Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2022, Starbucks had 51% of company-operated stores vs. 49% of licensed stores. In 2022, company-operated stores accounted for more than 80% of total revenues, thus making Starbucks a chain businessmodel.
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 the Barista knew 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 – the third place between work and home.
What’s Starbucks’ mission?
Starbucks’s mission is “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” And its vision is to “treat people like family, and they will be loyal and give their all.”
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?
Starbucks follows a chain business model strategy, where most of its revenue comes from its owned stores. For instance, in 2022, with over $32.2 billion in revenue, most of the revenue came from owned stores ($26.57 billion) compared to franchised stores ($3.65 billion) and other revenue sources ($2 billion). Yet owned stores have higher operational costs compared to franchised stores.
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, comprising China/ 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
Starbucks had 18,253 operated stores vs. 17,458 licensed stores in 2022. Starbucks leverages primarily company-operated stores to keep tight control over product development, branding, distribution, and customer experience. While it also leverages licensed stores for better amplification of brand, revenue, and profits.
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.
McDonald’s is a heavy-franchised businessmodel. In 2021, over 56% of the total revenues came from franchised restaurants. The company’s long-term goal is to transition toward 95% of franchised restaurants (in 2020, franchised restaurants were 93% of the total). The company generated over $23 billion in revenues in 2021, of which $9.78 billion was from owned restaurants and $13 billion from franchised restaurants.
Indeed, McDonald’s leases and buys the land where franchised restaurants are operated, thus keeping tight control over their operational activities.
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?
Starbucks is a chain business model that makes most of its money from company-operated stores and beverages. Within Starbucks’ strategy, licensed stores are also critical to expanding its reach, distribution, and margins while lowering operational costs. At the same time, its beverage business is the engine that enables Starbucks to build another product offering around food and more.
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?
Starbucks made over 61% of its revenue, in 2022, from beverages, followed by other revenue, which accounted for 21% of the total revenue (that comprises packaged and single-serve coffees and teas, plus royalty and licensing revenues, beverage-related ingredients, serve ware, and ready-to-drink beverages, among other items.) and food, which accounted for 18% of the total sales in 2022.
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?
In 2022, Starbucks generated over $32.2 billion in revenue, compared to $29 billion in 2021 and over $23.5 billion in 2020. Most of the revenue in 2022 came from owned stores ($26.57 billion) compared to franchised stores ($3.65 billion) and other revenue sources ($2 billion), which comprise revenue coming from the Global Coffee Alliance and ready-to-drink business.
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 Bars in 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 businessmodel, 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.
Business Model Recap
Element
Description
Value Proposition
Starbucks offers a range of value propositions for its customers: – Premium Coffee Experience: Starbucks provides a premium coffee experience, offering high-quality coffee beverages made from carefully sourced beans. – Customization: Customers can customize their beverages with various syrups, milk options, and toppings, allowing for a personalized coffee experience. – Store Ambiance: Starbucks stores provide a welcoming ambiance with comfortable seating, free Wi-Fi, and a relaxing atmosphere for customers to enjoy their coffee. – Global Brand: Starbucks is a global brand recognized for its consistency and familiarity, making it a trusted choice for coffee enthusiasts worldwide. – Community Engagement: Starbucks engages with local communities by supporting local initiatives, sourcing ethically, and promoting sustainability. – Mobile Ordering: The Starbucks mobile app offers convenience, allowing customers to order ahead and earn rewards.
Core Products/Services
Starbucks’ core products and services include: – Coffee Beverages: Starbucks offers a wide range of coffee beverages, including espresso, lattes, cappuccinos, brewed coffee, and iced coffee. – Tea and Non-Coffee Drinks: The menu includes tea, hot chocolate, and non-coffee options to cater to diverse tastes. – Food and Snacks: Starbucks offers a selection of food items, including sandwiches, pastries, salads, and snacks, complementing its beverage offerings. – Merchandise: Starbucks sells branded merchandise, such as mugs, tumblers, coffee beans, and accessories. – Mobile Ordering and Rewards: The Starbucks mobile app enables customers to place orders, pay, and earn rewards for future purchases. – Music and Entertainment: Some Starbucks locations feature live music performances and promote entertainment partnerships.
Customer Segments
Starbucks’ customer segments include: – Coffee Enthusiasts: Coffee connoisseurs and enthusiasts looking for high-quality coffee beverages. – Students and Professionals: Students, professionals, and remote workers seeking a conducive environment for work or study. – Families and Groups: Families and groups of friends who gather at Starbucks for coffee and socializing. – On-the-Go Customers: People looking for quick, convenient coffee options on their daily commute. – Merchandise Shoppers: Customers interested in Starbucks-branded merchandise and coffee beans for home use. – Mobile App Users: Customers who use the Starbucks mobile app for ordering and rewards.
Revenue Streams
Starbucks generates revenue through several revenue streams: – Coffee and Beverage Sales: The primary source of revenue comes from the sale of coffee beverages, tea, and non-coffee drinks. – Food Sales: Revenue is earned through the sale of food items, including sandwiches, pastries, and snacks. – Merchandise Sales: Starbucks generates revenue from the sale of branded merchandise like mugs, tumblers, and coffee beans. – Loyalty Program: Revenue is earned through the Starbucks Rewards program, where customers accumulate points and receive discounts and free drinks. – Mobile Ordering: The mobile app facilitates revenue generation through mobile orders and payment. – Franchising: Starbucks licenses its brand to franchise partners, earning revenue through franchise fees and royalties.
Distribution Strategy
Starbucks’ distribution strategy focuses on accessibility and customer experience: – Physical Stores: Starbucks operates a vast global network of physical stores, including cafes, drive-thrus, and standalone locations. – Franchising: Some Starbucks stores are operated by franchise partners, expanding the brand’s presence. – Mobile Ordering: The Starbucks mobile app allows customers to place orders, pay, and schedule pickup, enhancing convenience. – Grocery and Retail Partnerships: Starbucks products, including packaged coffee and beverages, are sold through grocery stores and retail partnerships. – E-commerce: Starbucks offers an e-commerce platform for merchandise sales and coffee subscription services. – Social Responsibility: Starbucks engages in social responsibility initiatives, supporting local communities and ethical sourcing practices, aligning with its brand image.
Visual Stories Contained In The Starbucks Business Model Analysis
Starbucks’ main individual shareholder is Howard Schultz, the founder of Starbucks. Major institutional shareholders comprise BlackRock, with 7.18%, and The Vanguard Group, with 8.6% ownership. Starbucks follows a heavy-chained businessmodel, where the company-operated stores play a critical role in the company’s long-term strategy, compared to McDonald’s heavy-franchised businessmodel, where the long-term plan is to have over 95% of the stores as franchising.
Starbucks is a retail company that sells beverages (primarily consisting of coffee-related drinks) and food. In 2022, Starbucks had 51% of company-operated stores vs. 49% of licensed stores. In 2022, company-operated stores accounted for more than 80% of total revenues, thus making Starbucks a chain business model.
Starbucks follows a chain business model strategy, where most of its revenue comes from its owned stores. For instance, in 2022, with over $32.2 billion in revenue, most of the revenue came from owned stores ($26.57 billion) compared to franchised stores ($3.65 billion) and other revenue sources ($2 billion). Yet owned stores have higher operational costs compared to franchised stores.
Starbucks follows a chain business model, building its brand through its owned stores.
And its owned stores are also where most of the revenue is generated.
In addition, the owned stores are a great asset to keep experimenting with new products while maintaining tight control over the customer experience.
Indeed, in 2022, of the over 18K owned stores, Starbucks generated over $26.5 billion in revenue.
Yet, its licensing operations are also critical to further amplifying the brand while generating royalties at much lower operational costs than owned stores.
In addition, Starbucks’ main revenue driver is comprised of beverages which generated over $19.5 billion in 2022, followed by food, which generated over $3.5 billion in the same year.
Starbucks had 18,253 operated stores vs. 17,458 licensed stores in 2022. Starbucks leverages primarily company-operated stores to keep tight control over product development, branding, distribution, and customer experience. While it also leverages licensed stores for better amplification of brand, revenue, and profits.
Starbucks made over 61% of its revenue, in 2022, from beverages, followed by other revenue, which accounted for 21% of the total revenue (that comprises packaged and single-serve coffees and teas, plus royalty and licensing revenues, beverage-related ingredients, serve ware, and ready-to-drink beverages, among other items.) and food, which accounted for 18% of the total sales in 2022.
Starbucks’s mission is “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” And its vision is to “treat people like family, and they will be loyal and give their all.”
Starbucks is a multinational coffee chain headquartered in Seattle, Washington. It was founded by Jerry Baldwin, Zev Siegl, and Gordon Bowker in 1971. From a single and very humble bean roasting store in Pike Place Market, the company is now a global giant operating over 37,711 stores around the world. This large global footprint obviously increases the competition for Starbucks in many different markets. The coffee industry itself is also highly competitive, with established players including McDonald’s and Dunkin’ Donuts.
Starbucks follows a matrix organizational structure with a combination of vertical and horizontal structures. It is characterized by multiple overlapping chains of command and divisions.
McDonald’s and Starbucks sit in the opposite spectrum of retail business models. Indeed, whereas McDonald’s follows a heavily franchised business model, Starbucks follows a heavy-chained one.
Starbucks highlights its mission as “to inspire and nurture the human spirit – one person, one cup and one neighborhood at a time.” And its vision is to “treat people like family, and they will be loyal and give their all.”
Starbucks is a global consumer brand with direct distribution, recognized brands, and products that make it a viable business. Its reliance on the Americas as a primary operating segment makes it a weakness. At the same time, Starbucks faces risks related to coffee beans price volatility. Yet the company still has global expansion opportunities.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
