Even the thirst of loyalists for high-price coffee can’t be taken for granted. Starbucks’ growth over the past decade coincided with a remarkable surge in the economy. Consumer spending has continued strong in the downturn, but if that changes, those $ 3 lattes might be an easy place for people on a budget to cut back. Starbucks executives insist that won’t happen, pointing out that even in the weeks following the terrorist attacks, same-store comparisons stayed positive while those of other retailers skidded.

Starbucks also faces slumping morale and employee burnout among its store managers and its once-cheery army of baristas. Stock options for part-timers in the restaurant business was a Starbucks innovation that once commanded awe and respect from its employees. But now, though employees are still paid better than comparable workers elsewhere—about $ 7 per hour—many regard the job as just another fast-food gig. Dissatisfaction over odd hours and low pay is affecting the quality of the normally sterling service and even the coffee itself, say some customers and employees. Frustrated store managers among the company’s roughly 470 California stores sued Starbucks in 2001 for allegedly refusing to pay legally mandated overtime. Starbucks settled the suit for $ 18 million this past April, shaving 40.03 per share off an otherwise strong second quarter. However, the heart of the complaint---feeling overworked and underappreciated—doesn’t seem to be going away.

To be sure, Starbucks has a lot going for it as it confronts the challenge of maintaining its growth. Nearly free of debt, it fuels expansion with internal cash flow. And Starbucks can maintain a tight grip on its image because stores are company-owned: There are no franchisees to get sloppy about running things. By relying on mystique and word-of-mouth, whether here or overseas, the company saves a bundle on marketing costs. Starbucks spends just $ 30 million annually on advertising, or roughly 1 percent of revenues, usually just for new flavors of coffee drinks in the summer and product launches, such as its new in-store Web service. Most consumer companies its size shell out upwards of $ 300 million per year. Moreover, unlike a McDonald’s or a Gap Inc, two other retailers that rapidly grew in the United States, Starbucks has no nationwide competitor.

Starbucks also has a well-seasoned management team Schultz, 49, stepped down as chief executive in 2000 to become chairman and chief global strategist. Orin Smith,60, the company’s numbers-cruncher, is now CEO and in charge of day-to-day operations. The head of North American operations is Howard Behar,57,a retiring. The management trio known as H20, for Howard, and Orin.

Schultz remains the heart and soul of the operation. Raised in a Brooklyn public-housing project, he found his way to Starbucks, a tiny chain of Seattle coffee shops, as a marketing executive in the early 80’s . The name came about when the original owners looked to Seattle history for inspiration and chose the moniker of an old mining camp: Starbo·Further refinement led to Starbucks, after the first mate in Moby-Dick, which they felt evoked the seafaring romance of the early coffee traders (hence the mermaid logo). Schultz got the idea for the modern Starbucks format while visiting a Milan coffee bar. He bought out his bosses in 1987 and began expanding. Today, Schultz has a net worth of about $ 700 million, including $ 400 million of company stock.

Starbucks has come light-years form  those humble beginnings, but Schultz and his team still think there’s room to grow in the United States—even in communities where the chain already has dozens of stores. Clustering stores increases total revenue and market share, Smith argues, even when individual stores poach on each other’s sale’s. The strategy works, he says, because of Starbucks’ size. It is large enough to absorb losses at existing stores as new ones open up, and soon overall sales grow beyond what they would have with just one store. Meanwhile, it’s cheaper to deliver to and manage stores located close together. And by clustering, Starbucks can quickly dominate a local market.

The company is still capable of designing and opening a store in 16 weeks or less and recouping the initial investment in three years. The stores may be oases of tranquility, but management’s expansion tactics are something else. Take what critics call its“predatory real estate” strategy—paying more than market-rate rents to keep competitors out of a location. David C Schomer, owner of Espresso Vivace in Seattle’s hip Capitol Hill neighborhood, says Starbucks approached his landlord and offered to pay neatly double the rate to put a coffee shop in the same building.

The landlord stuck with Schomer, who say:“It’s a little disconcerting to know that someone is willing to pay twice the going rate.” Another time: Starbucks and Tully’s Coffee Corp, a Seattle based coffee chain, were competing for a space in the city. Starbucks got the lease but vacated the premises before the term was up. Still, rather than let Tully’s get the space, Starbucks decided to pay the rent on the empty store so its competitor could not move in. Schultz makes no apologies for the hardball tactics.“The real estate business in America is a very, very tough game,” he says.“It’s not for the faint of heart.”

Still, the company’s strategy could back. Not only will neighborhood activists and local businesses increasingly resent the tactics, but customers could also grow annoyed over having fewer choices. Moreover, analysts contend that Starbucks can maintain about 15 percent square-footage growth in the United States—equivalent to 550 new stores—for only about two more years. After that, it will have to depend on overseas growth to maintain annual 20 percent revenue growth.

Starbucks was hoping to make up much of that growth with more sales of food and other noncoffee items, but has stumbled somewhat. In the late 90’s, Schultz thought that offering $ 8 sandwiches, desserts, and CDs in his stores and selling packaged coffee in supermarkets would significantly boost sales, but growth has been less than expected. A healthy 19 percent this year, it’s still far below the 38 percent growth rate of fiscal 2000. That suggests that while coffee can command high prices in a slump, food—at least at Starbucks—cannot. One of Behar’s most important goals is to improve that record. For instance, the company now has a test program of serving hot breakfasts in 20 Seattle stores and may move to expand supermarket sales of whole beans.

What’s more important for the bottom line, though, is that Starbucks has proven to be highly innovative in the way it sells its main course: coffee. In 800 location it has installed automatic espresso machines to speed up service. And in November, it began offering prepaid Starbucks cards, priced from $ 5 to $ 500, which clerks swipe through a reader to deduct a sale, That, says the company, cuts transaction times in half. Starbucks has sold $ 70 million of the card.

In early August, Starbucks launched Starbucks Express, its boldest experiment yet, which blends java, Web technology, and faster service. At about 60 stores in the Denver area, customers can pre-order and prepay for beverages and pastries via phone or on the Starbucks Express website. They just make the call or click the mouse before arriving at the store, and their beverage will be waiting—with their name printed on the cup. The company will decide in January on a national launch.

And Starbucks is bent on even more fundamental store changes. On August , it announced expansion of a high-speed wireless Internet service to about 1,200 Starbucks locations in North America and Europe. Partners in the project—which Starbucks calls the world’s largest Wi-Fi network—include Mobile International, a wireless subsidiary of Deutsche Telecom, and Hewlett-Packard. Customers sit in a store and check e-mail, surf the Web, or download multimedia presentations without looking for connections or tripping over cords. They start with 24 hours of free wireless broadband before choosing from a variety of monthly subscription plans.

Starbucks executives hope such innovations will help surmount their toughest challenge in the home market: attracting the next generation of customers. Younger coffee drinkers already feel uncomfortable in the stores. The company knows that because it once had a group of twenty something’s hypnotized for a market study. When their defenses were down, out came the had nes. “They either can’t afford to buy coffee at Starbucks, or the only peers they see are those working behind the counter,” says Mark Braden, who conducted the research for the Hal Rainey & Partners ad agency (now part of Public’s Worldwide) insane Francisco. One of the recurring themes the hypnosis brought out was a sense that “people like me aren’t welcome here except to serve the yuppies,” he says. Then there are those who just find the whole Starbucks scene a bit pretentious. Katie Kelleher, 22, a Chicago paralegal, is put off by Starbucks’ Italian terminology of grandee and venting for coffee sizes. She goes to Dunkin’ Donuts, saying:“Small, medium, and large is fine for me.”

As it expands, Starbucks faces another big risk: that of becoming a far less special place for its employees. For a company modeled around enthusiastic service, that could have dire consequences for both image and sales. During its growth spurt of the mid-to-late-1990s, Starbucks had lowest employee turnover rate of any restaurant or fast-food company, largely thanks to its then unheard of policy of giving health insurance and modest stock options to part-timers making barely more than minimum wage

Such perks are no longer enough to keep all the workers happy. Starbucks’ pay doesn’t come close to matching the workload it requires, complain some staff. Says Carrie Shay, a former store manager in West Hollywood, Calif:“If I were making a decent living, I’d still be there.” Shay, one of the plaintiffs in the suit against the company, says she earned $ 32,000 a year to run a store with 10to 15 part-time employees. She hired employees, managed their schedules, and monitored the store’s weekly profit-and-loss statement. But she was also expected to put in significant time behind the counter and had to sign an affidavit pledging to work up to 20 hours of overtime a week without extra pay—a requirement the company has dropped since the settlement, Smith says that Starbucks offers better pay, benefits, and training than comparable companies, while it encourages promotions from within.

   For sure, employee discontent is far from the image Starbucks wants to project of relaxed workers cheerfully making cappuccinos. But perhaps it is inevitable. The business model calls for lots of low. And the more people who are hired as Starbucks expert the less they are apt to feel connected to the original mission of high service—bantering with customers and treating them like family. Robert J Thompson, a professor of popular culture at Syracuse University, says of Starbucks:“It’s turning out to be one of the great twenty-first century American success stories—complete with all the ambiguities.”

   Overseas, though, the whole with Starbucks package seems new and, to many young people, still very cool. In Vienna, where Starbucks had a gala opening for its first Austrian store last December, Helmut Spudich, a business editor for the paper Der. Standard predicted that Starbucks would attract a younger crowd than the established cafes.“The coffeehouses in Vienna are nice, but they are old. Starbucks is considered hip,” he says.

But if Starbucks can count on its youth appeal to win a welcome in new markets, such enthusiasm cannot be counted on indefinitely. In Japan, the company beat even its own bullish expectations, growing to 368 stores after opening its first in Tokyo in 1996. Affluent young Japanese women like Anna Kato, a 22-year-old Toyota Motor Corp. worker, loved the place.“I don’t care if it costs more, as long as it tastes sweet,” she says, sitting in the world’s busiest Starbucks, in Tokyo’s Shibuya district. Yet same-store sales growth has fallen in the past 10 months in Japan, Starbucks’ top foreign market, as rivals offer similar fare. Add to that the depressed economy, and Starbucks Japan seems to be losing steam. Although it forecasts a 30 percent gain in net profit, to $ 8 million, same-store sales are down 14 percent for the year ended in June. Meanwhile in England, Starbucks’ second-biggest over-seas market, with 310 stores, imitators are popping up left and right to steal market share.

Entering other big markets may be tougher yet. The French seem to be ready for Starbucks’ sweeter taste, says Philippe Bloch, cofounder of Columbus Café, a Starbucks-like chain. But he wonders if the company can profitably cope with France’s arcane regulations and generous labor benefits. And in Italy, the epicenter of European coffee culture, the notion that the locals will abandon their own 200,000 coffee bars en masse for Starbucks strikes many as ludicrous. For one, Italian coffee bars prosper by serving food as well as coffee, an area where Starbucks still struggles. Also, Italian coffee is cheaper than U.S. java and, say Italian purists, much better. Americans pay about $ 1.50 for an espresso. In northern Italy, the price is 67 cent; in the south, just 55 cents. Schultz insists that Starbucks will eventually come to Italy. It’ll have a lot to prove when it does. Carlo Perini founder of the ant globalization movement Slow Food, sniffs that Starbucks’ “substances served in Styrofoam” won’t cut it. The cups are paper, of course. But the skepticism is real.   

As Starbucks spreads out., Schultz will have to be increasingly sensitive to those cultural challenges. In December, for instance, he flew to Israel to meet with Foreign Secretary Shimon Peres and other Israeli officials to discuss the Middle East crisis. He won’t divulge the nature of his discussions. But subsequently, at a Starbucks outlets already in Kuwait, Lebanon, Oman, Qatar, and Saudi Arabia, he created a mild uproar among Palestinian supporters .Schulz quickly backpedaled, saying that his words were taken out of context and asserting that he is “pro-peace” for both sides.

There are plenty more minefields ahead. So far, the Seattle coffee company has compiled an envious record of growth. But the giddy buzz of that initial expansion is wearing off.

Now StarBucks is waking up to the grand challenges faced by any corporation bent on becoming a global powerhouse.

Profit at Starbucks Coffee Japan fell 70 percent in the first

nine months of the year because of growing competition from rival coffee chains. Sales at stores open more than one year fell 16 percent. The firm expects a loss for the year.

QUESTIONS

As a guide, use Exhibit 1.2 and its description in Chapter 1, and do the following:

1.      Identify the controllable and uncontrollable elements that Starbucks has encountered in entering global markets.

2.      What are the major sources of risk facing the company and discuss potential solutions.

3.      Critique Starbucks’ overall corporate strategy.

4.      Flow might Starbucks improve profitability in Japan ?

Visit WWW.starbucks.com for more information.

Sources: Stanley Holmes, Drake Bennett, Kate Carlisle, and Chester Dawson, “Planet Starbucks: To Keep Up the Growth IT Must Go Global Quickly,” Business Week, December 9,2002,pp 100—110. Reprinted by permission of Businesss week; and Ken Betson, “Japan: Starbucks Profit Falls,” New York Times, February 20,2003,p.1