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8B09A02
Teaching Note
TROUBLE BREWS AT STARBUCKS
Lauranne Buchanan and Carolyn J. Simmons wrote this teaching note as an aid to instructors in the classroom use of the case
Trouble Brews At Starbucks, No. 9B09A002. This teaching note should not be used in any way that would prejudice the future use
of the case.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
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Copyright © 2009, Ivey Management Services Version: (A) 2009-01-22
SYNOPSIS
After going public in 1992, Starbucks’ strong balance sheet and double-digit growth made it a hot growth
stock. The Starbucks vision was coffee culture as community, the Third Place between work and home
where friends share the experience and exotic language of gourmet coffee. Its growth was fueled by rapid
expansion in the number of stores both in the United States and in foreign markets, the addition of drive-
though service, its own music label that promoted and sold CDs in stores and other add-on sales including
pastries and sandwiches. In an amazingly short time, Starbucks became a wildly successful global brand.
But in 2007, Starbucks’ performance slipped; the company reported its first-ever decline in customer visits
to U.S. stores, which led to a 50 per cent drop in its share price. In January 2008, the board ousted CEO
Jim Donald and brought back Howard Schultz — Starbucks’ visionary leader and CEO from 1987 to 2000
and current chairman and chief global strategist — to re-take the helm.
Starbucks’ growth strategies have been widely reported and analyzed, but rarely with an eye to their impact
on the brand. This case offers a compelling example of how “non-brand” managerial decisions — such as
store locations, licensing arrangements and drive-through service — can make sense on financial criteria at
one point in time, yet erode brand positioning and equity in the longer term. Examining the growth
decisions made in the United States provides a rich context in which to examine both the promise and
drawback of further foreign expansion.
OBJECTIVES AND DISCUSSION OUTLINE
One of the overarching objectives of the case is to demonstrate how brand value and positioning can be
influenced by seemingly unrelated, non-branding decisions. That Starbucks’ new-product initiatives —
from food to music, books and movies — influenced brand meaning is obvious. But the Starbucks story
offers a more nuanced appreciation of how brand value is built and maintained. The company’s aggressive
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expansion through company-owned stores and licensees added millions of new customers, but it also
changed the nature of Starbucks’ customer base and eroded its positioning as a destination or Third Place.
Its decision to add drive-through windows created customer convenience, but shifted the competitive set
from specialty coffee houses to fast-food restaurants. In addition, rising food and gas prices and the entry
of McDonald’s and Dunkin’ Donuts into the specialty coffee market created new challenges for Starbucks.
The discussion questions lead participants first to consider why Starbucks’ growth initiatives were so
successful in generating growth and then to consider the impact of the same initiatives on brand
positioning and value. An important distinction here is between strategic growth — growth that is
consistent with the company vision and that reinforces the brand’s positioning — versus opportunistic
growth — growth for growth’s sake. This leads into the discussion of whether further foreign expansion is
strategic or merely opportunistic. Finally, participants are asked to recommend what Starbucks’ positioning
should be today and — given that recommendation — to evaluate some of the initiatives taken to recover
the brand.
Some class participants may be familiar with Starbucks’ early history, but reviewing that history while
focusing on brand management should lead to significant new insights.
ASSIGNMENT QUESTIONS
1. When Howard Schultz launched Starbucks, who was the target market, how was Starbucks positioned
and what decisions about product, price, distribution and promotion supported this positioning?
2. Wall Street and Starbucks management placed great emphasis on the company’s ability to continue its
impressive growth rate. What were some of the growth initiatives undertaken by Starbucks and how
did they fuel company growth?
3. It’s clear that, in general, the company’s growth initiatives were sound in terms of generating the
growth expected by Wall Street. But which of Starbucks’ initiatives, in retrospect, were sound
decisions for the brand and which were inconsistent with brand positioning?
4. What role should foreign expansion play in Starbucks’ strategy?
5. How should Starbucks define its target market and positioning after its decline in 2007?
6. Evaluate the actions taken to reinvigorate Starbucks.
Some content contained in this teaching note is not included in the case itself, but may be introduced in
class to supplement and stimulate discussion.
ANALYSIS
1. When Howard Schultz launched Starbucks, who was the target market, how was Starbucks
positioned and what decisions about product, price, distribution and promotion supported
this positioning?
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• Target Market
• Positioning
• Marketing Program
Initially, the marketing program consistently conveyed the image of Starbucks as an “experience” and
2. Wall Street and Starbucks management placed great emphasis on the company’s ability to
continue its impressive growth rate. What were some of the growth initiatives undertaken by
Starbucks and how did they fuel company growth?
The intent here is not to delve into Starbucks’ financial statements. Rather, it is to understand in a
qualitative, yet concrete, way how the company’s various growth initiatives led to its phenomenal growth.
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• Margins
– Selling Price
Limited price competition. In its first twenty years, Starbucks benefited from a competitive
environment in which there was little price pressure from other specialty coffee houses.
– Variable Costs
Over the years, Starbucks weathered the effects of roiling commodity prices. In 1994, frosts in
• Volume
– Number of Customers
Adding customers through new locations. Starbucks’ site location model — based on regional
1
Aaron Lucchetti, “Crowded Coffee Market May Keep a Lid on Starbucks after Price Rise Hurt Stock,” Wall Street Journal,
June 4, 1997, C1.
2
Howard Schultz and Dori Jones Yang, Pour Your Hear Into It, 1997, pp. 144-145.
3
Brad Stone, “Lax Real Estate Decisions Hurt Starbucks,” New York Times, July 4, 2008.
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markets, 80 per cent of purchases were consumed in the store, compared to only 20 per cent in
U.S. stores.
4
Increasing number of customers through store clusters. By clustering stores, Starbucks captured
Increasing number of customers through market response, policies and procedures. Participants
accommodate their desire for convenience.
– Frequency of Visits and Amount of Purchase
Creating opportunities for incremental sales. The ubiquity of Starbucks’ locations encouraged
Managing non-peak periods. Starbucks strategically introduced products (such as cold coffee
• Fixed Costs
4
Janet Adamy, “Starbucks Brews Growth Abroad,” Wall Street Journal, June 12, 2008, B2.
5
Dina ElBoghdady, “Pouring It On,” The Washington Post, August 25, 2002, H1.
6
Steven Gray, “‘Fill ‘er Up — with Latte,’” Wall Street Journal, January 6, 2006, A9.
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time workers. Providing benefits (health insurance) and incentives (Bean Stocks) for partners
– Marketing Costs
Promotions. Starbucks was one of the first global brands to be built primarily on word-of-mouth
efforts. In its first twenty years, the chain spent less than $20 million on advertising
7
— in
comparison, McDonald’s was estimated to have spent $1.1 billion on U.S. advertising in 2007
3. It’s clear that, in general, the company’s growth initiatives were sound in terms of generating
the growth expected by Wall Street. But which of Starbucks’ initiatives, in retrospect, were
sound decisions for the brand and which were inconsistent with brand positioning?
Growth is necessary for any company. But each opportunity for growth should be considered in light of
whether it is strategically sound — whether it is good for the brand in the long term — and if so, how it
can be effectively implemented. For example, music CDs and food items were both consistent with
enhancing the customer experience in the Third Place. But Starbucks’ implementation of music (choice of
7
Dina ElBoghdady, “Pouring It On,” The Washington Post, August 25, 2002, H1.
8
“National Advertisers Ranked 1 to 50,” Advertising Age, June 23, 2008, p. 6.
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• New Products
– Extended Menu Items
Branding issues: Food items add to sales and have the potential to draw customers in during
Evaluation of alternative:
o It’s an easy call that pastries/food go with coffee and that the pastries and sandwiches simply
– Partnerships with Pepsi, Dreyer’s and Jim Beam
Branding issues:
o Not every “partnership” and corresponding brand extension is equally consistent with
Starbucks’ positioning — potentially diluting the value of the core brand.
• Locations
– Starbucks’ Ubiquitous Presence and Accessibility
Branding issues:
o Widespread exposure alters how customers perceive the store. With such ubiquity, how can
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– Site Locations
The point here is to recognize that (1) good location decisions from a growth standpoint can have
some unintended negative consequences from a branding standpoint and (2) poor location
• Entertainment
– Music and CD sales
Branding issues:
o It became more difficult to tailor music offerings to the more diverse, convenience-oriented
customers.
o Did Starbucks overreach in playing the role of “cultural arbiter”? Did customers go to
Starbucks to discuss global warming or to hang out and relax? A brand can only be stretched
so far before customers fail to make the connection and an endorsement crosses the line to
crass commercialism.
As a result of this discussion, participants should begin to appreciate the importance of anticipating the
unintended consequences of incremental decisions. Each initiative was initially in line with achieving
4. What role should foreign expansion play in Starbucks’ strategy?
Students will often jump to the conclusion that Starbucks should simply refocus its attention on global
expansion. It has, after all, been successful in creating demand in the markets it has entered. Yet as seen in
The decision to expand its global presence should therefore be carefully considered, and students should be
pressed to recognize the potential problems that can arise in relying on global expansion.
• Cost
• Implementation
– Ownership and Employee Relations: Starbucks built its brand by owning the entire process from
roasting the beans to serving the coffee. This was the only way Schultz felt Starbucks could deliver
on “uncompromised quality.” Its employees have been an integral part of its ability to deliver the
• Branding issues:
– Public relations missteps — such as the location in the Forbidden City — can generate negative
publicity worldwide. If focused on securing sites in high-traffic tourist areas, how will Starbucks
5. How should Starbucks define its target market and positioning after its decline in 2007?
• Target Market
Schultz’s original vision was to bring the Italian coffee bar experience to the United States — creating
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Starbucks adapted itself to the American “on-the-go” experience — 80 per cent of sales are now take-
• Positioning
If its customer base cannot be refocused, the question of Starbucks’ positioning — what it should be
— is really the heart of its future. Is Starbucks the Third Place? Is it a premium fast-food alternative?
What actions can Starbucks take now to reinforce this difference?
6. Evaluate the actions taken to reinvigorate Starbucks.
The key initiatives taken by CEO Jim Donald in 2007 are described in the case and included in the
discussion below. Actions taken by Howard Schultz after his return are not included in the case, primarily
because the company seems to be trying a lot of different things, making decisions and then reversing
outlets.
9
George M. Richmond, “McDonald’s Vs. Starbucks: Called to the Espresso Bar,” Wall Street Journal, January 16, 2008.
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• $1 Coffee and Free Refills
The goal, presumably, was to attract price-sensitive customers in order to boost same-store sales,
• National TV Advertising
According to Jim Donald, the goal of the TV ads was “to reach out to this broader audience that maybe
Howard Schultz’s Initiatives
As evidenced by this list of Schultz’s activities, there is no deficit of ideas on how to recreate the company.
• Re-creating the Starbucks Experience
Recognizing that the company had drifted away from its Third Place positioning, Schultz developed
And I anticipate that the reaction after this year’s conference will be the same.”
10
Stephanie Kang, Janet Adamy and Suzanne Vranica, “TV Campaign is Culture Shift for Starbucks,” Wall Street Journal,
November 17, 2007, A1.
11
Howard Schultz, “The Commoditization of the Starbucks Experience,” Internal E-mail, February 14, 2007,
http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html.
12
Emily York, Matthew Creamer, Michael Bush, William Hupp and Johnathan Lemonnier, “News Outlets Fixate on
Starbucks’ No-Joe Play,” Advertising Age, 79:9, March 3, 2008, pp. 1-2.
13
Melissa Allison, “Brief: Starbucks plans Leadership Conference in New Orleans,” McClatchy-Tribune Business News, May
14, 2008.
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– Emphasizing the romance of coffee. In-store grinding of coffee will be reintroduced to restore the
aroma and ambiance of a coffee house.
15
– Enhancing dialog with customers. MyStarbucksidea.com is a social networking community that
• New Products
– Breakfast sandwiches without the smell. In January 2008, the company announced that it would
eliminate warm breakfast sandwiches because cooking smells overwhelmed the aroma of coffee in
14
Jonathan Birchall, “Starbucks to Perk Up Sales,” Financial Times (UK), March 20, 2008, p. 17.
15
Anonymous, “Putting the Jolt Back in Starbucks Java,” McClatchy-Tribune Business News, March 21, 2008.
16
Jeff Jarvis, “The Buzz From Starbucks Customers,” Business Week, April 28, 2008, p. 106.
17
Janet Adamy, “Starbucks Keeps Sandwiches, Tweaks Recipe,” Wall Street Journal, July 26, 2008, B5.
18
Janet Adamy, “Starbucks Restores Bold Blend, Yielding to Its Customers,” Wall Street Journal, June 20, 2008, B3.
19
Anonymous, “Starbucks Sashays into Smoothies,” Business Week (Online), July 15, 2008.
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• Location
– Trimming U.S. expansion. By May, the company had revised its plans for new stores — planning
to open only 1020 new U.S. locations, down from a forecast of 1175 stores in January. Future
• Entertainment Options
– Reorganizing the entertainment segment. Starbucks will hand over management of its Hear Music
record label to Concord Music Group. President of Starbucks Entertainment Ken Lombard left the
company; Chris Bruzzo, chief technology officer, now leads the entertainment segment. An
• Enhanced Marketing Communication
– Sales promotion. The chain introduced its first rewards program for registered Starbucks card
holders (the Starbucks card is a stored-value card). These customers received a complimentary
beverage of their choice, up to two consecutive hours of free Wi-Fi each day in company-operated
20
Janet Adamy, “Starbucks Slows U.S. Growth Plans as Sales Weaken,” Wall Street Journal, May 1, 2008, B3.
21
Anonymous, “Business: Grounds Zero: Starbucks,” The Economist, 388:8587, July 5, 2008.
22
Jonathan Birchall, “Starbucks Acts to Perk Up Sales,” Financial Times (UK), March 20, 2008, p. 27.
23
Claude Brodesser-Akner, “How Starbucks Is Changing its Tune,” Advertising Age, April 28, 2008, p. 3.
24
Ibid.
25
Anonymous, “Starbucks Hones Its Entertainment Strategy,” Wireless News, April 30, 2008.
26
Janet Adamy, “Starbucks to Overhaul Its Entertainment Business,” Wall Street Journal, April 25, 2008, B2.
27
“Starbucks Card Rewards Puts Extra Value in Your Wallet,” 2008,
http://www.starbucks.com/aboutus/pressdesc.asp?id=874, accessed August 1, 2008.
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TEACHING PLAN
We initiate the discussion with these ideas:
In 2007, Starbucks had more than 15,000 stores worldwide and was regarded as one of the world’s most
successful brands. It had made the top 100 in Business Week’s Best Global Brands list every year since the
inception of the rankings in 2001.
30
Starbucks’ success was largely due to Howard Schultz’s vision,
passion and leadership. He taught Americans about the rich flavor of Italian espresso, instructed them in
the exotic language of coffee culture and gave them an intimate café setting in which to enjoy the
experience of both. This is the Starbucks experience and it has captivated millions.
But there was a downside to Starbucks’ success. The business grew explosively by catering to the
convenience-oriented customer with drive-throughs and dense store placement. It also expanded its product
mix enormously — not just coffee, but food and other beverages, music, books, movies and even teddy
bears. These changes broadened the customer base and changed the nature of the brand. Facing
competition from Dunkin’ Donuts and McDonald’s, Starbucks must now confront the question of whether
it can be all things to all specialty coffee drinkers, especially in an environment of rising gas and food
prices.
We begin by considering Starbucks’ marketing strategy at its inception in 1987. Then we examine the
growth initiatives that got it where it is today, first in terms of their profit implications and then in terms of
their implications for the long-term viability of the brand. In doing so, we make a distinction between
strategic growth — growth that is consistent with the company vision and that reinforces the brand’s
positioning — and opportunistic growth — growth for growth’s sake. Finally, we consider what the
brand’s marketing strategy should be today and evaluate some of the initiatives taken to recover the brand
(see Exhibit 1 for the board plan.)
EPILOGUE
The first months of Schultz’s return in 2008 showed that Starbucks’ turnaround would not be quick or
miraculous. Thousands of jobs were cut, top executives were shuffled among as many as three different
jobs and many decisions were made only to be reversed. The company reported its first quarterly loss on
July 30, 2008, suggesting that problems had deepened. The company cited a worsening sales picture and a
$167.7 million charge for costs associated with closing 600 U.S. stores. For the first time in its history, the
company would close more U.S. locations than it planned to open in the coming fiscal year. In addition,
2008.
All of this led some to question whether even Howard Schultz could return the company to its
former glory.
32
29
Ibid.
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Exhibit 1
BOARD PLAN
Higher volume
Number of customers
Frequency
Amount purchased
Lower costs
Global expansion