The most important factors behind Starbucks decline in 2007 and 2008
In 2007, several factors stood behind Starbucks’ decline, among which one might note a loss of human connection. Schultz observed that the company steadily lost its connection with customers, as fewer and fewer baristas remembered clients’ names, and massive coffee machines hid the very process of coffee making. For Schultz, the mentioned process was of great significance, as it lay at the core of the company’s success. Furthermore, the entrepreneur wanted each store to tell the story of Starbucks, with a wealth of emotional connections. Also, the redesign of outlets led to a dilution that was expressed in the loss of a friendly neighborhood atmosphere. In other words, it decreased the customers’ loyalty and pinpointed Starbucks’s weakness among competitors.
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Also, the company was insufficiently equipped within the framework of the newly emerged digital world. Stores were deprived of the opportunity to express their passion for high-quality coffee and service all over the world. In particular, the online space was not presented as a part of the company’s arsenal. In this regard, plenty of localized outlets, as well as coffee farmers, could not take part in the online discussion that arose after the memo written by Schultz about the company’s weaknesses was posted on the Internet. The above fact illustrated the need to join the global online community to remain successful.
Another factor faced by Starbucks was an overexposure that was seemingly the right course to pursue. However, there was a risk that the company might lose its uniqueness and become just another one of the usual coffee retailers. Although the company’s revenue growth was conspicuous, it became difficult to establish appropriate relationships with new partners and stores, as well as to manage the latter.
Finally, increased competition occurred, due to growing demand and Starbucks’ success. The most notable competitors were Caribou Coffee and Peet’s Coffee & Tea chains. This situation also caused a proliferation of non-coffee companies, when food and beverage retailers began entering the coffee market. For instance, Dunkin’ Donuts announced a set of distinctive drinks that included the Mocha, Coolata, and others.
During the crisis, Starbucks also faced competition from McDonald’s and other fast-food giants. Customers did not understand why they should buy more expensive coffee. Consequently, Starbucks’ assets fell significantly, as both Dunkin’ Donuts and McDonald’s offered cheaper alternatives. As per the discussed article, the majority of factors were detected in 2007.
In 2008, Schultz noted that the company offered plenty of food. He did not like that the coffee stores sold a lot of food, as the smell of sandwiches interrupted the coffee aroma. The entrepreneur realized that coffee was what made Starbucks different from the fast-food chains, and thought about how to improve the technology of preparation. At the same time, too many products created a loss of value and confusion in customers. Also, financial metrics sounded alarm bells: The growth in the number of comp-store sales increased by only five percent, and the stock price decreased in 2008.
Speaking of the less obvious factors, it is essential to mention that overexposure was one of them. In the context of increasing revenues, it was difficult to notice the problem. Nevertheless, being an experienced entrepreneur, Schultz detected that something had gone wrong.
Thus, the stated factors impacting the decline of Starbucks showed an urgent need for transformation.
The most important aspects of Starbucks transformation
In his memo, Schultz pinpointed that the company needed to get back to its roots. Since its beginning in the 1970s, Starbucks has positioned itself as the third place, after home and work, where people can pleasurably spend their time. The smell of freshly ground coffee fills the brightly lit stores, where visitors can charge their laptops and phones from conveniently located sockets. In the majority of Starbucks coffee shops in the United States, and several other countries, there is the possibility of wireless Internet access. However, the desire to return to the roots, to some extent, contradicts the stated goal of opening 40,000 coffee stores all over the world.
In this connection, Schultz introduced some vital transformation strategies, including supporting customers’ loyalty to the brand, increasing the company’s competitive advantage in the United States, and enhancing internal issues, such as healthcare benefits and ethical sourcing. Innovation and reinvention became the two central goals to emerge from the basis of transformation aimed at long-term changes.
The first initiative was devoted to the current state of the company in the United States, as the revenues from this part of the business were large. Consequently, Starbucks’ leadership was tasked to slow the quick pace of operations and close all underperforming stores.
Second, to revitalize intimacy with customers, Schultz tried to enhance the Starbucks Experience at the core of the company’s performance. However, the mentioned goal was abstract to some extent. It consisted of baristas’ attentive relationships with customers, seasonal offerings, and an excellent coffee aroma. Schultz emphasized that Starbucks’ competitive advantage was in the fact that it amazingly combined standardization, comprised of process, service, location, and branding, with an individual and attractive design. Coming to any coffee store, a person can see recognizable details and compelling solutions adapted for a definite location, while by contrast, the majority of competitors look too standardized.
It should be noted that almost all advertisements concerning Starbucks and presented on social media tend to focus on emotions. Bringing people together, seeking inspiration for new and positive changes, gathering new experiences with old friends, and traveling—all this draws people closer to Starbucks. At the same time, the brand engages completely different people, from entrepreneurs drinking espresso on the go to young couples stretching the pleasure of coffee. At Starbucks, there are also active freelancers and bloggers writing their new posts, as the atmosphere of the coffee shops attracts people with laptops.
Third, the organizational structure should be reorganized. For instance, while walking through New York City’s Chelsea neighborhood, Schultz saw a Clover coffee machine. According to Schultz, this was the best coffee he had tasted in 25 years of working for Starbucks. In 2008, Starbucks bought the manufacturer of that brand of coffee machines and began to set Clover in some of its coffee outlets. Also, IT capabilities, supply chain, and other organizational aspects should be reconsidered and adjusted to current requirements.
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Trying to win among the new players in the market, Schultz firmly closed non-core divisions that had turned into a kind of flea market. Also, he revised the menu, removing the notorious sandwich with egg, and returned to Mastrena espresso machines that allowed customers to observe the process of coffee making. Schultz organized machines per serving, making the aroma of coffee stronger. The results were impressive. Customers rushed to Starbucks, and the stock rose. Not only trusting customers but also cautious investors believed that the spirit of transparency and open environment reigned at Starbucks for a long time. Thus, Starbucks confidently solved two key challenges: financial stability and understanding its customers.
To save Starbucks, Schultz had to implement several tough decisions. To optimize costs, the company closed 600 stores in 2008, and another 300 in 2009. Schultz aimed all the company’s efforts at overcoming the consequences of the crisis and improving service. In 2008, Starbucks launched an interesting project on the Internet, a site that focused on ideas for Starbucks, called ideastorm.com. Any person, whether he is an employee of the company or a client, can share his or her idea about improving a particular store, or the company in general. It was and still is, expected that each idea would be considered, and some might even be implemented. It should be noted that before the ideas reach the company, registered users can vote for each idea.
The described transformation was crucial for Starbucks to survive in the context of a rapidly changing environment. Otherwise, the company could have lost its position in the U.S. market and turned into a typical coffee shop. Schultz used to say that if the barista was just repeating memorized actions without worrying about the taste of the beverage, it meant that Starbucks had lost the purpose for which it was created 40 years ago—inspiring people. The company’s mission is not to fill stomachs, but to fill souls. Here it is, the secret of Starbucks’ success.
Speaking of the generalization of these ideas, it should be stressed that each country has its peculiarities that should be taken into account during the expansion. As an example, one might consider China’s coffee market. It was necessary to save the brand and satisfy the local community, as well. Therefore, the company supported the development of Arabica coffee in the Yunnan Province of China, for example. However, the Chinese needed the kind of place where they could meet with friends and family and have a great time.
This aspect promoted the expansion of Starbucks, as several Chinese partners invested in the company. As a result, Starbucks created the coffeehouse culture in China, due to acquiring and deepening the local customers’ loyalty. Today, Starbucks’ mission is not limited to the position of being the leader in the United States. From its beginnings on a national scale, the company is expanding throughout the world and aims at strengthening its position as a major supplier of coffee with the highest level of product quality.
Starbucks is “redefining the role of a for-profit company”
Schultz stated that Starbucks was “redefining the role of a for-profit company” (Koehn, McNamara, Khan, & Legris, 2014, p. 36). This statement meant that he wanted to integrate profit stimulus with social consciousness. In other words, the leadership strategy addressed plenty of issues, beginning with the appropriate healthcare services for those employees who worked more than 20 hours per week, up to investment in environmental sustainability.
From the very beginning of his work for Starbucks, Schultz devoted much attention to personnel. There are two things on which he did not scrimp: the quality of coffee, and health insurance for employees. This rule was valid even in times of crisis when the company needed to cut its costs. As in most chain retailers, most of the coffee shop workers are young people, such as students and those who are saving money to continue their education.
Especially for the latter, in 2014, Starbucks formed an association with the University of Arizona so that employees can earn credits from an online college (Perez-Pena, 2014). At the same time, the company will fully cover the costs of those students who have already studied weaned for two years. According to the calculations of The New York Times, this is about 30,000 dollars per student (Perez-Pena, 2014). Any of the 135,000 U.S. Starbucks employees who are working at least 20 hours a week might take part in the program. It should slow down the burnout of employees, increase their productivity, and attract new staff.
As one might note from the above example, Starbucks is seizing a plethora of opportunities in the framework of corporate responsibility. Furthermore, Starbucks pursues a policy of social responsibility in all aspects of its business. This applies to the selection of suppliers of coffee and includes compliance with human rights and labor standards.
For instance, Starbucks supports the Conservation International organization, encouraging sustainable technologies in agriculture and protection of biodiversity through innovative approaches to the production of coffee. The results of the program showed an increase in revenues and the number of coffee plantations located in an area of tropical forests, without damaging biodiversity. Additionally, the coffee chain sells only “fair trade” coffee. This means that the products sold were made without the use of child labor, and comply with social and health standards.
The bottom line of this is the social protection of employees, partners, and the environment. Thus, the principles formed within the company take into account the product, relationships with employees and customers, the company’s interaction with public organizations, participation in the protection of the environment, and profits. The coordination of the two main aspects, in particular, the commitment to high standards and high-scale inner values of the company, contributes to strengthening the position of the brand and corresponds to corporate responsibility.
The company has always believed that Starbucks should and can have a positive impact on society. Therefore, the operation of the company keeps a continuing focus on corporate social responsibility:
- Starbucks works with non-profit organizations to assist them in achieving objectives focused on the improvement of education, health, housing, security, and employment;
- Starbucks allocates grants for young professionals, attracting thousands of people per year and considering these investments a significant contribution toward changing the world for the better—the creation of a successful business, as well as social non-profit organizations investing in skills and promoting the improvement of the world’s economy;
- Starbucks supports social projects aimed at the development of communities that produce coffee, tea, and cocoa. Projects include improvement of access to education and agricultural training, development and preservation of biodiversity, and enhancement of the level of health standards, health care, food, and water.
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Koehn, N. F., McNamara, K., Khan, N., & Legris, E. (2014). Starbucks Coffee Company: Transformation and Renewal. Harvard Business Review, pp. 1-71.
Perez-Pena, R. (2014). Starbucks to Provide Free College Education to Thousands of Workers.