DMG0313 MANAGEMENT IN THE SERVICE INDUSTRY SEM: MAY 2014

INDIVIDUAL ASSIGNMENT 1
(50 MARKS)


You are required to read a case study entitled Starbucks in China and answer all the questions on the
case study. The answer sheets should not exceed 10 pages and must follow the format provided below.
You are free to look for references other than the case study. However, a maximum of 5 references are
allowed.

You will be assessed according to the marks given for each answer. Any students that do not follow the
format are subject to marks deduction. Plagiarism is strictly prohibited.


FORMAT


1. Cover page
i Font types : Arial
ii. Font size : 18
iii. Colour : PINK
iv. Details : Subject name and code, Assignment
Topic, Student name and ID

2. Report
i. Font types : Arial
ii. Font size : 11
iii. Spacing : 1.5


Submission date - 21
st
July 2014 (MONDAY)
*Any late submission would not be tolerated.













DMG0313 MANAGEMENT IN THE SERVICE INDUSTRY SEM: MAY 2014
CASE STUDY STARBUCKS IN CHINA

Company Overview

The first Starbucks was opened in Seattle, Washington in 1971 by three partnersEnglish
teacher Jerry Baldwin, history teacher Zev Siegel, and wrier Gordon Bowker. The three were
inspired by Alfred Peet, whom they knew personally, to open their first store in Pike Place
Market to sell high-quality coffee beans and equipment.

Entrepreneur Howard Schultz joined the company in 1982, and, after a trip to Milan, suggested
that the company sell coffee and espresso drinks as well as beans. The owners rejected this
idea, believing that getting into the beverage business would distract the company from its
focus. To them, coffee was something to be prepared in the home. Certain there was much
money to be made selling drinks to on-the-go Americans, Schultz started the Il Giornale coffee
bar chain in 1985.

In 1984, the original owners of Starbucks, led by Baldwin, took the opportunity to purchase
Peet's. (Baldwin still works there today.) In 1987 they sold the Starbucks chain to Schultz's Il
Giornale, which re-branded the Il Giornale outlets as Starbucks and quickly began to expand.
Starbucks opened its first locations outside Seattle in Vancouver, British Columbia, Canada (at
Waterfront Station) and Chicago, Illinois, United States that same year. At the time of its initial
public offering on the stock market in 1992, Starbucks had grown to 165 outlets.
The first Starbucks location outside of North America opened in Tokyo in 1996. Starbucks
entered the UK market in 1998 with the acquisition of the then 60-outlet Seattle Coffee
Company, re-branding all its stores as Starbucks. By November 2005, London had more outlets
than Manhattan, a sign of Starbucks becoming an international brand.

In April 2003, Starbucks completed the purchase of Seattle's Best Coffee and Torrefazione Italia
from AFC Enterprises, bringing the total number of Starbucks-operated locations worldwide to
more than 6,400. On September 14, 2006, it was announced by rival Diedrich Coffee that it
would sell most of its company-owned retail stores to Starbucks. This sale includes the
company owned locations of the Oregon-based Coffee People chain. Starbucks representatives
have been quoted as saying they will convert the Diedrich Coffee and Coffee People locations
to Starbucks stores.

As of November 2006, Starbucks had 7,102 company-operated outlets worldwide: 5,668 of
them in the United States and 1,434 in other countries and U.S. territories. In addition, the
company has 5,338 joint-venture and licensed outlets, 3,168 of them in the United States and
2,170 in other countries and U.S. territories. This brings the total locations (as of November,
2006) to 12,440 worldwide.



DMG0313 MANAGEMENT IN THE SERVICE INDUSTRY SEM: MAY 2014



Business Situation

The China push may be the ultimate test for Starbucks brand lifestyle-oriented marketing
approach. Starbucks China doesn't plan any advertising, promotions, or other marketing
strategies, aside from sponsoring an on-line coffee club and the occasional office-tower coffee
tasting. Instead, the company is counting on selecting such high-visibility, high-traffic caf
locations that they market themselves.

In Hong Kong and China, coffee is still more of a social event than a daily necessity, Starbucks
the world's leading retailer, roaster and brand of specialty coffee, opened its first store in
Beijing, capital of China in January 1999, it has quickly gained attraction amongst the Chinese
people. But in the five years that it has operated in Hong Kong, Starbucks has come to be
viewed as a destination restaurant rather than a coffee take-out establishment. The Chinese
perception is that coffee must be served with food. Starbucks is hoping to transform this
perception by marketing to its current customers to convert from tea to coffee and consume
coffee at least 10 times a month until it becomes a part of daily life. A spokesman from
Starbucks China made the following statement explaining the generalized Chinese notions of
coffee that Starbucks is hoping to transform. "Our sales per customer are higher than in the
United States -- they buy food with their coffee and they will stay in the store all night and
socialize if we allowed them to." Wu also said that less than 5 percent of the Starbucks business
in China that he oversees is cash and carry. They come here and make use of the store, which is
why they will pay a premium," said Wu.

Starbucks strategy has been to sell many other items such as coffee beans, mugs, music,
sandwiches and pastries. But in Hong Kong and China, that has yet to take off, CDs and whole
coffee beans are sluggish in China. In Hong Kong, the initial strategy was to sell coffee first and
in five years embark on other sales distributions channels.
At the present time the company has over 120 stores in the Chinese mainland and over 300
across Hong Kong and Taiwan. Citing China's large urban population, rising economy and
increase in coffee consumption, Starbucks estimates that China could ultimately be the largest
markets outside the United States.

For the short term, Starbucks regards Asia Pacific as its major target markets, which now has
over 1,200 stores and could ultimately have some 6,500 stores in the region, Wu said. For the
long term, the company plans to expand to 15,000 locations beyond the United States, he
added. The Chinese, though, are remaking the "Starbucks Experience."

Current Market Position and Financial Data

Starbucks opened 2,199 new stores in 2006 and total net revenues exceeded $7.8 billion for the
full fiscal year a 22% increase from 2005. Net earnings of $564 million a 14% increase compared
DMG0313 MANAGEMENT IN THE SERVICE INDUSTRY SEM: MAY 2014
to $494 million in fiscal year 2005. EPS of $0.73, compared to $0.61 per share in fiscal year
2005, an increase of 20 percent. Starbucks has a 7.25% profit margin and a beta of 1.24 analyst
rates the stock as a strong buy in today's market. Maxim's Caterers Ltd of Hong Kong is
Starbucks' joint venture partner in Hong Kong, Macau and southern China. Starbucks last year
increased its stake in the joint venture, Coffee Concepts (Southern China) Ltd, to 51% from 5%.
The new controlling interest of the partnership for Starbucks strengthens management control
and "reap substantial profits as the market grows", said Pei Liang, secretary general of the
China Chain Store and Franchise Association.

Looking forward for fiscal 2007 targets include the opening of approximately 2,400 net new
stores on a global basis, total net revenue growth of approximately 20 percent, comparable
store sales growth in the range of three percent to seven percent and earnings per share in the
range of $0.87 per share to $0.89 per share for the fiscal year.


ANSWER ALL QUESTIONS

TOTAL MARKS: 50

1. Explain the importance of strategic management as an overview to the Starbucks
situation in China
(8 marks)


2. Describe the strategic management process chronologically.
(12 marks)


3. Provide a SWOT analysis of Starbucks based on the case study.
(12 marks)


4. Should Starbucks continue its expansion in China? Give reasons for your choice of
answer.
(6 marks)


5. Based on the strategy levels you studied in Chapter 6, what business-strategy levels that
can be implemented by Starbucks to improve its profits.
(8 marks)


6. In your opinion, what lesson does this case have for other multinationals that want to
enter the Chinese market?
(4 marks)