January 23, 2008 – Business Management Article
Starbucks (SBUX) is famous for its frappuccinos and mochas and has always concentrated on premium coffee, typically costing more than £2 a cup. But now Starbucks Corp is testing $1 coffee and free refills. Starbucks says that this test is not indicative of any new business strategy. Well, new strategy or not it surely makes business sense. Over the past year, Starbucks’ shares have lost about half their value. Analysts feel that this is due to over-expansion, increasing competition from fast-food rivals, and concerns about lower U.S. consumer spending. There is stiff competition from fast-food rivals such as McDonald’s Corp and Dunkin’ Donuts, a unit of Dunkin’ Brands Inc.. Both offer specialty coffees and regular coffee prices at both start in the low $1 range.
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Will restructuring help Starbucks Turnaround?
Earlier this year, Starbucks had announced management restructuring. Howard Schultz, was brought back back into the CEO position. Howard Schultz is once again looking after day-to-day operations of the business. His return follows after the sudden departure of chief executive Jim Donald. Scultz has immediately felt the need to fix important things, particularly in the US like over enthusiastic expansion, large queues in stores and bureaucracy. Starbucks started 2,571 new stores globally last year, taking its total to 15,011. According to Starbucks’ estimates there was scope for 20,000 more stores in the US and a further 20,000 internationally. Schultz is expected to scale back such ambitious expansion strategy and concentrate on reviving the popular brand after transactions in its 10,600 US stores slowed down. Schultz commented in an interview to the Fortune magazine, “Yes, we became less passionate about customer relationships and the coffee experience. We spent time on efficiency rather than experience. We never wanted to be transaction driven.“
Starbucks: A contrast in 2003
When Fortune came out with its annual list of ‘Fortune 500 companies’ in March 2003, Starbucks featured in the list. For Howard Schultz, Chairman of Starbucks Corp (Starbucks) and Seattle based entrepreneur it was like a dream coming true. Afterall, Starbucks announced a 31% increase in its net earnings and a 23% increase in sales for the first quarter of 2003. This inspite of many retail majors reporting losses and applying for bankruptcy. The US economy was reeling under recession. For Starbucks it only showed that a quality product speaks for itself. Also the fact that Starbucks spent less than 1% of its sales on advertising and marketing was indicative of its popularity. Many analysts felt that the success of Starbucks was primarily due to its profitable domestic operations. They felt that Starbucks’ international operations were not as well planned as its US operations.
In 1971, Jerry Baldwin, Zev Siegl and Gordon Bowker had launched a coffee bean retailing store named Starbucks to sell specialty whole-bean coffee in Seattle. The three partners, took the name “Starbucks” from mate Starbuck in the novel Moby Dick. In ten years, by 1981, Starbucks had five stores and a small roasting facility in Seattle. In 1982, Schultz joined Starbucks as marketing manager. In 2001, Interbrand (a brand management consultancy) had named Starbucks as one of the 75 global brands of the 21st century. In 2002, Starbucks had 5689 outlets in 28 countries. By early 2006, Starbucks had more 11,000 stores around the world. Starbucks had turned coffee from a commodity into an experience to savour.