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Case Study On
Transcript of Case Study On
A Case Study
Date: May 08, 2015
Introduction About The Case Study
Case study originally prepared under the supervision of Professor Mary Crossan.
Richard Ivey School of Business.
University of Western Ontario.
Presents facts instead of a judgement on the management of Starbucks.
Howard Schultz (The Beginning)
Chairman and CEO of Starbucks Corporation.
Began his career with Starbucks Coffee Company in 1982.
Back then the company was a retailer solely of whole bean coffees.
Visited Italy in 1983 and was inspired by the coffee bars in Milan.
Presented this idea but The Board of Directors refused it.
Left the company and opened up his own coffee shop called Il Giornale.
Company did so well that he purchased Starbucks name and assets.
"Not a fear of failure but a fear of mediocrity."
Specialty Coffee Industry
Coffee: second most traded commodity next to oil.
Specialty Coffee & Basic Coffee.
Specialty Coffee: highest echelon of quality coffee or gourmet coffee.
Vs basic supermarket brand coffee.
Specialty coffee industry was growing at the rate of 15% per year.
Basic coffee industry was suffering.
Difference starts with the coffee grower.
Specialty coffee companies did not deal with the suppliers or coffee farmers directly.
Farmers did not have the desire, volume, money, connections or expertise to export it themselves.
Coffee processors or exporters visited small farms (3 acres on average) and bought their coffee.
Coffee's journey from a farmer to the retail store begins.
First to the collector, to the miller, to to the exporter to the miller, to the importer, and finally to the retail store.
Price and Quality of Beans
Arabica beans for specialty coffee.
Robusta beans for commercial industry or basic coffee.
Specialty coffee made up 31 per cent of the total coffee consumption.
Price confirmations are usually difficult because of factors such as;
weather conditions, health of coffee trees, harvesting practices, insects, social, political, regulatory, and economic environment of the coffee producing country.
Product based competition.
Retail based competition.
In 1996 per capita consumption of coffee in the United States was 1.7 cups per day person.
Compared to 2 to 3 cups per day per person in the 60s and 70s.
Causes: poor product development, packaging and price focused position.
Recently, however, coffee consumption is on the rise.
Comparison of U.S consumption rates to global consumption rates.
Causes Of Recent Popularity
Replacement of coffee with alcohol as part of a healthier lifestyle.
Coffee shops; places of social interaction.
People like affordable luxuries.
Consumers were more aware about coffee.
Product Based Competition
Specialty coffee competes with tea, juice, soft-drinks and alcohol etc.
Flavored coffee vs non-flavored coffee.
Flavors include hazelnut, amaretto, raspberry, vanilla and mint.
Originally not offered by Starbucks but was offered by Timothy's and Second Cup.
Flavored coffee popular among traditionally non-coffee drinkers.
Supermarket brands in grocery stores tried to launch superior coffee blends (81% specialty coffee sales vs 46% in 1999).
Comparison of retail sales of different types of coffee.
Consumer Trends (Specialty Coffee)
Avenues for Growth (20 year review of the U.S specialty coffee industry).
Single people purchased 39% above average.
College students purchased 49% above average.
Women purchased slightly more than men.
Retail Based Competition
Retail specialty coffee market has low barriers to entry.
3485 competitors in the market.
Primarily a franchiser (90% of the locations).
Cash flow positive.
Traditionally mall based but has moved to stand-alone locations recently.
Growth oriented not just a cash cow; acquisitions included Gloria Jeans.
Alliances with food companies; Harvey's and Swiss Chalet.
Deal with Air Canada Flights.
Strategy for future presented in the letter from Howard Schultz and Orin Smith in the 1996 Annual Report.
Highlights of the Letter:
Ended fiscal year 1996 with over 1000 retail locations in 32 markets.
Locations in Tokyo, Japan.
20,000 dedicated partners (employees).
Starbucks experience: a memorable experience.
Look forward to the reception of bottled Frappucino.
New state of the art manufacturing and roasting equipment.
New America Online Starbucks Store.
New channels of distribution.
Want to keep up sales and growth for the next 25 years to achieve success.
Starbucks Business System
Roasting and Blending
Supply Chain Operations
Domestic vs International Retail Image
50% beans from Latin America.
35% from the Pacific Rim.
15% from East Africa.
Customer service and consistency to and from exporters.
Exporters anxious to become Starbucks suppliers.
Sampling and the right to reject the coffee if not up to the standard.
Roasting & Blending
Combo of time and temperature.
A technological art.
Entire taste of the blend depends on this.
Signature roasting curves.
Incorporated into computer software.
Vacuum sealed into one wave valve bags.
Increases shelf life to 26 weeks.
7 days after the bag is opened.
Supply Chain Operations (SCO)
Best transportation rates.
Complex bakery distribution model.
Accurate forecasting process.
Integrated manufacturing and distribution process.
Fundamental growth vehicle.
Howard Schultz's vision:
Interesting coffee products in a theatrical atmosphere.
A place where you can escape, reflect, read, chat and relax.
Baristas; College and University students.
Provide coffee education to customers along with service.
Develop coffee knowledge.
Highest quality products.
Purchased machines from Krups, Gaggia, Bodum.
Coffee mugs, grinders, and coffee filters.
Starbucks has its own design team.
Can operate in any sort of space.
Over 20 real-estate managers.
Generation of 20-40 stores per month.
Starbucks cart called Doppio.
8x8 foot cube that unfolds into a larger stand.
Starbucks could now sell at train stations, street corners, malls etc.
Agreements with retailers, wholesalers,restaurants, service providers etc.
To sell Starbucks coffee.
Growth potential and name recognition.
Names of some of the partners:
Dryer's Ice cream.
Bottled frappuccino with Pepsi.
Penetration into the grocery channel.
Cater to customers not located near retail stores.
Boosts transaction size.
All partners not employees: from the CEO to the baristas.
Senior management in close contact with the baristas.
Principles; hospitality, production and education.
All partners go through a mandatory 24 hour of training before a cup of coffee can served by the barista.
Even the executives go through a two-week term at the store.
Health Insurance (Dental, Vision, Medical).
Disability and Life Insurance.
Free pound of coffee each week.
"Bean Stock" (stock option plan).
Starbucks own all of its stores.
Vs franchises such as The Second Cup.
Rely heavily on debt financing and equity.
Great work environment.
Respect and Dignity.
Highest standards in purchasing, roasting, and fresh delivery.
Positive contribution to the environment.
Profitability is essential.
Starbucks is not just about the coffee.
Its about the place and the experience.
Defining brand image.
Leveraging the brand.
Options and Future Opportunities
Growing opportunities in domestic and international retail markets.
New specialty sales partners.
Penetration in the grocery channel.
Future potential of mail order business.