Starbucks: Evolution of a Culturally-Significant Brand

Apr. 8.11 | About: Starbucks Corporation (SBUX)

Whenever you see a successful business, someone once made a courageous decision.

-Peter F. Drucker

Starbucks (NASDAQ:SBUX) recently celebrated its 40th birthday with some historic relevance. First off, the 16th century Norse siren in the coffee chain’s logo has become a queen. She now appears without text making the global brand more appealing abroad. According to Vikas Mittal, a Rice University professor who studies logo redesigns and branding, the logo has reached a "tipping point" where it is recognizable without text, something to which most big companies aspire [i.e. Nike’s (NYSE:NKE) swoosh]. In a paper published by Mittal (and co-authors Michael Walsh and Karen Winterich), the Journal of Consumer Marketing found that when angular logos were changed to rounded ones, they were more appealing in countries like India and China. Secondly, a new motivational book, "Onward: How Starbucks Fought for Its Life Without Losing Its Soul," was recently released. In the book, Howard Schultz, Chairman & CEO, chronicles his return to the helm of Starbucks during one of the most tumultuous times in the company’s 40-year history.

Growth, we know all too well, is not a strategy. It is a tactic. -Howard Schultz

As Schultz and his investors experienced over the last few years, the Starbucks business model was challenged by many constituents – the media, Wall Street, and competitors. Closing underperforming stores (shuttering around 600 stores) and laying off thousands of employees "was the most emotional, most difficult moment in my 30 years at Starbucks," said Schultz. However, the 2010 results are indicative that Schultz never "underestimated the power of the culture and values and the resiliency of the brand and the people." In fiscal 2010, Starbucks built upon the nearly $ 600 million of cost savings in fiscal 2009 while driving many of its key financial metrics to record levels. 2010 marked the transformation as Starbucks delivered the following record financial results:

SBUX Historical Results (2006-2010)

2006

2007

2008

2009

2010

Revenue

7,786.9

9,411.5

10,383.0

9,774.6

10,707.4

Net Earnings

564.3

672.6

315.5

390.8

945.6

Assets

4,428.9

5,343.9

5,672.6

5,576.8

6,385.9

Long Term Debt

2.7

550.9

550.3

549.5

549.4

Shareholder Equity

2,228.5

2,284.1

2,490.9

3,045.7

3,674.7

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Revenue Increased to a record $ 10.7 billion – an 8.7% increase over 2009 revenue:

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Net Earnings Increased to $ 945.6 million – a 5.87% increase over 2009

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Shareholder Equity Increased to $ 3.674.7 billion – a 17.12% increase over 2009

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Clearly 2010 was a record year for Starbucks and the results are indicative of an evolving brand transformation from a "brick and mortar" model into a consumer branding experience. As Howard Schultz, Chairman and CEO, remarked, "If you look at the world of consumer brands today you have two types in terms of channels. You’ve got brick and mortar businesses like Gap or J. Crew or Wal-Mart hat have built their brands and business through a national footprint of retail stores, and on the other side you have classic consumer brands like Coke (NYSE:K), Pepsi (NYSE:PEP), and Kellogg (K) whose business has been developing multiple channels of distribution. There isn’t a consumer brand that has been able to integrate their business into both channels and what we’re about to do is exactly that and we’re uniquely positioned to do it. We are building and investing in resources and people to build a significant consumer products business that over time will rival the size and scale of our retail company." Clearly the premium single-cup category is forging a path to become a world-class consumer product business, leveraging on its almost 17,000 stores. In 2010, the innovative coffee giant launched its "ready brew" brand of products, VIA, and sales have surpassed $180 million (2010) with more than 50,000 points of distribution (primarily global grocery stores). Starbuck’s Global Chief Marketing Officer, Annie Young-Scrivner, adds "Our vision is to continue to leverage the footprint of our retail stores in other places where our customers enjoy Starbucks, such as at home or at work, and to extend the emotional connection we have with our customers through methods such as social and digital media ... and we’re leveraging it again as we build Starbucks VIA Ready Brew into a $1 billion global brand."

In 2010, Starbucks had broad-based revenue growth in all operating segments and the company is well on its way to build a world-class sales organization. Here is a breakdown of the company’s three (3) operating segments (the company added a 4th segment in 4Q 2010 and added "Other" representing the Seattle’s Best unit).

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Brick and Mortar

With over 17,000 global sites, Starbucks is one of the most recognized specialty coffee brands. Here is a breakdown of the company-operated and licensed retail stores (as of October 3, 2010):

SBUX Company-Operated and Licensed Retail Store Summary

(as of October 3, 2010)

US

%

International

%

Total

%

Company-Owned

6,707

60%

2,126

37%

8,833

52%

Licensed

4,424

40%

3,601

63%

8,025

48%

Total

11,131

100%

5,727

100%

16,858

100%

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Here is a graph of historical company-operated and licensed stores:

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Here is a comparison of company-owned stores for 2009 and 2010:

SBUX Company-Operated Retail Stores

10/3/2010

9/27/2009

% Change

United States

6,707

6,764

-1%

International

Canada

799

775

3%

United Kingdom

601

666

-10%

China

220

191

15%

Germany

142

144

-1%

Thailand

133

131

2%

Other

231

234

-1%

Total International

2,126

2,141

-1%

Total Company-Operated

8,833

8,905

-1%

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Here is a summary of historical company-owned stores between 2006 and 2010:

SBUX Company-Operated Retail Stores

2006

2007

2008

2009

2010

United States

5,728

6,793

7,238

6,764

6,707

International

1,483

1,785

2,038

2,141

2,126

Total

7,211

8,578

9,276

8,905

8,833

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In 2008 and 2009 Starbucks took a number of actions to rationalize the size of the global-company-operated stores in the portfolio. Currently (2011) Starbucks is strategically expanding its retail sites in a disciplined manner, by selecting new stores in existing markets, opening stores in new markets, and increasing sales in existing stores. The retail stores are typically located in high-traffic, high-visibility locations. To provide a greater degree of access and convenience for non-pedestrian customers, Starbucks continues to selectively expand development of drive-thru stores. Many of the retail stores are leased and here is a summary of the company’s lease obligations:

SBUX Operating Lease Obligations

Total

> 1 Year

1-3 Years

3-5 Years

> 5 Years

4,084

718

1,279

1,007

1,080

($ in millions)

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In addition to its retail stores, Starbucks also operates properties used in connection with its roasting and distribution operations:

SBUX Roasting and Distribution Facilities

Location

SF

Owned/Leased

Purpose

Auburn, WA

491,000

Leased

Warehouse & Distribution

Kent, WA

332,000

Owned

Roasting & Distribution

Kent, WA

215,000

Leased

Warehouse

Renton, WA

125,000

Leased

Warehouse

York County, PA

450,000

Owned

Roasting & Distribution

York County, PA

298,000

Owned

Warehouse

Carson Valley, NV

360,000

Owned

Roasting & Distribution

Sandy Run, SC

117,000

Owned

Roasting & Distribution

Portland, OR

68,000

Leased

Warehouse

Atlanta, GA

32,000

Leased

Warehouse & Distribution

Basildon, UK

142,000

Leased

Warehouse & Distribution

Amsterdam, NA

97,000

Leased

Roasting & Distribution

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Starbucks also leases approximately one million square feet of office space in Seattle, WA for its corporate offices.

The Competition

As noted above, the Starbucks revenue stream consists of its global retail portfolio and its global consumer products group. Given the size (in number of stores and revenue), there is not a "direct" coffee competitor; however, there are many "primary" competitors in the quick-service and specialty coffee categories. Here is a summary of some of the "primary" competitors:

SBUX - Direct Retail Brand Comparison

SBUX

MCD

DRI

YUM

EAT

CBOU

Locations

16,858

32,478

1,773

37,000

1,550

534

Market Cap

27.79 B

79.28 B

6.72 B

24.03 B

2.27 B

218.03 M

Revenue

10.94 B

24.07 B

7.27 B

11.34 B

2.78 B

284.0 M

Net Income

1.05 B

4.95 B

439.9 M

1.16 B

137.5 M

9.40 M

Employees

200,000

400,000

174,000

52,920

68,800

1,642

MCD

McDonald'sCorp

DRI

Darden Restaurants, Inc.

YUM

Yum! Brands, Inc.

EAT

Brinker International, Inc.

CBOU

Caribou Coffee Co., Inc.

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Although a giant in the retail world, Starbucks transformation into a consumer giant, with multiple distribution channels, is evolving. With the acceptance of the company’s new VIA® branded products, there is a strong indication that Starbucks could extend its brand value into a global consumer experience and join the likes of Cola-Cola (K), Pepsi (PEP), Kellogg (K), Colgate-Palmolive (NYSE:CL), and Walt Disney (NYSE:DIS):

SBUX - Direct Consumer Brand Comparison

SBUX

KO

PEP

K

CL

DIS

Market Cap

27.79 B

154.22 B

103.47 B

19.72 B

39.77 B

81.38 B

Revenue

10.94 B

35.12 B

57.84 B

12.40 B

15.56 B

39.04 B

Net Income

1.05 B

11.81 B

6.31 B

1.25 B

2.17 B

4.42 B

Employees

200,000

139,000

294,000

30,645

39,200

149,000

KO

Coca-Cola Company

PEP

Pepsico, Inc.

K

Kellogg Company

CL

Colgate-Palmolive

DIS

Walt Disney Company

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Your premium brand had better be delivering something special or it’s not going to get the business. -Warren Buffett

Starbucks has built an excellent reputation globally for the quality of its products and for delivery of consistent positive consumer experience. To be successful in the future, the Starbucks brand must preserve, grow, and leverage the value of the brands across all of its sales channels. As Howard Schultz said, "I think great companies have the curiosity to see around the corner about what’s possible and the courage to execute. All small and large companies have to push for reinvention and self-renewal. Consumers are rethinking what they’re buying and how they’re buying it. Business plans decades in the making have to be rethought and reexamined, because they will not be relevant in the future."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own 1 share of SBUX