case study
Question in file named: starbucks.docx
2 years ago 10
Starbucks.docx
StarbucksCBSarticle.docx
HBRHowStarbucksGrowthDestroyedBrandValue.pdf
Coffeeindustryoverview.docx
Starbucks.docx
DON’T USE AI AT ALL, TURNIT IS GOING TO BE USED TO CHECK
ONLY USE FILES AND REFERENCES PROVIDED
BUS 4999 FINAL EXAM
Starbucks Case Study
Case study References:
i. Quelch, J. (2008) ‘How Starbucks’ Growth Destroyed Brand Value’ – Harvard Business Review, available at https://hbr.org/2008/07/how-starbucks-growth-destroyed
ii. Berr, J. (2018) ‘Is Starbucks losing its mojo?’ – CBS Moneywatch, available at https://www.cbsnews.com/news/is-starbucks-losing-its-mojo/
iii. Starbucks Press Release (2018) ‘CEO Unveils Innovative Growth Strategy at 2018 Annual Meeting’, available at https://news.starbucks.com/press-releases/starbucks-unveils-innovative-growth-strategy-at-2018-annual-meeting
iv. Craft Beverage Jobs (2016) ‘The History of First, Second, and Third Wave Coffee’, available at https://www.craftbeveragejobs.com/the-history-of-first-second-and-third-wave-coffee-22315
THIS IS AN OPEN BOOK EXAM. The word count is a guideline but going well below would suggest that an answer is not of the detail expected. Using the documents provided, course notes, and your own research, answer the following:
Generic / Grand Strategies
Answer the below questions on generic and grand strategies, noting also any key changes over time.
1. Which generic strategy / strategies has Starbucks been following, and what is its business model? (15 marks, >100 words)
2. Identify at least two grand strategies shown by Starbucks and at least 1-2 examples of these in practice. (15 marks, >150 words)
Strategy Outlook
The enclosed documents comprise a Starbucks press release, and two other documents which paint a more critical view of the chain’s performance.
3. What are some key features of Starbucks’ current external environment? (20 marks, >250 words)
(note: suggest you prioritize operating/industry rather than remote environment, and consider opportunities/threats)
4. “Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special” (Quelch, 2008).
Evaluate Starbucks’ 2018 strategy, and whether you think it will generate the growth that the company is seeking (50 marks, >400 words)
(note: this is an essay-type question and I would expect that it requires an analytical answer of at least 400 words to be substantive. You are encouraged to draw on sources outside of the documents provided, and Issues you can consider may include, e.g., whether the strategy adequately responds to the external environment, whether it prioritizes shareholder growth expectations, stakeholder CSR expectations, or addresses both, contribution to company culture / core values, etc. An evaluation of a strategy looks at areas where you think the strategy is responding well to change and competition, in addition to gaps you identify. Extra credit will be given to answers which leverage and show understanding of the strategic principles we have discussed throughout this course.)
StarbucksCBSarticle.docx
Is Starbucks losing its mojo? https://www.cbsnews.com/news/is-starbucks-losing-its-mojo/
By JONATHAN BERR MONEYWATCH May 28, 2018 © 2018 CBS Interactive Inc.. All Rights Reserved.
After Howard Schultz purchased Starbucks in 1987, he wowed coffee fans with his concept for hand-crafted lattes and impressed investors with the chain's fast growth. But the novelty of the Seattle-based company appears to have worn off.
Same-store sales, a key retail metric measuring the performance locations opened at least a year, rose 2 percent in the most recent quarter, a far cry from the 7 percent growth recorded as recently as 2015. Competition from rivals such as Dunkin' Donuts and McDonald's McCafe is siphoning off business.
Given its slowing growth, it may be no surprise that Starbucks has also lost its luster on Wall Street. Shares of the coffee chain have barely budged this year. As a result, some who closely follow Starbucks argue it might make a tempting target for an activist investor. "Certainly if we don't see improvement in the U.S. numbers over the next couple of quarters, I think that's a reasonable possibility," said R.J. Hottovy, an analyst with Morningstar, who expects the coffee chain to close a few hundred locations in the U.S. over the next 18 to 24 months "The leash on (CEO) Kevin Johnson is getting shorter by the day." Starbucks didn't respond to a request for comment.
Now executive chairman, Schultz owns about 3 percent of Starbucks' common shares, which isn't a big enough stake to thwart activist investors who target companies they believe are underperforming. And when it comes to Starbucks, there is plenty for an activist not to like.
Starbucks' sales are especially weak during the afternoon hours, even though coffee consumption during that time period is on the rise, according to Bernstein analyst Sara Senatore. In a recent presentation to clients, Senatore noted that growth in the company's My Starbucks Rewards Program and gift card purchases have slowed. Profits for newly opened locations have also fallen. According to a report in the financial site Activistmonitor, the U.S. coffee market is saturated, which means new Starbucks locations are stealing customers from existing locations.
The activist playbook
Activist investors would likely pressure Starbucks to return additional capital to shareholders in the form of stock buybacks. They might also demand Starbucks add new board members, as the company's current board members have an average tenure of 10 years. Activist investors have targeted the Seattle-based company before. Billionaire Nelson Peltz's Trian Funds took a position in Starbucks in 2008 and sold it later that year. At the time, Schultz had returned as CEO after the chain fell on hard times. Schultz ended his second tenure as CEO last year, when Johnson took over the job. Trian, which has battled Wendy's, Mondelez and Kraft Foods, didn't respond to a request for comment. Investors, meanwhile, will be keeping close watch on the company's results in the current quarter.
The company, which is increasingly relying on gimmicky drinks like the Unicorn Frappuccino and Crystal Ball Frappuccino to drive traffic, recently struck a $7bn deal with Nestle for the rights to sell its packaged beans and coffee pods. The 64-year-old Schultz is focusing his attention on developing the company's high-end concept Roastery and Reserve stores, which the company hopes will help it compete with independent coffee shops and smaller chains.
Starbucks' brand image took a hit with the public uproar over two African-American men who were arrested at a Philadelphia Starbucks after a manager called police because they didn't buy anything while they waited for a business associate. Schultz is spearheading the public response, vowing to transform the way it does business . The media firestorm over the incident underscores a bigger challenge facing Starbucks: how to satisfy customers who view the chain as a "third place" to spend time outside of home and work, as well as people interested in only buying a cup of coffee. "Trying to satisfy those two audiences at the same time is difficult," Hottovy said.
HBRHowStarbucksGrowthDestroyedBrandValue.pdf
12/08/2018 How Starbucks’ Growth Destroyed Brand Value
https://hbr.org/2008/07/how-starbucks-growth-destroyed 1/3
BRANDING
How Starbucks’ Growth Destroyed Brand Value by John Quelch
JULY 02, 2008
Starbucks announcement that it will close 600 stores in the US is a long-overdue admission that
there are limits to growth.
In February 2007, a leaked internal memo written by founder Howard Schultz showed that he
recognized the problem that his own growth strategy had created: “Stores no longer have the soul of
the past and reflect a chain of stores vs. the warm feeling of a neighborhood store.” Starbucks tried
to add value through innovation, offering wi-fi service, creating and selling its own music. More
recently, Starbucks attempted to put the focus back on coffee, revitalizing the quality of its standard
beverages. But none of these moves addressed the fundamental problem: Starbucks is a mass brand
attempting to command a premium price for an experience that is no longer special. Either you have
to cut price (and that implies a commensurate cut in the cost structure) or you have to cut
distribution to restore the exclusivity of the brand. Expect the 600 store closings to be the first of a
series of downsizing announcements. Sometimes, in the world of marketing, less is more.
Schultz sought, admirably, to bring good coffee and the Italian coffee house experience to the
American mass market. Wall Street bought into the vision of Starbucks as the “third place” after
home and work. New store openings and new product launches fueled the stock price. But sooner or
later chasing quarterly earnings growth targets undermined the Starbucks brand in three ways.
First, the early adopters who valued the club-like atmosphere of relaxing over a quality cup of
coffee found themselves in a minority. To grow, Starbucks increasingly appealed to grab and go
customers for whom service meant speed of order delivery rather than recognition by and
12/08/2018 How Starbucks’ Growth Destroyed Brand Value
https://hbr.org/2008/07/how-starbucks-growth-destroyed 2/3
conversation with a barista. Starbucks introduced new store formats like Express to try to cater to
this second segment without undermining the first. But many Starbucks veterans have now
switched to Peets, Caribou and other more exclusive brands.
Second, Starbucks introduced many new products to broaden its appeal. These new products
undercut the integrity of the Starbucks brand for coffee purists. They also challenged the baristas
who had to wrestle with an ever-more-complicated menu of drinks. With over half of customers
customizing their drinks, baristas hired for their social skills and passion for coffee, no longer had
time to dialogue with customers. The brand experience declined as waiting times increased.
Moreover, the price premium for a Starbucks coffee seemed less justifiable for grab and go
customers as McDonald’s and Dunkin Donuts improved their coffee offerings at much lower prices.
Third, opening new stores and launching a blizzard of new products create only superficial growth.
Such strategies take top management’s eye off of improving same store sales year-on-year. This is
the heavy lifting of retailing, where a local store manager has to earn brand loyalty and increase
purchase frequency in his neighborhood one customer at a time. That store manager’s efforts are
undercut when additional stores are opened nearby. Eventually, the point of saturation is reached
and cannibalization of existing store sales undermines not just brand health but also manager
morale.
None of this need have happened if Starbucks had stayed private and grown at a more controlled
pace. To continue to be a premium-priced brand while trading as a public company is very
challenging. Tiffany faces a similar problem. That’s why many luxury brands like Prada remain
family businesses or are controlled by private investors. They can stay small, exclusive and
premium-priced by limiting their distribution to selected stores in the major international cities.
John Quelch is the Charles Edward Wilson Professor of Business Administration at Harvard
Business School and holds a joint appointment at Harvard School of Public Health as a professor in
health policy and management.
Coffeeindustryoverview.docx
The History of First, Second, and Third Wave Coffee
APRIL 17, 2016 BY CRAFT BEVERAGE JOBS (ABRIDGED)
Have you ever wondered what the term third wave coffee actually means?
Third Wave references the current movement within specialty coffee that appreciates coffee as an artisan or craft beverage. Coffee, from the origin of the harvested bean to the roasting and brewing process, is treated with the same reverence as fine wine and craft beer.
This culinary approach to coffee is nothing new to the industry, in fact, it is a re-birth from the days before tin cans and instant coffee hit retail shelves. Although the transitions from first, second and third wave are not always discernible, their priorities were certainly unique:
· 1st Wave: Growing coffee consumption exponentially.
· 2nd Wave: The defining and enjoyment of specialty coffee.
· 3rd Wave: Purchasing coffee based on its origin and artisan methods of production.
The History of First Wave Coffee
First wave coffee can trace its roots back to the 1800’s, when entrepreneurs saw a market for providing coffee that was both affordable and “ready for the pot”. Coffee brands like Folgers and Maxwell House would quickly become household names across the United States.
This first wave receives criticism for sacrificing taste and quality to promote convenience and mass production. While the quality of the mass marketed brew may be frowned upon, the innovations in processing, packaging and marketing would allow the coffee industry to skyrocket into the future.
Innovations for industry growth - Vacuum Packaging, Instant Coffee, Mr Coffee
In 1900, R.W. Hills invented the process of vacuum packaging , changing the way coffee would be packaged to this very day. The source for coffee moved from the local roaster to the retail shelves of grocers from San Fran to NYC.
In 1903, Japanese-American Satori Kato, patented the instant coffee dehydration process. It didn’t require brewing equipment and was perfect for WWI soldiers. By 1938, Nestle’ marketed their Nescafe beverage, supplying the U.S. military for WWII. By the 1970’s almost one-third of imported roasted coffee was processed into instant coffee, but by the 80’s more discerning taste-buds brought its downfall.
It would be remiss not to mention the invention of the first automatic drip home coffee maker: Mr. Coffee machines were a sensation, with over 40,000 sold every day during the 1970s.
The History Of Second Wave Coffee
One of the driving forces in the transition into the second wave was a reaction to the “bad coffee” being marketed under the first wave. Consumers expressed a desire to know the origin of their coffee and understand the unique roasting styles of what will now be called “specialty coffee” beans. Our coffee vocabulary began to change with second wave. Words like espresso, latte, and French Press became common among lovers of specialty coffee. The criticism of second wave is that it lost its way, forsaking the source of the bean for the social experience of drinking coffee. Coffee shops became big business. The coffee business most often associated with second wave coffee is Starbucks.
Starbucks: ‘2000 outlets by 2000’
Patterned after the business model of Peet’s Coffee in Berkeley, California, Starbucks opened its doors in 1971, specializing in serving fresh roasted coffee beans . Friends and business partners, Jerry Baldwin, Zev Siegl and Gordon Barker were passionate about fresh coffee from freshly roasted beans . Starbucks was more third wave than second in its origin. When Howard Schultz joined the team, he worked hard to convince the trio of owners to sell brewed coffee. They declined. Schultz moved on to found a very successful coffee chain, Il Giornale Coffee and in 1987 purchased Starbucks for $3.8 million. Starbucks surpassed its growth goal in the 1990’s by opening a new location every work day and by the year 2000 had over 3,000 locations. Starbucks became the poster child for second wave, not only giving specialty coffee its own language, but making it social by introducing the masses to the coffee shop experience. The social experience of drinking coffee became more important than the artisan process of producing it.
History Of Third Wave Coffee
The use of the term began in 2002 with an article in The Flamekeeper by Trish Rothgeb of Wrecking Ball Coffee Roasters : “The third wave is, in many ways, a reaction. It is just as much a reply to bad coffee as it is a movement toward good coffee” (Rothgeb).
The third wave of coffee is characterized by coffee lovers interested in the character of the coffee itself. Not that marketing and social are not important in third wave growth, but they are not the driving forcé. In the first wave, the consumer led the way. It was all about availability to the masses. With second wave, the coffee was better, but marketing the experience was the driving force. With third wave, production and marketing take the back seat, and the product takes center stage.
With a new emphasis of transparency within the coffee industry, consumers can trace the heritage of their favorite coffee to the very farm from which it was harvested. The soil, altitude, and method of processing become important factors to the discerning pallet. The majority of roasters and coffee shops associated with third wave are small businesses, independently owned and operated.
Larger third wave businesses are Intelligentsia Coffee & Tea in Chicago; Counter Culture Coffee (NC) and Stumptown Coffee Roasters (OR). Each is an evangelist for product quality, direct trade, and sustainable business practices. Coffee education also takes a significant role in their respective business models, believing that a better-educated consumer strengthens the industry.
Is There A Fourth Wave For Coffee?
Whatever your opinion about the coffee waves, you have to admit coffee is in a great place right now. If we have to define a fourth wave, perhaps the best way to characterize it is this way – it’s the best of all waves combined in the rise of the independent specialty coffee business.
First wave brought innovation to the coffee industry in ways to provide coffee to the masses for a profit. It’s that same innovation that enables us to have access to quality coffee today. It is very easy to have freshly roasted single-origin Ethiopia Hambela or Costa Rica Natural coffee offered right in your own community coffee shop or shipped right to your door in a matter of days.
In the second wave, consumers drove companies like Starbucks and Caribou to the top of the coffee industry. Today the independent coffee shop business is where fourth wave growth is seen.
You no longer have to be BIG COFFEE to have an influence in the market. A changing of the guard for industry standards and practices has produced a coffee market more vigilant for equality, fair trade and sustainable practices. Is it a fourth wave? Only time will tell.
1
image1.jpeg
Starbucks.docx
DON’T USE AI AT ALL, TURNIT IS GOING TO BE USED TO CHECK
ONLY USE FILES AND REFERENCES PROVIDED
BUS 4999 FINAL EXAM
Starbucks Case Study
Case study References:
i. Quelch, J. (2008) ‘How Starbucks’ Growth Destroyed Brand Value’ – Harvard Business Review, available at https://hbr.org/2008/07/how-starbucks-growth-destroyed
ii. Berr, J. (2018) ‘Is Starbucks losing its mojo?’ – CBS Moneywatch, available at https://www.cbsnews.com/news/is-starbucks-losing-its-mojo/
iii. Starbucks Press Release (2018) ‘CEO Unveils Innovative Growth Strategy at 2018 Annual Meeting’, available at https://news.starbucks.com/press-releases/starbucks-unveils-innovative-growth-strategy-at-2018-annual-meeting
iv. Craft Beverage Jobs (2016) ‘The History of First, Second, and Third Wave Coffee’, available at https://www.craftbeveragejobs.com/the-history-of-first-second-and-third-wave-coffee-22315
THIS IS AN OPEN BOOK EXAM. The word count is a guideline but going well below would suggest that an answer is not of the detail expected. Using the documents provided, course notes, and your own research, answer the following:
Generic / Grand Strategies
Answer the below questions on generic and grand strategies, noting also any key changes over time.
1. Which generic strategy / strategies has Starbucks been following, and what is its business model? (15 marks, >100 words)
2. Identify at least two grand strategies shown by Starbucks and at least 1-2 examples of these in practice. (15 marks, >150 words)
Strategy Outlook
The enclosed documents comprise a Starbucks press release, and two other documents which paint a more critical view of the chain’s performance.
3. What are some key features of Starbucks’ current external environment? (20 marks, >250 words)
(note: suggest you prioritize operating/industry rather than remote environment, and consider opportunities/threats)
4. “Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special” (Quelch, 2008).
Evaluate Starbucks’ 2018 strategy, and whether you think it will generate the growth that the company is seeking (50 marks, >400 words)
(note: this is an essay-type question and I would expect that it requires an analytical answer of at least 400 words to be substantive. You are encouraged to draw on sources outside of the documents provided, and Issues you can consider may include, e.g., whether the strategy adequately responds to the external environment, whether it prioritizes shareholder growth expectations, stakeholder CSR expectations, or addresses both, contribution to company culture / core values, etc. An evaluation of a strategy looks at areas where you think the strategy is responding well to change and competition, in addition to gaps you identify. Extra credit will be given to answers which leverage and show understanding of the strategic principles we have discussed throughout this course.)
StarbucksCBSarticle.docx
Is Starbucks losing its mojo? https://www.cbsnews.com/news/is-starbucks-losing-its-mojo/
By JONATHAN BERR MONEYWATCH May 28, 2018 © 2018 CBS Interactive Inc.. All Rights Reserved.
After Howard Schultz purchased Starbucks in 1987, he wowed coffee fans with his concept for hand-crafted lattes and impressed investors with the chain's fast growth. But the novelty of the Seattle-based company appears to have worn off.
Same-store sales, a key retail metric measuring the performance locations opened at least a year, rose 2 percent in the most recent quarter, a far cry from the 7 percent growth recorded as recently as 2015. Competition from rivals such as Dunkin' Donuts and McDonald's McCafe is siphoning off business.
Given its slowing growth, it may be no surprise that Starbucks has also lost its luster on Wall Street. Shares of the coffee chain have barely budged this year. As a result, some who closely follow Starbucks argue it might make a tempting target for an activist investor. "Certainly if we don't see improvement in the U.S. numbers over the next couple of quarters, I think that's a reasonable possibility," said R.J. Hottovy, an analyst with Morningstar, who expects the coffee chain to close a few hundred locations in the U.S. over the next 18 to 24 months "The leash on (CEO) Kevin Johnson is getting shorter by the day." Starbucks didn't respond to a request for comment.
Now executive chairman, Schultz owns about 3 percent of Starbucks' common shares, which isn't a big enough stake to thwart activist investors who target companies they believe are underperforming. And when it comes to Starbucks, there is plenty for an activist not to like.
Starbucks' sales are especially weak during the afternoon hours, even though coffee consumption during that time period is on the rise, according to Bernstein analyst Sara Senatore. In a recent presentation to clients, Senatore noted that growth in the company's My Starbucks Rewards Program and gift card purchases have slowed. Profits for newly opened locations have also fallen. According to a report in the financial site Activistmonitor, the U.S. coffee market is saturated, which means new Starbucks locations are stealing customers from existing locations.
The activist playbook
Activist investors would likely pressure Starbucks to return additional capital to shareholders in the form of stock buybacks. They might also demand Starbucks add new board members, as the company's current board members have an average tenure of 10 years. Activist investors have targeted the Seattle-based company before. Billionaire Nelson Peltz's Trian Funds took a position in Starbucks in 2008 and sold it later that year. At the time, Schultz had returned as CEO after the chain fell on hard times. Schultz ended his second tenure as CEO last year, when Johnson took over the job. Trian, which has battled Wendy's, Mondelez and Kraft Foods, didn't respond to a request for comment. Investors, meanwhile, will be keeping close watch on the company's results in the current quarter.
The company, which is increasingly relying on gimmicky drinks like the Unicorn Frappuccino and Crystal Ball Frappuccino to drive traffic, recently struck a $7bn deal with Nestle for the rights to sell its packaged beans and coffee pods. The 64-year-old Schultz is focusing his attention on developing the company's high-end concept Roastery and Reserve stores, which the company hopes will help it compete with independent coffee shops and smaller chains.
Starbucks' brand image took a hit with the public uproar over two African-American men who were arrested at a Philadelphia Starbucks after a manager called police because they didn't buy anything while they waited for a business associate. Schultz is spearheading the public response, vowing to transform the way it does business . The media firestorm over the incident underscores a bigger challenge facing Starbucks: how to satisfy customers who view the chain as a "third place" to spend time outside of home and work, as well as people interested in only buying a cup of coffee. "Trying to satisfy those two audiences at the same time is difficult," Hottovy said.
HBRHowStarbucksGrowthDestroyedBrandValue.pdf
12/08/2018 How Starbucks’ Growth Destroyed Brand Value
https://hbr.org/2008/07/how-starbucks-growth-destroyed 1/3
BRANDING
How Starbucks’ Growth Destroyed Brand Value by John Quelch
JULY 02, 2008
Starbucks announcement that it will close 600 stores in the US is a long-overdue admission that
there are limits to growth.
In February 2007, a leaked internal memo written by founder Howard Schultz showed that he
recognized the problem that his own growth strategy had created: “Stores no longer have the soul of
the past and reflect a chain of stores vs. the warm feeling of a neighborhood store.” Starbucks tried
to add value through innovation, offering wi-fi service, creating and selling its own music. More
recently, Starbucks attempted to put the focus back on coffee, revitalizing the quality of its standard
beverages. But none of these moves addressed the fundamental problem: Starbucks is a mass brand
attempting to command a premium price for an experience that is no longer special. Either you have
to cut price (and that implies a commensurate cut in the cost structure) or you have to cut
distribution to restore the exclusivity of the brand. Expect the 600 store closings to be the first of a
series of downsizing announcements. Sometimes, in the world of marketing, less is more.
Schultz sought, admirably, to bring good coffee and the Italian coffee house experience to the
American mass market. Wall Street bought into the vision of Starbucks as the “third place” after
home and work. New store openings and new product launches fueled the stock price. But sooner or
later chasing quarterly earnings growth targets undermined the Starbucks brand in three ways.
First, the early adopters who valued the club-like atmosphere of relaxing over a quality cup of
coffee found themselves in a minority. To grow, Starbucks increasingly appealed to grab and go
customers for whom service meant speed of order delivery rather than recognition by and
12/08/2018 How Starbucks’ Growth Destroyed Brand Value
https://hbr.org/2008/07/how-starbucks-growth-destroyed 2/3
conversation with a barista. Starbucks introduced new store formats like Express to try to cater to
this second segment without undermining the first. But many Starbucks veterans have now
switched to Peets, Caribou and other more exclusive brands.
Second, Starbucks introduced many new products to broaden its appeal. These new products
undercut the integrity of the Starbucks brand for coffee purists. They also challenged the baristas
who had to wrestle with an ever-more-complicated menu of drinks. With over half of customers
customizing their drinks, baristas hired for their social skills and passion for coffee, no longer had
time to dialogue with customers. The brand experience declined as waiting times increased.
Moreover, the price premium for a Starbucks coffee seemed less justifiable for grab and go
customers as McDonald’s and Dunkin Donuts improved their coffee offerings at much lower prices.
Third, opening new stores and launching a blizzard of new products create only superficial growth.
Such strategies take top management’s eye off of improving same store sales year-on-year. This is
the heavy lifting of retailing, where a local store manager has to earn brand loyalty and increase
purchase frequency in his neighborhood one customer at a time. That store manager’s efforts are
undercut when additional stores are opened nearby. Eventually, the point of saturation is reached
and cannibalization of existing store sales undermines not just brand health but also manager
morale.
None of this need have happened if Starbucks had stayed private and grown at a more controlled
pace. To continue to be a premium-priced brand while trading as a public company is very
challenging. Tiffany faces a similar problem. That’s why many luxury brands like Prada remain
family businesses or are controlled by private investors. They can stay small, exclusive and
premium-priced by limiting their distribution to selected stores in the major international cities.
John Quelch is the Charles Edward Wilson Professor of Business Administration at Harvard
Business School and holds a joint appointment at Harvard School of Public Health as a professor in
health policy and management.
Coffeeindustryoverview.docx
The History of First, Second, and Third Wave Coffee
APRIL 17, 2016 BY CRAFT BEVERAGE JOBS (ABRIDGED)
Have you ever wondered what the term third wave coffee actually means?
Third Wave references the current movement within specialty coffee that appreciates coffee as an artisan or craft beverage. Coffee, from the origin of the harvested bean to the roasting and brewing process, is treated with the same reverence as fine wine and craft beer.
This culinary approach to coffee is nothing new to the industry, in fact, it is a re-birth from the days before tin cans and instant coffee hit retail shelves. Although the transitions from first, second and third wave are not always discernible, their priorities were certainly unique:
· 1st Wave: Growing coffee consumption exponentially.
· 2nd Wave: The defining and enjoyment of specialty coffee.
· 3rd Wave: Purchasing coffee based on its origin and artisan methods of production.
The History of First Wave Coffee
First wave coffee can trace its roots back to the 1800’s, when entrepreneurs saw a market for providing coffee that was both affordable and “ready for the pot”. Coffee brands like Folgers and Maxwell House would quickly become household names across the United States.
This first wave receives criticism for sacrificing taste and quality to promote convenience and mass production. While the quality of the mass marketed brew may be frowned upon, the innovations in processing, packaging and marketing would allow the coffee industry to skyrocket into the future.
Innovations for industry growth - Vacuum Packaging, Instant Coffee, Mr Coffee
In 1900, R.W. Hills invented the process of vacuum packaging , changing the way coffee would be packaged to this very day. The source for coffee moved from the local roaster to the retail shelves of grocers from San Fran to NYC.
In 1903, Japanese-American Satori Kato, patented the instant coffee dehydration process. It didn’t require brewing equipment and was perfect for WWI soldiers. By 1938, Nestle’ marketed their Nescafe beverage, supplying the U.S. military for WWII. By the 1970’s almost one-third of imported roasted coffee was processed into instant coffee, but by the 80’s more discerning taste-buds brought its downfall.
It would be remiss not to mention the invention of the first automatic drip home coffee maker: Mr. Coffee machines were a sensation, with over 40,000 sold every day during the 1970s.
The History Of Second Wave Coffee
One of the driving forces in the transition into the second wave was a reaction to the “bad coffee” being marketed under the first wave. Consumers expressed a desire to know the origin of their coffee and understand the unique roasting styles of what will now be called “specialty coffee” beans. Our coffee vocabulary began to change with second wave. Words like espresso, latte, and French Press became common among lovers of specialty coffee. The criticism of second wave is that it lost its way, forsaking the source of the bean for the social experience of drinking coffee. Coffee shops became big business. The coffee business most often associated with second wave coffee is Starbucks.
Starbucks: ‘2000 outlets by 2000’
Patterned after the business model of Peet’s Coffee in Berkeley, California, Starbucks opened its doors in 1971, specializing in serving fresh roasted coffee beans . Friends and business partners, Jerry Baldwin, Zev Siegl and Gordon Barker were passionate about fresh coffee from freshly roasted beans . Starbucks was more third wave than second in its origin. When Howard Schultz joined the team, he worked hard to convince the trio of owners to sell brewed coffee. They declined. Schultz moved on to found a very successful coffee chain, Il Giornale Coffee and in 1987 purchased Starbucks for $3.8 million. Starbucks surpassed its growth goal in the 1990’s by opening a new location every work day and by the year 2000 had over 3,000 locations. Starbucks became the poster child for second wave, not only giving specialty coffee its own language, but making it social by introducing the masses to the coffee shop experience. The social experience of drinking coffee became more important than the artisan process of producing it.
History Of Third Wave Coffee
The use of the term began in 2002 with an article in The Flamekeeper by Trish Rothgeb of Wrecking Ball Coffee Roasters : “The third wave is, in many ways, a reaction. It is just as much a reply to bad coffee as it is a movement toward good coffee” (Rothgeb).
The third wave of coffee is characterized by coffee lovers interested in the character of the coffee itself. Not that marketing and social are not important in third wave growth, but they are not the driving forcé. In the first wave, the consumer led the way. It was all about availability to the masses. With second wave, the coffee was better, but marketing the experience was the driving force. With third wave, production and marketing take the back seat, and the product takes center stage.
With a new emphasis of transparency within the coffee industry, consumers can trace the heritage of their favorite coffee to the very farm from which it was harvested. The soil, altitude, and method of processing become important factors to the discerning pallet. The majority of roasters and coffee shops associated with third wave are small businesses, independently owned and operated.
Larger third wave businesses are Intelligentsia Coffee & Tea in Chicago; Counter Culture Coffee (NC) and Stumptown Coffee Roasters (OR). Each is an evangelist for product quality, direct trade, and sustainable business practices. Coffee education also takes a significant role in their respective business models, believing that a better-educated consumer strengthens the industry.
Is There A Fourth Wave For Coffee?
Whatever your opinion about the coffee waves, you have to admit coffee is in a great place right now. If we have to define a fourth wave, perhaps the best way to characterize it is this way – it’s the best of all waves combined in the rise of the independent specialty coffee business.
First wave brought innovation to the coffee industry in ways to provide coffee to the masses for a profit. It’s that same innovation that enables us to have access to quality coffee today. It is very easy to have freshly roasted single-origin Ethiopia Hambela or Costa Rica Natural coffee offered right in your own community coffee shop or shipped right to your door in a matter of days.
In the second wave, consumers drove companies like Starbucks and Caribou to the top of the coffee industry. Today the independent coffee shop business is where fourth wave growth is seen.
You no longer have to be BIG COFFEE to have an influence in the market. A changing of the guard for industry standards and practices has produced a coffee market more vigilant for equality, fair trade and sustainable practices. Is it a fourth wave? Only time will tell.
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