Starbucks Coffee Company

In the 21st Century

Myra Ann L. Wee-Toe Hio

Ateneo de Davao University

MBA: Business Ethics

Professor Oliver Victoriano

October 31, 2020

Starbucks Coffee Company started in 1971 and was bought over by Schultzs in 1987.

Schultzs built the brand by establishing it as a premium coffee brand as well as making the

company one with a conscience towards its customers, employees, suppliers, other

stakeholders and as well as the environment. It trained its front liners to take an active part

in creating a coffee house experience for its customers and thereby creating loyalty that led

to its success. Starbucks was able to lead in the then nascent premium coffee market and its

growth, driven by expansions initially financed by the financial market, was phenomenon. In

2007, it had become the largest coffee retailer in the world.

II – Problem Statement

Starbucks had become the darling of Wall Street, and it had difficulties in holding on

to its status. From an initial stock price of $2 in 1992, it continued to climb to $39 in 2006.

However it started to descend after that, and was $19 in 2008. How should Starbucks

position itself and what should it do to ensure continued growth, to satisfy its shareholders

while at the same time be true to its initial mission, to do “the right thing”, and to

concentrate on what they do best – specialty coffee?

Rapid Growth

In 2006, the stock price of Starbucks appreciated over 2,500% since the company’s

initial public offering in 1992. Starbucks grew at a very rapid rate, which was no longer

sustainable by 2007. Starbucks was able to create a niche in the premium coffee market and

created a unique coffeehouse experience for its customers. The street was surprised by

Starbuck’s sustained performance in the stock market, but its run had come to an end by

2006. In an attempt to refocus, Schultzs readjusted the target of operating 40,000 outlets

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set in 2006 by reducing the number to 21,500 operating outlets by 2011. The comparable

sales figure had been maintained at 5% or higher for the past 16 years, but in 2006, the

comparable sales fell to 4%, which caused the market to react by negative 8% on its stock

price. The reaction seems to indicate that the market views the stock as over-valued and is

therefore sensitive to a relatively small change in comp sales figure.

Increased Competition and brand dilution

In the 1980s, the specialty coffee market was still starting to grow. In 1989, there

were 585 retailers and by the end of 2006, there were nearly 24,000. Aside from chains such

as Starbucks, Peet’s Coffee & Tea and Caribou Coffee, there were also plenty of independent

neighborhood operators. Starbucks had created the market for specialty coffee and as part

of its initiative to increase store sales growth, it abandoned some of its core market when it

moved to “greener pastures of Pomegranate Banana Frappuccinos”, according to an

independent coffee shop owner.

Established food chains also wanted to be in on the band wagon of specialty coffee

and by 2006, Dunkin Donuts and McDonalds offered espresso drinks. McDonald’s premium

drip coffee rated best in a Consumer Report, beating both Dunking Donuts and Starbucks. A

“coffee war” was underway and both McDonalds and Dunkin Donuts positioned their

products as thriftier and less pretentious, although their prices were not always lower than

Starbucks for comparable products.

Personnel Issues

Schultzs had always valued the employees of Starbucks and were referred to as

“partners” and not mere employees. As partners, they were given a big role in establishing

the coffee house culture of the company, through “ways of being”, as baristas were

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expected to be welcoming, genuine, knowledgeable, considerate and involved. As partners,

they were given more than fair wages ($2.00 more than New York’s minimum in one case),

and also generous benefits, such as health care coverage for employees who worked at least

20 hours a week. Partners also participated in employee stock option plan called Bean Stock.

Starbucks also trains its partners through intensive 3-day training of new hires, with topics

such as coffee brewing techniques, history and connoisseurship of coffee, and customer

service. Nevertheless, Starbucks had labor issues related to wrongful termination, illegal

employment practices such as working off the clock and illegal division of barista tips.

Starbucks was also experiencing an increasing turnover rate of 80% in 2004, which

was previously at 60% in the mid 19902. However, it is still lower than the industry average

at more than 200%. In a Partner View Survey conducted in 2006, job satisfaction fell to 82%

from 86% in 2003. The percentage of partners who felt engaged with their work also fell

from 73% to 69%, and issues raised were pay and benefits and job opportunities. Starbucks

addressed these by increasing wages, give trainings for career advancement opportunities

and reinstated the leadership conference that was earlier cut to pay for pay raises.

Due to the need to standardize processes and ensure quality, Starbucks had replaced

manual coffee machines to automatic coffee makers, decreasing the artisan quality of the

specialty coffee. Starbucks also needed to reduce customer waiting time and engaged an

industrial engineer to study store operations for a more efficient way of doing things.

Changes like not requiring signature for credit card purchases under $25 and engaging

assigning “Floaters” were introduced. Despite these, less than 60% of all stores met the goal

of serving customer within three minutes or less.

Leadership Vacuum

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 The rapid growth of Starbucks made it difficult to train internally to fill leadership

positions, and maintaining dedicated executives knowledgeable about the espresso craft

became a challenge. The retirement of several longtime executives also left vacuums waiting

to be filled, such as the position of chief financial officer, senior vice president of global

brand strategy and communications and Starbucks U.S. president.

Supply Chain Issues

Starbucks created an infrastructure that retained tight control over the processing

and distribution of coffee beans. Starbucks sourced its beans from the international market,

but ensured that it acted in a socially responsible manner by supporting three main areas:

literacy and community development, the environment, and support for the farmers who

supplied the company. Starbucks paid its coffee suppliers an average of 23% over the

market prices, and helped improve the quality of life in coffee-farming areas. Starbucks

partnered with Conservation International and African Wildlife Foundation to promote

environmental sustainability and natural resource conservation in Africa. Despite these

efforts, activists protested and pressured Starbucks to offer Fair Trade Certified coffee in its

store. Starbucks agreed, but as alternate, set up a Coffee and Farmer Equity (C.A.F.E.)

guideline for buying socially responsible coffee. Starbucks also had to deal with the

Ethiopian government who demanded trademark rights for several varieties of coffee sold in

its stores. Starbucks initially resisted as it paid Ethiopian coffee 28% above market but

eventually an agreement was made with the Ethiopian government. Starbucks also had to

deal with Organic Consumers Association and as a result stopped using milk produced from

cows that had been injected with the rBST (recombinant bovine somatotropin) hormone.

Economy

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 The economy of the U.S. was experiencing a crisis that was triggered by subprime

mortgages. It resulted in a downturn in the real-estate market, which had a direct impact on

home equity, thus reducing liquidity. At a time when inflation is relatively high, with gas

prices increasing from $3.16 in June 2007 to $4.00 in June 2008, more than half of

Americans felt poorer than they had in years.

III – Objectives of the Study

This paper seeks to lay a clear path for Starbucks to take considering that it has to

remain attractive to its shareholders, address the challenges it faced from market share

erosion due to increased competition, supply chain issues, personnel challenges while

maintaining its unique Starbucks culture of always choosing to do the socially responsible

method of conducting its affairs.

Rapid Growth

Schultzs could not sustain the rapid growth of Starbucks and moved to close 100 US

Starbucks outlets in 2008. Was closing 100 outlets in the US a socially responsible move by

Starbucks? Did this move send a message to its supposed valued employees that the

company truly value them or was this a mere rhetoric? Was Schultzs putting shareholder

interest first before employee security?

Increased Competition

Competition is a natural market development specially in the lucrative specialty

coffee market. The six initiatives presented by Schultzs brings Starbucks back to its true

core, giving customers the special Starbucks experience that cannot be had in other brands.

Will Starbucks be able to differentiate itself from the competition and in a market

increasingly becoming saturated? Is Starbucks an ethical company that it pose itself to be, or

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is marketing a simple commodity such as coffee, and charging $4 for a cup irresponsible,

creating a need amongst gullible consumers?

Personnel Issues and Leadership Vacuum

The disconnect between what Starbucks portrays itself to its partners and how the

partners feel should be considered if Starbucks continues to offer itself as a brand with

coffee house feel, where partners are front liners in creating that experience. Partners need

to feel that they are not cookie cutters, that they have growth opportunities and that they

are valued by the firm. What was the balancing act that Starbucks had to do when it closed

its 100 outlets but at the same time trying to offer its employees an employment

opportunity which seeks to value them more than merely cheap front-liners? Moreover, if

Starbucks truly cared for its employees, it is hard to believe that there would be a leadership

vacuum as it would have provided its employees with opportunities for growth, providing

plenty of possible successors to leadership positions.

Supply Chain Issues

There will always be activists who will seek to ask for more even if Starbucks is

already the industry leader in its dealings with suppliers. How should Starbucks deal with

this considering there are governments who are not even able to protect or set up

standards for protecting its farmers and environment? What is Starbucks’ role in this

matter? Is Starbucks truly involved in saving the environment, or is its demand for coffee in

third world countries another face of slavery covered in the guise of international trade, and

its effort to use recycled paper cups another futile effort in covering the great

environmental damage it incurs when looking at the overall paper and energy consumptions

that it uses?

Economy

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 Consumers may no longer feel that they can afford the little luxuries offered by

Starbucks and may well settle for regular coffee in the grocery store. How should Starbucks

position itself so that its consumers will see reason to patronize Starbucks even in an

economic downturn? Is it ethical for Starbucks to offer and entice low income wage earners

to consume its expensive beverage through the addictive effects of its drinks and the feel

good atmosphere of its coffee houses?

IV – Situational Analysis

Weaknesses-Opportunities Strategic
Strengths-Opportunities Strategic Options
Options
(Offensive and Proactive Actions)
(Defensive and Proactive Actions)
The economic downturn is an

Starbucks is the leader in specialty retail opportunity for Starbucks to rationalize

coffee and it enjoys a reputation of being a the decline of its stock price. However,

socially responsible company. With such a the lower price could also be seen as

strong brand, it should expand in the resulting to a higher price to earnings (PE)

international market and preach its purpose ratio making it an attractive stock in the

and being, continuing to contribute to market. Instead of a growth stock, it can

societies where it operates in. reposition itself as a long term stock that

pays out regular dividends to its

shareholders.

Strengths-Threats Strategic Options Weaknesses-Threats Strategic Options

responsible and its different projects and by the public and may have resulted in

outreach should be used as defense against being easily labelled as just another big

threats from activists taking advantage of the corporation taking advantage of

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 consumers. It should publicize its CSR

company’s size and resources. activities such as “voice behind the bean”

program to avoid or minimize activists

attacks and bad press.

V – Strategic Alternatives

1) Starbucks will maximize shareholders equity. This would mean that it continue to

open outlets in places and countries where it enjoys the best reputation. This

alternative may pay lip service to ethical issues such as how it deals with its

employees, its suppliers, and even the environment. However, if a choice needs to

be made, Starbucks will choose what is best for its bottom line.

2) Starbucks will prioritize the responsibility it has towards its employees and suppliers,

and giving less importance to shareholder’s equity.

3) Starbucks will position itself as a truly ethical company by maximizing the welfare of

all its stakeholders and not merely focusing on its shareholders. Although it will still

require to be profitable to cover costs, its margins will either be reduced or will be

channeled to do more in its interactions with stakeholders. Its causes will truly

ensure a fair and living wages for everyone in its supply chain, even to the extent of

reducing the short term return of investments for shareholders.

VI – Analysis and Conclusion

If the Categorical Imperative were to be used as basis for Starbucks’ decision, it

would choose option two and act in a way that respects the dignity and autonomy of every

human being. It would lower its profit margin so as not to enslave its gullible consumers, it

would treat its employees fairly and give them opportunities to step into leadership
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positions, it would not just close 100 outlets for the sake of increasing profits, and its

purchase of coffee beans would ensure that the livelihood of its suppliers is indeed

improved not only through the purchase of beans but through direct investment of basic

necessities such as infrastructure for the education of the children of communities that

supply its beans.

For consequentialists, the utilitarianism normative theory will choose the strategy

that would produce the greatest good for the greatest number of people. In this case, there

has to be a calculation to compare the total number of shareholders compared to the total

number of partners, farmers, and suppliers. The total good produced for all shareholders by

choosing the alternative to maximize stock price should be compared to the total good

produced for partners and suppliers by choosing the alternative to stay true to its culture.

The good produced to customers may be negated as there is minimal difference in the good

produced to them either way, as they will still have their Starbucks specialty coffee. It would

however seem safe to say that there are many more shareholders (partners are also

shareholders through the stock option plan) compared to partners and suppliers, thus by

sheer number, choosing to maximize share prize would produce the greatest good. Thus

method of rationalizing would lead to option one. However, we will arrive at a different

conclusion if we take to consideration the length of time that Starbucks will continue to

operate because such an option may shorten the life of Starbucks in the market, as its

consumer appeal may slowly be eroded through time.

Utilizing the virtue ethics of equity and reciprocity, Starbucks will choose a strategy

that seeks an equitable way of distributing wealth with its partners, suppliers as well as

shareholders. It will also use reciprocity in analyzing how much it needs to give and receive

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in social relationships that it has with its stakeholders. With this method, Starbucks will

choose the third strategy of trying to balance both doing the right thing for its partners and

suppliers, as well as giving what is due to its shareholders.

VII – Recommendation to Management

The third course of action is best for Starbucks, i.e., to balance the demands of its

shareholders and remaining true to its mission of “doing the right” thing. Schultz should

capitalize on the strength of its reputation and at the same time make its CSR activities

publicly known in order to assuage those who have a natural abhorrence for big

corporations. Management need to clarify its position with the employees so that they will

understand why the need for closing unprofitable outlets that result in termination of

employment and need to actively engage the employees in conversations if indeed they are

partners and not employees. This move would also clarify shareholder expectation, that

instead of windfall that they were used to, the share would now be an income generating

stock, for sustained long term growth. Starbuck’s partnership with its suppliers should

continue to grow and the focus should always be for the long term, with decisions that

would benefit entire communities. Investments in the improvement of farms and farming

methods should be implemented so that the relationship will be sustained even for the next

generation farmers. Finally, it could offer more targeted perks to its loyal customers who

may be facing financial difficulties but still patronize their outlets. By doing so, Starbucks

would successfully achieve not only the coffee house atmosphere but will also be a venue

for the community to go to and face the crisis together.

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