1987-1997: the rise of Starbucks Coffee Empire

April 7, 2017

Industry information

In 1971, Starbucks opened its first store in Seattle, selling high-quality coffee beans and coffee equipment. In the first decade of its establishment, Starbucks stopped positioning itself as a local coffee retailer in the Seattle area.

In 1983, an event that had a far-reaching impact on Starbucks, readers who read the autobiography "Heart injection" of current CEO Schultz may be impressed: when Schultz, then a Starbucks employee, went on a business trip to Milan, he came across an espresso bar on his way to the international furniture fair, and indulged in the taste of espresso and the beautiful atmosphere of the store.

This unforgettable coffee experience gave Schultz the idea of going back to the United States to develop an Italian coffee chain, but the founder of Starbucks did not approve. Schultz left Starbucks in 1985 and founded his first Italian cafe (Il Giornale) the following year.

At that time, Starbucks was still a coffee bean retailer with four stores in Seattle.

In 1987, Schultz killed a "back horse gun". He bought Starbucks and repositioned it as a chain cafe. At this point, Starbucks' existing business is really taking shape.

The young giant took thirty years to go global from Seattle. It has created its own category (a chain of coffee shops for the masses) and redefined coffee retail. Today, Starbucks is not only a coffee retailer, but also synonymous with a popular way of life.

It brings an "affordable luxury" where students, truck drivers and CEO can find affordable coffee at Starbucks and enjoy the same comfortable environment and consumer experience. Schultz once said: "We are not in the coffee industry, but to provide services to customers." We are running the lives of our customers, and coffee is just a service. "

Starbucks went public in 1992. As a consumer investor in the primary market, in the 30-year development history of this giant, we are most concerned about the development process of Starbucks from 1987 to about ten years before listing. The expansion of retail companies is not as light as that of Internet companies. In the early days of Starbucks' development, what did it do right to lay the foundation for it to become the king of the chain industry today?

When Starbucks went public in 1992, it had 165 stores, covering only eight cities in the United States and Canada, namely Seattle, Chicago, Vancouver, British Columbia, Portland, Los Angeles, San Francisco and San Diego. At that time, Starbucks stores in the United States were mainly located in four states, namely, Washington, Illinois, Oregon and California.

It can be said that until listing, Starbucks is still a "regional" enterprise, operating only on the west coast of the United States except Chicago, and has not even entered New York, the largest city in the United States, let alone the vast Midwest.

CEO Schultz chose the strategy of intensive store opening and regional ploughing in the early stages of Starbucks' development, that is, covering an area "aggressively" with a large number of stores, and then considering expanding to the next area or radiation vicinity after gaining a foothold in one area.

From the demand side, the "intensive" expansion strategy is consistent with consumer demand for Starbucks and in line with Starbucks' early positioning. In the early days, the founder Schultz insisted on creating the "third space" as the driving force for the development of Starbucks.

"third Space" emphasizes the community attribute of Starbucks, and is an important place for users to socialize besides work and home. One of its important features is "highly accessible", preferably a place that people can reach only on foot. If there are more Starbucks stores in the same area, it will relatively shorten the time it takes customers to find any store.

Convenience allows consumers to increase consumption frequency and create path dependence, thereby enhancing brand stickiness-Starbucks enthusiasts visited Starbucks an average of 18 times a month in the 1990s, which is unmatched by other retailers.

In the 1990s, it was not uncommon for a new Starbucks store to steal 30% of sales from nearby Starbucks stores. Although this intensifies the competition between different stores in the same region, it can quickly deepen the impression of the Starbucks brand among local consumers. Second, by increasing the density of stores and diverting customers to nearby stores, we can reduce the waiting time for customers in single stores and optimize the consumer experience, which is in line with Starbucks' essence of "selling service rather than coffee".

From the supply side, the scale effect formed by intensive operation is an important reason for Starbucks' profits. The main form of the product is brewing beverage, which is easy to operate and easy to realize standardized production. In other words, as long as an enterprise sets up a factory to produce in one area, its fixed expense rate continues to decline and its profitability increases as the number of stores that can be supported nearby increases. Therefore, Starbucks must rely on this expansion model if it wants to provide standardized and high-quality coffee.

After the regional expansion model became popular, and in conjunction with the listing financing in 1992, Starbucks began to gradually improve the speed of opening stores. The 1990s was a period of rapid growth for Starbucks in the US market. Not only is the opening of stores faster, but Starbucks' entry into an area is also getting faster and faster-the good reputation and brand image that Starbucks has established in a region can often spread across regions. In 1995, each new Starbucks store contributed an average of $700000 in revenue in its first year, an increase of 60 per cent from the average in 1990.

Interestingly, the average annual opening rate of Starbucks in the United States in 1993-1997 was about the same as that in China in 2010-2014, and the total number of Starbucks stores in the United States in 1997 was basically the same as that in China in 2014.

Thus, in China and the United States, Starbucks has experienced a similar period of rapid growth. This golden period occurs many years after Starbucks began operating in their respective regions (Starbucks entered China in 1999). The building of an emerging brand, from the cultivation of user awareness to the establishment of a standardized process, requires years of precipitation, but once the flashpoint comes, it may produce amazing energy.

In addition to the proper macro strategy, Starbucks' tactical implementation in its early expansion is also quite prescient: the operation and improvement of its stores has always been an important focus of Starbucks. The ability of store operation can be measured from the dimensions of store type, manager team training, staff training and storefront design.

Starbucks has focused on the high quality and standardization of coffee from the early days, and to ensure this, Starbucks has adopted a direct marketing model in almost all its business districts and shopping malls on the basis of its intensive expansion strategy.

Starbucks adopts franchising for some special public places, including airports, university towns, large amusement parks and other crowded places. For example, in the early days of Starbucks' development, Marriott International Hotel won the franchise of Starbucks to open stores at airports and schools.

However, in the 1997 annual report, franchise stores did not contribute much to Starbucks' total revenue, accounting for only 12.2%. The way of direct operation is heavier, with higher requirements for management and team development, but also deeper barriers.

To achieve the expansion of directly operated stores, the key is to cultivate a strong store operation team, and the training of store managers is the top priority.

Whenever Starbucks enters a new market, it typically recruits and organizes training locally a few months before its opening to ensure that it can gain a foothold in the new city and shape its influence.

Starbucks has a unique vertical career path. Store managers and managers are often Starbucks store employees and baristas, or Guan Peisheng, who is recruited from new graduates.

In Starbucks' training system, Guan Peisheng takes an 8-12-week training course, not only to master the basic skills needed by baristas, but also to take management courses in store operations and personnel management. After the course training, Guan Peisheng also has to complete an apprenticeship examination for a period of time and grow into an assistant store manager within 9-15 months, and the trainers leading them are experienced regional managers and managers of Starbucks stores.

In addition, Starbucks continues to recruit retail elites from the outside world to its senior management, such as hiring professionals with rich operation and promotion experience in chain stores as regional vice presidents to co-ordinate regional development and "transplant" corporate culture.

Starbucks takes the region as the management unit and implements a semi-independent store management and expansion model. Starbucks will set up a central store in each target area and deploy a professional team here to support the central store and other stores in the area, achieving the goal of supporting at least 20 stores in two years.

In addition to the store manager and management, a sound grass-roots staff training system is also Starbucks' strength. In the training, the most important purpose of Starbucks is to let the corporate culture take root in the hearts of new employees, so that employees fully master the knowledge of coffee and maintain their love for Starbucks.

According to statistics, in the 1990s, 80% of Starbucks employees were white, and more than 85% of them graduated from high school, with an average age of 26. Usually a few weeks before entering a new market, Starbucks recruits baristas locally and sends senior teams to conduct peer-to-peer training.

Starbucks even opened a special coffee school in San Francisco. The average barista needs to receive a total of 24 hours of training, including coffee history, customer service, coffee brewing, retail skills, and so on. At the same time, they need to keep many rules in mind to ensure that products follow strict standards. For example, if the brewed espresso is not taken out within 23 seconds, it must be discarded and discarded; the coffee cannot be left in a container for more than 20 minutes.

In addition to team-building, store operators also need to compete with design capabilities. Since 1991, Starbucks began to form its own team of architects and designers to ensure that the style and characteristics of the company can be reflected in every store.

Because Starbucks does not take real estate ownership of every store like McDonald's and Wal-Mart, but leases existing stores, which makes each Starbucks store different in size and shape, so it is necessary to design stores according to local conditions.

Although Starbucks limits the size of most stores to 90-130 square meters, it usually opens at crowded crossroads with huge floor-to-ceiling windows, and pedestrians can also directly feel the pleasant scene created by the fireplace, leather chairs, newspapers and couches.

Starbucks adheres to the idea that the brand is built on the store experience itself rather than advertising marketing. In the 1990s, advertising and marketing budgets accounted for only 1% of Starbucks' annual sales, while most other retailers spent as much as 10% on promotion during the same period. It can be said that Starbucks has successfully turned each store into its best "billboard".

After the opening of a store, operating capacity is the key to increase revenue. But to a large extent, the location has laid the foundation for the store's success (or failure) before opening the store. Starbucks' location ability can be attributed to two key factors: a professional location team and a complex geographic information system.

In the late 1980s, Schultz set up a real estate team at his Seattle headquarters to study the location of the coffee industry. According to statistics, the early Starbucks stores are located in office buildings, urban or suburban community shopping centers, airports, university towns, etc., especially office buildings (business area) and community center (shopping area) account for the highest proportion. In the business district and shopping district, the former is located on the ground floor of the office building, with a high proportion of takeout and a small storefront, while the latter needs to consider more factors than the former in site selection and storefront design.

Based on the characteristics of the urban structure of the United States, Starbucks initially focused on community shopping malls (community retail center) rather than large shopping malls (regional shopping mall).

(regional shopping malls)

According to the classification of shopping places in the United States by the industry think tank The International Council of Shopping Centers, large shopping malls are mostly built on the side of highways, characterized by invisible stores and parking lots outside, while community shopping centers refer to the open-air retail areas near the community and on both sides of the road, with shops arranged in ribbons and close to each other as the main characteristics, roughly arranged into "L" or "U" type.

Compared with large shopping malls, the brands of community shopping centers are clear and walkable, and customers are more likely to have the need to stop and chat and socialize. Shopping centers generally need to be built separately, close to the road, consumers usually drive a long time to arrive, and from the outside can not see what stores inside, out of touch with community life. Therefore, in order to meet the consumption scene of the "third space" outside Starbucks family and work, the community shopping center has become the best choice to choose the location of the store.

(community Shopping Center)

In addition to the professional real estate team, Starbucks flexibly uses GIS (Geographic Information system) data analysis to determine store location and marketing methods. GIS is a system used to collect, store, process, analyze, retrieve and display spatial data. Compared with traditional maps and GPS, GIS is more like a database. By collecting different data into the database and comparing them, we can understand traffic flow, consumer group distribution, security information, commercial composition and other geographical location information. For example, if a new store is to be opened in San Francisco, the Starbucks local team will use the platform to locate the best store location, including several office buildings under construction within walking distance of the store. Whether it is located on a commercial street or on the edge of an intersection, how many people flow, and so on. Starbucks' data analysis method is not only beneficial to store location. They also use the data to locate the time and area of the offer. For example, they will access weather data and skillfully match the promotion time of Frappuccino with the predicted time of the heat wave. For chains like Starbucks, using GIS and other data services follows a simple logic: it helps prevent companies from wasting money by opening stores in inappropriate locations.

After 1994, Starbucks began to try more location types. It offers special drive-in windows (drive-through window) in traffic-intensive areas, kiosks (kiosk) in supermarkets, and smaller, more flexible stores such as beverage bars, in-store stores and mobile stalls to serve a wider range of needs.

Excellent location ability ensured the high hit rate of Starbucks stores, until 1997, of the nearly 1500 stores opened since its inception, only 2 stores were closed.

Conclusion: optimizing efficiency is the main goal of Starbucks' expansion process, and it is also the universal magic weapon of retail industry.

In the second half of the 20th century, a series of vertical professional retailers known as "category killers" appeared in various industries in the United States, among which Starbucks was a leader. In the analysis of the rise of Starbucks, views on how to create a comfortable "third space" and how to shape the "social lifestyle of young people" can be seen everywhere. However, the rise of a retail enterprise is not only because of the shaping of space and lifestyle, but also because it has improved the customer experience with a reasonable cost structure, that is, to greatly optimize the operational efficiency. From the pace of expansion to store operation to store location, Starbucks' handling of every detail discussed above points to efficiency optimization. The process of its rise can not be replicated, but the pursuit of efficiency improvement (retail essence) can still be used for reference today.