Case Study: Starbucks

Introduction

Starbucks created its uniqueness by delivering on two promises: customer service, and quality coffee. For example, when CEO Howard Schultz visited Milan, he was inspired by the high quality espresso and dynamic social experiences at Milanese espresso cafes, and sought to bring such a concept back to America. As a result, when he took over Starbucks, Schultz labored to ensure that baristas brewed great coffee from the best blends of ingredients, and made sure that they provided excellent customer service and a welcoming space for their customers. Starbucks baristas were told to write the names of their customers on their cups, to get to know the people they were serving, and to ensure that the teak-panelled, Scandinavian-designed cafes were always a comfortable, relaxing and welcoming space for its patrons to get quality, customized drinks, wherever in the world they were. Starbucks, under Schultz, also invested heavily in making each store the hub of a local neighborhood, and engaging with its customers, suppliers and partners, to ensure that the twin promises of great customer service and quality coffee were present in every store.

Challenges to the business model

Starbucks lost its uniqueness and struggled in the mid-2000s because it focused too heavily on improving efficiency, economies of scale and company growth at the cost of its two key value propositions of customer experience and quality coffee. Foremost, Starbucks tried to grow rapidly in the mid-2000s, and failed to ensure that adequate quality control measures were in place at each of its franchisee and licensee stores. This resulted in a lower customer experience quality across its stores, and significant brand reputation damage to the Starbucks brand. Secondly, Starbucks focused heavily on improving efficiency in its labor productivity, and economies of scale in its production and supply chains, in a way that alienated its employees and its suppliers. This resulted in a lower quality of customer service, coffee beans and produced coffees, which also damaged the core value propositions that had driven Starbucks to its initial success. For example, Starbucks outlets became overcrowded, and baristas started focusing on the speed of order delivery rather than coffee quality. This led its originally loyal clients to switch to more exclusive brands such as Peets and Caribou Coffees. The speed at which Starbucks introduced new products at this time also created superficial growth, and led to overcomplicated menus which customers new and old struggled to understand. Baristas also struggled to keep up with the increasingly large variety of products and customisation. As a result, Starbucks’ customer service propositions declined.

Successful strategic initiatives to revive the brand

The key strategic initiatives that Howard Schultz implemented were in the areas of customer service, corporate transformation, and social responsibility. Foremost, Schultz, upon his return, sought to recenter the corporation’s focus on customer service. He famously ordered over 7,000 Starbucks franchises to close for 24 hours, in order for baristas to learn how to prepare quality espressos and recreate the unique Starbucks experience that made the chain successful. He also introduced draconian but effective customer service guidelines such as the ‘no multitasking’ rule, which ensured that baristas focused on the quality of the drinks they were making by limiting them to making a maximum of 2 drinks at a time.

Secondly, Schultz sought corporate transformation by emphasizing the emotional attachment, neighborhood hub experience and partner engagement that each Starbucks store had to deliver in order to be successful. This allowed Starbucks stores to once again connect with their different stakeholders, such as their customers, retailers and suppliers, in order to deliver on their promise of quality coffee and great customer experience.

Thirdly, Schultz redirected the company’s attention toward being a socially responsible enterprise. Under Schultz, Starbucks began to support same sex marriage, social equality, the ethical sourcing of Starbucks coffee beans, affordable access to healthcare and education, the RED organization (by contributing $13 million to fight HIV/AIDS in Africa), and a commitment to hire military veterans and low-income racial minority individuals. Starbucks also worked with community development organizations to launch Create Jobs for USA program, and offered to fund the education of its employees via an Arizone State University online course system. These initiatives captured the hearts and minds of Starbucks’ stakeholders, and boosted the public reputation of Starbucks in a way that made demand for Starbucks products rise.

Evaluation of Starbucks CEO as a strategic leader

An effective strategic leader is a leader who is able to identify future sustainable growth opportunities, and drive his or her company in the direction of those opportunities through the judicious application of corporate strategy. By this definition, Howard Schultz is an effective strategic leader as he invested in social responsibility heavily as the head of Starbucks, and ensured that Starbucks remained in the public eye as an ethical and sustainable corporation. Schultz did so by pursuing strategic initiatives such as the Coffee and Farmer Equity (CAFE) practices, Fair Trade certified coffee, Farmer Support Centers in Africa and the Caribbean, and Leadership in Energy and Environmental Design (LEED) certifications. This was effective in ensuring that Starbucks capitalized on the opportunity of sustainable business, as shown by the rapid expansion of stores and revenues in Exhibit 2 post 2008 under Schultz’s leadership, from under 15,000 stores to almost 25,000 stores in the period 2008 to 2016.

Future growth horizons for Starbucks

Starbucks is trying to grow through expansion into the high-end food and beverages market, and the use of technology to deliver a seamless digital experience. Foremost, Starbucks is trying to enter the high-end food market, and is moving toward being an evening food-and-wine destination, as well as a super-high-end coffee chain. Given that Starbucks has already begun to diversify into non-traditional items such as flatbread pizzas, cheese platters, desserts and alcoholic beverages with some success, and has launched higher-end coffee experiences such as the Reserve Roastery shops, this strategy represents a significant source of growth potential for Starbucks.

Secondly, Starbucks is trying to expand through the use of technology to deliver a seamless digital experience. The use of social media platforms, a digital loyalty program and an app to order and pay directly for food and beverages have been early successes of Starbuck’s push to deliver a seamless digital customer experience.

These strategies are collectively targeted at addressing Starbucks’s three big challenge: (1) its dependence on an increasingly saturated North American market, (2) its expansion into competitive international markets, and (3) its struggle to implement digital engagement while maintaining the same level of customer experience.

Recommendations for the company

Recommendations for the new Starbucks CEO, Kevin Johnson, fall into three categories: addressing a saturated market, expanding into an emerging market, and digitizing the customer experience. Foremost, Johnson must continue to create unique offerings for a saturated North American market. These can be achieved through the expansion of Starbucks’s product lines into products such as Tazo teas, Doubleshot espressos and Frappuccinos. Johnson should eye mergers and acquisitions, and increase investment into R&D labs, in order to keep a steady stream of innovative offerings ready for launch. Johnson could also lead strategic initiatives to roll out healthier food options which contain less fat and sugar, in order to maintain competitive edge against companies such as Dunkin Donuts. Like Panera, Johnson could also commit to removing all artificial flavors, sweeteners and preservatives. Finally, Johnson should move more aggressively into high end coffee, and invest in ‘third wave’ or ‘craft’ coffee that delivers novel experiences and ‘blue ocean strategy’ opportunities for Starbucks to grow in a saturated North American market.

Next, Johnson must focus on emerging markets with high growth potential. Starbucks’s expansion into Italy, despite its use of savvy digital marketing and a luxurious boutique store, was not wise given how saturated the Italian coffee market is. Rather, Johnson should focus instead on emerging markets in east Asia and sub-saharan Africa. The Shanghai Reserve Roastery in Shanghai, China is a prime example of this, with coffees brewed using Chemexes and the French Press, catering to a growing middle class in a Tier 1 Chinese city. This allows Johnson to position the Starbucks brand for growth in these markets, by branding coffee as a luxury product and status symbol. Rwanda, the Maldives and Morocco are potential tourist markets that Johnson could consider next. Johnson could also ride the coffee craze in China, Japan and South Korea, where an emerging middle class that is digitally literate and has rising disposable incomes is eager to consume foreign imported coffee.

Finally, Johnson should push Starbucks’s digitization strategy more forcefully through the use of unique digital experiences such as virtual reality showrooms, digital advertisement campaigns, and digital storytelling. Johnson could also spearhead a push to integrate Starbucks with e-payment systems in emerging markets such as M-PESA, WeChat Pay and Tencent.

References

Chua, Alton YK, and Snehasish Banerjee. “Customer knowledge management via social media: the case of Starbucks.” Journal of Knowledge Management 17, no. 2 (2013): 237-249.

Harrison, Jeffrey S., Eun-Young Chang, Carina Gauthier, Todd Joerchel, Jorge Nevarez, and Meng Wang. “Exporting a North American concept to Asia: starbucks in China.” Cornell Hotel and Restaurant Administration Quarterly 46, no. 2 (2005): 275-283.

Moon, Youngme, and John A. Quelch. Starbucks: delivering customer service. Boston, MA: Harvard Business School, 2006.

Schultz, Howard. Pour your heart into it: How Starbucks built a company one cup at a time. Hachette Books, 2012.

Schultz, Howard, and Joanne Gordon. Onward: How Starbucks fought for its life without losing its soul. Rodale books, 2012.

Taecharungroj, Viriya. “Starbucks’ marketing communications strategy on Twitter.” Journal of Marketing Communications 23, no. 6 (2017): 552-571.