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Investor Letters: Starbucks in the Dot-Com Bust

SEATTLE, WA - MARCH 18: Starbucks Chairman and CEO Howard Schultz speaks during Starbucks annual shareholders meeting March 18, 2015 in Seattle, Washington. Schultz announced a 2-for-1 stock split, the sixth in the company's history, during the meeting. (Stephen Brashear/Getty Images)

 

Starbucks was founded in 1971, was purchased in 1987 Howard Schultz (the man globally associated with the brand), went public in 1992, and opened its first international location in Japan in 1996. By the late 1990’s when the dot-com boom was in full swing, Starbucks was onboard, investing in eventual blow-ups like Kozmo, Talk City, and Living.com.

In 2000 – just as the company was taking writedowns on the investments listed above – Howard Schultz and Orin Smith penned the following letter to shareholders which laid out core focus areas and set the table for the massively important technology company Starbucks has become today.

All of the charts, images, quotes, and emphasis below were added by us.

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Starbucks’ 2000 Letter to Shareholders

To our Shareholders,

We entered the new Millennium with a great sense of accomplishment and excitement, knowing that we were poised to share the Starbucks Experience with even more people around the world. Today, the anticipation we experienced as we began fiscal year 2000 has been more than fulfilled, thanks to the passion and dedication of our partners (employees), our unwavering commitment to the highest quality coffee, and the connection that we are fortunate to enjoy with our customers. We believe that the possibilities for our future achievements are virtually limitless, and we are even more inspired to climb to greater heights. These are still the early days of building our company and the Starbucks brand.

Starbucks experienced tremendous success and growth in fiscal year 2000. We had record revenues of $2.2 billion for the year.

Our stellar performance included three consecutive quarters of double-digit comparable store sales increases – an amazing achievement for any retail company of our size and maturity, culminating in a 9 percent comparable stores sales growth for the full year, the highest it has been since 1995.

While 9% comparable store sales growth represented an “amazing achievement” in 2000 – when the company had around 3,000 locations – the fact that they have maintained that growth over the last decade and a half and still see strong comparable growth at 20,000+ locations is…whatever you call something more amazing than an “amazing achievement”.

We far exceeded our projected target of 600 new store openings for the year, with 1,035 new company owned and licensed locations worldwide, including 778 stores in North America alone. We surpassed our goal to open 150 international stores, opening 257 international locations by the end of fiscal year 2000. In the United Kingdom, we opened 63 new locations, well ahead of our target of 50 stores. We also entered a number of international markets including Lebanon, the United Arab Emirates, Qatar, Hong Kong, Shanghai and Australia, bringing our total number of international locations to 525 at the end of the fiscal year. During the year we acquired a majority interest in our Thailand operations. We were also thrilled to announce our plans to enter Switzerland, our first market in continental Europe. Our remarkable success in virtually every international market we have entered to date has inspired us to set ambitious targets for the future. We plan to have 650 Starbucks locations throughout Europe by the end of fiscal year 2003, and we believe that customers in the European market will embrace the Starbucks Experience.

Over the years, Starbucks has struggled with growth in its European markets as it has had to combat an embedded coffee and cafe culture that shuns the impersonal, big box experience Starbucks was reputed to have. 

That has since turned around a bit as both comparable store sales in the EMEA region and anecdotal evidence – lines to or out out the door in Lyon, France and Geneva, Switzerland seen during Visible’s recent trip to Europe.

Our outstanding growth is testimony to the strength of the Starbucks brand worldwide. When we opened our first store in Tokyo, consultants told us that Japanese customers would never use to-go cups or drink coffee while walking on the street. If you visit Japan today, you will see people proudly holding Starbucks cups with the logo facing out. As the result of our customers’ warm acceptance, Starbucks Coffee Japan became profitable in fiscal year 2000 – more than two years ahead of plan. Additionally, we were extremely pleased that Nikkei Restaurant Magazine, one of Japan’s most respected food service industry publications, recognized Starbucks as the most preferred restaurant chain in Tokyo, just four years after our entry into the market. In addition, Interbrand Corporation, the world’s leading brand consultancy, recently ranked Starbucks as one of the top 75 global brands. These accomplishments confirm our belief that we have incredible opportunities ahead.

By the end of fiscal year 2000, Starbucks had more than 3,500 locations worldwide, serving more than 12 million customers per week in 17 countries. We believe that in the past we dramatically underestimated the size of the global market and the power of the Starbucks brand. We now believe that we have the potential to have at least 20,000 locations worldwide, with as many as 10,000 locations in international markets.

Amazingly, they have surpassed this number at the beginning of Q1 2014 and haven’t looked back!

Our core retail business in North America continues to thrive. We introduced the sumptuous White Chocolate Mocha and Caramel Apple Cider drinks early in the year, followed by two decadent new blended beverages for summer – Chocolate Brownie Frappuccino ® and Orange Mocha Chip Frappuccino ®. These popular additions to our menu provided our customers with delightful indulgences for every season. We also introduced the Starbucks Barista AromaA ™ coffeemaker and thermal carafe – an instant hit with customers. And our positioning for Holiday 2000, “Home for the Holidays,” offered simple, traditional messaging designed to capture our customers’ hearts. In addition to festive favorites such as the Eggnog Latte and our unique Christmas Blend coffee, we introduced the delectable Gingerbread Latte to bring alive the flavor of the season. We also created and unveiled the revolutionary Starbucks Barista Utopia™ vacuum coffee brewing system. This stylish, innovative machine brews the perfect cup of Starbucks ® coffee for our customers to savor at home. Customers gave the Utopia a very enthusiastic reception, and we were delighted by its success.

This was a pivotal year for two Starbucks brands that complement the coffeehouse experience – Tazo® tea and Hear Music™. In fiscal year 2000, Tazo Tea crafted and introduced a new line of filter bag and full-leaf teas to tempt customers’ palates. Our customers also enjoyed an enhanced music program through Hear Music’s displays and branded compilation discs. These two emerging brands are positioned for strong growth, and they add to the richness and texture of the Starbucks Experience.

One mark of a great company is its ability to choose business partners who reflect its core values and guiding principles. Our Business Alliances group, part of our specialty operations, created and nurtured relationships that reach more than 20 million customers per month by providing increased access and visibility to the Starbucks brand. During the year, we signed licensing agreements with several key accounts, including Albertson’s, Inc., Safeway Inc., Dayton Hudson Corporation (Super Target stores) and Marriott International, Inc. Our achievements to date have extended the Starbucks brand and created significant momentum for our future growth. We are confident that we have the potential to open many more licensed locations in grocery stores, airports and other convenient venues.

We also announced an exciting alliance with The New York Times, which recently became the exclusive nationwide newspaper sold in all of our company-owned locations in the United States. As part of this strategic three-year agreement, The Times will use its advertising resources to promote the Starbucks brand. We are proud to team up with The Times to provide our customers with one of the world’s most widely read and respected newspapers.

A newer Starbucks partnership worth noting is their tie-up with Lyft, which again positions the coffee maker as one of the most employee-friendly and forward thinking companies on earth (more on those two things below!). 

Even in the best years, we face challenges. In the fourth quarter, we took a non-cash write-down of our entire investment in living.com Inc. and the majority of our equity positions in Kozmo.com, Inc., Cooking.com, Inc. and Talk City, Inc. to reflect fair value. We have learned from this experience and we believe this knowledge will benefit our business going forward. Starbucks is an entrepreneurial company, and we have achieved extraordinary benefits from courageous and innovative business practices. That spirit and practice of innovation will continue. However, we remain focused on our core business, and we realize that the growth potential within that core business is far greater than even we previously imagined. Going forward, we will pursue only those opportunities that we feel will complement our core operations.

After these specific setbacks and the meltdown of the market as a whole, many businesses would have (and did) shy away from investing in (either internally or externally) technology. Starbucks did not do this, instead opting to commit to the Internet (and later, mobile) and an important part of their long-term business. Starbucks is a technology company and they have been since well before the popularization of the “every company is a technology company” idea.

L2 Digital is one of our go-to resources for understanding what drives the growth (and decline) of individual companies as well as broad sectors. They have done a number of studies and reports on Starbucks and their tech success over the years. Here are a couple of our favorites!

 

Our people are crucial to ensuring that we deliver the Starbucks Experience every day. The passion they bring to our customers is one of our greatest assets. To ensure that our partners share in Starbucks success, we provided stock option grants to eligible partners under the Bean Stock Plan for the 10th consecutive year. Our ongoing commitment to providing a great work environment has also had many positive impacts on our partners and customers. One indication of our collective passion is the dedication and team spirit displayed by partners at our LaBrea & San Vicente store (opened through our alliance with Earvin “Magic” Johnson). The morning after these outstanding partners won the fourth largest lottery jackpot in California history, they chose to come to work and cheerfully opened the store at 5:30 a.m. to serve their customers.

It may be buried down towards the end of this letter but a commitment to building a culture that attracts and fosters the growth of talented people – at all levels of the company – is one area where Starbucks truly stands out. Through a partnership with Arizona State University, Starbucks covers tuition for its team members across the United States. In total, the company spends more per year on employee benefits than it does on coffee beans!

Starbucks long-term success as a company will be measured in part by our ability to be a responsible global citizen. As part of our ongoing efforts to address social and environmental issues in coffee origin countries, we committed to a year-round offering of shade grown, organic or Fair Trade certified coffees. We launched this Commitment to Origins™ category with Shade Grown Mexico coffee in collaboration with Conservation International, and we were proud to introduce Fair Trade Certified coffee to our customers through a new alliance with TransFair USA. In addition, we significantly increased our commitment to provide financial support for Conservation International’s work to protect global biodiversity. Starbucks also continues to be one of the largest North American contributors to CARE, the international aid and development organization, and we are honored to support their work to improve the lives of people in coffee origin countries.

We are also deeply committed to bringing the joy of reading to people around the world. The Starbucks Foundation assisted more than 100 organizations in fiscal year 2000 by providing more than $1 million in literacy grants in North America. We also extended the program to include initiatives in New Zealand, Thailand and the Philippines. In addition, we held our fourth annual All Books for Children drive, through which we collected more than 335,000 books for schools and literacy programs.

Our joint venture with Earvin “Magic” Johnson’s Johnson Development Corporation to open Starbucks Coffee stores in under-served urban neighborhoods continues to enrich lives and contribute positively to the communities in which the stores operate. During fiscal year 2000 we opened 11 new stores in six states in the United States through this unique joint venture.
We each assumed new leadership roles in fiscal year 2000 that were designed to leverage our respective skills and experience in our growing and dynamic company. We feel that our transition has been seamless, and we are more confident than ever that the Starbucks brand has tremendous opportunities ahead. We are humbled by Starbucks success. The achievements of the past inspire us to continue this amazing journey together as we strive towards our goal of becoming a great, enduring global brand.

For all of you who bring Starbucks to life, thank you for your ongoing support.

Warm regards,

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