1. There were several important factors that led to the decline in 2007 and 2008. While some were notional factors, most of them were factors that were actually taking place and affecting the sales of the company. It was at the beginning of February 2007 that Schultz began noticing that the media communication of Starbucks was failing to tell the story of the company. He also noticed some of the following factors in play that were behind the possible decline of Starbucks.
a) The personalization of the customer experience that existed in the smaller coffee shops no longer existed in Starbucks anymore. Not many baristas could remember the names of the customers who frequented them for their coffee. The streamlined store design was not helping either and rendered the entire experience futile. As per Schultz, this resulted in a customer no longer having the human connection with his or her barista since he was of the opinion that Starbucks was not all about coffee, but also the human experience. This experience meant including the customer in the story of its offerings as well as the process of buying, roasting and selling the best quality coffee. Therefore, Schultz felt that this singular aspect had been heavily compromised by Starbucks in a bid to pursue breakneck growth in sales.
b) In a bid to speed up the process of coffee making, Starbucks had introduced large espresso machines (La Marzocca Machines) that would substantially reduce waiting time for customers. While these machines achieved that objective, the flipside was that they ended up completely blocking a customer’s line of sight. While earlier the customer could see coffee being prepared as per custom specification, the machines allowed very little customization and obstructed the view of the coffee making process. The result of this problem was that the contact between the customers and the partners was greatly diminished, thereby also affecting the customer experience greatly (Koehn, 2014, p.2).
c) Schultz also noted that in a few stores, the smell of burnt cheese from ovens making breakfast sandwiches overpowered the smell of the coffee. Since coffee was central to the Starbucks’ experience, such a major issue was resulting in the dilution of the core central theme of the brand.
d) The single biggest issue that plagued the Starbucks brand was the stores running out of ingredients. As per Schultz, these problems were signs of a bigger malaise that would result not only in dilution of the brand image itself, but also result in loss of sales to competition.
e) Most of the store managers were not very interested in how the stores turned out. While Schultz wanted them personally invested in their work and proud of what they doing, in fact, the contrary was true. Most of the store managers were focused completely on the gross margins, thus leading to an erosion of the company’s core values.
f) Schultz also noted that most of the managers and partners had informed him of declining comparable sales (Comps). In this industry, declining comparable sales only meant that standalone stores were facing a sales slowdown or that existing stores were cannibalizing each other in terms of sales.
Most of these points had already been observed by Schultz in 2007 and he had noted the same in his Memo to the senior management of Starbucks. However, the decline in sales had not yet translated to a decline in profits and stock price in the first half of 2007. Schultz’s observations above only indicated that the situation would progressively worsen as they went into 2008. Sure enough, Schultz saw that 2008 would be worse since it would be a year which would see a tremendous amount of restructuring in order to improve operational and financial performance. It would begin with his reentry into the organization as the head of the company. He also felt that 2008 should be a year in which the group should began to reinforce measures through training and development of existing managers, baristas and make the model sustainable. These thoughts were the basis of the Transformation strategy crafted by Schultz.
There were some other factors that were less obvious. For instance, increasing competition hit Starbucks very badly on the external front. The expansion of Dunkin’ Donuts as into the custom brewed segment coupled with the effective media campaign and branding exercise that advocated a revolt against “espresso oppression and the tyranny of long waits, high prices, and confusing sizes.” (Koehn, 2014, p. 6) Additionally, McDonalds also introduced gourmet espresso bars called McCafés with a stronger upgraded drip coffee brew at lower prices than Starbucks. Not only did they introduce these products that were hitherto in the domain of Starbucks, a 2007 Consumer Report Test also voted McDonald coffee better than Starbucks and Dunkin Donuts.
Thus, Starbucks was in trouble on both ends – internally with a sagging morale and poor operational performance, and, externally, with competition breathing down their necks.
2. In order to effectively prepare Starbucks for facing competition as well as to ensure that the company arose from internal problems Schultz came up with three crucial initiatives that were absolutely necessary to restore the state of Starbucks’ retail arms. These initiatives were the most important aspects of the transformation that Schultz wanted to bring in Starbucks.
The first initiative was the most important and involved significant enhancements in the operational rigor at retail stores. This meant slowing down the speed at which new stores were being opened, close underperforming stores or those that were running in losses. The premise of this first initiative was that the domestic store performance would, in turn, help shape the global view of the company and the brand. This was the reason for that this first initiative was not only critical but also needed execution on an urgent basis.
The second initiative was about ensuring a high level of emotional attachment of customers. While this was abstract, Schultz felt this could be brought about through highly interesting product innovations, while also simultaneously improving the Starbucks experience in retail stores. As a result, Starbucks would have to ensure that baristas would be trained to cultivate close relationship with regular customers, feature seasonal offerings and ensure that the aroma in the stores is predominantly that of coffee. Schultz believed that the sum total of these experiences was critical to attract new customers and retain them.
The third initiative was to ensure that the entire operations, supply chain and IT would have to be examined with a view to cost cutting, increasing efficiencies and improving customer service. Except for partners’ health coverage (employee health cover) and the ethical as well as quality sourcing of the Starbucks coffee, Schultz wanted to reexamine every single aspect from top to bottom.
These transformational aspects were extremely important since they would ensure that the company would continue to survive and stay ahead of the competition. In the broader economy, 2008 saw the beginning of the recession that would eventually bring ripples globally. In the ensuing crisis, consumer confidence dropped and with that was a proportional fall in discretionary spending. Given this backdrop, Schultz felt it absolutely necessary to enforce these initiatives and crafted the Transformation Agenda consisting of seven goals. These seven goals were as follows:
Be the undisputed Coffee authority
Engage and Inspire Partners
Ignite the emotional attachment with customers
Expand globally but only when each store has completely captured the attention of the local neighborhood
Leader in Ethical Sourcing and minimizing environmental impact
Create innovative growth platforms worthy of the Starbucks Coffee
Deliver a sustainable economic and business model (Koehn, 2014, p. 14)
As one can see, each of these points (and the underlying initiatives) focused on strengthening specific dynamics of the Company’s operational aspects with special emphasis on the retail stores. Since these stores were crucial to the Starbucks’ story and the themes related to it, these mattered deeply to the survival of the company.
The points that Schultz laid out are not only highly practical in nature, but are also generalizable to most businesses that are client facing. For instance, a company that is an undisputed authority in a particular product and which engages and inspires its employees, while creating an emotional attachment with customers would easily be able to capture the local market. Even generally one sees that companies who build a strong local brand tend to also replicate similar success abroad. Also, one cannot understate the importance of sustainable growth through due environmental consideration, ethical practices and the like. All of these eventually culminate into a sustainable economic and business model. Therefore, one clearly sees that all of these initiatives are not only generalizable but also practical in the broader context.
3. In an interview, Schultz once said that Starbucks is “redefining the role of a for-profit company.” (Koehn, 2014, p. 39). By saying this, Schultz has very smartly defined that he intends to build Starbucks with the right amount of transparency and trust. He feels this is especially essential in a world wherein faith in public institutions, corporates and businesses have fallen to a massive low. In such an environment, customers tend to side with those companies that are both transparent and trustworthy. In saying so, Schultz intends to make sure that people identify the Starbucks brand as an entity that would strike the right balance between profit and a social conscience. Hence, Schultz essentially wants his management to ensure that they are well aware of the responsibilities that a big corporate entity like Starbucks has towards both the neighborhoods in which they operate as well as towards the entities where they source products from. Therefore, the line means that Schultz would want Starbucks to setup the benchmark for other companies on the manner in which they should act with responsibility although they are basically profit seeking entities by nature.
Clearly, one can understand that Schultz’s outlook on Corporate Social Responsibility (CSR) is quite refreshing and, yet, essential. It is refreshing because most traditional industrialists only gave away donations to trusts or other charitable organizations without getting into the deeper aspects. It was Schultz and his team who started to get involved in CSR initiatives such as their assistance to the Philadelphia based OFN and the creation of the Create Jobs For USA initiative (p. 38). Moreover, Starbucks prevented the eventual demise of traditional small manufacturers such as American Mug and Stein Company by placing large orders with them for sale in Starbucks store with part of the proceeds going to Create a Job initiative. Such efforts not only helped local manufacturers but also provided funds for the groups CSR initiatives. Further, in March 2014, the Schultz Family Foundation introduced the Onward Veterans Program aimed at helping veterans amalgamate successfully into civilian life. One can understand, therefore, that Schultz was interested in integrating such Social Initiatives deep into the culture of Starbucks.
One can understand, then, that the revenues of Starbucks also saw a progressive rise. Both revenues and net income of the company shot up in the years preceding these CSR initiatives. While the company’s operational performance improved, one can certainly argue that the slew of CSR initiatives further augmented the improvement of both the topline and the bottomline. Part of this can be attributed to the fact that Schultz’s wish of having people viewing Starbucks as a humane organization came true. Due to this, it is possible that the bottom line of Starbucks was positively impacted.
4. In the case, one sees that the authors tend to review the Transformational Aspect of the company in the most amount of depth. Within this, the case focus is largely on the manner in which Schultz brought about a complete change in his senior and middle management before he took Starbucks on the voyage of transformation and change. The Seven Big Moves and New Product Launches of the Company also get a fair amount of in-depth coverage.
The section in which Schultz and his team reengage partners and management has also received a fairly in-depth coverage. Within this section, the community service activities undertaken by Schultz and his senior leadership team have also received a fair amount of coverage. Additionally, the operational description is also very descriptive and goes deep into the subject in an attempt to explain the manner in which the Starbucks Team worked on improving operational efficiencies, with the improving results clearly in sight. In order to retain this turnaround, Schultz introduced Starbucks into the digital space in a very big way and also introduced the Starbucks Rewards Program – both of which have also received a fair coverage here. The International Expansion of Starbucks has also received a good coverage, but is dated considering that Starbucks as of today has expanded far more in both India and China as compared to the figures presented.
Lastly, the CSR initiatives undertaken by the Starbucks group as well as Schultz have dominated a fair section in terms of coverage. As mentioned elsewhere, the reason behind the in-depth coverage of this aspect may have been the need to show that impact of CSR initiatives on the company’s bottom line.
Reference
Koehn, N.F. et.al. (2014). Starbucks Coffee Company: Transformation and Renewal. Harvard Business School. Retrieved from hbsp.harvard.edu
