Strategy case study: Starbucks-sacrificing dividends for growth
Starbucks has grown a lot since it's opening in Seattle in 1985. It went from 17 stores, to over 15.000 stores all around the world in 2010. But they are changing their strategy, and purpose. They started closing down shops, and refocused on the Starbucks experience, which would increase customer's willingness to pay and also increase profitability. They even payed their first dividend 2010. That ment a huge change of purpose.
But is growth bad ? It has it's benefits and dangers. Warren Buffet states, that ‘Growth benefits investors only when the business in point can invest at incremental returns that are enticing – in other words, only when each dollar used to finance the growth creates over a dollar of long term market value.’
We can say that it worked for Starbucks in the beginning, when growth also meant growth of the share price, and even though no dividends were paid, the company was still profitable over the years, but with the emerging of new competition (ex. McDonalds coffee shops,…), and the loss of some of the Starbucks Experience, in 2008 the company didn’t see any share price growth, and still hasn’t paid out any dividends. From this, we can see focusing strongly on growth is not always a good idea, and while it can bring the company market share in the beginning and can even prove the be more profitable in the long term, it should not be the only purpose of the company. And when Starbucks reached the point, where growth had no more effect, they changed their short-term strategy, which led to a profit of 1,25Billion in 2011, and a 43% increase in share price. In some cases focusing only on growth can also make the shareholders unhappy because their biggest interest is the profitability of the company, so as long as investment in growth meant more profitability in the future, they were ok with it, but when that stopped, the company realized changes had to be made.
Starbucks is of course unique in its own way, but that doesn’t mean other companies can’t learn anything from it. The most important lesson they can learn from the 2008 situation is, identifying the problem of the current strategy, which was in this case focus on growth, and change it in the short term. Problem is, most companies don’t know how to adapt their long term purpose or strategy, into something else in the short term, so Starbucks might be unique in this perspective. Companies can learn having a clear vision for the short term is equally important as the long term, and adjustments in the purpose need to be made, if the market demands it. Again, problem with this is either, they don’t identify the problem early enough, or just don’t know how to change their strategy. Sometimes the whole organization functions for one purpose, so changing everything is also not possible. And as the numbers show, Starbucks did a great job in it’s restructuring, and is a great lesson material for other companies.