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In this report, we focus on Starbucks , a successful giant in the ready-to-drink beverage industry, and analyze the following questions:

(1) Reviewing Starbucks’ development history in North America, and discussing the problems and success factors that a ready-made beverage chain may encounter in its development from the perspectives of stock price and operation;

(2) Review the successes and failures of Starbucks’ international expansion, with a focus on how the mainland China market became the second growth engine to drive performance growth.

Starbucks was founded in Seattle, USA in 1971. It was originally a coffee trader, operating the sales business of coffee beans and coffee machines. In 1987, Schultz, the soul figure, bought out the equity and took over to become a chain coffee shop that provides freshly ground drinks. In 1999, 2000, and 2002, it established joint ventures with Handing Asia Pacific, Taiwan Uni-President, and Hong Kong Maxim's to enter the mainland and Hong Kong and Macau, and then gradually recovered its equity. In 2017, Starbucks acquired the remaining 50% of Shanghai Uni-President Starbucks for US$1.3 billion, marking that all 3,521 Starbucks stores in China have become self-operated stores. The current market value is US$101.2 billion, making it the largest restaurant company in terms of market value besides McDonald's (MCD). Since its listing, the compound return rate of the stock price has reached 22%.

In the fourth quarter of 2019, Starbucks' financial performance remained outstanding. During the reporting period, Starbucks' global total revenue was US$6.75 billion, a year-on-year increase of 7%; net profit attributable to the parent was US$803 million, a year-on-year increase of 6.2%. During the reporting period, the North American region's revenue was US$4.65 billion, accounting for 69% of the total revenue, a year-on-year increase of 9.2%; the mainland, Hong Kong and Macau region's revenue during the reporting period was US$763 million, accounting for 11.31%, a year-on-year increase of 14%. As of the fourth quarter of 2019, Starbucks had a total of 31,256 stores worldwide, 18,067 in North America, and 4,125 in mainland China, Hong Kong and Macau. During the reporting period, global same-store sales increased by 5%, same-store sales in the United States increased by 6%, and same-store sales in mainland China, Hong Kong and Macau increased by 5%. Behind the outstanding financial performance is the solid competitive barrier forged by a successful ready-made beverage company.

1. Review of Starbucks’ development history in North America

Reviewing Starbucks' development history in North America, we found that for ready-made beverage companies, the core competitive advantage is brand power; product innovation is the key to bringing continuous revenue growth and attracting potential customers; the first-mover advantage of store location is important and will become a scarce resource as competitors enter the market; supply chain construction is the basis for forming economies of scale; standardization of processes and the updating of machinery and equipment are the key to ensuring product quality and reducing cost rates; brand recognition and loyal customer base are the guarantee of long-term development. As one of the leaders in the global ready-made beverage industry, Starbucks has stimulated the market demand for high-quality boutique coffee and established standards for product quality, service level, and ethical procurement of raw materials for the boutique coffee industry.

1. 1971-1992: From its inception to its transformation and financing and listing

Starbucks was born with the emergence of the concept of boutique coffee in the United States. In the early days, it was positioned as a regional boutique coffee bean and coffee equipment retailer, and accumulated a good reputation in the local area through high-quality products. In 1982, Howard Schultz, the soul of Starbucks, joined the company. Inspired by Italian coffee shops, he discovered the potential market demand for freshly ground coffee drinks, so he combined the taste of high-quality coffee with leisure attributes, stimulating the market demand for optional leisure consumer goods.

1. 1971-1987: Specialty coffee emerged and Starbucks was born

The concept of boutique coffee was introduced to the United States. In the 1950s, the American coffee consumption market was still dominated by instant coffee, which was basically produced through the spray drying process. The coffee powder was obtained by drying the concentrated coffee liquid with hot air, which affected the original aroma of the coffee and made the taste bland and bitter. Dutch-American Pete was the son of a coffee roaster. He grew up in an environment where he drank high-quality coffee. After coming to the United States, he could not tolerate the low-quality synthetic coffee that was widely consumed at the time. In 1966, he opened a store in California, USA, selling freshly roasted high-quality Arabica coffee beans. He used a deep roasting method, which took longer to roast, and the moisture in the coffee beans was evaporated, making the taste stronger and richer, which was in sharp contrast to the bland coffee taste on the market at the time. In addition to selling roasted coffee beans, he also communicated with customers about coffee roasting and brewing techniques, and gradually cultivated the local people's understanding of boutique coffee.

Starbucks was born, positioned as a regional specialty coffee bean retailer, and its high-quality products accumulated brand and reputation. In 1971, three young men, Zev Siegl, Jerry Baldwin, and Gordon Bowker, were inspired by Peet's Coffee House. Each of them invested $1,350 and borrowed $5,000 from the bank to build the first Starbucks store in Seattle, mainly selling specialty coffee beans and coffee equipment. The coffee beans were sourced from Peet's Coffee House. Starbucks' specialty coffee was very popular in the local area, and by 1982, it had 5 stores.

At the same time, a vice president of a kitchenware company noticed a large number of coffee machine orders from Starbucks. After a field visit, he became very interested in Starbucks coffee. He was Howard Schultz. In 1982, he joined Starbucks' retail operations and marketing department. In 1983, Schultz went to Italy and was inspired by the social atmosphere of Italian coffee shops. He decided to develop a similar boutique coffee shop culture in the United States. However, because the founder of Starbucks was unwilling to sell coffee drinks, Schultz left Starbucks in 1985 and established Il Giornale, which began to provide lattes and other Italian espresso drinks made with milk. The taste was suitable, and the large cup capacity was more in line with people's drinking habits from instant coffee. Il Giornale was enthusiastically sought after by people at the time. At that time, the sales of the three stores had reached an average annual sales of US$500,000, which laid the foundation for Schultz's later financing.

2. 1987-1992: Changing positioning and entering the blue ocean market

Schultz acquired Starbucks and expanded to other cities in the coffee shop chain model. In 1987, Tiantian Coffee House had 5 stores. Schultz raised $3.8 million to acquire the six existing Starbucks stores, merged all stores under Starbucks, and began to expand to capital cities such as Chicago. By the end of 1987, the total number of Starbucks stores reached 17. The merged Starbucks continued to use Tiantian Coffee House products, selling coffee drinks and specialty coffee beans.

High-quality innovative products stimulate demand and drive revenue growth. Starbucks launched coffee products such as latte, cappuccino, and flat white, which changed the original bitter taste of coffee. Deeply roasted coffee beans are combined with sugar and milk to make rich and strong coffee drinks, stimulating the market demand for boutique coffee. Coffee drinks are highly addictive in themselves, and with the added refreshing effect, they can easily become rigid needs, forming high customer stickiness. In addition, the production process is relatively simple and fixed, easy to standardize, and highly reproducible. In addition, the required raw materials are simple, making it possible to promote boutique coffee on a large scale. Stores are easy to expand in the form of chain coffee shops, and the cost is more controllable when large-scale production is carried out.

Based on the in-store experience, creating the third space, the leisure attribute enhances the product value. In the 1990s, the United States was rich in productivity, the baby boomers were in their prime, and the per capita disposable income increased year by year. Compared with the per capita disposable income of US$21,542 in 1980, the per capita disposable income in 2000 was US$33,568, an increase of 56%. The increase in income has stimulated people's demand for quality life and leisure needs after busy work. Starbucks' third space meets people's needs for socializing or being alone by bringing together high-end store decoration, relaxing music, soft lighting, and high-quality coffee. At the same time, the unique in-store design also enhances the coffee experience. Starbucks adopts a semi-open bar, where customers can communicate with baristas while tasting hand-brewed coffee, which invisibly enhances the value of coffee.

In 1990, Starbucks' core management team was formed and stabilized, with complementary capabilities and rich experience. Howard Schultz, Orin Smith, and Howard Behar formed the core management team of Starbucks. Before joining Starbucks, Howard Schultz was the vice president of a Swedish kitchenware company and had extensive experience in marketing and sales; Orin Smith was the budget director of Washington State and had a strong financial background; Howard Behar proposed the concept of "people-oriented", employees are partners rather than labor costs, and customers are service objects rather than profit sources. These concepts have become the basis of Starbucks' corporate culture and employee management.

The employee incentive mechanism is in place, and performance is linked to personal income. Starbucks is one of the first companies in the United States to provide medical insurance to all employees. In 1988, Starbucks began to provide comprehensive medical health insurance to all full-time and part-time employees. In 1991, Starbucks launched the Coffee Bean Incentive Plan, becoming the first private company in the United States to provide a stock plan to all employees, including part-time employees. Employees who work part-time for more than 20 hours a week have the opportunity to hold Starbucks coffee bean stocks (Bean Stock) and enjoy a series of salary and welfare programs.

Starbucks' revenue grew rapidly and its performance was good . From 1989 to 1992, Starbucks' total revenue grew from $19.2 million to $103.2 million, with a CAGR of 75%. Net profit grew from -$12 million to $45 million, with a CAGR of 256%. The increase in revenue came from the increase in the number of stores and high same-store growth. The high year-on-year growth in the number of stores and same-store sales came from high-quality products and unique in-store experiences. In 1990, 1991, and 1992, the same-store growth was 21%, 17%, and 19%, respectively. At the end of 1992, the total number of Starbucks stores reached 165.

(II) 1992-2000: Deepening regional development and building brands

1. Operating performance and valuation jointly drive high growth in market value and stock price:

In 1992, Starbucks went public. From 1992 to 2000, Starbucks' market value rose from US$144 million to US$8.327 billion, with a CAGR of 66%, and its share price rose from US$0.37 to US$4.74, with a CAGR of 37%. During the same period, the CAGRs of EPS and P/E were 42% and 10% respectively, with obvious double-clicks, and performance-driven valuation increases. In the early stages of Starbucks' development, its stock price was driven by both performance growth and high valuations. The unique third space + freshly ground high-quality coffee beverage model was favored, and it was expected to have high future growth, great potential, and broad development space.

2. Operational level: Deeply cultivate the region, scale effect forms a strong brand power, and builds core competitive barriers

During this period, Starbucks insisted on deepening its regional presence, gradually expanding from the Midwest of the United States to cities on the East Coast, rapidly increasing the number of stores in each city, forming economies of scale, and improving brand awareness. After gradually forming its brand, the company's bargaining power increased, thus forming a low-rent model; experiential marketing and the output of the company's positive and friendly culture reduced advertising expenses, increased customer recognition, and gradually formed a loyal customer base; product innovation capabilities became the driving force behind the company's stable revenue growth.

Same-store growth + rapid store opening drive revenue growth. From 1992 to 2000, Starbucks' revenue grew from $103 million to $2.169 billion, with a CAGR of 46%, and net profit grew from $45 million to $95 million, with a CAGR of 46%. After financing and listing in 1992, the total number of Starbucks stores increased from 165 to 3,501 in 2000, with a CAGR of 47%. The growth rate of Starbucks' stores in North America far exceeded that of its competitors Seattle's Best Coffee and Diedrich Coffee in the same period. The former was acquired by Starbucks for $72 million in 2003. In 2003, Starbucks had a total of 5,630 stores in North America, Diedrich Coffee had 417 stores, and Seattle's Best Coffee had only 129 stores.

Strong product innovation capabilities and unique service models have led to high same-store sales growth and year-on-year growth in the number of stores. From 1990 to 1994, Starbucks' same-store sales growth was 21%, 17%, 19%, and 19% respectively. In 1994, as Starbucks expanded to the East Coast, same-store sales growth declined, but as the new store model stabilized and the business model matured, same-store sales growth remained stable at around 6%.

The increase in the number of stores is centered on the region, spreading from the capital cities of each state to surrounding cities, and sinking from first-tier cities to second- and third-tier cities. Before 1994, it mainly covered large cities in the Midwest of the United States. After 1994, it began to expand to the East Coast through the acquisition of Boston's The Coffee Connection. The strategy of opening stores densely in the region increases customer reach, improves regional influence, and forms a brand. At the same time, the formation of brands and reputations in large cities has a radiating effect on surrounding cities, accelerating sinking. Develop franchise stores through multiple channels and expand traffic entrances. Starbucks initially developed franchise stores mainly in places with huge traffic such as airports, hotels, universities and hospitals. Starting in 1999, Starbucks reached a franchise agreement with Kraft Foods and began to sell coffee beans in supermarkets and other stores, with Kraft responsible for transportation, promotion and sales. Franchise income includes franchise fees, royalties, and income from coffee bean resales. Franchise stores must abide by the same operating rules as direct stores, and all employees working in franchise stores need to receive Starbucks unified training. The various scenarios of franchise stores increase Starbucks' brand exposure and customer reach.

The scale effect is prominent, the bargaining power of the supply side is improved, and the cost rate is reduced. The large-scale raw material procurement demand forms a scale advantage and improves the bargaining power of the upstream raw material procurement side. At the same time, Starbucks stabilizes the procurement price by adopting a fixed price procurement contract to avoid the cost risk caused by short-term coffee bean transaction price fluctuations. The stability of the store opening model and the standardization and standardization of store management processes have reduced the proportion of management expenses. In 1990, Starbucks' raw material cost ratio and management expense ratio were 43.14% and 11.65% respectively, which dropped to 37.92% and 5.08% in 2000. Starbucks' raw material costs mainly include the expenditure of raw materials such as coffee beans and milk for making coffee drinks, as well as the distribution and transportation costs of raw materials. Store operating expenses mainly include in-store labor cost expenditures, equipment investment, in-store marketing and advertising expenses, new product promotion expenses, etc.

The brand effect is formed, and strong rent bargaining power becomes the driving force for profitability. Starbucks has rapidly increased the number of stores by deepening its presence in the region, and has formed its brand by exporting high-quality products and positive corporate culture. The high-quality brand positioning and good corporate image have made Starbucks' entry a driving force for the development of businesses around the community, so it can obtain lower rents. In 1990, Starbucks' rent accounted for 6.78% of its direct store revenue, which dropped to 4.87% in 1995, indicating that the company's brand effect in North America has gradually formed, and the low-rent model has improved the company's profitability. In 1996, Starbucks began to explore the international market, so the rent ratio rebounded. Compared with other chain coffee brands of the same period, Starbucks has a clear advantage in rent ratio. For example, from 1998 to 2000, Peet's Coffee's rent ratio was 0.18%, 1.28% and 1.53% higher than Starbucks respectively.

Establish roasting and distribution factories with regions as the core, and control the supply chain transportation system. While maintaining the high growth rate of the number of stores, Starbucks has established roasting factories and warehouses in different regions, responsible for coffee bean roasting, manufacturing and packaging, warehousing and distribution, covering stores in surrounding cities, effectively reducing transportation and distribution costs, while ensuring the supply of fresh coffee beans in stores.

3. Product and service upgrades enhance customer experience, build brand awareness and a loyal customer base

High-quality raw materials guarantee product taste. Coffee beans are the soul of coffee drinks, and Starbucks has paid great attention to the research and development of coffee bean flavors since the beginning. In 1975, Starbucks invited Dave Olsen, a famous Seattle coffee master, to develop the rich-flavored Espresso Roast (espresso roasted coffee beans), which later became the base of coffee drinks such as latte and is still used today. Later, Starbucks gradually adopted high-quality coffee beans from different origins around the world to enrich the taste of coffee to the greatest extent, making boutique coffee a brand with its origin as its characteristic.

Product flavor innovation stimulates demand and forms a star product. In the summer of 1995, Starbucks began to offer Frappuccino in stores. This innovative blended coffee drink attracted customers who were not accustomed to the taste of mellow coffee, stimulated the market demand for cold drinks such as coffee milkshakes, and created popularity for the company. Frappuccino sales accounted for 11% of the total product sales in the summer of that year, becoming one of the company's most popular products. Driven by revenue, the company's stock price increased significantly in the summer of 1995. Starbucks subsequently continued to innovate the flavor of Frappuccino, making it a star product and a stable revenue growth engine.

Experiential marketing enhances customer stickiness and establishes a good reputation. Compared with fast food companies such as McDonald's, Starbucks' advertising expenditure has remained at a stable low level, mainly due to the upgrade of in-store experience and the stable output of the company's positive culture. In addition, fast food companies such as McDonald's and KFC have many terminals and franchise stores, so they need to increase exposure and provide brand support to franchisees. At the same time, the fast food industry is highly competitive and the product iteration speed is fast, so it is necessary to continuously launch new products and increase advertising to attract customers. In contrast, Starbucks stores are both business locations and company marketing and customer acquisition channels. Good service is the key to increasing product repurchase rates. Starbucks attaches importance to the communication between store employees and customers, creating a relaxed, equal and friendly social atmosphere, and gradually forming a stable and loyal customer base. At the same time, the company's high-exposure store location, eye-catching and unified store decoration, iconic company logo design, and derivative peripherals such as Starbucks cups and T-shirts, etc., all of which have virtually reduced Starbucks' marketing costs, increased exposure and attention, and enhanced customer stickiness.

2000-2008: Schultz left, the company expanded blindly, and neglected its core products and in-store experience

When a chain of ready-made beverage companies develops, the internal problems they encounter may be the pursuit of rapid expansion while ignoring product quality and in-store experience. The product quality and service level of franchise stores cannot be guaranteed to be consistent with those of directly-operated stores. The rapid increase in the number of new stores has brought revenue and diversion pressure to mature old stores. The company's core values ​​and management strategies have changed and are not in line with the company's existing brand recognition. In 2000, Schultz, the soul of Starbucks, no longer served as CEO of Starbucks, and former Chief Operating Officer Orin Smith became CEO. Starbucks has been opening up new areas while increasing the number of stores in cities it has entered. While the number of directly-operated stores and franchise stores has increased rapidly, the in-store experience and service level have been ignored. In 2008, the company's net profit fell 53% year-on-year, and global same-store sales were negative for the first time.

1. Market value changes are driven by valuation, and revenue growth slows down as scale expands

From 2000 to 2008, Starbucks' market value dropped from 8.327 billion US dollars to 6.958 billion US dollars, a decrease of 16%, and its stock price dropped from 4.74 US dollars to 4.06 US dollars, a decrease of 14%. From 2000 to 2008, EPS value increased by 176%, and P/E value decreased by 89%. During this period, the changes in the company's market value and stock price were mainly affected by the decline in valuation.

Changes in revenue and net profit are mainly affected by scale expansion. From 2000 to 2004, the company continued to maintain high year-on-year growth in revenue and net profit, benefiting from the increase in the number of stores. From 2005 to 2008, the year-on-year growth rate of revenue and net profit slowed down, and the pressure brought by scale expansion became apparent. In 2000, Starbucks' revenue was US$2.169 billion, and in 2008, it was US$10.383 billion, with a CAGR of 22%. In 2000, Starbucks' net profit was US$95 million, and in 2008, it was US$316 million, with a CAGR of 16%.

2. Operational level: From 2000 to 2004, the scale effect continued to benefit the company, maintaining a high growth rate in profits; the construction of the upstream supply chain ensured product quality.

The franchise model achieves rapid expansion at a low cost rate. Compared with the direct operation model, the company has less investment in franchise stores, low risk, and can achieve rapid expansion. From 2000 to 2008, the number of Starbucks franchise stores increased rapidly in both North America and the international market. In 2000, Starbucks had a total of 882 franchise stores, of which North America accounted for 60%. In 2008, the total number of franchise stores increased to 7,463, of which North America accounted for 65%. From 2000 to 2008, the proportion of franchise stores in the total number of stores increased from 25% to 45%. Starbucks adopts a multi-format giant franchise model and uses high-quality franchisees to enhance brand power. Starbucks franchisees are mostly companies with large scale, mature business models, sufficient funds, and good reputation in the local area. Taking the United States as an example, Starbucks franchisees include American retail chain Target, grocery chain Albertsons, Macy's, Disney, etc. The franchisees are quite large, with sufficient customer flow and superior store locations.

While the franchise model can rapidly expand the company's scale, it also presents potential problems. Whether the company can meet the same standards as the directly-operated stores will affect the company's brand and image . This includes whether the company can provide the same in-store experience and whether the product quality can be guaranteed to be consistent. For franchisees, Starbucks stipulates store design, decoration style, advertising, beverage menu, etc., and provides the same employee training process as the directly-operated stores. The store employees are independently managed by the franchisee. Starbucks provides all the products sold in the store and the coffee beans used. Franchisees need to follow Starbucks' store operating guidelines. The sources of income for Starbucks franchise stores include franchise fees, royalties, advertising fees, and income from the resale of Starbucks products in the store.

Open up the supply chain from coffee bean plantations to stores, ensuring product quality and stable supply from the cost side.

1) Stabilize the purchase price of raw materials through fixed-price purchase contracts to avoid the impact of short-term coffee bean price fluctuations. As one of the internationally traded commodities, coffee beans have large price fluctuations. The control of raw material purchase prices by enterprises directly affects the profit level. In 1996, Starbucks began to use fixed-price contracts to purchase coffee beans, determine the coffee bean transaction quantity and price in advance, reduce the impact of raw material price fluctuations, and reduce risks. For example, the fluctuation of coffee bean prices from 2009 to 2011 did not affect Starbucks' profit level. The average price of coffee beans in 2009 was 1.26 per pound, and the average price of coffee beans in 2011 was 2.53 per pound, with a CAGR of 42%. Starbucks' operating profit in 2009 was US$562 million, and the operating profit in 2011 was US$1.729 billion, with a CAGR of 75%.

2) Starbucks has established coffee grower support centers around the world to lock in upstream high-quality coffee bean resources. Starbucks provides local coffee farmers with knowledge training and technical support on coffee planting and processing, and uses professional technology to help local coffee farmers choose reasonable planting sites, improve coffee quality and yield, and grow high-quality coffee beans while protecting the environment. In 2004, Starbucks established its first coffee grower support center in San Jose, Costa Rica. Currently, Starbucks has a total of 9 coffee grower support centers around the world.

3) Starbucks began to establish the CAFE Regulation (Coffee and Farmer Fairness Regulation) in 2001. Leading enterprises output standards for the industry: CAFE is a set of standards for evaluating and assessing coffee bean suppliers, advocating sustainable development and fair trade in coffee bean cultivation, and producing high-quality coffee while protecting the environment and improving farmers' lives. The CAFE Regulation scores suppliers based on four aspects: product quality, economic responsibility, social responsibility, and environmental leadership. Suppliers are divided into strategic suppliers, preferred suppliers, and certified suppliers. Starbucks only accepts coffee beans from certified farms. This is the first set of comprehensive sustainable development standards in the coffee industry, which has a huge impact on the standardization and transparency of upstream coffee bean procurement in the industry. Starbucks guarantees a high-quality and sustainable supply of coffee beans and cooperates with upstream coffee farmers with its first-mover advantage.

3. Operational level: From 2004 to 2008, the disadvantages of rapid expansion began to emerge, and the revenue growth rate declined.

While opening stores quickly, the in-store experience was ignored. Same-store sales declined as the number of stores increased. The high growth rate of profits before 2004 came from the high year-on-year growth in the number of stores and same-store sales. However, as the number of stores increased, new stores put pressure on old stores to divert traffic. Same-store sales began to decline year by year in 2004. In 2004, the company's same-store sales were 10%, and in 2008 it dropped to -3%. At the same time, Starbucks began to use packaged pre-ground coffee powder to make coffee drinks in stores around 2000, which greatly reduced the fresh taste of coffee. In 2005, it began to provide heated breakfast sandwiches in stores. Although sales were considerable, it reduced the original operating efficiency and increased the time customers waited for drinks.

The increase in stores has led to a decline in store operating efficiency and an increase in the proportion of various costs and expenses . As Starbucks has established baking factories and distribution warehouses in different regions, the increase in store density in the region will put pressure on the logistics and distribution system. The increase in logistics costs such as distribution and transportation will affect the profit margin. The cost of goods sold disclosed in Starbucks' financial report includes raw material costs (including distribution and transportation costs) and store rent. In 2001, the cost of goods sold in Starbucks North America accounted for 40.93%, and this ratio rose to 42.75% in 2008. In 2001, the operating expenses of Starbucks stores in North America accounted for 32.85%, and in 2008 it rose to 39%. Due to the increase in the number of stores, the cost of labor training and the investment in in-store equipment increased.

Focusing on expanding existing product lines, product innovation capabilities declined. From 2004 to 2008, Starbucks expanded its original Frappuccino product line and added a variety of Frappuccino flavors, but rarely launched new coffee drinks, and new products were mainly tea drinks. The popularity of the original star products gradually declined, and due to their high replicability, they were easily replaced by similar drinks from other brands. From 2005 to 2008, Dunkin' Donuts, Burger King and McDonald's successively launched a variety of flavors of iced coffee drinks, impacting Starbucks' original market share.

(IV) 2008-2019: Schultz returns, strategic adjustments, and returns to the top

1. Improved operating performance and stable high valuations jointly drive the market value to rise, and multiple stock repurchase plans boost the stock price

In 2008, Schultz returned to Starbucks as CEO and proposed to return to the core coffee business and improve the in-store experience. He proposed Starbucks' new mission: to inspire and nurture the humanistic spirit and advocate for every person, every cup, and every community. Since 2009, the stock price and market value have gradually recovered. In 2008, the market value and stock price were US$6.958 billion and US$4.06, respectively. On September 30, 2019, the market value and stock price were US$105.839 billion and US$88.42, respectively. The market value increased by 1421%, with a CAGR of 28%, and the stock price increased by 2080%, with a CAGR of 32%. During this period, the stock price was driven by both operating performance and valuation. From 2008 to 2019, the company's EPS and P/E had a CAGR of 34% and 7%, respectively. The company's multiple stock repurchase plans since 2008 have also boosted its stock price. From 2008 to 2019, the cumulative number of repurchased shares was 432 million, with a total amount of approximately US$25.9 billion.

2. Operational level: Schultz reshapes Starbucks' values ​​and returns to the core business of the store

Streamlining the number of stores, reducing a large number of directly-operated stores, and slowing down the expansion of franchise stores. In 2009, the company closed 430 directly-operated stores in North America, accounting for 5.4% of the total number of directly-operated stores in North America. The slowdown in the number of stores has led to a significant increase in same-store sales growth. In 2009, the global market and North America had a same-store sales growth of -6%, which rose to 7% in 2010. During this period, the number of franchise stores grew slowly, with only 166 franchise stores added in North America between 2008 and 2012.

Actively innovate products, launch new flavors of coffee beans and instant coffee series, and add new types of meals. In 2008, Starbucks launched Pike Place Market roasted coffee beans, which are medium roasted coffees with neutral acidity and body. The taste is balanced and rich but not too strong, which better meets the taste needs of the public. In 2009, Starbucks launched the Starbucks VIA™ Ready Brew instant coffee series. In 2008, Starbucks began to provide healthy breakfast series such as oatmeal porridge in stores.

Equipment updates improve store operating efficiency and upgrade in-store coffee machines. In 2008, Starbucks acquired the five-star coffee machine company Coffee Equipment Company and began to use the Clover® series of single-cup brewing coffee machines, using innovative vacuum pressing technology to brew coffee, automatically controlling brewing time and temperature to improve the taste of coffee. At the same time, Starbucks replaced the original coffee machine with a fully automatic espresso machine Mastrena, which automatically controls coffee extraction time and temperature, saves production time, and ensures the consistency of the taste of coffee drinks. In 2008, the company's store operating expenses accounted for 36%, which dropped to 29% in 2018.

Corporate values ​​are the foundation of a company's long-term development, and customers' recognition of corporate values ​​is more likely to generate brand premium. Starbucks uses humanistic spirit as a starting point to output corporate values ​​and insists on creating the best customer experience and high-quality coffee. After Schultz returned, he advocated reshaping the in-store experience. In 2008, Starbucks closed 7,100 stores across the United States to conduct 3 hours of coffee knowledge and service level training for store employees. In May 2018, the store was closed for half a day again for anti-racial discrimination training. Schultz also insisted on returning to using freshly ground coffee beans to make coffee in Starbucks stores, and changing them every 30 minutes (originally every 90-120 minutes), which improved the taste of coffee drinks.

Pay more attention to customer feedback, cultivate loyal user groups through online communities, and improve corporate innovation capabilities by collecting user ideas. In 2008, Starbucks established the My Starbucks Idea website to collect customers' ideas on product taste, in-store experience, membership cards, in-store design, corporate social welfare, etc. Users can interact with other users online and vote for other people's ideas. Ideas with high votes will be adopted by the company. Successfully monetized products include star items such as Matcha Cocoa Flakes Frappuccino and Pumpkin Velvet Latte.

The membership system increases user stickiness, cultivates consumption habits, and improves product repurchase rates. Starbucks launched the My Starbucks Rewards project in 2008. Members can upgrade their levels through consumption points. As their levels increase, they can get more rewards, thereby stimulating consumer demand. In 2018, the average annual consumption of a single member was US$349, and the average annual consumption of a single non-member was US$123. The proportion of Starbucks member revenue has increased year by year. In 2013, the proportion of member revenue was only 23%, and it rose to 42% in 2019. In 2019, the number of active member users in the United States reached 17.6 million, accounting for 19% of the total number of users.

For catering companies, good products are delivered through people, so the management of people is crucial. In Starbucks, every employee is called a "partner". Whether full-time or part-time, they can enjoy a series of compensation and benefits programs, including stock incentive plans, housing allowances, medical insurance, and even welfare plans for parents and family members. The welfare plan improves employees' sense of corporate identity and work enthusiasm.

Good employee management and incentive mechanisms are the basis for improving customer experience. Starbucks has established a comprehensive talent training program for employees at different levels, including star barista training program -> duty supervisor training program -> store manager training program -> regional manager training program, with a clear internal career promotion path. The level of baristas is distinguished by the color of the aprons, green apron: star barista -> black apron: coffee master -> brown apron: coffee minister. The unique advancement mechanism encourages employees to continue to learn coffee knowledge and improve their coffee making skills.

Starbucks advocates social sustainability and is the first company in the industry to use recyclable materials to make paper beverage cups. In 2011, it opened its first community store in the United States. As part of Starbucks' plan to support the economic development of youth and underdeveloped areas, each community store employs women or disadvantaged groups as employees. Starbucks also encourages employees to give back to society through community service. For coffee beans, Starbucks insists that 99% of coffee beans are purchased in an ethical manner. By investing in coffee communities, sharing coffee planting techniques with coffee farmers and creating new methods of coffee planting, coffee has become the world's first sustainable agricultural product.

Starbucks returns to shareholders through stock repurchases and dividends every year. In 2019, Starbucks returned $12 billion to shareholders (stock repurchases and dividends combined), in 2018, Starbucks returned $8.9 billion to shareholders, and in 2017, it returned $3.5 billion to shareholders. The high dividends stabilized investor confidence and formed a stable equity structure. From 2014 to the present, BlackRock Group and Vanguard Group have steadily held more than 10% of Starbucks shares, and their shareholding ratio has increased year by year.

Schultz's reforms have achieved remarkable results. Starbucks' operating performance has begun to improve significantly and maintain a sustained growth trend . From 2008 to 2019, the company's revenue increased from US$10.383 billion to US$26.509 billion, with a CAGR of 9%, and net profit increased from US$316 million to US$3.599 billion, with a CARG of 25%.

2. The road to global expansion: Mainland China becomes the top priority of global strategy

1. Internationalization process:

In 1996, the opening of the first Starbucks in Japan marked the beginning of Starbucks' international expansion. In the following years, Starbucks gradually entered other Asian markets, Europe, Africa, Latin America and other regions. Before 2000, Starbucks mainly expanded in the Asian market, entering China, Singapore, the Philippines, Malaysia, Thailand, South Korea, as well as the United Kingdom, Australia and other countries. After 2000, Starbucks gradually entered European countries such as Germany, France, and Spain. After 2009, Starbucks' international market revenue share began to stabilize at a relatively high level because of Schultz's return. He focused international expansion on countries with huge development potential and broad market space, such as India and China, and withdrew from markets with poor management and continuous losses. In 2008, Starbucks closed 64 directly-operated stores in Australia, and in 2010, Starbucks closed 65 directly-operated stores in the UK.

2. Mainland China Market – The Second Engine Driving Growth

In 1999, Starbucks opened its first store in mainland China and Hong Kong and Macao. Starbucks operates in mainland China and Hong Kong and Macao by first joining the joint venture and then gradually reclaiming the equity of the joint venture company . It chose to understand the local market, have large business scale and mature business model and granted agency rights. It established Beijing Meida Starbucks Coffee Co., Ltd. in North China with Handing Asia Pacific, and granted agency rights to Beijing Meida Starbucks North China. It jointly established Shanghai Unicom with Taiwan Unicom Group in East China and granted agency rights to Jiangsu, Zhejiang and Shanghai. It jointly established Meida Starbucks with Hong Kong Meixin Company and granted agency rights to its southern and Hong Kong and Macao regions. In 2003, Starbucks began to gradually reclaim its equity and switch to direct operation and strengthen control. In 2003, Starbucks increased its shareholding in the Shanghai joint venture, from the original 5% to 50%; in 2005, it acquired Meixin Starbucks shares to 51%; in 2006, Starbucks increased its shareholding in North China to 90%, and its stores in North China were directly operated; in 2011, it acquired the remaining 30% of the shares held by Meixin Group, and obtained 100% ownership of cities such as Guangdong, Sichuan, Chongqing, and Hubei; in 2017, the company reclaimed the remaining 50% of the shares of Shanghai Uni-Starbucks and obtained 100% control of the East China region.

In the fourth quarter of 2019, the company's financial performance in mainland China and Hong Kong and Macao regions was outstanding, with revenue of US$763 million, a year-on-year increase of 14%, accounting for 11.31% of the company's total revenue in the current period. As of the fourth quarter of 2019, the total number of stores in mainland China and Hong Kong and Macao regions reached 4,125, accounting for 13.2% of the total number of Starbucks stores. In the fiscal year 2019, same-store sales in mainland China and Hong Kong and Macao regions increased by 4%.

Reviewing Starbucks China's development history, we found that good products and good services are still the basis for the development of freshly made beverage companies ; innovations on the supply side of products and services will stimulate potential market demand; the leisure attribute bonus of optional consumer products can increase customers' willingness to purchase; opening up the industrial supply chain and standardizing production process can reduce cost and expense rates and improve operational efficiency; the bonus of scale effect is conducive to forming a good brand and reputation. Since freshly made beverage products themselves have strong replicability and the industry's entry barriers are low, so brand power will become the company's final moat.

In the early stage of Starbucks entering the mainland market, the market space is vast and consumption habits need to be cultivated. Before 1999, the coffee consumption market in mainland China was still dominated by instant coffee, with cheap prices and mediocre taste. Although the form of freshly ground coffee and third space has appeared in some restaurant coffees, it has not formed strong brands and chain enterprises. Consumers have a low awareness of fine coffee, and consumption habits have not yet been formed. However, the economy of domestic first- and second-tier cities has developed rapidly, consumption dividends are huge, and consumption upgrade trends have emerged. People's demand for casual consumer goods increases with the increase of disposable income and working hours. The fine coffee market is still a blue ocean market at this stage.

High pricing + high-quality products create a high-end brand positioning. Starbucks insisted on high pricing + high-quality products in the early stage of entering the mainland market. The average price of a single cup of coffee is about 24 yuan, mainly for business people and white-collar workers. Most of the store locations are high-end office buildings or large shopping malls. Starbucks is also one of the earliest companies in mainland China to provide free wireless networks, which is more in line with the social or business negotiation needs of white-collar workers.

The third space positioning stimulates consumer demand, and the attributes of leisure consumer goods increase the willingness to purchase. In 2009, the proportion of coffee consumption and dine-in in mainland China was 76%, indicating that a large part of the consumption demand comes from the demand of third space. Starbucks has a large number of stores, a wide coverage, densely distributed in the central urban area, high availability, and a comfortable store environment. The leisure attribute bonus of coffee improves the bargaining power of products and customers' willingness to purchase.

The concentration of stores is high, and it has been sinking from first- and second-tier cities. Starbucks first settled in high-end shopping malls and business office buildings in first-tier cities such as Beijing, Shanghai, and Hong Kong. The number of stores has grown rapidly with the region as the core, forming a scale and building a brand. The formation of brands and reputation in first-tier cities can radiate to second- and third-tier cities, which is conducive to the later sinking and expansion of brands. The number of stores has increased rapidly since around 2012, indicating that the company has increased its strategic investment. In 2012, there were 700 stores in mainland China and Hong Kong and Macao, reaching 4,125 in 2019, with a CAGR of 29%.

Open up the supply chain from plantations to stores, ensure the source of high-quality raw materials while improving the brand's influence in the local market. Starbucks began to build an upstream coffee bean plantation in Yunnan in 2010, from the coffee grower support center to the first coffee bean store to use Yunnan origin, while improving the conditions for coffee planting in Yunnan, Starbucks also locked in high-quality coffee farm resources and effectively reduced the cost of the supply chain. Starting to use coffee beans produced in Yunnan in 2018, marking that Starbucks has opened up the supply chain from upstream coffee plantations to stores.

Actively explore the transformation of new retail, and combine to reverse the same store. Due to the impact of new retail coffee companies such as Luckin Coffee and Lian Coffee, the growth of same store in mainland China and Hong Kong and Macao in Q3 2018 was negative for the first time, and the operating profit margin in Asia-Pacific was 19%, a year-on-year decrease of 7.6%. Starbucks began to explore the digital transformation of mainland China, actively adapting to the new retail trend, and actively taking the initiative to make changes to cope with local market competition:

: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : During the fourth quarter, the CAP area revenue increased by 41% year-on-year and operating profit increased by 15% year-on-year.

2) The improvement of the membership system brings an increase in user consumption. In May 2019, Starbucks launched "Fish Fast" in the mainland to improve the order and payment methods under the membership system, optimize the consumption experience, and shorten the waiting time in queues. In the third quarter of 2019, same-store growth in mainland China and Hong Kong and Macao was 6%, an increase of 3% compared with the second quarter, mainly due to the increase in transaction volume. The mobile phone ordering method attracts more users to register and become members, the willingness of members to consume increases, and user stickiness increases. At the same time, "Fish Fast" saves manual ordering time in the store, and electronic orders are directly displayed in the ordering system, improving store operation efficiency.

(III) Other failure cases of international markets, taking Brazil and Vietnam as examples

In 2006, Starbucks entered the Brazilian market with a direct store model. In 2008, the company announced that it would sell 112 company-operated stores to SouthRock, transforming the operating model of the Brazilian market from direct stores to a franchise model. In 2013, Starbucks entered the Vietnamese market, but its operating conditions were not optimistic and the store expansion was slow. After reviewing their development history, we believe that the reasons for the failure are as follows:

As the origin of coffee, the local market has high quality and low price. Brazil and Vietnam are the world's first and second largest coffee producers respectively. They have a large number of high-quality coffee bean resources and have obvious cost advantages upstream of the supply chain.

People have a long history of drinking coffee, with a large number of local coffee shops, and a wide coverage, and coffee is cost-effective. Taking Brazil as an example, coffee is a daily consumer product with a long history of drinking, integrating into the local lifestyle, local people have a sufficient understanding of coffee knowledge and mature consumption habits. Moreover, local coffee shops with high cost-effectiveness, good reputation, high recognition and widely distributed are already present. Starbucks enters the local market with high pricing and relatively low competitiveness products, and Brazilians are accustomed to watching football games in coffee shops, which is inconsistent with Starbucks' third space positioning, and the demand-side stimulus effect is weak. The company cannot expand on the basis of shaping good products + services.

(Report source: Huachuang Securities)

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