Paper 2 – Starbucks: “Naysayers never built A great enterprise.”


As per the paper two guidelines, please find below my second paper

Introduction/Preface

Companies live and die by their brand image. Countless small companies have failed in their attempts to evolve into large scale corporations due to a wide array of factors. Some manage to make the change, grow, and enter a new phase in the company’s history. Ben & Jerry’s started in a rundown gas station in Burlington, Vermont. Wal-Mart began its retail empire as a five and dime shop in Bentonville, Arkansas, and has grown to become the biggest retail company in the world. Rome was not built in a day, and none of these companies became a success over night. Some companies falter when they grow too big for their own good, scrapping the once fundamental ideals on which their company was built. Some take the domestic or international success and run with it, staying committed to their roots. Is sacrificing your brand identity worth it to become an icon? It is this process of defining a brand that is compelling. A company that views business as more than just the bottom line. A company whose success is not based on its net worth, but rather the impact that it will have on the community.

History

Before and After: The Age of Schultz

Starbuck’s had a modest beginning, founded by Jerry Baldwin, Zev Siegel, and Gordon Bowker with $8,000 in cash and loans as their initial capital. The first store, originally called “Starbucks Coffee, Tea, and Spice,” was located across from Pike Place Market in Seattle, and was opened in 1971[1]. In fact, the store didn’t even sell any drinks at first. Instead, they sold premium coffee beans and specialty coffee equipment.  With the guidance of Alfred Peet, Starbuck’s rose to become the largest coffee roaster in Washington by 1980, with 6 shops across the state.[2] Early in the 1980’s, Siegel left the coffee business, leaving the remaining founders to manage the company. However, co-owner Gordon Bowker spent most of his time on external projects, including the launch of a microbrewery. This placed the majority of the responsibility in the hands of Baldwin, who took over as CEO. 1982 brought the arrival of Howard Schultz, who joined Starbucks as the director of retail operations and marketing.[3] Within the infancy of his employment, he traveled to Italy. It is said that this is where Schultz experienced his first cafe latte, and was so vastly impressed by the popularity and feel of espresso bars, that he was inspired to develop a coffeehouse culture in Seattle. When Baldwin was first approached with the idea, he was not all too interested in the idea of an “old world coffee house.” He was, however, persuaded by Schultz, and allowed him to test his theory with a “modest” espresso bar. The results were good, but the founders were still hesitant.

In late 1985, Schultz left Starbucks, convinced that his idea was a profitable endeavor. With funding from Baldwin and Bowker, he founded his own business, Il Giornale. Schultz experienced immediate success with his espresso drinks, and in 1987, purchased Starbucks from its two remaining founders for $3.7 million.[4] Schultz brought everything together under one roof, rebranding everything under the Starbucks Corporation. Schultz now maintained 17 total stores, and began expanding to Chicago and Vancouver.[5] In the next five years, Starbucks would grow to 165 stores, and on June 26th 1992 they went public.

In a few short years, Starbucks would grow tenfold. With the introduction of Frappuccino blended beverages, super-premium ice cream, drive through locations, and expansion into Tokyo, Singapore, England and more, Starbucks was experiencing unprecedented growth, boasting nearly 2,000 stores by 1998.[6]  In 2000, with more than 3,500 stores, Schultz was transitioned to Chairman and Chief Global Strategist. Growth and expansion continued without Schultz at the helm, as new products were introduced, acquisitions were made, and ethical coffee-sourcing guidelines were put into place. In October of 2006, Starbuck’s stood at $37.75 a share[7]. But the recession hit hard. By February of 2009, they had fallen to $9.15 a share.[8] Money was short for most people, and they had to reassess their spending habits. In an effort to get back on track, Schultz returned as CEO. Schultz revamped the company by slowing it down, and focused his efforts on the customer experience. The rebuilding process was not easy. Over the period from 2002 to 2007, Starbucks had nearly tripled the number of stores they had worldwide. People were complaining that Starbucks was beginning to feel more like a fast food restaurant than a coffeehouse. In 2009, the company cut thousands of jobs, and closed 600 underperforming domestic stores.[9] Schultz slowed down the growth of Starbucks in the U.S. but continued to urge further expansion into international markets, where the demand was still high. The plan was working. In 2010, there was an eightfold increase in profits from the first to the second quarter, with a steady amount of that growth coming from international sales. Today, after 40 years in business, Starbucks serves millions of customers every day, with nearly 18,000 retail stores in 60 countries.

 

Corporate and Social Responsibility

“In this ever-changing society, the most powerful and enduring brands are built from the heart. They are real and sustainable. Their foundations are stronger because they are built with the strength of the human spirit, not an ad campaign. The companies that are lasting are those that are authentic…Mass advertising can help build brands, but authenticity is what makes them last. If people believe they share values with a company, they will stay loyal to the brand.”[10]

“Don’t be threatened by people smarter than you. Compromise anything but your core values. Seek to renew yourself even when you are hitting home runs. And everything matters.”[11]

For decades, Starbucks’ existence has been marked by its unique approach. In 1997, Schultz published his book, Pour Your Heart Into It: How Starbucks Built A Company One Cup At A Time, where he discussed the principles behind the success of Starbucks, and how he was able to make it all happen. He knew that his business plan was strong, and that it would be successful. He was able to carry this confidence over to his investors, and his employees. When Schultz first took over Starbucks in the 1980’s, morale was low. Schultz wanted to create a system that would establish trust between management and the employees through due recognition and motivation, and this process worked. He was able to create an environment where employees could see that the company truly cared about them. People were the most important resource of an organization.[12] Schultz fostered an atmosphere that was passionate about every facet of its existence, from the customer to the coffee, but he took it a step further. It wasn’t about being a good company; it was about being a responsible company.

Part of the Starbucks mission statement declared “we’ve always believed that business can – and should – have a positive impact on the communities they serve.” This included efforts in the arena of social and environmental issues in the areas where Starbucks coffee was being produced. Starbucks mission was to impact long term investments such as the construction of schools, health clinics and other facilities that would improve the well being of all families involved in coffee cultivation.[13]

“By investing in sustainable business practices and the origin countries that provide our coffees, we encourage a continued high quality supply.” CSR Fiscal 2001 Report

Starbucks has a long history of corporate and social responsibility. In order to “strike a balance between profitability and social conscience,” it partakes in a set of goals for ethical sourcing, environmental stewardship, and community involvement.[14] The goal is to improve the standard of living for the farmers, while ensuring sustainability of their supply chain. In 1991, Starbucks partnered with CARE, a non-profit international relief and development organization. CARE’s focus is to help fight global poverty, and make an impact in communities around the world to improve education, prevent the spread of disease, and increase access to clean water and sanitation.[15] In its partnership with Starbucks, CARE has served communities in Ethiopia, Guatemala, Indonesia and elsewhere on projects to improve community and civil society development, health and nutrition, bio-diversity conservation, and natural disaster relief. By the end of the fiscal year of 2001, Starbucks had donated and helped to raise over $1.8 million dollars for various CARE programs, which helped to provide aid to almost 3 million people in Africa.[16]

Further philanthropic efforts came in the form of the Starbucks Foundation which was created in 1997. The main focus of the foundation was literacy, with a goal of providing educational opportunities to traditionally underserved communities. While the foundation is separate from the Starbucks Coffee Company, its funding comes from Starbucks, individual donations, and the royalties from Schultz’s book.[17] In 2001, Starbucks donated $1.3 million to the foundation.

Perhaps one of the most far reaching decisions made by Starbucks was its advocacy of Fair Trade Certified coffee and their partnership with Conservation International in 1998 to promote sustainable coffee growing practices. In 2000, Starbucks established a licensing agreement with TransFair USA to sell certified coffee in the U.S. and Canada. Under this agreement, suppliers of “Shade Grown Mexico” saw a 50% increase in their exports, while receiving a 60% price premium over local prices for their coffee.

“In the Fair Trade System, farmers form and participate in democratically run cooperatives that, in turn, may sell their beans directly to importers, roasters, and retailers at favorable guaranteed prices.”[18]

As a result of the partnership with TransFair USA, the number of companies offering Fair Trade Certified coffee in the U.S. tripled by 2001. Later that year, Starbucks and Conservation International produced ethical coffee sourcing guidelines, which would reward farmers for using sustainable growing practices. In order to continue improving the farmers standard of living, Starbucks offered outright prices, long term contracts, direct purchasing, and access to credit to their suppliers.

In 2004, Starbucks worked again with Conservation International to create a verification system for Coffee and Farmer equity, (C.A.F.E. practices for short). Under this system to ensure ethical sourcing, farms were evaluated by more than 200 social, economic, and environmental indicators.[19] In 2011, 86% of Starbuck’s coffee was C.A.F.E. Practices verified.

“Over the course of our longstanding partnership, we have seen Starbucks raise the bar for the entire industry, by expanding their innovative work with coffee-growing communities. These cutting edge efforts have enabled Starbucks to help improve farmer livelihoods while protecting some of the world’s richest and most valuable ecosystems. Starbucks’ leadership in environmental and social stewardship is a great example of a company using its size for good.” Peter Seligmann, Co-Founder, Chairman, and CEO of Conservation International[20]

Awards, Honors, and Recognitions

Starbucks has enjoyed great success in its 40 year existence, and has been recognized for a number of achievements. Over the period from 1998-2012, Starbucks was rated as “One of the 100 Best Companies to Work For” by Fortune Magazine a total of 14 times.[21]In 2011, Starbucks received the “Sustainability Design Award” from Global Green USA, and in that same year, Howard Schultz was recognized as “Business Person of the Year” by Fortune. See Exhibit 3 for a comprehensive list of recent awards and recognitions.

The Market

Competition in the Industry

Starbucks is defined under the “Services” sector, and the “Specialty Eateries” industry, with a market cap of $37.56 Billion. It’s primary competitor is Dunkin Brands, but its extended list of competitors includes McDonald’s Corporation and Nestle.

Financial Growth, Expansion, and Acquisitions

Starbucks was able to achieve unprecedented growth in its 40 year existence, even with the financial drought that currently plagues our economy. They have been able to expand domestically and internationally with great success, and at an impressive rate. When Howard Schultz purchased the company in 1987, there were 17 total stores. 4 years later, that number grew to 84 stores, nearly a 5 fold increase. From 1990 to 1995, the company experienced a percent growth rate of over 700%. From 1995 to 2000 there was a percent growth rate of 417%, and from 2000 to the present, there was a 414% growth rate. The company currently stands at over 18,000 stores in more than 60 countries.

In terms of profitability, the company has performed solidly, posting revenue growth rates in the double digits many times over the past decade.[22] In the past five years, Starbucks has outperformed its competition, raking in almost 80 times more revenue in 2012 alone.[23]

Starbucks extended its growth opportunities through partnerships and acquisitions of other companies. Through its existence, it has acquired companies such as Tazo Tea, Seattle Coffee, Ethos Water, and a coffee equipment company. Starbucks looks to grow even further in the coming years. They have announced a partnership with Square,[24] (the digital card reader that can be used with smart phones for mobile transactions) and have introduced the Verismo system, a premium single cup-espresso machine, which will be coming soon.

Conclusion

What began as a small idea in Seattle has grown into a global phenomenon. In addition to its business success, it has been able to maintain its corporate integrity and has made substantial contributions on the social, economic, and environmental fronts. Over a period of 40 plus years, staying true to their core values has been a landmark of the company. Despite having a luxury product, they have been able to weather the economic turmoil, and adapt to the conditions. They have stayed strong, and their revenue numbers have continued to rise. Their ability to contribute and be viewed as a genuine corporation has created a benchmark for the rest of the industry, and business at large. They have consistently followed through with their philanthropic endeavors, rather than providing a lip service. It isn’t all about the money for them. They truly believe in the causes that they are involved in.

 

Works Cited


[1] “Starbucks Coffee Company Timeline.” TWOOP Timelines. N.p., n.d. Web. 11 Nov. 2012. <http://www.twoop.com/food_drink/archives/2005/10/starbucks_coffee_company.html&gt;

[2] “Starbucks History – A Magnificent Tale of Innovation in the Coffee Industry.” Gourmet Coffee Zone. N.p., n.d. Web. 18 Nov. 2012. <http://gourmet-coffee-zone.com/starbucks-history.html&gt;.

[4] “Starbucks History – A Magnificent Tale of Innovation in the Coffee Industry.” Gourmet Coffee Zone. N.p., n.d. Web. 18 Nov. 2012. <http://gourmet-coffee-zone.com/starbucks-history.html&gt;.

[7] Exhibit 1

[8] Exhibit 2

[9] Harrer, Andrew. “Starbucks Corporation.” The New York Times. N.p., 26 Jan. 2012. Web. 18 Nov. 2012. <http://topics.nytimes.com/top/news/business/companies/starbucks_corporation/index.html?8qa&gt;.

[10] Schultz, Howard, and Dori Jones. Yang. Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time. New York, NY: Hyperion, 1997. Print.

[11] Schultz, Howard, and Dori Jones. Yang. Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time. New York, NY: Hyperion, 1997. Print.

[12] Schultz, Howard, and Dori Jones. Yang. Pour Your Heart into It: How Starbucks Built a Company One Cup at a Time. New York, NY: Hyperion, 1997. Print.

[13] “Corporate Social Responsibility Annual Report: Fiscal 2001.” Starbucks Corporation. N.p., 2001. Web. 27 Oct. 2012.

[15] “About CARE.” CARE. N.p., n.d. Web. 28 Oct. 2012. <http://www.care.org&gt;.

[16] “Corporate Social Responsibility Annual Report: Fiscal 2001.” Starbucks Corporation. N.p., 2001. Web. 27 Oct. 2012.

[17]“Corporate Social Responsibility Annual Report: Fiscal 2001.” Starbucks Corporation. N.p., 2001. Web. 27 Oct. 2012.

[18] Corporate Social Responsibility Annual Report: Fiscal 2001.” Starbucks Corporation. N.p., 2001. Web. 27 Oct. 2012.

[19] “Starbucks Global Responsibility Report – Goals and Progress 2011.” Starbucks Corporation. N.p., 2011, Web. 19 Nov. 2012

[20] “Starbucks Global Responsibility Report – Goals and Progress 2011.” Starbucks Corporation. N.p., 2011, Web. 19 Nov. 2012

[21] Exhibit 3

[22] Exhibit 4

[23] Exhibits 5,6

[24] York., Claire Cain Miller; Brian X. Chen Contributed Reporting From New. “Starbucks And Square To Team Up.” The New York Times. The New York Times, 08 Aug. 2012. Web. 20 Nov. 2012. <http://www.nytimes.com/2012/08/08/technology/starbucks-and-square-to-team-up.html?_r=0&gt;.

 

 

Appendices

Exhibit 1:

Citation: Yahoo! Finance

 

Exhibit 2:

Citation: Yahoo! Finance

 

Exhibit 3:

 

Exhibit 4:

Citation: Ycharts

 

Exhibit 5:

Citation: Yahoo! Finance

 

Exhibit 6:

Citation: Yahoo! Finance

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