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                       What does
          experience    music
passion                 mean?
      conversation
   connection
           third place
                 coffeehouse
           friendly
What does
Starbucks            connect
 mean?    welcoming
                     intimate
             local
What does
  music
 mean to
Starbucks?
                            ♪




Starbucks Entertainment      GLOBAL MUSIC STRATEGY

                   Carla Culos Mila Lukic Matt Martell Hon Lam
“Music has always
been a part of the
    Starbucks
  experience…”

           -Ken Lombard
 Starbucks Entertainment
                   Starbucks Entertainment: Challenge


                                                                   SHORT TERM:
                                                                   Revenue Boost
        Music                          Music
                                                                     LONG TERM:
        Sales                         Selection
                                                                       Loss of
                                                                      Customers




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                     Shultz’s Transformational Plan

                           • In-store experience
      Restore              • Customer attachment
                             to brand



       Realign             • Management focus



                           • Scale-back in US
      Growth               • Scale-up International



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                       Starbucks Core Ideology
                                        What we are passionate
                                               about:
                                              Creating our
                                              “third place”
                                               experience



                        What we are best in                 What drives our
                          the world at:                    economic engine:
                           “Being the                            “Value
                        finest purveyor                       transaction
                           of coffee”                          per store”




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                            Global Music Strategy



                 Music                                              Music
                Selection                                        Distribution




              In line with the Restore section of Shultz’s “Transformational Plan”



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
“While Starbucks is a
coffee store and not a
music store, the music
 does have to add to
    the Starbucks
experience and to the
 bottom line in some
        sense.”

               -Chris Bruzzo
    Starbucks Entertainment
Music Selection
                 Music Selection: Joint Ventures
                       • Starbucks Entertainment will establish
     Music               joint ventures with a local label
    Selection            partners
                            – Similar to Concord Music Group &
                              Starbucks Entertainment
                       • Joint ventures form HEAR Music
                         subsidiaries
                       • Joint venture “selects” music
                         consistent with local customer
                         preferences and in line with Starbucks
                         Core Ideology

Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                         Music Selection: Joint Ventures
               Customer Insight
    Joint      •Understand music preferences of
                                                                    Customer
   Venture      target market in country of expansion                Market
   Partner                                                          Research


               Music Mix
    Joint      •Determine what music mix to offer                   Country-
   Venture      target market                            Global                 Store-specific
                                                                     specific
   Partner

               Starbucks Core Ideology
   Starbucks   •Music is “filtered” to ensure
                selections fit with Starbucks Core
      Ent.      Ideology and enhance the Starbucks
                “experience”



               Music Selection
    Joint                                                           Country-
               •Music is selected based on Music Mix     Global                 Store-specific
   Venture      demanded by target market and fit                    specific
                                                        Selection                 Selection
   Partner      with Starbucks Core Ideology                        Selection



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Music Distribution
                         Music Delivery: Industry
                       • Declining physical music sales
      Music            • Shift towards digital music
     Delivery          • Fragmentation of web based music
                         portals
                       • Many different methods of delivering
                         music
                       • Technology for retrieving music varies
                         depending on market



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                           Music Delivery: Model



      Joint Venture                                                           Starbucks
         Partner                                                              Customer
                                                    Web-based
                                                    Music Portal




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Global Expansion
                                    Country Criteria




                        Starbucks                              Piracy &           Different
     Non-US                               250+ Stores
                        Presence                              Regulation         Continents



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                    Country Criteria




                        Starbucks                              Piracy &           Different
     Non-US                               250+ Stores
                        Presence                              Regulation         Continents



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                    Country Criteria


                                       Expand to:




                        Starbucks                              Piracy &          Different
                                                                                 Different
     Non-US                               250+ Stores
                        Presence                              Regulation        Continents
                                                                                Continents



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Implementation`
                              Partnership Analysis: iTunes in UK
                                                                                           CONCLUSION
                                   • Does not interfere with delivering Coffee             • iTunes is largest provider of digital music in UK
                                   • Music will enhance Starbucks experience               • iTunes has internal web based portal for
                                   • Generate additional revenue                           music downloads
                                   • Does not create a new core competency                 • Existing partnership with iTunes in US

                                                                                           iTunes is a good fit with our needs
  • Music is a part of Starbucks           Management
                                           Management
  experience                                Preferences
                                           Preferences               • Finest Purveyor of Coffee
  • Existing partners in UK                                          • Create third place environment
                                                                     • Increase transactions per store



               Organization                                           Strategy                                     Environment



                                                                                                         • Customers purchase music on CD’s
                                                                                                         and downloads
                                            Resources                                                    • Customers listen to music on iPods,
       • 553 locations in UK
                                                                                                         digital music players mobile phones
       • Wireless resources in place
                                                                                                         iPhones, Computers, CD players
       • Joint venture partner for Music




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                          Implementation Timeline: UK
                                                                                                      Key Contact iTunes
              Send RFP for Joint Venture partnership                                                  Mr. Eddie Cue
                                                                                                      Vice President iTunes
                   Contact iTunes

                                             Select Joint Venture partner

                                                                      Sign contract with iTunes


                                                                                              Begin implementation in London, Cardiff, Manchester test stores

                                                                                                                               Full implementation




     April 2008               Spring 2008                Summer 2008              Fall 2008                     Beginning 2009

      Key Milestones
      • Enter into joint venture partnership
      • Contract with iTunes
      • Successful trials in test market stores



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                       Partnership Analysis: DoCoMo in Japan
                                                                                            CONCLUSION
                                   • Does not interfere with delivering Coffee              •DoCoMo is largest mobile provider in Japan
                                   • Music will enhance Starbucks experience                •DoCoMo has internal web based portal for
                                   • Generate additional revenue                            music downloads
                                   • Does not create a new core competency
                                                                                            DoCoMo is a good fit with our needs

  • Music is a part of Starbucks          Management
                                          Management
  experience                               Preferences
                                          Preferences                  • Finest Purveyor of Coffee
  • Existing partners in Japan                                         • Create third place environment
                                                                       • Increase transactions per store



               Organization                                           Strategy                                    Environment




                                                                                                           • Customers purchase music
                                                                                                           through mobile phones
     • 755 locations in Japan               Resources
                                                                                                           • Customers listen to music on
     • Wireless resources in place
                                                                                                           mobile phones
     • Joint venture partner for Music




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                          Implementation Timeline: Japan
                                                                                                    Key Contact DoCoMo
              Send RFP for Joint Venture partnership                                                Mr. Kiyoyuki Tsujimura
                                                                                                    Executive Vice President
                   Contact DoCoMo                                                                   Managing Director of Products & Services Division
                                             Select Joint Venture partner

                                                                      Sign contract with DoCoMo


                                                                                             Begin implementation in Tokyo, Kanagawa & Osaka test stores

                                                                                                                             Full implementation




     April 2008               Spring 2008                Summer 2008             Fall 2008                    Beginning 2009

      Key Milestones
      • Enter into joint venture partnership
      • Contract with DoCoMo
      • Successful trials in test market stores



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Financial Forecast
                                          UK and Japan Store Growth
                                        Store Growth (UK and Japan)
                          1,600
                                                                                1,499
                          1,400
                                                                                1,307
                          1,200
       Number of Stores




                          1,000
                           800
                                  722
                                                             Growth Rate:               Japan
                           600    580
                                                             Japan = 12.9%              U.K.
                           400
                                                             U.K. = 14.5%
                           200
                             0
                              2007      2008   2009   2010    2011   2012    2013
                                                      Year


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                                     Financial Forecast

                                                    Revenue Breakdown
                                250
      Total Sales (Million $)




                                200

                                150

                                100                                              Digital Tracks
                                                                                 Physical CDs
                                50

                                 0
                                      2009   2010       2011      2012   2013
                                                         Year



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                                          Financial Forecast

                                                        Revenue Breakdown
                               250
     Total Sales (Million $)




                               200                                            56
                                     NPV = $ 54.7 Million (Five
                               150   Years)                            42           Starbucks
                               100                            30                    Label Partners
                                                  21                                Artists
                               50     13
                                                                                    Distributors
                                0
                                     2009        2010       2011      2012   2013
                                                             Year



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Conclusion
                   Starbucks Entertainment: Challenge
                                                    EXECUTION                    RESULT

                                                    Music Selection
                                                        Joint
                                                      Ventures
                                                                                 Enhanced
                                                         Music                  Experience
                                                      Distribution
                                                     In-store &                 Increased
                                                    Web-based                   Number of
                                                    music portal               Transactions
                                                   Global Expansion
                                                    UK & Japan




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
Questions
                      Mission Statement


                                             Establish Starbucks as the
                                              premier purveyor of the
                                             finest coffee in the world
                                               while maintaining our
                                            uncompromising principles
                                                  while we grow.




Company Challenges Issues & Objectives Recommendations Financial
                          Conclusion
                              6 Guiding Principles
                                                 1.   Provide a great work
                                                      environment and treat each
                                                      other with respect and dignity.
                                                 2.   Embrace diversity in the way we
                                                      do business.
                                                 3.   Highest standards of excellence
                                                      to the purchasing, roasting and
                                                      delivery of our coffee
                                                 4.   Enthusiastically satisfied
                                                      customers
                                                 5.   Contribute positively to our
                                                      communities and environment
                                                 6.   Profitability is essential to
                                                      future success


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                           Starbucks Core Values




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                      Starbucks Positioning Map


                        Price




                                X            Experience


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                              CEO: Howard Shultz
                        • CEO & Chairman as of January 7, 2008
                        • Former CEO, 1985 – 2000
                        • Transformational Agenda
                             – Renewed focus on “coffee experience”
                             – Long-term model to realize transformational
                               agenda & shareholder value
                             – Forego revenue-generating activities to focus on
                               coffee
                        • Focus on:
                             – Customers wants and expectations
                             – Company partners to help them exceed
                               customer expectation



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                      Shultz’s Vision


        “Renew Starbucks Experience to customers
      while systematically building the foundation for
       strong, sustainable growth in fiscal 2009 and
                         beyond.”1




                                       Music Strategy Implementation Financial Conclusion
Transformation Core Ideology Globalfiled with the SEC in February, 2008 for the quarter
                         1From the 10Q

                                       ended December 30, 2007
                   Starbucks Entertainment: Challenge




    Starbucks                                                        LONG TERM
      Core                 Music               Experience
                                                                    SUSTAINABLE
                          Selection           Enhancement
    Ideology                                                          GROWTH




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   Music Selection: Joint Venture Creation



                     Why?                           According to Howard Schultz:
                                                       “So as we go forward, it’s
                                                    important to state very clearly
                                                     that we’re a coffee company
                     How?                                  and we’re not an
                                                    entertainment company, that
                                                      entertainment is part of the
                                                      strategy that enhances the
                     Who?                                    experience…”




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   Music Selection: Joint Venture Creation


                                                   Process of choosing the Joint
                     Why?                          Venture Partner in Japan and UK:

                                                   • Criteria Development for
                                                   choosing the partner
                     How?                          • Criteria developed based on how
                                                   the Starbucks chose Concord Music
                                                   Group as a joint venture partner

                     Who?                          OVERALL: MUST FIT WITH
                                                   STARBUCKS CORE IDEOLOGY




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   Music Selection: Joint Venture Creation


                                                   Criteria for choosing the label
                     Why?                          partner:
                                                   1.Independent record companies
                                                   (outside the organizations of the
                                                   major record labels)
                     How?                               • Send out RFP
                                                   2.Understanding of the local target
                                                   market customers
                                                   3.Broad national base
                     Who?                          4.Positive social image




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   Music Selection: Joint Venture Creation



                     Why?

                                                        After applying the
                                                        selection criteria –
                     How?
                                                      potential joint venture
                                                      partners are identified
                     Who?




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                    Value Proposition: Joint Ventures

    • Dynamic music industry
         – Growth in digital music sales
         – Decrease in physical music sales


    • Opportunity:
         – Starbucks has world’s largest wi-fi network
         – Starbucks has the biggest retail distribution
           network in the music industry

Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                           What Music will Starbucks
                                 distribute?
    •  Criteria for Starbucks Entertainment to
       determine what music to distribute:
    1. We want to be the home for established
       artists with timeless resonance
    2. We want to support and develop emerging
       artists with inspired vision and extraordinary
       talent
    3. We want to create compelling music choices
       for consumers

Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
  Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
            Music Selection: Joint Venture Creation
                   Independent Record Companies

• Definition of the independent record companies and the major record
  labels:
 According to Association of Independent Music (AIM) "(...) A "major" is
  defined in AIM's constitution as a multinational company which (together
  with the companies in its group) has more than 5% of the world market(s)
  for the sale of records and/or music videos. The majors are (currently)
  Sony BMG, Warner, EMI, and the Universal Music Group (which
  incorporates Polygram).(...) If a major owns 50% or less of the total shares
  in your company, you would not (usually) be owned or controlled by that
  major. In that case, you can join AIM.”

 In the US, independent record labels are represented by A2IM Association
  for Independent Music, in the UK, by the Association of Independent
  Music.
                  Music Selection: Joint Venture Creation
                         Potential Joint Venture Partners – UK

    • UK
         – Association of Independent Music
         – 586 members
         – Hence 586 potential partners
         – http://www.musicindie.org/show_companies.asp
           ?action=back&finish=99&thestart=50




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                         Music Selection: Joint Venture Creation
                                Potential Joint Venture Partners – Japan
    •     Japan
           –   IFPI International Member Record Companies
           –   12 potential partners
           –   http://www.ifpi.com/content/section_links/member_sites.html#J)


    1.    Avex Group Holdings, Inc cavex.avexnet.or.jp
    2.    Columbia Music Entertainment Inc     www.columbia.jp .
    3.    Geneon Entertainment Inc        www.geneon-ent.co.jp
    4.    King Record Co Ltd www.kingrecords.co.jp
    5.    Nippon Crown Co Ltd        www.crownrecord.co.jp
    6.    Pony Canyon Inc     www.ponycanyon.co.jp
    7.    Pryaid Records Inc www.pryaid.co.jp
    8.    Teichiku Entertainment Inc      www.teichiku.co.jp
    9.    Tokuma Japan Communications Co Ltd www.tkma.co.jp/tjc
    10.   Toshiba-EMI Ltd     www.toshiba-emi.co.jp
    11.   VAP Inc        www.vap.co.jp
    12.   Victor Entertainment, Inc www.jvcmusic.co.jp




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
          Starbucks Entertainment: US
• Starbucks Entertainment in US lost its cachet
  through the mismanagement of a broad music
  mix:
   – Starbucks Entertainment critisized for becoming too
     “mainstream” or “filtering”
   – Moved away from core business offering to more
     mainstream
• Lesson for International:
   – Localize content based on country preferences in line
     with Starbucks “experience”
                            Japan: Music Industry
   Key Trends                                                 Piracy                    Low
   • Mobile phones are 90%, single track                      Annual Sales (USD)    $5.0 Billion
   biggest
                                                              Digital Sales (USD)   $ 600 Million
   • Mobile phone culture
                                                              Digital Growth           100%
   • Recorded music is decreasing in
   Japan
   • Almost even split between
   international and domestic music
   types
   • Leveling of domestic debut artists



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                               UK: Music Industry
   Key Trends                                                Piracy                    Low
   • Customers purchase CD’s and
                                                             Annual Sales (USD)    $3.33 Billion
   downloads
   • 59% UK bands, 41% International                         Digital Sales (USD)   $121 Million


   • Customers listen to music on iPods,                     Digital Growth            50%

   digital music players mobile phones
   iPhones, Computers, CD players
   • 88% of UK singles are not Top 40
   • Highest CD sales per capita
   • iTunes is largest



Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                    Digital Music Delivery Methods




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   Mobile service providers: Japan
                              Percentage of      Internal Music             iTunes
                               Subscribers      Download Service           Capable



             DoCoMo               55%                Yes                    No

             AU-KDDI              26%                Yes                    No

             Softbank             19%                Yes                    Yes


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                                 Canada: Music Industry
    •   According to Nielsen SoundScan, 1.98 million digital albums were sold in Canada last year, which amounts to just
        4.5 percent of the 44.4 million total album sold. The figures show that modest digital sales in Canada fall far short
        of making up for the sharp, long-term decline in sales of physical formats.
    •   In contrast with Canada's relatively undeveloped digital market, where digital downloads, subscription services
        and mobile music comprise just 12 percent of total sales, in the U.S. these channels comprise 29 percent of sales
        (source: IFPI, June 30, 2007). Because of weak copyright rules that inhibit investment in legitimate digital services
        and their entry into the market, digital sales in Canada are failing to replace declining CD and music DVD sales at
        the same rate they do in markets like the U.S., Japan and the U.K.
    •   Nielsen also found that unit album sales fell 9.5 percent from 2006 to 2007
    •   Based on research conducted in 2006, Pollara conservatively estimates that there are more than 1.3 billion
        unauthorized downloads in this country per year, far overshadowing the estimated 20 million legitimate
        downloads in 2006 - a ratio of 65 unauthorized downloads for every legitimate download - as reported by survey
        respondents. This finding indicates that the readiness of many Canadians to choose unauthorized file-sharing sites
        over legitimate digital services is fundamentally unchanged since the OECD in 2005 identified Canada as having
        the highest per capita incidence of online file-swapping in the world.
    •   http://www.cria.ca/news/08-01-08_n.php
    •   Nielsen SoundScan Figures Confirm Canada's Weak Digital Music Market and the Sharp, Ongoing Decline in Overall
        Recorded Music Sales
    •   Toronto, Jan 04, 2008
    •   CIRPA Report: State of the Music Industry 2007




Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                              HEAR Music Criteria
    • (Est. 2007) The Hear Music label became a joint
      venture between Concord Music Group and Starbucks
      in 2007. The label develops emerging artists with
      inspired vision and extraordinary talent and also serves
      as a home for established artists with timeless
      resonance. Hear Music advocates creative control for
      artists and encourages musicians to stretch and take
      risks, which the new label believes will result in
      compelling music choices for consumers.
    • http://www.concordmusicgroup.com/labels/Hear-
      Music/


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   History of Starbucks Entertainment
    •    1995
    Begins selling compact discs (CDs) as a result of an extremely popular in-
         house music program.

    •    1999
    Acquires Hear Music, a San Francisco–based music company.

    •    2004
    Created Starbucks Entertainment business unit (Ken Lombard appointed
         president)

    •    2007
    Starbucks Entertainment and Concord Music Group form a new record label,
         Hear Music, thorough a joint venture
    Announces partnership with Apple Computer


Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion
                   History of Starbucks Entertainment
                                  - 2007
    •      2007 Starbucks Entertainment and Concord Music
           Group form a new record label, Hear Music, to
           forge relationships with artists and distribute
           recordings in Starbucks and traditional music
           channels
    •      Announces an exclusive partnership with Apple
           Computer, Inc. that lets customers wirelessly
           browse, search for, preview, buy and download
           music from the iTunes® Wi-Fi Music Store at
           Starbucks while at participating Starbucks locations
           in the U.S.

Transformation Core Ideology Global Music Strategy Implementation Financial Conclusion

				
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