Brajkovich 1 Kelsea Brajkovich Section AQ December 7, 2009

The Globalization of Starbucks Coffee Company

Despite its humble beginnings as a single store with a simple mission to sell quality coffee beans, Starbucks has come to establish itself as a transnational corporation and the leading coffee brand in the world. As a company, Starbucks has globalized to acquire its goods, to find new markets, and to market its image. It follows the trends of globalization both in its business practices and in the ways it has fashioned its brand image. Starbucks has been recognized over the past decade for its staggeringly aggressive expansion policies. For a five-year period the company opened upwards of three stores per day and raked in $1,539 million in net earnings from operations in 44 different countries (Starbucks Coffee Company 2008). These global advances made Starbucks the cultural icon for the rapacious excesses, predatory intentions, and cultural homogenization that social critics attribute to globalizing corporate capitalism (Arsel and Thompson 2004 p. 631). More recently, however, the company is making efforts to be known as a responsible company that is taking steps in the local communities around its stores and sourcing locations to become more worker, community, and environment friendly. Examination of the company website, financial reports, news articles, and third-party certification companies reveals the nature of Starbucks globalization from 1996 to 2008. As a vertically integrated company Starbucks controls the buying, roasting, and distribution of its coffee (Starbucks 2007). In addition to coffee beans, the company also sells a variety of coffee drinks, teas, and food items in its stores. Success of the company through its global expansion has particularly hinged on its ability to associate the brand with an idea of highest quality

Brajkovich 2 (Starbucks 2008). Starbucks works to acquire quality goods, sell the product in a setting of high quality, and maintain a high-quality ethical image while ultimately making a profit. These three platforms also categorize the way in which Starbucks globalized. From the beginning, the Seattle, Washington-based company has depended on global resources to manufacture its product because coffee is a foreign grown commodity. As the company grew it began to look for new and bigger markets across the globe in which to invest. After drawing the attention of the world, the company was forced to cultivate an image that satisfied the consumers demands for a responsible global corporation. In some ways Starbucks has always been a global company because the nature of its main product, coffee, is global. According to the company website, Starbucks currently purchases coffee beans from farms in 28 different countries. Only one of these farms is located in the United States, on the Hawaiian Islands (Starbucks 2009a). The other farms are primarily located in Central and South America, Africa, and in the Asia-Pacific region. By sourcing coffee beans from different areas of the world, Starbucks has access to many different coffee flavors and can sell a larger variety of products. Also, most coffee farms are located in tropical climates, forcing the company to take this part of the commodity chain outside the U.S. The next part of the commodity chain, the roasting of the beans, mostly takes place in the United States, but the company has also globalized in this area of production. After harvest, green coffee beans are sent to one of five company-owned roasting facilities. There are four roasting plants in the U.S. They are located in Kent, Washington, York, Pennsylvania, Minden, Nevada, and Columbia, North Carolina. The only international roasting plant was built in 2002 in the Port of Amsterdam in the Netherlands. Previously, all coffee roasting had been kept within the United States to ensure the utmost quality of the roasts, but as new markets opened

Brajkovich 3 abroad Starbucks decided that there needed to be a roasting plant in Europe to ensure the freshness of coffee for that region. The plant is located near the Port of Amsterdam which is an ideal geographic location for the facility because the green coffee beans can be roasted, packaged, and made ready for distribution without being moved far from the ship on which they arrived (Burnson 2002). After oil, coffee is the second largest commodity traded in the world. The company buys its coffee beans either through outside brokers or through personal contacts with growers. When Starbucks first began it used fixed price purchase commitments to contract with growers for nine months. Price commitments are often necessary because the price of coffee is subject to a number of variables including weather, economic, and political conditions (Starbucks Coffee Company 2007). In 2007 Starbucks began a temporary shift towards price-to-be-fixed purchase contracts in response to the sharp rise in prices due to poor weather conditions in Brazil, the worlds largest producer of arabica beans. The prices can also be affected by price or supply controls set up by trade organizations such as the International Coffee Organization (ICO) or the Association of Coffee Producing Countries (ACPA) (Starbucks Coffee Company 1996). These organizations have stepped in to help stabilize the historically volatile prices of coffee which had been drastically affected by the World Wars, the Korean War, and a drought and frost in Brazil (International Coffee Organization 2009). Up until 2001 most of the ICOs agreements were put in place to fix price and supply quotas. Beginning in 2001 the ICO began initiatives to specifically help small farmers by monitoring living and working conditions (International Coffee Organization 2009). Since 2004 Starbucks has also helped to stabilize the prices of the coffee that it purchases by building Farmer Support Centers near the coffee plantations. The first center was built in Costa Rica and is controlled by a wholly owned subsidy known as Starbucks

Brajkovich 4 Coffee Agronomy Company S.R.L. In 2009 another center was built in Rwanda. The agronomists and sustainability experts who work at the centers help to make sure that the farms are sustainable and are consistently producing high quality beans (Starbucks Coffee Company 2009b). Since 1996 Starbucks has globalized its retail sales in order to reach new and bigger markets. Starbucks has achieved remarkable growth over the past fifteen years. In 1996 Starbucks had1,006 operating stores with just two open outside North America (Starbucks Coffee Company 1996). As of February 2008 there were 11,168 Starbucks stores, with 4,588 operating abroad in 43 different countries (Starbucks Coffee Company 2009b). This explosive growth has established Starbucks as a worldwide brand that markets its products globally. 1996 marks the first year that Starbucks set the goal to establish itself as the most recognized and respected brand of coffee in the world (Starbucks Coffee Company 1996). Because the company has maintained several retail outlets in Canada since its early beginnings, Starbucks only considered the stores outside North America to be international operations for many years, but current lists of international stores include all stores outside the U.S. (Starbucks Coffee Company 1996). Beginning in 1996, Starbucks made its first international move when it opened two stores in Tokyo, Japan. This opened the floodgates for thousands of international stores with an ultimate goal of opening 20,000 units worldwide. About half of these units were planned to be located abroad and China was expected to surpass the United States in store count (Keeley and Salamie 2006). By 1999 Starbucks had opened stores in ten more countries and had opened over 200 stores in Japan and 100 in the U.K. Starbucks invaded continental Europe in 2001 by opening stores in Switzerland and Austria. The company was expanding at a very aggressive rate, opening an average of 1,200 new stores each year from 2001 to 2004. In

Brajkovich 5 2005 the expansion rate increased even more to 1,700 new outlets and put the company store count above the 10,000 unit mark. During the period from 2001-2005 Starbucks opened stores in 15 new countries (Keeley and Salamie 2006). In order to get into foreign markets Starbucks launched its first foreign forays by entering joint venture and licensing agreements with prominent local retailers in Tokyo, Japan in 1996. The company chose to put its first international stores in Japan because it was the worlds third largest coffee importer (Chang 2005). By working with SAZABY Inc., a Japanese retailer and restaurateur, it developed its first Japanese market by entering into a 50/50 joint venture partnership under the name Starbucks Coffee Japan, Ltd. That same year Starbucks also opened a store in Singapore with the help of a similar partnership. However, the company used a different approach when entering the market in the U.K. In 1998 Starbucks acquired the Seattle Coffee Company, the U.K.s leading specialty coffee firm, for 1,817,894 shares of Starbucks common stock. Once it bought the firm, Starbucks rebranded the Seattle Coffee Company stores with the Starbucks name and began sales (Keeley and Salamie 2006). Starbucks most commonly enters a countrys market by joint venture and licensing agreements. The company places its stores in high-traffic, high visibility locations. Licensing agreements are made with prominent retailers in the area that allow the company access to desirable retail locations. The employees who work for licensed retail stores are required to undergo similar training as employees of company-owned stores and must follow similar operating procedure guidelines (Starbucks Coffee Company 2007). Once the stores in the country prove to be profitable, Starbucks Corporation begins a process of buying up the licensed operations. For example, in 2000 Starbucks acquired Coffee Partners Co. Ltd., the company licensed to operate Starbucks stores in Thailand, Thailand Operations (Anon. 2009).

Brajkovich 6 Starbucks partly or wholly owns a total of 84 subsidies, 62 which are located in foreign countries. Global expansion has proved to be a profitable policy for Starbucks. The value of common stock and net earnings has increased consistently each year from 1996 to 2007. In 2008 the company suffered a drop in net earnings from $673 million in 2007 down to $315 million in 2008. The company attributes this drop to the troubled economy and also to underperforming stores. Starbucks depends on consumer discretionary spending because the company sells luxury products that can easily be cut out of a consumers budget when times are hard. The company is experiencing the effects of lower consumer spending during the current economic downturn. The company closed 600 underperforming stores in the U.S. and 61 in Australia and had to deal with expenses related to closing underperforming stores, such as lease termination and payroll fees. Many of the stores that were closed were underperforming because there were too many stores in one location. While some areas of the market were over developed, the company maintains that the global market remains unsaturated. For fiscal year 2009, Starbucks expects to open 700 new international stores. About two-thirds of the stores will be licensed retail stores. The company is planning to invest in emerging markets such as Russia, China, India, and Brazil in the next year and will be cautious about expanding especially in the U.K. and western Europe (Starbucks Coffee Company 2008). Starbuckss move into the Chinese market showcases the companys ability to expand despite foreign cultural preferences and business practices. The company opened its first store in China in 1999 through a joint venture lead by prominent Chinese businessman, Da Wei Sun. Under his guidance the brand was able to navigate the Chinese markets rigid business policies. It was not until after 2001 that China came under the WTO effect and implemented policies

Brajkovich 7 such as lower tariffs for foreign investors. Starbucks was eager to get into the Chinese market because the emerging economy and immense population hold great opportunities for the company. Because coffee is an insignificant part of Chinese culture which is largely dominated by tea, Starbucks concentrated its stores in affluent, urban areas where there is a large population of young consumers. The younger generation of Chinese consumers are more open to Western brands. To build the brand name in China, Starbucks continued its use of employee enthusiasm to create good relationships with customers rather than resorting to mass advertising. Starbuckss style as an experiential brand fit in well with the desires of the Chinese consumer who is seeking the fashion and style of a Western brand. As of 2005, Starbucks was continuing to open just under thirty stores per year in the large cities of Beijing, Shanghai, and Hong Kong (Chang 2005). The lack of popularity of coffee in the Chinese culture may not prove to be a problem for Starbucks because when the company first started out in America there was not quite the demand for coffee that there is today. Starbucks has already proven that it can powerfully affect cultural desires and preferences. For instance, in 1990 there were only 200 freestanding coffee shops in the United States. After Starbucks popularized coffee, the figure grew to over 14,000 in 2004; 30% of these coffee shops were owned by Starbucks (Arsel and Thompson 2004). While the future appears bright because coffee is an emerging beverage and there is a large base of young consumers, Starbucks may encounter problems because the large economic disparities in China limit the success of a company that sells gourmet products at high prices. Starbucks is not only following the globalization trend in business, but also in the style and design of its brand. In order to promote the Starbucks brand, the company draws on the current social allure of globalization. Through images, video clips, store design, and written

Brajkovich 8 descriptions, Starbucks uses its website to present itself with a global image. The companys home page contains globally charged words such as: community, environment, AIDS Awareness, International, and Shared Planet. Starbucks first promotes itself as a dominant global company and second as a responsible member of the global and local community. On its website Starbucks showcases the global reach of the company through an interactive map. This feature includes maps that show the countries that have Starbucks stores and the approximate location of coffee farms across the world from which Starbucks beans come. Both maps include an arrow labeled YOU that points to the viewers location. In addition, there is a box in the corner of the map that shows the number of miles in between the consumer and the farm selected. By including the consumer in the map Starbucks creates the feeling that when a person is connected to Starbucks, he or she is connected to the world. Starbucks promotes itself as a global brand in order to sell the Starbucks experience as a way to connect to the world community. Through a series of videos on the homepage Starbucks shows how it is directly involved in global causes. The first clip on the page advertises Starbucks partnership in Product(RED) which raises money to fight AIDS in Africa. The second video presents Starbucks initiative to remodel each company-owned store to fit U.S. Green Building Council standards. This video features clips of Starbucks president, Arthur Rubinfeld, and director, Jim Hanna, speaking about the companys effort to move toward environmentalism and sustainability. Through the changes made in the company-owned stores, the executives hope that Starbucks can demonstrate eco-friendly ways to live to neighborhoods around the world. The third video showcases Starbucks campaign to promote environmentalism, called Shared Planet. It emphasizes Starbucks effort to be a responsible company by reducing its environmental impact. The

Brajkovich 9 company is investing in remodeling the stores so that they are Leadership in Energy and Environmental Design (LEED) certified. LEED is a third party that Starbucks is working with to make sure that the whole renovation process for its stores is green (Starbucks Coffee Company 2009b). As Starbucks took on the globe and established the brand as a household name, the company came under fire for its aggressive capitalist practices. In its efforts to be more environmentally friendly, Starbucks is ensuring its consumers that by globalizing it is not having a negative impact on the Earth. In 2000 after Global Exchange, a human rights group, made threats to stage a protest at stores in 28 cities, Starbucks announced that the company would begin to work towards buying more fair trade certified coffee (Keeley and Salamie 2006). As of 2008 75% of the coffee that Starbucks purchased was fair trade certified. It is working to reach a goal of buying 100% fair trade coffee by 2015 (Starbucks Coffee Company 2009b). In addition to buying fair trade coffee, Starbucks has also been involved in a series of programs that encourages their coffee sources to meet economic, environmental, and social standards. In 2001 Starbucks initiated a Preferred Supplier Program in association with Conservation Internationals Center for Environmental Leadership in Business. This program served to encourage sustainable coffee sourcing. Farms that met certain sustainability standards were offered higher prices and better contracts. Then, in 2005, Starbucks and Conservation International began the Coffee and Farmer Equity (C.A.F.E .) practices program to ensure that environmental and social standards be met in each step of the supply chain. Small and large farms, coffee mills, and exporters are evaluated to see how well they follow C.A.F.E practices by Scientific Certification Systems (SCS), a third party evaluation and certification firm partnered with Starbucks. One of the most important evaluation points in the C.A.F.E practices is

Brajkovich 10 economic accountability. This point evaluates whether or not workers are paid for their efforts and whether or not they are paid an equitable wage. At the end of the certification process, suppliers are given a numerical score. Suppliers that score well are given preferential buyer status which includes higher prices and more favorable contract terms. As of 2007, Starbucks bought 60% of its coffee from sources that followed C.A.F.E. practices (Conservation International 2009). Through the C.A.F.E. practices program Starbucks makes it economically possible for local farmers to practice the more expensive, environmentally sound farming methods. As a transnational company Starbucks is enabling local changes that can benefit the globe (Starbucks Coffee Company 2008). Coffee farms are mostly located in poor, rural areas in developing countries where new technology and equipment are difficult to come by. For this reason, Starbucks began to place Farmer Support Centers in the countries where it purchases green coffee beans. The company currently runs two farmer support centers. They are located in San Jose, Costa Rica (est. 2001) and in Kigali, Rwanda (est. 2008). There were plans to open another center in Addis Ababa, Ethiopia in 2008, but the opening has been delayed. The company also plans to open a center in the Asia-Pacific region in the near future (Allison 2007, 2009). According to the company website, the center in Costa Rica has proven to be very successful, increasing farm yields by 20% and reducing the use of pesticide by 80%. In addition to the farmer support centers, Starbucks has also helped to open free medical clinics in Guatemala and East Timor. These clinics are funded in part through grants given by Starbucks and the premiums paid on free trade coffee (Starbucks Coffee Company 2009b). Starbucks has consistently demonstrated its commitment to responsible company practices through its partnership with Conservation International (CI). As early as 1998

Brajkovich 11 Starbucks and CI worked together to provide technical assistance and equitable pricing to farms in Chiapas, Mexico. Then in 2004, soon after the company began the C.A.F.E. practices program, it also joined with CI to help found Verde Ventures, a program that allows small-scale coffee farmers access to affordable loans. In March 2008 Starbucks committed to continue its conservation efforts through a five-year agreement to combat global climate change, especially by the way of preventing deforestation. These efforts will include directly supporting individual communities that practice climate-friendly activities (Conservation International 2009). As a transnational corporation Starbucks exhibits patterns of globalization in the its sourcing, retailing, and marketing, but global expansion and imagery alone have not lead the company to success. In its efforts to affect communities, both through its stores and through its charity and support programs, Starbucks has effectively globalized its brand. While spanning the globe and maintaining an awareness of local communities, it has created a sense of world community (Arsel and Thompson 2004). The company has effectively created a reputation that allows consumers to rest assured knowing that while consuming Starbucks products and socializing in their local coffee shop, they are contributing to a company that works to alleviate poverty in coffee producing countries. While Starbucks heavily advertises its charitable, environmental, and fair trade programs to create an admirable image, each of the programs directly helps the company save money on operating costs or indirectly helps the company increase profit by building brand loyalty.

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Brajkovich 14 Thompson, C., and Arsel Z., 2004. "The Starbucks Brandscape and Consumerr's (AntiCorporate) Experiences of Glocalization." Journal of consumer Research Inc. vol. 31. pgs. 631-39.