Ch. 10 Mergers and Acquisitions

In chapter 10, we explore the concept of mergers and acquisitions as vehicles of business growth, diversification, and expansion.

The following is a list of acquisitions by Starbucks Corporation, by year, since its founding in 1971:
1999 Tazo Tea; Hear Music, a San Fransico-based music company
2003 Seattle Coffee Company, which includes Seattle's Best Coffee and Torrefazione Italia coffee
2005 Ethos Water
2008 Coffee Equipment Company and its Clover® brewing system
2011 Evolution Fresh
2012 LaBoulange® bakery brand; Teavana

Source: Starbucks Company Timeline

In previous entries, I've talked about the recent Evolution Fresh and LaBoulange acquisitions. These two recent acquisitions have helped Starbucks to expand its product offerings. In today's entry, I'd like to talk about the recent $620 million Teavana acquisition , announced in December of last year.

Starbucks CEO Howard Schultz discusses the acquisition in an interview with CNBC. He describes the logic behind the 53% premium price despite Teavanna's falling sales. "I think the issue is not the premium. The issue is the long-term opportunity. Starbucks is buying into a $40 billion category of tea that is right for innovation. We believe we can do for tea what we have done for coffee." says Shultz.

"Teavana has 300 stores that are mall-based, that has stunning unit economics, with sales to an investment ratio of 3 to 1. That is best in class. Inside Teavana today, despite how good those unit economics are, they do not have a beverage business to speak of. We think just like in the mid 80s when we brought an espresso bar and the romance of coffee into our Starbucks stores, we can create a very unique beverage opportunity that will build frequency and loyal customers."

He then describes how he believes that Starbucks "can leverage the existing best of class real estate acquisition and design capability that Starbucks has to build urban neighborhood sites for Teavana around the country and around the world."

He also explains that one of Starbucks' strengths is its "underlying capabilities in social and digital media with the Starbucks card and loyalty program," and their leadership and success in having the "strongest mobile commerce payment business in the retail business." He describes, "We will thread those benefits to Teavana consumers in which Teavana customers will have the same seamless benefits that Starbucks customers have driving awareness and trial." Finally, he explains that Starbucks can leverage its existing international partnerships to support this expansion, describing the success Teavana already is experiencing in the middle east and gulf region.

To link this back to our chapter 10 text, recall the section on pricing and premiums. The buyer must consider factors such as the targets's market value, intrinsic value, an the value to be gained from potential synergies between the target and the buyer (pg. 341). Despite Teavana's falling sales, Starbucks justifies the 53% premium it paid with a clear vision for how it can achieve synergies and can integrate the brand into its strategy for corporation-wide long-term growth.

The full CNBC interview with Howard Schultz, including transcript
More about the Teavana acquisition from the Starbucks Newsroom

Ch. 9 Alliances

Chapter 9 of our text introduces us to the concept of alliances, a vehicle that "enable[s] participants to share in investments and rewards while reducing the risk and uncertainty that each firm would otherwise face on its own" (pg.296). Through joint investment, knowledge sharing, complementary resources, and effective management, the participants in this partnership can achieve competitive advantages that they wouldn't be able to achieve on their own. The chapter highlights the different forms of alliances based on their level of financial commitment. For example, an alliance can be either an equity alliance (high financial commitment) or nonequity alliance (lower degree of financial commitment).

A nonequity alliance can be described as "an alliance that involves neither the assumption of equity interest nor the creation of separate organizations" (pg.302). Some examples  of Starbucks' nonequity alliances, as highlighted in our text, include: Barnes & Nobles (bookstore cafés), United Airlines (in-flight coffee service), Dreyer's (coffee ice cream), and Pepsi (Frappuccino ready-to-drink coffee) (pg. 302). 

Another example of one of Starbucks' successful partnerships is its alliance with Target, which allows Starbucks to operate its cafés in Target stores. The twelve year partnership has been so successful that in 2012, the two corporations made plans to extend Starbucks cafés into over 130 Canadian Target locations (set to open in 2013). From the Canadian Publication Globe and Mail, "'Our goal is to bring the true Target brand shopping experience to our Canadian guests, so expanding our relationship with Starbucks as we enter the Canadian marketplace is a natural fit,' said John Morioka, the senior vice-president of merchandising at Target Canada." Starbucks manages other partnerships in Canada, including alliances with grocery stores Safeway and Longos.

As we can see from the examples above, Starbucks grows its business by seeking alliances that create competitive advantage and allow it to expand its brand, products, and international presence.

However, as our text makes clear, not all alliances end in success. Some are dissolved when one or both of the firms discover that they are not receiving sufficient benefit from the partnership, or the alliance doesn't work out because of other inconsistencies.

Starbucks' partnership with Kraft is an example of an alliance that stopped working out. Starbucks decided to break from Kraft in 2010, deciding that it could more effectively market and distribute its packaged coffee itself, cutting out the middle man. It claimed Kraft did not do a good enough job marketing its products. Kraft says it has increased Starbucks packaged coffee sales from $50 million to $500 million annually. The two firms continue to argue it out in court over how much Kraft should be compensated and who breached their partnership contract. If you are interested in more details about the conflict between Kraft and Starbucks, the following two articles provide some interesting details about Kraft's issues with Starbucks and vice versa. Starbucks now oversees its own packaged coffee distribution:

-"Starbucks and Kraft escalate battle over marketing pact" William Neuman, The New York Times 12/6/10
-"Starbucks, Kraft Start Arbitration in Dispute over Coffee Distribution" Melissa Allison, The Seattle Times, 6/11/12

Ch. 8 Looking at International Strategies

Chapter 8 of our text helps us to understand how and why businesses decide to expand internationally. As highlighted in the previous chapter, expansion can create economies of scale and market growth. However, simply adopting a new market will not necessarily result in these benefits. A firm must take into account all of the attributes that create cultural, administrative, geographic, and economic distances in a new market when deciding where to invest, identify the best vehicle, such as creating a franchise or pursuing a joint venture, for entering the market, and sculpt how locally responsive it must be to operate profitably in that region.

From the Starbucks website: 
"With more than 5,500 coffeehouses in over 50 countries, it’s clear that our passion for great coffee, genuine service and community connection transcends language and culture.

We knew we were onto something when we decided to open our first international coffeehouse in Tokyo back in 1996. The response was extraordinary, and to this day we’re still amazed by how warmly our coffeeshops have been embraced by millions of people around the world."

Global expansion has and continues to be an important part of Starbucks' growth and financial success. An interesting article by CNBC.com contributor Shaun Rein describes how Starbucks' has been able to achieve success in its Chinese stores, citing its strategic moves to "adapt to consumer wants and promote dine-in service." Rein explains, "Starbucks adapted its business model specifically for the Chinese, rather than trying to transplant everything that worked in America into China." This represents a locally-responsive approach that has allowed the company to grow as a whole.

International expansion is integrated into Starbucks' future plans for growth. MSN Money writes, "The company aims to open 800 net new stores in its fiscal year ending Sept. 30. Half of those stores will be in the Americas -- and half of those will be licensed stores in places like Target and shopping malls. About 300 of the new stores will be in China and Asia Pacific, and 100 will be in Europe, the Middle east, Russia and Africa." 

While on the topic of Starbucks and its presence around the world, I'd like to close out this entry with an opportunity for my readers to view some of Starbucks' exciting locations around the world and their unique designs-- you'll find a slide show of the "Coolest Starbucks around the world" here.

Update as of 6/26/13: Starbucks announces the opening of 100 new stores in Malaysia over the next four years.

Edit: The Starbucks Company Timeline shows Starbucks international expansion over time.

Ch. 7 Developing Corporate Strategy

Ch. 7 describes corporate strategy and types of diversification. The chapter identifies ways a business can achieve corporate-wide benefits through expansion and diversification that results in economy of scope and revenue-enhancement synergy. 

While Starbucks does not share the same kind of complex multi-business makeup of Walmart or conglomerate G.E., Starbucks is a business that is focused on growth through expansion and diversification. This is clearly not a company focused on "just coffee." Starbucks invests in complimentary products such as juices, teas, and baked goods. 

Kim Peterson, of MSN Money, writes, "The company is clearly trying to expand its business in just about every way possible. It will soon begin selling wine and beer in several restaurants in Atlanta, Chicago and Southern California. It already offers alcohol at some stores in Seattle and Portland, [Oregon]."

Other areas of expansion include plans to enter the premium juice market, having purchased Evolution Fresh last November and its growth in grocery store sales with its packaged coffee and the K-cup pods for Keurig machines. 

In a dynamic business environment, Starbucks must actively seek out ways to differentiate itself from the competition and to continue the track of growth that its been on over the last few years. To do this, Starbucks must diversify and expand in ways that create economies of scope and scale, and play into its mission and vision.

Ch. 6 Crafting Business Strategy for Dynamic Contexts

Ch. 6 of our text reminds us that businesses must be able to be flexible and innovative in their strategies in the face of an ever-changing external environment. The theory of competitive interaction describes a cycle (Exhibit 6.1 Phases of Competitive Interaction on pg. 186) in which competitive actions generate reactions. 

A market leader in coffee sales, Starbucks can be a difficult force to compete with for the local coffee shops. However, as discussed in a previous entry, larger business like McDonald's and Dunkin' Donuts can pose a threat to Starbucks' sales when they offer customers such advantages as convenience and cost-savings. How then does Starbucks' react to competitive reactions such as McDonald's new McCafe line? For one, Starbucks has been expanding its product line by acquiring Bay Bread LLC and its LaBoulange Bakery brand. Beginning with its Seattle locations, Starbucks has recently started integrating LaBoulange Bakery baked goods. I will discuss Starbucks' acquisitions in a later entry when it becomes a topic of focus in our text.

Starbucks has also moved into new arenas, expanding globally further into locations such as China and Japan (which will be discussed further in an upcoming entry about international strategy).

Ch. 5 Creating Business Strategies

Ch. 5 introduces M. E. Porter's Strategic Position Model, which describes four generic strategic positions that a business can pursue and around which it can set the stage for long-term strategic decisions and reduce the effects of rivalry. The text describes, "these positions are a function of two sets of choices--economic logic (low-cost leadership versus differentiation) and scope of arenas (broad versus niche market arenas). An integrated strategic position results when a "elements of one position support strong standing in another." 

In comparing the characteristics of these strategies, I noticed that Starbucks stands out as a firm that pursues differentiation as a strategic position over low-cost leadership. Starbucks is able to command premium pricing on its products because of its ability to differentiate itself from other coffee shops and suppliers on the basis of quality of product and store atmosphere.

Starbucks has made innovative moves that has drawn customers to its relaxed environment. For example, as of 2010, Starbucks as offered unlimited free wi-fi in its stores. Starbucks also attracts and maintain customers through customer loyalty programs, in which Starbucks customers receive special offers, and have created two mobile apps that allow customers to rack up "stars" (reward points) and pay for their order using their phone. Through these examples, we can see that Starbucks actively integrates new ways to differentiate its store experience from the competition, allowing it to create appeal to customers and expand as a business.

Ch. 4 Macro and Industry Dynamics

Ch. 4 focuses on the external environment in which a company builds its strategy. A company must be able to adapt to changes in the external environment such as changes in regulation, technology, the economy, social and political views, and competitor behavior, as well as understand how these changes will affect customer demand.


Important to shaping strategy is understanding competitors' actions, and not just reacting to what competitors are doing, but proactively trying to predict competitors' behavior. Among the corporations competing for Starbucks' coveted market share and superior coffee sales are Dunkin' Donuts, McDonald's, and Panera Bread. McDonald's, for example, recently launched McCafe, now offering specialty coffees and beverages that are cheaper and convenient to grab through the drive-thru with the rest of the order. 

Another cause of concern for Starbucks in the past has been the economy. As mentioned in an earlier entry, Starbucks hit a financial rough patch in 2008, reflected by a stock price at half of its previous value and other performance measures. An article in NPR at the time wrote, "The culprits behind Starbucks' woes are overexpansion, a weak economy and lots of competition." As discussed in a previous blog entry, the effects of the external business environment (as well as some internal ineffective decision making) and the resulting hit to Starbucks' operations challenged CEO Howard Shultz to make decision to close 900 stores. Since then, however, Starbucks has been able to expand and become financially healthier and positioned for entering new international markets. 

One more example of how Starbucks has adjusted to an ever-changing external environment has been how it has reacted (and planned for) changes in the sociocultural environment. In the United States, for example, where the nation is suffering from an obesity epidemic, food service businesses have noticed demand for healthier item menus and better access to nutritional information. Available on the Starbucks website is a timeline of how Starbucks has developed its product offerings to "accommodate [customer] nutrition and taste preferences," incorporating more wholesome ingredients and limits on calories in products. They also provide nutrition information on their website. 

Ch. 3 Resources, Capabilities, and Activities

From our introduction to the strategic decision making process in chapter 1, we know that formulating a (flexible) business strategy requires an understanding of the internal and external environment in which a firm operates. This chapter focuses on the internal environment, and teaches about how firms need to be able to exploit their unique (i.e. valuable, rare, inimitable, nonsubstitutable) resources and capabilities in order to set their company apart from others.

Starbucks uses its resources, capabilities, and strong relationships with its suppliers, customers and stakeholders to achieve profitability and customer loyalty. Let's explore a few of these resources:

Starbucks' product offering, including their coffees, teas, beverages, bakery goods, lunch menu items, etc. is achieved in part through Starbucks' capability of forming strategic supplier relationships. One such example is Starbucks' recent (June 3rd)  introduction of bakery goods from the LouBalange Bakery in Seattle to a few of its Seattle stores.

The Starbucks website announces, "Customer favorites will be reimagined in the style of a variety of classic French offerings, such as:

• Classic & Chocolate Croissants – made with real butter, creating flaky, light layers of pastry that melt upon the first taste
• Savory Croissants – made with a variety of toppings and fillings – from tomato and cheese to ham and cheese to spinach and more 
• Loaves – a delectable assortment of seasonal fruit and nut varieties 
• Cookies – from Classic Chocolate Chip to Chewy Chocolate Meringue "

The decision to form supplier/business relationships with companies that supply products that complement the Starbucks Experience and are appealing to customers are one of Starbucks' capabilities that allow it to achieve success with loyal and future customers.

Let's explore a few other resources and capabilities that make up Starbucks' internal environment:

Location: Starbucks continues to expand both domestically and internationally, investing heavily in store locations in countries such as China and Japan  (to be discussed in greater detail when we study globalization). 

Channels of distribution: Starbucks products are founds in universities, malls, airports, stand-alone stores (some with drive-thru), grocery stores, within larger stores (for example, Target), office buildings and online. 

Reputation: Starbucks' website describes the many social causes that it supports and contributes to, maintaining the image of good corporate social citizen. It considers itself a business that helps communities by creating jobs. Starbucks has a general reputation for high-quality coffee, its main product, and a relaxed, comfortable environment in its coffee-shops.

Brand: Both a resource and a result of its capabilities, the Starbucks brand connotes quality. The Starbucks brand is embedded in our consumer culture. The brand is so widely-recognizable that in 2011, the company redesigned its logo, dropping the words "Starbucks Coffee" from the logo without fear of losing its identity.

Ch. 2: Leading Strategically Through Effective Vision and Mission

A strategic leader is responsible for "managing an overall enterprise and influencing key organizational outcomes." Ch. 2 of our text breaks down the diverse responsibilities of an organization's leader-- his unique interpersonal, informational, and decisional roles.  Some of his roles include: leader, figurehead, liaison, spokesperson, disseminator, entrepreneur, and disturbance handler. His various roles require him to build and nurture relationships with internal and external stakeholders, communicate information to these stakeholders, designing the organization's strategy, allocate resources as a part of implementing strategy, and handling nonroutine transactions and situations. (Carpenter)

Howard Shultz, the CEO of Starbucks, takes on these roles to provide Starbucks with the leadership it needs to fulfill its business purpose, create value for stakeholders, and move the firm forward toward its vision. His leadership is relied upon by his executive team and employees to understand company values and objectives and to share in the company vision.

In her article "Starbucks CEO Howard Shultz Discusses Turnaround," Seattle Times business reporter Melissa Allison interviews Shultz about his return to Starbucks as CEO eight years after leaving the position. Shultz originally joined the company in 1981 and was very instrumental in its growth during his time there. He left the CEO position in 2000. When the firm experienced a rough patch in 2008, CEO Harold Shultz returned to the scene, reclaiming the roles and responsibilities of CEO, and executed some difficult but successful strategic decisions that revived Starbucks, moving firm forward and helping it achieve the improved revenues and economic standing that it has today. Among these decisions was the need to cut 900 stores to get the budget in order. (Allison) The firm also made smart strategic decisions with products and marketing and has since regained its status as a profitable business and a leader in the food services industry. 

Starbucks' mission? "To inspire and nurture the human spirit- one person, one cup and one neighborhood at a time." This is accomplished through their relationships with their customers, employees, shareholders, suppliers, and the communities they serve. The firm continues to make strategic decisions that support its mission and expand its presence around the world.

Sources

• Allison, Melissa. "Starbucks CEO Howard Shultz Discusses Turnaround," http://seattletimes.com/html/businesstechnology/2014461881_starbucks13.html

• Carpenter, Mason. Strategic Management textbook.

Ch. 1: Introducing Strategic Management

In chapter one, we are introduced to the concept of strategy, "the coordinated means by which an organization pursues its goals and objectives." This chapter highlights the interconnected parts of the strategic management process including establishing a vision and purpose for the organization, setting goals and objectives, assessing the external and internal environment, and creating an action plan to meet objectives and create value for the organization's stakeholders. The role of the strategic leader is to successfully implement the organization's strategy by making implementation lever and resource allocation decisions and developing support for the strategy from key stakeholders. (Carpenter, Strategic Management)

In this blog, A Look Into Starbucks, we'll explore the various elements of Starbucks' strategy as they relate to the concepts covered in our text. With over $13 billion of revenue, Starbucks is #208 on Fortune Magazine's Fortune 500 list and is the third largest food service business on the list after McDonald's and Yum Foods. (Fortune) With over 18,000 stores world-wide, Starbucks has grown considerably since its foundation in 1971. 


This week, I'd like to highlight some of the important characteristics of the Starbucks strategy that has allowed this company to achieve financial success and turn itself into household name in America and throughout the world:


Starbucks is all about atmosphere. One of the firm's goals and key strategic moves has been to bring the luxury coffee experience to Americans for an affordable price. They emphasize comfort, providing a relaxed environment for customers to break away from the hustle and bustle of daily life. Unlike McDonald's or other food service retailers, Starbucks emphasizes comfort over convenience or speed.


Starbucks offers high quality products. Their selection includes their trademark coffee, hot and cold beverages, sandwiches, smoothies, and desserts. Their product decisions are based on customer feedback and they are very successful in responding to customer demands. For example, over time they have been creating more healthful options, using more wholesome ingredients, providing nutrition information on their website, and adjusting portion sizes to meet customer demands. The company also sells books, mugs, cups, coffees for home, instant coffee, coffee makers, and other products.


Starbucks manages a customer loyalty program that offers deals and discounts that make customers feel valued by the firm and keep them coming back.


Starbucks strives to be a good corporate social citizen, investing in many admirable causes.


Starbucks expands internationally. It fosters healthy business relationships with communities all around the world, recently creating 500 new stores in China. (Mourdoukoutas)


In my next entry, we'll look at Starbucks' mission and vision, and the role of CEO Howard Shultz.


Sources: 

• Carpenter, Mason. Strategic Management textbook.
• Fortune Magazine: Fortune 500 Snapshot: Starbucks http://money.cnn.com/magazines/fortune/fortune500/2013/snapshots/10567.html
• Mourdoukoutas, Panos. "Starbucks and McDonald's Winning Strategy" http://www.forbes.com/sites/panosmourdoukoutas/2013/04/25/starbucks-and-mcdonalds-winning-strategy/