Starbucks - Final 2(2)

STARBUCKS CORPORATION BY CHRISTINA CARTER FLORIDA ATLANTIC UNIVERSITY BRENDA RICHEY – MAN 6937 JULY 18, 2006

Starbucks Coffee’s mission statement is to “Establish Starbucks as a premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow” (Starbucks, 2006a). Starbucks has grown at incredible rates since the opening of its first location in 1971. The company has dominated the specialty coffee market. A Starbucks Coffee store can be found on just about any given corner. The Starbucks brand has become very well known across the globe, even though the company does minimal advertising. Starbucks has been faced with many issues from externalities and has become a pariah for various causes. This paper will begin by discussing Starbucks social responsibility. Next, it will discuss the technologies that Starbucks has implemented through the years. It will follow with problems that Starbucks encountered while globalizing. The paper will then analyze the treatment of Starbucks’ employees. Finally, it will debate the controversial issue of genetically engineered ingredients in Starbucks additives. Social Responsibility Finding problems in Starbuck’s social responsibility and ethics is no small task. Not only were they named number 17 on the “Business Ethics 100 Best Corporate Citizens” list, but they have been included in that list seven years in a row. They are on the EPA’s “Green Power Top 25 List” for their use of renewable energy. Starbucks was awarded the International Human Rights Award by the Council on Economic Priorities (CEP). Finally, for the fifth time they were included in Fortune's "100 Best Companies to Work For" (CNN Money, 2006). After that impressive list of credentials, the fact that Starbucks ever had social responsibility issues is hard to believe. However, they have not remained completely out of the limelight. At one point, Starbucks was protested against for their inhumane wages. The following paper will discuss their labor problem, solution, and my conclusion on whether the issue was resolved (Business Ethics, 2006). In 1994, Starbucks was protested against for their inhumane labor costs. They were buying coffee beans from export houses that paid their Guatemalan workers $2.50 a day. The miniscule income was not even considered a living wage. Ironically stated, “To earn enough to afford a pound of Starbucks' coffee, a Guatemalan worker would have to pick 500

pounds of beans, about five days of work” (Entine, 1996). The investors do not want to see heavy investment in a cause that reaps no tangible benefits (Tishler, 2002). This proved true when it was voted negatively during the shareholder meeting. Shareholders did not want to see decreased revenues as a result of social responsibility. Globalization was a primary concern in order to ensure the growth of Starbucks after the US Market was saturated. To keep the steady increase of revenue, they needed to keep costs under control. The vote was to not increase spending of fair-trade coffee. Starbucks obvious public PR issue forced them to deal with the problem before negative brand image association impacted their prestigious company. Their plan was to start participating in the Fair Trade, which means buying coffee from workers who are making a living wage. They publicly announced that they created a “Framework for a Code of Conduct” (Starbucks, 2006b). This code stated that Starbucks would seek to buy coffee from growers who pay a decent wage and follow environmental practices. Starbucks has brought statistical studies to the attention of the U.S. and Guatemalan governments and human rights organizations. Starbucks has not conducted any studies personally. Although some believe that Starbucks has improved this situation, I would disagree. From a PR standpoint, they have successfully solved the issue. The majority of environmentalists have stopped harassing them and writing negative articles. They have definitely stopped the negative headlines from appearing. Yet Starbucks has not actually fixed the issue; their fair trade involvement is quite minimal. According to the Global Exchange, they only purchase 1-3% of their coffee from farmers who are guaranteed a living wage. Considering Starbucks’ buying power and high cash flow, I think they underestimate their power to make a difference. In numerous cases, they claim to have severe limits in their philanthropic programs. Orin Smith, former CEO, blames the limits on, “Poverty, standard of living issues, and despair are widespread and deeply ingrained in many parts of the world...Governments often can't tackle these global problems— corruption sometimes gets in the way, and many governments simply don't have the resources. NGOs have filled some of the voids left by governments, but they can't do it all” (Tishler, 2002).

Starbucks philanthropic endeavors are not limited to fair trade coffee. They are involved in numerous environmental causes and have donated to the CARE FOUNDATION, which helps give growers an opportunity at healthcare. Starbucks claims to have minimal, if any, monitoring of the policies that they create for their suppliers. Do you really think that all the money goes to workers, or do you think a majority goes into the pockets of exporters? Starbucks does not even know the answer. The Commission for Verification of Codes of Conduct (COVERCO) is an independent, neutral, civil society formed by professionals in Business, Communications, Medicine, Law, Sociology and Education. COVERCO was formed in an effort to monitor working conditions in Guatemalan factories and farms. They finance their own research and then publicly post results. They do not have the power to enforce codes of conduct and that is not their purpose. Here are some statistics that were found in 2000 by the COVERCO: 50% report failure to pay over the legal wage, 80% are not paid overtime (as required by law), and 58% are not covered by legally-required Social Security and healthcare (Coverco, 2000). Starbucks claims to not have the ability to punish violators (Entine, 1996). I disagree, eliminating the violator as a supplier would be punishment enough. In some of the third world countries where Starbucks purchases coffee, coffee accounts for 70% of their GDP. From a financial aspect, Starbucks is doing the right thing by not becoming too heavily involved. From an ethical standpoint, Starbucks should wholeheartedly support their causes. Globalization Starbucks is considered a thriving global enterprise. Although Starbucks has successfully entered, penetrated, and saturated many global markets, not all attempts have been successful. Starting in 1996, Starbucks has hastily moved into 41 countries fruitfully (Starbucks, 2006a). Why did they have to pull out of the Israel market after opening only 6 stores? The following will describe Starbucks unsuccessful venture into Israel; the four main contributors to Starbucks failure in Israel: politics, location, pricing, lack of localization; and conclusions for future expansion.

The business environment in Israel, much like China, would not allow for Starbucks to be complete owners of their stores. They either had to franchise or enter into a joint venture. Since Starbucks is against any form of franchising, they chose to enter in a business venture with Delek Group. This is not a new concept for Starbucks; they typically enter into most international ventures in the same manner. The difference was in the political environment. Numerous countries, including Israel, have large activist populations that do not support globalization. The Muslim and Jewish religions present in Israel promote conservatism. They do not like western society’s consumerism, liberalism, and free trade. To Israelis, Starbucks seems to be symbolic of the problems caused by globalization.

These

countries believe that Americans are trying to force their culture, beliefs, and morals onto the developing countries they enter. Also, many Israelis and Palestinians resent Americans for getting involved in their civil war. To make matters worse, Howard Schultz involved himself by speaking politically about the situation in Israel. He spoke to an audience at a synagogue in Seattle, “asserting that the Palestinians needed to fight terrorism and that Jews were about to be faced with increased anti-Semitism” (Hahn, 2002). As a result, Israeli’s boycotted Starbucks. When Starbucks removed themselves from Israel in April 2003, they stated that it was due to operational challenges and not the current economic and political status in the Middle East (Coussin, n.d.). Starbucks was probably just trying to save their reputation by making this comment and did not want to sound offensive. After developing a customer base, location and pricing are the next important considerations for a retail / food outlet. Starbucks attempted to enter the coffee penetrated market of Tel Aviv, instead of focusing on some of the less established areas. Also, they did not do their typical saturation arrival. They placed only six coffee shops into a market that already contained the chains of Arcaffe, Aroma, Ilan’s, and neighborhood shops. Why was Starbucks so timid to engulf the area? Maybe their research suggested that they would not fare well in Israel. From their perspective, one can see how caution might have been a good decision factor, yet they have a proven success rate at how they establish locations. They should have considered immersing themselves into Israel and lowering prices to compete

with the other coffee shops. Chief Financial Officer, Michael Casey, says tough competition is the problem. Rivals often charge lower prices” (Business Week, 2003). Why didn’t Starbucks note the pricey competition before moving into these locations? “Glocalization” is an invented term used to show a combination between the local and global approaches. In theory, they maintain the main features of the brand, but the modify it to meet the local cultures needs. Starbucks should have looked at KFC’s failure entering is Israel as an example of what not to do. KFC did not realize that the slaughtering of chicken in Israel was totally different from other countries. On top of that, they were a kosher society that did not eat pork, so KFC attempted to adapt their pig gelatin chicken coating. A successful example that Starbucks should have followed was McDonald’s success in Israel. McDonalds understood that in Israel food was very important and they needed to adjust food preparation in order to be embraced. They decided to grill their hamburgers instead of frying them (Coussin, n.d.). Starbucks didn't manage to adapt themselves to the regional coffee culture. Starbucks did not modify any of their existing beverages, food products, or pricing. They should have introduced unique food items like falafels, blintzes, and mandelbrot (Thompson, 2006). At Starbucks they are saying that the parent company has already learned from their mistake in Israel. In the branches that have opened recently in Turkey and in Greece, they will add for the first time, some local variety. Along with the roasted, weak coffee created originally for American tastes, coffee that will be suited to local tastes. They will also include local variety baked goods, such as Middle Eastern-style cookies. I also believe that due to their prior mistake, they do not want to take any chances with risky new ventures. That is most likely the reason why they have not made the move into India (Bhatnagar, 2004). Starbucks needs to take risks, and then follow through with their choices by being more flexible with regional tastes. Maybe then it wouldn’t seem like they are forcing American culture on Israeli customers. Technology

It is traditionally common for retailers to use technology sparingly. Retail companies typically employ computer software on registers, a website, and theft monitoring equipment. Starbucks has always used technology to give them an international competitive edge. Through technology, they have increased universal payment capabilities, worldwide online shopping, and music customization. They not only use register software and website development; furthermore, they have also created a wireless network, CD burning capabilities, personalized credit cards, automated coffee machinery, and e-commerce solutions. In March 2004, Starbucks partnered with Hewlett Packard (HP) and T-Mobile to offer wireless technology in all of their stores (Hewlett Packard, 2004b). As of July 14, 2006, they have added this service in 4674 stores and continue to add more daily. By staying on the leading edge of technology, Starbucks gives their customers more than just coffee.

Patrons

have a place to relax, do homework, search the web, have meetings, and socialize. This technology has been accepted globally and has been truly innovative in some international societies that do not have readily available access to these amenities. This has proven to be a very successful venture that many retailers have imitated. Once again, Starbucks partnered with HP to launch the Hear Music store in 2004. This unique store allows customers to create custom CDs from thousands of songs across numerous music styles. They can even design their own CD covers. Starbucks experimented with this type of store in Santa Monica and, after it proved to be successful, started expanding nationwide beginning in the Seattle area. With plans to expand internationally as well, this unique marketing approach has the potential to increase the market share and reach. Starbucks will need to account for the various music tastes of the cultures in which they are introducing this feature (Hewlett Packard, 2004a). Starbucks should allow international store employees to help build these song databases so that they can keep up with the music culture in the area. Another smart innovation was the creation of the Starbucks credit card. Starbucks realized that they needed a universal payment method for customers who do not carry cash.

Starbucks also wanted to add a loyalty program. They decided to put these two features into one card. Since Starbucks did not want to worry about collecting bad debt and servicing collections of payment, they left it up to the company that specializes in that - Visa. Starbucks partnered with Bank One and Visa to create the Duetto card (Visa, 2003). This innovation added additional convenience and rewarded customer loyalty. Moreover, like most of Starbucks’ initiatives, the Duetto covers the needs of international customers by way of the Visa logo. The card was originally launched in November 2001 and by 2003 there were more than 11 million cards activated. Not only does this card function as a credit card, it also has the functionality of a debit card. Customers can preload money and use it at any Starbucks location. Other features included are the ability to add money to cards online, replace lost or stolen cards, and track Starbucks’ cash and awards (Starbucks, 2006c). Starbucks has traditionally limited the sale of items online because of their market penetration and locations internationally. However, during the holiday season, Starbucks featured select holiday merchandise on their website in order to provide another sales avenue. The website allows visitors to view the items, load them onto a Starbucks Card and personalize the greeting card (Cypress Consulting, 2006). In addition to shopping capabilities, the website has up to date information for investors, and it allows interested international partners to easily contact Starbucks. This is not to say that Starbucks will always stay on top of innovation. Recently, there has been discussion as to whether Starbucks should outsource their technology department. With increasing healthcare costs and minimal growth, they do not want to lose to this major advantage that competitors have (Meyers, 2005). The main obstacle that Starbucks has to overcome is whether this cost savings will be worth the loss of reputation. Starbucks has generated goodwill by way of constantly providing added value to its customers. The fast expanding coffee chain has also distinguished itself by treating its employees (partners) as key instruments. Schultz has invited the entire technology department to talk with him and senior management about outsourcing. "Howard has a 100 percent commitment to leave no one behind, and that's rare in business leaders today,"

says Kenneth Lombard, president of Starbucks' entertainment division. Adds Schultz: "We all want the same thing as people--to be respected and valued as employees and appreciated as customers" (Meyers, 2005). It will be interesting to see the outcome as Starbucks continues to change. So far, they have successfully captured and implemented technology. Employees Every company has seen it fair share of employee hostility and Starbucks is no different. Despite these objectives, employees have been trying to unionize in order to address concerns including wages, raises, benefits, hours, stress, and risky environment. Employees claim that $7.75/hour is not a living wage. The poverty threshold for 1, 2, 3, and 4 person households are $9,800, $13,200, $16,600 $20,000 (U.S. Department of Health & Human Services, 2006). At $7.75 an hour an employee working 30 hours a week would be receiving $12,090 and at 40 hours a week they would be receiving $16,120. These are both living wages for 1 or 2 person households. On a side note, I believe that the US regulating minimum wage is not beneficial because it leads to more companies using illegal employment to keep cost low. Also, it increases inflation and does not force people to learn a trade. I do not agree that Starbucks wages are insufficient because they pay 1.5 times federal minimum wage. In addition to that, the average age of baristas is 28. This proves even further that most of these employees are college students using the job as a means to get through school (Klaff, 2004). Another employee complaint is that the raises are inadequate, only cents on the dollar. Starbucks has many programs for baristas to become involved in and move up in the company. If one has the desire he or she can get a promotion and with that promotion he or she would be compensated according. Why should two people doing the same job make significantly different pay? Are they taking on more responsibility? Along with the complaint of insufficient wages, baristas complain that the benefits are unattainable. Starbucks prides themselves in offering great benefits including 401K, stock options, medical, dental, and vision insurance. Baristas say that due to the low wages, there is not enough money left to contribute to these benefits. Starbucks covers 75% of the insurance plan and the baristas are only asked to pick up 25%. The benefit is

pretty generous considering they only require those employees to work 20 hours a week to qualify for insurance. Starbucks has even gone as far as to create an entertaining program to encourage baristas to utilize their 401K called Futureroast.com. The program “features four interactive computer games that demonstrate key investment concepts” (Klaff, 2004). Since the implementation of this interactive program the 401K participation has raised 4-5%. Does that sound like a company that is trying to scam their employees? Definitely not, Starbucks is encouraging partners to employ benefits. Finally, baristas criticize the fact that they cannot get full-time status and the hours are filled with “repetitive stress and unsafe conditions” (Proudfoot, 2006). They claim that they have to work so fast that it jeopardizes their health. Employees say they are working with beverages that are 200 degrees and with such unsafe speeds are prone to harm.

In any job, there is at least minimal risk. I could

get carpal tunnel through excessive typing at my workplace. The risk for Starbuck’s employees must be quite minimal or many lawsuits would have occurred. When starting the company Howard Schultz maintained the objective to treat employees “partners” well. Howard Schultz’ goal was to make his employee feel like part of a team and offer great benefits. He watched his father struggle with health problems and lack insurance. Howard vowed to never let that happen to his employees. He decided that even part time employees should be able to get health insurance. With the growing cost of healthcare, this is a pretty costly decision. Howard believed that "If people relate to the company they work for, if they will form an emotional tie to it and buy into its dreams, they will pour their hearts into making it better" (Schultz, 2005). Consumerism In the United States, which is consumerism based, we still have a ways to go in the consumer protection aspect. Consumer woes have not gone unnoticed. Starbucks has been harassed by the Organic Consumers Association (OCA) for declining to guarantee their milk products to not contain recombinant Bovine Growth Hormone (rBGH) and/or other genetically engineered ingredients.

Even though every major country has banned the use of this drug, the Food and Drug Administration (FDA) has allowed it in the US. There have been studies that show that it has potential cancer risks, antibiotic resistance, and immunological effects (European Commission, 1999). Starbucks is also using genetically modified (GM) ingredients including: cooking oil, sweeteners, soy lecithin, and soy derivatives. These are not only contained in the coffee additives but also in the baked goods (Organic Consumers Association, 2001). After the media outburst, Starbucks decided to conform. For GM concerned patrons, they will offer a substitute coffee additive free if rBGH if requested. Orin Smith wrote a response letter to OCA guaranteeing that at least 25% of their milk was rBST free. Mr. Smith stated that the major problem was that although only a small amount of cows have been injected with the drug, the regulation process is not in place to easily show the major percent that has not been injected. Orin Smith proceeded to say, “significantly less than 5% of the commercially produced milk can be certified as coming from rBST-free herds because of the bulking processes used within the milk industry. Without an adequate source of rBST-free milk, we cannot make immediate changes. However, we are already discussing with existing suppliers what we can do to ensure the remainder of our supply is rBST-free and will push for a solution” (Organic Consumers Association, 2001). Overall, Starbucks has done great job of handling all external issues through quick response and communication. They realize how valuable brand identity and positive reputation are.

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