Starbucks and the Spotlight Effect: Corporate Social Responsibility and Reputation Risk Case Solution

Starbucks had prided itself on being a “good citizen” and had made substantial efforts to be a socially responsible company. It had made significant contributions to charities that focus on children, the environment, and AIDS research, was an active supporter of the arts, and made a commitment to be a strong supporter of local not-for-profit organizations and events in each community where it did business. But five years earlier, Starbucks had experienced embarrassing grassroots protests because it sourced coffee beans from Guatemala exporters who paid workers less than a daily living wage. Protesters leafleted Starbucks stores across the country and targeted the February 1995, annual meeting The company had responded with its “Framework for a Code of Conduct” becoming the first US importer in the agriculture commodities sector to try to improve working conditions in the world’s coffee growing regions.. 

While Starbucks was no worse than the average coffee wholesaler, its reputation as a values-driven corporation made it a vulnerable target. Perhaps it was a victim of the “Spotlight Effect” where companies which purport to be good corporate citizens are held to a higher standard. How could Starbucks deflect this spotlight, protect its reputation, and provide evidence to the world that it takes it Corporate Social Responsibility very seriously?

1. Company Background

Starbucks was founded in 1971 in Seattle by coffee aficionados Gordon Bowker, Jerry Baldwin, and Ziv Siegl, three academics who opened a Seattle coffee shop named after the coffee-loving first mate in Moby Dick. They adopted the two-tailed siren, a medieval symbol of power and strength, as their logo. Their goal was to sell the finest quality whole bean and ground coffees. By 1982, Starbucks had five retail stores and was selling coffee to restaurants and espresso stands throughout Seattle.

Howard Schultz joined the company in 1982 to manage retail sales and marketing. After a trip to Italy, where he was impressed with the popularity of espresso bars, he convinced Starbuck owners to open a downtown coffee bar in 1984. After its success, Shultz left Starbucks to open his own coffee bar, Il Giornale, which sold Starbucks coffee. In 1987 Il Giornale purchased Starbucks retail operations for $4 million. Il Giornale, with Schultz as CEO, changed its name to Starbucks Corporation, prepared to expand nationally, and opened coffee bars in Chicago and Vancouver. The company published its first mail-order catalogue in 1988.

Starbucks lost money in the late 1980s as it focused on rapid expansion, tripling its stores to 55 between 1987 and 1989. In 1992 the company went public and set up shops in Nordstrom department stores. It entered into a licensed development agreement that allowed Host International to operate Starbucks retail stores in multiple airports. In 1993 it set up shops in Barnes and Nobles bookstores; it had nearly 275 stores at the end of 1993. In 1994 Starbucks began providing coffee to ITT/Sheraton hotels and later expanded its specialty sales to restaurants, wholesale houses, retailers, other hotels, and airlines. In 1995 Starbucks formed a joint venture with Pepsico to develop a bottled coffee drink and agreed to produce a line of premium coffee ice cream with Dreyer’s. Based on a popular in-house music program, it also began to sell compact discs. Starbucks expanded into Japan and Singapore in 1996; in 1997 it began testing sales of ground and whole bean coffee in supermarkets in Chicago and, in 1998, expanded supermarket sales nationally. Also in 1998, Starbucks expanded into the UK when it acquired the UK-based Seattle Coffee Company for about $86 million and converted its store into Starbucks locations. By the end of fiscal year 1999, Starbucks was involved in multiple other joint ventures and had acquired Oregon-based Tazo Tea Company.

During the period from going public in 1992 until the end of fiscal 1999, company profits increased nearly 2500%. (Exhibit 1). The number of stores increased from 165 to well over 2000. 

2. Product supply

Starbucks was committed to selling only the finest whole beans and coffee beverages. The company purchased and roasted high-quality whole bean coffees and sold them, along with a variety of coffee and tea beverages, pastries, confections, and coffee-related accessories and equipment, primarily through its company operated stores and licensed airport stores. To ensure compliance with its rigorous standards, Starbucks was vertically integrated, controlling its coffee sourcing, roasting, and distribution through its retail stores. The company purchased green beans for its more than 50 blends and varieties from coffee growing regions throughout the world and custom roasts them to precise standards. The company’s objective was to establish Starbucks as the most recognized and respected brand of coffee in the world.

Starbucks depended on both brokers and direct contact with exporters for its supply of green coffee beans. Coffee is the world’s second-largest traded commodity and its supply and prices are subject to market volatility. Supply and price can be affected by multiple factors including weather, political, and economic conditions. Coffee of the quality sought by Starbucks tends to trade substantially higher than commodity priced coffee. In order to lessen the risks associated with increases in coffee prices, the company entered into fixed price purchase commitments to secure an adequate supply of high quality green coffee and fix a cost for future periods.

3. Employees

The first guiding principle in Starbucks mission statement promised to “provide a great work environment and treat each other with respect and dignity” (Exhibit 2). At Starbucks the employees were referred to as “partners.” Each partner, including those working part-time, was eligible for health care benefits, could participate in the Bean Stock program, and was entitled to one free pound of coffee each week. In 1991 Starbucks became one of the first privately-owned companies to offer stock options to employees and they continued that practice after going public. Under the Bean Stock program, employees were offered stock at 85% of its fair market value four times per year. Starbucks employees also participated in a 401(k) profit sharing plan; the company matched 25% of each employee’s contribution to this plan up to 4% of the employee’s total compensation.

Starbucks believed that it is in the “people development business” as well as the coffee business. It had a nondiscrimination policy with respect to age, race, sexual orientation, veteran status, or handicap. In 1995 it hired a diversity manager to help improve the racial mix among its than 11,500 employees. Each employee completed an extensive training program that includes product expertise and a commitment to customer service. While the industry turnover rate is about 400% per year, Starbucks’ turnover was about 50%. Howard Schultz believed that Starbucks is profitable because the value system of the company is taught to every employee. By the end of fiscal 1999, the company employed more than 26,000 partners.

4. Environmental Policies

An environmental committee guided Starbucks’ strong commitment to the environment. The firm had a separate Environmental Mission Statement (Exhibit 3). Starbucks’ policy to recycle and conserve wherever possible drove a constant examination of ways to reduce, re-use, and recycle. They sold and encouraged use of long wear filters instead of paper filters. As many company products as possible, such as paper bags and boxes, catalogues, brochures, and publications, including their annual report, were made of recycled paper. Paper cups were made from oxygen-whitened rather than chlorine-bleached paper, which does not release dioxins into the environment. A wide selection of reusable, inexpensive thermal cups were offered at all stores and a discount was offered to encourage their use. Discounts were similarly given to those who reused their coffee bags. Individual stores were encouraged to pursue recycling arrangements for milk cartons and waste paper, and several composted coffee grounds for use by local gardeners.

Starbucks environmental conscience extended to its emphasis on and support of sustainable, responsible, and organic agriculture methods. In 1998 it partnered with Conservation International to promote environmentally sound ways of growing coffee. In the same year it also introduced Shade Grown Mexican coffee into their line. Shade grown coffee is grown using ecologically sound practices that help protect biodiversity and provide economic opportunity for small farmers.

5. Social Responsibilities

Starbucks made significant efforts to be a socially responsible company. It made contributions to local charities that focus on children, the environment, the arts, and AIDS research as well as coffee donations to homeless shelters in every state in which they had retail stores. In 1997, it formed an alliance with eight companies to provide 320,000 new books for children through the All Books for Children first annual book drive. It also, in that year, established the Starbucks Foundation to support literacy programs in communities where they had coffee houses. In 1998 it began offering the Doonesbury@Starbucks line of products with all net proceeds donated to local literacy organizations. In 1999 it formed the “Out of the Park, Into the Books” partnership with baseball player Mark McGwire. 

In 1991 Starbucks established a relationship with CARE, the international relief and development organization and introduced the CARE coffee sampler into their stores. Over several years the company became the largest corporate giver to CARE.  Initially the CARE projects were directed at rural development in general; several years later, Starbucks worked with CARE to develop a project that directly benefited families of coffee workers.

After the embarrassing grass roots protests from a campaign initiated by the US/Guatemala Labor Project (US/GLEP) in 1994, Starbucks created a code of conduct to guide them in doing business abroad and became the first US importer in the agricultural commodities sector to try to improve working conditions in the world’s coffee growing regions. On October 20, 1995, the company released its “Framework for a Code of Conduct” (Exhibit 4) that set minimum standards for working conditions and workers rights at the plantations from which they buy. In addition to pledging to limit child labor and guaranteeing workers the right to free association, the code committed to progressive environmental practice and conservation efforts as well as established the belief that wage and benefit levels should be sufficient to address the basic needs of workers and their families. At its February 1998, shareholders meeting, the company released its Framework for Action for Improving the Lives of People Who Grow, Harvest, and Process Coffee. In the framework, Starbucks describes four major areas in which it was trying to improve the lives of coffee workers including paying incentives to large farms to improve the living and working condition of their workers, advocating for improved working conditions within the Specialty Coffee Association of America and the National Coffee Association, providing support for a study of Guatemalan coffee working conditions, and providing financial assistance for a project aimed at assisting small coffee producers. In response to these efforts the US/GLEP stated that they “applaud and vigorously support Starbucks, with some important caveats” and revealed it had “no plans to resume its Starbucks campaign work”.