Starbucks Chain Business Model In A Nutshell - FourWeekMBA (2024)

Starbucks origin story

In 1983, Howard was a young man walking through the streets of Milan and Verona.

As Howard Schultz would put it, he became “enamored” by people’s coffee experience in the Italian bars.

Places where theBaristaknew the name of each person entering it, and the coffee experience was about more than just a cup of coffee; it was about creating this sense of community.

That’s how Howard Schultz set out to bring that same experience back to the US.

At that time in 1983, Starbucks had three stores in Seattle.

However, it wasn’t serving any beverage, but only coffee to bring home.

When Howard looked at the way he experienced Italian coffee, he understood the real segment of the business that could have made Starbucks truly successful was serving coffee directly to consumers.

The objective was to replicate the Italian experience back in the US. Thus, making Starbucks – in the words of its founder – thethird place between work and home.

What’s Starbucks’ mission?

Starbucks’ mission is to provide the so-called Starbucks Experience, consisting of “superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty.“

What are the primary segments of the business?

The main Starbucks segments can be broken down in:

• Company-operated Store Revenues.
• Licensed Store Revenues.
• CPG, Foodservice, and Other Revenues.

At the geographical level instead, Starbucks operates in four main regions:

• Americas, comprising the US, Canada, and Latin America
• CAP, comprisingChina/ Asia Pacific
• EMEA, comprising Europe, the Middle East, and Africa
• All others, which are related instead to the development of new products, thus called “channel development” and “includes roasted whole bean and ground coffees, premium Tazo® teas, Starbucks- and Tazo-branded single-serve products, a variety of ready-to-drink beverages, such as Frappuccino®, Starbucks Doubleshot® and Starbucks Refreshers® beverages and other branded products sold worldwide through channels such as grocery stores, warehouse clubs, specialty retailers, convenience stores and U.S. foodservice accounts.“

Is Starbucks a chain or franchising? Understanding Starbucks’ business strategy

The answer is both if we look at the mix of operated vs. licensed stores.

However, in revenue generation, company-operated stores made up more than 80% of the company’s revenues in 2022.

As specified by Starbucks in its annual reports:

The mix of company-operated versus licensed stores in a given market will vary based on several factors, including our ability to access desirable local retail space, the complexity and expected ultimate size of the market for Starbucks, and our ability to leverage the support infrastructure within a geographic region.

As the company further highlighted:

Our retail objective is to be the leading retailer and brand of coffee and tea in each of our target markets by selling the finest quality coffee, tea, and related products, as well as complementary food offerings, and by providing each customer with a unique Starbucks Experience.

To understand why Starbucks chose to increase its company-owned stores substantially, we need to look at the customer experience:

The Starbucks Experience is built upon superior customer service and a seamless digital experience as well as clean and well-maintained stores that reflect the personalities of the communities in which they operate, thereby building a high degree of customer loyalty

Thus, Starbucks wants to keep as much control over its customer experience by operating most of its stores.

In the case, for instance, of a business model like McDonald’s, the company has been able to control the look and feel of its franchised restaurants thanks to the fact it operates a commercial real estate business.

Indeed, McDonald’s leases and buys the land where franchised restaurants are operated, thus keeping tight control over their operational activities.

This formula worked for McDonald’s as the company built a multi-billion commercial real estate empire.

Starbucks, instead, picked the opposite route where the properties are primarily bought to operate its company’s owned stores and keep as much control over the experience through this business strategy.

Where do most of Starbucks’ revenues come from?

As of 2022, company-operated stores accounted for over 80% of total net revenues. At the same time, the rest came from licensed stores and other revenue.

As specified in the Starbucks annual reports, “In our licensed store operations, we leverage the expertise of our local partners and share our operating and store development experience. Licensees provide improved and at times, the only access to desirable retail space.“

It is important to remark that even though company-operated stores have higher gross margins. They also have a lower operating margin compared to licensed stores.

What are the most sold Starbucks products?

As specified in its annual reports:

Starbucks is committed to selling the finest whole bean coffees and coffee beverages. To ensure compliance with our rigorous coffee standards, we control coffee purchasing, roasting and packaging and the global distribution of coffee used in our operations. We purchase green coffee beans from multiple coffee-producing regions around the world and custom roasts them to our exacting standards for our many blends and single-origin coffees.

Regarding revenue generation, beverages represented most of the company’s net sales in 2022. Followed by food and other products.

Beverages comprise fresh-brewed coffee, hot and iced espresso beverages, Iced Coffee, Cold Brew, Nitro, Frappuccino® coffee and non-coffee blended beverages, Starbucks Refreshers® beverages, and Teavana® teas.

How does Starbucks protect itself from the sudden change in the price of raw coffee?

As specified in its annual reports Starbucks “buys coffee using fixed-price and price-to-be-fixed purchase commitments, depending on market conditions, to secure an adequate supply of quality green coffee.“

Thus, the company leverages large orders to guarantee supply at a fixed price. And as specified, “price-to-be-fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the date, and therefore the price, at which the base “C” coffee commodity price component will be fixed has not yet been established.“

As the company further explains, “for most contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. For other contracts, Starbucks and the seller may agree upon pricing parameters determined by the base “C” coffee commodity price.“

How much revenue does Starbucks make?

The US still represents the most critical geographic area in terms of revenues.

Starbucks’ transition toward a heavy company-owned business model

Starting in 2015, Starbucks completed the acquisition of a good chunk of former licensed stores, then became the company’s operated stores.

At the same time, Starbucks is unloading some of its previously operated stores to the licensee in some other geographic areas. More precisely

• 112 company-operated retail stores in Brazil were passed licensed stores as a result of the sale of Starbucks’ Brazil retail operations recorded in 2018
• Starbucks closed 132 Target Canada licensed stores in the second quarter of fiscal 2015.
• Starbucks transferred of 1,009 Japan stores from licensed stores to company-operated as a result of the acquisition of Starbucks Japan in the first quarter of 2015.
• The company also completed the transfer of 133 Singapore stores from company-operated stores to licensed stores in the fourth quarter of 2017
• The transfer of 1,477 licensed stores in East China to company-operated retail stores as a result of the purchase of our East China joint venture in the first quarter of 2018.
• And the transfer of 144 German company-operated retail stores to licensed stores as a result of the sale to AmRest Holdings SE in the third quarter of 2016.

In short, in the last 3-5 years, Starbucks has gone through a substantial business model change.

As of 2018 skewed more toward company-operated stores.

Starbucks’ business model highlights

• • Starbucks is a coffee retail company that was inspired by a trip by Howard Schultz to Italy.
  • When in the Barsin Milan and Verona, he saw the whole experience of having coffee, and he realized it was way more about building communities around local coffee shops rather than just coffee itself. That’s how he thought to rebuild and bring the same kind of experience back to the US.
  • At the financial level, Starbucks’ company-operated stores generated most of the revenue in 2022.
  • Company-operated stores comprised over 80% of the revenues in 2022. They contributed to Starbucks’ transition toward a heavy-chained business model where Starbucks tries to control the customer experience by controlling and buying back previously licensed stores.
  • The company has also been converting some geographic areas (like Brazil and Europe) of some of the company-owned and operated stores into licensed stores.

Key Highlights

• Origin Story: Starbucks was inspired by Howard Schultz’s trip to Italy in 1983, where he observed the coffee experience in Italian bars and aimed to bring a similar sense of community back to the US.
• Mission and Vision: Starbucks’ mission is “to inspire and nurture the human spirit – one person, one cup, and one neighborhood at a time.” The vision is to treat people like family and create customer loyalty.
• Primary Segments: Starbucks’ business can be divided into three main segments:
  • Company-operated Store Revenues
  • Licensed Store Revenues
  • CPG, Foodservice, and Other Revenues
• Geographical Regions: Starbucks operates in four main regions: Americas, CAP (China/Asia Pacific), EMEA (Europe, Middle East, Africa), and All Others (development of new products).
• Business Strategy: Starbucks follows a chain business model, with over 80% of revenues coming from company-operated stores. Licensed stores are also crucial for brand amplification and expansion.
• Customer Experience: Starbucks aims to provide the “Starbucks Experience” built on customer service, digital interactions, and well-maintained stores reflecting community personalities.
• Revenue Breakdown: In 2022, beverages accounted for over 61% of revenue, followed by other revenue (21%) and food (18%).
• Raw Coffee Price Management: Starbucks uses fixed-price and price-to-be-fixed purchase commitments to secure a supply of quality green coffee and protect against sudden price changes.
• Transition to Company-Owned: Starbucks has shifted towards a heavy company-operated store model, where the majority of revenues come from its owned stores.
• Acquisitions and Sales of Stores: Starbucks has acquired and converted licensed stores to company-operated stores in certain regions, while also transferring some company-operated stores to licensed stores.
• Revenue Growth: Starbucks generated over $32.2 billion in revenue in 2022, with most of it coming from company-operated stores and beverages.
• Control over Customer Experience: Starbucks’ strategy includes maintaining control over customer experience by operating a significant number of company-owned stores.

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