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Sta
ucks—Going Global FastCASE 1-1
The Sta
ucks coffee shop on Sixth Avenue and Pine Street in
downtown Seattle sits serene and orderly, as unremarkable as
any other in the chain bought years ago by entrepreneur Howard
Schultz. A few years ago, however, the quiet storefront made front
pages around the world. During the World Trade Organization talks
in November 1999, protesters flooded Seattle’s streets, and among
their targets was Sta
ucks, a symbol, to them, of free-market capi-
talism run amok, another multinational out to blanket the earth.
Amid the crowds of protesters and riot police were black-masked
anarchists who trashed the store, leaving its windows smashed and
its tasteful green-and-white decor smelling of tear gas instead of
espresso. Says an angry Schultz: “It’s hurtful. I think people are
ill-informed. It’s very difficult to protest against a can of Coke, a
ottle of Pepsi, or a can of Folgers. Sta
ucks is both this ubiqui-
tous
and and a place where you can go and
eak a window. You
can’t
eak a can of Coke.”
The store was quickly repaired, and the protesters scattered to
other cities. Yet, cup by cup, Sta
ucks really is caffeinating the
world, its green-and-white emblem beckoning to consumers on
three continents. In 1999, Sta
ucks Corp. had 281 stores a
oad.
Today, it has about 7,000—and it’s still in the early stages of a plan to
colonize the globe. If the protesters were wrong in their tactics, they
weren’t wrong about Sta
ucks’ ambitions. They were just early.
The story of how Schultz & Co. transformed a pedestrian com-
modity into an upscale consumer accessory has a fairy-tale quality.
Sta
ucks grew from 17 coffee shops in Seattle to over 19,000 outlets
in 58 countries. Sales have climbed an average of 20 percent annu-
ally since the company went public, peaking at $10.4 billion in 2008
efore falling to $9.8 billion in 2009. Profits bounded ahead an aver-
age of 30 percent per year through 2007, peaking at $673 million,
then dropping to $582 million and $494 million in 2008 and 2009,
espectively. The firm closed 475 stores in the U.S. in 2009 to reduce
costs. But more recently, 2017 revenues rebounded to $22.4 billion
profits with an operating profit of $4.1 billion.
Still, the Sta
ucks name and image connect with millions of
consumers around the globe. Up until recently, it was one of the
fastest-growing
ands in annual BusinessWeek surveys of the top
100 global
ands. On Wall Street, Sta
ucks was one of the last
great growth stories. Its stock, including four splits, soared more
than 2,200 percent over a decade, surpassing Walmart, General
Electric, PepsiCo, Coca-Cola, Microsoft, and IBM in total returns.
In 2006 the stock price peaked at over $40, after which it fell to just
$4, and then again rebounded to more than $50 per share.
Schultz’s team is hard-pressed to grind out new profits in a
home market that is quickly becoming saturated. The firm’s 12,000
locations in the United States are mostly in big cities, affluent sub-
u
s, and shopping malls. In coffee-crazed Seattle, there is a Star-
ucks outlet for every 9,400 people, and the company considers
that to be the upper limit of coffee-shop saturation. In Manhattan’s
24 square miles, Sta
ucks has 124 cafés, with more on the way.
That’s one for every 12,000 people—meaning that there could be
oom for even more stores. Given such concentration, it is likely to
take annual same-store sales increases of 10 percent or more if the
company is going to match its historic overall sales growth. That, as
they might say at Sta
ucks, is a tall order to fill.
Indeed, the crowding of so many stores so close together has
ecome a national joke, eliciting quips such as this headline in The
Onion, a satirical publication: “A New Sta
ucks Opens in Restroom
of Existing Sta
ucks.” And even the company admits that while
its practice of blanketing an area with stores helps achieve market
dominance, it can cut sales at existing outlets. “We probably self-
cannibalize our stores at a rate of 30 percent a year,” Schultz says.
Adds Lehman Brothers Inc. analyst Mitchell Speiser: “Sta
ucks is
at a defining point in its growth. It’s reaching a level that makes it
harder and harder to grow, just due to the law of large numbers.”
To duplicate the staggering returns of its first decades, Sta
ucks
has no choice but to export its concept aggressively. Indeed, some
analysts gave Sta
ucks only two years at most before it saturates the
U.S. market. The chain now operates more than 7,000 international
outlets, from Beijing to Bristol. That leaves plenty of room to grow.
Most of its planned new stores will be built overseas, representing a
35 percent increase in its foreign base. Most recently, the chain has
opened stores in Vienna, Zurich, Madrid, Berlin, and even in far-off
Jakarta. Athens comes next. And within the next year, Sta
ucks plans
to move into Mexico and Puerto Rico. But global expansion poses
huge risks for Sta
ucks. For one thing, it makes less money on each
overseas store because most of them are operated with local partners.
While that makes it easier to start up on foreign turf, it reduces the
company’s share of the profits to only 20 percent to 50 percent.
Moreover, Sta
ucks must cope with some predictable chal-
lenges of becoming a mature company in the United States. After
iding the wave of successful baby boomers through the 1990s, the
company faces an ominously hostile reception from its future con-
sumers, the twenty- or thirty-somethings. Not only are the activists
among them turned off by the power and image of the well-known
and, but many others also say that Sta
ucks’ latte-sipping sophis-
ticates and piped-in Kenny G music are a real turnoff. They don’t
feel wanted in a place that sells designer coffee at $3 a cup.
Even the thirst of loyalists for high-price coffee cannot be taken
for granted. Sta
ucks’ growth over the early part of the past decade
coincided with a remarkable surge in the economy. Consumer
spending tanked in the downturn, and those $3 lattes were an easy
place for people on a budget to cut back.
To be sure, Sta
ucks has a lot going for it as it confronts the chal-
lenge of regaining its fast and steady growth. Nearly free of debt, it
fuels expansion with internal cash flow. And Sta
ucks can maintain
a tight grip on its image because most stores are company-owned:
There are no franchisees to get sloppy about running things. By
elying on mystique and word of mouth, whether here or overseas,
the company saves a bundle on marketing costs. Sta
ucks spends
just $30 million annually on advertising, or roughly 1 percent of
evenues, usually just for new flavors of coffee drinks in the summer
and product launches, such as its new in-store web service. Most
consumer companies its size shell out upwards of $300 million per
year. Moreover, Sta
ucks for the first time faces competition from
large U.S. competitors such as McDonald’s and its new McCafés.
Schultz remains the heart and soul of the operation. Raised in
a Brooklyn public-housing project, he found his way to Sta
ucks,
a tiny chain of Seattle coffee shops, as a marketing executive in the
early 1980s. The name came about when the original owners looked
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to Seattle history for inspiration and chose the moniker of an old
mining camp: Sta
o. Further refinement led to Sta
ucks, after the
first mate in Moby Dick, which they felt evoked the seafaring romance
of the early coffee traders (hence the mermaid logo). Schultz got
the idea for the modern Sta
ucks format while visiting a Milan
coffee bar. He bought out his bosses in 1987 and began expanding.
The company is still capable of designing and opening a store in
16 weeks or less and recouping the initial investment in three years.
The stores may be oases of tranquility, but management’s expansion
tactics are something else. Take what critics call its “predatory real
estate” strategy—paying more than market-rate rents to keep com-
petitors out of a location. David C. Schomer, owner of Espresso
Vivace in Seattle’s hip Capitol Hill neighborhood, says Sta
ucks
approached his landlord and offered to pay nearly double the rate
to put a coffee shop in the same building. The landlord stuck with
Schomer, who says: “It’s a little disconcerting to know that some-
one is willing to pay twice the going rate.” Another time, Sta
ucks
and Tully’s Coffee Corp., a Seattle-based coffee chain, were com-
peting for a space in the city. Sta
ucks got the lease but vacated the
premises before the term was up. Still, rather than let Tully’s get the
space, Sta
ucks decided to pay the rent on the empty store so its
competitor could not move in. Schultz makes no apologies for the
hardball tactics. “The real estate business in America is a very, very
tough game,” he says. “It’s not for the faint of heart.”
Still, the company’s strategy could backfire. Not only will
neighborhood activists and local businesses increasingly resent the
tactics, but also customers could grow annoyed over having fewer
choices. Moreover, analysts contend that Sta
ucks can maintain
about 15 percent square-footage growth in the United States—
equivalent to 550 new stores—for only about two more years. After
that, it will have to depend on overseas growth to maintain an
annual 20 percent revenue growth.
Sta
ucks was hoping to make up much of that growth with
more sales of food and other noncoffee items but stumbled some-
what. In the late 1990s, Schultz thought that offering $8 sand-
wiches, desserts, and CDs in his stores and selling packaged coffee
in supermarkets would significantly boost sales. The specialty busi-
ness now accounts for about 16 percent of sales, but growth has
een less than expected.
What’s more important for the bottom line, though, is that Star-
ucks has proven to be highly innovative in the way it sells its main
course: coffee. In 800 locations it has installed automatic espresso
machines to speed up service. And several years ago, it began offer-
ing prepaid Sta
ucks cards, priced from $5 to $500, which clerks
swipe through a reader to deduct a sale. That, says the company, cuts
transaction times in half. Sta
ucks has sold $70 million of the cards.
When Sta
ucks launched Sta
ucks Express, its boldest experi-
ment yet, it blended java, web technology, and faster service. At
about 60 stores in the Denver area, customers could pre-order and
prepay for beverages and pastries via phone or on the Sta
ucks
Express website. They just make the call or click the mouse before
a
iving at the store, and their beverage would be waiting—with
their name printed on the cup. The company decided in 2003 that
the innovation had not succeeded and eliminated the service.
And Sta
ucks continues to try other fundamental store
changes. It announced expansion of a high-speed wireless Internet
service to about 1,200 Sta
ucks locations in North America and
Europe. Partners in the project—which Sta
ucks calls the world’s
largest Wi-Fi network—include Mobile International, a wireless sub-
sidiary of Deutsche Telekom, and Hewlett-Packard. Customers sit
in a store and check e-mail, surf the web, or download multimedia
presentations without looking for connections or tripping over
cords. They start with 24 hours of free wireless
oadband before
choosing from a variety of monthly subscription plans.
Sta
ucks executives hope such innovations will help surmount
their toughest challenge in the home market: attracting the next gen-
eration of customers. Younger coffee drinkers already feel uncom-
fortable in the stores. The company knows that because it once had
a group of twentysomethings hypnotized for a market study. When
their defenses were down, out came the bad news. “They either can’t
afford to buy coffee at Sta
ucks, or the only peers they see are those
working behind the counter,” says Mark Barden, who conducted
the research for the Hal Riney & Partners ad agency (now part of
Publicis Worldwide) in San Francisco. One of the recu
ing themes
the hypnosis
ought out was a sense that “people like me aren’t
welcome here except to serve the yuppies,” he says. Then there are
those who just find the whole Sta
ucks scene a bit pretentious.
Katie Kelleher, 22, a Chicago paralegal, is put off by Sta
ucks’ Ital-
ian terminology of grande and venti for coffee sizes. She goes to
Dunkin’ Donuts, saying: “Small, medium, and large is fine for me.”
As it expands,