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Bruce Cannady
MKTG 3215-090
February 11, 2013
Case #1: Starbucks
Executive Summary
Founded in 1971 in Seattle, Starbucks was purchased by Howard Schultz in 1987, and has been an
amazing business success story. With well over 20,000 stores in 61 countries, and growing, Starbucks
has faced and responded to the consequences of breakneck growth, the challenges of adding consumer
packaged goods (CPG) division to the company, devising optimum strategies for measured expansion
in China, in particular, all the time while remaining solid in its US growth. The company, under
Schultz has made the hard realization that “less is more” when it comes to unabated expansion, CPG is
the diversifying tool of future brand sustainability, and new maturing technologies are central in
Starbucks' place in the Global Marketplace.
Background
The company has had to grapple with the effects of unbridled expansion, often times at the
expense of efficiency and cost effectiveness. Before Schultz retook the reigns of the company in 2008,
Starbucks, it seems, was beset by certain hubris – a sort of manifest destiny to expand – just for the
sake of expansion. This despite the indisputable overall successful penetration in scores of foreign
markets, not to mention domestically.
And now with the challenges of vastly increased retail commitments overseas, coupled with
acquisitions of Teavana and Evolution Fresh, the launching of their Verismo System home brewing
machine, and further penetration in consumer packaged goods (CPG), Starbucks aims to, with the help

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of the expanded impact of social and digital media, along with mobile payment platforms, propel
themselves as a global brand paradigm.
Problems
Predominantly during the period leading to Howard Schultz's return as CEO, Starbucks was
engaged in an unabated growth, ostensibly for the sake of growth itself. This growth was looked as a
strategy as opposed to a tactic, which it should have been, and was hugely undisciplined. As such,
these expansion decisions were complicit with the company's stock market prices, which were quite
high.
A real consequence of this undisciplined expansion was that many underperforming stores that
had to be subsequently closed had been open for less than eighteen months. This represented money
invested that had to written off. In CEO Schultz's view the “distinctive Starbucks experience” was in a
sense being bastardized in the face of this rapid uncurtailed growth.
An essential dilemma in Schultz's eyes was the company's practice in complying with Wall
Street expectations in providing monthly comp-store sales numbers (historical month by month same-
store sales numbers for those units over a year old). This particular metric, in the CEO's eyes, had
become to represent a detriment to the kind of growth he wanted and envisioned for Starbucks. In
Schultz's view this practice of same-store sales numbers generated decisions that emphasized
incremental value perhaps at the cost of consistent overall brand equity. So in the face of charges by
financial analysts of not being transparent, Schultz ceased reporting these monthly comp-store
numbers.
Quite another challenge was for Starbucks/Schultz to institute what was referred to as a seven-
point transformation agenda that specifically did not forgo the goal of 'growth'. He felt it would be

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vital to the goal of attracting and retaining valued employees that this future vision of the company was
not compromised.
Since around 2010, Starbucks' infiltration into grocery and drug stores with their branded
consumer packaged goods (CPG) distribution has added great value while presenting the possibility of
cannibalizing sales from their own retail stores. Somewhat related to this increase CPG footprint, is the
goal of jump starting the My Starbucks Rewards card by incorporating these outside purchases to earn
additional points/stars.
The ongoing alluring promise of further expansion into Asia, and China in particular, brings
with it obvious enormous opportunity, with so many potential customers. But as Schultz points out,
based on lessons learned from past mistakes, the growth must remain thoughtful and disciplined. The
caution is to not spread out into these seemingly ripe markets too wide or too quickly. And for that
matter, when it comes to international stores in general, and China/Asia in particular, the challenge,
based on mistakes made and lessons learned in the past, is to retain an indigenous relevancy, respecting
local tastes and cultures (even nuances), while still providing the essential Starbucks experience and
trappings, if you will.
It could be argued that successfully confronting the challenges noted above starts with the
company attracting and retaining people, domestically and internationally, whose values are consistent
with the culture of Starbucks. And particularly on the home front, this will be essential in the company
continuing to deliver solid growth in the US, already somewhat saturated with the brand and challenged
by the increased competition from chains such as McDonald's and Dunkin' Brands.
There have been mixed reviews on the company's home brew coffee machine, Verismo. This
may cause a certain weight on its stock as indicated after several quarters.
The margins of company-owned stores have been just below 20%, as opposed to the higher
margins of franchised units – typically four times that amount. This affects overall margins as

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company-owned outnumber the franchised stores.
In spite of CEO Schultz's 2008 decision on not reporting monthly comp-store sales due to its
propensity to produce stock price fluctuation extremes from month to month, 2012 saw notable
volatility, with prices reaching as high as $62 in April before falling to $43 in August.
Sobering to US investors is the reality that most of Starbucks' profits from growth overseas will
be kept overseas and won't be brought back to the US. That will affect earnings per share numbers as it
concerns those US investors.
Courses of Action
Whereas growth pre Schultz's return was viewed merely as strategy, the CEO's seven-point
growth agenda focuses on discipline and deliberate moves to contend with higher material prices and
enhanced competition, all with the focus of remaining true to the long range equity of the brand.
The company has closed close to 1000 stores worldwide over the past five years in an effort to
become more cost effective. These closures had to do with underperformance coupled with local
cultural dissimilarities.
Schultz was successful in his efforts to get away from monthly comp-store sales numbers
reporting, and despite isolated fluctuations, this had led to more consistent reliable market prices, and
moreover with a greater perceived improvement in overall Starbucks brand equity across the board.
And since decisions are no longer made that are seemingly chasing growth, going forward there should
be fewer closings of recently opened underperforming stores.
Starbucks has strived to achieve its goal of attracting people with values that enhance the brand
and experience by continuing to be an “outside the box” retailer and employer, and emphasizing
transformation and growth as part and parcel of each other.
CPG's successful ventures have truly taken Starbucks to the next level as a brand. Interestingly,

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it has served not to eat into its retail store sales, but to compliment them to a large extent. This in no
small part has to do with the successful implementation of the My Starbucks Reward card in the
purchasing transactions at grocery stores – the CPG channels. In 2013 it should be the first and most
innovative cross-channel customer loyalty program worldwide.
While the intoxicating lure of China/Asia is overwhelming, Schultz is cognizant of past
overzealousness in tempering his mainland infiltration. His strategy is to go deep into the established
Asian markets before taking on the alluring wider landscape. This affords a greater and less imposing
settling in period for the company within the local culture – the potential buying public isn't going
anywhere – better to ingratiate rather than alienate.
With more than 3000 new stores planned for America over the next five years, the president of
Starbucks Americas has committed half of these units to the strong US markets, augmented by the
inclusion of recently acquired Evolution Fresh juices and La Boulange French pastries in the new as
well as established stores. This is a deliberate and disciplined approach to solid growth domestically.
Concerning the Verismo, Starbucks' home brewing machine, despite early discounts to spur
interest, it seems that wider distribution channels should increase sales in the long run. Either way, all
forecasts seem to anticipate no real damaging effects from this venture on the company's long range
market prices.
As mentioned, the margins of franchised stores are significantly higher than their company-
owned counterparts. How this ultimately affects Starbucks' overall margins should be mitigated going
forward as the company plans to open a much higher percentage of franchised units, especially in the
China/Asia Pacific region. Also, the fact is that the absolute value of profits generated by a company-
operated store is more likely to be higher than that for a franchised store.
And while much of the overseas growth will not necessarily translated to increased earnings per
share in and of itself, there is a synergistic affect coupled with significant 9% US revenue growth to

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assuage those disposed with EPS figures quite adequately.
Recommendations
Going forward, Starbucks has to, and I believe, will become much more stable as it has to do
with the multitudes of underperforming stores closed. This is essential to the long range relevancy and
perception of the Starbucks brand, indeed. Ubiquity most times is closely acquainted with over-
exposure – exacerbated with a fleeting presence. CEO Schultz seems to have resolved that in his long
range plan for sustainability and profitability, 'less' most times means 'more'.
The crossover into consumer packaged goods (CPG) is the linchpin to brand relevancy across
the board, I believe. Walmart shoppers not inclined to buy lattes and scones at the local bistro will at
some point give into the whimsical choice of purchase – and voila! The exponential capacity of this
synergistic dynamic cannot be overestimated when it comes to brand identification, loyalty, and
profitability.
In this time, the most ambitious scale of profitability lies with the expansion of the
Chinese/Asian market. As alluded to before, striking the right balance of assertiveness and
deliberateness while being mindful of the greater political/economic fluidity between the US and the
mainland in particular is the art that must become science for this venture to be all that it could be.
Social media will continue to be the vehicle that transcends convention. Business plans to this
day are still struggling to realize and comprehend its full scale and impact when utilized to its full
potential. Starbucks as a brand, culture, its outgrowths with music and other social/cultural/artistic
ventures places it in a unique position to be at the vanguard of this ongoing communications/marketing
revolution.
Conclusion
Starbucks for me seemed to be an establishment that you either loved or – wasn't exactly your 'cup of

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tea'. I remember a time when as someone who prefers a strong full-bodied cup of coffee, I was put off
when I would go into a Starbucks and they would have no French Roast, no Sumatra brewing – no
strong full-bodied coffee – just the House Blend, or whatever they called it... That changed a while
ago. I guess by popular demand, most stores now had at least one version of a 'full-bodied' brewing for
that customer. That, in a small way for many, but in a substantial way for me represented progress –
real progress that I could touch, feel, taste.
That’s the progression that leaves me confident as one who enjoys and occasional cappuccino,
latte, frapacino, and yes, a cup of Sumatra – that under Howard Schultz's leadership, Starbucks will
continue to find its way, and leave landmarks for others to follow.

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Appendix
Webb, A. (2011). Starbucks' quest for healthy growth: An interview with Howard Schultz. McKinsey
Quarterly. Retrieved January 2013 from Global Marketing Management, University Readers, 101-107
Trefis Team (2012). Starbucks Global Growth And New Products Can Support Earnings. Forbes.
Retrieved January 2013 from http://www.forbes.com/sites/greatspeculations/2012/07/26/starbucks-
global-growth-and-new-products-can-support-earnings/
Trefis Team (2012). Don't Get Excited About Starbucks' Chinese Expansion Just Yet. Forbes. Retrieved
January 2013 from http://www.forbes.com/sites/greatspeculations/2012/05/04/dont-get-excited-about-
starbucks-chinese-expansion-just-yet/
Trefis Team (2012). Starbucks' New Products Can Jolt Earnings Thursday. Forbes. Retrieved January
2013 from http://www.forbes.com/sites/greatspeculations/2012/04/26/starbucks-new-products-can-jolt-
earnings-thursday/
Starbucks Newsroom (2012, Dec 5). Starbucks Unveils Accelerated Global Growth Plans. Retrieved
January 2013 from http://news.starbucks.com/article_display.cfm?article_id=733
Kenwell, B. (2013). Starbucks: Is The Growth Real Or Should You Stay Away? Seeking Alpha.
Retrieved January 2013 from http://seekingalpha.com/article/1104341-starbucks-is-the-growth-real-or-
should-you-stay-away
Wheatley, M. (2013). Data-Driven Location Choices Drive Latest Starbucks Surge. DataInformed.
Retrieved January 2013 from http://data-informed.com/data-driven-location-choices-drive-latest-

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starbucks-surge/
Mylant, J. (2012). Starbucks Is Growing Too Fast. Seeking Alpha. Retrieved January 2013 from
http://seekingalpha.com/article/488861-starbucks-is-growing-too-fast