Starbucks: Schultz Serves UP a Turnaround
Inspired by Italian coffee bars, Starbucks CEO Howard Schultz set out to provide a completely new
consumer experience. The trademark of any Starbucks is its ambience – where music and comfortable
chairs and sofas encourage customers to sit and enjoy their beverages and, more recently, food and even
wine. While hanging out at Starbucks, customers can use the complimentary wireless service or just
visit with friends. The barista seems to speak a foreign language as she rattles off the offerings: Caffe
Misto, Caramel Macchiato, Cinnamon Dolce Latte, Espresso Con Panna, or Mint Mocha Chip
Frappuccion, among some 30 different coffee blends. Dazzled and enchanted, customers pay $4 or more
for a venti-sized drink. Starbucks has been so successful in creating its ambience that customers keep
coming back for more.
Starbuck` s core competency is to create a unique consumer experience the world over. The strategic
intent was to create a “third place”, between home and work, where people wanted to visit, ideally daily.
Customers are paying for the unique experience and ambience, not for the cup of coffee. The consumer
experience that Starbucks created is a valuable, rare, and costly to imitate intangible resource. This
allowed Starbucks to gain a competitive advantage. Since 2000, Starbuck` s revenues have grown 10fold,
from less than $2 billion to some $20 billion in 2015.
While core competencies are often built through learning from experience, they can atrophy through
forgetting. This is what happened to Starbucks. Between 2004 and 2008, Starbucks expanded operations
rapidly by doubling the number of stores from 8,500 to almost 17,000 stores. It also branched out into
ice cream, desserts, sandwiches, books, music, and other retail merchandise, straying from its core
business.
Trying to keep up with its explosive growth in both the number of stores and product offerings,
Starbucks began to forget what made it unique. It lost the appeal that made it special, and its unique
culture got diluted. For example, baristas used to grind beans throughout the day whenever a new pot of
coffee had to be brewed (which was at least every eight minutes). The grinding sounds and fresh coffee
aroma were trademarks of Starbucks stores. Instead, to accommodate its fast growth, many baristas
began to grind all of the day` s coffee beans early in the morning and store them for the rest of the day.
New espresso machines, designed for efficiency, were so tall that they physically bocked interaction
between baristas and customers. Although these and other operations changes allowed Starbucks to
reduce costs and improve efficiency, they undercut Starbuck` s primary reason for success – that going
to Starbucks was not simply a stop for caffeine; it was a sensory experience. The negative impact of
cost-reduction measures was underscored when Starbucks lost a blind taste-test to fast-food giant
McDonald` s . Among six coffees tested, Starbucks came in last. Even run-of-the-mill supermarket
coffees sold in huge cans were rated higher. Some customers don` t like Starbucks coffee and gave the
chain the nickname “Charbucks” ´- because critics say that a lot of the coffee has an overly roasted
quality, a dark and bitter taste.
To make matters worse, the global financial crisis (2008 – 2009) hit Starbucks hard. The first item
consumers go without during recession are luxury items such as a $4 coffee at Starbucks.
Coming out of an eight-year retirement, Howard Schultz again took the reins as CEO in January 2008,
attempting to re-create what had made Starbucks special. He immediately launched several strategic
initiatives to turn the company around. Just a month after coming back, Schultz ordered more than 7,000
Starbucks stores across the United States to close for one day so that baristas could learn the perfect way
to prepare coffee. The company lost over $6 million in revenue on that one day. This exacerbated
investor jitters, but Schultz felt the importance of relearning how to create a unique Starbucks experience
was key to bringing back its unique corporate culture.
In 2009, Starbucks introduced Via, its new instant coffee, a move that some worried might further dilute
the brand. In 2010, Schultz rolled out new customer service guidelines: Baristas would no longer
multitask, making multiple drinks at the same time, but would instead focus on no more than two drinks
at a time, starting a second one while finishing the first. Schultz also focused on readjusting store
manager` s goals. Before Schultz return, managers had been given a mandate to focus on sales growth.
Schultz, however, knew that Starbucks` main differentiator was its special customer experience. The
CEO instructed managers to focus on what had made the Starbucks brand successful in the first place.
Although its earlier attempt to diversify away from its core business in the mid-2000s failed, under
Schultz, Starbucks was able to successfully introduce food items. Attempting to drive more store traffic
in other than the morning hours where customers need their daily caffeine shot, the chain has added
baked goods, sandwiches, and other food items to its menu. To get more customers into its stores in the
late afternoon and early evening – traditionally its slowest time – Starbucks stores now offer items such
as vegetables, flatbread pizza, plates of cheese, and desserts. It even introduced alcoholic beverages such
as wine and beer, available after 4 p.m. Starbucks` goal is to double its revenues from food over the next
few years and to be seen as an evening food-and-wine destination. To symbolize its transition from a
traditional coffeehouse, Starbucks dropped the world coffee from its logo.
Schultz also pushed the adoption of new technology to engage with customers more intimately and
effectively. Starbucks now uses social media platforms Facebook and Twitter to communicate with
customers more or less in real time. Its highly successful Starbucks loyalty program has over 10 million
regular users. Some 20 percent of all transactions in U.S. stores are now made using mobile devices.
The latest tech innovation is a Starbucks app that allows customers to order and pay for drinks and food
ahead of time, so that they can bypass standing in line and just need to pick up their order.
Finally, as the U.S. market appears to be saturated with some 12,000 stores, Schultz believes that
Starbucks has a great growth opportunity by opening more cafes overseas. Starbucks is planning to have
more than 3,000 stores in China by 2019, up from 1,500 in 2015. Starbucks also plans to double its
number of cafes elsewhere in Asia to more than 4,000 in the next few years.
As the creator of Starbucks, however, Schultz enjoyed a degree of freedom that an ordinary CEO would
not have had. Howard Schultz is to Starbucks much like Steve Jobs was to Apple. Schultz has the
reputation and power of personality to implement a change that reduces operational effectiveness in
favor of delighting customers. Schultz was able to orchestrate a successful turnaround, and with it
Starbucks was able to gain and sustain a competitive advantage. Since 2009, Starbucks` stock price has
appreciated by over 1,000 percent, outperforming the Dow Jones Industrial Average by some 940
percentage points. Between January 1, 2009, and August 20, 2015, Starbucks shares appreciated by
1,030 percent, while the Dow Jones Industrial Average appreciated by 91 percent.
Discussion questions:
1. How did Starbucks create its uniqueness in the first place? Why was it so successful?
2. To be a source of competitive advantage over time, core competencies need to continuously be
honed and upgraded. Why and how did Starbucks lose its uniqueness and struggle in the mid-
2000s?
3. What strategic initiatives did Howard Schultz put in place to re-create Starbucks` uniqueness
after his return in 2008? Explain why a specific strategic initiative was successful, if so.
4. What makes Schultz a great strategic leader?