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Closing Case: Starbucks

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chapter 4

Closing Case: Starbucks

In 2006, Starbucks’, the ubiquitous coffee retailer, closed a decade of astounding financial performance. Sales had increased from $697 million to $7.8 billion and net profits from $36 million to $540 million. In 2006, Starbucks’ was earning a return on invested capital of 25.5%, which was impressive by any measure, and the company was forecasted to continue growing earnings and maintain high profits through to the end of the decade. How did this come about?

Thirty years ago Starbucks was a single store in Seattle’s Pike Place Market selling premium roasted coffee. Today it is a global roaster and retailer of coffee with more than 12,000 retail stores, some 3,000 of which are to be found in 40 countries outside the United States. Starbucks Corporation set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffeehouse experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse format—and the Starbucks experience was born.

Schultz’s basic insight was that people lacked a “third place” between home and work where they could have their own personal time out, meet with friends, relax, and have a sense of gathering. The business model that evolved out of this was to sell the company’s own premium roasted coffee, along with freshly brewed espresso-style coffee beverages, a variety of pastries, coffee accessories, teas, and other products, in a coffeehouse setting. The company devoted, and continues to devote, considerable attention to the design of its stores, so as to create a relaxed, informal and comfortable atmosphere. Underlying this approach was a belief that Starbucks was selling far more than coffee – it was selling an experience. The premium price that Starbucks...

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