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.