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Starbucks is the world's leading retailer, roaster and brand of specialty coffee, now with operations in more than 75 countries. The company was initially lampooned for its empire-building ambitions, as it extended its network with bewildering speed, first throughout the United States and then around the globe. Yet Starbucks was astonishingly successful in creating a global brand in record time, while also maintaining - until 2008 at least - an enviable 20%-plus annual increase in revenues. There was a dip in performance for a couple of years as Starbucks recovered its poise, but the group has delivered record performance once again since 2010. It has also extended its footprint into packaged retail coffee, the ready-to-drink sector (with an equally successful bottled Frappuccino in association with PepsiCo), and most recently instant coffee and a home-brew system to compete with Nestle's Nescafe and Nespresso respectively. Yet for all its ruthless commercial acumen, Starbucks still prefers to think of itself as a personality choice, a lifestyle brand, a home away from home.
Click here for agency account assignments for Starbucks from Adbrands.net. The company declared advertising expenditure of $249m in fiscal 2016, included in total marketing expenses of $379m.
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Starbucks has proved to be one of the more unexpected marketing phenomena of recent years, expanding from a regional coffee house chain into a global giant in the space of little more than a decade. Until the recent global recession, sales growth had averaged 20% per annum or more, and yet the group is only now beginning to tap into such potentially vast markets as China, India, Russia and Brazil. That expansion is vital if Starbucks is to reduce its reliance on the US market, which began to slow sharply towards the end of 2007. The group also wants to broaden its menu, since it remains to be seen just how many more variations on a standard cup of coffee Starbucks researchers can come up with. The number of items served by the chain has risen from around 181 in 2009 to 255 in 2015.
Starbucks Coffee Company is the world's leading retailer of specialty coffee. Yet the company prefers to regard itself as something more than this. Starbucks isn't just a coffee shop; the "Starbucks Experience" is a lifestyle choice, a home away from home, an emotional experience contributed by the warmth, friendliness and convenience of the in-store environment, the smell and taste of the coffee, the attractive bustle of customers and the relaxing vibe of its background music. Clearly, it's a formula that works. In 2016, founder & CEO Howard Schulz estimated that roughly 90m people visit a Starbucks somewhere in the world every week.
Much of the company's success in the past has been ascribed not to advertising (which was negligible until around 2008), but to the "cluster strategy" it uses when selecting its outlets, saturating high volume urban markets. As a result, Starbucks becomes a invaluable hub for each community which its serves. Total store numbers by Oct 2017 were 27,339 worldwide across more than 70 countries. The US remains the biggest market by far with around 13,170 company-operated or licensed outlets. Yet in reality, that many outlets spread throughout the country isn't really a great number. (Sandwich chain Subway has just over twice as many). However in prime locations Starbucks has a deliberate policy of locating its outlets as closely together as possible, to give the impression of greater density than is actually the case. In 2006, the group began a push out of US urban centres into the suburbs and more rural areas with the introduction of new cafes with drive-though windows. By the end of 2008, more than 2,800 outlets offered drive-through service. Another key strategy is to maximise service in different day-parts - for example, breakfast or lunch - with a more versatile and attractive food menu.
The proof of the strategy's success is in the numbers. Starbucks had risen from being the 28th food service chain in the US in 1997 to the #2 by systemwide sales by 2014. It overtook Subway that year with system sales estimated at over $13.0bn. For 2016, NRN estimated US systemwide sales of $17.9bn, or $1.4m per outlet. That's equivalent to almost 63% share of the US beverage and snacks retail market, compared to main rival Dunkin' Donuts at just under 29%.
Starbucks operates the cluster approach in the international market as well. The first Starbucks outside North America only opened in 1996, in Japan. Yet since then the chain has mushroomed with astonishing speed. Japan is now its second biggest market by retail sales, home to more than 1,140 outlets, until recently all operated under license. It bought out its local licensee in 2015 for around $900m. Japan has more recently been overtaken by China, where store numbers had risen to 2,382 by late 2016. Doubling down on this market, Starbucks announced the biggest acquisition in its history in 2017, buying out its joint venture partners in Eastern China to take full control of all outlets in the country. South Korea is another major market, with over 950 outlets, all operated by licensees.
There are around 1,400 stores in Canada (although Starbucks trails local leader Tim Horton's). The UK is the next biggest market with 898 stores. Here as in many other territories the success of Starbucks led to the spawning of numerous competitors. When Starbucks launched into the UK in 1998, it initially faced competition from more than five existing competitors, each already cast in the Starbucks mould. Several competitors have fallen by the wayside as margins have become ever thinner. Starbucks is currently #2 in the UK behind the Costa chain, with around 27% share by sales in 2014 (to its rival's 47%. Caffe Nero is ranked third with 13%). In 2014, the group started opening in-store cafes at selected outlets of supermarket Asda under the Seattle's Best brand. In 2015, it began opening Starbucks outlets within Casino supermarkets in France.
The company continues to make new inroads into new countries, although in most cases its local presence is still comparatively small. In 2007, the group entered the potentially vast new market of Russia for the first time, following a long-running court-case to reacquire rights to its name, which had been illegally registered by a local company. Bulgaria, Portugal and Argentina got their first stores in 2008. The first outlets opened in India in 2012, and in 2017 Starbucks finally took its first steps in the original home of coffee bar culture, Italy.
Of Starbucks' 25,000 or so stores, just over half are owned and controlled by the group, including approximately two-thirds of outlets in the US, Canada and the UK outlets. In some countries (such as Japan, France, Thailand and Singapore), it owns all or almost all local outlets. For the rest, Starbucks licenses local operators or international hotel operators such as Hyatt or Marriott, to operate branded outlets on its behalf. In some cases, Starbucks also owns a minority shareholding in its local licensee. However all outlets are essentially identical in concept, cafes selling gourmet coffee, tea and pastries for consumption in-store or takeaway.
The group's latest strategy is introduce a new network of premium outlets offering a more sophisticated "reserve and roastery" service. These outlets operate under the Siren Retail banner, a reference Starbucks' logo figurehead. The upscale outlets also serve alcohol in the evenings. Sales of beer and wine were tested in standard US outlets of Starbucks in the mid-2010s but that experiment was eventually terminated in 2017.
Starbucks has also broadened its scope with a small collection of subsidiary brands. In 2003 the group acquired wholesaler Seattle Coffee Company, whose brands include Seattle's Best and Torrefazione, for $72m. Another new idea was the launch of the Starbucks Duetto Card in 2003, in partnership with what was then BankOne (now Chase), which combined the store's existing reward card program with a Visa credit card. Underpinning all its promotional marketing is the My Starbucks Rewards loyalty programme, which has partnership arrangements with multiple other companies including streaming service Spotify, taxi service Lyft and the New York Times. More than 13m customers worldwide use the service to earn discounts on purchases.
The group supplies coffee in bulk to foodservice companies, mainly in the US, for sale through offices, hotels, restaurants and airlines. It also licenses selected partner companies to market Starbucks-branded consumer products through grocery clubs or supermarket channels. The most significant business is the sale through supermarkets of packaged beans, ground coffee and tea under the Starbucks, Seattle's Best and Tazo Tea banners. This business was managed under license for several years by Kraft Foods, in a relationship that dated back to 2000. However, Starbucks terminated that arrangement in 2010, and took back direct control of the business. Kraft sued for improper termination, and successor company Mondelez was eventually awarded $2.7bn in damages in 2013 by an independent arbitrator. According to figures from Euromonitor, the Starbucks packaged coffee brand had 1.4% share of the global coffee retail market. In the US alone Starbucks had approximately 9% share of the packaged ground coffee market in 2014 (IRI in Grocery HQ), behind JM Smucker/Folgers and Kraft. In a surprise development in 2018, Starbucks sold perpetual global rights to its packaged products to Nestlé. That deal will massively expand grocery sales of Starbucks' branded products from around 28 countries to more than 190.
The North American Coffee Partnership is a joint venture with PepsiCo to produce ready-to-drink Frappuccino, now available in more than seven different varieties, as well as Starbucks DoubleShot, a canned ready-to-drink chilled espresso. Both products are available through normal supermarket channels in the US and selected other markets. That partnership was extended beyond North America from 2007, with China among its first targets. In 2008, an RTD version of Tazo Tea was added to PepsiCo's global tea partnership with Unilever. In 2005, Starbucks agreed a similar partnership with Suntory to market a line of pre-packaged chilled coffees through convenience stores in Japan under the Starbucks Discoveries brand. In 2005 the company agreed to lend its name to a new Starbucks Coffee Liqueur, produced under licence by Jim Beam Brands. In 2008, a line of chocolate products were launched in the US by Hershey, and the license to product Starbucks-branded ice cream was transferred from Nestle's Dreyer to Unilever. Arla Foods launched a licensed range of Starbucks chilled coffees in the UK in 2010.
In perhaps the most surprising development to-date, the company introduced its first instant coffee product in early 2009 under the Via Ready Brew banner. It was sold in company stores as well as Costco and Target from 2009, and through other grocery outlets from 2010. Against the odds perhaps, it has proved to be a definite hit, with sales topping $200m in 2010. The following year, the group also announced a deal with Green Mountain Coffee Roasters to distribute Starbucks coffee and tea for Keurig single-serve coffeemakers. SymphonyIRI named the Starbucks K-Cup line as the second most successful food & beverage launch of 2011/12 with first full-year sales of $198m. In 2012, Starbucks unveiled its own single-serve home coffee system, Verismo, designed as a direct challenger to Nespresso and similar devices. Manufactured by German company Krueger, it was launched initially in North America and four key European markets. By 2014, Starbucks had accumulated around 14% of the retail single-cup coffee market (IRI for Grocery HQ), behind Keurig (44% share) but ahead of Folgers (11%). Sales of packaged or single-serve products through traditional retail channels were $2.87bn in ye 2016.
The group has also diversified into other areas. In November 2011, it took a step into the fruit juice market, acquiring Californian juice bar business Evolution Fresh for $30m. Another unexpected move was the acquisition in 2012 of San Francisco's Bay Bread Group, which owned the La Boulange bakeries chain, for $100m. That deal proved unsuccessful, and all of La Boulange's remaining outlets and bakeries were shuttered in summer 2015. However, the group did later become an investor in and licensee of boutique artisan bakery chain Princi. Also in 2012, the group acquired Teavana, a chain of specialist tea stores, mainly in the US, for $620m. In 2014, Teavana teamed up with Oprah Winfrey to develop a co-branded Teavana Oprah Chai Tea, also sold through Starbucks as well as Teavana's own urban "tea bars". The Teavana brand has proved to be very popular with customers, especially in China, but the chain of standalone outlets less so. All 380 of the separately branded Teavana stores were shuttered in 2017. A secondary packaged tea brand, Tazo, was sold in 2017 to Unilever for $384m, almost 50 times more than Starbucks originally paid for it.
Yet all this expansion has not been without its troubles. In early 2007, founder and chairman Howard Schultz gave a stark warning to senior executives at the chain warning of over-commoditisation of the business. The internal memo, leaked to the press, warned that the expansion of the business from 1,000 to almost 17,000 stores in a decade had resulted in a dangerous "watering down of the Starbucks experience". Among the factors which he said had "damaged" the brand were the move to automatic espresso machines which "blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista"; and flavour-locked packaging which removed "aroma - perhaps the most powerful non-verbal signal we had in our stores" as well as the sight of "our people scooping fresh coffee from the bins and grinding it fresh in front of the customer". The end result, said Schultz, was that outlets no longer had "the warm feeling of a neighborhood store", making it easier for rival operators to poach Starbucks customers.
That damage began to be reflected in a sudden slowdown in growth. In the financial year ending September 2008, the group experienced a 5% decline in same-store sales in the US, partly offset by a 2% improvement in other markets. At the end of 2008, however, Starbucks began to address some of its weaker existing markets in the light of worsening global economic conditions. In its most significant such move to-date, it closed 600 under-performing US outlets, as well as three-quarters of its stores in Australia, where Starbucks has faced fierce competition from McDonalds' McCafe outlets. Another 200 US outlets and 100 international stores were added to the closure list in early 2009, and the company also reduced the number of planned new openings.
It also scaled back the level of involvement in entertainment, an odd sideline which had grown up alongside the main cafe business. Satellite unit Hear Music first originated to service the stores' instore music requirements. A joint venture with re-release label Concord Music Group, it initially marketed compilation CDs to be played and sold in Starbucks outlets, but eventually evolved into a fully-fledged record label. The business experienced unexpected success during 2005 with the release of the final album by Ray Charles, which received 8 Grammy awards. As a result it began releasing more new material under license from artists including Herbie Hancock, as well re-releases of selected material by artists as mainstream as the Rolling Stones and Elton John. In a startling coup announced in early 2007, Hear Music signed a deal to release the new album by former Beatle Paul McCartney, and followed this with a similar arrangement with Joni Mitchell. In 2006, the company signed up as a major promotional partner for family movie Akeelah and the Bee, and expanded its range of instore merchandise to include DVDs and books. However, as sales in the main coffee retail business began to slow in 2008, Starbucks indicated plans to scale back its entertainment division, and management of Hear Music was transferred to partner Concord Music Group.
Until 2008, the company had reported an annual sales increase of more than 20% every year for a decade. A decline in US same-store sales during 2007 and 2008 was offset by new openings and increasing international revenues, but overall performance dipped sharply during 2009, with annual sales slipping year-on-year for the first time ever. A more hands-on approach from founder Howard Schultz, accompanied by the closure of under-performing outlets, and several new product innovations allowed sales to rise once again from fiscal 2010.
Group revenues for the year ending October 2012 hit a new high of $13.30bn, up an impressive 14% on the year before. Company-owned stores contribute around 79% of sales. Net income also hit a new record in 2012 of $1.38bn, up 10% year on year. Revenues for the year to 2013 rose 12% to another record of $14.89bn, but net income plunged as a result of the Kraft judgment to just $8m. For the year to Sept 2014, revenues rose 10% to $16.45bn, while net income rebounded to a best-ever $2.07bn.
For the year to Sept 2015, revenues rose by almost 17% to a new high of $19.16bn. Attributable net income jumped by a third to $2.76bn. Topline broke the $20bn barrier for the first time in ye 2016, with an 11% increase to $21.32bn. Beverages accounted for 58% of sales and food for 16%. Despite Starbucks' global footprint, almost three-quarters of revenues - $15.8bn - were still generated in the US. Net earnings also set a new record at $2.82bn.
Revenues for the year to 2017 rose 5% to $22.38bn, while net earnings edged up a little over 2% to $2.88bn.
Howard Schultz is the effective founder of Starbucks as it is now. He took back the role of president & CEO from Jim Donald at the beginning of 2008 to supervise a relaunch of the business following several years of poor performance. In April 2017, he took on a new role as executive chairman, handing over the CEO position to former president & COO Kevin Johnson. Roz Brewer was recruited from Sam's Club to take over from Johnson as COO & group president, Americas. Schultz announced his retirement from the business in 2018 to involve himself in public service. There had been speculation that he might launch a bid to become Democratic candidate for the US presidency in 2020, but he ruled this out in 2019.
The first Starbucks shop opened in Pike Place Market in Seattle in 1971. A simple retailer of fine beans and blends as well as coffee-making equipment, it was named by owners Gordon Bowker and Gerald Baldwin after a character in Herman Melville's literary classic Moby Dick. (Mr Starbuck is first mate on Captain Ahab's ship, the Pequod. Despite the legend that has grown up around the naming of the store, there is no reference by Melville to Mr Starbuck being a particular fan of coffee). The romantic vision of early sea-born coffee traders also gave rise to the mermaid logo. For a decade it remained just a shop not a cafe. By 1982, there were six Starbucks outlets in Seattle, and the company had a profitable operation selling its coffee in bulk to upmarket restaurants. That year Howard Schultz joined as director of retail operations and marketing. On a business trip to Milan two years later he fell in love with the style and atmosphere of Italian espresso bars and tried persuade Bowker and Baldwin to open a coffee bar inside each Starbucks store. They declined the suggestion, but lent Schultz some money to start his own, which he named Il Giornale. This proved even more successful than Starbucks, and in 1987, Schultz bought out Bowker and Baldwin and merged his coffee shop concept into the Starbucks chain.
As a result of further openings in Chicago and Canada, Schultz now operated 17 outlets, and he launched a mail order catalogue in 1988 to supply fine coffee throughout the US. Further locations opened in the wake of the mail order division's modest success, and by 1991, the chain had grown to 116 outlets. The following year, Starbucks Corporation issued an IPO, and subsequently negotiated deals to open instore cafes in Nordstrom department stores and Barnes & Noble bookstores, and to supply beans and ground coffee to ITT Sheraton Hotels and United Airlines. In 1996 Starbucks took its first steps outside North America, agreeing a joint venture with Sazaby Inc to open the first Starbucks outlet in Japan. Further shops quickly followed in Japan and in Singapore. The same year, a tie-up was agreed in the US with Dreyer's to market Starbucks coffee ice cream, and with PepsiCo to market its Frappuccino iced coffee.
By now, the coffee bar concept was being borrowed by other companies, especially in the UK, where a number of Starbucks imitators had sprung up. The Seattle Coffee Company UK had been set up in 1990 by Scott and Ally Svenson to introduce Starbucks-style cafes to the local market. It proved a notable success, and was itself followed by a number of competitors. By 1998, Seattle Coffee Company remained the biggest player in the UK market with 60 outlets. That year it was acquired by Starbucks, and was rebranded under the Svensons' management. Back home the company also began acquiring other smaller coffee bars and importers as well as tea importer and blender Tazo.
In the late 1990s, the company moved aggressively into the internet economy, conscious that internet users were a key part of its target market. Starbucks introduced internet terminals into several US outlets, and made a number of investments in online businesses, including cooking site Cooking.com, furniture store Living.com and delivery service Koszmo.com. However most of these failed to survive the subsequent crash. More successful was the Starbucks card, introduced in 2001, which allowed customers to charge their purchases to a pre-paid swipe card. In 2002, the company began rolling out what it claimed was the world's biggest Wi-Fi or wireless internet network, in partnership with T-Mobile and Hewlett Packard. This allowed users to log on to a wireless Starbucks internet portal instore using their own laptops. Meanwhile the company continued its relentless expansion into new international markets. In 2002, the Starbucks brand made its debut in eight new countries including Germany, Spain, Mexico and Greece, followed by four new markets in 2003, including its first in South America. Also in 2003, the group moved into a new sector, negotiating "pouring rights" at venues including The Statue of Liberty, Madison Square Garden and Radio City Music Hall in New York, as well as several Seattle locations, to make Starbucks those venues' official coffee. The group launched in France, home of cafe culture, for the first time in 2004.
Last full revision 27th September 2017
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