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Will dean tough mudder net worth

16/10/2021 Client: muhammad11 Deadline: 2 Day

Business Analysis

EXPLOITING INNOVATION
OVERVIEW
From the same case that you have chosen for Deliverables 1 and 2, you will determine the company’s top advantage(s) and recommend alternative strategies that the company could take in order to beat its competitors.

INSTRUCTIONS
Write a 3–5 page paper in which you:

Evaluate the importance of innovation for the long-term survival for your chosen company, as well as the industry that your chosen company fits in. Next, recommend an overall strategy in order to foster innovation in your chosen company. Provide a rationale for your response.
Speculate on how you would expect the industry to evolve over a period of five and ten years, based on your analysis of the innovative and technology trends from Project Deliverable 2. Provide a rationale for your response.
Determine your chosen company’s top advantage(s) over its competitors. Justify your answer.
Determine two or three strategies that the company could use to exploit its innovation breakthroughs, using the top advantage(s) that you determined in Question 3. Analyze the main advantages and disadvantages of each strategy.
Recommend one of the strategies that you determined for the company and suggest how pursuing that strategy would exploit the company’s advantages over its competitors and minimize its key weaknesses. Provide a rationale for your response.
Use at least three quality references. Note: Wikipedia and other similar websites do not qualify as academic resources.
This course requires the use of Strayer Writing Standards. For assistance and information, please refer to the Strayer Writing Standards link in the left-hand menu of your course. Check with your professor for any additional instructions.

The specific course learning outcome associated with this assignment is:

Determine competitive advantage strategies to exploit innovation at a given company.
Requirements: 3-5 pages

Case 1 Tough Mudder Inc.: The Business of Mud Runs

Tough Mudder Inc. is a Brooklyn-based company that hosts endurance obstacle events—a rapidly growing sport also known as “mud runs.” During 2015, about 600,000 participants will each pay between $180 and $260 to tackle a 10- to 12-mile Tough Mudder course featuring 15 to 20 challenging obstacles. The obstacles include wading through a dumpster filled with ice (the “Arctic Enema”), crawling through a series of pipes part-filled with mud (“Boa Constrictor”), and dashing through live wires carrying up to 10,000 volts (“Electroshock Therapy”). The 2015 schedule com- prises 46 two-day Tough Mudder events (a separate run on each day) in the US, Canada, the UK, Ireland, Germany, and Australia. Tough Mudder’s website describes the experience as follows:

Tough Mudder events are team-based obstacle course challenges designed to test your all around strength, stamina and mental grit, while encouraging teamwork and camaraderie. With the most innovative courses and obstacles, over two million inspiring participants worldwide to date, and more than $8.7 million raised for the Wounded Warrior Project by US participants, Tough Mudder is the premier adven- ture challenge series in the world. But Tough Mudder is more than an event; it’s a way of thinking. By running a Tough Mudder challenge, you’ll unlock a true sense of accomplishment, have a great time and discover a camaraderie with your fellow participants that’s experienced all too rarely these days.1

Tough Mudder was founded in 2010 by former British school pals Will Dean and Guy Livingston. While a Harvard MBA student, Dean entered Harvard Business School’s annual business plan competition using Tough Guy, a UK obstacle race based upon British Special Forces training, as the basis for his plan.2 On graduat- ing from Harvard, Dean and Livingstone launched their first Tough Mudder event. On May 21, 2010 at Bear Creek ski resort, Pennsylvania 4,500 participants battled through a grueling 10-mile course.

Really tough. But really fun. When I got back to the office on Monday morning, I looked at my colleagues and thought: “And what did you do over the weekend?”

—Tough Mudder parTicipanT

436 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

The Market for Endurance Sports

The origins of endurance sports can be traced to the introduction of the modern marathon race in 1896, the triathlon in the 1920s, orienteering in the 1930s, and the first Ironman triathlon in 1974. In recent years, a number of new endurance sports have appeared, including:

● adventure races—off-road, triathlon-based events which typically include trekking/orienteering, mountain biking, and paddling;

● obstacle mud runs—cross-country running events with a variety of challeng- ing obstacles;

● novelty events—fun events such as 5K races in which competitors are doused in paint (Color Run), running with real bulls (Great Bull Run), and food fights (Tomato Royale).

Tough Mudder used several strategic variables to map the market and position the different products (Figure 1).

Obstacle mud runs were initiated in the UK in 1987 with the annual Tough Guy race organized by ex-British soldier Billy Wilson (which provided the inspiration for Tough Mudder). In the US, Warrior Dash launched in July 2009, followed by Tough Mudder and Spartan Races in May 2010. A flood of new entries followed. During 2011–2013, new entrants included: Mud Mingle, Play Dirty Adventure Runs, Dirty Girl, Mudslayers, Gritty Goddess Runs, Alpha Warrior, Big Nasty Mud Run, Survival Race, Udder Mud Run, Fugitive Mud Run, Hot and Dirty Mud Run, and many more. During 2013, there were 3.4 million participants in US obstacle mud runs paying a total of $290.1 million.3 By comparison, triathlons attracted about two million participants in 2013. In 2013, close to 350 organizations offered obstacle mud runs. The surging popularity of mud runs pointed to the desire of the young (and not so young) to turn away from video screens and virtual experiences and test their physi- cal and mental limits in the Great Outdoors.

Figure 1 The market for endurance sports

Source: Adapted from a presentation by Nick Horbaczewski to Strategic Planning Innovation Summit, New York, December 2013.

Tough Mudder

Color Run

Tough Mudder

Spartan Races

Warrior Dash

Ironman

Marathons

Color Run

Marathons Ironman

Warrior Dash

Spartan Races

Collaborative Unconventional

TraditionalCompetitive

Low risk High risk Activity-led event

Brand-led event

CASE 1 TOuGh MuddER INC.: ThE BuSINESS Of Mud RuNS 437

The psychology of mud runs (and other endurance sports) is complex. The satisfaction participants derive from overcoming their perceived physical and men- tal limits combines with identification with warrior role models and the nourishing of camaraderie. The New York Times referred to the “Walter Mitty weekend-warrior complex,” noting that, while the events draw endurance athletes and military veter- ans, “the muddiest, most avid, most agro participants hail from Wall Street.”4 A psy- chologist pointed to the potential for “misattributed arousal”: the tendency among couples participating in endurance events to attribute increased blood pressure, heart rate, and sensory alertness to their emotional relationship with their partner. Bottom line: “Want your boyfriend or girlfriend to feel intense feelings of love and desire for you? Put yourselves through a grueling, 12-mile obstacle course!”5

During 2013–2015, the mud run industry experienced a shake-out as many weaker organizers were unable to attract sufficient participants to cover their costs. At the same time new entry continued—new obstacle race series were launched by BattleFrog in the US and Swedish-based Nexthand’s “Toughest” obstacle races in Scandinavia and the UK. By 2015, the industry leaders were Tough Mudder, Spartan Races, and Warrior Dash (Table 1).

Growing the Company, Building the Brand

Tough Mudder’s strategic priority was to establish leadership within an increasingly crowded market. How to position Tough Mudder in relation both to other endur- ance sports and to other obstacle runs was the critical strategic issue for CEO Will Dean. Dean believed that compared to traditional endurance sports—such as mara- thons and triathlons—the key attributes of obstacle course races were that they pre- sented significant personal risk, of injury, hypothermia, or extreme exhaustion; they could be collaborative rather than competitive events; and they were more engaging by allowing a variety of experiences and challenges.

However, combining the various attributes of the mud run experience— exhaustion, camaraderie, fun, and fear—was challenging in terms of product design. In trading off individual achievement against collaboration, Dean emphasized the collaborative dimension—Tough Mudder would be untimed and team-based;

TABLe 1 Tough Mudder’s leading competitors

Spartan races Warrior Dash

Founding Started by Joe De Sena in 2010 Expanded overseas through

franchising

Red Frog Events LLC launched Great Urban Race in 2007, Warrior Dash in 2009, and Firefly Music Festival in 2012

2015 events US: 108 mostly 1-day events Overseas: 76 events in 26 countries

US: 27 1-day events Canada: 1 event (No overseas events after 2014)

The product 3 types of race: Sprint (3 miles, 15 obstacles), Super (8 miles, 20 obstacles), Beast (12 miles, 25 obstacles)

3- to 4-mile race with 12 obstacles followed by post-race party (beer, bbq, live music)

Sponsors Reebok, Clif Bar, Paleo Ranch Jerky, Bodybuilding.com, PursuitRx

Shock Top Brewing, Vibram, Anytime Fitness, Gold Bond, Rockin’ Refuel

438 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

the individual challenge would be to complete the course. A more complex chal- lenge was the need for Tough Mudder to present itself as formidable (“Probably the Toughest Event on the Planet”) while attracting a wide range of participants. Making it a team-based event and giving participants the option to bypass individual obstacles helped reconcile these conflicting objectives. Appealing to military-style principles of esprit de corps (“No Mudder left behind”) also helped reconcile this dilemma. This combination of personal challenge and team-based collaboration also encouraged participation from business enterprises and other organizations seeking to build trust, morale, and motivation among teams of employees.

The principle of collaboration was not only within teams but extended across all participants. Before each Tough Mudder event, the participants gather at the start line to recite the Tough Mudder pledge:

● I understand that Tough Mudder is not a race but a challenge.

● I put teamwork and camaraderie before my course time.

● I do not whine—kids whine.

● I help my fellow Mudders complete the course.

● And I overcome all my fears.

As psychologist Melanie Tannenbaum observes: “this pledge is setting a very powerful descriptive norm … a very powerful determinant of our behavior … More than anything else, though, there’s a little part of our brains that hasn’t quite left the ‘Peer Pressure’ halls of high school. We want to fit in, and we want to do what oth- ers are doing.”6

The spirit of unity and collaboration provides a central element of Tough Mudder’s marketing strategy. Tough Mudder has relied almost exclusively on Facebook for building its profile, encouraging participation, and building community among its participants. Its Facebook ads target specific locations, demographics, and “likes” such as ice hockey and other physical sports. Tough Mudder also makes heavy use of “sponsored stories,” which appear on users’ Facebook “news feeds” when their friends “Like” Tough Mudder. Most important, Facebook is the ideal media for Tough Mudder to exploit its greatest appeal to participants: the ability for them to proclaim their courage, endurance, and fighting spirit. As the New York magazine observes: “the experience is perfect for bragging about on social media, and from the outset Tough Mudder has marketed to the boastful.”7 By March 2015, Tough Mudder had four million Facebook “likes.”

Establishing leadership within the obstacle mud run market was a key strate- gic goal for the company. The tendency for the market to coalesce around a few leading firms would be reinforced by the ability of the market leader to set indus- try standards—to establish norms of the key attributes of an authentic mud run. Hence, Dean envisaged Tough Mudder playing a similar role as the World Triathlon Corporation and its Ironman brand in triathlon racing.

Early-mover advantage combined with rapid growth (Figure 2) gave Tough Mudder market leadership in North America. However, staying ahead of the compe- tition required delivering an experience that people would want to come back for, time and time again. This involved three major activities at Tough Mudder:

● Meticulous attention to customer feedback was achieved through customer surveys, on-site observations (including employee participation in mud runs),

CASE 1 TOuGh MuddER INC.: ThE BuSINESS Of Mud RuNS 439

and close attention to social media. Tough Mudder continually sought clues as to how it might make improvements that would allow it to match the energy, determination, and gung-ho spirit of the participants.

● Continuous development of obstacles and course design involved generat- ing ideas for new obstacles while on retreats, developing and testing pro- totypes at the Brooklyn HQ, and learning from participant experiences. Tough Mudder continually increased its investment in product development with new and improved obstacles announced each year. In January 2015, Tough Mudder announced that “its entire obstacle menu has been revamped” including “ten exhilarating new obstacles,” “2.0 versions” of its classic chal- lenges, and off-course “Mudder Village” obstacles for participants and specta- tors to experience.

● Efforts to extend brand leadership focused heavily on social media and maxi- mizing traffic to Tough Mudder’s website, but also included extensive out- reach to the online and print media.

Partnering

Partnering with other organizations has been a central feature of Tough Mudder’s growth. Its partnerships have been important for building market momentum, pro- viding resources and capabilities that Tough Mudder lacked, and generating addi- tional sources of revenue.

Since its inaugural run in 2010, Tough Mudder has been an official sponsor of the Wounded Warriors Project, a charity that offers support to wounded veterans. The relationship reinforces Tough Mudder’s military associations and helps legitimize Tough Mudder’s image of toughness, resilience, and bravery. Military connections were further reinforced by sponsorship from the US Army Reserve, which viewed Tough Mudder events as an opportunity for promotion and recruitment.

Figure 2 Tough Mudder: Growth 2010–2015

Note: Participant numbers are case writer’s estimates. Data for 2015 are projections.

2010 2011 2012 2013 2014 2015

No. of events Participants (tens of thousands)

440 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Commercial sponsors include Under Armour, Shock Top beer, General Mills’ Wheaties brand, Radisson hotels, Cellucor nutrition products, MET-Rx food supple- ments, and Oberto Beef Jerky.

Expanding the Product Range

Reconciling aspirations for toughness and difficulty with breadth of participation and market appeal, encouraged Tough Mudder to introduce several new products between 2011 and 2015:

● World’s Toughest Mudder was introduced in 2011 to reinforce the brand’s reputation for toughness. The annual run featured individuals and teams competing to complete the greatest number of course laps during a 24-hour period. The Financial Times described the event: “Le Mans on foot, through a Somme-like landscape with Marquis de Sade-inspired flourishes.”8

● Mudderella is a “5–7 mile obstacle course, designed by women for women. The event is all about working together, having fun, and owning your strong!”9 Nine Mudderella events were planned for 2015.

● Urban Mudder a 5- to 6-mile city-based obstacles course debuted on Randall’s Island New York City on July 25, 2015. Participants were required “to scale brick walls, hurtle between platforms and fling themselves into giant air bags” and perform “Mission Impossible-like contortions to avoid break- ing a beam in a field of lasers.” The event was designed to be a “festival-like party with DJs and street performers, food trucks and a beer garden.”10

● Fruit Shoot Mini Mudder is a mile-long adventure course for children aged 7 to 12 years old. Like Mudderella, it accompanies the main Tough Mudder events in order to create family involvement. According to Product Director Daniella Sloane, “We’ve created a bunch of obstacles that will work whether you’re short or whether you’re tall. If you’re at least 42 inches you’re going to have a good time and you’re going to have to work with your fellow team- mates to make it through.” The obstacles were developed through children’s focus groups and test events.

Management

As CEO of Tough Mudder, Will Dean focuses upon key priorities. “There are only two things a leader should worry about,” he told Inc. magazine, “strategy and culture … We aspire to become a household brand name, so mapping out a long-term strat- egy is crucial. I speak with Cristina DeVito, our chief strategy officer, every day, and I meet with the entire five-person strategy team once a week … We go on retreats every quarter to a house in the Catskill Mountains … There’s no phone coverage, and the internet connection is slow … We started the retreats to get everyone think- ing about the future.”11

At the core of Tough Mudder’s strategy is its sense of identity, which is rein- forced through the culture of the company: “Since Day 1, we’ve had a clear brand and mission: to create life-changing experiences. That clear focus means that every employee is aligned on the same vision and knows what they’re working toward.”12 “We know who we are and what we stand for,” he added. To sustain the culture,

CASE 1 TOuGh MuddER INC.: ThE BuSINESS Of Mud RuNS 441

Tough Mudder has established a list of core values to guide the actions and behavior of the management team.

An additional key responsibility of Dean’s is hiring: Tough Mudder grew from eight employees at the end of 2010 to around 250 by the end of 2014. His obser- vation that “a business is only as good as the people who build it” is reflected in meticulous talent seeking aimed at hiring executives who combine professional achievement with the pursuit of adventure and share Dean’s passion and values.

Tough Mudder in 2015

In 2015, Tough Mudder was reckoned to hold a narrow lead over Spartan Races in terms of revenue and numbers of participants—a result of astute strategic position- ing, effective brand building, careful product design, meticulous operational plan- ning, and obsessive focus on the customer experience. However, sustaining the company’s growth and market leadership in the endurance sports sector would be an ongoing challenge as the market began to mature. While the consolidation of the industry around the three leading players would assist the stability and reputation of obstacle mud runs as an endurance sport, competition among the leading players was becoming increasingly intense as the market leaders became ever-more sophis- ticated in course design, marketing, and operations management—and increasingly adept at imitating one another’s innovations.

Market positioning became a key issue for Tough Mudder: was the firm’s attempt to reconcile toughness with breadth of participation sustainable or would the market segment between the organizers of extreme events (such as Tough Guy in the UK and BattleFrog Races in the US) and those offering events more oriented toward fun and recreation (Mud Factor, Zombie Mud Run)?

Finally, there was the long-run future of the industry as a whole: would obstacle courses establish themselves as a continuing sport or were they a passing fad?

1. http://toughmudder.com/about/, accessed July 20, 2015. 2. An acrimonious legal dispute between Will Dean and

Tough Guy Challenge founder Billy Wilson over the alleged theft of trade secrets was resolved by Dean pay- ing $725,000 to Wilson in an out-of-court settlement.

3. “Obstacle Race World: The State of the Mud Run Business ( June 2014)”, http://www.obstacleusa.com/ obstacle-race-world-the-state-of-the-mud-run-business- details-the-size-and-reach-of-the-ocr-market-as-the- sports-first-ever-industry-report/, accessed July 20, 2015.

4. “Forging a Bond in Mud and Guts,” New York Times (December 7, 2012).

5. M. Tannenbaum, “The Making of a Tough Mudder” ( January 15, 2015), http://blogs.scientificamerican.com/ psysociety/2015/01/15/mud-running/, accessed July 20, 2015.

6. Ibid.

7. “Tough Mudder: There are riches in this mud pit,” New York Magazine (September 29, 2013), http://nymag. com/news/business/boom-brands/tough-mudder- 2013-10, accessed July 20, 2015.

8. “Tough Mudder,” Financial Times online edi- tion ( January 18, 2013), http://www.ft.com/ cms/s/2/7a80e610-603d-11e2-b657-00144feab49a. html#ixzz2nFzd1Xx4, accessed July 20, 2015.

9. http://mudderella.com/, accessed July 20, 2015. 10. http://urbanmudder.com/, accessed July 20, 2015. 11. “The Way I Work: Will Dean, Tough Mudder,” Inc.,

Magazine, http://www.inc.com/magazine/201302/issie- lapowsky/the-way-i-work-will-dean-tough-mudder.html, accessed July 20, 2015.

12. “On the Streets of SoHo. Will Dean, Tough Mudder,” http:// accordionpartners.com/wp-content/uploads/2013/02/ QA-Will-Dean.pdf, accessed July 20, 2015.

Notes

Howard Schultz, chairman and CEO of Starbucks Corporation, opened the com- pany’s annual shareholders meeting in Seattle on March 18, 2015 with the following words:

2014 was a remarkable year: record revenue, record profit, record stock price. But, I must say, when I think about the year and what we’ve accomplished, what I’m most proud of is our consistent ability to balance profitability and social impact.1

Schultz went on to elaborate some of Starbucks’ accomplishments in relation to both financial and social performance and, in doing so, noted that a $10,000 invest- ment in Starbucks’ stock at the time of its 1992 IPO would currently be worth almost $2 million.

Starbucks’ rise from a single Seattle coffee store to a global chain of over 22,000 coffee shops employing almost 200,000 people and generating revenues that would top $18 billion in 2015 was one of the wonders of American entrepreneurial capi- talism. Its founder, Howard Schultz, was a legend among US business leaders, his heroic status enhanced by the fact that, having built a hugely successful corporation and relinquishing the CEO position in 2000, he returned in 2008 to restore Starbucks’ flagging performance. Within two years, profits and share price had set new records (Table 1 and Figure 1).

For many observers, including the owners of the Milanese cafés that had pro- vided the inspiration for Schultz, the Starbucks story was little short of miraculous. America’s first coffeehouse had opened in Boston in 1676. How could brewing a better cup of coffee in the 1980s produce a company with a market value of $78 billion? Given the ubiquity of good coffee, could Starbucks possibly sustain its success?

The Starbucks Story

Starbucks Coffee, Tea and Spice had been founded by college buddies Gerald Baldwin and Gordon Bowker. In 1981, Howard Schultz, a coffee filter sales- man, visited their store. The coffee he sampled was a revelation: “I realized the coffee I had been drinking was swill.” Captivated by the business potential that Starbucks offered, Schultz encouraged the founders to hire him as head of marketing. Shortly afterwards, Schultz experienced a second revelation. On a

Case 2 Starbucks Corporation, May 2015

CaSe 2 StarbuCkS Corporation, May 2015 443

TABLE 1 Starbucks Corporation: Financial data for 2007–2014 ($million)

12 months to end-September 2014 2013 2012 2011 2010 2009 2008 2007

Income Statement Items

Total net revenues of which 16,448 14,892 13,300 11,700 10,707 9,775 10,383 9,412

—company-operated stores 12,978 11,793 10,534 9,632 8,964 8,180 8,772 7,998

—licensed stores 1,589 1,360 1,210 1,007 1,744 1,595 1,611 1,413

—CPG,a food service, other 1,881 1,739 1,555 1,061

Cost of sales 6,859 6,382 5,813 4,916 4,459 4,325 4,645 3,999

Store operating expenses 4,638 4,286 3,918 3,595 3,551 3,425 3,745 3,216

Other operating expenses 450 457 430 393 293 264 330 294

Depreciation and amortization 710 621 550 523 510 535 549 467

General and administrative expenses 991 938 801 636 570 453 456 489

Special chargesb — 2,784 — — 53 3,324 266.9 —

Total operating expenses 13,635 15,469 11,513 10,176 9,436 9,335 9,993 8,466

Operating income 3,081 (325.4) 1,997 1,729 1,419 562 504 1,054

Net earnings 2,068 8 1,384 1,246 946 391 315 673

Net cash from operations 608c 2,908 1,750 1,612 1,705 1,389 1,259 1,331

Capital expenditures (net) 1,161 1,411 974 1,019 441 446 985 1,080

Balance Sheet Items

Working capital (deficit) 690 94 1,990 1,719 977 455 (442) (459)

Total assets 10,752 11,516 8,219 7,360 6,386 5,577 5,673 5,344

Short-term borrowings — — — — — 713 713

Long-term debt 2,048 1,299 550 549 549 549 550 551

Shareholders’ equity 5,272 4,482 5,115 4,385 3,675 3,046 2,491 2,284

Notes: aConsumer Products Group. b The special charge in 2013 comprised a payment to Kraft Foods arising from litigation. Special charges in other years were restructuring costs.

cOperating cash flow was reduced by the $2.8 billion payment made to Kraft.

trip to Italy, he discovered the joys of the Milanese coffee houses which offered a combination of good coffee, ambiance, social interaction, and the artistry of the barista. His ideas for recreating Starbucks to be a place where people would come to share the experience of drinking great coffee rather than to buy coffee beans failed to persuade the founders. Schultz left to open his own Italian-styled coffee bar, Il Giornale. In 1987, he acquired the Starbucks chain of six stores, merged it with his three Il Giornale bars, and adopted the Starbucks name for the enlarged company.2

444 CaSeS to aCCoMpany ConteMporary StrateGy anaLySiS

Schultz’s original idea of replicating Italian coffee bars (where customers mostly stand to drink coffee) was adapted to “the American equivalent of the English pub, the German beer garden and the French café.”3 With the addition of wi-fi, Starbucks’ stores became a place to work as well as to socialize. By 1992, Starbucks, with 165 outlets, went public. With $27 million from the stock offering, Schultz accelerated growth. Expansion followed a cluster pattern: opening mul- tiple stores in a single metro area in order to increase local brand awareness and to help customers make a Starbucks’ visit part of their daily routine. International expansion began with Japan in 1996 and the UK in 1998. Starbucks relied mainly on organic growth, but with occasional acquisitions: the UK-based Seattle Coffee Company in 1998, Seattle’s Best Coffee and Torrefazione Italia in 2003, and Diedrich Coffee in 2006.

The Starbucks Experience

Starbucks’ mission “to inspire and nurture the human spirit” required not just serv- ing excellent coffee but also engaging customers at an emotional level. As Schultz explained: “We’re not in the coffee business serving people, we are in the people business serving coffee.”

Central to Starbucks’ strategy was Schultz’s concept of the “Starbucks Experience,” which centered on the creation of a “third place”—somewhere other than home and work where people could engage socially while enjoying the shared experience of drinking good coffee. The Starbucks Experience combined several elements:

FigurE 1 Starbucks’ share price ($), May 2005 to May 2015 (adjusted for splits)

0 2005 2007 2009 2011 2013 2015

CaSe 2 StarbuCkS Corporation, May 2015 445

● Coffee beans of a high, consistent quality and the careful management of a chain of activities that resulted in their transformation into the best pos- sible espresso coffee: “We’re passionate about ethically sourcing the finest coffee beans, roasting them with great care, and improving the lives of the people who grow them.”

● Employee involvement. Starbucks’ counter staff—the baristas—played a central role in delivering the Starbucks Experience. Their role was not only to brew and serve coffee but also to engage customers in the ambiance of the Starbucks coffee shop. This was supported by human resource practices based upon a distinctive view about the company’s relationship with its employees. Employees needed to be committed and enthusiastic commu- nicators of the principles and values of Starbucks, which implied treating employees as business partners. Starbucks’ human resource practices were tailored, first, to attracting and recruiting people whose attitudes and per- sonalities were consistent with the company’s values and, second, to foster trust and loyalty that facilitated their engagement with the Starbucks experi- ence. Starbucks’ employee selection emphasized adaptability, dependability, capacity for teamwork, and willingness to further Starbucks’ principles and mission. Its training program extended beyond basic operational and cus- tomer-service skills and placed particular emphasis on educating employees about coffee. Unique among catering chains, Starbucks provided health insurance for almost all regular employees, including part-timers. In 2014, Starbucks introduced its College Achievement Plan, providing tuition reim- bursement for employees taking online degree programs from Arizona State University.

● Community relations and social purpose. Schultz viewed Starbucks as rede- fining the role of business in society: “I wanted to build the kind of company my father never had the chance to work for, where you would be valued and respected wherever you came from, whatever the color of your skin, what- ever your level of education … We wanted to build a company that linked shareholder value to the cultural values that we want to create with our people.”4 Schultz’s vision was of a company that would earn good profits but would also do good in the world. This began at the local level: “Every store is part of a community, and we take our responsibility to be good neighbors seriously. We want to be invited in wherever we do business. We can be a force for positive action—bringing together our partners, customers, and the community to contribute every day.”5 It extended to Starbucks’ global role: “we have the opportunity to be a different type of global company. One that makes a profit but at the same time demonstrates a social conscience.” Starbucks’ sponsoring of social causes was not without controversy: its March 2015 “Race Together” campaign, which encouraged employees to discuss racism with customers, was hit by a “cascade of negativity” on Twitter and was soon abandoned.6

● The layout and design of Starbucks’ stores were critical elements of the expe- rience. Like everything else at Starbucks, store design was subject to meticu- lous planning, following Schultz’s dictum that “retail is detail.” While every Starbucks store is adapted to its unique neighborhood, all stores reflect some

446 CaSeS to aCCoMpany ConteMporary StrateGy anaLySiS

common themes. “The design of a Starbucks store is intended to provide both unhurried sociability and efficiency on-the-run, an appreciation for the natu- ral goodness of coffee and the artistry that grabs you even before the aroma. This approach is reflected in the designers’ generous employment of natural woods and richly layered, earthy colors along with judicious high-tech acces- sorizing … No matter how individual the store, overall store design seems to correspond closely to the company’s first and evolving influences: the clean, unadulterated crispness of the Pacific Northwest combined with the urban sua- vity of an espresso bar in Milan.”7

● Starbucks’ location strategy—its clustering of 20 or more stores in each urban hub—was viewed as enhancing the experience both in creating a local “Starbucks buzz” and in facilitating loyalty by Starbucks’ customers. Starbucks’ analysis of sales by individual store found little evidence that closely located Starbucks stores cannibalized one another’s sales. To expand sales of coffee- to-go, Starbucks began adding drive-through windows to some of its stores and building new stores adjacent to major highways.

Broadening the Experience

Delivering the Starbucks Experience encouraged Starbucks to broaden its prod- uct range. “The overall strategy is to build Starbucks into a destination,” explained Kenneth Lombard, then head of Starbucks Entertainment. This involved adding food, music, books, and videos. In music publishing, Starbucks’ “Artists Choice” CDs, for which well-known musicians chose their favorite tracks, were particularly success- ful. “I had to get talked into that one,” says Schultz. “But then I began to understand that our customers looked to Starbucks as a kind of editor. It was like, ‘We trust you. Help us choose.’ ”

Starbucks also diversified its business model to include other ownership and management formats, additional products, and different channels of distribution. These included:

● Licensed coffee shops and kiosks. The desire to reach customers in a variety of locations eventually caused Starbucks to abandon its policy of only sell- ing through company-owned outlets. Its first licensing deal was with Host Marriot, which owned food and beverage concessions in several US airports. This was followed by licensing arrangements with Safeway and Barnes & Noble for opening Starbucks coffee shops in their stores. Overseas, Starbucks increasingly relied upon licensing arrangements with local companies.

● Distribution of Starbucks retail packs of Starbucks coffee through super-markets and other retail food stores.

● Licensing of Starbucks brands to PepsiCo and Unilever for the supply of Starbucks bottled drinks (such as Frappuccino and Tazo Tea).

● Starbucks’ involvement in financial services began with its Starbucks prepaid store card, which was later combined with a Visa credit card (the Starbucks/ Bank One Duetto card). The Starbucks card allowed entry to the Starbucks reward program, which offered free drinks and other benefits to regular customers.

CaSe 2 StarbuCkS Corporation, May 2015 447

Adjusting the Strategy

Crisis and Retrenchment, 2007–2009

Starbucks’ downturn of 2007–2009 was triggered by slowing growth of same-store sales and operating profits and exacerbated by the financial crisis. Amidst concerns over Starbucks’ strategy and future prospects, chairman and founder Howard Schultz returned as CEO at the beginning of 2008.

Schultz’s turnaround strategy comprised two initiatives. First, retrenchment: Schultz cancelled new store openings and revised operational practices to improve cost efficiency. In the summer of 2008, he announced the closure of 600 US stores and most Australian stores; 6,000 jobs were lost in the stores and 700 positions in corporate and support activities. Savings in operating costs of $500 million in 2009 included Schultz cutting his own salary from $1.2 million to $10,000 and selling two of Starbucks’ three corporate jets.8

The second thrust was the reaffirmation of Starbucks’ values and business prin- ciples, including revitalizing the “Starbucks Experience” and reconnecting with its customers. Reinvigorating Starbucks’ social commitment played a central role in the rediscovery process. During 2008, a company-wide reconsideration of Starbucks’ purpose and principles resulted in a revised mission statement and a stronger com- mitment to corporate social responsibility. Initiatives included participation in the New Orleans clean-up after Hurricane Katrina and launching Starbucks’ Shared Planet: an environmental sustainability and community service program.

Schultz’s review of operating practices to assess their consistency with the Starbucks Experience and Starbucks’ image resulted in reducing the automation of coffee making. To speed up coffee making, Starbucks had replaced its La Marzocco espresso machines, which required grinding coffee for each cup, with automatic machines that required baristas to press a button. During 2008, Starbucks began replacing these automated machines with new coffee machines that made individual servings from freshly ground beans. Revisions to Starbucks’ food menu included withdrawing toasted breakfast sandwiches whose aromas masked that of the coffee: “The breakfast sandwiches drive revenue and profit but they are in conflict with everything we stand for in terms of the coffee and the romance of the coffee,” noted Schultz.9

Reconnecting with customers involved the extensive use of new digital media. Starbucks was a leader in the use of Facebook and Twitter for promotional and loyalty-building purposes. Starbucks also pioneered new payment methods to facilitate transactions and build customer loyalty. The original Starbucks Card, an in-store debit card, was launched in 2002 and was subsequently linked to a loyalty program offering rewards based upon cumulative purchases. The loyalty program was relaunched in 2011 as “My Starbucks Rewards” and was linked to an innova- tive cell phone payment system. Customers displayed a two-dimensional barcode on their cell phones which was scanned at the point-of-sale. By 2015, ten million customers had downloaded the Starbucks app and mobile transactions accounted for 14% of its US sales.

Most of all, Schultz traveled extensively meeting with employees (“partners”) to reignite their drive and enthusiasm and reinforce Starbucks’ values. At a series of meetings held in concert halls and other venues, Schultz recounted inspiring tales

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that exemplified the “humanity of Starbucks” and challenged his store managers to return to the values and practices that had made Starbucks a special place.10

Diversification within the US, 2009–2015

With operational efficiency, customer connections, and core values and principles restored, Starbucks returned to growth. In the US market the primary emphasis was on exploiting new revenue opportunities. Overseas, it was building Starbucks’ pres- ence in emerging markets,

Major US initiatives included:

● The introduction of Via, a new type of instant coffee, launched in February 2009 at $2.95 for a pack of three individual servings and $9.95 for 12 serv- ings. Via used a patented process which allowed the company to “absolutely replicate the taste of Starbucks coffee.” In less than two years, sales of Via reached $200 million.

● Entry into single-serve pod coffee systems. In 2011, Starbucks began produc- ing Starbucks’ K-cup pods for Keurig machines. In 2012, Starbucks intro- duced its own pod-based home espresso system.

● In November 2011, Starbucks acquired premium juice maker Evolution Fresh Inc. with a view to expanding the retail distribution of fruit juices both within its own stores and to the grocery trade.

● In June 2012, Starbucks acquired San Francisco bakery La Boulange, with a view to distributing pastries and baked goods to 2,500 Starbucks stores by the end of 2013.

● In November 2012, Starbucks acquired Teavana Holdings, Inc. for $620 mil- lion with a commitment “to grow and extend Teavana’s already-successful 300 mall-based stores as well as add a high-profile neighborhood store concept that will accelerate Teavana’s domestic and global footprint.” Schultz antici- pated over 1,000 Teavana stores and argued that “the tea category is ripe for reinvention and rapid growth. The Teavana acquisition now positions us to disrupt and lead, just as we did with espresso starting three decades ago.”11

● In June 2014, Starbucks introduced its Fizzio Handcrafted Sodas: individually prepared soda drinks in three flavors made from all-natural ingredients.

Several of these initiatives involved growing Starbucks’ sales to the grocery sec- tor. Under Schultz’s leadership Starbucks’ Channel Development (previously the Consumer Products Group) became the fastest-growing part of the company. The strategy was based upon exploiting complementarities between Starbucks’ coffee- houses and the grocery trade:

Starbucks can seed and introduce new products and new brands inside our stores. We introduced Via instant coffee in our stores. Instant coffee is a $24 billion global category that has not had any innovation in over 50 years. And no growth. If we took Via and we put it into grocery stores and it sat on a shelf, it would have died. But we can integrate Via into the emotional connection we have with our custom- ers in our stores. We did that for six to eight months and succeeded well beyond expectations. And as a result of that, we had a very easy time convincing the trade, because they wanted it so badly.12

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This use of Starbucks’ stores to lead sales through traditional grocery channels became Starbucks’ “Blueprint for Profitable Growth” (Figure 2). At the base of the model were Starbucks’ values and business principles. As Schultz explained: “We have built the Starbucks brand with a goal of staying true to our values and our guiding principles with a deep sense of humanity. Going forward, we will continue to focus on what made us a different kind of company, one that balances profitability and social conscience while providing exceptional shareholder value.”13 These values were the basis for Starbucks’ emotional engagement with its customers. Increasingly, Starbucks augmented face-to-face customer contact within its stores with its use of social media to extend and deepen its relationships with customers. Starbucks’ social media team connects with consumers through over 30 accounts on 12 different social platforms— the most important being Facebook, Twitter, Instagram, Google+, and Pinterest. This online engagement has greatly facilitated Starbucks’ expansion into new overseas mar- kets and the introduction of Starbucks-branded products in the grocery trade.

International Expansion, 2009–2015

Schultz saw emerging markets, China in particular, as a huge opportunity for Starbucks:

The big opportunity, in terms of total stores, is what’s happening in China; we’ve got 800 stores in greater China, 400 in the mainland. When all is said and done, we’ll have thousands. We’re highly profitable there. We’ve been there 12 years, and I would say that the hard work—in terms of building the foundation to get access to real estate, design stores, and operate them—is well in place.14

India was next. In January 2012, Starbucks announced a 50/50 joint venture with Tata Global Beverages to establish a chain of Starbucks coffeehouses. By July 2014, Tata Starbucks Ltd. had 50 outlets in India, mainly in airports, malls, and commercial complexes.

Other new market entries during 2012–2014 included Morocco, Colombia, Vietnam, Monaco, Brunei, Costa Rica, Finland, and Norway. In 2014, Starbucks took full ownership of Starbucks Japan, buying out its Japanese partner for $915 million. Table 2 shows store information by region.

FigurE 2 Starbucks’ “Blueprint for Profitable Growth”

EMOTIONAL ENGAGEMENT

CONSUMER PRODUCTS’

REACH

RETAIL FOOTPRINT

VALUES AND

PRINCIPLES

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TABLE 2 Starbucks Corporation: Store information, 2007–2014

2014 2013 2012 2011 2010 2009 2008 2007

Percentage change in same store sales

Americas 6 7 8 8 7 (6) (5) 42 EMEAa 5 0 0 3 5 (3)

21 71China/Asia-Pacific 7 9 15 22 11 2 Consolidated 6 7 7 8 7 (6) (3) 5 Stores opened during the year (net of closures) Americas Company-operated

stores 317 276 228 32 32 (419) 4,452 10,652 Licensed stores 381 404 280 215 101 110 4,382 7,232 EMEA Company-operated

stores (9) (29) 10 25 (64) 20 2,361 2,861 Licensed stores 180 129 101 79 100 98 5,501 497 China/Asia-Pacific Company-operated

stores 250 240 154 73 30 24 n.a. n.a. Licensed stores 492 348 294 193 79 129 n.a. n.a. All other segments Company-operated

stores 12 343 0 6 (1) (2) n.a. n.a. Licensed stores (24) (10) (4) (478) 10 (5) n.a. n.a. Total 1,599 1,701 1,063 145 223 (45) 1,669 2,571 Total number of stores at year-end Americas Company-operated

stores 8,395 8,078 7,802 7,574 7,542 7,574 72,382 67,932 Licensed stores 5,796 5,415 5,011 4,731 4,516 4,415 43,292 38,912 EMEA Company-operated

stores 817 853 882 872 847 911 2,093 1,831 Licensed stores 1,323 1,116 987 886 807 707 3,020 2,496 China/Asia-Pacific Company-operated

stores 1,132 906 666 512 439 409 n.a. n.a. Licensed stores 3,492 2,976 2,628 2,334 2,141 2,062 n.a. n.a. All other segments Company-operated

stores 369 357 14 14 8 9 n.a. n.a. Licensed stores 42 66 76 80 558 548 n.a. n.a. Total 21,366 19,767 18,066 17,003 16,858 16,635 16,680 15,011

Note: aEurope, Middle East, and Africa. n.a. = not available. Source: Starbucks Corporation, 10-K reports.

CaSe 2 StarbuCkS Corporation, May 2015 451

Starbucks’ Strategy, 2015

By 2015, these themes had been developed into a seven-part strategy that was outlined by Beto Guajardo, senior vice president for global strategy. The “Seven Strategies for Growth” are summarized in Table 3.

The Market for Coffee

Coffee was the most popular beverage of North America and Europe, with Northern Europeans the heaviest consumers (Table 4).

The US was the world’s biggest market for coffee with expenditure (for con- sumption at home, at work, and at catering establishments) of $52.5 billion in 2013. In terms of expenditure, the market was split roughly equally between sales for

TABLE 3 Seven strategies for growth

Theme Action Notes

1 Be the Employer of Choice

Invest in partners capable of delivering a superior customer experience

First and foremost, Starbucks is a people business: customers’ relationship with Starbucks employees is a key determinant of customer loyalty

2 Coffee Leadership Build our leadership position around coffee

Central to Starbucks’ commitment to quality coffee is close control of its supply chain right back to the grower During 2015, 99% of Starbucks’ coffee would be ethically sourced and sustainably produced

3 Grow the Store Portfolio

Increase the scale of the Starbucks store footprint with disciplined expansion

Number of stores in China Asia-Pacific to double during 2015–2019, including growth from 1,600 to 3,400 stores in China

India would become one of Starbucks’ top-five markets In N. America new retail formats include small stores,

Starbucks’ mobile trucks for college campuses, and “Reserve” roasteries

4 Create New Occasions

Grow store usage throughout the day with new product offers

New food offerings to include hot breakfast items, lunchtime meals, and evening snack and alcoholic drinks

5 Consumer Product Brand Growth

Focus on the Starbucks brand to unlock industry-leading profitable growth

Starbucks to grow sales of packaged coffee and ready-to- drink coffee beverages by 60% by 2019

Growth will come primarily for Asia-Pacific—especially China where Starbucks partnering with Tingy

6 Build Teavana Create a second major business in tea

Teavana to spearhead Starbucks’ growth within the $125 billion global market for tea

Starbucks’ tea revenues to double by 2019 7 Extend Digital

Engagement Drive convenience and brand

engagement through mobile commerce platforms

Starbucks’ growth to be underpinned by its Rewards program and its mobile payments platform

New features to the Starbucks mobile app include advance ordering and payment prior to pick-up at a Starbucks store

Source: Starbucks 2015 Annual Meeting of Shareholders, Growth Strategy Panel Discussion.

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TABLE 4 Coffee consumption per head of population, 2014

Rank Country Kilograms Rank Country Kilograms

1 Finland 9.6 11 Bosnia-Herzegovina 4.3 2 Norway 7.2 12 Estonia 4.2 3 Netherlands 6.7 13 Switzerland 3.9 4 Slovenia 6.1 14 Croatia 3.8 5 Austria 5.5 15 Dominican Republic 3.7 6 Serbia 5.4 16 Costa Rica 3.7 7 Denmark 5.3 17 Macedonia 3.6 8 Germany 5.2 18 Italy 3.4 9 Belgium 4.9 19 Canada 3.4 10 Brazil 4.8 20 Lithuania 3.3

Source: Euromonitor (www.caffeineinformer.com/caffeine-what-the-world-drinks).

the home-brewed coffee and sales of ready-brewed coffee. However, in terms of consumption, 80% of the coffee consumed in the US was at home. Sales of home- brewed coffee had recently reversed their long-term decline due to the popularity of single-serve coffee makers.

The US market could also be segmented between “ordinary” coffee and “spe- cialty” coffee (also known as “premium” or “gourmet” coffee). Although specialty coffeehouses had existed for many decades, especially on the east and west coasts of the US, Starbucks’ achievement had been to bring quality coffee to the mass mar- ket. Sales of premium brewed coffee were estimated to have grown from about $3.5 billion in 2000 to about $13 billion in 2013, with the number of coffee shops roughly doubling over the same period to reach 29,000.

Although Starbucks had been the primary driver of this growth, its success had spawned many imitators. These included both independent coffeehouses and chains, most of which were local or regional, although some aspired to grow into national chains (Table 5).

In addition to specialty coffeehouses, most catering establishments in the US, whether restaurants or fast-food chains, served coffee as part of a broader menu of food and beverages. Increasingly, these outlets were seeking to compete more directly with Starbucks by adding premium coffee drinks to their menus. McDonald’s had introduced a premium coffee to its menuv but had reconfigured its outlets to include McCafés which highlighted its premium coffee drinks. Burger King and Dunkin’ Donuts had also moved upmarket in their coffee offerings. Both McDonald’s and Dunkin’ Donuts had targeted Starbucks in their advertising, characterizing Starbucks as overpriced and snobbish.

Outside of the US, Starbucks’ competitive situation varied by country. In many, competition was even more intense than in the US. For example, Starbucks’ with- drawal from Australia was a consequence of a highly sophisticated coffee market developed by southern European and Middle Eastern immigrants. Throughout con- tinental Europe, Starbucks had to deal with well-developed markets with high stan- dards of coffee preparation and strong local preferences. In the UK, where Starbucks was second to Costa in terms of outlets, it was barely profitable.

CaSe 2 StarbuCkS Corporation, May 2015 453

As well as competition from the bottom (McDonald’s, Dunkin’ Donuts), Starbucks faced competition from the top. The upmarket Italian coffee roaster Illycaffè SpA was expanding in the US through franchise arrangements with independent coffee- houses. Some observers believed that once Starbucks had educated North Americans about the joy of good coffee consumers of gourmet coffee would go on to seek superior alternatives to Starbucks.

The home-brewed coffee market was also being revolutionized. Sales of Italian- style espresso coffee makers, which used highly pressurized hot water to make coffee, had grown rapidly since 2000. The key stimulus had been the popularity of single-serve coffee pod systems pioneered by Nestlé’s Nespresso subsidiary. In the US, Keurig Green Mountain with its K-Cup system was the market leader. Other major entrants were the Senseo system launched by Philips and Sara Lee, Kraft’s Tassimo system, Lavazza’s Espresso Point system, and Illy’s Iperespresso system. In March 2012, Starbucks joined the fray by launching its own single-serve, home cof- fee makers under its Verismo brand. Starbucks also supplied K-Cups for Keurig cof- fee makers. By 2014, Starbucks was US brand leader in retail sales of both premium packaged coffee and single-cup capsules (Table 6).

TABLE 5 Leading chains of coffee shops in the US, 2014

Company No. of outlets Headquarters

Starbucks 10,780 Seattle, WA Tim Hortons 714 Oakville, Ontario Caribou Coffee 415 Brooklyn Center, MN Coffee Bean and Tea Leaf 296 Los Angeles, CA Peet’s Coffee & Tea 193 Emeryville, CA Tully’s Coffee Shops 180 Seattle, WA Coffee Beanery 131 Flushing, MI It’s A Grind Coffee House 105 Long Beach, CA Gloria Jean’s 90 Chicago, IL Dunn Bros Coffee 85 St Paul, MN PJ’s Coffee 50 New Orleans, LA Port City Java 32 Wilmington, NC

Source: Multiple web sources.

TABLE 6 Brand market shares of packaged coffee shops in the US, 2014

Premium roast ground coffee Single cup servings

Brand Market share (%) Brand Market share (%)

Starbucks 26.1 Starbucks 16.3 Dunkin’ Donuts 14.8 Green Mountain 15.9 Private label 8.5 Private label 11.2 Peet’s Coffee & Tea 7.7 Folgers Select 9.5 Eight O’clock 7.6 Coffee People 6.5

Source: Multiple web sources.

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Looking Ahead

The credibility of the growth projections revealed by Beto Guajardo, head of global strategy, at Starbucks’ 2015 shareholders meeting was reinforced by the release of the company’s quarterly financial results on April 26, 2015. For the quarter ended March 26, 2015, revenues were 18% higher than the corresponding quarter in 2014 and operating profit was 21% higher. Among 30 investment analysts polled by the Financial Times on April 24, 2015, 23 assessed Starbucks as a “buy” or “outperform.”

Yet amidst the acclaim for Starbucks’ resumption of its growth path since 2009 and confidence in its expansion strategy for the future, doubts existed over the com- pany’s ability to sustain its outstanding performance record. Several of these risks were identified in Starbucks’ 10-K report for 2014, including:

● Risks to Starbucks’ brand reputation resulting from “business incidents, whether isolated or recurring and whether originating from us or our business partners, that erode consumer trust, such as actual or per- ceived breaches of privacy, contaminated food, recalls or other potential incidents…”15

● Growing competition in all of Starbucks’ markets: “In the US, the ongo- ing focus by large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages could lead to decreases in customer traffic to Starbucks … Similarly, continued competition from well- established competitors in our international markets could hinder growth … Increased competition in the US packaged coffee and tea and single-serve and ready-to-drink coffee beverage markets, including from new and large entrants to this market, could adversely affect the profitability of the Channel Development segment. Additionally, declines in general consumer demand for specialty coffee products for any reason, including due to consumer pref- erence for other products, could have a negative effect on our business.”16

● Saturation of the US market: “because the Americas segment is relatively mature and produces the large majority of our operating cash flows, such a slowdown or decline could result in reduced cash flows…”17

● In international markets, Starbucks’ future growth was heavily dependent upon China and Asia Pacific. Here risk factors included political and regula- tory uncertainties, difficulties of protecting intellectual property and enforcing contracts, reliance upon foreign partners, and the challenge of adapting to differences in consumer tastes and business and employment practices.

Some observers expressed concern over Starbucks’ growing diversification—both its widening range of food and beverage products and its entry supplying the gro- cery trade, about which Barclays Capital analyst Jeff Bernstein observed: “They’re starting a new chapter from scratch … the question has to be: Do you realize the magnitude of the task you’re taking on?”18 Other commentators expressed concern over the possible erosion of the Starbucks Experience and Starbucks’ identity as it extended into tea, soda drinks, hot food, instant coffee, and drive-through stores.

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Appendix: Starbucks’ Country and Segment Data Starbucks’ Stores by Country

TABLE A1 Starbucks’ company operated stores

2014 2012

US 7,303 6,856 Canada 983 874 Brazil 89 53 Puerto Rico 20 19 UK 506 593 Germany 152 157 France 78 67 Switzerland 55 50 Austria 17 12 Netherlands 7 3 China 823 408 Thailand 203 155 Singapore 106 80 All othera 369 14 Total 10,711 9,327

Note: aIncludes Seattle’s Best Coffee, Teavana, and Evolution Fresh. Source: Starbucks Corporation 10-K reports.

TABLE A2 Starbucks’ licensed stores

2014 2012

US 4,659 4,189 Mexico 434 356 Canada 462 300 Other Americas 241 166 UK 285 168 Turkey 220 171 United Arab Emirates 115 99 Spain 86 78 Kuwait 72 65 Saudi Arabia 67 64 Russia 87 60 Other EMEAa 391 282 Japan 1,060 965 China 544 292 South Korea 700 467 Taiwan 323 271 Philippines 240 201 Other CAP 625 432 Other licensed 42 76 Total licensed 10,653 8,702

Note: aEMEA: Europe, Middle East, and Africa. Source: Starbucks Corporation 10-K reports.

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TABLE A3 Starbucks’ Americas segment ($million)

2014 2013

Net revenues: Company-operated stores 10,866.5 10,038.3 Licensed stores 1,074 915.4 CPG, food service and other 39.1 47.1 Total net revenues 11,979.6 11,000.8 Cost of sales including occupancy costs 4,487.0 4,214.9 Store operating expenses 3,946.8 3,710.2 Other operating expenses 100.4 96.9 Depreciation and amortization expenses 469.5 429.3 General and administrative expenses 167.8 186.7 Total operating expenses 9,171.5 8,638.0 Income from equity investees — 2.4 Operating income 2,808.1 2,365.2

Source: Starbucks Corporation, 10-K report for 2014.

TABLE A4 Starbucks’ EMEAa segment ($million)

2014 2013

Net revenues: Company-operated stores 1,013.8 932.8 Licensed stores 238.4 190.3 CPG, food service and other 42.6 36.9 Total net revenues 1,294.8 1,160.0 Cost of sales including occupancy costs 646.8 590.9 Store operating expenses 365.8 339.4 Other operating expenses 48.2 38.5 Depreciation and amortization expenses 59.4 55.5 General and administrative expenses 59.1 71.9 Total operating expenses 1,179.3 1,096.2 Income from equity investees 3.7 0.4 Operating income 119.2 64.2

Note: aEMEA is Europe, Middle East, and Africa. Source: Starbucks Corporation, 10-K report for 2014.

Starbucks’ Segment Results, 2013 and 2014

CaSe 2 StarbuCkS Corporation, May 2015 457

TABLE A6 Starbucks’ Channel Development segment

2014 2013

Net revenues: CPG 1,178.8 1,056.0 Food service 367.2 342.9 Total net revenues 1,546.0 1,398.9 Cost of sales 882.4 878.4 Other operating expenses 187.0 179.4 Depreciation and amortization expenses 1.8 1.1 General and administrative expenses 18.2 21.1 Total operating expenses 1,089.4 1,080.0 Income from equity investees 100.6 96.6 Operating income 557.2 415.5

Note: Channel Development comprises sales of packaged coffee, packaged beverages, and other products to the grocery and food service trades. Source: Starbucks Corporation, 10-K report for 2014.

TABLE A5 Starbucks’ China/Asia Pacific segment ($million)

2014 2013

Net revenues: Company-operated stores 859.4 671.7 Licensed stores 270.2 245.3 Total net revenues 1,129.6 917.0 Cost of sales including occupancy costs 547.4 449.5 Store operating expenses 221.1 170.0 Other operating expenses 48.0 46.1 Depreciation and amortization expenses 46.1 33.8 General and administrative expenses 58.5 48.4 Total operating expenses 921.1 747.8 Income from equity investees 164.0 152.0 Operating income 372.5 321.2

Source: Starbucks Corporation, 10-K report for 2014.

Notes

1. Starbucks’ 2014 Annual Shareholders’ Meeting, March 18, 2015. Opening remarks by Howard Schultz, http:// investor.starbucks.com/phoenix.zhtml?c=99518&p=irol- irhome, accessed July 20, 2015.

2. Howard Schultz, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time (New York: Hyperion, 1997).

3. J. Wiggins “When the Coffee Goes Cold,” Financial Times (December 13, 2008).

4. Quoted in: Howard Schultz: Building the Starbucks Community (Harvard Business School Case No. 9-406-127, 2006).

5. “The Way We Do Business,” http://gr.starbucks.com/ en-US/_About+Starbucks/Mission+Statement.htm, accessed July 20, 2015.

6. “Starbucks hit by ‘cascade of negativity’ after ordering staff to talk racism with customers: Vice President forced off Twitter as angry public turns on ‘patronizing’ project,” www.dailymail. co.uk/news/article-3000260/Starbucks-PR-fail- Twitter-mockery-causes-coffee-executive- delete-account-customers-say-NOT-want-talk-racism- ordering-coffee.html#ixzz3YTz4jXh5, accessed July 20, 2015.

458 CaSeS to aCCoMpany ConteMporary StrateGy anaLySiS

7. “Starbucks: A Visual Cup o’ Joe,” @Issue: Journal of Business and Design 1, (2006): 18–25.

8. Starbucks Corporation, press release, Starbucks Reports First Quarter Fiscal 2009 Results ( January 28, 2009).

9. M. Allison, “Schultz Concerned about Consumers, Not Competitors,” Seattle Times ( January 31, 2008), http:// seattletimes.com/html/businesstechnology/2004155269_ starbucksadd31.html, accessed July 20, 2015.

10. A meeting at London’s Barbican Center is described in J. Wiggins, “When the Coffee Goes Cold,” Financial Times (December 13, 2008).

11. “Starbucks’ Quest for Healthy Growth: An Interview with Howard Schultz,” McKinsey Quarterly (March 2011).

12. Ibid. 13. Ibid. 14. “Starbucks Outlines Blueprint for Profitable Growth at

Annual Shareholders Meeting,” Starbucks Corporation press release (March 23, 2011).

15. Starbucks Corporation 10-K report for 2014: 10. 16. Ibid.: 12. 17. Ibid.: 13. 18. “Latest Starbucks Concoction: Juice,” Wall Street Journal

(November 11, 2011).

In March 2013, the French fashion and retail giant Pinault-Printemps-Redoute (PPR) changed its name to Kering. According to CEO François-Henri Pinault: “Kering is a name with meaning, a name that expresses both our purpose and our corporate vision. Strengthened by this new identity, we shall continue to serve our brands to liberate their potential for growth.” The change in name followed the transformation in the business of the company.

PPR was primarily a retailing company: it owned the department store chain Au Printemps, the mail-order retailer La Redoute, and the music and electronics chain Fnac. However, the acquisition of 40% of the Gucci Group in 1999 (later increased to 99.4%) marked the beginning of a transformation from being a retailing company to a fashion and luxury goods company. Table 1 shows the main acquisitions and divestments of PPR/Kering.

This was not the first transformation that the company had undergone. PPR/ Kering was the creation of the French entrepreneur Francois Pinault who had established Pinault SA as a timber trading company before acquiring retailers Au Printemps and La Redoute. In March 2005, Francois Pinault was replaced by his son, François-Henri Pinault—a graduate of HEC School of Management—as chairman and CEO of Kering. The Pinaults’ dominance of Kering is ensured through the role of the Pinault family’s holding company, Groupe Artémis, which owns 40.9% of Kering. (Artemis also owns Christie’s, the auction house, and the Château Latour vineyards.)

In recreating itself as a diversified fashion and luxury goods company, Kering has been widely viewed as modeling itself on LVMH—the world’s leading purveyor of luxury goods. However, despite the close parallels between the two companies— and their leading families, the Pinaults and the Arnaults—Kering has underper- formed LVMH. During the ten-year period under the leadership of François-Henri Pinault (March 2005 to March 2015), Kering’s share price growth was 121% com- pared to 271% for LVMH. Kering’s revenues had declined by 41% over the period, compared to LVMH’s growth of 100%, while operating profit had grown by 21%, compared with 67% for LVMH. (Figure 1 charts changes in Kering’s share price.) It was widely believed that LVMH’s superior performance would continue: of the investment analysts surveyed by the Financial Times during summer 2015, 62% rated LVMH as a “buy” or “outperform” as compared with 36% for Kering.

Efforts to boost Kering’s performance included a shakeup of the manage- ment of Gucci—chief executive Patrizio di Marco was replaced by Marco Bizzarri and Creative Director Frida Giannini by Alessandro Michele—and exploring the

Case 3 Kering SA: Probing the Performance Gap With LVMH

460 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

possible sale of its sportswear company, Puma. However, if Kering was to close the performance gap between itself and LVMH, a critical first step was to understand the sources of that performance differential.

Kering in 2015

In 2015, Kering SA operated in two segments:

● Luxury: designs, manufactures, and markets ready-to-wear clothing, leather goods, shoes, watches, jewelry, fragrances, and cosmetic products through a number of high-profile brands.

TABLE 1 Kering’s principal acquisitions and divestments, 2000–2014

Year Business

2000 Acquisition of Boucheron (jewelry and perfumes) 2001 Acquisition of Bottega Veneta and Balenciaga

Launch of Stella McCartney and Alexander McQueen brands 2004 Ownership of Gucci Group increased to 99.4%

Sale of Facet (financial services), Rexel (distributors of electrical equipment) 2006 Sale of Printemps 2007 Acquisition of 62% of Puma 2009 Acquisitions of Dobotex (manufacturer of Puma socks and apparel) and Brandon (corporate merchandising) 2010–2011 Acquisitions of Cobra and Volcom (sports equipment suppliers) and luxury menswear supplier, Brioni 2012 Divestment of Fnac

Sale of Redcats online businesses Joint venture formed with Yoox for online sales of luxury brands

2013 Acquisition of Christopher Kane (fashion clothing), Pomellato (jewelry) and France Croco (processor of crocodile skins)

Sale of La Redoute and Relais Colis (parcel delivery) 2014 Acquisition of Ulysse Nardin (watches)

Source: Tables 1, 2, 3, A1 and A2 are based upon information in Kering Financial Documents for 2014, 2012, and 2010.

FIGURE 1 The share price of PPR/Kering, 2000–2015  (log Scale)

200

150

100

30 2001 2003 2007 20132005 2009 2011 2015

Source: Yahoo! Finance.

CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 461

FIGURE 2 Kering Group: Simplified organizational chart, January 2015

Source: Kering Financial Document, 2014.

KERING

Kering Corporate Kering Asia PacificKering Americas

Sport & Lifestyle Division

YSL

Boucheron

Balenciaga

Brioni

Qeelin 78%

Gucci

Bottega Veneta

Alexander McQueen

Christopher Kane (51%)

Pomellato (75%)

Puma (86%) Volcom

Electric

Luxury Division

● Sport & Lifestyle: designs and develops footwear, apparel, and accessories under the Puma, Volcom, and Electrics brands.

Figure 2 shows Kering’s organizational structure. Table 2 shows the performance of major brands.

Table 3 shows revenue by geographical region. Kering’s states that its mission is “To offer products that enable its customers to

express their personality. To reach this goal, the Group empowers an ensemble of powerful, complementary brands to reach their full potential, while ensuring that each of them stays true to its own values and identity—this is what Kering calls Empowering Imagination.”1

Kering’s strategy comprises a combination of organic and external growth:

● Organic growth involves “(i) launching new product categories and continuously refining existing lines; (ii) strengthening distribution channels through selective expansion of directly-operated store networks, close relationships with third- party retailers, and implementation of a dynamic e-commerce strategy; (iii) enhancing sales performance, notably through increasingly efficient

462 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

merchandising, in-store excellence, sophisticated customer intelligence, and relevant, well-targeted communications.”2 For example, in 2014 Gucci launched a range of cosmetics. Another strategic initiative is the development of an integrated approach to eyewear comprising an internal value chain for product develop- ment, supply chain management, brand strategy, and sales and marketing.

● External growth involves acquiring brands with “exceptional brand identity, well-rooted values and a sought-after legacy; a unique scope of expression through lasting codes and language, often referred to as their DNA; an ability to broaden their territories independently or through alliances; and an aptitude to gradually expand their market coverage beyond their current borders.”3 For example, Kering’s acquisition of watchmaker Ulysse Nardin was based upon its complementary relationship with Kering’s other watch brands and Ulysse Nardin’s potential for geographical expansion, especially in Asia-Pacific.

Synergies across Kering’s businesses are achieved through:

● Talent development and deployment: “The idea behind the HR strategy is for the brands to flourish through access to a shared talent pool [which] primar- ily targets the top 200 managers of the Group.”4

TABLE 3 Kering Group: Sales revenue by geographical region

2014 €million

2013 €million

Reported change (%)

Comparable change (%)a

Western Europe 3,152 3,022.0 +4.3 +1.6 North America 2,147 2,032 +5.7 +5.5 Japan 963 968 –0.5 +7.3 Eastern Europe, Middle East and Africa 728 710 +2.7 +4.9 South America 465 475 –2.2 +9.0 Asia-Pacific (excluding Japan) 2,583 2,449 +5.4 +5.3 Total revenue 10,038 9,656 +4.0 +4.5

Note: aChange in revenue after correcting for changes in exchange rates.

TABLE 2 Kering Group: Performance of the major brands (€ millions)

Brand

Revenue Op. Incomea Op. margin Net assets

2014 2013 2014 2013 2014 2013 2014 2013

Gucci 3497 3561 1056 1132 30.2% 31.8% 6373 6355 Bottega Veneta 1131 1015 357 331 31.6% 32.5% 1072 532 Saint Laurent 707 557 105 77 14.9% 13.8% 547 1005 Other luxury brands 1424 1337 147 144 10.3% 11.6% 2551 1935 Total Luxury Division 6759 6378 1666 1684 24.6% 26.4% 10542 9826 Puma 2990 3002 128 192 4.3% 6.4% 4399 4335 Other sport/lifestyle brands 255 245 10 9 3.7% 3.5% 277 418 Total Sport & Lifestyle

Division 3245 3247 138 200 4.2% 6.2% 4675 4753

Note: aRecurrent operating income. Excludes impairment of goodwill, restructuring costs, etc.

CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 463

● An e-business strategy developed initially for Gucci but then extended to each of Kering’s brands.

● A group-wide approach to sustainability that “represents long-term differ- entiation and competitive advantage by offering new business development opportunities, stimulating innovation and in many cases helping to reduce costs. It is also a motivating factor for the employees … The Kering sustain- ability department acts as a platform of resources to accompany the brands’ own activities.”5

Appendix 1: Kering SA: Selected Financial Data6

TABLE A1 Selected items from the financial statements of Kering SA, year to 31 December (€million)

2014 2013 2012 2011 2010

INCOME STATEMENT Total revenue 10,038 9,656 9,736 8,062 11,008 Cost of sales 3,742 3,615 3,776 3,087 5,639 Selling, general and admin. expenses 1,545 1,516 1,494 1,229 1,637 Non-recurring net expenses 112 441 25 24 98 Other operating expenses, total 3,087 2,774 2,675 2,245 2,405 Total operating expense 8,486 8,345 7,970 6,584 9,779 Operating income 1,552 1,311 1,766 1,478 1,229 Net income from continuing operations 1,008 874 1,324 968 709 Net income from discontinued operations (479) (825) (276) 18 255 Net income 529 50 1048 986 965 BALANCE SHEET Assets Cash and short-term investments 1,196 1,527 2,168 1,316 1,449 Total receivables, net 1,168 1,069 1,061 1,183 1,317 Total Inventory 2,235 1,806 1,737 2,203 2,227 Total current assets 5,273 4,925 5,460 5,277 6,940 Property, plant, and equipment 1,887 1,677 1,376 1,372 1,424 Goodwill, net 4,040 3,770 3,871 4,215 4,540 Brands and other intangibles 10,748 10,703 10,490 10,331 10,200 Total assets 23,254 22,811 25,257 24,954 24,695 Liabilities Accounts payable 983 766 685 1,536 1,928 Notes payable/short-term debt 1,254 540 362 892 372 Current portion long-term debt/capital leases 1,247 1,310 1,223 1,095 1,799 Total current liabilities 5,780 4,559 4,381 7,072 6,495 Total long-term debt 3,195 3,133 2,989 3,066 3,148 Total debt 5,696 4,982 4,212 5,053 5,319 Total liabilities 12,620 12,224 13,843 14,029 14,095 Total shareholders’ equity 10,634 10,587 11,414 10,925 10,599 CASH FLOWS Net cash from operating activities 1261 1521 1366 1,332 1,264 Total cash from investing of which (903) (966) 259 402 79 —Capital expenditures (551) (675) (442) (325) (305)

464 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Appendix 2: LVMH: Selected Financial Data

LVMH Moet Hennessy Louis Vuitton SA (LVMH) is a Paris-based luxury goods company. Tables A3 to A5 show financial data for the company and its main businesses.

TABLE A3 LVMH’s businesses and brandsa

Revenue (€million)

Op. profit (€million)

Division 2014 2013 2014 2013 Major brands

Wines and Spirits

3,973 4,187 1,147 1,370 Moët & Chandon, Dom Pérignon, Veuve Clicquot, Krug, Ruinart, Mercier, Château d’Yquem, Château Cheval Blanc, Hennessy, Glenmorangie, Ardbeg, Wen Jun, Belvedere, Chandon, Cloudy Bay

Fashion and Leather Goods

10,828 9,882 3,189 3,140 Louis Vuitton, Céline, Loewe, Kenzo, Givenchy, Thomas Pink, Fendi, Emilio Pucci, Donna Karan, Marc Jacobs, Berluti, Nicholas Kirkwood, Loro Piana

Perfumes and Cosmetics

3,916 3,717 415 414 Christian Dior, Guerlain, Parfums Givenchy, Parfums Kenzo, Loewe Perfumes, Benefit Cosmetics, Make Up For Ever, Acqua di Parma

Watches and Jewelry

2,782 2,784 283 375 Bulgari, TAG Heuer, Chaumet, Dior Watches, Zenith, Fred, Hublot, De Beers Diamond Jewellers Ltd (a joint venture)

Selective Retailing

9,534 8,938 882 901 DFS, Sephora, Le Bon Marché, la Samaritaine, Royal Van Lent

Note: aNet assets by business in 2014 were: Wines and Spirits €10,543m; Fashion and Leather €9,484m; Perfumes and Cosmetics €1,397m; Watches and Jewelry €7,196m; Selective Retailing €4,849m. Source: Tables A3, A4, and A4 are based upon LVMH Annual Reports for 2014, 2012, and 2010.

TABLE A2 Kering Group: Divisional information

Luxury Sport & Lifestyle

Brand 2014 2013 2014 2013

Brand value (€m) 6578 6629 3887 2523 Goodwill (€m) 2944 2523 1096 1247 Number of stores 1173 1088 677 608 Number of production & logistic units 140 110 44 51 Divisional revenue by product 6759 6378 1666 1684 Apparel (%) 16 16 40 43 Footwear (%) 12 13 40 39 Leather goods (%) 53 54 -- -- Watches & jewelry (%) 10 9 -- -- Other (%) 9 8 20 18 Divisional revenue by region W. Europe (%) 32 33 30 30 N. America (%) 19 19 26 25 Asia Pacific (%) 31 31 14 13 Japan (%) 10 10 9 10 Other (%) 8 7 21 22

CASE 3 KERING SA: PRObING THE PERfORMANCE GAP WITH LVMH 465

TABLE A4 LVMH’s revenues by geographical region, 2014 (€million)

France 3,212 Europe (excluding France) 5,830p Asia (excluding Japan) 8,740 Japan 2,107 United States 7,262 Other countries 3,487

TABLE A5 Selected items from financial statements of LVMH (€million)

2014 2013 2012 2011 2010

INCOME STATEMENT ITEMS Total revenue 30,638 29,016 27,970 23,659 20,320 Cost of sales 10,801 9,997 9,863 8,092 7,184 Selling, general, and admin. expenses 14,117 12,979 12,164 10,304 8,815 Non-recurring net expenses 289 116 174 95 155 Operating income 5,431 5,898 5,742 5,154 4,169 Net income 5,648 3,436 3,425 3,065 3,032 BALANCE SHEET ITEMS Cash and short-term investments 4,091 3,397 2,187 2,448 2,511 Total receivables, net 2,628 3,132 2,173 2,750 2,155 Inventory 9,475 8,492 7,994 7,510 5,991 Total current assets 18,110 15,971 14,167 13,267 11,199 Property, plant, and equipment 10,387 9,621 8,694 8,017 6,733 Goodwill, net 8,810 9,058 7,709 6,957 5,027 Brands and other intangibles 13,031 12,596 11,322 11,482 9,104 Total assets 53,362 56,176 49,850 47,113 37,164 Accounts payable 3,606 3,297 3,118 2,952 2,298 Notes payable/short-term debt — 3,661 — 1,825 823 Current portion long-term debt/capital leases 4,189 1,013 2,950 1,219 1,011 Total current liabilities 12,175 11,639 9,405 9,594 7,060 Total long-term debt 5,054 4,149 3,825 4,132 3,432 Total debt 9,243 8,823 6,775 7,176 5,266 Total liabilities 31,599 29,297 25,426 24,742 19,966 Shareholders’ equity 21,763 26,879 24,424 22,371 17,198 CASH FLOWS Net cash from operating activities 4,607 4,714 4,115 3,907 4,049 Total cash from investing of which (2,007) (3,917) (1,690) (3,016) (2,691) —Capital expenditures (1,775) (1,657) (1,694) (1,749) (1,002)

Notes

1. Kering Financial Document 2014: 8. 2. Ibid.: 8. 3. Ibid.: 9.

4. Ibid.: 10. 5. Ibid.: 11. 6. LVMH 2014 Annual Report.

Case 4 Pot of Gold? The US Legal Marijuana Industry

During the early months of 2015, the US venture capital industry was waking up to the opportunities offered by the legalization of marijuana in several US states. Several specialist investment firms had been established to invest in marijuana- related businesses. An early leader was Seattle-based Privateer Holdings, which sought “to cement a leading position within the legal cannabis industry by con- solidating market share through strategic investments”—these included Marley Natural, established in collaboration with Bob Marley’s daughter. Another pioneer was Emerald Ocean Capital, founded by Justin Hartfield, which sought to “own and operate the ‘Starbucks’ and ‘Bacardi’ of the marijuana industry.” Mainstream interest in the industry was triggered by the news in January that Founders Fund, led by PayPal co-founder Peter Theil, and a major investor in Airbnb, Lyft, and Spotify, was investing in Privateer Holdings. The Cannabis Capital Summit held in Denver during June 2015 organized by the Rockies Venture Capital Club provided a further boost to the marijuana industry by linking the growing number of potential investors with the many entrepreneurs seeking to exploit the business opportunities that legaliza- tion had made available.

However, amidst the “new gold rush” hype that surrounded the rapid growth of the legal marijuana industry—especially in Colorado—were perplexing ques- tions over the industry’s potential to generate attractive profits. Would the industry offer the sustained high profitability associated with the two other heavily regulated industries supplying recreational drugs—alcohol and tobacco—or would the indus- try be associated with the squeezed margins and low returns typical of the agricul- tural sector?

Legalization

Legalization of the sale of marijuana by the states of Colorado and Washington in 2014 was a milestone in the transition of America’s marijuana business from a clandestine activity—where growers, dealers, and consumers risked fines and jail sentences—to a legitimate economic activity, which many believed would increas- ingly resemble tobacco and alcoholic beverages. By the beginning of 2015, Colorado, Washington, Oregon, and Alaska allowed the sale of marijuana for recreational use, 12 other states and the District of Colombia permitted its sale for medical use, and

CaSe 4 PoT of GoLd? The US LeGaL MarIjUana IndUSTry 467

six states (Massachusetts, Maine, Rhode Island, California, Nevada, and Hawaii) were expected to legalize recreational use by 2018.

Yet, amidst continuing concerns over the physical and psychological ill effects of marijuana consumption, the impetus to change federal law was weak. Continuing illegality of the production, sale, and possession of marijuana under federal law was a major handicap for the industry, even if the federal government did not seek to counter or overturn legalization by individual states. In particular, firms engaged in producing and selling marijuana had very little access to the US financial sys- tem. Banks were fearful that involvement with the industry might contravene drug- racketeering or money-laundering rules. In the US as a whole, law enforcement against consumers and suppliers of marijuana continued to be active. In 2013, there were 693,481 arrests throughout the US on marijuana-related charges—88% of them for possession.

The Market for Marijuana

The US market for marijuana may be segmented between legal and illegal sectors and between medical and recreational use. Table 1 provides some data.

There were various estimates as to the extent of marijuana consumption in the US. A US government survey found that:

Marijuana was the most commonly used illicit drug in 2013. There were 19.8 million past month users in 2013 (7.5 percent of those aged 12 or older), which was similar to the number and rate in 2012 (18.9 million or 7.3 percent). The 2013 rate was higher than the rates in 2002 to 2011 (ranging from 5.8 to 7.0 percent). Marijuana was used by 80.6 percent of current illicit drug users in 2013.1

One suggested that 7.5% of adult Americans were regular users. A 2013 study by Pew Research found that 12% of adult respondents had used marijuana in the previ- ous 12 months: 30% of which were for medical reasons, 47% “just for fun,” and the remainder for both reasons.

TABLE 1 The US marijuana market

Market feature Data

Numbers of users, 2014 Total users 19.5m (of which, legal users 1.5m) Marijuana sales, 2014 Legal: $2.7bn (of which 82% medical, 18%

recreational) Illegal: between $18bn and $30bn

Top six states for legal marijuana sales, 2014 California $1.32bn; Colorado $0.81bn; Washington $0.22bn; Arizona $0.16bn; Michigan $0.11bn; Oregon $0.05bn

Rate of annual growth of US legal marijuana sales

2012—18%; 2013—35%; 2014—74%; 2015E—31%; 2016E—23%

Estimate of US annual sales of marijuana with full legalization

Between $20bn and $46bn

Sources: Houston Chronicle, ArcView Market Research, Medical Marijuana Business Daily.

468 CaSeS To aCCoMPany ConTeMPorary STraTeGy anaLySIS

The Colorado Legal Marijuana Industry

Because Colorado was the first state to legalize recreational marijuana, it was seen as a bellwether for how the legal marijuana industry might develop elsewhere—even though the structure and conduct of the industry would depend greatly upon how each state framed its regulations.

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