Assignment #4.

Starbucks Coffee Company Transformation

Report by: Olivia Singh, Olamide Esther Abraham, Anthony Odushola, Haitham Al Khalaf

Department of Holzschuh Faculty of Business Administration: MBA, Niagara University

Course: MGT 691 – Business Research, Strategy, & Planning

Instructor: Dr Radu Cureteanu

Due Date: December 3, 2022

As instructed, this paper analyzes the Starbucks Coffee Company Transformation and Renewal

case study from the perspective of the organizational life cycle. Unless otherwise referenced, all

the materials used in the analysis are from the case provided.

What is Starbucks’s stage in the organizational life cycle (2007-2008)?

Mirroring the 2007-2008 global financial crisis, at this time, Starbucks was at the DECLINE

STAGE phase of the organizational life cycle (OLC). This meant that to survive and thrive in the

market, the company needed to make some changes in its operations, marketing, personnel, and

the like. The goal at this stage was to revive the company and rebuild its reputation and

commitment to par excellent and personalized customer service.

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Image credit: AIHR (McCoy, 2021)

The company displayed signs of slowed growth and innovation due to

➢ Loss of sales due to the larger economic recession.

➢ The original mission and marketing strategy of providing customers with the “Starbucks

experience” and its association with affordable luxury, backfired. This reflected the

ongoing global financial crisis in the market but reflected poorly on the company’s

marketing concept.

➢ The stock price, operating margins, earnings, and global operating income declined

(Exhibits 4 and 5).

➢ On July 1 2008, the company announced the closure of 600 stores. The opening of more

than 340 stores previously planned was put on hold.

In 2007-2008, Starbucks floundered but did not decay into extinction. Schultz was determined to

revive the company and he did. In other words, it reached the RENEWAL STAGE of its life

cycle.

THE INTRODUCTION/ BIRTH STAGE

Consumer resistance to change

Starbucks’ entry into Chicago proved far more troublesome than management anticipated. The

first Chicago store opened on October 27, 1987, the same day the stock market crashed. Three

more stores were opened in Chicago over the next six months, but customer counts were

substantially below expectations—Chicagoans didn’t take to dark-roasted coffee as fast as

Schultz had anticipated. At the first downtown store, for example, which opened onto the street

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rather than into the lobby of the building where it was located, customers were hesitant to go out

in the wind and cold to get a cup of coffee in the winter months. Store margins were squeezed for

several reasons: It was expensive to supply fresh coffee to the Chicago stores out of the Seattle

warehouse, and both rents and wage rates were higher in Chicago than in Seattle. Gradually,

customer counts improved, but Starbucks lost money on its Chicago stores until 1990, when

prices were raised to reflect higher rents and labour costs, more experienced store managers were

hired, and a critical mass of customers caught on to the taste of Starbucks products.

The entry into San Francisco proved more troublesome because of an ordinance there against

converting stores to restaurant-related uses in certain prime urban neighbourhoods; Starbucks

could sell beverages and pastries to customers at stand-up counters but could not offer seating in

stores that had formerly been used for general retailing. However, the city council was soon

convinced by café owners and real estate brokers to change the code. Still, Starbucks faced

strong competition from Peet’s and local espresso bars in the San Francisco market. When star

bucks entered continental Europe it had to encounter established coffee cultures, anti-American

sentiment at times, and 121000 existing espresso bars in Italy-the ultimate challenge.

When the company first ventured into Japan and Singapore in 1996, in Japan the company went

against the Japanese love for cigarettes and refused to allow smoking in its coffeehouses, arguing

that smoke would overwhelm the coffee aroma. Contrary to some predictions, Japanese women

loved the smoke-free stores and men followed suit.

Crisis: Losses

From the outset, the strategy was to open only company-owned stores; franchising was avoided

to keep the company in full control of the quality of its products and the character and location of

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its stores. But company ownership of all stores required Starbucks to raise new venture capital,

principally by selling shares to new or existing investors, to cover the cost of expansion. In 1988

the company raised $3.9 million; in 1990, venture capitalists provided an additional $13.5

million; and in 1991 another round of venture capital financing generated $15 million. Starbucks

was able to raise the needed funds despite posting losses of $330,000 in 1987, $764,000 in 1988,

and $1.2 million in 1989. While the losses were troubling to Starbucks’ board of directors and

investors, Schultz’s business plan had forecast losses during the early years of expansion.

Product- One wall was devoted to whole-bean coffees; another had shelves of coffee products.

The store did not offer fresh-brewed coffee by the cup, but samples were sometimes available for

tasting.

Price- Initial prices were high as they had to meet Major operating costs such as labour, cost of

sales, Lower output, sales absorbing fixed costs and Major start-up expenditures such as property

and equipment.

The recession affected customers’ willingness to spend, and greater risks in investment-

Starbucks has reached saturation point in some parts of the West - in July it registered its first

loss in 16 years as a public company, last week closed 61 of 84 cafes in Australia and it will also

shed 600 stores and 1,000 jobs in the United States

These factors distracted it from making its cafes inviting places with new products.

➢ Starbucks lost focus on its main business.

➢ The economic crisis in the US and the world economy

➢ Starbucks’ rapid expansion strategy

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 ➢ Direct competition from Peets and Coffee Bean is increasing. Lack of marketing

➢ Cheaper alternatives from Mcdonald’s and Dunkin Donuts.

How can Starbucks overcome the crisis?

GROWTH STAGE

Product

Starbucks continues to use product modification to appeal to the global market. In Japan and

China, new snacks were created and drinks undergo style modification. Starbucks Coffee jelly

and Green tea Frappuccino are a part of Starbucks’ many product line extensions. For each

product mix, Starbucks has a different marketing strategy depending on the country.

Price

In 2009, Starbucks revamped its pricing structure. Starbucks redesigned its menu to feature

lower-priced brewed coffees and offered promotions on its drinks. Starbucks increased the

prices of its higher-end and more complex drinks. The Frappuccino and Caramel macchiato was

raised by 8% because Dunkin Donuts and McDonald's cannot compete. Starbucks is using the

lack of competitors and gaining profit from its most devoted consumer of the drinks.

Place

Starbucks continues to expand the company by acquiring 16000 stores worldwide. Every day it

opens 2 stores worldwide. Almost 85% of its sales come from its stores. So it is opening new

stores at a breakneck pace. Six years ago it had just 1015 stores –that’s 400 fewer than it built

last year alone.

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Starbucks' store launches grew steadily more successful. In 1995, new stores generated an

average of $700,000 in revenue in their first year, far more than the average of $427,000 in 1990.

This was partly due to the growing reputation of the Starbucks brand. In more and more

instances, Starbucks' reputation reached new markets even before stores opened. Moreover,

existing stores continued to post year-to-year gains in sales.

International Expansion

In markets outside the continental United States (including Hawaii), Starbucks' strategy was to

license a reputable and capable local company with retailing know-how in the target host country

to develop and operate new Starbucks stores. In some cases, Starbucks was a joint venture

partner in the stores outside the continental United States. Starbucks created a new subsidiary,

Starbucks Coffee International (SCI), to orchestrate overseas expansion and begin to build the

Starbucks brand name globally via licensees; Howard Behar was president of SCI.

Going into 1998, SCI had 12 retail stores in Tokyo, 7 in Hawaii, 6 in Singapore, and 1 in the

Philippines. Agreements had been signed with licensees to begin opening stores in Taiwan and

Korea in 1998. The company and its licensees had plans to open as many as 40 stores in the

Pacific Rim by the end of September 1998. The licensee in Taiwan foresaw a potential of 200

stores in that country alone. The potential of locating stores in Europe and Latin America was

being explored.

Beyond opening new shops, Starbucks is expanding each store’s food offerings, testing

everything from Krispy Kreme doughnuts and fresh field’s gourmet sandwiches to Greek pasta

salads and assorted chips.

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By offering a beefed–up menu, the company hopes to increase the average customer sales ticket

while also boosting lunch and dinner traffic.

Promotion

Most of Starbucks’ advertising is done in and outside of its retail chains. Starbucks’ in-store

advertising helps customers get comfortable in the comfy chairs, relax to relaxing music and

have the choice of spending hours sitting without even having to make a purchase. Which

compels the customer to spend money because they almost feel like they are taking Starbucks for

granted. When it releases a commercial, the commercial receives huge popularity. The

commercials have driven up sales and received very positive feedback. Starbucks reported 26%

of respondents like them and the commercial appeals equally to men and women. The music is

the key to the success of each commercial. Although Starbucks executives are happy with the

feedback, they want to stick with creating unique and welcoming first handed experiences for all

customers.

Sales rise faster

Almost 85% of its sales come from its stores. So it is opening new stores at a breakneck pace.6

years ago it had just 1015 stores –that’s 400 fewer than it built last year alone.

Production facilities are streamlined to meet the fast-moving sales- Starbucks focuses on

reliability, responsiveness, assurance, empathy, and tangibles (RATER) to increase service

quality. When Starbucks restructures the way they serve coffee to decrease service time, they

make sure it does not affect reliability. With the addition of special espresso machines, Starbucks

has greatly increased their dependability.

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Product improvements

Starbucks has partnered with several firms to extend its brand into new categories. E.g., it joined

with Pepsi Co to stamp the Starbucks brand on bottled Frappuccino drinks and a new Double

Shot espresso drink, Starbucks ice cream marketed in a joint venture with Breyers is now the

leading brand of coffee ice cream.

MATURITY STAGE

Starbucks comes to maturity where the product becomes a cash cow. This can be proven by how

fast Starbucks and how fast it can change people’s behaviour and lifestyle. Starbucks sales

always rose every year, the image is strongly attached to people’s mind and the company have

strong financial to support all of its new retails

Product

Starbucks Coffee has introduced summer beverage products that do not contain elements of pure

coffee packaged products, such as bottled Frappuccino and instant coffee.

It has entered into a country with packaged goods and following later with cafes, something

Starbucks has never done before, is suddenly on the table.

Price

Uniform and lower prices: The coffee giant is fighting back against rivals' claims that the

company's coffee drinks are expensive and the notion it is losing share to cheaper coffee makers.

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As it reported a 77% drop in quarterly profit, the company said it will adjust its pricing in some

markets, lowering prices on basic drinks. For example, Starbucks will offer a "grande" size iced

coffee for less than $2, shaving as much as 45 cents off the price, depending on the market.

The company has been trying to promote value in other ways, too. Starbucks recently entered the

instant-coffee market with its Via brand, a product billed as offering a cup of Starbucks coffee

for less than $1. It also pairs breakfast sandwiches with drinks for $3.95.

Starbucks has been cutting costs and closing stores to boost profit. In January 2011 Starbucks

announced plans to lay off 6,700 employees and to close 300 more stores on top of the 600

announced last year. With closings and openings, the net store count will rise by 20 by the end of

the fiscal year, Starbucks said.

Place

Development of new markets-The vast majority of coffee in America is bought in stores and

sipped at home. To capture this demand, Starbucks is also pushing into America’s supermarket

aisles. However, rather than going head-to-head with giants such as Procter and Gamble, and

Kraft, Starbucks struck a co-branding deal with Kraft. Under this deal, Starbucks will continue to

roast and package its coffee, while Kraft will market and distribute it. Both companies benefit:

Starbucks gains quick entry into 25000 U.S supermarkets supported by the marketing muscle of

3500 Kraft salespeople.

Promotion

It has reached a normal ratio to sales. Starbucks is making efforts to rationalize the existing

budget though the total expenditure does not expand, a major share of the expenditure goes to

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distribution and brand promotion to keep the dealer’s loyalty intact. Advertising emphasizes the

difference between one brand and those of competitors. As a result, Starbucks’ weaker

competitors leave the market.

RENEWAL STAGE

Product - Starbucks should focus on its main business. Top-quality, fresh-roasted, whole-bean

coffee was the company's differentiating feature and bedrock value. Starbucks has been clever,

too, about adapting its offerings to the local market. Its sweet, syrupy blended drinks and sugary

pastries are especially popular in the Middle East now; last year, during Ramadan, it brought out

the Date Frappucino, the first localized beverage to be specially created for customers across all

stores in the Middle East

Development of style change

They should continue with the new store concepts- for example in Seattle, it’s testing café

Starbucks, a European-style family bistro with a menu featuring everything from huckleberry

pancakes to oven-roasted seared sirloin and Mediterranean chicken bread on focaccia. In San

Francisco, it is testing circadian-a kind of bohemian, coffee house concept with tattered rugs,

high-speed internet access and live music.

Competition in social networking sites

Starbucks had a head start with an 8 times higher number of stores (248 compared to the 30

Costa Coffees) for example when the number of check-ins made during the Olympic Games

(July 27th – August 12th) with the same period a month before was compared. Although Costa

has fewer stores, it’s consistently getting more check-ins on average. But when analyzing the

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direct impact of the Games, Starbucks is the winner with a 36% increase (it grew from 1,800 to

2,451 check-ins). The Olympic traffic helped Starbucks catch up with Costa, which went down

by 1% during the same period (from 306 to 303 check-ins a month later.

Starbucks check-ins reached their peaks on the days of the swimming, tennis and athletics finals

and the final ceremony day

International Expansion

This helped Starbucks at the growth stage and can be used at the renewal stage.

Starbucks’ presence in the Emirates is growing. With its strong economic growth, expanding

population and increasing number of tourists, the UAE is already Starbucks' fastest-growing

market in the Middle East. According to industry statistics, the UAE is currently experiencing a

retail boom, meaning that the potential for all retail outlets and food chain franchises is huge.

Retail space in the UAE is expected to grow to 4.25 million square meters by the end of the

decade - an increase of 209 per cent from today's figures.

Promotion

Starbucks was the first international coffee house to have a bilingual MENA website, a

pioneering step that affirms its leadership of the industry. The user-friendly website, designed

specifically for the MENA region, reflects Starbucks' proud heritage of producing outstanding

quality coffee without compromising a strong commitment to sustainable and eco-friendly

practices.

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The website provides users with detailed information on the latest offerings from Starbucks,

local community initiatives, and blog posts from the team and their local partners. The site can

also show users the location of the Starbucks store closest to them.

Possibilities of related future research

● Starbucks and Fairtrade coffee-Fairtrade coffee empowers small-scale farmers organized

in democratically-run cooperatives to invest in their farms and communities, protect the

environment, and develop the business skills necessary to compete in the global

marketplace.

● Starbucks Coffee and Health: There are rising health concerns about the amount of

calories in a cup of Starbucks Coffee.

● Conversion of Starbucks Coffee Grounds into Bioplastic-Starbucks is planning to convert

coffee grounds and leftover bakery goods into bioplastics, laundry detergents and other

everyday products.

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McCoy, J. W. (2021, November 29). Organizational Life Cycle: Definition, Models, and Stages.
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