This article is part of our Business Strategies series, an insight and analysis into the makeup and model of some of the world's most successful startups.
Why order a medium black coffee with two sugars when you could order a grande half-vanilla, decaf espresso heated to 100 degrees with non-fat milk and caramel-drizzle-on-top latte? After all, this is the type of beverage you could not order at your typical coffee shop, unless, of course, your local happens to be Starbucks.
Indeed, many major chains have attempted to emulate the Starbucks business model through unique varieties of opulent java, the likes of which wouldn't look out of place in Paris or Rome. But the Seattle-based coffee giant remains number one, revolutionising the coffee shop culture and bringing corporate social responsibility (CSR) to the forefront of their operations.
To explore how the one-time coffee bean merchants became an international juggernaut, we've analysed Starbucks' business strategy – a model that goes far beyond brewing and selling coffee – as well as what you, as a business owner, can learn from it.
Vital Information
- Founded: March 1971
- Founders: Jerry Baldwin, Zev Siegl and Gordon Bowker
- Headquarters: Seattle, WA, USA
- Current CEO: Kevin Johnson
- Global Employees: 291,000 (December 2018)
- Type: Public (Floated June 1992)
- Key Products / Services: Coffee, beverages and food
To inspire and nurture the human spirit — one person, one cup and one neighbourhood at a time.
To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.
History
Founded in 1971 by three college students, Starbucks – named after the chief mate in Moby Dick – began life as a coffee roasting venture, before acquiring their primary coffee bean provider, Peet's, in the early 1980s.
The business rode the wave of speciality coffee sales during this decade, expanding to six stores in the Seattle area, before selling the brand to former employee Howard Schultz – the man who would transform and define the company as we know it today.
Starbucks' Business Model
According to the Fortune 500 list of largest US corporations by revenue, Starbucks is ranked 132nd. But does the company really generate billions in revenues and profits by just selling coffee and food?
On the surface, yes. According to its corporate reports, the company makes most of its money by offering these products at its 14,000 locations and 15,000 licensed shops. However, it also maintains a dependable revenue stream by selling ready-to-drink beverages, packaged coffee, and branding rights worldwide.
The company does an excellent job of drawing in customers and – crucially – keeping them there. Each of the chain's 28,000+ branches are designed to be relaxing and welcoming, offering free Wi-Fi, appealing aesthetics and, of course, the alluring aroma of freshly brewed coffee.
Starbucks also invests a lot of money into customer service, offering in-depth training and career progression opportunities to its employees. These staff members are not only learning how to brew non-fat, iced skinny mochas with light ice; they are also training to be personable and knowledgeable about the brand. The company makes a real attempt to recruit bright, motivated individuals, offering a plethora of benefits to its baristas, including stock options and tuition. Even in an industry where staff turnover is notoriously high, Starbucks employs an intelligent and effective retention strategy.
Like all good chains, it strives for consistency, too. Whether you are in Boston or Barcelona, Starbucks aims to ensure the same brand experience for every customer.
Value
Indeed, although the company relies primarily on coffee for its revenues, the true value of Starbucks is this sense of experience. The company is not selling just beverages; it is selling a participatory experience to its patrons. By commodifying the European cafe culture and translating it to North America in the 1980s and 1990s, Schultz created an entirely new market.
This concept has been deemed 'the Starbucks Experience', and intimates that you are not paying the company to drink their coffee; instead, you are paying to drink a coffee at Starbucks. This is central to the company's initial and maintained success, as no matter how much competitors such as McDonald's or Tim Hortons try to create a comparable atmosphere with fireplaces and lounge chairs, many consumers believe that nothing can replace the original – regardless of how the coffee tastes.
Key People
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Howard Schultz | Former CEO and Chairman
No one person has arguably been more responsible for the meteoric rise of Starbucks than former CEO (and current chairman emeritus) Schultz. Hired as head of marketing and operations in 1982, the former office equipment salesman took and implemented the coffee culture he had observed on his travels to Europe, emphasising the importance of the experience as much as the coffee itself. He was also responsible for striking numerous partnership and collaboration agreements with hotels, food retailers and, most famously, bookstores, identifying the potential for Starbucks to expand and diversify beyond its own stores.
Kevin Johnson | CEO and President
Personally recruited by Schultz as his successor, Kevin Johnson has been the company's CEO since April 2017 – with shares surging by 60% during this time.
He has also advocated heavily for social change among its workforce, promoting paid parental leave for staff among other initiatives. The former COO has advanced the company's CSR strategy by partnering with various non-profit organisations while, from a corporate standpoint, he has scaled back several of Schultz's ideas (including the experimentation of Starbucks Reserve Roastery cafes that contributed to slow growth for its primary stores).
Overall, Johnson's goal is to innovate beverages, expand the brand's reach into China, and improve customer service.
Starbucks' Branding Strategy
In 2007, Starbucks spent a little over $100m on advertising. More than a decade later, it is spending closer to $300m, employing a multi-faceted brand strategy that goes beyond reminding everyone that it is still here.
It generally maintains five key branding tactics:
A Consistent Brand Experience
Starbucks invests in quality-based differentiation and customer service that has customer orientation and brand equity in mind. In other words, you know that if you spend your hard-earned money on a Starbucks product, you will have a positive experience every time.
An Ethical Brand Reputation
A long-term element of the company's brand strategy has involved employing policies that enhance its CSR initiatives. Instead of importing coffee at the cheapest possible cost, for instance, it has adhered to the principles of fair trade and embraced ethical sourcing. The Fair Trade programme supports farmers who have been certified to offer fair wages and safe working conditions, while ethical sourcing involves the importing of goods that are created and distributed in a fair, responsible, and sustainable way throughout the supply chain.
This is a vital part of the company's appeal, especially for environment-conscious millennials and Generation Z consumers.
High-Quality Products
Whether it's a cup of coffee, an iced cappuccino, a brownie, or a tote bag, the company endeavours to promote quality in everything that it sells.
Brand Merchandise
Merchandising is an integral part of Starbucks' marketing strategy, as it helps to maintain customer retention and improve satisfaction. The company's iconic logo is printed on a diverse array of merchandise, such as apparel, tumblers, notebooks, and even music.
Unconventional Marketing Measures
One of the more interesting aspects of the company’s marketing strategy is its lack of conventional advertising. It has refrained from investing in television spots, billboards, and print advertising, yet still generates a hefty dose of popularity and publicity.
It has done this by investing in local communities, sponsoring hundreds of millions of dollars in college scholarships, for instance. It has also put significant emphasis on its social media outreach; on Twitter alone, it has 11.2m followers and engages with its audience through a mix of polls, customer stories, quotes, and promotions.
Competition
As far as Starbucks is concerned, if you are selling coffee, then you are a competitor. Among its primary rivals, though, are other established chains, including:
- Dunkin'
- Tim Hortons
- McDonald's (McCafe)
- Lavazza
- Costa Coffee
Although the first three names on this list may not be primarily known for their coffee, they are still established chains that sell in-demand basic coffee at a low price. They have modelled (or remodelled) their approach to emulate Starbucks, too, evident in the impressive décor renovations that are designed to invite – and keep – more people inside their locations and boost foot traffic. Ten years ago, McDonald's was simply a fast-food burger joint; now, many consumers go there to catch up with friends or even meet with business associates over a coffee.
This isn't anecdotal, either. For example, McDonald's has invested nearly $1bn to renovate most of its Canadian locations (although the return on investment (ROI) is arguable, as same-store sales are lagging). Dunkin', meanwhile, is spending more than $100m on freshening up its locations, with revenue, operating income and earnings per share targets all being met.
Lavazza and Costa Coffee are running a similar model to Starbucks (albeit with different mission and vision statements, as well as different geographical targets), but it is the rise of these already established players that Starbucks should perhaps be most wary of.
Starbucks' Company Culture
Starbucks is a unique corporation because what you see in its stores is what you can expect at its corporate offices. The organisation aims to maintain a culture of diversity, inclusion and belonging that is ubiquitous at its coffee shops and offices. This is evident in its human resource development as it strives to adopt collaboration and communication, institute a relationship-driven approach to business, and put forward a servant leadership model. Again, this is true at both Starbucks locations and offices.
The primary challenge for the company in this regard is a practical implementation of these HR concepts among licensees and franchisees, since business partners might have their own ideas on HR management and cultural development. However, Starbucks fosters the initiative of building on desirable behaviours and attributes, with partners seeing that if these aspects are working, then why change them?
"This relatively subtle approach has far more power than an unfocused 'culture initiative', writes Paul Leinwand, a global managing director at PwC, in the Harvard Business Review. "It lets people bring their own emotional energy to an enterprise where they feel they have a stake – and thus leverages the company's culture to bring its strategic identity to life".
From the supply chain to human resources management to front-line staff, everyone shares the common goals of customers first, and premium quality products and service.
Key Takeaways
What is fascinating about Starbucks is that every company in different sectors can mirror its approach to business. By now, it is evident that the coffee giant is all about the customer experience, in a similar (albeit differently executed) way to Amazon.
This is not a coincidence. The Starbucks and the Amazons of this world have become successful through stable leadership, high-quality products and services, and innovative marketing endeavours. For Starbucks, the visionary outlook of Schultz was integral to this, but it still comes down to the premium coffee served with a smile behind the counter.
Starbucks had competitors when it started, and it has competitors now. The difference, however, is that Starbucks took – and continues to take – a different slant to its business model. Consumers not only purchased coffee, but they also bought unique beverages and sat down in a relaxing coffee shop to read, work on the next great American novel or converse with friends and family. After all, that can often be the trick for any business to stand out in a crowded market: take a unique approach to a conventional concept, or, as Schultz himself put it, represent more than just a cup of coffee.
In the meantime, if you're looking for more strategy inspiration, be sure to check out our in-depth analyses of Apple, Netflix and Uber!
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