Starbucks: Transformed Organizations

Starbucks: Transformed Organizations

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Starbucks Coffee Corporation, based in Seattle, Washington, has been one of the nation's premier companies in the last two decades in terms of growth, both with physical locations and an ever-increasing customer base. In a country where specialty espresso-based beverages were once considered a niche market, Starbucks has experienced unparalleled growth, tapping into a customer base that was once thought absent in non-European nations. In fact, growth was so substantial that the company was opening an average of one new store a day; however, every company has peaks that are followed by a plateau of growth and income, or in Starbucks case, a massive loss. After seeing 39 consecutive quarters of growth, the company was hit hard by a nearly $7 million loss last quarter. Due in part to over-zealous expansion and a tightening national budget, Starbucks has been forced to rethink their traditional business model in a time when the economy seems forbidding – and an end is not in sight.

Through many of its internal programs and customer-driven initiatives, Starbucks has long been seen as a model of a transformed business. Known more as an international, faceless corporation than a neighborhood coffee shop, Starbucks pioneered distinctive perks for employees that were not customary of regular “fast food” business models, such as benefits for part-time employees and tuition reimbursement. Further, the company placed great emphasis on the employees to make every cafe a customer's “third place”; a place where they are encouraged to spend time and feel comfortable when not at home or work. However, Starbucks remained a very traditional business model when it came to the financial end of the spectrum. Unlike fast-food outlets or even similar business, such as Dunkin' Donuts, Starbucks did not offer “deals”; there were no 99 cent cups of coffee, no “buy-one-get-one-free.” In addition, regular customers were not offered loyalty cards which offered them a free or discounted beverage after so many purchases. This happened at a time when other large food and beverage retailers, such as McDonald's and Dunkin' Donuts, begun offering such loyalty programs and specially-priced beverages, all often at a much lower cost than Starbucks. In addition, the increased focus of the company on its own music and film lines, as well as on hot food and sandwiches, began to focus the company off of their primary selling point of being a specialty coffee house, which led to complexities, for both employees and customers.

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According to Time, “There's only so much stuff you can run through a 1,500-sq.-ft. retail store, although Starbucks has added everything from CDs to books to Scrabble sets. 'You have to have new products. That's the retailer's dilemma,' says John Glass, who covers Starbucks for CIBC World Markets. But every new item, whether edible or readable, increases the complexity of the organization, and complexity is a killer” (Kiviat). Quality shrunk while the menu options grew, and a lesser experience was enjoyed by the consumer, leaving Starbucks as a product and experience that held no differentiating characteristics from the local Golden Arches.

To combat the net loss, Starbucks was forced to redefine their traditional profit-based business model to a new business model that began to shift the focus back to quality, but also to begin focus on an entirely new concept to the company: value. The new combination of quality and value began in mid-2008, with the reintroduction of former CEO Howard Schultz back to the company. Responsible for the creative growth and initial success of the company, Schultz was not responsible for the over-zealous expansion and dilution of quality and experience that has plagued the company since the rise of now-former CEO Jim Donald.

To focus on the re-energized business model built on the concept of value, it is important to examine numerous loyalty programs that have been introduced to the Starbucks customer – the oft-unrewarded flag-bearer of specialty coffee – since mid-2008. The changes began in Seattle with the test-marketing of a $1 brewed coffee, with free refills, but this did not adequately satisfy the needs of customers who were already accustomed to more indulgent drink tastes. After being discontinued, a further loyalty card-style program went out using pre-paid gift cards, or Starbucks cards. According to the promotion, customers who place money on the card and use it to purchase their drink receive free “modifiers,” -- optional extras on a drink such as soy or half-and-half instead of milk, and various flavors of syrup to an otherwise plain latte. A third promotion allowed customers who purchased a beverage before 1pm to receive a “Treat Receipt” earning them $1 off a second beverage that afternoon. A final promotion utilized the receipt trend, but this time promised any iced grande beverage at just $2 – nearly cutting the price in half while doubling the value for the consumer.

How have all of these changes affected the world in and outside of Starbucks? As part of its effort to focus more on the coffee experience in the store, and also help with the dilution of the brand in the minds of customers, this summer Starbucks announced what was perhaps the most shocking move of them all, with “plans to close 600 stores in the U.S. and eliminate as many as 12,000 positions, or 7 percent of the workforce” (Coleman-Lochner). The closings came as a surprise to consumers, but not to Wall Street market watchers who have watched the company grow. As reported on CNN, “Starbucks seemed to be expanding just for the sake of growing – with little regard for profits or common sense. And while Starbucks used to claim that its aggressive pace of new store openings wouldn't cannibalize sales at existing Starbucks, it got to a point where that was clearly no longer the case” (La Monica). The crash of Starbucks profits have affected its playing field in the Dow Jones, but the effect of the recent slump on investors and existing shareholders alike is turning out to have potential positive effects: “...Despite all the bad news, analysts still expect Starbucks to report earnings increases of about 17%, on average, over the next few years” (La Monica).

The skills needed of employees is exactly what Starbucks has always preached to its partners, and is now finally re-emphasizing: focus on quality, not quantity, and the ability and willingness to go out of ones' way in generating a friendly “third place” atmosphere. However, there is now a new added twist: focus on value. The emphasis may still be on up-selling a customer's morning order – Would you like a blueberry muffin with that? -- but now it is up to the friendly neighborhood barista to encourage return visits in the afternoon and the extra value it will save them. In addition, skilled employees need the ability to communicate the benefits of using a Starbucks card to customers who add modifiers to their drink, but be able to do so in a matter that is born of a service-approach rather than a selling-approach. Support systems in place include a through training program – already a staple at Starbucks – and knowledgeable store management staff who set by example when advising customers of potential value. It is not just an important tool to help increase sales – in the current Starbucks climate, it could be the difference between employment and unemployment.

The most important elements from Starbucks that correlate to best practices in my own work experience is the need to communicate service and value. When customers pay a premium amount for your product or service, be it coffee or education, it is important to communicate the short and long-term value in the product without diluting its message or purpose. Rather it's a short-term investment in a cup of morning coffee to pay for that iced grande latte later, or a long-term investment in yourself, an investment needs to be communicated with skill and tenacity that helps the individual know what is in their best interest – not just the company's bottom line.

Kiviat, Barbara, “The Big Gulp At Starbucks.” Time.com, 10 Dec 2006

Coleman-Lochner, “Starbucks Cuts 1,000 Jobs, Makes Executive Changes,” bloomberg.com, 29 July 2008

La Monica, Paul R., “Wishing on a Fallen Starbucks,” money.cnn.com, 30 July 2008
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