This document summarizes the history and challenges faced by Starbucks Coffee Company. It discusses how Starbucks grew rapidly under Schultz's leadership in the 1990s and 2000s, popularizing specialty coffee drinks globally. However, under CEO Jim Donald in the mid-2000s, Starbucks lost its focus on quality and the third place experience. When the financial crisis hit in 2008, sales declined sharply. Schultz returned as CEO and launched several initiatives to return Starbucks to its roots, including closing underperforming stores, emphasizing quality coffee and service, and innovating new products. After difficult changes, Schultz helped lead Starbucks' resurgence.

1. Reaching A
Boiling Point
A Turnaround Case on Starbucks Coffee Company

2. Agenda
• The World’s Most Precious Commodity
• From Italy With Love
• The Latté Revolution
• Trouble Brewing
• Getting Down in the Mud
• Resurgence of an Empire

3. Most Precious Commodity?

4. Coffee Industry
• Valued at $15 billion USD
• 17 billion pounds harvested and traded
• Employing 20 million people in 80
countries
• Second highest valued commodity

5. Coffee Exports
• Grown in a variety of places across
South America, Asia, and Africa
• In 2012, 14.3 billion lbs harvested
• Price: 147.12 US cents/lb

6. Coffee Exports
International Coffee Organization
• Founded in 1963 to monitor and control
global trade of coffee
• Created trade agreements to stabilize
prices through quotas
• In 1989, the ICA of 1983 expired and
allowed quotas to dissolve
• Coffee prices plummeted during the
early 90s

7. Coffee Exports
Fair Trade Coffee
• Earning disparity between producers and
retailers grew
• Fair Trade arose as a movement to correct
this disparity
• Fairtrade International (FLO) administers
sanctions and regulations
• 827 Fairtrade Certified producers in 58
countries, representing 1.2 M farmers

8. Coffee Exports
Fair Trade & Starbucks
• In 2011, Starbucks purchased 86% (367
M lbs) of their total coffee as Fairtrade
• Largest purchaser of Fairtrade Coffee in
North America
• Reached out to communities in 20
different countries
• All attained Fairtrade prices of $2.38
USD/lb

9. Coffee Imports
• In the last decade, global consumption
has grown 27%
• Imports of coffee have grown by 35%
• The United States has remained the
dominant importer and consumer of
coffee

10. Coffee Imports
United States of America
• Retail industry valued at $37 billion USD
• Consumes 20% of the world’s coffee
supply
• In 2011, the average American
consumed 4.2 kg of coffee a year
(approx. 500 cups)
• Americans spend $40 billion USD/year
on coffee alone

11. From Italy with Love

12. In the Beginning
• Founded in 1971, Seattle, WA
• Originally a coffee whole bean roaster
and seller
• Four stores and two roasting plants
• Hired on Howard Schultz in 1982 as head
of marketing

13. Il Giornale
• In 1983, Schultz discovered the magic of
espresso
• In 1986, Schultz left Starbucks and
opened Il Giornale
• Over the next 16 months, he would
open 7 stores throughout Seattle
• All served Starbucks coffee in a style
that mimicked what he’d experienced
in Italy

14. The Latté Revolution

15. Starbucks
Schultz Era

16. Starbucks
Schultz Era
• In 1987, Schultz purchased Starbuck’s four
Seattle stores and roasting plants for $3.8
mill. USD
• Immediately expanded outside of Seattle
• In 1992, Starbucks filled for an IPO (NASDQ:
SBUX)
• In 1996, Starbucks expanded
internationally

17. Latté Revolution
Schultz Era
• In 2001, daily coffee drinkers increased
by 280% from 1997 (7 M to 27 M)
• Specialty coffee consumption
increased due to a factor know as the
“Starbuck’s effect”
• Starbucks had managed to decommoditize an industry

18. Global Focus
Smith Era

19. Global Focus
Smith Era
• In 2000, Schultz stepped down as CEO
of a $2 B/year company
• Grown to 2,600 stores in 13 countries,
providing shareholders with a CAGR of
49% since 1992
• Orin C. Smith, then COO, would step up
into the CEO role on a 5 year
commitment

20. Global Focus
Smith Era
• Smith grew Starbucks from 4,700 to
10,200 stores worldwide
• Earnings grew from $2 to $6.4 B USD
• Smith took Starbucks stock from $8.5 to
$25.83 in 2005
• Expanded Starbucks outside of its stores
into other areas of service
• Continued to push Social Responsibility

21. A Boiling Point
Donald Era

22. A Boiling Point
Donald Era
• In 2005, Jim Donald, head of Starbuck’s
NA Division, was selected as Smith’s
successor
• Experienced professional as former
head of Wal-Mart’s grocery division
• His relational leadership style made him
the board’s obvious choice
• Following in Orin’s steps would prove
difficult

23. A Boiling Point
Donald Era
• Wall Street and Shareholders set high
expectations for Starbucks
• Starbuck’s saw momentous growth,
opening 4,700 stores
• Revenues jumped $1.4 B USD in one
year and stock price rose by $11.92
(from $25.83 to $37.75)
• Donald made the Starbucks brand into
an authority beyond coffee quality

24. Trouble Brewing

25. Trouble Brewing
• Starbucks ballooned to new heights
internationally and domestically
• However, comparable store sales were
declining, from 10% to 7% in 3 years
• Operating margins took its first decline in
four years, dropping from 12.3% to 11.5%
• Schultz could sense something was not
right

26. The Infamous Memo
• Outlined three key issues to the
company’s impending demise
1. The Espresso Machines
2. The In-Store Aroma
3. The Store Designs
•
Starbucks had diverted far from its core
and it was at risk of loosing its
differentiation for ever

27. Return of an Entrepreneur
• Starbucks had a dismal financial year
• Many partners felt Schultz was right
• In 2008, Schultz would return as the CEO
and President of Starbucks
• Schultz needed to answer the question
of balance: grow but remain local

28. Financial Tidal Wave
• The fall of 2007 marked the beginnings
of what would be the worst financial
crisis
• Financial markets began to collapse
and buyer confidence would drop
• Coffee sales dropped in 2008, by 9
million kg
• US Consumer spending on food
dropped 5% between 2007-2010

29. Getting Down in the Mud

30. In the Mud
• Schultz recognized the pitfalls and
dangers around his return
• Three strategic initiatives
1. Improve the state of the US retail business
2. Reignite emotional attachment with
customers
3. Long-term changes to the business
foundation

31. In the Mud
The People
• The Transformation Agenda
• Outlined seven big moves that would
help Starbucks achieve its mission
• It would provide partners with more
than a business plan; something to
believe in

32. In the Mud
The People
• A New Mission Statement
• Would encompass six major aspects to
Starbucks business
The Starbucks mission: To inspire and nurture the human spirit one
person, one cup, and one neighbourhood at a time

33. In the Mud
The People
Store Closures and Layoffs
•
• First in its history; Closing 600 US stores in July
of 2008
• Displaced about 12,000 people
• Downside to their rapid growth; 70% of
stores closed were opened in the last 3
years
• Eliminated 1,000 non-store positions, firing
500 people

34. In the Mud
Product Innovation
• Success would not come from one
magic bullet, but a series of successes
• Schultz pulled from his entrepreneurial
roots
• Pike Place Roast would address the
everyday average consumer
• Providing a consistent, common, blend
of coffee

35. In the Mud
Product Innovation
• VIA: Starbucks in an instant
• Over 65 M cups of instant coffee
consumed annually; Starbucks had 4%
of this market
• Consumers had become complacent
• A chance to reinvent an industry

36. In the Mud
Product Innovation
• Coffee Equipment Company and “The
Clover”
• Focusing on espresso, literally put coffee
on the back burner
• The Clover Brewer would bring the
magic back into brewed coffee

37. In the Mud
Operational Costs
• Consumed with reinvigorating the frontend of the business, the back end went
unkept for too long
• Schultz and his team stripped 100 million
in permanent costs
• However, supply chain was becoming a
growing issue
• In 2008, hired Peter Gibbons as head of
SCO

38. In the Mud
Operational Costs
• Archaic POS systems were in place at many
Starbucks
• Hired Stephen Gillett as CIO
• Secured the acquisition of 10,000 HP laptops
• Pushed Starbucks into the Social Media realm
• Transformed the 3rd place into the 21st
century

39. In the Mud
Operational Costs
• In 2005, Scott Heydon began exploring lean
within Starbucks
• Hinged on engaging employees opinions to
better serve customers
• A store in Portland reduced their turnover from
60% to 0%
• Provided the empowerment needed to make
individual store experiences as best as possible

40. Resurgence of an Empire

41. Resurgence

42. Resurgence

43. Resurgence

44. Resurgence

45. Resurgence

46. Lessons Learned
“As we grew at a faster and faster clip during 2006 and 2007,
maintaining that positive comp growth history drove poor business
decisions that veered us away from our core” - Schultz

47. Lessons Learned
• Growth had to come from product
innovation and differentiation
• Third place atmosphere is what drove
differentiation
• Focusing on the core; quality coffee and
quality service were keys to success

48. Book Report

49. Onward

50. “You have to stay true to your
values and true to the company’s
core. Those are your rudder now.”
- Howard Schultz, President and CEO Starbucks