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Case 1
In July 1998, Glenn Wakefield, vice-president of National Hockey League
Enterprises Canada (NHLEC), was faced with an opportunity to pursue
the development of a retail outlet solely dedicated to Brand NHL
merchandise. If pursued, Wakefield had to select one of three
implementation options: NHLEC could retain managerial and financial
control of the facility, control could be relinquished to a management
firm, or floor space could be rented in a department store where NHLEC
would maintain partial control over operations. Opening a flagship store
would be a shift in the organization's strategy and Wakefield wondered if
it was the right thing to do.
The National Hockey League (NHL), a professional hockey organization
housing 27 teams in total, was divided into two conferences, each
consisting of the divisions. Each team received representation from the
NHL division responsible for officiating, scouting, and public relations as
well as the marketing division, National Hockey League Enterprises.
Additionally, each NHL team employed its own marketers who were
responsible for promoting the team and selling tickets to the team's
games.
National Hockey League Enterprises (NHLE) managed the promotion of
the game, the licensing of NHL merchandise, and the exploitation of
corporate marketing partnerships. NHLE was a large enterprise with job
descriptions ranging from "Asia/Pacific Promotions" to "Grassroots
Development". NHLE was housed in downtown New York City.
NHLE's Canadian counterpart, the National Hockey League Enterprises
Canada (NHLEC), was located in Toronto, Ontario, Canada. NHLEC was
a relatively small operation under the managerial control of the New
York office.
One of NHLEC's primary strategic goals was to develop a distinct brand
image. The ever-increasing number of licensees and retailers for NHLbranded merchandise was becoming too fragmented. Wakefield wanted
the brand's image to be presented consistently to consumers at the retail
level. He believed this approach would, in turn, translate into increased
sales of NHL-brand merchandise and also increased recognition of the
NHL. The greatest obstacle in achieving this goal lay not with the
independent retailer, but with the larger department store chains such as
Wal-Mart. NHLEC relied on these large retailers to push crucial sales
volume but the end result was scattered NHL merchandise and an
inconsistent brand image presented to the consumer. Frequent buyer
turnover, power struggles and turf wars among the buyers, and the sheer
size of these retailers had all contributed to NHLEC's difficulties in
developing brand equity at a mass-market consumer level. Wakefield had to find a way to convince large retailers that there was a
better way to display and promote NHL product. One potential solution
would be to focus NHLEC's selling efforts toward the general
merchandise manager, rather than (and one step above) the individual
buyer, encouraging a more coordinated purchase and display effort.
Another option would be the introduction of the NHL's own store. This
flagship store would sell merchandise purchased from NHL licensees.
This store would be used to illustrate to these large retailers the positive
effects that a consistent NHL brand image could have on sales.
While the apparel industry experienced rapid growth throughout the
1980s, the recession in the early 1990s had hurt apparel sales. Recovery
from the recession had been gradual and it a well-known fact that
apparel sales tightly to the overall level of economic activity.
With the introduction of both the Canada-US. Free Trade Agreement
(FTA) and the North American Free Trade Agreement (NAFTA) in the late
1980s, Canadians had witnessed a multitude of lower priced imports
entering the market. Within the last decade, there had been a
restructuring of the retail apparel industry. Consolidation and the
emergence of U.S/-based retail giant such as Wal-Mart had resulted in a
highly concentrated retail industry. The large Canadian retailers had
sought to narrow their supplier base and increase their margins. In
addition, the Canadian dollar was trading at a record low (around 0.66
USD).
Although Wakefield wondered what impact all of this would have on
small NHL licensees and what the NHL store might do for these
retailers, his review of the retail industry convinced him that the timing
was right for a venture. GDP for both Canada and Ontario was expected
to grow steadily at a rate of three percent into the next century.
Additionally, lower unemployment, reduced housing costs, and general
consumer confidence were predicted to characterize the years to come.
Consumer demand was also driven by demographic factors, the first of
which was population. The “baby boom" and "baby boom echo1"
population accounted for 56per cent of the total population, with this
group driving growth in consumer demand. As baby boomers aged, their
needs in terms of apparel were likely to include a greater emphasis on
quality, comfort, functionality, value, and service; whereas, by 1996,
those in the "baby boom echo" phase had entered their teenage years, a
time when people were typically more fashion-conscious.
Canadians were spending a greater portion of their disposable income on
consumer goods such as computers, electronics, and leisure productsleaving less for apparel. Also, as consumers became more knowledgeable
about products, they placed increased importance on the price-value
relationship. Today's consumers demanded value (high quality merchandise at reasonable prices) and had begun to shop at more
inexpensive retail stores. Furthermore, today's consumers spent less
time shopping for apparel. Since less time was spent shopping,
consumers looked for reliable indicators of product quality and service
prior to the purchase. In addition to these changes in consumer behavior,
there was a trend towards relaxation of the dress code in the work place.
As consumers became more knowledgeable about products and
demanded more from retailers, quick response (QR) technologies-such as
electronic data interchange (EDI) - were being utilized to provide
topnotch service to customers. These technologies allowed retailers to
immediately process, store, and forward point-of- sale statistics to the
manufacturer who, in turn, could replenish inventory levels.
Wakefield identified three models for establishing a NHLEC retail
presence. In the first model, NHLEC would have complete managerial
control over the location and operation of the retail store. There were
three viable locations to choose from: Vancouver, Toronto and Montreal.
Investment funds of $2,200,000for start-up and approximately $800,000
in working capital would be required. He wondered how NHLEC could
raise those kinds of funds. He also knew that if the venture was not
profitable, NHLEC would have to absorb the loss and NHLEC's budget
was simply not large enough to sustain significant losses. If he decided to
pursue this option, Wakefield would have to convince New York to give
the go-ahead.
The location would need to be 15,000 square feet in total, with 10,000 of
that being retail space. The average lease range for a downtown Toronto
location was $50 to $60 per square foot. Wakefield estimated the store
could generate $750 revenue per retail square foot per year. Cost of
goods sold was estimated to be 50 per cent of sales. Salaries and wages
were estimated at 10 percent and other miscellaneous costs at 15 per
cent. Net income would be taxed at 45 per cent and the prime-lending
rate was currently at 6.5 per cent (borrowers would typically pay an
interest rate of prime plus one and a half per cent).
In the second model, NHLEC would hire and relinquish all control to a
management firm that would handle all the operational and
administrative functions. In turn, NHLEC would collect a licensing fee-I5
percent of gross revenue-from the management firm. Typically, a
management firm would rent a much smaller space, likely around 4,000
square feet, and might require NHLEC to invest as much as $500,000 for
furnishings and fixture. While he knew that several of these firms
existed, he also knew that it was often a challenge to persuade them to
adopt a project. How could he pitch the idea to such a firm?
In the third model, NHLEC could rent floor space in a major department
store. Wakefield estimated the location would be 200 square feet in size and would generate $200 revenue per square foot per year. The
department tore usually charged an operating fee of 10 per cent of sales
to manage the area and a lease rate equal to 50 per cent of revenues. An
initial investment in inventory of $6,000 and another $6,000 would be
needed to equip the space with fixtures and signage.
With these three options before him, Wakefield sat down to write out his
proposal. He knew each proposal would have to be valuated based n the
following criteria:
• Maintaining sufficient control to present the proper “Brand NHL”
image.
• Limiting NHLEC’s investments (both financial and human resources).
• Establishing a profitable retail outlet. Glenn was unsure how important this last criterion was in the face of the project’s true
objective to increase the exposure of “Brand NHL”
Question: What effect does the NHL’s structure have on its strategic
options?
Case 2
Against a backdrop of dropping coffee consumption per capita and high
completion among coffee retailers, Howard Schultz invented the modem
Starbucks-transforming the coffee-roasting company into a retailer that was
backward vertically integrated into coffee bean purchasing and roasting. The
Starbucks concept had enjoyed during its first 20 years. By 1997, Starbucks'
revenues had grown to $975 million and the balance sheet showed positive
net cash position (cash minus debt) of $42 million. About 86 percent of
revenues were derived from the company's 1,325 retail stores. Starbucks
tested sales of coffee through 10 West Coast supermarkets-expanding to
4,000 grocery stores the next year. By the end of its next decade, Starbucks
had more than 15,000 company-owned and licensed stores. Revenues for
2007 came in at $9.4 billion accompanied by operating income of more than
$1 billion for an operating profit margin of 11.2 percent. Return on invested
capital was an impressive 17.7 percent in 2007, despite the company's
whopping $282 million in cash. The company's average annual sales growth
of 57 percent along with its 65 percent average yearly jump in operating
profits over the decade put Starbucks squarely in an elite class of American
success stories such as Wal-Mart.
Eventually things began to turn sour for Starbucks, though. Schultz stepped
down as CEO in 2000 and took a much less active role in day-to-day
operations as the company's chairman. Store traffic began to slow early in
2007. By fan 2007, cracks appeared in Starbucks' business model. The
company announced in November 2007 that traffic at its U.S. stores had
fallen for the first time. The company also lowered its projected store openings for fiscal 2008 and lowered its estimates on comparable store sales
growth (sales growth in stores open 12 months or longer). Starbucks was
feeling the effects of the stagnant economy. At the same time, Starbucks was
struggling to offset rising dairy and labor costs and trying to fight off strong
competitive pressure from McDonald's and Dunkin' Donuts. The stock
dropped nearly 50 percent in 2007.
Schultz and the Starbucks team spent months diagnosing Starbucks'
problems. As Schultz noted in Onward, "The more rocks we turned over, the
more problems we discovered."? Opera rating margin had slumped from a
peak of 12.3 Percent in 2005 to 11.2 percent in 2007, but earnings still
increased. That all changed in 2008 when operating earnings plunged nearly
27 percent excluding restructuring charges and 52 percent including charges.
Schultz went on to say, "From where I sat as CEO, the pieces of our rapid
decline were coming together in my mind. Growth had been a carcinogen.
When it became our primary operating principal I it diverted attention from
revenue and cost-saving opportunities and we did not effectively manage
expenses and rising construction costs and additional monies spent on new
equipment… Then as customers cut their spending we faced a lethal
combination: rising costs and sinking sales – which meant Starbucks’
economic model was no longer viable.” Although Starbucks had a sizable
presence in international markets, the United States still accounted for 76
percent of company revenues. The United States has to be fixed in order to
turn around the company.
Schultz spent the next couple years refocusing Starbucks on the coffee
business. He cut breakfast items from the menu and got managers to think
about customer service and selling coffee. Schultz closed all the U.S. stores
for a day and retrained baristas on preparing the perfect cup of espresso. He
also replaced top management and built up the company’s capabilities in
supply and logistics. The management team tackled major inefficiencies in
the supply chain as well as in the stores. Stores were redesigned to improve
efficiency and reduce the on-the-job injuries. He also emphasized the
Starbucks experience and the importance of being passionate about coffee.
Despite significant pressures from Wall Street, Schultz refused to drop health
care benefits for part-time employees as he recognized the barista was one
of the fundamental drivers of company performance. Starbucks also closed
nearly 1,000 underperforming stores and laid off about 12,000 workers. It
slowed dramatically the rate of store expansion from about 1,300 per year in
the United States to about 300. After a painful few years, the company came
roaring back with outstanding results. Schultz vowed never to allow the
company to make the same mistakes again.
In late 2010, Starbucks' management announced plans to create long-term
shareholder value through a new "blueprint for profitable growth." Schultz
said, "Our next phase of growth will come from extending the Starbucks
Experie1Jce to our customers beyond the third place to every part of their
day, through multiple brands and channels. Starbucks' U.5. retail business
and our connection with our customers form the foundation on which we
build all of our lasting assets, and we will combine that with new capabilities
in multiple channels to accelerate the model we've created that no other
company can replicate." Starbucks Chief Financial Officer Troy Alstead went
on to say, "Starbucks has reached a critical juncture as we move from a high unit growth specialty retailer focused on coffee in our stores, to a global
consumer company with diversified growth platforms across multiple
channels."
In short, Starbucks intended to introduce new products and brands in its
Starbucks retail stores, establish a base of customers for the new items, and
later expand distribution to mass-market channels like grocery stores. The
company meant to transform itself from a specialty retailer selling a few
coffee and tea products through mass outlets into a global consumer
products powerhouse. To do so, Starbucks planned to augment its proven
model for new brand development with vertical integration and acquisitions.
Management was confident it would be able to build a stable of billion-dollar
brands by following the model Starbucks developed with two key products:
Frappuccino and VIA.
Frappuccino was a coffee blended with ice and milk. The sugary beverage
became enormously popular with Starbucks devotees immediately after its
summer 1995 introduction. Frappuccino built up a following in Starbucks
stores before Starbucks and Pepsi pushed a bottled version of the product
into mass retail outlets. Schultz credited a large part of Frappuccino’s retail
success to Starbucks having the "unique opportunity every single day to
reinforce the equity of the Frappuccino blended product in our stores” The $2
billion global brand commanded nearly two-thirds of the U.S. iced coffee
category in 2012.
Similarly, Starbucks introduced VIA instant coffee in its stores in 2009.
According to Schultz, the product introduction marked the first innovation
other than in packaging in the instant coffee market in 50 years. Schultz
regarded the category as one that was "ripe for renewal” Although the U.S.
market for instant coffee was relatively small at about $700 million in 2009,
Schultz regarded the product extension as a critical one for the company. He
felt it would spur innovation within the company, put Starbucks into new
retail channels like specialty sporting goods stores, and support the
company's objective to be the undisputed coffee authority. The instant coffee
market accounted for about 40 percent of worldwide coffee consumption and
generated an estimated $21 billion per year in sales. Higher-end instant
coffees generated less than 20 percent of instant coffee sales globally, which
suggested to Schultz the category was a candidate for "premiumization"- just
as the U.S. coffee market had been prior to Starbucks' entry into the market.
In addition, instant coffee consumption had grown at a much faster clip in
emerging markets than in the United States, where sales of the product were
flat. Global Coffee Review magazine pegged worldwide instant coffee growth
at 7 to 10 percent and 15 to 20 percent in emerging markets from 2000 to
2012. Coffee drinkers in emerging markets favored instant or soluble coffee
over brewed coffee because consumers often could not afford special coffeemaking equipment. Starbucks' management reckoned that it could establish
the VIA brand in the United States in its own stores, expand into mass
retailing, and then move the brand into Starbucks stores in the United
Kingdom, Japan, and emerging markets. (Instant coffee accounted for about
80 percent of all coffee sales in the United Kingdom and 63 percent of sales
in Japan.)
Schultz believed Starbucks could use technology to produce a cup of instant
coffee that would taste the same as a cup of Starbucks brewed coffee. The challenge for Starbucks was threefold. First, the company had to overcome
the stigma of instant coffee being associated with weak, low-quality, poortasting coffee in the United States. Second, Starbucks had to convince
consumers to pay a hefty premium for VlA, which retailed for $0.82 to $0.98
per serving. Other instant coffees could be purchased for as little as $0.04 to
$0.07 per serving. Folgers Instant Coffee Singles were priced at $0.20 per
serving. Third, the company had to overcome substantial competition in the
segment once it launched the product into supermarkets and other mass
outlets.
In order to change consumer perceptions of instant coffee, the company
employed extensive use of sampling in its own stores to encourage
consumers to taste VIA side by side with Starbucks brewed coffee. The taste
tests continued for a year before Starbucks rolled out the product into
grocery and other mass retail stores. The company also sent baristas into its
network of 3,000 licensed store-within-a-store Starbucks locations in retailers
such as Target and Safeway to give out millions of VIA samples to customers.
Starbucks created free publicity for the brand by inviting reporters to
participate in blind taste tests comparing Starbucks brewed coffee with VIA
instant coffee. The evidence from the taste tests overwhelmingly supported
Starbucks' claim that VIA was a convenient, less expensive version of a
Starbucks coffee rather than a low quality, watered-down version of "real"
coffee. (An eight ounce serving of brewed coffee in Starbucks stores cost
$1.50 in 2009.) In April 2012, the Huffington Post conducted a blind taste test
of instant coffees and concluded that VIA Columbia was not only the best
instant coffee on the market but was indistinguishable from regular brewed
coffee.
Starbucks had to compete against well-established brands in the United
States and elsewhere. Nestle, the worldwide leader in instant coffee and
inventor of the product, held about 34 percent of the U.S. instant coffee
market in 2010. Kraft General Foods (Maxwell House) was number two in the
market with a share of about 26 percent, followed by JM Smacker (Folgers)
with about a 21 percent share. Nestle had used its first-mover status to its
advantage—holding 51 percent of the global market for instant coffee. In fact,
Nestle was the largest manufacturer of packaged coffee in the world with
nearly a 22 percent global share due largely to its huge presence in the
instant coffee market. Nevertheless, Starbucks grabbed more than 10 percent
of the U.S. instant coffee market in VIA's first year on the market.
Starbucks aimed to turn VIA into a $1-billion-dollar brand by leveraging its
international presence and taking on Nestle head to head. The company
launched VIA in the Chinese market in April 2011 where Nestle controlled 75
percent of the instant coffee market. Instant coffee accounted for 80 to 90
percent of coffee consumption in the $11.3 billion Chinese coffee market.
Still, by 2012, VIA had generated $300 million in annual worldwide
revenues through 80,000 distribution points in 14 countries.
Starbucks acquired premium juice brand Evolution Fresh for $30 million in
cash in late 2011. The acquisition was Starbucks' first major plank in a new
health and wellness platform for the company. Starbucks intended to
expand the brand by launching a chain of juice bars, selling the line through
Starbucks coffeehouses, and expanding the brand's retail distribution. Schultz commented, "This is the first of many things we're going to do around health
and wellness...We're not only acquiring a juice company, but we're using this
acquisition to build a broad-based, multi-million-dollar health and wellness
business over time." As it had done in the coffee and instant coffee markets,
Starbucks aimed to "reinvent the $1.6 billion super-premium juice segment."
Starbucks claimed the company would be able to take "a currently
undifferentiated, commoditized product segment and introduce a unique,
high-quality product to redefine and grow the super-premium juice market."
According to Schultz, "Our intent is to build a national Health and Wellness
brand leveraging our scale, resources and premium product expertise.
Bringing Evolution Fresh into the Starbucks family marks an important step
forward in this pursuit."21 By October 2013, Evolution Fresh juice was sold in
8,000 retail locations—up from 2,000 in 2012—as3weU as in four standalone
Evolution Fresh stores. The company opened a $70 million factory in
Rancho Cucamonga, California, in late 2013 to support the rollout of Evolution
Fresh products across the United States.
Sales of fruit and vegetable juices and juice drinks generated an estimated
$20 billion in annual revenues in 2012. Industry sales had not grown
appreciably for more than five years. Moreover, per capita juice consumption
had declined as Americans turned to other beverages like energy drinks and
fortified waters to slake their thirst. Per capita juice consumption declined
from 6.1 gallons in 2006 to 5.17 gallons in 2011.22 In contrast, the superpremium juice segment had boomed, and sales jumped to an estimated
$2.25 billion in 2013 as "juice cleanses" gained popularity and manufacturers
touted the health benefits of cold-pressed juices.
Norman Walker, supposed "health expert" and sometime mountebank,
invented cold pressing m1910. His Norwalk hydraulic juicer was still
considered by many to be the best on the market in 2013 and retailed for a
whopping $2,000. Cold pressuring pulverized fresh fruits and vegetables in
order to extract all of the juice from the produce. Evolution Fresh and others
placed cold-pressed juices in bottles and then subjected the filled bottles to
high pressure while floating in water. The high-pressure pascalization (HPP)
process stunted the growth of pathogens and extended the shelf life of the
juice from a few days to about three weeks. Mass-market brands such as
Tropicana relied on high-heat pasteurization to kill pathogens in juice. Fans of
cold-pressed juice claimed it was healthier than pasteurized juices. While
there was little scientific evidence to support manufacturers' claims of
superior health benefits, so-called juicers asserted the flavor of cold-pressed
juice was "closer to fresh" than mass-market stalwarts like Minute Maid or
Tropicana. Critics of cold pressing were concerned about the product's safety.
They noted that Odawalla juice, a leader in the cold-pressed juice category,
introduced flash pasteurization after a batch of apple juice was contaminated
with E. coli in 1996. The contaminated apple juice had caused illness in at
least 66 people and reportedly led to the death of a 16-month...
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