Starbucks

Abstract

This case study revolves around Starbucks ability to launch an aggressive expansion in China, a coffee frontier steeped in nearly 5,000 years of tea, Starbucks location-scouting skills and marketing savvy will be put to the test. This case study involves three questions: 1) Should Starbucks continue its expansion in China? 2) Will the Chinese be persuaded to drink coffee instead of tea after 5000 years of no consumption of coffee? 3) Will Starbucks current marketing plan work in China without advertising?

Company Overview

The first Starbucks was opened in Seattle, Washington in 1971 by three partners--English teacher Jerry Baldwin, history teacher Zev Siegel, and wrier Gordon Bowker. The three were inspired by Alfred Peet, whom they knew personally, to open their first store in Pike Place Market to sell high-quality coffee beans and equipment.

Entrepreneur Howard Schultz joined the company in 1982, and, after a trip to Milan, suggested that the company sell coffee and espresso drinks as well as beans. The owners rejected this idea, believing that getting into the beverage business would distract the company from its focus. To them, coffee was something to be prepared in the home. Certain there was much money to be made selling drinks to on-the-go Americans, Schultz started the Il Giornale coffee bar chain in 1985.

In 1984, the original owners of Starbucks, led by Baldwin, took the opportunity to purchase Peet's. (Baldwin still works there today.) In 1987 they sold the Starbucks chain to Schultz's Il Giornale, which re-branded the Il Giornale outlets as Starbucks and quickly began to expand. Starbucks opened its first locations outside Seattle in Vancouver, British Columbia, Canada (at Waterfront Station) and Chicago, Illinois, United States that same year. At the time of its initial public offering on the stock market in 1992, Starbucks had grown to 165 outlets.

The first Starbucks location outside of North America opened in Tokyo in 1996. Starbucks entered the UK market in 1998 with the acquisition of the then 60-outlet Seattle Coffee Company, re-branding all its stores as Starbucks. By November 2005, London had more outlets than Manhattan, a sign of Starbucks becoming an international brand.

In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione Italia from AFC Enterprises, bringing the total number of Starbucks-operated locations worldwide to more than 6,400. On September 14, 2006, it was announced by rival Diedrich Coffee that it would sell most of its company-owned retail stores to Starbucks. This sale includes the company owned locations of the Oregon-based Coffee People chain. Starbucks representatives have been quoted as saying they will convert the Diedrich Coffee and Coffee People locations to Starbucks stores.

As of November 2006, Starbucks had 7,102 company-operated outlets worldwide: 5,668 of them in the United States and 1,434 in other countries and U.S. territories. In addition, the company has 5,338 joint-venture and licensed outlets, 3,168 of them in the United States and 2,170 in other countries and U.S. territories. This brings the total locations (as of November, 2006) to 12,440 worldwide.

Business Situation

The China push may be the ultimate test for Starbucks brand lifestyle-oriented marketing approach. Starbucks China doesn't plan any advertising, promotions, or other marketing strategies, aside from sponsoring an on-line coffee club and the occasional office-tower coffee tasting. Instead, the company is counting on selecting such high-visibility, high-traffic cafй locations that they market themselves.

In Hong Kong and China, coffee is still more of a social event than a daily necessity, Starbucks the world's leading retailer, roaster and brand of specialty coffee, opened its first store in Beijing, capital of China in January 1999, it has quickly gained attraction amongst the Chinese people. But in the five years that it has operated in Hong Kong, Starbucks has come to be viewed as a destination restaurant rather than a coffee take-out establishment. The Chinese perception is that coffee must be served with food. Starbucks is hoping to transform this perception by marketing to its current customers to convert from tea to coffee and consume coffee at least 10 times a month until it becomes a part of daily life. A spokesman from Starbucks China made the following statement explaining the generalized Chinese notions of coffee that Starbucks is hoping to transform. "Our sales per customer are higher than in the United States -- they buy food with their coffee and they will stay in the store all night and socialize if we allowed them to." Wu also said that less than 5 percent of the Starbucks business in China that he oversees is cash and carry. They come here and make use of the store, which is why they will pay a premium," said Wu.

Starbucks strategy has been to sells many other items such as coffee beans, mugs, music, sandwiches and pastries. But in Hong Kong and China, that has yet to take off, CDs and whole coffee beans are sluggish in China. In Hong Kong, the initial strategy was to sell coffee first and in five years embark on other sales distributions channels.

At the present time the company has over 120 stores in the Chinese mainland and over 300 across Hong Kong and Taiwan. Citing China's large urban population, rising economy and increase in coffee consumption, Starbucks estimates that China could ultimately be the largest markets outside the United States.

For the short term, Starbucks regards Asia Pacific as its major target markets, which now has over 1,200 stores and could ultimately have some 6,500 stores in the region, Wu said. For the long term, the company plans to expand to 15,000 locations beyond the United States, he added. The Chinese, though, are remaking the "Starbucks Experience."

Current Market Position and Financial Data

Starbucks opened 2,199 new stores in 2006 and total net revenues exceeded $7.8 billion for the full fiscal year a 22% increase from 2005. Net earnings of $564 million a 14% increase compared to $494 million in fiscal year 2005. EPS of $0.73, compared to $0.61 per share in fiscal year 2005, an increase of 20 percent. Starbucks has a 7.25% profit margin and a beta of 1.24 analyst rates the stock as a strong buy in today's market. Maxim's Caterers Ltd of Hong Kong is Starbucks' joint venture partner in Hong Kong, Macau and southern China. Starbucks last year increased its stake in the joint venture, Coffee Concepts (Southern China) Ltd, to 51% from 5%. The new controlling interest of the partnership for