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 whole-

heartedly 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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