Starbucks' business model: discussing corporate strategy

B2
90 min
Premium
1

Think about these questions before watching. Share your ideas with a partner.

  1. Think about a cafe or restaurant you visit regularly. Beyond the product itself, what specific factors contribute to your loyalty as a customer?
  2. In your opinion, what transforms a simple local business into a powerful global brand? Consider factors like marketing, customer experience, and innovation.
  3. Many companies encourage customers to use loyalty apps or load money onto gift cards. Why do you think this strategy is so profitable for businesses, and what are the potential downsides for the consumer?
2

Watch the video from 3:15 to 6:20. Pay attention to the main ideas, key vocabulary, and examples in this section.

Video script165 segments · click a timestamp to jump

(dramatic music)

(liquid hissing)

- [Narrator] If you've ever ordered something at Starbucks,

you've probably loaded one of these.

- Starbucks, between October and December

has had something like $3 billion of value

is loaded onto these cards.

I mean, that's a lot of money.

- [Narrator] So much money in fact,

that if Starbucks was a bank,

it would rank as the 385th biggest in the country.

And it's money that Starbucks gets to use upfront as revenue

before a single product is even purchased.

- Eventually it is a liability if someone chooses to use it,

and you will find that

in lots of gift card programs,

they're plenty of people who never use it.

- [Narrator] So how important is Starbucks' mobile app

and gift cards to its bottom line?

And what role does technology play

in its continued evolution?

This is the economics of Starbucks.

In 1971, the first Starbucks,

a small unassuming cafe opened in Seattle's downtown.

Fast forward 50 years, and that store is still in operation,

but Starbucks is a global coffee giant.

- Only McDonald's is bigger than Starbucks

when it comes to market caps.

So they are really a powerhouse

when it comes to really the whole restaurant industry.

- [Narrator] In its early years of operation

Starbucks expanded slowly and only within Seattle.

It wasn't until 1987 when the original owners

sold the company to its then marketing director,

Howard Schultz,

that the Starbucks that we know today took root.

Schultz began expanding Starbucks outside of the city

and introduced Americans to what was then a little known

Italian drink, the espresso.

- They were really founded on this coffee house culture

that they make each beverage by hand according to order.

As Starbucks has grown,

that has gotten more complicated.

- [Narrator] Today, Starbucks says they make more than

a 170,000 different varieties of drinks.

- These beverages can be very complex.

They can take a while.

They can take many different ingredients.

And so it's good for Starbucks.

And that these tend to be higher price beverages,

but for workers, the baristas, they can be very complicated.

- [Narrator] The company's early investment in espresso

has transformed to many different signature drinks

from the creation of the frappucino

to the launch with a pumpkin spice latte.

- Pumpkin spice latte, high five it.

- They really didn't know

that it would take off like it did,

but clearly it is formed quite a phenomenon

all around the world really.

- We introduced pumpkin to spice, us here, Starbucks.

- One additional thing in Starbucks evolution is

cold beverages have become much more important

to the company, whether it's just an iced coffee

or a nitro iced coffee,

or all these cold foam and cold brewed.

Increasingly this is so important to their revenue,

the company has gone through periods where frappuccino sales

have softened, but they've come up with more cold drinks

to keep people interested and keep people ordering.

- [Narrator] In part due to the company's Seattle founding

technology has played a large role in the change dominance.

- A key moment of that was the founding of its mobile app

in 2009, which was very early

for one of these kinds of apps.

And they really saw this as a digital flywheel.

- At the end of 2021, mobile orders accounted for nearly

a quarter of all Starbucks transactions in the US.

Many of those purchased

through a virtual Starbucks gift card,

which was previously the only way

a customer could order on their phone.

Today, a little under one half or 44% of all transactions

at Starbucks are done with a Starbucks card.

In fact, so many Starbucks customers use a Starbucks card

or the Starbucks mobile app to purchase items

that Starbucks says it holds about $2.4 billion in cash

that was uploaded by customers to be used later.

That number exceeds the deposits at many American banks.

- Starbucks also gets a lot of data from that.

They own a lot of that data in a way that many companies

don't because they have created this whole ecosystem

where people are using the Starbucks app,

they're mobile ordering, and they're hooked into that

Starbucks unique proprietary system.

- [Narrator] As mobile payments rise,

Starbucks' business priorities have shifted.

Prior to the pandemic, approximately 80% of US Starbucks

transactions were on the go,

either as drive-through or mobile order.

- Starbucks started in cities,

but really has spread all around the country,

including the suburbs.

And a lot of that is through drive-thrus.

- [Narrator] These alternate pickup options

are becoming increasingly important

to the company's bottom line.

- [Woman] Especially during the pandemic.

I mean, these stores have been a lifeline to Starbucks

because they kept running and people could easily queue up

and go and not have to enter an actual cafe.

- [Narrator] Starbucks has long said that

"It remains committed to a set of values

established early in the company's existence."

- Starbucks is very committed to trying to create

a connection between its baristas and its customers,

even in its drive-thru.

They talk about this on earnings calls

that there are these customer connection scores.

They want to make sure that everyone is feeling good

about their Starbucks experience,

which is getting increasingly challenging

when you're ordering through a drive-thru or a mobile app.

You're trying to get in and out.

- [Narrator] Starbucks says, "Those values also appear

in the manner in which their stores are designed."

- The items you will find in the store,

they really choreograph that down to where the basket

of water is placed into a store.

They want this all to feel very similar.

- [Narrator] Starbucks has long touted its internal culture,

which it says is built on a strong relationship

between management and employees.

- The workers at it's stores are not called workers

or baristas they are called partners.

And this is very central to the company's ideology.

Part of that is that all these partners

do get shares in the company, it's called Beanstalk.

- [Narrator] That relationship may look different

going forward for some Starbucks locations.

After two of three Buffalo stores voted

in favor of unionization.

- [Narrator] Since then, Starbucks has thrown

a huge amount of energy and resources into this issue.

And executives have traveled to Buffalo extensively

to meet with workers, to try to understand their concerns

(indistinct) to the company.

They want to maintain this direct relationship

with their workers, they call unions an intermediary.

They do not want that relationship to be severed.

But according to these workers, they who support the union,

they want a more direct relationship with the company.

- [Narrator] In a statement to the "Wall Street Journal"

Starbucks said, "Starbucks's success past, present,

and future is built on how we partner together,

always with our mission and values at our core.

From the beginning, we've been clear in our belief

that we are better together as partners

without a union between us at Starbucks.

And that conviction has not changed."

- They are the world's biggest coffee chain.

They are very dominant when it comes to coffee sales,

and they are really synonymous with the coffee house culture

in a lot of ways, but they do face increasing pressures.

(upbeat music)

3

Answer these questions in your own words. Support your answers with evidence from the video.

01According to the video, what financial advantage does Starbucks gain from customers using its mobile app and gift cards?
Sample answerThe video explains that Starbucks holds about $2.4 billion in cash that customers have loaded onto their cards but haven't spent yet. This is a huge amount of money, even more than some banks have in deposits, which gives the company a significant financial benefit.
02Besides processing payments, in what way is the Starbucks app valuable to the company's strategy?
Sample answerThe app is also valuable because it allows Starbucks to collect a lot of customer data. The video says they've created their own 'ecosystem', which means they own this data and can use it to understand customer habits and keep them loyal to the brand.
03Why were drive-thrus described as a 'lifeline' for Starbucks, particularly during the pandemic?
Sample answerThey were called a lifeline because they allowed stores to continue operating and serving customers safely. People could simply queue up in their cars to get their orders without having to enter the physical cafe, which was crucial during that period.
04How does the video contrast Starbucks' official company culture with some of its recent challenges?
Sample answerThe video highlights a conflict. On one hand, Starbucks promotes a culture of connection with customers and calls its employees 'partners' who get company shares. On the other hand, it mentions that this connection is harder to maintain with fast drive-thrus, and the relationship with employees is being tested by recent unionization votes.
4

Vocabulary

Vocabulary
These expressions will help you communicate more naturally about this topic.
Examples
To gain a competitive edge — to achieve an advantage over other companies in the same industry.
Usage note: This is a common business collocation. You can gain an edge through innovation, by offering lower prices, or with better customer service.
To tap into a market — to access or start to use a new group of potential customers or a new area of business.
Usage note: This phrasal verb is often followed by 'a new market' or 'an untapped market.' For example, 'The company is trying to tap into the market for sustainable products.'
To foster customer loyalty — to encourage customers to repeatedly buy from your company instead of from competitors.
Usage note: This is a key goal in marketing. It's a more formal alternative to 'keep customers coming back.' Companies use loyalty programs and good service to foster loyalty.
A steady stream of revenue — a reliable and continuous flow of money coming into a company.
Usage note: This phrase emphasizes consistency. It's often used to describe business models based on subscriptions or frequent, repeat purchases, like the system described in the video.
To pivot one's strategy — to fundamentally change the direction of a business, usually in response to new information or market changes.
Usage note: This term implies a significant, not a small, change. For example, 'When the pandemic hit, many businesses had to pivot from in-person services to online models.'
5

Decide if each statement is true or false. Correct the false ones.

01Starbucks employees, known as 'partners', can receive company shares through a program called 'Bean-shares'.
02Even before the pandemic, the vast majority (around 80%) of Starbucks transactions in the US were for takeaway, through drive-thrus or mobile orders.
03The video suggests that Starbucks puts a lot of effort into making its store layouts feel consistent and carefully planned.
04Over half of all purchases at Starbucks are currently made using a Starbucks card.
05Starbucks measures and discusses the quality of the interaction between baristas and customers, even for drive-thru service.
6

Complete the sentences with words from the box. One word is extra.

Word bank
01A good rewards program is an effective way for a company to foster customer and encourage repeat business.
02By offering unique in-store experiences, the coffee shop hoped to gain a competitive over larger chains.
03Subscription models are popular because they provide companies with a steady and predictable stream of .
04The company launched a new line of vegan products to the growing market of health-conscious consumers.
05When their initial product failed to sell, the tech startup had to its strategy and focus on software instead of hardware.
7

Choose the best answer based on what you heard in the video.

01According to the video, the amount of money customers have loaded onto Starbucks cards and apps is significant because it...
02How has Starbucks' expansion strategy evolved from its early days?
03Why does the video mention that Starbucks calls its employees 'partners'?
04Which of the following is NOT mentioned in the video as a component of Starbucks' business strategy?
8

Business strategy in action

Complete the sentences to show you understand key concepts in corporate strategy.

Match the beginning of each sentence with its correct ending.

Drag or click to match
Definitions
9

Discuss these questions with a partner. Try to use vocabulary from the lesson.

  1. The video highlights that Starbucks offers over 170,000 drink varieties, which can be complex and time-consuming to make. Do you think this level of customization helps Starbucks gain a competitive edge, or does it risk slowing down service and hurting their brand in the long run?
  2. Starbucks successfully tapped into the American market by popularizing Italian espresso culture. Thinking about your own country, how have global coffee chains influenced or changed local cafe culture? Have local businesses had to pivot their strategy to compete?
  3. The video explains how Starbucks' gift card and app program creates a steady stream of revenue and fosters customer loyalty. Besides coffee shops, what other types of businesses do you think could successfully implement a similar 'digital wallet' model, and what are the most critical factors for making it work?