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The Starbucks Experience
Going Global (continued)
Most analysts who follow Starbucks are bullish on the stock, despite the current general market woes. After all, a share purchased in 1992 at the IPO is now worth more than 16 times its original value, taking into account stock splits. As Schultz points out, a contemplative moment of relaxation over a Starbucks latte is an affordable luxury even during a recession. “I have a strong buy recommendation on the stock,” says John Glass of Deutsche Banc Alex Brown. This is the best long-term play in the restaurant/retail field I’ve ever seen.” As long as the company sticks to its core expertise, Glass is confident that the firm can continue to expand successfully. Schultz clearly tried to spread the Starbucks brand image too thin, particularly with forays into various internet companies that made the share price tumble severely in the summer of 1999. But when the brand sticks close to its identifiable product - the cold coffee drink Frappuccino, sold in a venture with Pepsi, or coffee-flavored ice cream with Breyer’s - it may succeed.

The major unanswered question is how Starbucks will fare in continental Europe over the next few years, particularly when it goes back to Italy, where Schultz had his epiphany in 1983. It is likely that Starbucks will do well in Germany, where there are already Starbucks clones. But what about Scandinavia, which already prides itself on its fine coffee heritage and the world’s highest per capita coffee consumption? And what about France, which has a long history of anti-American sentiment and which already hosts a vibrant cafe culture? Finally, of course, what about Italy, with its 121,000 existing neighborhood espresso bars?

Peter Maslen, the president of Starbucks Coffee International, is cautiously optimistic. “We know that Europe has a long coffee tradition, so it’s with humility and respect that we come back to Europe.” On the other hand, he says that “so far, we’ve been very fortunate; we’ve been embraced everywhere we’ve gone without exception, but it still surprises us.”

That isn’t quite true, however. When Starbucks opened an outlet in Beijing’s Forbidden City in 2000, it provoked protests from Chinese nationalists such as Duan Fei, a middle-aged officer in the People’s Liberation Army. “This is an American product,” he complained. “It’s imperialism. We should kick it out.” On the other hand, Huang Bing, a young part-time model, bubbled, “It’s fantastic. Coffee is cool now. The Forbidden City can be cool, too.”

That attitude is likely to be the key to Starbucks’ success in Europe over the next few years as well. With minimal advertising, Starbucks already has phenomenal brand recognition around the world, through word-of-mouth, movie placements, and the like. With its saturation placement, Starbucks acts as its own advertisement, analyst John Glass points out. “Almost anywhere in the world, even in Beijing, you can see one Starbucks outlet from another. They’ve raised store density to a level I’ve never seen before. Their secret is to put outlets in suburban markets, with a second and third in each town.”

In Europe, while older people may remain faithful to their neighborhood cafe, it is likely that younger consumers will flood the new Starbucks. If the company is wise, it will open its first Italian franchise in Milan, which is a fast, trend-setting city. Since that is where Schultz had his first espresso, it would be a sweet full circle as well.

Dan Cox, owner of Coffee Enterprises, thinks that the fate of Starbucks in Europe depends on its cultural savvy. “If they go in with the attitude, ‘We’re Starbucks and know it all, we’re bringing good coffee to the heathens,’ then I think they’ll be in for a surprise.” But he points out that if Starbucks is more astute, it could do quite well, offering its 100% fine Arabica blend, since the trend in Europe has been to increase the amount of inferior Robusta used in blends. Norwegian Alf Kramer, the co-founder of the Specialty Coffee Association of Europe, is cautious in his forecast. “Europe is a continent with a huge variety of coffee cultures, and Starbucks will have to adapt to all of them. When all that is said, however, coffee as a product is probably not that important to Starbucks. People will go to them for the 15 minutes of relaxation.”

Ted Lingle, the executive director of the Specialty Coffee Association of America (SCAA), says that Starbucks has a “strong potential to do well in Europe, in part because its proven retail concept, established management team, substantial financial resources, and a good game plan.” His only caution is that “one approach does not fit all countries. While the Starbucks Experience is their signature, that may not call for the same execution in every country or city. That could apply to the menu mix, the availability of chairs or just walk-away tables, and hours of operation.”

At the moment, the Starbucks rollout appears to be advancing like a well-oiled machine. It may vary its food offerings somewhat to fit local tastes, but Peter Maslen says that it has no plans to alter its coffee. People can choose milk-based drinks, drip coffee, or espresso, light or dark roasts. “We want to elicit the same emotional response all over the world,” he emphasizes. Before going into a country, Starbucks conducts extensive focus groups and quantitative research.

The company also seeks a strong local business partner, which shares its values and aggressive growth strategy. “We have no debt and we’re spinning a lot of cash, so we could go on our own,” he says. But Starbucks wants to rely somewhat on a business partner’s local knowledge and enterprise, and this strategy also allows the company to expand more rapidly with the same resources.

Despite occasional protests by activists, Starbucks has managed to maintain a squeaky-clean image, working with Conservation International to promote shade-grown, ecologically friendly coffee. It sells Fair Trade certified coffee and encourages local employees to volunteer in orphanages and other worthy causes. In the midst of the disastrously low prices coffee growers are getting for their green beans, Starbucks gave a one-time shot-in-the-arm of $1 million to the Calvert Social Investment Foundations to help coffee farmers. At the same time, the company announced that it would expand its Fair Trade program, promising to buy at least a million pounds over the next year and a half.

And the bright-eyed coffee evangelists who serve up Starbucks blends throughout the world are all trained in the Starbucks Experience that some have likened to a cult. “Starbucks is a brand built on passion,” Maslen says, “and you can easily feel the passion of our partners in any of our international stores.” To instill this attitude in its first Swiss employees, Starbucks flies its new foreign managers to Seattle for 13 weeks of rigorous education and indoctrination.

Will Starbucks approach a saturation point in places like the United States and, eventually, elsewhere in the world? Will it face increasingly stiff competition as imitators spring up to feed on its success? Amazingly, there is no real Pepsi to Starbucks’ Coke, anywhere in the world. Tully’s and Seattle’s Best Coffee (SBC, now owned by AFC, Inc.) also have international profiles, but they are so far behind Starbucks that they pose no real threat.

And saturation? That’s not likely to be an issue for the next few years. Look at all those coffee bars in Italy. What if Starbucks could convince the Chinese to drink coffee like Italians? Also recall lessons from history: in London, back in 1700, there were 2,000 coffeehouses. Even in the U.S. and Canada, there still appears to be room for growth. In the province of Quebec, for instance, Starbucks teamed in 2001 with a Quebec pizza franchiser to open some 75 retail outlets. And in my own state of Vermont, Starbucks has just recently opened one lonely outlet in Burlington, the hip college town. There is obviously room for growth. They don’t seem to be feeling the success wind down; Starbucks just opened its third U.S. roasting plant in Nevada, a 300,000-square-foot facility scheduled to begin operations in 2003.

And what happens if an emergency arose and leader Howard Schultz had to leave the company tomorrow? Analyst Glass isn’t worried. “Schultz is important, one of the great entrepreneurs of our time, but he has already taken on more of an ambassador role with a concentration on international development. He leaves the day-to-day operations to c.e.o. Orin Smith and c.f.o. Michael Casey. Starbucks has a wonderful, deep management team. It is not dependent on one person.” On the other hand, he notes that Schultz “embodies the passion, the human side,” of the company, and as a symbolic leader of the loyal troops, he is unparalleled.

Mark Pendergrast is the author of Uncommon Grounds: The History of Coffee and How It Transformed Our World. He lives in Colchester, Vermont.

Tea & Coffee - February/March 2002


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