The Starbucks Phenomenon

One must begin with the overview that Starbucks and its thousands of worldwide stores, all owned and operated by the company an d not franchises, is truly a phenomenon. This is more than a coffee shop or a seller of morning caffeine products. Howard Schultz, CEO of Starbucks explains the Starbucks phenomenon best: " Can something get big and stay small? And I would submit that over the years, we've demonstrated, really, an unusual ability to create intimacy with both our people and, most importantly, our customers. And unlike McDonald's, Starbucks is not in the fast-food business, and we're not a franchise system. We own and operate our stores" ("Starbucks CEO" para. 12). Schultz goes on to explain that not unlike the English pub in the U.K., Starbucks really has created something quite important in America and all around the world, and that is this third place between home and work, an extension of people's lives, at a time when people have no place to go.While Starbucks is one of the most ubiquitous trade names and over the years, more and more stores had been successfully opened, the recent economic downturn has affected Starbucks like many other businesses. As Schultz recently wrote: " In the first half of 2008, Starbucks was entering a tremendously chaotic period. There was a lot the company could try to control, but so much we could not--the tanking economy, competition, vocal critics. In the first three months of our fiscal year our same-store sales--that all-too-important measure of retail success--had gone up by only 1 percent. One percent after 16 years of 5 percent or better growth! It was Starbucks' worst performance since the company went public in 1992" (Schultz, para. 21). New products, even larger servings of existing coffee products have reversed Starbucks' downward trend, so that, Today, Starbucks has more than $10 billion in annual revenue and serves more than fifty million visitors a week in seventeen thousand stores in fifty-four countries.

Nevertheless, competition has increased. There are companies offering products different from Starbucks. They are taking a bite out of the Starbucks business. Here is what Advertising Age says: " Peet's Coffee & Tea... posted $168 million in 2007 retail revenue. Los Angeles-based Coffee Bean & Tea Leaf... now has 400 locations in 14 countries" (York 260). Coffee Bean has grown by offering more tea drinks, food and, in some cases, more seating room. Another competitor is Caribou Coffee. They try to differentiate themselves from the look of the Starbucks outlets by offering customers what they consider a less pretentious atmosphere. They now have about 500 stores in 19 states. They earned $240 million in U.S. coffee house sales.

Within the U.S, there is another competitor lurking- one increasing single-cup coffee sales: " Green Mountain's growth has been driven by its Keurig business, which sells single-cup brewing systems used in homes and offices, along with the coffee that goes into them. Under Chief Executive Officer Larry Blanford, the company's revenue almost quadrupled in the past three years, helping its market value balloon more than sevenfold, to $5.8 billion. Its 80 percent share of the U.S. single-cup coffee market makes Green Mountain an attractive acquisition target for Coca-Cola and Nestlé" (Patton and Tsang para. 2).

There are a couple of other events occurring that threaten Starbucks supremacy. First, the price of coffee has risen sharply in recent months because of a poor coffee harvest. And, second- the increase of tea-drinkers in the U.S. "The tea trend may be perfectly timed. Coffee consumption in the U.S. dipped 2.3 percent from 2006 through 2009, and tea drinking has climbed 4.5 percent, to 117 eight-ounce servings per capita in 2009, according to Beverage Digest . "It's been a long time coming, but it's getting bigger and bigger, like a snowball" (Patton, para. 3). The article goes on to cover Starbucks by starting that the company has taken notice. Tazo tea has become a billion-dollar brand. Starbucks also recently dropped the word "coffee" from its logo. "Could that be a signal that they want Starbucks to represent more than just coffee?" (Patton para. 4).

Even given rising coffee prices, Starbucks recent earnings per share information positions the company strongly: The company now expects EPS of $1.44 to $1.47, reflecting 15% to 20% growth over fiscal 2010. However, the company is also continuing to slow its potential growth domestically. As mentioned earlier, chances of more unprofitable store closings- or stores not performing up to expectations- may close in the U.S., with more stores opening overseas. Even here, there will be increased competition in India, where Tata is now strong especially in tea, and in Britain where several processors are finding increased patronage with prices below those of Starbucks.

References: Patton, Leslie and Tsang, Michael: "Coffee Company Green Mountain: A Pricey Takeover?" Bloomberg Businessweek, Feb. 24, 2011 Patton, Leslie: "Tea Is Hot, from Trendy Teahouses to Starbucks" Bloomberg Businessweek Jan. 27, 2011

Schultz, Howard: " How Starbucks Got Its Mojo Back; After

years of remarkable growth, the iconic coffee chain started

to look bad. Even smell bad. In an excerpt from his new

book, CEO Howard Schultz tells how he reinvented the company

from the coffee bean up" Newsweek March 21, 2011

vol. 157, issue 2

Starbucks CEO: "'Can you get big and stay small?'" NPR

Morning Edition , March 28, 2011.

York, E.D.: " Starbucks paved way , and now it must pay"

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Iss. 12; pg. 28,