Examination Thesis, 2005
45 Pages, Grade: 1
Background Page 3/45
Starbucks is the child of two parents: 1.) original Starbucks founded in 1971
2.) Vision and values which Howard Schultz brought to the company
Fig. 1: Howard Schultz / Source: Seattle Weekly
Starbucks Cooperation is a Seattle, Washington based coffee company. The spiritual grandfather of Starbucks is Alfred Peet a Dutchman who introduced America to dark roasted coffees. 1966 he opened a small store Peet’s Coffee and Tea on Vine Street in Berkley. 1970 he opened a coffee store in Seattle. Starbucks was opened in April1971 from three Seattle entrepreneurs - Jerry Baldwin (English Teacher), Zev Siegel (history teacher) and Gordon Bowker (writer). Starbucks doors were opened with thirty different varieties of coffee beans - they had coffee beans from all over the world, like Sumatra, Kenya, Ethiopia, Costa Rica, a.s.o. The three entrepreneurs were no typical businessmen - they loved coffee and tea and wanted Seattle to have access to the best. None of them aspired to build a business empire. Their prime product was the selling of whole bean coffee in one Seattle store - Pike Place Market.
All three learned from master Alfred Peet in Berkley about coffee roasting. The roast was what differentiated Starbucks from others - they called it “The Full City Roast” (now called “The Starbucks Roast). Schultz’s way to Starbucks
After his college degree at Michigan college in 1975 Schultz worked for Xerox as a salesman in New York and afterwards -1979 - he worked for Hammerplast a Swedish company with an office in North Carolina. He sold components for kitchen and furniture. He went back to New York as a vice president and general manager of Hammerplast. Schultz’s adventure started in 1981 when he traveled from New York to Seattle to check out a popular coffee bean store called Starbucks that had been buying many of Hammerplast’s Swedish drip coffeemakers he was selling. At that time - 1981 - retail merchandising manager was Linda Grossman - she met Schultz and introduced him to the owners of the company - Gerald Baldwin and Gordon
Italian Espresso Page 4/45
Bowker. The third partner Zev Siegel sold out of the company in 1980 - for him there came a silent partner named Steve Donovan.
Schultz was very impressed with the owners’ dedication to educating the public about the wonders of coffee connoisseurship - and he wanted to be a part of that company. It took Schultz a year to convince Jerry Baldwin to hire him in 1982 for managing retail and marketing parts.
In between the business had grown into five stores selling the coffee beans, a roasting facility, and a wholesale business for local restaurants. Italian espresso
1983 Schultz attended an international housewares show. He discovered the ritual and the romance of coffee bars in Italy. He recognized that coffee is an integral part of the culture in Italy - Italians start their day at an espresso bar and later in the day return with their friends. Schultz also found out that Starbucks sold great coffee beans, but didn’t serve coffee by the cup.
The Italians had turned the drinking of coffee into a symphony, and it felt right. This also Schultz wanted to do at Starbucks, he brought this new ideas to the owners, but was turned down.
In April 1984 Jerry Baldwin agreed to test an espresso bar when Starbucks opened its sixth store.
Also in 1984 Starbucks bought Peet’s Coffee and Tea. At this time Peet’s Coffee and Tea had around the same size as Starbucks - five locations. After this deal the company was now so heavily leveraged that there was no money available for growth or innovation.
But Schultz wanted to grow faster with the Italian concept he had seen at his trip to Italy. So in late 1985 Schultz left Starbucks to start own company - a coffee-bar-enterprise - with the name “Il Giornale” (pronounced: ill jor-nahl-ee).
The first surprise for Schultz after leaving Starbucks was that Jerry Baldwin invested $150k of Starbucks money. The reason was that it wasn’t a business where Starbucks wanted to go - but supported Schultz with his idea.
Gordon Bowker and Schultz visited nearly 500 espresso bars in Milan and Verona - looking for investments in coffee bars in US.
They started the first store running in April 1986, but Schultz was still looking for investors.
Harold Gorlick out of the heating and plumbing business invested $200k - the biggest single check which was done.
At that time it was very difficult to get investors, because all were investing in proprietary ideas or technology. If you hold a patent to your product so much the better - biotechnology, software or telecommunications.
Il Giornale didn’t fit in any of these paradigms. But coffee was the second most widely traded commodity in the world, after oil. But nobody wanted to invest. There was only one last chance the three business leaders Jack Benaroya, Herman Sarkowsky and Sam Stroum - locally they were titians who had developed some of the tallest buildings - most successful residential complexes and sturdiest businesses in Seattle.
They were ready to invest a lot of money, but with some stiff demands - lower price and options and board seats. They invested $750k. Steve Sarkowsky - Herman’s son became a director.
Combining Starbucks and Il Giornale Page 5/45
Café Allegro was a prototype for what Starbucks later became Dave Olson and Schultz agreed to work together. Today Dave is senior vice president for coffee at Starbucks. He helped shape its values, bringing a strong romantic love for coffee, unshakable integrity, disarming honesty and an insistence on authenticity in every aspect of the business. Dave is a rock - part of the foundation of the company. The plan was to open 75 stores in 5 years in North America, with stores in every major city.
The first Il Giornale store opened in April 8 th ,1986 - nearly 300 customers visited the store over time per day.
At the beginning a lot of mistakes were made - Schultz and Dave accepted the fact that they had to adapt the store to customer’s needs, like adding chairs and varying the music. Within 6 month more than 1.000 customers were served a day. The second store was opened after six month after the first at Seattle Trust Tower at Second and Madison Third store. After that they went international in Vancover, British Columbia - Sea Bus Terminal opened in April 1987. By mid 1987 sales were around $500k a year for each store. In 1987 Starbucks (Jerry Baldwin and Gordon Bowker) decided to sell the Seattle stores, the roasting plant and the name Starbucks, keeping only the Peet’s assests. Schultz new he had to buy Starbucks, he needed to find $4 million to by Starbucks. One of Schultz’ investors wanted to buy Starbucks alone, without Schultz. Now Schultz had to handle, he felt like as though his life had ended. Within Schultz & Co managed to raise the $ 3.8 million they needed to buy Starbucks. By August 1987 - Starbucks belonged to Schultz as a new owner and CEO. Combining Starbucks and Il Giornale
After buying Starbucks - Schultz told people his vision of building a national company. Morale at Starbucks was terrible at that time. The only way to win the confidence of Starbucks employees was to be honest with them, to share future plans and exitements with them, and then to follow through and keep the word, delivering exactly what promised.
Starbucks management (4 persons) now had to figure out not only how to merge Il Giornale and Starbucks, but also how to open 125 new stores in five years - as promised to investors:
- 15 stores first year
- 20 stores second year
- 25 stores third year
- 30 stores fourth year
- 35 stores fifth year
Estimated sales was around $60 million - looked good on paper. So the first thing was that Schultz needed to hire experienced managers, and take steps immediately to win over the support and enthusiasm of Starbucks’ people. Ron Lawrence had to close the offering, merge the financial records of Starbucks and Il Giornale - put a new computer system in place, switch accounting systems and conduct a fiscal year end audit .
Lawrence Maltz invested in Starbucks and joined the company as executive vice president in Nov.1987. He was in charge of operations, finance and human resources.
Combining Starbucks and Il Giornale Page 6/45
He was 15 years older than Schultz and had 20 years experience in business, including eight years as president of a profitable public beverage company. Schultz handled expansion, real estate, design, marketing, merchandising and investor relations. He wanted to create a brand name respected for the best in coffee and wellrun company admired for its corporate responsibility.
Schultz wanted to elevate the enterprise to a higher standard, to make their people proud of working for a company that cared for them and gave back to their community - not only measured in stores.
Schultz went back to Terry Heckler, who had helped with the name Starbucks years before. One corporate name is needed - the name Il Giornale is hard to write, spell and pronounce. People find it obscure.
Starbucks in contrast has magic. It piques curiosity - to mail order it was from the beginning be known across America.
Finally Heckler opted to use Starbucks - a name people could relate to, would provide enormous equity.
In December 1987 there were new stores prepared to open in Chicago and Vancouver. With this openings also the initial doubts which some employees had - began to fade and trust began to build.
Daryl Moore a college student had started at Starbucks 1981 as a part-time-clerk in the Bellevue store - voted against unionization in 1985. Daryl didn’t see the need for a union as long as Starbucks managers were responsive to employee concerns. He wrote a letter and carried it to many stores in person to get signatures of people who no longer wished to be represented by the union.
The outcome of Daryl’s efforts were that the union no longer represented the store employees.
For five years, from 1987 to 1992 Starbucks remained a privately held company. The target was to built up a strong home base in Seattle with expanding to Portland and Vancouver.
The first store in Chicago opened in Oct.1987 - near the corner of West Jackson and Van Buren, one block from Sears Tower.
Over the next six month three more stores were opened in that area. But over two years tens of thousands of dollars were lost in Chicago, because the business was not running. Chicago was different of the climate and behavioral of the people. Until 1990 - after Howard Behar was hired to run the retail operations - Chicago began to turn the corner. The solution included hiring experienced managers and raising the prices they charged, to reflect higher rents and labor costs. Today Starbucks has become so much a part of the landscape and culture of Chicago that a lot of residents think it’s a local company.
As promised to investors on the base of eleven stores, following stores were opened:
- 15 stores in fiscal 1988
- 20 stores in 1989
- 30 stores in 1990
- 32 stores in 1991 and
- 53 in 1992
Store openings Page 7/45
If we compare the promised data to the real data - in real it was much better as promised to the investors.
Fig. 2: Store openings promised / Source: T.Strutzmann
But with greater visibility, Schultz became increasingly afraid of waking up sleeping giants - the big packaged food companies. If they had begun to sell speciality coffee early on, they could have wiped Starbucks out.
But with every growing and new market entering it get harder and harder for them to displace Starbucks.
The competitive strategy was to win customers by offering the best coffee and customers service and an inviting atmosphere.
Starbucks had started serving customers by mail in the mid-1970s. At first - just mailed out a simple brochure listing products.
In 1988 the first catalogue was developed and began expanding mail-order base to targeted demographic groups. In 1990 in a small phone and computer system was invested to set up their 800 number.
By 1991 - Starbucks had ventured into the mail-order catalogue business, licensed airport stores, expanded into California, and had just over 100 retail stores.
By late 1989 it was clear that Starbucks had to reach outside Seattle for institutional investors, which meant approaching the venture capital community. As the chairman of a company that had recently gone public, Jeff Brotman had the connections and the credibility to make contracts for us.
Starbuck’s board remained stable for six years, adding only two inside directors. As Starbucks expanded into more markets, they needed someone familiar with the process of opening and running many retail stores at once.
They hired Howard Behar for that job, a man who had 25 years of retail background in the furniture business and at Thousands Trails, an outdoor resort developer. In 1990 as Starbucks prepared for more sophisticated financing, they began scouting for a chief financial officer with broad experience. It was Orin Smith they hired, he had managed far larger and more complex organizations than Starbucks. He had worked as udget director for the State of Washington for five years and before that for Deloitte and Touche for 13 years.
People Page 8/45
By 1990 the Starbucks management team worked so close together that people called them H 2 0 for Howard, Howard and Orin. They stood for the vision, the soul and the fiscal responsibility.
In Oct.1990 Schultz could report to the board that Starbucks had achieved the first profitable year. 1991 sales shot up 84 percent and the company turned profitable. By 1991 - Starbucks was ready for the next big market entry - California, later Los Angeles and 1992 San Francisco.
With all this new stores the distance to the roasting facility was getting bigger and bigger and the flavour of the coffee beans was getting lost. 4. “Flavorlock”- bags
This was the reason why Starbucks started to use “Flavorlock”- bags, a kind of vacuum packing with a one way valve to allow carbon dioxide gases to escape without allowing harmful air and moisture in. This was a key decision that made expansion strategy feasible. It meant - no need to build a roasting plant in every city in which Starbucks entered.
“Treat people like family, and they will be loyal and give their all. Stand by people and they will stand by you” It’s the oldest formula in business, but by the late 1980s it seemed to be forgotten.
Starbucks began offering full health benefits to all part-timers in late 1988. They offer health-care coverage to all employees who have terminal illnesses, paying medical costs in full from time they are not able to work, until they are covered by government programs, usually 29 months.
In April 1994 President Clinton invited Schultz to Washington D.C., for a one-to-one meeting in the Oval Office. Schultz should tell him about Starbucks’ health-care program.
Also a Mission-Review-system was set up in 1990 and is still in place today. Every employee in each store would be given a postcard-sized comment card and encouraged to report to the Mission Review team if they saw a decision that did not support Starbucks Mission Statement.
Any employee, anywhere, can make a suggestion or report an action that seems contradictory to our purpose - a relevant manager will respond within two weeks. Employee - as a partner
With the introduction of the so called Bean stock - a stock option plan which turned every employee of Starbucks into a partner. In May 1991 the plan of “Bean Stock” was presented to the board. Over 700 employees got granted stock options when Starbucks was still private. Using the word “employees” was stopped they called all people now “partner”. Everyone is eligible for stock options as soon as he or she has been with Starbucks for six month - even part-timers qualify.
Going Public Page 9/45
The company went public in June 26 th , 1992, trading on the Nasdaq under the symbol SBUX implemented an IPO for 2.1 million shares at $17 a share, raising $28 million in net proceeds to further fuel the company’s expansion.
Starbucks’ initial public offering of common stock in June 1992 turned into one of the most successful IPOs of the year.
After initial public offering, Starbucks continued to grow in terms of store development and new enterprises. When Starbucks went public it had 165 stores. Within five years the number of Starbucks stores grew tenfold, with locations in US, Japan and Singapore.
Expansion in terms of stores as well as concept has been a key element of Starbucks' success in the past decade. Stores have sprouted up in San Diego, Denver, Minneapolis, Boston, Atlanta and most everywhere in between. One intersection in Vancouver, B.C. boasts two stores kitty-corner from each other. You can find Starbucks at Nordstrom, Barnes and Noble and even Chicago's Wrigley Field. Yes, Starbucks is everywhere. And it's more than just coffee these days. You can still get a cappuccino or a caffe latte at Starbucks, but you can also have a mini-shopping spree while you sip. Over two dozen varietals and blends are available for purchase, bearing exotic names like Costa Rica Tres Rios and Ethiopia Yergacheffe. Furthermore - since the company owned its stores, it did not have to worry about answering to unhappy franchisees about the closeness of some of its locations. By 1996, Starbucks had more than 1,000 stores in the U.S.
That same year, Starbucks initiated its global expansions, opening its first international store in Tokyo Japan, as already mentioned before. The success of Starbucks in a country where green tea was the national drink indicated the concept could work in other cultures as well. By 2002, Starbucks had stores on four continents. At the end of fiscal 2001, profits had grown 32 percent to $181.2 million on sales of $2.6 billion, from profits of $94.6 million on sales of $2.2 billion in 2000. Company-operated retail stores accounted for approximately 84 percent of net revenues in 2001, with the balance coming from Starbuck’s specialty operations, which include business alliances, international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer joint ventures, and other initiatives. By early 2002, Starbucks was serving an average of 18 million customers a week worldwide, and new stores were opening daily.
Starbucks Stores Page 10/45
Following map shows Starbucks stores by country - 2003:
Fig. 3: Starbucks Stores by country / Source: INA (Princeton Edu.)
Starbucks successful method to enter international business
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