COMPANY PROFILE OF STARBUCKS CORPORATION

& BUSINESS ENVIRONMENT OVERVIEW FOR JAPAN AND KOREA

TEAM – GLOBAL STRATEGISTS

Alicia Adams-Glover

Jenny Marie Glenn

Bill Kemp

Nona Keith-Henson

URL: http://polaris.umuc.edu/jglenn2/omba606

OMBA606/9023 – Combined Week 1 and 2 Team Assignments

March 9, 2003
 
 
 
 

TABLE OF CONTENTS

Executive Summary
Company Profile of Starbucks Corporation
Business Environment Overview for Japan vs Korea
Brief History of all Three Countries
Political Structure - The Government and Legal System
Economic Health, Culture of the Country
National Security, Financial Markets
Technological Infrastructure and Environmental Issues
Summary
References by Company and Country

Executive Summary
The team, "Global Strategists," chose to investigate the business environment in Japan and Korea for both academic and personal reasons. Japan and North and South Korea represent more than a group of countries listed in the OMBA606/9023 Week One syllabus. The two countries are important participants in the global expansion strategy for our chosen company, Starbucks Corporation and its wholly owned subsidiary Starbucks Coffee International. The two countries also represent a different political, cultural, social, and financial environment from the America-centered perspective each team member presently lives in. Choosing this pair of countries will push our team to accomplish the switch from a local outlook and reference point to an international business orientation. The overview of the business environment in Japan is presented first, followed by North and South Korea. The framework of our analysis follows the Six Dimensions of Globalization identified by Thomas Friedman: culture, financial markets, politics, national security, technological infrastructure, and environmental issues (Friedman, 2000).

Simply stated, "Starbucks," is the United State's number one specialty coffee retailer, operating nearly 5,900 company-operated shops/kiosk in a variety of locations (office buildings, shopping centers, airport terminals, and supermarkets) throughout the U.S. and 25 countries (Hoover’s Online). The world known ‘brand name’ corporation sells coffee drinks and beans, pastries, and other food items and beverages, as well as mugs, coffeemakers, coffee grinders, and storage containers. The company also sells its beans to restaurants, businesses, airlines, and hotels, and it offers mail order and online catalogs for consumers. Starbucks has expanded into coffee ice cream (with Dreyer’s) and makes Frappuccio (a bottled coffee drink with PepsiCo) (Hoover’s Online). The product line of focus throughout this course will be on their various coffees and beans.

Starbucks is truly a global company: The Starbucks Experience is about passion for a quality product, excellent customer service, and people. With nearly 900 coffeehouses in 22 markets outside of North America, it is clear that Starbucks transcends language and culture. Since the company’s international journey began in 1996 with the first coffeehouse in Tokyo, Starbucks has obtained global acceptance and visibility of their "brand name" in numerous international markets, under the leadership direction of Peter Maslen, President of Starbucks Coffee International (Hoover’s Online).

International Business Partnership: Starbucks global success would not be possible without international partners, who share in their values and commitment to extending the Starbucks Experience to customers worldwide. "We remain highly respectful of the culture and traditions of the countries in which we do business," says Howard Schultz, chairman and chief global strategist. "We recognize that our success is not an entitlement, and we must continue to earn the trust and respect of customers every day." Key criteria is utilized for choosing partnerships, which all operations must follow as it is critical to their operational success; Shared Values and Corporate Culture, Strong Multi-Unit Retail/Restaurant Experience, Dedicated Human Resources, Commitment to Customer Service, Quality Image, Creative Ability, Local Knowledge and Brand-building Skills, and Strong Financial Resources.

Starbucks Corporation Mission Statement: Establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow. The following six guiding principles help us measure the appropriateness of our decisions:

1.      Provide a great work environment and treat each other with respect and dignity.
2.      Embrace diversity as an essential component in the way we do business.
3.      Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee.
4.      Develop enthusiastically satisfied customers all of the time.
5.      Contribute positively to our communities and our environment.
6.      Recognize that profitability is essential to our future success.

Starbucks Environmental Mission Statement: Starbucks is committed to a role of environmental leadership in all facets of our business. We fulfill this mission by a commitment to:

1.      Understanding of environmental issues and sharing information with our partners.
2.      Developing innovative and flexible solutions to bring about change.
3.      Striving to buy, sell and use environmentally friendly products.
4.      Recognizing that fiscal responsibility is essential to our environmental future.
5.      Instilling environmental responsibility as a corporate value.
6.      Measuring and monitoring our progress for each project.
7.      Encouraging all partners to share in our mission.

Starbuck’s "Corporate Social Responsibility"
Starbucks demonstrates corporate social responsibility by giving back to the community, as a way of doing business. Contributing positively to local communities and the environment is so important to Starbucks it is listed as a guiding principle of the company’s mission. Partners at all levels are involved in this initiative in a number of areas, helping to improve resources and well-being in all of their surroundings with the 1997 introduction of the Starbucks Foundation, community programs and investments.

Company Performance and Annual Reports: Starbucks has a pledge to keep their stakeholders informed of their business practices and social responsibility initiatives. In 1998, Starbucks had over 1,500 stores in North America and the Pacific Rim, and was opening new ones at a rate of more than one per day. Sales in fiscal year 1997 were a record $967 million and profits reached an all-time high of $57.4 million. The company's closest competitor had fewer than 300 retail locations. Since going public in June 1992, Starbucks has seen its stock price increase nearly nine-fold. The initial public offering (IPO) of common stock turned into one of the most successful IPOs of the year (refer to link Exhibit 3 for the performance of the company's stock price since the IPO). With the capital afforded it by being a public company, Starbucks accelerated the expansion of its store network (refer to link Exhibit 1). Starbucks' success helped specialty coffee products begin to catch on across the United States. Competitors, some imitating the Starbucks model, began to spring up in many locations however, The Specialty Coffee Association of America, predicted that the number of coffee cafés in the United States would rise from 500 in 1992 to 10,000 by 1999. Link Exhibit 1 contains a summary of Starbucks key performance statistics for the 1992–1997 period (Thompson and Strickland, 1999).

Net revenues have continued to grow significantly over the past three years; the retail gross revenue in thousands was $1,823,607 with $354,007 in specialty products as of Oct. 1, 2000, and as of Sept. 30, 2001 retail was $2,229,594 and specialty $419,386, and on Sept. 29, 2002 retail revenue was $2,792,904 and specialty 496,004. For the 13 weeks ended December 29, 2002, net sales rose 25% to $1.00 billion. Net income rose 17% to $80 million. Revenues reflect the opening of new licensed stores and higher comparable store sales. Net income was partially offset by the absence of a $13.4 million gain from the sale of Starbucks Japan shares (Yahoo-Finance Online).

Financial Goals: Starbucks overall goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products, and by providing superior customer service. Company-operated retail stores accounted for approximately 85% of net revenues during fiscal 2002. The company's retail sales mix was roughly 61 percent coffee beverages, 15 percent whole-bean coffees, 16 percent food items, and 8 percent coffee-related products and equipment. The product mix in each store varied, depending on the size and location of each outlet (Thompson and Strickland, 1999).

Starbucks specialty operations strive to develop the ‘brand’ outside the company-operated retail store environment through a number of channels including foodservice accounts; North American retail store licensing; grocery channel licensing; warehouse club accounts; international retail store licensing; direct-to-consumer marketing; and joint ventures, among others. Specialty operations accounted for approximately 15% of net revenues in fiscal 2002.

Overview of Starbucks Coffee International -a Wholly-Owned Subsidiary of Starbucks:As Starbucks moves into new markets all over the world, they continue to build their ‘brand’ through the delivery of the Starbucks Experience. Starbucks Corporation’s success at every market that has been entered into reiterates their commitment to become a great, enduring company with the most recognized and respected brand in the world, known for inspiring and nurturing the human spirit as illustrated by the below statements:
The Mission Statement:To be a global company, making a difference in peoples' lives by leveraging our brand and the coffee experience to foster human connections, and the International Business Development Statement: The development strategy adapts to different markets addressing local needs and requirements. Currently Starbucks utilizes three business strategies: Joint ventures, Licenses, and Company-owned operations. Their corporate website was developed to specifically address inquiries from individuals, organizations, and corporations interested in exploring opportunities as partners in international markets as noted below. Environmental Affairs: Starbucks has incorporated environmental leadership into all parts of the business, from "Green Teams" and in-store recycling to environmentally friendly store and office design, Starbucks has essentially established high standards for environmental responsibility.

Existing International Market Partnerships:Starbuck Corporate Headquarters is based in the United States on the west coast in Seattle, Washington, and have established retail locations throughout the U.S.Their international markets consist of the following; Australia, Austria, Bahrain, Canada, Germany, Greece, Guam, Hawaii, Hong Kong S.A.R., Indonesia, Israel, Japan, Kuwait, Lebanon, Malaysia, Mexico, New Zealand, Oman, People’s Republic of China (Beijing), People’s Republic of China (Shanghai), Philippines, Portugal, Puerto Rico, Qatar, Saudi Arabia, Singapore, South Korea, Spain, Switzerland, Taiwan, Thailand, United Arab Emirates, and the United Kingdom.

Strategic Business Plan for Development of International Markets: Starbucks Coffee Company currently uses three different business structures for their international markets: Joint ventures, Licenses, and Company-owned operations.Individual franchises or sub-franchise have not been and are not part of Starbucks future operational plans, they will either operate the coffeehouses directly (or through a local subsidiary), or will enter into a business agreement with a company or group of individuals. Whereby the respective partner company or group is granted the right to develop and operate coffeehouses throughout a defined region.The initial development typically begins with Starbucks retail locations only

Starbucks’ Top Three Competitors: At present, the top three competitors in the coffee retailing market are: (1) Diedrich Coffee, operator of 380 coffeehouses in 37 U.S. states and 10 other countries. The company is the nation's number two coffeehouse spot (behind Starbucks); it operates under the Diedrich Coffee, Gloria Jean's, Coffee People, and Coffee Plantation brands. Besides cappuccino, latte, and other Italian-style beverages, Diedrich offers food items, whole bean coffees, and coffee accessories. Diedrich buys coffee beans from brokers and growers and roasts them at its own facility in central California, which supplies both its retail locations and wholesale accounts, (2) AFC Enterprises, the number two operator of fast-food chicken restaurants who owns or franchises more than 3,900 restaurants and owns Seattle Coffee, whose Seattle's Best Coffee (SBC) and Torrefazione Italia subsidiaries operate a coffee roasting and wholesale business and some 160 SBC coffee houses and 20 Torrefazione cafes. The company also owns the Cinnabon chain (600 retail bakeries). Investment firm Freeman Spogli, owned in part by AFC directors John Roth and Ronald Spogli and former director William Wardlaw, owns about 24% of AFC, and (3) New World, The company formerly New World Coffee-Manhattan Bagel, was in the top bageldom position with its 2001 acquisition of Einstein/Noah Bagel. However, Nasdaq soon cited it for violations related to the acquisition and delisted the company. Chairman RaminKamfar resigned, and CFO Jerold Novack was fired. The SEC is investigating the company. New World has about 750 shops (60% are company-owned) in 34 states branded under the names New World Coffee, Manhattan Bagel, Einstein Bros. Bagels, and Noah's New York Bagels. They are considered a competitor to Starbucks based strictly on the fact that their bagel shops offer consumers various other coffee brands. (Hoover’s Online)

Starbuck’s Summary -Starbucks is definitely a world leader in the coffee business, and currently has a Strategic Business Plan for expansion to many more regions in the world. According to their latest annual report they are often eager to expand into new regions, however various constraints may have delayed their entry into a specific country, as one can determine by utilizing the FAQ’s link on their interactive website, due to the fact that the timing and specifics of future development plans is kept confidential and undisclosed until there is an initial public offering. The Global Strategists are looking forward to researching this international company further and finding more interesting facts during the course of our assignments.

JAPAN - A Brief History

National Flag and Country Map Taken from CIA Factsheet

Japan is a country characterized by ancient traditions and state-of-the-art innovation. The country is able to trace its sovereignty back through thirteen dynasties to 300 B.C. (National History Museum of Japan, 2003). Japan’s system of imperial government formally came to an end in 1946, when the United States imposed the Constitution of Japan as part of the post-World War II occupation of the country (National History Museum of Japan, 2003). Today, Japan is a highly urbanized country of 126.8 million people living in a series of islands with a geographical area similar in size to California (U.S. Department of State, 2002). The two main religions in the country are Buddhism and Shintoism (U.S. Department of State, 2002). The urban nature of Japan is favorable for the business model used by Starbucks. Tokyo has a population of 14 million people, and nine other cities have populations of greater than 1 million people (U.S. Department of State, 2002). Concentrated numbers of people are necessary to generate the flow of foot traffic that Starbucks depends on to generate high sales volume, since each individual purchase is small compared to a food establishment like a sit-down restaurant.Political Structure
Government and Legal System – Japan’s political and legal systems resemble those of the Western world and the United States. This is not surprising since a parliamentary government was imposed on the country by the United States after World War II. The government is divided into executive, legislative, and judicial branches. There are seven primary political parties, including the Liberal Democratic Party (LDP), Democratic Party of Japan (DPJ), New Clean Government Party (Komeito), Liberal Party, New Conservative Party (CP), Japan Communist Party (JCP), Social Democratic Party (SDP) (U.S. Department of State, 2002). The similarity between the American and Japanese political and legal systems may make the expansion of the Starbucks franchise into Japan somewhat easier than if Starbucks were attempting to expand into a state-controlled economy. A store lease agreement in Japan may be more likely to be honored than a lease agreement in China, as McDonald’s discovered in 1992 (Hill, 2003).

Economic Health - Japan is affected by the regional tensions between North and South Korea. Japan spends about 1% of its GDP on national defense (CIA, 2003). North Korea is equipped with missiles that can reach the Japanese islands. If Japan decides to increase defense spending, this will draw financial and labor resources away from growing the economy. South Korea is an important trading partner in Southeast Asia, and a war between North and South Korean would affect trade regionally and globally. The volatile nature of North Korean politics may affect the willingness of investors to partner with Starbucks in Japan and South Korea. It may also cause consumers to have less confidence and decide to save money, which would depress the market for consumer luxury items like Starbucks coffee.

Culture of the Country - Japan’s ethnic & societal mix is extremely homogeneous making up more than 99% of the total population.The second largest group is Koreans, which are a fraction of a percent. The Japanese people are primarily descendants of prehistoric migrant peoples from Asia; primarily Mongolian, Malay, and Indonesian (Columbia, 2001).Their culture is heavily influenced by Buddhist and Shintoist values.

National Security - Although Japan’s constitution forbids maintaining armed forces, Japan does maintain defensive military capability which amount to approximately 1.0% of their GNP. The United States currently assists Japan in its country’s defense and has encouraged Japan to assume more responsibility for its own defense.Japan’s military has approximately 239,500 (1995) total active duty personnel with 63.1% army, 18.3% navy and 18.6% air force (Columbia, 2001).

Financial Markets - Japans’ economic stagnation is starting to correct itself through increased financial competition (Friedman, 2000). Wider availability of capital will in turn allow small entrepreneurs to flourish, creating many potential business partners for a franchise operator like Starbucks.Another potential economic concern for Japan is an aging population relative to the rest of Asia. More than 16% of the Japanese population is over age 65. (http://www.business-in-japan.net/japan1.html). This may reduce Japan’s ability to grow out of its current economic slump. The conversion rate between the U.S. dollar and the Japanese Yen is presently 1.00 U.S. dollar to 117.298 Japanese Yen, or 1 Japanese Yen to 0.00852532 U.S. dollars (Xe.com, 2003).

Technological Infrastructure - Japan is a technologically sophisticated country that manufactures automobiles, complex machinery, electronics, steel, and ships for export (CIA, 2003). In 2001 the Gross Domestic Product (GDP) was $4.2 trillion; the real growth rate was -0.4% (U.S. Dept of State, 2003). In 2001 the industrial production growth rate was -8.3% and the unemployment rate was 4.9% (CIA, 2003). The combination of high GDP and declining growth rates highlights a current weakness in the Japanese economy that is a result of Japanese culture, government policies, and financial practices. Japan enjoyed a long period of economic growth and prosperity fostered by interlocking partnerships between workers, businesses, and the government Ministry of Economy, Trade and Industry (METI) (Hill, 2003; METI, 2003). These business and government connections had the eventual effect of over controlling the distribution of capital and led to severe economic inefficiencies. 

Environmental Issues- Japan suffers from the effects of a burgeoning manufacturing operation, namely; Acid raid from Power Plant emissions into the air, and acidification of lakes and reservoirs.Water quality is degrading, threatening aquatic life. Due to Japan’s large consumption of fish and tropical timber they are depleting these resources throughout Asia and beyond (CIA, 2003).

NORTH KOREA - A Brief History

National Flag and Country Map Taken from CIA FactsheetPrior to the end of the Korean War with Japan in 1945, the country of Korea was a single unified entity, under Japanese control and occupation.The end of the war marked the end of Japanese rule and the signing of an armistice that separated the country into North and South Korea. The separation is demarcated by a demilitarized zone around the 38^th parallel (38° N Lat.) (CIA, 2002). The northern portion was controlled by the Soviet Union, while the southern portion administered by the United States. The portion of the country residing north of this line was called North Korea, and the portion below this line was South Korea.North Korea began to grow its economy by using the abundant natural resources it possessed for export.The country developed a socialist government and economic structure, which grew successfully until the late 1960’s (Australia, 2002).Due to declining Soviet aid, the country’s economic growth slowed from the 1970s to until an economic crash came in the 1990’s when the Soviet Union and Eastern Europe collapsed.In 1994 the founder of the SocialistState, Kim Il-Sung's died, and his son Kim Chong-il assumed power.Today, the country’s population is approximately 22 million with a literacy rate of 99% (CIA, Australia, 2002). The country still maintains an authoritarian Socialist dictatorship with an isolated economy that is centrally planned (CIA, 2002).The country has been in a famine condition since 1995 and is taking humanitarian aid from World Food Program and the UN Development Program (Australia, 2002).

Political Structure

The Government and Legal System - The North Korean government is regarded as an authoritarian socialist one-man dictatorship (CIA, 2002) under the leadership of Kim Chong-il. His family has ruled over North Korea since 1948. The government controls North Korean livelihood and economic progress.The legislative system is “unicameral,” and is called the Supreme People’s Assembly. The members of this assembly are supposed to be re-elected every five years (Australia, CIA, 2002). North Korean government is supported by its socialist legal system. The legal system of North Korea is based on the German system and uses Communist legal theory; there are also Japanese influences (CIA, 2002).

Economic Health - The economy is centrally planned and closed to external markets. This isolation, coupled with large scale natural disasters has severely slowed economic growth. Mismanagement of existing production and natural resources has further contributed to its present economic stagnation (Australia, CIA, 2002). The restricted business policies of North Korea hinder efforts in establishing an economy that thrives from foreign investment, entrepreneurship, and technological advancements.

• GDP: purchasing power parity: $21.8 billion (2001 est.)
• GDP Growth Rate: -3% (CIA 2002)
• Exports: “minerals, metallurgical products, manufactures (including armaments); agricultural and fishery products” (CIA, 2002)
• Imports: “petroleum, cooking coal, machinery and equipment; consumer goods, grain” CIA, 2002
• Trade Agreements: None known

National Security - North Korea invests heavily in its national security.A sizeable amount of the country’s budget is spent on maintaining and growing its military structure.In 1998, total military expenditures were estimated to equal 3.7 to 4.9 billion, which represented 25% – 33% of GDP (CIA, 2002).

Financial Markets - The official country currency is North Korean Won.North Korea does not have a booming financial market.One reason that attributes to this is the secured, controlled policy administered by the government against foreign investment and developments.Its currency is rapidly devaluating due to run away inflation.In 2001 the approximate exchange rate of Korean Won (KRW) to U.S. Dollar was 1.855 to 1 (Australia, 2001), today the exchange rate is approximately 1210.50 KRWto 1 U.S. Dollar (XE.com, 2003).

Technological Infrastructure - The country’s infrastructure and public transportation is badly degraded, under-utilized and in disrepair.Technological progress has been primarily directed towards military applications.As of 2001, there was one internet provider in the country.

Environmental Issues - The main environmental concerns of North Korea are its lack of adequate water supply, polluted water, and eroded soil (CIA, 2002).

SOUTH KOREA - A Brief History

National Flag and Country Map Taken from CIA Factsheet

Prior to the annexation of Korea by Japan in 1910, Korea was a closed isolationist state with close ties only to China.The Japanese retained control until its unexpected surrender at the end of World War II.As part of its overall surrender in World War II, Japan lost control of Korea.An agreement was made to surrender the portion of the country north of the 38^th parallel to the Soviet Union and the portion South of this parallel to the United States.The first UN supervised elections were held in 1947 and the United States relinquished their control to the South Koreans in 1948.These elections elected SyngmanRhee as its first president and the Republic Of Korea was created (U.S., 2001).In June 1950 Forces from North Korea invaded the South, marking the beginning of the Korean War.The United Nations intervened and aided the South in what would be a series of conflicts until 1953.In 1953 an armistice was signed by the commanders of the North Korean Army to re-establish the 38^th parallel (38° N Lat.) as the dividing line between the two countries.A zone around this dividing line was created and called the demilitarized zone.

Rhee stepped down and Major Maj. Gen. Park Chung Hee seized power via a coup in 1961. He held power until his assassination in 1979.Under his rule he ushered in Industrial modernization and economic growth that came to a close with his assassination.In the 1970s the economy started to accelerate again with the development of chemical industries consumer electronics and automobiles (U.S., 2001).Manufacturing continued to increase in the 1980s and 1990s.In 1997 the Asian contagion hit Korea and foreign investors lost confidence in the government and economy.The result was a dramatic contraction of GDP in 1998 of -6.6% (DFAT, 2002) and a serious liquidity crisis among Korean banks. Korea was forced to take economic assistance from the IMF to the tune of approximately 57 billion dollars (Atkinson, 1998).With it came a number of economic liberalization and deregulation policies that dropped trade tariffs and restrictions on foreign takeovers (Atkinson, 1998).This opened the door for many businesses to be bought by foreign investors and signaled a renewal of explosive economic growth.Economic growth still remains strong with 2002 GDP growth estimated at +6.6% (DFAT, 2001).

Political Structure
The Government and Legal System - South Korea is formally known as the Republic of Korea. Its government is republic with principles based on a democratic government system. The people of South Korea elect the presidents for a five-year term, as well as the National Assembly’s for a four-year term election (Korean Government Homepage). The country’s newly elected leader is Roh Moo-hyun.

South Korea is composed of European civil law, and Anglo-American law (CIA, 2002). The South Korea’s judiciary system is comprised of three courts – the Supreme Court, appellate courts, and district courts. The residing president appoints the Supreme Court’s Chief Justice, as well as the judges in the lower courts under guidance by the appointed Chief Justice. The Supreme Court is the highest level within the judicial system. The appellate courts serve as the presiding court for district and family courts, and hear cases concerning litigations against the government. South Korea’s district courts preside over the majority of the countries cases ranging from civil and criminal trials (Korean Government Homepage).
Economic Health - After the Asian financial crisis in the late 90’s, South Korea’s economy is developing and growing at a record rate partially due to countries trading and exports.The countries foreign direct investments have grown and surpassed prior foreign investment figures by over 50% (Korean Government Homepage). In order to boost and reap the benefits of a thriving economy, the South Korean government has aggressively reformed its businesses practices to include complying with international standards, and promoting the advancement of technology.The restructuring of the South Korean government has made it a major participant in the world economy.

One economic risk South Korea faces is the family owned conglomerates known as chaebols. The chaebols are in control of local businesses.The challenge for the new president is to overthrow the chaebol rule and allow for reforms.As research shows by reorganizing the chaebol, the South Korean economy will grow at least 2% (Unknown, 2003).

• GDP: purchasing power parity - $764.6 billion (2000 est.)
• GDP Growth Rate: 9% (2002 est.)
• Commodity Exports: electronic products, machinery and equipment, motor vehicles, steel, ships; textiles, clothing, footwear; fish (CIA, 2002)
• Commodity Imports: machinery, electronics and electronic equipment, oil, steel, transport equipment, textiles, organic chemicals, grains (CIA, 2002)
• Trade Agreements: Unknown at this time.