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Starbucks' road to success

  • Source: The Global Times
  • [20:02 May 24 2009]
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By Zhiwu Chen

Illustration: Liu Rui

Starbucks is an example of a successful business with good cost-control and commercial innovation. Lots of people have tried to run coffee shops, but how many have made billions in this established industry?

Howard Schultz founded Starbucks in 1985, and today, the company's market capitalization is in excess of $20 billion.

This is essent ial l y an economic miracle, coming in such a short period of time in an industry with a history of more than 300 years.

Starbucks' success lies first in its size: the company has 13,000 locations and a massive number of customers. The stores sell more than 40 million cups of coffee every week, and the number works out to 200 million cups every month. If every cup costs $3, the monthly sales of coffee alone will amount to $600 million.

Another secret of Starbucks' success is its advertising costs, which are zero.

Starbucks hasn't done any advertising up to now, while its brand is the best in the coffee industry.

This is where Starbucks has achieved its greatest success.

What makes Starbucks an exception in advertising? There are three factors.

First, Starbucks only locates its outlets on street corners in downtown areas. Despite high rents, striking locations actually serve as advertising.

The second factor, globalization, is even more important. The fact that people can travel almost anywhere in the world has brought a great opportunity to Starbucks.

Business people travel everywhere. Wherever they go, London, Milan, Paris, Brazil, or Beijing, they don't have the time or interest to explore other coffee houses in these places.

So Starbucks becomes a natural choice, because they are familiar with the menu and the coffee there. That is to say, once a person becomes a customer of a Starbucks in New York, he will be a customer of any Starbucks elsewhere.

Starbucks is listed on NASDAQ, which is the third factor. Apart from financing, another important effect of getting listed on the stock market is to consolidate the image of the brand and gain more fame.

Before Starbucks was listed in 1992, it was not widely recognized in the US and was really only well-known on the West Coast.

But as Starbucks prepared to be listed on the stock exchange, it received huge media attention. After being listed, its share price kept going up everyday, which made Starbucks the focus of media attention.

To sum up, the secret to a successful commercial enterprise is to reduce marginal costs and take advantage of globalization.

The author is a professor of finance at the Yale School of Management, Yale University. This article was translated by Ren Yaling