case Starbucks_Going_Global_Fast

CASE 1-1 Starbucks—Going Global Fast The Starbucks 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 Starbucks, a symbol, to them, of free-market capitalism run amok, another multinational out to blanket the earth. Amid the crowds of protesters and riot police were blackmasked 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 bottle of Pepsi, or a can of Folgers. Starbucks is both this ubiquitous brand and a place where you can go and break a window. You can’t break a can of Coke.” The store was quickly repaired, and the protesters scattered to other cities. Yet cup by cup, Starbucks really is caffeinating the world, its green-and-white emblem beckoning to consumers on three continents. In 1999, Starbucks Corp. had 281 stores abroad. 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 Starbucks’ ambitions. They were just early. The story of how Schultz& Co. transformed a pedestrian commodity into an upscale consumer accessory has a fairy-tale quality. Starbucks grew from 17 coffee shops in Seattle 15 years ago to over 19,000 outlets in 58 countries. Sales have climbed an average of 20 percent annually since the company went public, peaking at$10.4 billion in 2008 before falling to$9.8 billion in 2009. Profits bounded ahead an average of 30 percent per year through 2007 peaking at$673, then dropping to$582 billion and$494 billion in 2008 and 2009, respectively. The firm closed 475 stores in the U.S. in 2009 to reduce costs. But more recently, sales revenues rebounded to$11.2 billion in 2011, and profits reached a record$1.2 billion. Still, the Starbucks name and image connect with millions of consumers around the globe. Up until recently, it was one of the fastest-growing brands in annual BusinessWeek surveys of the top 100 global brands. On Wall Street, Starbucks 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 Sta

tes are mostly in big cities, affluent suburbs, and shopping malls. In coffee-crazed Seattle, there is a Starbucks outlet for every 9,400 people, and the company considers that the upper limit of coffee-shop saturation. In Manhattan’s 24 square miles, Starbucks has 124 cafés, with more on the way. That’s one for every 12,000 people—meaning that there could be room 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 Starbucks, is a tall order to fill. Indeed, the crowding of so many stores so close together has become a national joke, eliciting quips such as this headline in The Onion, a satirical publication:“A New Starbucks Opens in Restroom of Existing Starbucks.” 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 selfcannibalize our stores at a rate of 30 percent a year,” Schultz says. Adds Lehman Brothers Inc. analyst Mitchell Speiser:“Starbucks 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, Starbucks has no choice but to export its concept aggressively. Indeed, some analysts gave Starbucks 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, Starbucks plans to move into Mexico and Puerto Rico. But global expansion poses huge risks for Starbucks. 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, Starbucks must cope with some predictable challenges of becoming a mature company in the United States. After riding the wave of successful baby boomers through the 1990s, the company faces an ominously hostile reception from its future consumers, the twenty- or thirty-somethings. Not only are the activists among them turned off by the power and image of the well-known brand, but many others say that Starbucks’ latte-sipping sophisticates 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. Starbucks’ 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, Starbucks has a lot going for it as it confronts the challenge of regaining its fast and steady growth. Nearly free of debt, it fuels expansion with internal cash flow. And Starbucks 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 relying on mystique and word of mouth, whether here or overseas, the company saves a bundle on marketing costs. Starbucks spends just$30 million annually on advertising, or roughly 1 percent of revenues, 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, Starbucks for the first time faces competition from large U.S. competitors such as McDonald’s and its new McCafés.