Howard Schultz Strategy with Starbucks
When Howard Schultz first experienced Starbucks Coffee, Tea and Spice he was immediately smitten by the operations and business culture, and actively pursued a job with them. At that time, Starbucks Coffee, Tea and Spice was an 11 year old coffee shop with six stores in Seattle specializing in high-quality coffee beans. Starbucks Coffee, Tea and Spice desired to bring fine coffee to their customers, so to that end, they imported quality coffee beans, roasted them to their own exacting specifications and sold the beans and high-end coffeemakers to their customers, so customers could make superb coffee at home.
The only coffee brewed onsite was the sampling of a roast, in order for a customer to determine if they wanted to buy that flavor, and as part of the education of their customers base to appreciate, and presumable buy more, quality coffee over the common variety available at the grocery store. Schultz, after a company trip to Italy where he accidently discovered the espresso bars of Milan, came back home with an idea of how to transform the business. His excitement was not shared by the owners, and when little changed over the next two years, Schultz left Starbucks Coffee, Tea and Spice to start his own company Il Giornale.
At Il Giornale he did what he wanted to do at Starbucks Coffee, Tea and Spice – create the energy, ambience and community of the Italian coffeehouses in Seattle. Within two years the owners of Starbucks Coffee, Tea and Spice wanted to sell their business and Schultz happily purchased and combined both businesses, calling them Starbucks Corporation (SBUX). Schutlz, now in possession of the original stores, the roasting plant and his coffeehouses, was ready to fully explore his strategy.
His plan was to create a place where his customer could enjoy premium coffee and feel pampered and relaxed, making the stop at his coffeehouse a part of the customers’ day – a 3rd place where they could go – an “urban oasis” (Rumelt, 2011) (the 1st and 2nd place are home and work). This would be a treasured place, just for themselves or to meet with friends. Of course this unique experience was envisioned to expand nationally and create exponential sales as Starbucks became the place to be!
To realize this ideal, Schultz needed to attract the right employees and engage his staff to behave so that “customers (had) a very positive experience in its stores. ” (Thompson & Shah, 2010) He did this by a variety of methods, sourced from the six guiding principles the employee team came up with. He was able to achieve the 4th principle –“develop enthusiastically satisfied customers all of the time” – by having happy employees (1st principle), commitment to sourcing the best beans and standards to make the ‘perfect cup’ (3rd principle), and creating an emotional connection to his customers. Schultz firmly believed that Starbucks had to be a great place to work in order to provide the atmosphere and service that he envisioned. ” (Brown, 2011) He realized that in order for his employees to be happy, he needed them to trust and feel they could communicate without retribution, and to feel valued. One of the ways he demonstrated their value to the company was to provide health care to even his part time baristas. Employees, now called ‘partners,’ were supported by extensive training in coffee knowledge, brewing, and how to “go out of their way … to make sure customers were fully satisfied. (Thompson & Shah, 2010) Furthermore, they were rewarded by a recognition program which acknowledged excellence in brewing, customer service, leadership, savings, profits, and other activities that supported the company’s mission. Starbucks broadened their commitment to their staff by offering employee stock options to all employees, and later this would expand to include employee stock purchase programs. Schutz’s plan created a new romance with coffee and the coffeehouse. His customers flocked to experience the ‘experience. Customers appreciated Starbucks dedication to fine coffee and the attention paid to them from the moment they walked into the store. Starbucks discovered that “the connections we make in communities create[d] a loyal following. ” (starbucks. com) Customers spent afternoons at Starbucks. They brought their work to Starbucks. They dated at Starbucks. And they came back! Sometimes daily. Schultz’s strategy was a success. Starbucks became the number 1 retailer of specialty coffees. When Schultz took a break from everyday operations as CEO in 2000, Starbucks had grown to 3,501 stores.
What a growth from a start of 11 stores and 100 employees in 1987. Two CEOs followed Schultz’s tenure and Jim Donald, the second one, put increasing the number of stores and store efficiencies as his strategy above customer service driving the business. “Complaints surfaced that Starbucks felt more like a fast-food restaurant than a coffeehouse. ” (New York Times ~ Business Day, 2012) This pursuit, along with the Great Recession, created havoc in Starbucks finances, driving stock price “from a high of $40 (5/1/2006) to $8 (11/17/2008). ” (Living Economics) At that point, the Board usted Jim Donald and asked Schultz to come back as CEO and “lead a major restructuring and revitalization initiative. ” (Thompson & Shah, 2010) Just like the first time he walked into Starbucks in 1981, Schultz wanted to be transported by the aromas and the ambience. He found the corporation he came back to missing those points. Making of breakfast sandwiches, added to compete with encroaching competitors, diffused the rich smell of coffee and distracted from the core product. Growth and appeasing Wall Street appeared to have become the product.
His dream to “inspire and nurture the human spirit – one person, one cup and one neighborhood at a time” (starbucks. com) would need a brutal review of what wasn’t working and what needed to change. “Mr. Schultz faced a difficult task: He had to slow down the company to make stores feel more like hip neighborhood coffeehouses while also delivering the steady growth that investors have come to expect from Starbucks. ” (New York Times ~ Business Day, 2012) Schultz “concluded that growth had become a ‘carcinogen’ and that the company needed a transformation in its culture and operating approach. (McKinsey Quarterly, 2011) He halted the aggressive store openings and closed 900 underperforming stores. This in turn caused layoffs of 1,500 store employees nationally and 1,700 globally, and 700 corporate employees. He refocused the company back to its passion of obtaining the finest beans and creating the best brew. He recommitted to respect and pay to all – from the small coffee growers to the employees. And to devote Starbucks and their employees to the ‘human connection’ – from the customers seeking a good drink and a respite to meaningful contributions to the neighborhood where the store was located.
Keeping coffee at the core, Schultz explored other revenue streams in order to grow the business. They could “seed and introduce new products and new brands inside [the] stores” (McKinsey Quarterly, 2011) and then license them for sale with diverse retailers. For example Starbucks developed VIA, an instant coffee that was superior to the basic fare that was available. They “integrate[ed] VIA into the emotional connection [they] had with [their] customers in [Starbucks] stores…[doing] that for six to eight months and succeeded well beyond expectations. (McKinsey Quarterly, 2011) With that track record, grocery and drug stores lined up to add this exciting product to their store lineup. Starbucks has added many similar products to distribution – Frappuccino, a flavored iced coffee in glass bottles, now available just about everywhere. Starbucks has licensed Unilever Corporation to manufacture and distribute seven different flavors of super-premium coffee ice cream. Starbucks coffee beans are sold in various retail establishments, whether by the bag or in pods, for single cup dispensers like Keurig.
All these items keep Starbucks in control of their brand and have significantly contributed to Starbucks’ financial good health. The stock has clearly responded to Schultz’s revamped strategy by rebounding from the $8. 26 (11/17/2008) to $51. 17 (9/7/12). Today, Starbucks has slowed down from Donald’s ambition of 40,000 stores with a controlled growth of 17,000 stores in 55 countries. As the market, competition and economies change and adjust throughout the coming years, Starbucks can be expected to refine their strategic vision.
If they want to continue to grow, Schultz and his successor will need to keep the same core vision that Schultz first had in 1987 and then again in 2008: passion for the best and commitment to customer service. Bibliography (n. d. ). Retrieved September 2012, from Living Economics: http://livingeconomics. org/article. asp? docId=182 McKinsey Quarterly. (2011, March). Retrieved from McKinsey & Company: http://www. mckinseyquarterly. com/Starbucks_quest_for_healthy_growth_An_interview_with_Howard_Schultz_2777 New York Times ~ Business Day. (2012, January 26).
Retrieved from New York Times: http://topics. nytimes. com/top/news/business/companies/starbucks_corporation/index. html Brown, H. (2011, March). External Environmental Analysis of Starbucks and the Coffee Industry. Rumelt, R. (2011). Good Strategy Bad Strategy: The Difference and Why It Matters. Crown Business. starbucks. com. (n. d. ). Retrieved September 2012, from http://www. starbucks. com/about-us/company-information/mission-statement Thompson, A. A. , & Shah, A. J. (2010). Starbucks’ Strategy and Internal Initiatives to Return to Profitable Growth.