was succeeding, he didn’t want
to go forward with introducing beverages in other
Starbucks stores. Schultz’s efforts to persuade
Baldwin to change his mind continued to meet
strong resistance, although to avoid a total impasse
Baldwin finally did agree to let Schultz put espresso
machines in the back of possibly one or two other
Starbucks stores.
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-473
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Over the next several months, Schultz made
up his mind to leave Starbucks and start his own
company. His plan was to open espresso bars in high-
traffic downtown locations, serve espresso drinks
and coffee by the cup, and try to emulate the friendly,
energetic atmosphere he had encountered in Italian
espresso bars. Baldwin and Bowker, knowing how
frustrated Schultz had become, supported his efforts
to go out on his own and agreed to let him stay in his
current job and office until definitive plans were in
place. Schultz left Starbucks in late 1985.
Schultz’s Il Giornale Venture
With the aid of a lawyer friend who helped companies
raise venture capital and go public, Howard Schultz
began seeking out investors for the kind of com-
pany he had in mind. Ironically, Jerry Baldwin
committed to investing $150,000 of Starbucks’ money
in Schultz’s coffee bar enterprise, thus becoming
Schultz’s first investor. Baldwin accepted Schultz’s
invitation to be a director of the new company, and
Gordon Bowker agreed to be a part-time consultant
for six months. Bowker, pumped up about the new
venture, urged Schultz to take pains to make sure
that everything about the new stores—the name, the
presentation, the care taken in preparing the coffee—
be calculated to elevate customer expectations and
lead them to expect something better than competitors
offered. Bowker proposed that the new company be
named Il Giornale Coffee Company (pronounced
il jor NAHL ee), a suggestion that Schultz accepted.
In December 1985, Bowker and Schultz made a trip
to Italy, where they visited some 500 espresso bars
in Milan and Verona, observing local habits, taking
notes about decor and menus, snapping photographs,
and videotaping baristas in action.
About $400,000 in seed capital was raised by
the end of January 1986, enough to rent an office,
hire a couple of key employees, develop a store
design, and open the first store. But it took until the
end of 1986 to raise the remaining $1.25 million
needed to launch at least eight espresso bars and
prove that Schultz’s strategy and business model
were viable. Schultz made presentations to 242
potential investors, 217 of whom said no. Many who
heard Schultz’s hour-long presentation saw coffee
as a commodity business and thought that Schultz’s
espresso bar concept lacked any basis for sustainable
competitive advantage (no patent on dark roast, no
advantage in purchasing coffee beans, no ways to bar
the entry of imitative competitors). Some noted that
coffee couldn’t be turned into a growth business—
consumption of coffee had been declining since
the mid-1960s. Others were skeptical that people
would pay $1.50 or more for a cup of coffee, and the
company’s unpronounceable name turned some off.
Being rejected by so many of the potential investors
he approached was disheartening (some who lis-
tened to Schultz’s presentation didn’t even bother to
call him back; others refused to take his calls).
Nonetheless, Schultz maintained an upbeat attitude
and displayed passion and enthusiasm in making his
pitch. He ended up raising $1.65 million from about
30 investors; most of the money came from nine
people, five of whom became directors.
The first Il Giornale store opened in April 1986.
It had 700 square feet and was located near the en-
trance of Seattle’s tallest building. The decor was
Italian, and there were Italian words on the menu.
Italian opera music played in the background. The
baristas wore white shirts and bow ties. All ser-
vice was stand-up—there were no chairs. National
and international papers were hung on rods on the
wall. By closing time on the first day, 300 custom-
ers had been served—mostly in the morning hours.
But while the core idea worked well, it soon became
apparent that several aspects of the format were not
appropriate for Seattle. Some customers objected to
the incessant opera music, others wanted a place to
sit down, and many did not understand the Italian
words on the menu. These “mistakes” were quickly
fixed, but an effort was made not to compromise the
style and elegance of the store. Within six months,
the store was serving more than 1,000 customers
a day. Regular customers had learned how to pro-
nounce the company’s name. Because most custom-
ers were in a hurry, it became apparent that speedy
service was essential.
Six months after opening the first store, Schultz
opened a second store in another downtown build-
ing. A third store was opened in Vancouver, British
Columbia, in April 1987. Vancouver was chosen to
test the transferability of the company’s business
concept outside Seattle. Schultz’s goal was to open
50 stores in five years, and he needed to dispel his
investors’ doubts about geographic expansion early
on to achieve his growth objective. By mid-1987,
sales at the three stores were running at a rate equal
to $1.5 million annually.
C-474 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Il Giornale Acquires Starbucks
In March 1987 Jerry Baldwin and Gordon Bowker
decided to sell the whole Starbucks operation in
Seattle—the stores, the roasting plant, and the
Starbucks name. Bowker wanted to cash out his cof-
fee business investment to concentrate on his other
enterprises; Baldwin, who was tired of commuting
between Seattle and San Francisco and wrestling
with the troubles created by the two parts of the
company, elected to concentrate on the Peet’s opera-
tion. As he recalls, “My wife and I had a 30-second
conversation and decided to keep Peet’s. It was the
original and it was better.”10
Schultz knew immediately that he had to buy
Starbucks; his board of directors agreed. Schultz
and his newly hired finance and accounting man-
ager drew up a set of financial projections for the
combined operations and a financing package that
included a stock offering to Il Giornale’s original
investors and a line of credit with local banks. While
a rival plan to acquire Starbucks was put together
by another Il Giornale investor, Schultz’s proposal
prevailed—and within weeks Schultz had raised the
$3.8 million needed to buy Starbucks. The acquisi-
tion was completed in August 1987. The new name
of the combined companies was Starbucks Corpo-
ration. Howard Schultz, at the age of 34, became
Starbucks’ president and CEO.
STARBUCKS AS A
PRIVATE COMPANY:
1987–1992
The following Monday morning, Howard Schultz re-
turned to the Starbucks offices at the roasting plant,
greeted all the familiar faces, and accepted their con-
gratulations. Then he called the staff together for a
meeting on the roasting plant floor:
All my life I have wanted to be part of a company and
a group of people who share a common vision . . . I’m
here today because I love this company. I love what it
represents . . . I know you’re concerned . . . I promise
you I will not let you down. I promise you I will not
leave anyone behind . . . In five years, I want you to
look back at this day and say “I was there when it
started. I helped build this company into something
great.”11
Schultz told the group that his vision was for
Starbucks to become a national company with val-
ues and guiding principles that employees could be
proud of. He indicated that he wanted to include
people in the decision-making process and that he
would be open and honest with them.
Schultz believed that building a company that
valued and respected its people, inspired them, and
shared the fruits of success with those who contrib-
uted to the company’s long-term value was essen-
tial, not just an intriguing option. His aspiration was
for Starbucks to become the world’s most respected
brand name in coffee and for the company to be ad-
mired for its corporate responsibility. In the next few
days and weeks, Schultz came to see that the unity
and morale at Starbucks had deteriorated badly in the
20 months he had been at Il Giornale. Some employ-
ees were cynical and felt unappreciated. There was a
feeling that prior management had abandoned them
and a wariness about what the new regime would
bring. Schultz decided to make building a new re-
lationship of mutual respect between employees and
management a priority.
The new Starbucks had a total of nine stores. The
business plan Schultz had presented investors called
for the new company to open 125 stores in the next
five years—15 the first year, 20 the second, 25 the
third, 30 the fourth, and 35 the fifth. Revenues were
projected to reach $60 million in 1992. But the com-
pany lacked experienced management. Schultz had
never led a growth effort of such magnitude and was
just learning what the job of CEO was all about, hav-
ing been the president of a small company for barely
two years. Dave Olsen, a Seattle coffee bar owner
Schultz had recruited to direct store operations at Il
Giornale, was still learning the ropes in managing a
multistore operation. Ron Lawrence, the company’s
controller, had worked as a controller for several or-
ganizations. Other Starbucks employees had only the
experience of managing or being a part of a six-store
organization. When Starbucks’ key roaster and cof-
fee buyer resigned, Schultz put Dave Olsen in charge
of buying and roasting coffee. Lawrence Maltz, who
had 20 years’ experience in business and eight years’
experience as president of a profitable public bever-
age company, was hired as executive vice president
and charged with heading operations, finance, and
human resources.
In the next several months, a number of changes
were instituted. To symbolize the merging of the two
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-475
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
companies and the two cultures, a new logo was
created that melded the designs of the Starbucks logo
and the Il Giornale logo. The Starbucks stores were
equipped with espresso machines and remodeled to
look more Italian than Old World nautical. Il Giornale
green replaced the traditional Starbucks brown. The
result was a new type of store—a cross between a
retail coffee-bean store and an espresso bar/café that
has now become Starbucks’ signature.
By December 1987, the mood of the employees
at Starbucks had turned upbeat. They were buying
into the changes that Schultz was making and began
to trust management. New stores were on the verge
of opening in Vancouver and Chicago. One Starbucks
store employee, Daryl Moore, who had started
working at Starbucks in 1981 and who had voted
against unionization in 1985, began to question the
need for a union with his fellow employees. Over the
next few weeks, Moore began a move to decertify
the union. He carried a decertification letter around
to Starbucks’ stores securing the signatures of em-
ployees who no longer wished to be represented by
the union. He got a majority of store employees to
sign the letter and presented it to the National Labor
Relations Board, which then decertified the union
representing store employees. Later, in 1992, the
union representing Starbucks’ roasting plant and
warehouse employees was also decertified.
Market Expansion Outside
the Pacific Northwest
Starbucks’ entry into Chicago proved far more trou-
blesome than management anticipated. The first
Chicago store opened in October 1987 and three
more stores were opened over the next six months.
Customer counts at the stores were substantially
below expectations. Chicagoans did not take to dark-
roasted coffee as fast as Schultz had anticipated. The
first downtown store opened onto the street rather
than into the lobby of the building where it was
located; in the winter months, customers were hesi-
tant to go out in the wind and cold to acquire a cup of
coffee. It was more expensive to supply fresh coffee
to the Chicago stores out of the Seattle warehouse
(the company solved the problem of freshness and
quality assurance by putting freshly roasted beans in
special FlavorLock bags that used vacuum packag-
ing techniques with a one-way valve to allow carbon
dioxide to escape without allowing air and moisture
in). Rents were higher in Chicago than in Seattle,
and so were wage rates. The result was a squeeze
on store profit margins. Gradually, customer counts
improved, but Starbucks lost money on its Chicago
stores until, in 1990, prices were raised to reflect
higher rents and labor costs, more experienced store
managers were hired, and a critical mass of custom-
ers caught on to the taste of Starbucks products.
Portland, Oregon, was the next market Starbucks
entered, and Portland coffee drinkers took to its
products quickly. By 1991, the Chicago stores had
become profitable and the company was ready for
its next big market entry. Management decided
on California because of its host of neighborhood
centers and the receptiveness of Californians to high-
quality, innovative food. Los Angeles was chosen as
the first California market to enter. L.A. was selected
principally because of its status as a trendsetter
and its cultural ties to the rest of the country. L.A.
consumers embraced Starbucks quickly, and the Los
Angeles Times named Starbucks as the best coffee in
America even before the first area store opened. The
entry into San Francisco proved more troublesome
because San Francisco had an ordinance against
converting stores to restaurant-related uses in certain
prime urban neighborhoods; Starbucks could sell
beverages and pastries to customers at stand-up
counters but could not offer seating in stores that had
formerly been used for general retailing. However,
the city council was soon convinced by café owners
and real estate brokers to change the code. Still,
Starbucks faced strong competition from Peet’s and
local espresso bars in the San Francisco market.
Starbucks’ store expansion targets proved easier
to meet than Schultz had originally anticipated, and
he upped the numbers to keep challenging the or-
ganization. Starbucks opened 15 new stores in fiscal
1988, 20 in 1989, 30 in 1990, 32 in 1991, and 53 in
1992—producing a total of 161 stores, significantly
above the 1987 objective of 125 stores.
From the outset, the strategy was to open only
company-owned stores; franchising was avoided so
as to keep the company in full control of the quality
of its products and the character and location of its
stores. But company ownership of all stores required
Starbucks to raise new venture capital to cover the
cost of new store expansion. In 1988, the company
raised $3.9 million; in 1990, venture capitalists
provided an additional $13.5 million; and in 1991,
another round of venture capital financing generated
$15 million. Starbucks was able to raise the needed
funds despite posting losses of $330,000 in 1987,
C-476 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
$764,000 in 1988, and $1.2 million in 1989. While
the losses were troubling to Starbucks’ board of
directors and investors, Schultz’s business plan had
forecast losses during the early years of expansion.
At a particularly tense board meeting where directors
sharply questioned Schultz about the lack of profit-
ability, Schultz said:
Look, we’re going to keep losing money until we can
do three things. We have to attract a management team
well beyond our expansion needs. We have to build a
world-class roasting facility. And we need a compu-
ter information system sophisticated enough to keep
track of sales in hundreds and hundreds of stores.12
Schultz argued for patience as the company in-
vested in the infrastructure to support continued
growth well into the 1990s. He contended that hiring
experienced executives ahead of the growth curve,
building facilities far beyond current needs, and in-
stalling support systems laid a strong foundation for
rapid, profitable growth on down the road. His argu-
ments carried the day with the board and with in-
vestors, especially since revenues were growing by
approximately 80 percent annually and customer traffic
at the stores was meeting or exceeding expectations.
Starbucks became profitable in 1990; profits
had increased every year since 1990 except for fiscal
year 2000 (because of $58.8 million in investment
write-offs in four dot-com enterprises). Exhibit 3
provides a financial and operating summary for
2000–2005. Exhibit 4 shows the performance of the
company’s stock price. The stock had split 2-for-1
five times. In September 2005, Starbucks’ board of
directors approved the repurchase of up to 5 million
shares of common stock; a total of 35.7 million
shares had been repurchased since the company
went public.
HOWARD SCHULTZ’S
STRATEGY TO MAKE
STARBUCKS A GREAT
PLACE TO WORK
Howard Schultz deeply believed that Starbucks’ suc-
cess was heavily dependent on customers having a
very positive experience in its stores. This meant
having store employees who were knowledgeable
about the company’s products, who paid attention to
detail in preparing the company’s espresso drinks,
who eagerly communicated the company’s passion
for coffee, and who possessed the skills and per-
sonality to deliver consistent, pleasing customer
service. Many of the baristas were in their 20s and
worked part-time, going to college on the side or
pursuing other career activities. The challenge to
Starbucks, in Schultz’s view, was how to attract, mo-
tivate, and reward store employees in a manner that
would make Starbucks a company that people would
want to work for and that would generate enthusias-
tic commitment and higher levels of customer ser-
vice. Moreover, Schultz wanted to send all Starbucks
employees a message that would cement the trust
that had been building between management and the
company’s workforce.
One of the requests that employees had made to
the prior owners of Starbucks was to extend health
care benefits to part-time workers. Their request
had been turned down, but Schultz believed that
expanding health care coverage to include part-
timers was the right thing to do. His father had
recently passed away with cancer and he knew from
his own experience of having grown up in a family
that struggled to make ends meet how difficult it was
to cope with rising medical costs. In 1988, Schultz
went to the board of directors with his plan to expand
the company’s health care coverage to include part-
timers who worked at least 20 hours per week. He saw
the proposal not as a generous gesture but as a core
strategy to win employee loyalty and commitment
to the company’s mission. Board members resisted
because the company was unprofitable and the added
costs of the extended coverage would only worsen
the company’s bottom line. But Schultz argued
passionately that it was the right thing to do and
wouldn’t be as expensive as it seemed. He observed
that if the new benefit reduced turnover, which he
believed was likely, then it would reduce the costs of
hiring and training—which equaled about $3,000 per
new hire; he further pointed out that it cost $1,500
a year to provide an employee with full benefits.
Part-timers, he argued, were vital to Starbucks,
constituting two-thirds of the company’s workforce.
Many were baristas who knew the favorite drinks of
regular customers; if the barista left, that connection
with the customer was broken. Moreover, many
part-time employees were called upon to open the
stores early, sometimes at 5:30 or 6:00 a.m.; others
had to work until closing, usually 9:00 p.m. or later.
Providing these employees with health care benefits,
Case 29 Starbuck’s Global Quest in 2006: Is the Best Yet to Come? C-477
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Exhibit 3 Financial and Operating Summary for Starbucks Corporation,
Fiscal Years 2000–2005 (dollars in 000s)
Fiscal Years Ending1
October 2,
2005
October 3,
2004
September
30, 2003
September
29, 2002
September
30, 2001
October 1,
2000
Results of operations data
Net revenues:
Retail $5,391,927 $4,457,378 $3,449,624 $2,792,904 $2,229,594 $1,823,607
Specialty 977,373 836,869 625,898 496,004 419,386 354,007
Total net revenues $6,369,300 $5,294,247 $4,075,522 $3,288,908 $2,648,980 $2,177,614
Cost of sales and related
company costs
2,605,212 2,191,440 1,681,434 1,350,011 1,112,785 961,885
Store operating expenses 2,165,911 1,790,168 1,379,574 1,109,782 867,957 704,898
Other operating expenses 197,024 171,648 141,346 106,084 72,406 78,445
Depreciation and amortization
expenses
340,169 289,182 244,671 205,557 163,501 130,232
General and administrative
expenses
357,114 304,293 244,550 234,581 179,852 110,202
Income from equity ventures 76,745 59,071 36,903 33,445 27,740 20,300
Operating income $ 780,615 $ 606,587 $ 420,850 $ 316,338 $ 280,219 $ 212,252
Internet-related investment
losses2
2,940 58,792
Gain on sale of investment3 13,361
Net earnings $ 494,467 $ 388,973 $ 265,355 $ 210,463 $ 178,794 $ 94,564
Net earnings per common
share—diluted4 $0.61 $0.49 $0.34 $0.54 $0.46 $0.24
Cash dividends per share 0 0 0 0 0 0
Balance sheet data
Current assets $1,209,334 $1,350,895 $ 924,029 $ 772,643 $ 593,925 $ 459,819
Current liabilities 1,226,996 746,259 608,703 462,595 445,264 313,251
Working capital5 (17,662) 604,636 335,767 328,777 165,045 146,568
Total assets 3,514,065 3,386,541 2,776,112 2,249,435 1,807,574 1,491,546
Long-term debt (including
current portion)
3,618 4,353 5,076 5,786 6,483 7,168
Shareholders’ equity $2,090,634 $2,470,211 $2,068,689 $1,712,456 $1,366,355 $1,148,399
(Continued )
he argued, would signal that the company honored
their value and contribution.
The board approved Schultz’s plan, and part-
timers working 20 or more hours were offered the
same health coverage as full-time employees starting
in late 1988. Starbucks paid 75 percent of an employ-
ee’s health care premium; the employee paid 25 per-
cent. Over the years, Starbucks extended its health
coverage to include preventive care, crisis counseling,
dental care, eye care, mental health, and chemical de-
pendency. Coverage was also offered for unmarried
partners in a committed relationship. Since most
Starbucks’ employees were young and compara-
tively healthy, the company had been able to provide
broader coverage while keeping monthly payments
relatively low. The value of Starbucks’ health care pro-
gram struck home when one of the company’s store
managers and a former barista walked into Schultz’s
office and told him he had AIDS:
I had known he was gay but had no idea he was sick.
His disease had entered a new phase, he explained,
and he wouldn’t be able to work any longer. We sat
C-478 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Exhibit 3 Continued
Fiscal Years Ending1
October 2,
2005
October 3,
2004
September
30, 2003
September
29, 2002
September
30, 2001
October 1,
2000
Store operations data
Percentage change in
comparable store sales6
United States 9% 11% 9% 7% 5% 9%
International 6 6 7 1 3 12
Consolidated 8 10 8 6 5 9
Systemwide stores opened
during the year7,8
United States
Company-operated stores 574 514 506 503 498 388
Licensed stores 596 417 315 264 268 342
International
Company-operated stores 161 141 124 117 151 96
Licensed stores 341 272 256 293 291 177
Total 1,672 1,344 1,201 1,177 1,208 1,003
Systemwide stores open
at year-end8
United States9
Company-operated stores 4,867 293 3,779 3,209 2,706 2,208
Licensed stores 2,435 1,839 1,422 1,033 769 501
International
Company-operated stores 1,133 972 831 707 590 411
Licensed stores 1,806 1,465 1,193 937 644 381
Total 10,241 8,569 7,225 5,886 4,709 3,501
1The company’s fi scal year ends on the Sunday closest to September 30. All fiscal years presented include 52 weeks, except fi scal 2004,
which includes 53 weeks.
2In fi scal 2000, the company wrote off most of its investment in four ill-fated dot-com businesses. In fi scal 2001, the company wrote off an
additional $2.9 million in Internet-related investments.
3On October 10, 2001, the company sold 30,000 of its shares of Starbucks Coffee Japan Ltd. at approximately $495 per share, net of
related costs, which resulted in a gain of $13.4 million.
4Earnings per share data for fiscal years presented above have been restated to refl ect the 2-for-1 stock splits in fi scal 2006 and 2001.
5Working capital defi cit as of October 2, 2005, was primarily due to lower investments from the sale of securities to fund common stock
repurchases and increased current liabilities from short-term borrowings under the revolving credit facility.
6Includes only Starbucks company-operated retail stores open 13 months or longer. Comparable store sales percentage for fi scal 2004
excludes the extra sales week.
7Store openings are reported net of closures.
8International store information has been adjusted for the fiscal 2005 acquisitions of licensed operations in Germany, southern China, and
Chile by reclassifying historical information from licensed store to company-operated stores.
9United States stores open at fi scal 2003 year end included 43 SBC and 21 Torrefazione Italia Company–operated stores and 74 SBC
franchised stores.
Source: 10-K reports for 2005, 2004, 2003, 2002, and 2000. Notes refl ect 2005 10-K report.
together and cried, for I could not find meaningful
words to console him. I couldn’t compose myself. I
hugged him.
At that point, Starbucks had no provision for
employees with AIDS. We had a policy decision.
Because of Jim, we decided to offer health-care
coverage to all employees who have terminal illnesses,
paying medical costs in full from the time they are not
able to work until they are covered by government
programs, usually twenty-nine months.
Case 29 Starbuck’s Global Quest in 2006: Is the Best Yet to Come? C-479
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
After his visit to me, I spoke with Jim often and
visited him at the hospice. Within a year he was gone.
I received a letter from his family afterward, telling
me how much they appreciated our benefit plan.13
In 1994 Howard Schultz was invited to the
White House. He met one-on-one with President
Bill Clinton to brief him on the Starbucks’ health
care program.
The Creation of an Employee
Stock Option Plan
By 1991 the company’s profitability had improved to
the point where Schultz could pursue a stock option
plan for all employees, a program he believed would
have a positive, long-term effect on the success of
Starbucks.14 Schultz wanted to turn all Starbucks
employees into partners, give them a chance to
share in the success of the company, and make clear
the connection between their contributions and the
company’s market value. Even though Starbucks
was still a private company, the plan that emerged
called for granting stock options to all full-time
and part-time employees in proportion to their base
pay. The plan, dubbed Bean Stock, was presented
to the board in May 1991. Though board members
were concerned that increasing the number of
shares might unduly dilute the value of the shares
of investors who had put up hard cash, the plan
received unanimous approval. The first grant was
made in October 1991, just after the end of the
company’s fiscal year in September; each partner
was granted stock options worth 12 percent of base
pay. Each October since then, Starbucks has granted
employees options equal to 14 percent of base pay,
awarded at the stock price at the start of the fiscal
year (October 1). When the Bean Stock program was
presented to employees, Starbucks dropped the term
employee and began referring to all of its people as
partners because everyone, including part-timers
working at least 20 hours per week, was eligible for
stock options after six months. At the end of fiscal
year 2004, Starbucks’ employee stock option plan
included 38.4 million shares in outstanding options;
new options for about 9 million shares were being
granted annually.15
Starbucks Stock Purchase Plan
for Employees
In 1995, Starbucks implemented an employee stock
purchase plan. Eligible employees could contribute
up to 10 percent of their base earnings to quar-terly
purchases of the company’s common stock at 85
percent of the going stock price. As of fiscal 2005,
about 14.8 million shares had been issued since
inception of the plan, and new shares were being
purchased at a rate close to 1 million shares annually
by some 18,800 active employee participants (out
of almost 55,100 employees who were eligible to
Source: http://fi nance.yahoo.com (accessed December 28, 2005).
Exhibit 4 The Performance of Starbucks’ Stock, 1992–2005
C-480 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
participate).16 During fiscal 2004, the U.K. Share
Incentive Plan, a new employee stock purchase
plan was introduced, discontinuing the original plan
established in 2002. As of fiscal 2005, 10,732 shares
had been issued.17
The Workplace Environment
Starbucks’ management believed the company’s pay
scales (around $9–$12 per hour) and fringe benefit
package allowed it to attract motivated people with
above-average skills and good work habits. Store
employees were paid several dollars above the hourly
minimum wage. Whereas most national retailers
and fast-food chains had turnover rates for store
employees ranging from 150 to 400 percent a year,
the turnover rates for Starbucks baristas ran about 65
percent. Starbucks’ turnover for store managers was
about 25 percent, compared to about 50 percent for
other chain retailers. Starbucks executives believed
that efforts to make the company an attractive, caring
place to work were responsible for its relatively
low turnover rates. One Starbucks store manager
commented, “Morale is very high in my store among
the staff. I’ve worked for a lot of companies, but I’ve
never seen this level of respect. It’s a company that’s
very true to its workers, and it shows. Our customers
always comment that we’re happy and having fun. In
fact, a lot of people ask if they can work here.”18
Starbucks’ management used annual “Partner
View” surveys to solicit feedback from the company’s
workforce of over 115,000 people worldwide, learn
their concerns, and measure job satisfaction. In the
latest sample survey of 1,400 employees, 79 percent
rated Starbucks’ workplace environment favorably
relative to other companies they were familiar with,
72 percent reported being satisfied with their present
job, 16 percent were neutral, and 12 percent were
dissatisfied. But the 2002 survey revealed that many
employees viewed the benefits package as only
“average,” prompting the company to increase its
match of 401(k) contributions for those who had been
with the company more than three years and to have
these contributions vest immediately.
Exhibit 5 contains a summary of Starbucks’
fringe benefit program. Starbucks was named by
Fortune magazine as one of the “100 Best Companies
to Work For” in 1998, 1999, 2000, 2002, 2003, 2004,
and 2005. In 2005, Starbucks was ranked 11th, up
from 34th in 2004. In October 2005, Starbucks
had approximately 115,000 employees worldwide,
of which 97,500 were in the United States. It had
91,200 employees in its U.S. company-owned stores.
Employees at 10 stores in Canada were represented
by a union.
Starbucks’ Corporate Values and
Business Principles
During the early building years, Howard Schultz
and other Starbucks’ senior executives worked to
instill some key values and guiding principles into
• Medical insurance • Sick time
• Dental and vision care • Paid vacations (first-year workers got one vacation week and two
personal days)
• Mental health and chemical
dependency coverage
• 401(k) retirement savings plan—the company matched from 25% to
150%, based on length of service, of each employee’s contributions up
to the fi rst 4% of compensation.
• Short- and long-term disability • Stock purchase plan—eligible employees could buy shares at a
discounted price through regular payroll deductions
• Life insurance • Free pound of coffee each week
• Benefits extended to committed
domestic partners of Starbucks
employees
• 30% product discounts
• Stock option plan (Bean Stock) • Tuition reimbursement program
Source: Compiled by the case researchers from company documents and other sources.
Exhibit 5 Elements of Starbucks’ Fringe Benefit Program
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-481
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
the Starbucks culture. The cornerstone value in the
effort “to build a company with soul” was that the
company would never stop pursuing the perfect
cup of coffee—it would continue buying the best
beans and roasting them to perfection. Schultz
remained steadfastly opposed to franchising; he
wanted the company to be able to control the quality
of its products and build a culture common to all
stores. He was adamant about not selling artificially
flavored coffee beans: “We will not pollute our high-
quality beans with chemicals.” If a customer wanted
hazelnut-flavored coffee, Starbucks would add
hazelnut syrup to the drink, rather than adding hazel-
nut flavoring to the beans during roasting. Running
flavored beans through the grinders would result in
chemical residues being left behind to alter the flavor
of beans ground afterward; plus, the chemical smell
given off by artificially flavored beans was absorbed
by other beans in the store. Furthermore, Schultz
didn’t want the company to pursue supermarket sales
because it would mean pouring Starbucks’ beans into
clear plastic bins where they could get stale, thus
compro-mising the company’s legacy of fresh, dark-
roasted, full-flavored coffee.
Starbucks’ management was also emphatic
about the importance of employees paying attention
to what pleased customers. Employees were trained
to go out of their way—even to take heroic measures
if necessary—to make sure customers were fully
satisfied. The theme was “Just say yes” to customer
requests. Further, employees were encouraged to
speak their minds without fear of retribution from
upper management—senior executives wanted em-
ployees to be straight with them, verbalizing what
Starbucks was doing right, what it was doing wrong,
and what changes were needed. Management wanted
employees to be involved in and contribute to the
process of making Starbucks a better company.
A values-and-principles crisis arose at Starbucks
in 1989 when customers started requesting nonfat
(skim) milk in making cappuccinos and lattes. How-
ard Schultz, who read all customer comments cards,
and Dave Olsen, head of coffee quality, conducted
taste tests of lattes and cappuccinos made with
nonfat milk and concluded they were not as good as
those made with whole milk. Howard Behar, recently
hired as head of retail store operations, indicated
that management’s opinions didn’t matter; what
mattered was giving customers what they wanted.
Schultz said, “We will never offer nonfat milk. It’s
not who we are.” Behar, however, stuck to his guns,
maintaining that use of nonfat milk should at least be
tested—otherwise, it appeared as if all the statements
management had made about the importance of
really and truly pleasing customers were a sham.
A fierce internal debate ensued. One dogmatic
defender of the quality and taste of Starbucks’ coffee
products buttonholed Behar outside his office and told
him that using nonfat milk amounted to “bastardizing”
the company’s products. Numerous store managers
maintained that offering two kinds of milk was
operationally impractical. Schultz found himself in a
quandary, torn between the company’s commitment
to quality and its goal of pleasing customers. Then,
one day after visiting one of the stores in a residential
neighborhood and watching a customer leave to go to
a competitor’s store because Starbucks did not make
lattes with nonfat milk, Schultz authorized Behar to
begin testing.19 Within six months, all 30 stores were
offering drinks made with nonfat milk. Currently,
about half the lattes and cappuccinos Starbucks sells
are made with nonfat milk.
Schultz’s approach to offering employees good
compensation and a comprehensive benefits package
was driven by his belief that sharing the company’s
success with the people who made it happen helped
everyone think and act like an owner, build positive
long-term relationships with customers, and do things
efficiently. He had vivid recollection of his father’s
employment experience—bouncing from one low-
paying job to another, working for employers who
offered few or no benefits and who conducted their
business with no respect for the contributions of the
workforce—and he had no intention of Starbucks
being that type of company. He vowed that he would
never let Starbucks employees suffer a similar fate,
saying:
My father worked hard all his life and he had little
to show for it. He was a beaten man. This is not the
American dream. The worker on our plant floor is
contributing great value to the company; if he or she
has low self-worth, that will have an effect on the
company.20
The company’s employee benefits program was
predicated on the belief that better benefits attract
good people and keep them longer. Schultz’s ratio-
nale, based on his father’s experience of going from
one low-wage, no-benefits job to another, was that if
C-482 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
you treat your employees well, they in turn will
treat customers well.
STARBUCKS’ MISSION
STATEMENT
In early 1990, the senior executive team at Starbucks
went to an off-site retreat to debate the company’s
values and beliefs and draft a mission statement.
Schultz wanted the mission statement to convey a
strong sense of organizational purpose and to articu-
late the company’s fundamental beliefs and guiding
principles. The draft was submitted to all employees
for review and several changes were made based on
employee comments. The resulting mission state-
ment, which remained unchanged in 2005, is shown
in Exhibit 6.
Following adoption of the mission statement,
Starbucks’ management implemented a “Mission
Review” to solicit and gather employee opinions as
to whether the company was living up to its stated
mission. Employees were urged to report their con-
cerns to the company’s Mission Review team if
they thought particular management decisions were
not supportive of the company’s mission statement.
Comment cards were given to each newly hired
employee and were kept available in common areas
with other employee forms. Employees had the option
of signing the comment cards or not. Hundreds of
cards were submitted to the Mission Review team
each year. The company promised that a relevant
manager would respond to all signed cards within two
weeks. Howard Schultz reviewed all the comments,
signed and unsigned.
STARBUCKS’ STORE
EXPANSION STRATEGY
In 1992 and 1993 Starbucks developed a three-year
geographic expansion strategy that targeted areas
that not only had favorable demographic profiles but
also could be serviced and supported by the com-
pany’s operations infrastructure. For each targeted
region, Starbucks selected a large city to serve as a
hub; teams of professionals were located in hub cit-
ies to support the goal of opening 20 or more stores
in the hub in the first two years. Once stores blan-
keted the hub, then additional stores were opened in
smaller, surrounding spoke areas in the region. To
oversee the expansion process, Starbucks created
zone vice presidents to direct the development of
each region and to implant the Starbucks culture in
the newly opened stores. All of the new zone vice
presidents Starbucks recruited came with extensive
operating and marketing experience in chain store
retailing.
Starbucks’ strategy in major metropolitan cit-
ies was to blanket the area with stores, even if some
stores cannibalized another store’s business.21 While
a new store might draw 30 percent of the business of
an existing store two or so blocks away, management
believed its “Starbucks everywhere” approach cut
down on delivery and management costs, shortened
customer lines at individual stores, and increased
foot traffic for all the stores in an area.
In 2002, new stores generated an average of $1.2
million in first-year revenues, compared to $700,000
in 1995 and only $427,000 in 1990. The steady in-
creases in new-store revenues were due partly to
growing popularity of premium coffee drinks and
Establish Starbucks as the premier purveyor of the fi nest coffee in the world while maintaining our uncompromising
principles while we grow.
The following six guiding principles will help us measure the appropriateness of our decisions:
• Provide a great work environment and treat each other with respect and dignity.
• Embrace diversity as an essential component in the way we do business.
• Apply the highest standards of excellence to the purchasing, roasting, and fresh delivery of our coffee.
• Develop enthusiastically satisfi ed customers all of the time.
• Contribute positively to our communities and our environment.
• Recognize that profi tability is essential to our future success.
Exhibit 6 Starbucks’ Mission Statement
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-483
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
partly to Starbucks’ growing reputation. In more and
more instances, Starbucks’ reputation reached new
markets even before stores opened. Moreover, exist-
ing stores continued to post sales gains in the range
of 2–10 percent annually. In 2005, Starbucks posted
same-store sales increases averaging 8 percent (refer
back to Exhibit 3), the 14th consecutive year the com-
pany had achieved sales growth of 5 percent or greater
at existing stores. Starbucks’ revenues had climbed
an average of 20 percent annually since 1992.
One of Starbucks’ core competencies was
identifying good retailing sites for its new stores.
The company was regarded as having the best
real estate team in the coffee bar industry and a
sophisticated system for identifying not only the
most attractive individual city blocks but also the
exact store location that was best; it also worked
hard at building good relationships with local real
estate representatives in areas where it was opening
multiple store locations. The company’s site location
track record was so good that, as of 1997, it had
closed only 2 of the 1,500 sites it had opened; its
track record in finding successful store locations
was still intact as of 2005 (although specific figures
were not available).
International Expansion
In markets outside the continental United States
(including Hawaii), Starbucks had a two-pronged
store expansion plan: Either open company-owned
and company-operated stores, or else license a
reputable and capable local company with retailing
know-how in the target host country to develop and
operate new Starbucks stores. In most countries,
Starbucks used a local partner/licensee to help
it recruit talented individuals, set up supplier
relationships, locate suitable store sites, and cater
to local market conditions. Starbucks looked for
partners/licensees that had strong retail/restaurant
experience, had values and a corporate culture
compatible with Starbucks’, were committed to good
customer service, possessed talented management
and strong financial resources, and had demonstrated
brand-building skills.
Starbucks had created a new subsidiary, Star-
bucks Coffee International, to orchestrate overseas
expansion and begin to build the Starbucks brand
name globally via licensees. (Refer back to Exhibit 1
for the number of licensed international stores in
each country.) Starbucks’ management expected to
have a total of 10,000 stores in 60 countries by the
end of 2005. As of August 2005, Starbucks was lo-
cated in 34 countries, with 1,049 company-operated
stores and 1,734 licensed locations outside the United
States. The company’s first store in France opened
in early 2004 in Paris. China was expected to be
Starbucks’ biggest market outside the United States
in the years to come. Thus far, Starbucks’ products
were proving to be a much bigger hit with consum-
ers in Asia than in Europe. In 2003, the Starbucks
Coffee International division was only marginally
profitable, with pretax earnings of only $3.8 million
on sales of $603 million. However, the profitability
picture improved in 2004, with pretax profits rising
to $51.7 million on sales of $803 million. And it did
even better in fiscal 2005, with pretax earnings of
$86.4 million on sales of $1.03 billion.
So far, Starbucks had avoided franchising,
preferring licensing because it permitted tighter
controls over the operations of licensees. Often,
Starbucks opened foreign stores as a minority part-
ner with local companies. In 2005, Starbucks as-
sumed 100 percent equity ownership of previously
licensed operations in Germany and Chile (where it
had been a 20 percent equity partner), and it boost-
ed its ownership of stores in southern China from
20 percent to 51 percent.
In May 2005, Starbucks announced the first
step into expanding its consumer products channel
in the South Pacific region by launching the sales
of its Frappuccino line in Japan and Taiwan. The
combined ready-to-drink markets in these countries
represented more than $10 billion in annual sales.22
Marketing of Frappuccino products also began in
South Korea through agreements with leading lo-
cal distributors; the ready-to-drink coffee segment
in South Korea represented $320 million in annual
consumer sales.23
Employee Training and
Recognition
To accommodate its strategy of rapid store expan-
sion, Starbucks put in systems to recruit, hire, and
train baristas and store managers. Starbucks’ vice
president for human resources used some simple
guidelines in screening candidates for new posi-
tions, “We want passionate people who love coffee
. . . We’re looking for a diverse workforce, which
C-484 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
reflects our community. We want people who enjoy
what they’re doing and for whom work is an exten-
sion of themselves.”24
Every partner/barista hired for a retail job in a
Starbucks store received at least 24 hours training
in his or her first two to four weeks. The topics
included classes on coffee history, drink preparation,
coffee knowledge (four hours), customer service
(four hours), and retail skills, plus a four-hour
workshop titled “Brewing the Perfect Cup.” Baristas
spent considerable time learning about beverage
preparation—grinding beans, steaming milk, learn-
ing to pull perfect (18- to 23-second) shots of espresso,
memorizing the recipes of all the different drinks,
practicing making the different drinks, and learning
how to customize drinks to customer specifications.
There were sessions on operating the cash register,
cleaning the milk wand on the espresso machine,
explaining the Italian drink names to unknowing
customers, selling home espresso machines, making
eye contact with customers, and taking personal
responsibility for the cleanliness of the store.
Everyone was drilled in the Star Skills, three
guidelines for on-the-job interpersonal relations:
(1) maintain and enhance self-esteem, (2) listen and
acknowledge, and (3) ask for help. And there were
rules to be memorized: Milk must be steamed to at
least 150 degrees Fahrenheit but never more than
170 degrees; every espresso shot not pulled within
23 seconds must be tossed; never let coffee sit in
the pot more than 20 minutes; always compensate
dissatisfied customers with a Starbuck coupon that
entitles them to a free drink.
In response to feedback through 2003 Part-
ner View Survey, Starbucks expanded its training
and career development offerings by adding the
following:25
Coffee Masters Program: A set of courses in
which partners deepen their coffee knowledge
and expertise. More than 7,000 partners have
taken advantage of this training either partially
or fully.
Servant Leadership Workshop: A workshop
that emphasizes trust, collaboration, people de-
velopment, and ethics. Approximately 6,200
partners attended this workshop.
Career Power and Career Power for
Coaches Workshop: A workshop designed
to provide partners and their managers with an
opportunity to reflect on their personal values,
career dreams, and development through coach-
ing and feedback. More than 200 partners in
Seatle attended the workshop.
Management trainees attended classes for 8 to
12 weeks. Their training covered not only the cof-
fee knowledge and information imparted to baristas
but also the details of store operations, practices and
procedures as set forth in the company’s operating
manual, information systems, and the basics of man-
aging people. Starbucks’ trainers were all store man-
agers and district managers with on-site experience.
Among their major objectives were to ingrain the
company’s values, principles, and culture and to pass
on their knowledge about coffee and their passion
about Starbucks.
When Starbucks opened stores in a new market,
it launched a major recruiting effort. Eight to 10
weeks before opening a store, the company placed
ads to hire baristas and begin their training. It sent
a Star team of experienced managers and baristas
from existing stores to the area to lead the store-
opening effort and to conduct one-on-one training
following the company’s formal classes and basic
orientation sessions at the Starbucks Coffee School
in San Francisco.
To recognize the partner contributions, Star-
bucks had created 19 different awards programs
ranging from frequent awards to high-level cash
awards. Some of the high-level awards included
Manager of the Quarter for store manager leader-
ship, Green Apron Awards for outstanding customer
service, and Green Bean Awards for exceptional
support for company’s environmental mission.
Real Estate, Store Design, Store
Planning, and Construction
Starting in 1991, Starbucks created its own in-house
team of architects and designers to ensure that each
store would convey the right image and character.
Stores had to be custom-designed because the com-
pany didn’t buy real estate and build its own free-
standing structures like McDonald’s or Wal-Mart;
rather, each space was leased in an existing structure,
making each store differ in size and shape. Most
stores ranged in size from 1,000 to 1,500 square feet
and were located in office buildings, downtown and
suburban retail centers, airport terminals, university
campus areas, and busy neighborhood shopping
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-485
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
areas convenient for pedestrian foot traffic and/or
drivers. Only a select few were in suburban malls.
Over the years, Starbucks had experimented
with a broad range of store formats. Special seating
areas were added to help make Starbucks a desir-
able gathering place where customers could meet
and chat or simply enjoy a peaceful interlude in their
day. Flagship stores in high-traffic, high-visibility
locations had fireplaces, leather chairs, newspapers,
couches, and lots of ambience. The company also
experimented with drive-through windows in loca-
tions where speed and convenience were important
to customers and with kiosks in supermarkets, build-
ing lobbies, and other public places.
A “stores of the future” project team was formed
in 1995 to raise Starbucks’ store design to a still higher
level and come up with the next generation of Star-
bucks stores. The vision of what a Starbucks store
should be like included such concepts as an authen-
tic coffee experience that conveyed the artistry of es-
presso making, a place to think and imagine, a spot
where people could gather and talk over a great cup
of coffee, a comforting refuge that provided a sense
of community, a third place for people to congregate
beyond work or the home, a place that welcomes peo-
ple and rewards them for coming, and a layout that
could accommodate both fast service and quiet mo-
ments. The team researched the art and literature of
coffee throughout the ages, studied coffee-growing
and coffeemaking techniques, and looked at how
Starbucks’ stores had already evolved in terms of de-
sign, logos, colors, and mood. The team came up with
four store designs—one for each of the four stages
of coffeemaking: growing, roasting, brewing, and
aroma—each with its own color combinations, light-
ing scheme, and component materials. Within each of
the four basic store templates, Starbucks could vary
the materials and details to adapt to different store
sizes and settings (downtown buildings, college cam-
puses, neighborhood shopping areas). In late 1996,
Starbucks began opening new stores based on one of
four formats and color schemes. But as the number
of stores increased rapidly in 2000–2003, greater
store diversity and layout quickly became necessary.
Exhibit 7 shows the diverse nature of Starbucks stores.
To better control average store opening costs,
the company centralized buying, developed stand-
ard contracts and fixed fees for certain items, and
consolidated work under those contractors who
displayed good cost control practices. The retail
operations group outlined exactly the minimum
amount of equipment each core store needed so that
standard items could be ordered in volume from
vendors at 20 to 30 percent discounts, then delivered
just-in-time to the store site either from company
warehouses or the vendor. Modular designs for display
cases were developed. And the whole store layout was
developed on a computer, with software that allowed
the costs to be estimated as the design evolved. All
this cut store opening costs significantly and reduced
store development time from 24 to 18 weeks.
In August 2002, Starbucks teamed up with
T-Mobile USA, the largest U.S. carrier-owned
Wi-Fi service, to experiment with providing Internet
access capability and enhanced digital entertainment
to patrons at over 1,200 Starbucks locations. The
objective was to heighten the “third-place” Starbucks
experience, entice customers into perhaps buying
a second latte or espresso while they caught up on
e-mail, listened to digital music, put the finishing
touches on a presentation, or accessed their corporate
intranet. Since the August 2002 introduction of Wi-Fi
at Starbucks, wireless Internet service had been added
at over 1,700 more stores. Internal research showed
that the average connection lasted approximately
45 minutes and that more than 90 percent of accesses
were during the off-peak store hours.
During the early start-up years, Starbucks avoided
debt and financed new stores entirely with equity
capital. But as the company’s profitability improved
and its balance sheet strengthened, Schultz’s oppo-
sition to debt as a legitimate financing vehicle
softened. In 1996 the company completed its sec-
ond debt offering, netting $161 million from the
sale of convertible debentures for use in its capital
construction program. This debt was successfully
converted into common stock in 1997. Over the
next eight years, strong internal cash flows allowed
Starbucks to finance virtually all of its store ex –
pansion with internal funds; in 2005, the company had
less than $3 million in long-term debt on its balance
sheet despite having $1.8 billion in net investment in
facilities and equipment, but it did have long-term
liabilities of $193.6 million associated with lease
obligations at its stores.
Store Ambience
Starbucks management viewed each store as a
billboard for the company and as a contributor to
C-486 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Exhibit 7 Scenes from Starbucks Stores
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-487
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
building the company’s brand and image. Each detail
was scrutinized to enhance the mood and ambience
of the store, to make sure everything signaled “best-
of-class” and reflected the personality of the com-
munity and the neighborhood. The thesis was
“Everything matters.” The company went to great
lengths to make sure the store fixtures, the merchandise
displays, the colors, the artwork, the banners, the music,
and the aromas all blended to create a consistent,
inviting, stimulating environment that evoked the
romance of coffee, that signaled the company’s passion
for coffee, and that rewarded customers with ceremony,
stories, and surprise. Starbucks was recognized for
its sensitivity to neighborhood conservation with
the Scenic America’s award for excellent design and
“sensitive reuse of spaces within cities.”
To try to keep the coffee aromas in the stores
pure, Starbucks banned smoking and asked employ-
ees to refrain from wearing perfumes or colognes.
Prepared foods were kept covered so that customers
would smell coffee only. Colorful banners and post-
ers in tune with seasons and holidays kept the look
of Starbucks stores fresh. Company designers came
up with artwork for commuter mugs and T-shirts in
different cities that were in keeping with each city’s
personality (peach-shaped coffee mugs for Atlanta,
pictures of Paul Revere for Boston and the Statue of
Liberty for New York). To make sure that Starbucks’
stores measured up to standards, the company used
“mystery shoppers” who posed as customers and
rated each location on a number of criteria.
THE PRODUCT LINE
AT STARBUCKS
Starbucks stores offered a choice of regular or
decaffeinated coffee beverages, a special “coffee
of the day,” and an assortment of made-to-order
Italian-style hot and cold espresso drinks. In addition,
customers could choose from a wide selection of
fresh-roasted whole-bean coffees (which could be
ground or not on the premises for take-home in
distinctive packages), fresh pastries, juices, hot and
iced teas, coffeemaking equipment, coffee mugs and
other accessories, and music CDs. From time to time,
stores ran special promotions touting the company’s
special Christmas Blend coffee, shade-grown coffee
from Mexico, organically grown coffees, and various
rare and exotic coffees from across the world. In
2003, Starbucks began offering customers a choice
of using its exclusive Silk soymilk specifically de-
signed to accentuate its handcrafted beverages using
espresso roast coffee and Tazo chai teas; the organic,
kosher soymilk appealed to some customers as a
substitute for milk or skim milk in various coffee
and tea beverages.
The company’s retail sales mix in 2005 was
77 percent beverages, 15 percent food items, 4 per-
cent whole-bean coffees, and 4 percent coffeemak-
ing equipment and accessories.26 The product mix in
each store varied, depending on the size and location
of each outlet. Larger stores carried a greater variety
of whole coffee beans, gourmet food items, teas, cof-
fee mugs, coffee grinders, coffeemaking equipment,
filters, storage containers, and other accessories.
Smaller stores and kiosks typically sold a full line of
coffee beverages, a limited selection of whole-bean
coffees, and a few hardware items.
The idea for selling music CDs (which, in some
cases, were special compilations that had been put
together for Starbucks to use as store background
music) originated with a Starbucks store manager
who had worked in the music industry and selected
the new “tape of the month” Starbucks played as
background in its stores. He had gotten compliments
from customers wanting to buy the music they heard
and suggested to senior executives that there was
a market for the company’s music tapes. Research
through two years of comment cards turned up hun-
dreds asking Starbucks to sell the music it played
in its stores. The Starbucks CDs proved a signifi –
cant seller and addition to the product line; some of
the CDs were specifically collections designed to
tie in with new blends of coffee that company was
promoting. Starbucks had also co-produced a Ray
Charles CD, Genius Loves Company, which became
a multiplatinum album with significant sales from
Starbucks stores.
In 2000, Starbucks acquired Hear Music, a San
Francisco–based company, to give it added capabi-
lity in enhancing its music CD offerings. In 2004,
Starbucks introduced Hear Music media bars, a
service that offered custom CD burning at select
Starbucks stores, and it opened several Starbucks
Hear Music Coffeehouses—a first-of-its-kind cof-
fee and music establishment where customers could
enjoy a freshly brewed cup of coffee while downloading
music from the company’s 200,000-plus song library
C-488 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
and, if they wished, have the downloaded songs
burned onto a CD for purchase.
In 2005, in an average week, an estimated 30
million-plus customers patronized Starbucks, up
from about 5 million in 1998. U.S. stores did about
half of their business by 11:00 a.m. Loyal custom-
ers patronized a Starbucks store 15 to 20 times a
month, spending perhaps $50–$75 monthly. Some
customers were Starbucks fanatics, coming in daily.
Baristas became familiar with regular customers,
learning their names and their favorite drinks. Christine
Nagy, a field director for Oracle Corporation in Palo
Alto, California, told a Wall Street Journal reporter,
“For me, it’s a daily necessity or I start getting with-
drawals.”27 Her standard order was a custom drink:
a decaf grande nonfat no-whip no-foam extra-cocoa
mocha; when the barista saw her come through the
door, she told the reporter, “They just say ‘We need
a Christine here.’ ” Since the inception of Starbucks
Cards in 2001, 52 million Starbucks customers had
purchased the reloadable cards that allowed them to
pay for their purchases with a quick swipe at the cash
register and also to earn and redeem rewards. The
use of Starbucks Cards was a growing means of pay-
ment in Starbucks stores. In fiscal 2004, the company
reached approximately $1 billion in total life-to-date
activations and reloads on Starbucks cards. Due to
its success in the United States the Starbucks Card
was being launched internationally, with the initial
rollouts starting in Japan and Greece.
In the fall of 2003, Starbucks, in partnership
with Bank One, introduced the Duetto Visa card,
which added Visa card functionality to the reload-
able Starbucks Cards. By charging purchases to the
Visa account of their Duetto card anywhere Visa
credit cards were accepted, cardholders earned 1 per-
cent back in Duetto Dollars, automatically loaded on
their Starbucks card account after each billing cycle.
Duetto Dollars could be used to purchase beverages,
food, and store merchandise at any Starbucks loca-
tion. The Duetto card was an example of the ongo-
ing effort by Starbucks’ management to introduce
new products and experiences for customers that
belonged exclusively to Starbucks; senior executives
drummed the importance of always being open to re-
inventing the Starbucks experience.
So far, Starbucks had spent very little money
on advertising, preferring instead to build the brand
cup-by-cup with customers via word of mouth and
the appeal of its storefronts. The company spent a
total of $87.7 million on advertising in fiscal 2005,
up from $49.6 million in fiscal 2003.
Joint Ventures and Acquisitions
In 1994, after months of meetings and experi-
mentation, PepsiCo and Starbucks entered into a joint
venture to create new coffee-related products for mass
distribution through Pepsi channels, including cold
coffee drinks in a bottle or can. Howard Schultz saw this
as a major paradigm shift with the potential to cause
Starbucks’ business to evolve in heretofore unima-
ginable directions; he thought it was time to look for
ways to move Starbucks out into more mainstream
markets. Cold coffee products had historically met
with poor market reception, except in Japan, where
there was an $8 billion market for ready-to-drink
coffee-based beverages. Nonetheless, Schultz was
hoping the partners would hit upon a new product
to exploit a good-tasting coffee extract that had been
developed by Starbucks’ recently appointed director
of research and development. The joint venture’s first
new product, Mazagran, a lightly flavored carbonated
coffee drink, was a failure; a market test in southern
California showed that some people liked it and
some hated it. While people were willing to try it the
first time, partly because the Starbucks name was on
the label, repeat sales proved disappointing. Despite
the clash of cultures and the different motivations
of PepsiCo and Starbucks, the partnership held to-
gether because of the good working relationship that
evolved between Howard Schultz and Pepsi’s senior
executives. Then Schultz, at a meeting to discuss the
future of Mazagran, suggested, “Why not develop
a bottled version of Frappuccino?”28 Starbucks had
come up with Frappuccino in the summer of 1995,
and the cold coffee drink had proved to be a big hot-
weather seller; Pepsi executives were enthusiastic.
After months of experimentation, the joint venture
product research team came up with a shelf-stable
version of Frappaccino that tasted quite good. It was
tested in West Coast supermarkets in the summer of
1996; sales ran 10 times projections, with 70 percent
being repeat business. Sales of Frappuccino reached
$125 million in 1997 and achieved national super-
market penetration of 80 percent. Starbucks’ manage-
ment believed that the market for Frappuccino would
ultimately exceed $1 billion.
In October 1995 Starbucks partnered with Drey-
er’s Grand Ice Cream to supply coffee extract for
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-489
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
a new line of coffee ice cream made and distributed
by Dreyer’s under the Starbucks brand. The new
line, featuring such flavors as Dark Roast Expresso
Swirl, JavaChip, Vanilla MochaChip, Biscotti Bliss,
and Caffe Almond Fudge, hit supermarket shelves
in April 1996, and by July 1996 Starbucks’ coffee-
flavored ice cream was the top-selling superpremium
brand in the coffee segment. In 1997, two new low-
fat flavors were added to complement the original six
flavors, along with two flavors of ice cream bars; all
were well received in the marketplace.
The partnerships with Pepsi and Dreyer’s pro-
duced about $20 million in revenues for Starbucks
in fiscal 2005 (equal to about 2 percent of total spe-
cialty sales).
In 2004, Starbucks teamed with Jim Beam
Brands to invent a Starbucks Coffee Liqueur that
would be sold in bars, liquor stores, and restaurants;
projections were for systemwide gross sales of over
$8 million annually. Launched in February 2005,
Starbucks Coffee Liqueur was the top-selling new
spirit product through August 2005, according to
Nielsen. In October 2005, again collaborating with
Jim Beam Brands, Starbucks introduced Starbucks
Cream Liqueur, a blend of cream, spirits, and a
hint of Starbucks coffee. With 22 million cordial
consumers in the U.S. market, the cream liqueur
category was nearly three times the size of coffee
liqueur category. Both Starbucks Coffee Liqueur
and Starbucks Cream Liqueur were packaged in a
750-milliliter bottle priced at $22.99.
In April 2005, Starbucks purchased Ethos Water
for $8 million in cash. The acquisition was made to
expand the line of beverages in Starbucks’ stores in
the United States.
Licensed Stores and
Specialty Sales
Starbucks had a licensing agreement with Kraft
Foods to market and distribute Starbucks whole-bean
and ground coffees in grocery and mass-merchandise
channels across the United States. Kraft managed all
distribution, marketing, advertising, and promotions
and paid a royalty to Starbucks based on a percent-
age of net sales. The coffee that Starbucks sold in su-
permarkets featured distinctive, elegant packaging,
prominent positions in grocery aisles, and the same
premium quality as that it sold in its stores. Product
freshness was guaranteed by Starbucks’ FlavorLock
packaging, and the price per pound paralleled the
prices in Starbucks’ retail stores. Flavor selections in
supermarkets were more limited than those at Star-
bucks stores. Going into 2006, Starbucks coffees
were available in some 31,300 grocery and ware-
house clubs (such as Sam’s and Costco) with 30,000
in the United States and 1,300 in the international
markets. Revenues from this category comprised
24 percent of specialty revenues in fiscal 2005.
Starbucks executives recognized that supermar-
ket distribution entailed several risks, especially in
exposing Starbucks to first-time customers. Star-
bucks had built its reputation around the unique re-
tail experience in its stores where all beverages were
properly prepared—it had no control over how cus-
tomers would perceive Starbucks when they encoun-
tered it in grocery aisles. A second risk concerned
coffee preparation at home. Rigorous quality control
and skilled baristas ensured that store-purchased
beverages would measure up, but consumers using
poor equipment or inappropriate brewing methods
could easily conclude that Starbucks packaged cof-
fees did not live up to their reputation.
Starbucks had also entered into a limited number
of licensing agreements for store locations in areas
where it did not have ability to locate its own out-
lets. The company had an agreement with Marriott
Host International that allowed Host to operate Star-
bucks retail stores in airport locations, and it had an
agreement with Aramark Food and Services to put
Starbucks stores on university campuses and other
locations operated by Aramark. Starbucks received a
license fee and a royalty on sales at these locations
and supplied the coffee for resale in the licensed lo-
cations. All licensed stores had to follow Starbucks’
detailed operating procedures, and all managers and
employees who worked in these stores received the
same training given to Starbucks managers and store
employees. As of 2005, there were 2,435 licensed or
franchised stores in the United States and 1,806 li-
censed stores in other countries. Licensing revenues
increased from $241 million in fiscal 2001 to $673
million in fiscal 2005; domestic stores accounted for
$515 million of the revenues from licensing in 2005.
Starbucks had a specialty sales group that pro-
vided its coffee products to restaurants, airlines, ho-
tels, universities, hospitals, business offices, country
clubs, and select retailers. One of the early users of
Starbucks coffee was Horizon Airlines, a regional
carrier based in Seattle. In 1995, Starbucks entered
into negotiations with United Airlines to serve Star-
bucks coffee on all United flights. There was much
internal debate at Starbucks about whether such
C-490 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
a move made sense for Starbucks and the possible
damage to the integrity of the Starbucks brand if
the quality of the coffee served did not measure up
(since there was different coffeemaking equipment
on different planes). It took seven months of negotia-
tions for Starbucks and United to arrive at a mutually
agreeable way to handle quality control on United’s
various types of planes.
In recent years, the specialty sales group had
won the coffee accounts at Hyatt, Hilton, Sheraton,
Radisson, and Westin hotels, resulting in packets of
Starbucks coffee being in each room with coffee-
making equipment. Starbucks had entered into
an agreement with Wells Fargo to provide coffee
service at some of the bank’s locations in California.
A 1997 agreement with U.S. Office Products gave
Starbucks an entrée to provide its coffee to workers
in 1.5 million business offices. In addition, Starbucks
supplied an exclusive coffee blend to Nordstrom’s
for sale only in Nordstrom stores, operated coffee
bars in Barnes & Noble bookstores, and, most
recently, had begun coffee bar operations in Chapters
bookstores (Chapters was a Toronto book retailer that
had sites throughout Canada) and Borders bookstores
that had cafés. Starbucks also had an alliance with
SYSCO Corporation to service the majority of its
food-service and restaurant accounts. In fiscal 2005,
Starbucks was supplying its coffees to 15,500 food-
service accounts worldwide, producing fiscal 2005
revenues of $304 million, up from $179 million
in 2001.
Other Starbucks initiatives included a 24-hour
Starbucks Hear Music digital music channel avail-
able to all XM satellite radio subscribers and the
availability of wireless broadband Internet service
in company-owned stores in the United States and
Canada. Collectively, these other initiatives accoun-
ted for 3 percent of specialty revenue in fiscal 2005.
Starbucks experimented with a mail order cata-
log and with online sales at its Web site, but it dis-
continued those operations in 2003 when sales fell
off (chiefly because of the growing availability of
Starbucks coffees in supermarkets and the compa-
ny’s expanding number of store locations).
STARBUCKS COFFEE
PURCHASING STRATEGY
Starbucks personnel traveled regularly to coffee-
producing countries—Colombia, Sumatra, Yemen,
Antigua, Indonesia, Guatemala, New Guinea, Costa
Rica, Sulawesi, Papua, Kenya, Ethiopia, Java, and
Mexico—building relationships with growers and ex-
porters, checking on agricultural conditions and crop
yields, and searching out varieties and sources that
would meet Starbucks’ exacting standards of qual-
ity and flavor. The coffee-purchasing group, work-
ing with personnel in roasting operations, tested new
varieties and blends of beans from different sources.
Coffee was grown in 70 tropical countries and
was the second-most-traded commodity in the world
after petroleum. The global value of the 2000–2001
coffee bean crop was about $5.6 billion. By World
Bank estimates, some 25 million small farmers
made their living growing coffee. Commodity-grade
coffee, which consisted of robusta and commercial
quality arabica beans, was traded in a highly com-
petitive market as an undifferentiated product. Cof-
fee prices were subject to considerable volatility
due to weather, economic and political conditions in
the growing countries, new agreements establishing
export quotas, and periodic efforts to bolster prices
by restricting coffee supplies. Starbucks used fixed-
price purchase commitments to limit its exposure to
fluctuating coffee prices in upcoming periods and,
on occasion, purchased coffee futures contracts to
provide price protection. In years past, there had
been times when unexpected jumps in coffee prices
had put a squeeze on Starbucks’ margins, forcing
an increase in the prices of the beverages and beans
sold at retail.
Starbucks sourced approximately 50 percent of
its beans from Latin America, 35 percent from the
Pacific Rim, and 15 percent from East Africa. Sourc-
ing from multiple geographic areas not only allowed
Starbucks to offer a greater range of coffee varieties to
customers but also spread the company’s risks regard-
ing weather, price volatility, and changing economic
and political conditions in coffee-growing countries.
During 2002, a global oversupply of more than
2 billion pounds drove the prices of commodity
coffees to historic lows of $0.40–$0.50 per pound.
The specialty coffee market, which represented about
10 percent of worldwide production, consisted prima-
rily of high-quality arabica beans. Prices for specialty
coffees were determined by the quality and flavor of the
beans and were almost always higher than prevailing
prices for commodity-grade coffee beans. Starbucks
purchased only high-quality arabica coffee beans,
paying an average of $1.20 per pound in 2004. Its
purchases represented about 1 percent of the world’s
coffee bean crop. The company’s green coffee costs
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-491
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
reached a historic low in 2002 and had gradually
increased since then. Given the price volatility risk,
the company entered into fixed-price purchase com-
mitments in order to secure an adequate supply of
quality green coffee. As of October 2005, the com-
pany had over $375 million in fixed-price purchase
commitments, which along with existing inventory
was expected to provide an adequate supply of green
coffee through fiscal 2006.29
Believing that the continued growth and success
of its business depended on gaining access to ade-
quate supplies of high-quality coffees year-in and
year-out, Starbucks had been a leader in promoting
environmental and social stewardship in coffee-origin
countries. Starbucks’ coffee sourcing strategy was to
contribute to the sustainability of coffee growers and
help conserve the environment. In sourcing green
coffee beans, Starbucks was increasingly dealing
directly with farmers and cooperatives, and its policy
was to pay prices high enough to ensure that small
coffee growers, most of whom lived on the edge of
poverty, were able to cover their production costs
and provide for their families. About 40 percent of
Starbucks purchases were made under three-to five-
year contracts, which management believed enabled
the company to purchase its future coffee bean
requirements at predictable prices over multiple crop
years. Coffee purchases negotiated through long-term
contracts increased from 3 percent in 2001 to 36
percent in 2002. Farmers who met important quality,
environmental, social, and economic criteria, which
Starbucks had developed with the support of Conser-
vation International’s Center for Environmental
Leadership in Business, were rewarded with financial
incentives and preferred supplier status. In fiscal
2004, the company opened its Farmer Support
Center in Costa Rica to support existing and potential
Starbucks coffee suppliers and their communities.
Starbucks had $375 million in fixed-price pur-
chase commitments in October 2005 but was not
planning to increase this commitment in the near fu-
ture due to a significant jump in the prices of green
coffee beans (in some cases the going prices for green
beans were above the fixed purchase prices). The high
commodity prices for coffee beans made farmers less
willing to enter into fixed-price arrangements.
Fair Trade Certified Coffee
A growing number of small coffee growers were
members of democratically run cooperatives that
were registered with the Fair Trade Labeling Organi-
zations International; these growers could sell their
beans directly to importers, roasters, and retailers at
favorable guaranteed “Fair Trade” prices. The idea
behind guaranteed prices for Fair Trade coffees was
to boost earnings for small coffee growers enough
to allow them to afford basic health care, education,
and home improvements. Starbucks marketed Fair
Trade Certified coffee at most of its retail stores and
through other locations that sold Starbucks coffees.
In October 2005, Starbucks introduced Café Estima
Blend Fair Trade Certified Coffee as the coffee of the
week to support Fair Trade Month 2005. Starbucks
expected to purchase 10 million pounds of Fair Trade
Certified coffee in 2005, and it planned to purchase
12 million pounds in 2006.
Environmental Best Practices
Since 1998, Starbucks had partnered with Conser-
vation International to promote coffee cultivation
methods that protected biodiversity and maintained
a healthy environment. A growing percentage of
the coffees that Starbucks purchased were grown
“organically” without the use of pesticides, herbi-
cides, or chemical fertilizers; organic cultivation
methods resulted in clean groundwater and helped
protect against degrading of local ecosystems, many
of which were fragile or in areas where biodiversity
was under severe threat. Another environmental con-
servation practice involved growing organic coffee
under a natural canopy of shade trees interspersed
with fruit trees and other crops; this not only allowed
farmers to get higher crop yields from small acre-
ages but also helped protect against soil erosion on
mountainsides.
COFFEE ROASTING
OPERATIONS
Starbucks considered the roasting of its coffee beans
to be something of an art form, entailing trial-and-
error testing of different combinations of time and
temperature to get the most out of each type of bean
and blend. Recipes were put together by the coffee
department, once all the components had been tested.
Computerized roasters guaranteed consistency. Each
batch was roasted in a powerful gas oven for 12 to
15 minutes. Highly trained and experienced roasting
personnel monitored the process, using both smell
and hearing, to help check when the beans were
C-492 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
perfectly done—coffee beans make a popping sound
when ready. Starbucks’ standards were so exacting
that roasters tested the color of the beans in a blood-
cell analyzer and discarded the entire batch if the
reading wasn’t on target. After roasting and cooling,
the coffee was immediately vacuum-sealed in bags
with one-way valves that let out gases naturally pro-
duced by fresh-roasted beans without letting oxygen
in—one-way valve technology extended the shelf life
of packaged Starbucks coffee to 26 weeks. As a mat-
ter of policy, however, Starbucks removed coffees on
its shelves after three months, and, in the case of cof-
fee used to prepare beverages in stores, the shelf life
was limited to seven days after the bag was opened.
At the end of fiscal 2005, Starbucks had roast-
ing plants in Kent, Washington; York, Pennsylvania;
Minden, Nevada; and the Netherlands. In addition
to roasting capability, the Kent, York, Minden, and
Netherlands plants also had additional space for
warehousing and shipping coffees. The roasting
plants and distribution facilities in Kent supplied stores
west of the Mississippi and in the Asia-Pacific region.
The newly constructed Minden plant and distribution
center was used to supply stores in the Mountain West
and Midwest. The roasting and distribution facility in
York, which could be expanded to 1 million square
feet, supplied stores mainly east of the Mississippi.
The 94,000-square-foot facility in the Netherlands
supplied stores in Europe and the Middle East.
STARBUCKS’ CORPORATE
SOCIAL RESPONSIBILITY
STRATEGY
Howard Schultz’s effort to “build a company with
soul” included broad-based initiatives to contribute
positively to the communities in which Starbucks
had stores and to the environment. The guiding
theme of Starbucks’ social responsibility strategy
was “Giving back to our communities is the way we
do business.” The Starbucks Foundation was set up
in 1997 to orchestrate the company’s philanthropic
activities. Since 1991 Starbucks had been a major
contributor to CARE, a worldwide relief and de-
velopment organization that sponsored health,
education, and humanitarian aid programs in almost
all of the third world countries where Starbucks
purchased its coffee supplies. Stores featured CARE
in promotions and had organized concerts to benefit
CARE. A second major philanthropic effort in –
volved providing financial support to community
literacy organizations. In 1995 Starbucks began
a program to improve the conditions of workers
in coffee-growing countries, establishing a code
of conduct for its growers and providing financial
assistance for agricultural improvement projects. In
1997, Star-bucks formed an alliance with Appropriate
Technology International to help poor, small-scale
coffee growers in Guatemala increase their income
by improving the quality of their crops and their
market access; the company’s first-year grant of
$75,000 went to fund a new processing facility and
set up a loan program for a producer cooperative.
Starbucks had an Environmental Committee
that looked for ways to reduce, reuse, and recycle
waste, as well as contribute to local community en-
vironmental efforts. There was also a Green Store
Task Force that looked at how Starbucks stores
could conserve on water and energy usage and gen-
erate less solid waste. Customers who brought their
own mugs to stores were given a 10-cent discount of
beverage purchases (in 2002, customers used com-
muter mugs in making purchases about 12.7 million
times). Coffee grounds, which were a big portion of
the waste stream in stores, were packaged and given
to customers, parks, schools and plant nurseries as
a soil amendment. Company personnel purchased
paper products with high levels of recycled content
and unbleached fiber to help Starbucks minimize
its environmental footprint. Stores participated in
Earth Day activities each year with in-store promo-
tions and volunteer efforts to educate employees and
customers about the impacts their actions had on the
environment. Suppliers were encouraged to provide
the most energy-efficient products within their cat-
egory and eliminate excessive packaging; Starbucks
had recently instituted a Code of Conduct for sup-
pliers of noncoffee products that addressed standards
for social responsibility, including labor and human
rights. No genetically modified ingredients were
used in any food or beverage products that Starbucks
served, with the exception of milk. (U.S. labeling re-
quirements do not require milk producers to disclose
the use of hormones aimed at increasing the milk
production of dairy herds.)
Starbucks stores participated regularly in local
charitable projects of one kind or another, donat-
ing drinks, books, and proceeds from store-opening
benefits. Employees were encouraged to recommend
and apply for grants from the Starbucks Foundation
to benefit local community literacy organizations.
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-493
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
On the Fourth of July weekend in 1997, three
Starbucks employees were murdered in the com-
pany’s store in the Georgetown area of Washington,
D.C.; Starbucks offered a $100,000 reward for
information leading to the arrest of the murderer(s).
The company announced it would reopen the store in
early 1998 and donate all future net proceeds of the
store to a Starbucks Memorial Fund that would make
annual grants to local groups working to reduce
violence and aid the victims of violent crimes.
In 2005, Starbucks made a $5 million, five-year
commitment to long-term relief and recovery efforts
for victims of Hurricane Katrina and committed $5
million to support educational programs in China.
Starbucks felt so deeply about its responsibilities
that it even developed an environmental mission
statement to expand on its corporate mission state-
ment (see Exhibit 8). In 2002, Starbucks also began
issuing an annual Corporate Social Responsibility
Report (the reports for recent years can be viewed in
the Investors section at www.starbucks.com). Going
into 2004, Starbucks had received 20 awards from a
diverse group of organizations for its philanthropic,
community service, and environmental activities.
THE SPECIALTY COFFEE
INDUSTRY
While the market for traditional commercial grade
coffees had stagnated since the 1970s, the specialty
coffee segment had expanded, as interested, educated,
upscale consumers became increasingly inclined to
upgrade to premium coffees with more robust
flavors. Whereas retail sales of specialty coffees
amounted to only $45 million in 1969, by 1994 retail
sales of specialty coffees had increased to $2 billion,
much of which stemmed from sales in coffee bars or
the shops of coffee bean retailers (like Peet’s). The
increase was attributed to wider consumer awareness
of and appreciation for fine coffee, the emergence
of coffee bars featuring a blossoming number of
premium coffee beverages, and the adoption of a
healthier lifestyle that prompted some consumers to
replace alcohol with coffee. Coffee’s image changed
from one of just a breakfast or after-dinner beverage
to a drink that could be enjoyed at any time in the
company of others. Many coffee drinkers took to the
idea of coffee bars where they could enjoy a high-
caliber coffee beverage and sit back and relax with
friends or business associates.
Some industry experts expected the gourmet
coffee market in the United States would be saturated
by 2005. But the international market was much
more wide open as of early 2004. The United States,
Germany, and Japan were the three biggest coffee-
consuming countries.
COMPETITORS
Starbucks’ primary competitors were restaurants,
specialty coffee shops, doughnut shops, supermar-
kets, convenience stores, and others that sold hot cof-
fee and specialty coffee drinks. In 2003, there were
an estimated 14,000 specialty coffee outlets in the
United States, with some observers predicting there
would as many as 18,000 locations selling specialty
coffee drinks by 2015.
Starbucks’ success was prompting a number of
ambitious rivals to scale up their expansion plans.
Still, no other specialty coffee rival had as many
as 400 stores, but there were at least 20 small local
and regional chains that aspired to compete against
Starbucks in their local market arenas, most notably
Caribou Coffee (337 stores in 14 states and the
District of Columbia), Tully’s Coffee (98 stores in
4 states), Gloria Jean’s (280 mall locations in 35
states and several foreign countries), New World
Coffee (30 locations), Brew HaHa (13 locations in
Delaware and Pennsylvania), Bad Ass Coffee (about
60 locations in 18 states, Japan, and South Korea),
Starbucks is committed to a role of environmental
leadership in all facets of our business.
We fulfi ll this mission by a commitment to:
• Understanding of environmental issues and
sharing information with our partners.
• Developing innovative and flexible solutions to
bring about change.
• Striving to buy, sell, and use environmentally
friendly products.
• Recognizing that fi scal responsibility is essential
to our environmental future.
• Instilling environmental responsibility as a
corporate value.
• Measuring and monitoring our progress for each
project.
Exhibit 8 Starbucks’ Environmental
Mission Statement
C-494 Part 2 Cases in Crafting and Executing Strategy
Thompson−Strickland−Gamble:
Crafting and Executing
Strategy: Concepts and
Cases, 15th Edition
Starbucks’ Global Quest in
2006: Is the Best Yet to
Come?
Case © The McGraw−Hill
Companies, 2007
Second Cup Coffee (the largest chain based in
Canada), and Qwiky’s (India). Caribou Coffee went
public in late 2005, with a stock offering that raised
about $68 million. McDonald’s had begun opening
McCafés. While it had been anticipated in the late
1990s that local and regional chains would merge in
efforts to get bigger and better position themselves
as an alternative to Starbucks, such consolidation
had not occurred as of 2003. But numerous retail
entrepreneurs had picked up on the growing popu-
larity of specialty coffees and opened coffee bars in
high-pedestrian-traffic locations to serve espresso,
cappuccino, latte, and other coffee drinks. Growing
numbers of restaurants were upgrading the quality of
the coffee they served.
Starbucks also faced competition from nation
wide coffee manufacturers—such as Kraft General
Foods (the parent of Maxwell House), Procter &
Gamble (the marketer of Folger’s and Millstone
brands), and Nestlé—that distributed their coffees
through supermarkets. Both General Foods and Procter
& Gamble had introduced premium blends of their
Maxwell House and Folgers coffees on supermarket
shelves, pricing them several dollars below Star-
bucks’ offerings. But Starbucks’ most important
competitors in supermarkets were the increasing
numbers of rival brands of specialty coffees—Green
Mountain, Allegro, Peaberry, Brothers, and dozens
of other brands. Because many consumers were
accustomed to purchasing their coffee supplies at
supermarkets, it was easy for them to choose whatever
specialty coffee brand or brands were featured in their
local supermarkets over Starbucks.
FUTURE CHALLENGES
In fiscal 2006, Starbucks planned to open 1,800 new
stores globally. Top management believed that it
could grow revenues by about 20 percent annually
and net earnings by 20–25 percent annually for
the next three to five years. Howard Schultz and
CEO Jim Donald viewed China as a huge market
opportunity, along with Brazil, India, and Russia.
Howard Schultz believed that, to sustain its growth
and make Starbucks one of the world’s preeminent
global brands, the company had to challenge the
status quo, be innovative, take risks, and adapt its
vision of who it was, what it did, and where it was
headed. If the challenge was met successfully, in
all likelihood the company’s best years lay on the
strategic road ahead.
Endnotes
1As quoted in Cora Daniels, “Mr. Coffee,” Fortune, April 14, 2003,
p. 139.
22004 annual report, letter to shareholders.
32002 annual report, letter to shareholders.
4Ibid.
5Howard Schultz and Dori Jones Yang, Pour Your Heart Into It (New
York: Hyperion, 1997), p. 33.
6Ibid., p. 34.
7Ibid., p. 36.
8As told in ibid., p. 48.
9Ibid., pp. 61–62.
10As quoted in Jennifer Reese, “Starbucks: Inside the Coffee Cult,”
Fortune, December 9, 1996, p. 193.
11Schultz and Yang, Pour Your Heart Into It, pp. 101–2.
12Ibid., p. 142.
13Ibid., p. 129.
14As related in ibid., pp. 131–36.
152004 annual report, p. 36.
16Ibid.
172005 Starbucks 10-K report, p. 67.
18Ben van Houten, “Employee Perks: Starbucks Coffee’s Employee
Benefi t Plan,” Restaurant Business, May 15, 1997, p. 85.
19As related in Schultz and Yang, Pour Your Heart Into It, p. 168.
20As quoted in Ingrid Abramovitch, “Miracles of Marketing,” Success
40, no. 3, p. 26.
21Daniels, “Mr. Coffee,” p. 140.
22Company press releasse, May 31, 2005, and October 25, 2005
23Company press release, October 25, 2005.
24Kate Rounds, “Starbucks Coffee,” Incentive 167, no. 7, p. 22.
25CSR annual report, Starbucks, fiscal 2004.
26Fiscal 2005 annual report, p. 14.
27David Bank, “Starbucks Faces Growing Competition: Its Own Stores,”
The Wall Street Journal, January 21, 1997, p. B1.
28As related in Schultz and Yang, Pour Your Heart Into It, p. 224.
29Starbucks 2005 form 10-K report, p. 6.
Case 29 Starbucks’ Global Quest in 2006: Is the Best Yet to Come? C-495
