STARBUCKS CASE SOLUTIONS

1. In the beginning, how was Starbucks different from other coffee options for coffee drinkers in the United States? What activities and assets did Starbucks leverage to differentiate itself from competitors?

Starbucks offered some of the world’s finest fresh-roasted whole bean coffees. In addition to being expensive Starbucks coffee also tasted different as compared to other typical American coffee options. Starbucks also roasted its beans in its own carefully controlled facility where they were given a robust European style flavor called “Charbucks” and subsequently shipped to its stores where they were ground immediately before brewing in order to maintain its freshness, flavor and aroma and ensure maximum quality. Even the Espresso drinks at Starbucks were prepared differently by a barista using a La Marzocco machine by steaming milk to the right temperature, scooping elegant drops of foam for all cappuccinos while still making conversation with their customers. In order to differentiate themselves from its competitotrs, Starbucks aimed at customers from affluent locations by aspiring to offer them a lifestyle product that many customers believed was cooler, richer and more sophisticated than other coffee stalls. They were willing to pay a premium for this.

2. When Starbucks was rapidly expanding its store locations in 2006–2009 it made specific changes in order to facilitate that growth. What did Starbucks gain—and give up—as a result of each change?

Within five years, Starbucks had grown to nearly 5,000 stores. In 2007 Starbucks operated 15,000 stores and in the same year publicly announced a goal to open 40,000 locations worldwide, with 20,000 in the US alone. In conjunction with this expansion, Starbucks made some operational changes. Starbucks replaced the La Marzocco espresso machines with push button Verismo machines. This decision simplified the hiring and training of baristas since the Verismo machines produced a uniform product with less operator training. It also reduced the time to pull an espresso shot from 60 seconds to 36 seconds. However, the height of the Verismo machines’ grinding apparatus blocked the customer’s view of the barista, and the simplicity of the machine eliminated much of the romance and theater that accompanied a barista’s customized preparation of each order. Certain longtime customers insisted that the new machines produced inferior espresso remarking on the quality of their serves. Since measuring and grinding beans for every pot of coffee was time consuming and hampered the store’s ability to meet the 3 minute service goal, Starbucks stopped shipping coffee to its stores as whole beans to be ground throughout the day and instead shipped air tight packs of pre ground beans that it claimed would maintain their flavor for one year. This affected the consumer’s perception of the quality of their beans. Starbucks also limited any new stores being opened to four standardized design templates thereby affecting the look and feel of their stores. Due to tremendous expansion, merchandise displays in the stores were inconsistent and many stores did not carry basic coffee making items such as filters and french presses. There was also a lack of Internet connectivity affected Starbucks popularity among its customers as a Wifi hotspot. During its expansion, Starbucks forayed into music.

3. When Schultz returned to Starbucks as CEO in 2008, how had the competitive context changed since his first tenure running the firm? What had caused or facilitated the changes?

When Schultz was CEO until 2000, Starbucks was a upcoming retail coffee store in an unorganized and undervalued sector of coffee selling outlets. The quality of coffee being sold was not good and there were limited options for good quality coffee outlets in the US. This presented Starbucks with a unique opportunity to brand itself as a premium coffee outlet and distinguish itself by selling high quality roasted coffee beans and hot beverages. However in 2008, the market was filled with various stores seeling high quality coffee with their own distinguishing points. Many independent coffee retail stores had come up offering strong competition to Starbucks. Even fast food restaurants such as Dunkin’ Donuts and McDonald’s had started offering specialty coffee with various low priced and quality offerings for coffee drinkers. Hence the scenario had drastically changed in 2008 leading Starbucks into a financial crisis prompting Schultz to return as CEO in 2008.

4. Why did Schultz respond the way he did to the changes he found in 2008? What was he trying to achieve? Were his responses effective or ineffective?

Underperforming stores were closed as part of a broader strategy aimed at reducing operating costs. Through a combination of procurement savings, improved logistics, reduced operations waste, and labor cost savings, Starbucks cut $580 million in operating costs in 2009. Starbucks also introduced a new roast of coffee, Pike Place Roast during this period. Despite these and other actions, over the next fifteen months Schultz watched the stock price of Starbucks decline to half of its peak value thereby showing that these initiatives were majorly ineffective.

5. Did the introduction of VIA make sense in light of the market and the company’s other actions?

Yes, since the scenario of the market was changing and the instant coffee represented a $20 billion market with huge opportunity to reach more consumers. However, instant coffee was perceived to be a “down-market” category. Schultz predicted that VIA would create additional usage occasions for coffee, which would increase sales of the entire instant coffee category. However, this category only accounted for $700 million in sales in the United States which is about 8 % of the overall market. Its taste however was quite similar to its store sold coffee. After just 1 year, global sales of VIA topped $135 million. This made it the no 5 instant coffee brand by volume in the US, taking share from other brands, including market leader Folgers instant. Hence introduction of VIA seems like a lucrative and viable action in that context.