STARBUCKS

Starbucks opened in 1971, at a time when coffee consumption in America had been declining for a decade. The decline stemmed from rivalry among the major coffee brands, which were competing on price. As a result, they were using cheaper coffee beans to reduce costs, which compromised the quality of the coffee. Starbucks' founders decided to experiment with a new concept: a store that would sell only the finest imported coffee beans and coffee brewing equipment. The original store did not sell coffee by the cup, only beans. You could get a good cup of coffee, but you had to make it yourself at home. Howard Schultz came to Starbucks in 1982 and saw a new possibility for the company.

While in Milan on business, Schultz walked into an Italian coffee bar and had an epiphany with his espresso. "There was nothing like this in America. It was an extension of people's front porch. It was an emotional experience," he said. He knew right away that he wanted to bring this concept to the United States. Schultz set about creating an environment for Starbucks coffeehouses that would reflect Italian elegance melded with American informality. Schultz envisioned that Starbucks would become a "personal treat" for its customers, a "Third Place"-a comfortable, sociable gathering spot bridging the workplace and the home. Starbucks' geographical expansion throughout the United States was carefully planned. The management team agreed that all stores would be owned and operated by the company rather than as a franchise.

In building a strong brand, Schultz knew that he and his executive team needed complete control to cultivate an unparalleled image of quality. In too many other companies, franchisees did business their own way. Franchisees could potentially sacrifice Starbucks' commitment to excellence in order to turn higher profits. Starbucks did not want to allow the corner-cutting that had caused the original decline in Americans' consumption of coffee. Starbucks employed a "hub" expansion strategy, in which coffeehouses entered a new market in a clustered group. For each region, a large city served as the hub. Teams of trained professionals supported the new cluster of stores. In the large hub market, the company rapidly opened 20 or more stores within the first two years. From the established hub, Starbucks stores then spread to new "spoke" markets: smaller satellite cities and nearby suburban locations.

The joke about two Starbucks across the street from each other reflects Starbucks' strategy. The deliberate saturation often cannibalizes 30 percent of one store's sales by introducing a store nearby. But this drop in revenue is offset by efficiencies in marketing and distribution costs, and the enhanced image of convenience. A typical customer stops by Starbucks 18 times a month. No American retailer has a higher frequency of customer visits. Starbucks expanded to Tokyo in 1996. Although detractors said that fastidious tea-drinking Japanese would never buy coffee in paper cups, Starbucks proved them wrong. Locations in Japan have two and a half times the annual sales of those in the United States.

There are now over 500 Starbucks locations in Japan, and the country is the company's most profitable region anywhere. When expanding globally, Starbucks also used acquisitions. In 1998, it gained a foothold in the British coffee market by buying the London-based Seattle Coffee Company. In 2001, it made its first foray onto the Continent, opening locations in Switzerland and Austria and then Spain, Germany, and Greece. Interestingly, Starbucks is bucking the typical European coffeehouse trend by making its coffeehouses nonsmoking. About 40 percent of Europeans smoke. Critics said Starbucks would lose half of its market by prohibiting smoking at its coffeehouses, but Starbucks was unfazed. The first store in Vienna had 100,000 guests in the first two months. The controversial nonsmoking policy received a positive response because Starbucks couched it in terms of the coffee, not health. Signs in stores say "Aroma protection through smoke-free space" and then thank customers for not smoking. Howard Schultz stepped down as CEO in 2000, but he remains chairman and "Chief Global Strategist." Starbucks currently has over 7,400 stores, 1,460 of which are outside the United States in over 30 countries. Schultz eventually sees having 25,000 stores worldwide; he wants to see a Starbucks in every country in the world. But there's one country that especially has his eye: Italy, where the whole Starbucks concept began.

Discussion Questions

1. What have been the key success factors for Starbucks?

2. Where is Starbucks vulnerable? What should it watch out for?

3. What recommendations would you make to senior marketing executives going forward? What should the company be sure to do with its marketing?