Starbucks Case Study, August 2008

Recap: Howard Schultz in and out as CEO

Howard Schultz has been in and out of Starbucks as the Chief Executive Officer
since 1987. In 1971, Starbucks was founded in Seattle, Washington. Shultz joined
the firm in the mid-1980s and decided to start “Il Giornale.” In 1987, he purchased
all of the Starbucks’ assets and become the CEO. Former CEO Jim Donald joined
Starbucks in October 2002 as president of the North American division and became
CEO effective March 21, 2005.

Two years later on February 14, 2007 the infamous “Valentine’s Day Memo” was
sent from Schultz regarding business decisions that may have led to negative
effects in Starbucks. Donald was asked to step down as CEO in 2007 as a result of
slowing of same-store sales and Schultz was asked to return to his former CEO
position, effective January 7, 2008. From the February 14 memo:

“…one of the results has been stores that no longer have the soul of the past
and reflect a chain of stores vs. the warm feeling of a neighborhood store.
Some people even call our stores sterile, cookie cutter, no longer reflecting
the passion our partners feel about our coffee. In fact, I am not sure people
today even know we are roasting coffee. You certainly can’t get the message
from being in our stores.”

Capsule History of Starbucks

Starbucks as been in operation for over two decades in the United States as well as
into Europe, Asia and is currently working on Central and South American
expansion. They continued to experience growth in revenue for YE 2005, 2006 and
2007 which has been said to be attributed to an increase in domestic and
international stores, product development and mix changes as well as increase in
prices.

Growth relies mostly on visibility, word of mouth, saturation store placement and
other informal marketing methods. In November 2007, however, Starbucks
launched its first-ever nationwide TV ad campaign as a result of sluggish traffic in
US stores.

Net income was up to 26M USD in 1995. After growing share price from 1992 to YE
2004, the market has been volatile with marked downward trend. Stock price
peaked at ~40 USD in May 2006. At the time of Schultz’s reposting, shared were
down to $18.38 USD. Finally, on April 24, 2008, shares hit a 52-week low of
$15.39. The firm has never once paid a dividend to shareholders.
Recent years have brought much more competition, as many firms in the food
industry are trying to break into the coffee market. Firms include McDonalds,
Dunkin’ Donuts, Wendy’s and Sheetz, who have all added less expensive coffee-
based items to their menus.

Corporate Social Responsibility:

CSR is a central element to Starbucks’ philosophy, evidenced by their Mission

Statement talking to concerns from employees, environment and communities. An
“Environmental Mission Statement” articulates the importance of understanding
environmental issues and buying and selling environmentally friendly products.

A Key Performance indicator addresses a variety of categories including the firm’s

past, present and future goals and whether or not they were successful in achieving
them. In 2007, volunteerism declined and there was no report of health and safety
under the “Employee” portion of the report, which was visible in the 2005 Key
Performance Indicator. Additionally, “Workplace,” “Partner satisfaction” and
“Partner engagement” percentages were absent, which is different from years past.

Product Mix:

Since the February 2007, Starbucks has made many different changes in its
product mix with both the core (coffee, food) and non-core items (music, clothing).
Among the non-core product extensions includes teaming up with the Bravo
Network series, “Project Runway.” The purpose of this collaboration was to create
limited-edition T-shirts that represented customers’ favorite drinks. These shirts
included graphic icons that represented beverage choices such as a grande iced
triple 2% latte or a tall skim cappuccino with sugar-free vanilla syrup. This type of
promotion was an attempt on Starbucks’ behalf to build its business beyond coffee
and beverages to include merchandise such as books and mugs that have entail
lower labor costs.

In addition to adding merchandise to its line, the firm formed Hear Music in March
2007, a record label with the Concord Music Group. Hear Music was to form
relationships directly with artists and distribute recordings. Paul McCartney was
signed as a debut artist and records were released by musicians such as Ray
Charles and Sergio Mendes.

To expand beyond the record label, Starbucks additionally teamed up with iTunes to
give away 50 million songs that included selections geared towards a “younger
generation.” Musicians in this category included Bob Dylan, Joss Stone, John
Legend, Annie Lennox, Joni Mitchell, Keith Urban and Paul McCartney. This
promotion celebrated the launching of wireless iTunes Wi-Fi music store in more
than 600 locations including New York and Seattle. On top of the 50 million songs,
Starbucks offered its customers a free “song of the day,” at over 10,000 locations,
redeemable at the Apple Inc. iTunes Store selected by Starbucks Entertainment.

What experienced even more changes that Starbucks’ non-core products, were its
core source of revenue, its beverages. Changes included alterations in healthfulness
of beverages, to new items, to removed items, to customer feedback.

In March 2007, the company started to look towards adding low-calorie food and
beverage options to its menu and had an entire time working on a “better for you”
program. Additions included warm sandwiches, breakfast items to capitalize on in-
store breakfast traffic. This plan didn’t last very long, as they decided in December
2007 that they would stop serving warm breakfast items.

They did, however, continue to work on the healthfulness of their products,

announcing the elimination of trans-fat usage in all US, UK and Canada stores by
YE 2007. At the time, the statement was also made that work was underway to
remove trans fats from markets outside North America. Then, the use of whole milk
was eliminated from products and 2% became standard, via customer requests.

For the additions that Starbucks made, they decided on eliminating products as
well, such as Jones Soda. The purpose of this was to create more room for lunch
items such as salads and sandwiches. This move wasn’t expected to have a
negative toll on Jones, as Starbucks sales only amounted to under 3% of Jones’
total revenue.

In April 2008, Schultz made it a goal to “bring back the soul” and introduce a new
blend that would attract the original Starbucks drinkers from the 1980s. The new
item was called Pike Place Roast, an “everyday” brew. On April 8 the company
offered free 8 oz. portions, served in specially designed cups using the original
1971 logo. Two more additions to the menu that took place in April included a fresh
fruit and whey smoothie and an icy/sweet beverage developed with an Italian
company.

Outside core and non-core products, Starbucks made other attempts to spread the
word. The firm gave out loyalty cards in March 2007 for free refills and two hours of
free wireless Internet to lure in customers. Due to sluggish store traffic, in
November 2007 the firm announced plans for a nationwide TV ad campaign to
reach out to more customers.

After using TV as a form of promotion, the firm turned to the Internet, introducing
MyStarbucksidea.com in March 2008. This was a website where coffee fans had free
reign to suggest coffee flavors or other products that could be added to the
Starbucks menu in order to enhance the “Starbucks Experience.” The website was
monitored by a select team of employees that were able to respond back to
customers and report suggestions to more decision-makers of the company. (See
Exhibit 1)

Other notable differences include the heightened concern in terms of healthy

products, as seen in Exhibit 3. According to the 2006 CSR report, 2006 Health &
Wellness goals include investigation into the use of organic ingredients, menu
customization and readily available nutritional information.

Exhibit 4 examines the firms Health & Wellness goals for 2007. Among these
include decrease in calories for bakery and beverage items and increasing the
percentage of customers who view Starbucks as having healthy menu options from
21 percent to 50 percent by 2010.

Corporate and Organizational Changes:

Over the past few years, especially, Starbucks has experienced a number of store
openings, closings and expansions. They announced a plan to open 10,000 more
store by YE 2011. In June 2007, however, shares hit a 20-month low and the firm
announced plans to open 2400 more stores in 2007. Eventually, the target was
changed from 2400 to 2600, 200 of these stores being international locations.
Schultz continued to lower the pace of new stores openings to 1,600 in the US and
closed 100 underperforming stores by September 2007 and cut face for new store
openings by 425. Finally, the firm decided to close 45 grocery stores at Save Mart
and Lucky, brought development rights from Coffee Vision Atlantic, the Starbucks
license in Quebec and Atlantic Canada.

Internationally, Starbucks made adjustments to expand business around the globe.

In July 2007, a Mexico restaurant operator signed a letter of intent to develop
coffee shops in Argentina and Chile. Starbucks also expanded its relationship with
PepsiCo for ready-to-drink beverages available in China. Later in the year,
Starbucks announced the opening of 80 stores in greater China for the following
fiscal year as well as a joint venue with Mexico to form Café Sirena as part of Latin
American expansion. In other areas, the firm planned on the addition of UK and
Ireland stores to 100 in 2008 and a store in Lyon, France.

What Starbucks experienced even more than changes in number of stores opening
and closing, organizational shuffling. To begin with, CFO Peter Bocian replaced
Michael Casey, to receive an annual salary of 575K, while Casey transitioned into a
senior advisory role. Martin Coles moved from the position of President of Starbucks
Coffee International to Chief Operating Officer in June 2007. One of the largest
changes occurred in January 2008 when Jim Donald was replaced with Howard
Schultz at the Chief Executive Officer. After which, Shultz announced an overhaul in
management structure, eliminating 600 field-operation positions and 220
corporate-level jobs.
Harry Roberts returned to the company as Chief Creative Officer and Senior VP
while Terry Davenport was appointed as Senior VP of marketing to lead a new
marketing and brand strategy function. Chris Bruzzo was named the Chief Technical
Officer, a new position in the company. President of Entertainment, Ken Lombard,
left the company in April 2008 to “pursue other business interests.” Furthermore,
the US field operations were organized into four divisions instead of two creating:
Western/Pacific, Northwest/Mountain, Southeast/Plains and Northeast/Atlantic.

Efficiency in Starbucks Equipment/Preparation of Core Products:

As a part of Schultz’s effort to “bring back the soul” to Starbucks, he approved of

the elimination of La Marzocco machines for automated machines. Additionally, he
eliminated the scooping of whole-bean coffees and merchandised stores with pre-
packaged bags. Although an attempt to increase efficiency, these two decisions
resulted in a loss of aroma in every store. While some customers missed the loss of
“soul,” others found the ability to get in and out of the store appealing and kept
them coming back.

In February 2008, Schultz closed over 7,000 Starbucks stores for a 3.5 hour barista
training to “perfect the art of espresso.” New equipment was ground in for
efficiency and customer connection. They added a shorter automated espresso
machine so that the customer could make eye contact with the barista as they
create an espresso shot. Additionally, Starbucks acquired Coffee Equipment
Company that makes a non-drip machine to allow baristas to deliver one freshly
brewed cup of coffee at a time, similar to a French press.

Reconnecting with the Starbucks Image: Transformation Agendas to

Starbucks Partners:

There is a series of pages on www.starbucks.com dedicated “Transformation

Agendas” sent by Howard Schultz to updates shareholders about Starbucks’
progress to rebrand itself and reconnect with its audience.

On February 4, 2008 the memo discussed receiving 2,000 emails from customers
and employees with suggestions on improving the firm. Schultz shares thought that
he “knows to be true” that include roasting the highest Arabica coffee in the world,
having a renewed clarity of purpose and are laser-focused on the customer
experience. He voices his high expectations of customers and employees and
encourages them to continue communication.

February 11, 2008’s memo announced the in-store education and training event for
a hands-on espresso training experience. The goal of this education session was to
provide a renewed focus on espresso standards for a high-quality beverage. It
demonstrated focus on transforming the Starbucks Experience for both customers
and partners.

Other “agenda” items include modifications in a variety of fields from US Store

Development, to US licensed Stores, to Partner Resources, to Marketing and Global
Communication. Later on in Schultz’s list of “agendas,” he spends time to announce
the introduction of a new coffee, the Pike Place Roast. In this agenda, he discusses
the opportunity to celebrate history and take everybody “back to the future.” (See
Exhibit 6)

Where Did Starbucks Go from Here?

On May 16, 2008, Starbucks advanced 2.4% in pre-market trading, as the SEC
showed that Nelson Peltz’s Train Partners has a new stake in the coffee retailer. The
activist investor has about 900,000 shares in Starbucks. Given the previous pages,
do these events show a measure of success of failure on Starbucks’ part to rebrand
them selves and bounce back? Essentially, a lot has happen in Starbucks’ history
and then Peltz invested in 900,000 shares, what is he trying to insinuate?
Exhibit 1:Product Mix, Core vs. Non-Core

Month Core Product Non-Core Product

February 2007 Project Runway limited
edition t-shirts that
represented customers’
favorite drinks
March 2007 Planned on adding low-cal Formed “Hear Music,” with
food and working on a Concord Music Group
“better for you” program
May 2007 Eliminated use of trans-
fats in all stores in
continental US, Alaska,
Canada. Switched to 2%
as standard milk.
June 2007 Dropped Jones Soda to
make room for salads and
sandwiches
September 2007 Gave away 50 million
iTunes songs, Wi-Fi Music
stores live in 600 locations
November 2007 Outlined plans for first
ever nationwide TV ad
campaign
January 2008 Stopped serving breakfast
sandwiches
March 2008 Customer loyalty card for
free refills and two hours
of free wireless internet
April 2008 Introduced “Pike Place Targeted more than 7,000
Roast” coffee and offered stores with Wi-fi by May
free 8-oz cups on April 8. 1, for qualified AT&T
Used old 1971 logo customers