Maintaining the Growth
Looking back, Starbucks’ early success was due in large part to a recognition that, fundamentally, what America needed was “a really good cup of coffee.” Starbucks delivered a superior product via its extreme vertical integration and personal involvement from start to finish. Starbucks company-owned coffeehouses became a “Third Place”–not work and not home–where Starbucks could reward customers with a rich sensory experience by appealing to all five senses: through the rich aroma of the beans, the premium taste of the coffee, the product displays and attractive art work adorning the walls, the contemporary music playing in the background and even the cozy, clean feel of the tables and chairs. The “Starbucks experience” created stores with an “inviting, enriching environment that is comfortable and accessible yet also stylish and elegant.”
The startling success of Starbucks was evidenced by the fact that by the late 1990s, an average customer visited a Starbucks store six times a month, while their most loyal customers averaged 18 store visits a month, with an expenditure of over $3.50 a visit. A one-a-day “latte plus scone” habit could add up to over $1,400 a year. Given that 50 percent of the American public drank at least one cup of coffee a day (averaging 3.4 cups per day), there was an opportunity for Starbucks to create an enormously profitable customer franchise. Moreover, Starbucks introduced new products leveraging their coffee reputation such as Frappuccino iced coffee and premium coffee ice cream. This high level of consumer involvement and aggressive product development resulted in Starbucks realizing an annual growth rate of sales and profits exceeding 50 percent through much of the 1990s.
Starbucks’ purchased Tazo Tea, an Oregon tea retailer, in 1999. This indicated a potential new trend for Starbucks to acquire companies as a means of extending product lines. Starbucks planned to replace its in-house Infusia brand of tea with Tazo Tea, a move that would likely attract new customers who were looking for alternatives to coffee. Tazo Tea, once expected to become the “Starbucks of the tea market,” produced authentic, premium tea with a quirky image–each tea bag promoted that it contained “the mumbled chantings of a certified tea shaman” as part of its ingredients. With the wish to reinvent the tea culture in the same way as it reinvented coffee culture, Starbucks expected this acquisition to lead the company into growth opportunities by attracting new consumers. This new line of premium product, priced at an 80 percent premium of a typical competitor’s loose tea, was distributed in Starbucks coffee shops, as well as restaurants and supermarkets by year end.
Starbucks planned to strengthen its in-store and catalog product sales of CDs and books. Since 1995, Starbucks sold special mix CDs in their stores custom-made for the company by Capitol Records. The CDs were released seasonally, and were available online, as well as inside store locations. Another highly success venture started in 1998 when Starbucks partnered with Oprah Winfrey and sold the books her book club recommended.
Market Expansion into the Next Century
In 1987, Starbucks had only two coffee bars in Seattle and one in Vancouver, British Columbia. Starbucks’ growth strategy at the time aimed at increasing market share in existing markets while continuing to explore new areas in which the company could become the leading coffee retailer. Store designs were seen as flexible enough to be tailored to a variety of location types including office buildings, malls, airports, and supermarkets, allowing the company to expose the brand to diverse market segments.
A minimum of a half million dollars needed to be invested in each new site to lease the property and tailor the building to meet Starbucks’ uncompromising specifications for store interior design. Store locations were typically selected based on anticipated customer traffic volume, store visibility, and access to pedestrian street traffic. With so much money invested in each new market, however, Starbucks could not afford to make location selection errors. Starbucks specialty coffee retail stores were the core focus of the business, generating over 80 percent of the company’s revenues. Because the coffee store business was so crucial to the company’s success, precise calculations concerning the timing and location of new store openings were essential for the company to remain profitable.
Starbucks only deviated from the high-traffic, high-visibility equation for store site selection in a small number of cases such as its experimentation with drive-thru Starbucks locations. Drive-thru Starbucks locations targeted commuters who wanted their morning jolt as they battled traffic on the way to work instead of waiting until they reached the downtowns and business centers where Starbucks had typically been located. These drive-thru locations were conveniently placed on common commute routes in and around urban centers and targeted drivers instead of pedestrian customers. As of 2004, the company had increased its focus on drive-thru retail stores, operating 700 such locations.
Starbucks used acquisitions to expand its international network beyond its 300 plus stores. In September 1998, Starbucks acquired London-based Seattle Coffee Company for $84.5 million in equities, effectively establishing a foothold in the growing British coffee market, as well as a jumping-off point for future European expansion. Seattle Coffee Company, started by two enterprising American coffee connoisseurs in 1990, had much the same feel as Starbucks with its emphasis on serving gourmet coffees and offering a Euro-American style coffeehouse atmosphere. Betting on a dynamic coffee bar culture trend, Starbucks publicly announced its wish to implement its core concept in the United Kingdom as fast as possible. In 1998, Starbucks opened 40 coffee stores, in addition to transforming all of the Seattle Coffee Company’s 56 locations across Britain, as well as its two stores in South Africa and one store in Kuwait.
Later that year, Starbucks acquired Pasqua Coffee Company, a California-based coffee retailer that operated more than 50 locations in the San Francisco Bay Area and Los Angeles, including eight California airports. The Pasqua acquisition gave Starbucks the opportunity to further saturate the critical California markets and gave Starbucks desirable exposure to business travelers.
Strong Growth Continues
Nearly two decades of continuous and spectacular growth (1982—1999) built the Starbucks success story. In that time, Starbucks added about 30,000 employees, and as of 1998 the company added another 500 employees each month. In 1999, they opened 612 stores worldwide and posted revenues of $1.7 billion. As a result of the remarkable growth rate of Starbucks’ sales and profits, its market capitalization rose dramatically. This culminated in the company’s addition to the S&P 500 in 1999.
Nevertheless, in 1999, sales slowed down significantly. First, the pace of the opening of new coffeehouses fell behind schedule and same-store revenue growth flattened. Additionally, the initial high growth of Starbucks ice cream tapered considerably, and the supermarket launch of Frappuccino failed to meet sales expectations. To keep the brand on track, Starbucks continued to pursue strategies to push Starbucks beyond coffee shops to find growth areas. The challenge for Starbucks, however, was to manage growth and diversification while strengthening Starbucks core values and keeping customers trustful and loyal to the brand.
Ventures into new areas
Starbucks introduced its first full-fledged restaurant in Seattle under the name of Cafe Starbucks in 1998. The restaurant served light entrees to complement a full menu of coffee beverages. The thought behind opening a restaurant division was that almost 85 percent of Starbucks’ sales were completed by 3 p.m., with the majority of daytime purchases occurring in the morning. In 1999, Starbucks opened its first cybercafe–a coffeehouse/restaurant that provided web access along with food and beverages–in San Francisco, called Circadia.
Joe magazine, the result of a partnership with Time, Inc., was a major innovation launched in 1999. Starbucks aimed to tighten the relationship the brand had with consumers by creating an original, warm, and conversational lifestyle magazine inspired by the coffeehouse’s traditional atmosphere. It was also a means of re-asserting Starbucks core values such as a feeling of romance, relaxation, and trust.