Closing Case: Starbucks
In 2006, Starbucks’, the ubiquitous coffee retailer, closed a decade of astounding financial performance. Sales had increased from $697 million to $7.8 billion and net profits from $36 million to $540 million. In 2006, Starbucks’ was earning a return on invested capital of 25.5%, which was impressive by any measure, and the company was forecasted to continue growing earnings and maintain high profits through to the end of the decade. How did this come about?
Thirty years ago Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today it is a global roaster and retailer of coffee with more than 12,000 retail ...view middle of the document...
From the outset, Schultz also focused on providing superior customer service in stores. Reasoning that motivated employees provide the best customer service, Starbucks executives developed employee hiring and training programs that were the best in the restaurant industry. Today, all Starbucks employees are required to attend training classes that teach them not only how to make a good cup of coffee, but also the service oriented values of the company. Beyond this, Starbucks provided progressive compensation policies that gave even part-time employees stock option grants and medical benefits – a very innovative approach in an industry where most employees are part time, earn minimum wage and have no benefits.
Unlike many restaurant chains, which expanded very rapidly through franchising arrangement once they have established a basic formula that appears to work, Schultz believed that Starbucks needed to own its stores. Although it has experimented with franchising arrangements in some countries, and some situations in the United States such as at airports, the company still prefers to own its own stores whenever possible.
This formula met with spectacular success in the United States, where Starbucks went from obscurity to one of the best known brands in the country in a decade. As it grew, Starbucks found that it was generating an enormous volume of repeat business. Today the average customer comes into a Starbucks’ store around 20 times a month. The customers themselves are a fairly well healed group – their average income is about $80,000.
As the company grew, it started to develop a very sophisticated location strategy. Detailed demographic analysis was used to identify the best locations for Starbuck’s stores. The company expanded rapidly to capture as many premium locations as possible before imitators. Astounding many observers, Starbucks would even sometimes locate stores on opposite corners of the same busy street – so that it could capture traffic going...