Starbucks: It’s not just about the coffee.

Starbucks’ continued success is not just about the coffee, but about the close alignment between its business and operating models.

Intro

The coffee shop chain that started in 1971, with a small retail location in Seattle and grew to become one of the world’s most admired companies of all time[1], has actually a surprisingly simple company mission.

“To inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.”[2]

At the end of Fiscal Year 2014, Starbucks reported more than 23,000 retail stores in 68 countries and revenues greater than $19 billion.[3] So there is no question about it: Starbucks is creating value, but how are they doing it? Is it simply by following their main goal of providing great coffee or is it more than that?

Starbucks Global Locations [4][4]

More than just coffee

Starbucks’ rapid expansion and successful market penetration throughout the globe can actually be attributed to a lot more than just coffee. Its business model relies on this very fact, because if it was just coffee, customers wouldn’t pay $4 dollars for a cup of coffee and more importantly, they wouldn’t be repeat customers.[5]

In addition to providing great quality coffee, Starbucks creates value by delivering an amazing experience to its customers, through reliable and friendly service and an amazing in-store experience.

 

Starbucks’ Partners

In order to create this nurturing experience for their customer, Starbucks relies heavily on its more than 200,000 employees. They are probably the most important piece of its business model. The only way to ensure that every store will feel like a comfortable third-place place for customers and that they will get outstanding service is through invested and well-trained employees.

Starbucks figured this out at the very beginning. Howard Schultz understood the important role that employees played in his company and so he decided not to treat them as employees but as “partners”. To make sure they felt like partners, Starbucks actually gave them stock in the company and it was one of the first companies to give benefits to part-time employees.[6]

[7]

 

Starbucks’ Suppliers

Another part of Starbucks’ business model is their commitment to quality and consistency of their products. You know what to expect when you walk into a Starbucks and you know that your Caramel Macchiato will taste the same no matter where you are in the world.[8] However, this promise of consistency is no small task and the company accomplishes this not only thanks to its employees, but also through its great relationships with suppliers.

Starbucks has gone to great lengths to foster a good relationship with the suppliers of its more important cost component, coffee. For starters, all the coffee that Starbucks buys is high quality fair trade Arabica coffee beans and for every pound they buy, Starbucks pays a premium that goes directly to the coffee farmers and their communities (e.g. enabling children in Costa Rica to go to secondary school). [9]

Furthermore, the company focuses on building the coffee culture throughout the organization. In Mexico, for example, every corporate employee has to do a two-week in-store barista training program. In other parts of the world, they host barista competitions and the best partners are trained to become “Coffee Masters” (similar to sommeliers but in coffee terms).

[10]

 

Innovation

Starbucks' Innovation [11][11]

Constant innovation is also something that puts Starbucks in the map and they try to be an innovative company in many different ways. However, their most critical innovations revolve around finding ways to reduce waste and increase their productivity (measured as number of transactions per labor hour).[12]

Their main concern is: “How do we get employees to get more coffees done in less time and with less waste?” And they have addressed this question with a lot of very simple process improvements, such as buying smaller milk cartons, moving the syrups to be in a more easily accessible spot, designing new milk frothing jugs that allowed for faster heating, among others. As a result, Starbucks’ productivity increased from 8 transactions per hour to 12 in 2013.

Additionally, Starbucks has introduced other innovations, especially in the customer loyalty and mobile space with the Starbucks Card, Mobile Order and Pay, and Digital Tipping.[13]

 

Challenges Ahead

Now, I am not saying that they do everything perfectly, they of course have some flaws and make mistakes (for example they haven’t been successful in entering some international markets such as Italy, France and Spain, among other countries) and they have a lot of challenges ahead. However, they have also been incredibly successful and I think that the main reason for their continued success is the close alignment between their business and operating models.

 

 

Sources:

[1] Lorenzetti, Laura. “Fortune’s World’s Most Admired Companies: Starbucks, where innovation is always brewing” (http://fortune.com/2014/10/30/starbucks-innovation-cafe-to-classroom/). October 30, 2014.

[2] Starbucks Corporation. “Company Information” (http://www.starbucks.com/about-us/company-information).

[3] Starbucks Corporation. “Starbucks Reports Record Fourth Quarter and Record Fiscal Year 2015 Results” (http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-newsArticle&ID=2104341). October 29, 2015.

[4] Krikorian, Matthew. “A Starbucks on every corner: A guide to the SBUX business model” (http://marketrealist.com/2014/01/starbucks-every-corner-guide-sbux-business-model/). January 27, 2014.

[5] Simonds, Lauren. “Starbucks: A Model of Success” (http://business.time.com/2013/08/27/starbucks-a-model-of-success/). August 27, 2013.

[6] Larimore, Rachael. “The Starbucks Guide to World Domination” (http://www.slate.com/articles/business/when_big_businesses_were_small/2013/10/starbucks_business_strategy_how_ceo_howard_schultz_conquered_the_world.html). October 24, 2013.

[7] Starbucks Coffee. “What It’s Like to be a Starbucks Partner” (https://www.youtube.com/watch?v=XnEBixTe4ZI). June 14, 2012.

[8] Curtis, Chloe. “Starbucks’ New Business Model” (http://themarketmogul.com/starbucks-new-business-model/). October 1, 2015.

[9] Starbucks Coffee. “What Goes Into Making a Starbucks Coffee?” (https://www.youtube.com/watch?v=DHKtKF-e42M). September 1, 2009.

[10] Starbucks Coffee. “Your Perfect Starbucks Latte” (https://www.youtube.com/watch?v=qrVh4LLLd2s). May 4, 2010.

[11] O’Leary, Noreen. “Starbucks Talks Logo Redesign” (http://www.adweek.com/news/advertising-branding/starbucks-talks-logo-redesign-126217). January 5, 2011.

[12] Corey. “Starbucks’ Productivity Secrets: More to it than Caffeine” (http://knote.com/2014/10/28/starbucks-productivity-secrets/).

[13] Starbucks Corporation. “10 Starbucks Innovations of 2014” (https://news.starbucks.com/news/10-starbucks-innovations-of-2014).

Other Sources:

Henricks, Mark. “The Starbucks Business Model” (http://www.entrepreneur.com/article/173256). January 31, 2007.

Starbucks Coffee. “Making Your Cup a Perfect Cup” (https://www.youtube.com/watch?v=mdewPUKAhMY). March 12, 2012.

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2 thoughts on “Starbucks: It’s not just about the coffee.

  1. Alejandra – Great submission! As an avid Starbucks drinker, it was so interesting to hear about the background operations that allow for the business model to be so successful. From personal experience, I am always very impressed with Starbuck’s operations running smoothly as the baristas are always very kind and accommodating, and the ordering process is always very quick and easy. As a company that utilizes innovation and technology to improve operational efficiencies, I am curious to see how Starbucks adopts and integrates new consumer facing tech (e.g., Apple Pay) to make the experience even better. While Starbuck’s operations and business models are well aligned, I am worried about some challenges it may face going forward in competing with other smaller coffee shops that may be able maintain more of personalized, less corporate culture. It will be interesting to see how Starbucks will adapt its operations to combat these challenges in the future.

  2. Definitely agree that the close alignment between the company’s business and operating models is certainly one of the reasons it has remained successful for many years. As you’ve also mentioned, providing the best customer experience begins with taking care of its employees which Starbucks has been very well known for.

    Interestingly, I went to a Starbucks in Boston a few weeks ago that provided no seating arrangements at all. It felt a bit unusual, since to me, the idea of Starbucks isn’t just about buying a cup of coffee, but it’s also about the environment and experience within the store. Do you think if they continue to expand in such a way (offering only to-go items), that would deviate them from their business model and turn them into just another coffeeshop?

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