Starbucks Corp.

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Starbucks Corp.

founded: 1985

Contact Information:

headquarters: 2401 utah ave. s
seattle, wa 98134 phone: (206)447-1575 url: http://www.starbucks.com

OVERVIEW

Starbucks is proof that even the once exclusive pastime of coffee elitists, the cafe experience, can be marketed to the masses. In the span of a decade, the company became the largest specialty coffee company in the United States with more than 1,600 outlets and 1997 revenues of $967 million. Starbucks buys and roasts whole bean coffees and resells them, along with fresh-brewed coffees and Italian-style espresso drinks, mainly through its retail stores in North America. The company's rapid growth has taken the major coffee companies by surprise. As Starbucks moves nearly a store a day toward its goal of 2,000 stores by the millennium, critics decry the growing trend toward commercial standardization of the traditionally individualistic espresso cafe.

COMPANY FINANCES

In 1987 Procter and Gamble, General Foods, and Nestle held almost 90 percent of the multi-billion dollar retail coffee market. In 1991, gourmet whole-bean sales were almost 18 percent of the market share, and profit growth shifted to gourmet roasters. By 1993, Starbucks and the gourmet coffee industry had captured almost 22 percent of coffee market share, creating nearly $1 billion in shareholder value.

Starbucks reported sales of $967 million in 1997—up $271 million, or 38.8 percent, from 1996. Starbucks stock ranged from a low of $31.25 to a high of $59.94 over a 52 week period. The price-earnings ratio was 68.22. From 1993 to 1997, sales rose 439 percent, while profits rose 593 percent. The company attributes its explosive growth to aggressive store expansion and comparable store increases.

Sales come from three categories: retail stores (86 percent), specialty sales (12 percent), and direct response sales (2 percent). In the retail stores, coffee beverages accounted for 63 percent of sales; whole bean coffee, 14 percent; food items, 16 percent; and coffee-making equipment and accessories, 7 percent. Starbucks has never paid dividends and has no plans to do so in the near future, preferring instead to reinvest earnings back into the company.

ANALYSTS' OPINIONS

The large coffee companies made some attempts at marketing gourmet coffee and failed. When Starbucks and other small gourmet coffee makers appeared on the scene, Procter and Gamble, General Foods, and Nestle assumed the fad would peak and fade. The "big three" failed to note that other industries were dealing with small startups selling premium products at premium prices. While the specialty food customer base started small, it grew rapidly, forcing the larger firms to once again try the gourmet market. Analysts note it's a tough sell, as Starbucks, among others, have positioned themselves as the specialty coffee makers, while the big three are stuck with a supermarket image.

In a little over a decade, Starbucks exploded beyond coffee shops. Its coffee is found on airlines and in hotels and book and department stores. The Starbucks name is also found in grocery stores on cold coffee drinks and ice cream. The company plans to sell its famous coffee alongside Folger's and Maxwell House in supermarkets. Some analysts fear all this diversification could dilute the Starbucks name. After all, how can something be premium and special if it is available to everyone, everywhere? The analysts point out, however, that the Star-bucks management seems to plan well and associate mainly with upscale companies, which may help them avoid diluting the brand.

As the Starbucks chain proliferates across the United States, it has been accused, along with Wal-Mart and Home Depot, of contributing to "superstore sprawl." While not a large store like the others, Starbucks is seen by some as a symbol of the "saming" of America—making every city and town exactly like the other. The fear is that local places will no longer have local flavor, that around the corner, no matter where you are, you'll find a Wal-Mart, a Home Depot, and a Starbucks. The fact that Starbucks is beginning to place stores closer together upsets some. For example, in Katonah, New York, it was pointed out there was a Starbucks just five miles away from a proposed new outlet. Some local merchants fear the competition that chains bring, while others worry about rent increasing. Starbucks counters that it is community-friendly by donating food, money, and time to local charities.

HISTORY

While the Starbucks name has been around since the early 1970s, the company as we know it is really the brainchild of Howard Schultz. As an employee of the New York-based Hammerplast housewares company, Schultz sold coffee makers to Starbucks—at that time a four-store retailer of whole-bean coffee and coffee-making paraphernalia. He joined the company as marketing director in 1982, but he quit in 1985 after his employers dismissed his idea of opening Italian-style espresso cafes. With $1.7 million from 24 investors, Schultz started his own chain of coffee bars, calling it Il Giornale. His first cafe opened in 1986 and, in a year's time, the company had three outlets—two in Seattle and one in Vancouver, British Columbia. In 1987 Schultz bought out his ex-bosses' 11 stores with just under 100 employees for $3.8 million.

In August 1987 three Seattle cafes carried the Star-bucks name; by 1992 this number had grown to 150. While creating a local culture and loyal customer base in Seattle, the company was also dominating the market in select cities and establishing name recognition. When it went public in 1992, Starbucks already had 40 outlets in Chicago. By the end of 1994, there were 480 stores. That same year, the company bought its Boston-based competitor, the 24-store Coffee Connection, and later announced plans to build the nation's largest roasting plant in Pennsylvania. By 1997 Starbucks had more than 1,000 outlets across North America, continued its expansion, and began to diversify its product line.

STRATEGY

While there is no dearth of cafes and suppliers in the $2 billion specialty coffee industry, Starbucks differentiated itself from the pack by placing great importance on its human capital. In 1988, with a mere 26 cafes, Schultz hired experienced executives from high-profile companies, including PepsiCo. The strategy paid off, as the company experienced explosive, unfettered growth. Starbucks decided against a franchise system in its nationwide expansion, although its international operations may eventually entail partnerships with local coffee shop operators. The goal of the company is to have consumers think "Starbucks" when they think of the best coffee in the world.

Starbucks isn't just a cappuccino at the espresso bar. In addition to its counter service, the company is introducing drive-through service. In 1996 Starbucks began supplying coffee to United Airlines, which had just found from surveys that fliers didn't care for the coffee served. Starbucks had been looking for an airline to partner with and now had 80 million new potential customers. In such arrangements, Starbucks looks at the potential partner for commitment to quality service and fair treatment of employees. Other partnerships are with Barnes & Noble, Nordstrom, and ITT/Sheraton and Westin Hotels. The specialty sales division has seen sales go from $48.1 million in 1995 to $117.6 million in 1997. In another venture, Intel and Starbucks plan to establish a prototype computer-equipped cyberspace cafe.

FAST FACTS: About Starbucks Corp.

Ownership: Starbucks is a publicly owned company traded on NASDAQ. CEO Howard Schultz owns about 10 percent of the company.

Ticker symbol: SBUX

Officers: Howard Schultz, CEO & Chmn. of the Board, 1997 salary $740,385, bonus $487,500; Orin C. Smith, Pres. & COO, 1997 salary $592,308, bonus $360,000; Michael Casey, Exec. VP & CFO, 1997 salary $273,510, bonus $110,000

Employees: 25,000 (1997)

Chief Competitors: Starbucks competes against regular and gourmet coffee makers. The company competes against local and national coffee houses. Some competitors include: Seattle's Best Coffee; Gloria Jean's; Folger's; Procter & Gamble; General Foods; and Nestle.

CHRONOLOGY: Key Dates for Starbucks Corp.

1986:: Howard Schultz opens a chain of coffee bars called Il Giornale
1987:: Schultz buys the Starbucks chain of coffee paraphernalia
1992:: Starbucks goes public
1994:: Purchases The Coffee Connection
1996:: Begins supplying coffee to United Airlines
1998:: Starbucks announces plans to begin distributing gourmet coffee in grocery stores

The next big push from Starbucks is in grocery stores. Two-thirds of all coffee purchases are made at supermarkets, and the company has forecast that the wholesale market for specialty coffee in such stores will reach $1 billion by 2001. A test program by Starbucks was run in Chicago area grocery stores in 1997. It was declared a success, with Starbucks getting 25 percent of the sales for gourmet coffee. At the same time, sales at Chicago area Starbucks stores did not decline. In 1998, the company planned to distribute coffee in supermarkets in Los Angeles, San Francisco, Portland, Seattle, Spokane, Denver, Salt Lake City, Phoenix, Albuquerque, and Billings, Montana. The goal is to have a quarter of the specialty coffee sales in grocery stores in those areas.

CURRENT TRENDS

American tastes are changing and coffee drinkers are bombarded with options. While gourmet coffee could be twice as expensive as canned coffee, consumers considered it an "affordable luxury" and showed their willingness to pay more. This wealth of opportunities spawned market hyperactivity, whereby new companies rushed onto the scene and competition became fierce. While in 1989 there were only 200 cafes and espresso bars in the United States, the Specialty Coffee Association expects that number to skyrocket to about 10,000 locations by the year 2000.

PRODUCTS

Starbucks has expanded aggressively, opening 1,109 stores since 1993—giving the company a total of more than 1,600 stores worldwide. There were stores in 28 states and the District of Columbia in 1997, with plans to open 350 new units in 1998 and a goal of 2,000 U.S. stores by the year 2000. Sales have seasonal fluctuations, with the months of October through December having the highest numbers.

Starbucks stores offer a wide choice of coffees, including regular, decaffeinated, and Italian-style espressos. Customers can also purchase whole bean or ground coffee for consumption at home. Larger stores offer food items, such as pastries and muffins, as well as sodas, juices, and teas. Also for sale are espresso and coffee machines, coffee grinders, filters, containers, and mugs.

The bottled Frappuccino coffee drink is made and distributed in a joint venture with PespsiCo. At first limited to supermarkets, in 1997 the product was distributed to convenience and drug stores as well. Starbucks premium ice cream is made in a joint venture with Dreyer's. The product was introduced to supermarkets in 1996 and expanded from six flavors to eight in 1997, it also includes two ice cream novelties, two low-fat ice creams, and a low-fat blended coffee bar.

CORPORATE CITIZENSHIP

In addition to looking out for its domestic employees with a progressive employment policy, Starbucks contributes to aid programs for coffee-producing nations. With a $100,000 contribution every year, the company is the largest corporate contributor to the Atlanta-based CARE, a world relief and development organization, and in addition, Starbucks markets products whose proceeds benefit CARE. The company contributed $200,000 in 1993 to programs in the coffee-producing countries of Ethiopia, Indonesia, Kenya, and Guatemala.

ROMANCING THE BEAN

Coffee is second only to oil as a world commodity and has been traded much longer. It is the product of an evergreen fruit tree; the coffee "bean" is really the pit of a cherry. The fruit's pulp is sweet and tasty; inside each are two coffee beans. Each coffee tree produces the equivalent of just one pound of roasted coffee per year.

The roasting process at Starbucks is a mixture of art and science. The green beans, packed in 20-foot containers, are held in cool, dry storage until it is time to roast. They are sampled at least twice before being put into production. Roasting is done in three gas-fired machines, capable of roasting batches from 200 to 600 pounds each over a period of roughly 15 minutes per batch. Would-be roasters train for a minimum of 6-12 months, learning to relate subtle color and temperature changes in the coffee to the desired flavor characteristics for each specific variety. After roasting and air cooling, the coffee is immediately vacuum sealed in one-way valve bags to ensure freshness.

The eventual goal of roasting is the complete and natural unfolding of all the flavors present in the bean. The next step is called "cupping," the industry term for the traditional tasting ritual. Samples are ground, then brewed in cups. Tasters first judge aroma, then flavor and acidity. As with wine, the tasters don't swallow the beverage.

In February 1995 it signed a ground-breaking agreement with the United States/Guatemala Labor Education Project (U.S./GLEP), committing itself to consultation on the drafting of an international agricultural labor rights "code of conduct." Several months later, Starbucks produced such a code. Some labor activists, however, denounced the code as merely symbolic and discussed action to pressure the company into compliance.

GLOBAL PRESENCE

Starbucks considers the continental United States its American market, Hawaii international. Although there were no stores in international markets in 1993, by 1997 there were 17 stores. Most overseas stores are joint ventures in partnership with a local company. The foreign stores are located in Japan (10), Hawaii (4), Singapore (3), the Philippines, and Taiwan. In 1998 the company plans to continue opening in international markets in South Korea, Thailand, Malaysia, and New Zealand.

EMPLOYMENT

The average Starbucks employee, which the company refers to as a "partner," is 26 years old, white, works part-time, and has some education after high school. For Starbucks, the employee is key. The company sees in its "baristas" (counter servers) the path to profit and growth. Employees receive 25 hours of instruction to enable them to serve coffee appropriately and speak knowledgeably to customers.

As an incentive to stay with the company and partake of its success, all employees who work an average of 20 hours or more a week during the year have the option of buying stock in the company. Under the Bean Stock program, the goal is to grant 10 percent of base salary in stock options. If the company is more profitable, the percentage of the grant rises. One year after they are granted, it takes five years more for options to be fully vested.

All employees are eligible for stock options and health and dental benefits, along with career counseling, product discounts, and training programs. Also, executives and employees meet in periodic forums to discuss ideas and address a wide variety of concerns.

SOURCES OF INFORMATION

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