Starbucks' Human Resource Management Policies and the Growth Challenge
In January 2005, when Starbucks Coffee Company (Starbucks) was placed second
among large companies in the Fortune "Best Companies to Work For" survey, it was no
surprise to those familiar with the company's human resources management policies and
work culture.
In general, the retail industry is notorious for its indifferent attitude towards employees.
Despite the fact that employees, especially those on the frontline, are critical to the success
of retail businesses, most companies do not have a strong relationship with their employees,
and consequently suffer from a high rate of employee turnover (In the early 2000s,
employee turnover in the retail industry was around 200 percent).
In this scenario, Starbucks stood out for its employee-friendly policies and supportive work
culture. The company was especially noted for the extension of its benefits program to part-
time workers - something that not many other companies offered. As a result, Starbucks
employees were among the most productive in the industry and the company had a
relatively low employee turnover.
Though it was popular as an employer, Starbucks' main challenge in the early 2000s was
whether it would be able to continue to attract and retain the right kind of employees in the
right numbers, to man its rapid expansion program. Although it experienced slow growth in
the initial years the company expanded rapidly after its Initial Public Offer (IPO) in 1992 and
grew at an average rate of around 20 percent per annum.
Analysts said that, in the light of its ambitious expansion program, Starbucks' generous
human resource policies made sound strategic sense, as they kept the turnover low and
provided a ready pool of experienced employees to support expansion.
However, by the early 2000s, three possible problems had to be considered - would the
company be able to support its staff with the same level of benefits in the future, given the
large increase in the number of employees; would the company be able to retain employees
if it made any move to lower its human resource costs by cutting down on benefits; and
would Starbucks be able to maintain its small company culture, an important element in its
past growth.
Starbucks was founded in 1971, by three coffee lovers, Gordon Bowker (Bowker), Jerry
Baldwin (Baldwin), and Zev Siegl (Siegl). Baldwin and Bowker were fond of Peet's coffee,
which they drank when they were at college in San Francisco. Even after they moved to
Seattle, they continued ordering Peet's coffee by mail.
On one such occasion, Bowker got the idea of opening a coffee shop in Seattle to supply
world-class coffee to Seattle residents. He talked it over with Baldwin and his neighbor Siegl,
and together, the trio set up the first Starbucks store in Seattle. (Starbucks originally sold
only whole bean coffee. The coffee bar concept evolved much later).
Starbucks grew at a slow pace initially and at the end of its first decade (1981), there were
four Starbucks stores. The partners also opened a roasting plant in Seattle. In 1981, Howard
Schultz (Schultz), a housewares company executive from New York, became interested in
Starbucks.
He went to Seattle to meet the partners and learn more about the business. What he saw of
Starbucks interested Schultz immensely, and he soon convinced the partners to hire him in a
marketing position at the company.
Schultz saw the potential of serving ready-to-drink coffee by the mug, and suggested
introducing the concept in the US. The partners however, were reluctant to extend their
brand into espresso drinks, and it took Schultz a year to convince them of the potential of
the idea.
Eventually, Starbucks started serving espresso coffee in 1985, when it opened its sixth store
in downtown Seattle. The concept was an immense success and within two months, the
store was serving over 800 customers a day (espresso sales were much higher than sales of
the best selling whole bean coffee).
Schultz was keen on extending this concept to the other stores as well, but Baldwin believed
that selling beverages distracted the company from the core business of selling top quality,
whole bean coffee.
Eventually, in 1985, Schultz left Starbucks and started his own coffee bar called Il Giornale.
Bowker and Baldwin, along with a few private investors provided financial backing for this
venture, and Starbucks supplied the coffee beans.
Schultz had opened Giornale in partnership with Dave Olsen (Olsen), who was previously the
owner of Café Allegro, a coffee bar. Olsen and Schultz had a strong partnership as Schultz
took care of the external aspects of the business, while Olsen brought his experience to the
making and serving of coffee.
In 1987, Baldwin, Bowker and Siegl decided to sell Starbucks, with its six retail stores,
roasting plant, and the corporate name. Schultz, along with a group of local investors bought
Starbucks for $3.7 million. Eventually, he changed Giornale's name to Starbucks Coffee
Company, and merged the two businesses.
Starbucks grew rapidly under Schultz's leadership. During the late 1980s, the company
expanded into Chicago, Vancouver and Portland, and Schultz promised investors that
Starbucks would have 125 locations by the early 1990s.
Human Resources Management at Starbucks
Starbucks realized early on that motivated and committed human resources were the key to
the success of a retail business. Therefore, the company took great care in selecting the
right kind of people and made an effort to retain them. Consequently, the company's human
resource policies reflected its commitment to its employees.
Starbucks relied on its baristas and other frontline staff to a great extent in creating the
'Starbucks Experience' which differentiated it from competitors. Therefore the company paid
considerable attention to the kind of people it recruited. Starbucks' recruitment motto was
"To have the right people hiring the right people."
Starbucks hired people for qualities like adaptability, dependability and the ability to work in
a team. The company often stated the qualities that it looked for in employees upfront in its
job postings, which allowed prospective employees to self-select themselves to a certain
extent.
Having selected the right kind of people, Starbucks invested in training them in the skills
they would require to perform their jobs efficiently. Starbucks was one of the few retail
companies to invest considerably in employee training and provide comprehensive training
to all classes of employees, including part-timers...
Analysts said that Starbucks biggest challenge in the early 2000s would be to ensure that
the company's image as a positive employer survived its rapid expansion program, and to
find the right kind of people in the right numbers to support these expansion plans.
Considering the rate at which the company was expanding, analysts wondered whether
Starbucks would be able to retain its spirit even when it doubled or tripled its size. By the
early 2000s, the company began to show signs that its generous policies and high human
resource costs were reflecting on its financial strength
Although the company did not reveal the amount it spent on employees, it said that it spent
more on them than it did on advertising, which stood at $68.3 million in fiscal 2004.
That the company was finding its human resource costs burdensome was reflected in the
fact that it effected an increase of 11 cents on its beverage prices in mid-2004. Analysts
wondered whether the company's cost problems could be met by a price increase, as
customers already paid a premium for Starbucks beverages. On the other hand, it would not
be easy for the company to cut down on benefits, as it could result in a major morale
problem within the company.
I. Background
II. Problem Statement
III. Key Challenges
IV. Specific Objectives
V. Recommendation
Deliverables:
1. A written report composed of at least 7 pages.
Grading Criteria:
1. Clarity and coherence of the report (20%)
2. Depth of analysis and research (30%)
3. Practicality and feasibility of recommendation (40%)
4. Use of HRM trends and best practices (10%)
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Short bond paper
I. Background
Starbucks Coffee Company, founded in 1971, emerged as a global leader in coffee retailing.
The company grew rapidly under the leadership of Howard Schultz, especially after he
bought the company in 1987. Starbucks’ success was attributed not only to its premium
coffee but also to its distinctive company culture, which placed a strong emphasis on
employee welfare and development. The company expanded significantly in the 1990s and
early 2000s, establishing a robust network of stores worldwide.
As of the early 2000s, Starbucks had been consistently recognized for its human resources
management policies, particularly its commitment to employees. In 2005, it was ranked
second on Fortune’s “Best Companies to Work For” list. These policies, which included
providing comprehensive benefits to both full-time and part-time employees, helped
Starbucks maintain low employee turnover and ensured that employees delivered
exceptional customer service. However, the company faced significant challenges as it
pursued aggressive expansion, especially related to maintaining its employee-centric culture
while managing increasing costs.
II. Problem Statement
The primary issue facing Starbucks in the early 2000s was how to sustain its employee-
focused culture amidst its rapid growth. While Starbucks had established a strong reputation
for treating its employees well, concerns arose regarding whether it could continue to offer
the same benefits to an expanding workforce. Additionally, the company faced the challenge
of balancing employee satisfaction with cost management, as its human resource policies
were becoming increasingly expensive. The growth of the company also posed a risk to its
small company culture, which had been integral to its success. Starbucks needed to
determine how to attract, retain, and manage a large workforce without compromising its
reputation as a great place to work.
III. Key Challenges
1. Maintaining Benefits and Employee Satisfaction:
• As Starbucks expanded rapidly, it needed to hire more employees, which
increased its costs, particularly in terms of employee benefits. The company’s generous
benefits program had been a key factor in its low turnover rates, but there were concerns
that the company might struggle to maintain these benefits for a larger workforce.
2. Cost Control and Profitability:
• With growing human resource costs, Starbucks faced pressure to maintain
profitability without alienating employees. This led to an increase in beverage prices in mid-
2004, raising concerns about the company’s ability to sustain its pricing model without
compromising its customer base.
3. Cultural Integrity and Employee Experience:
• Starbucks prided itself on offering a unique “Starbucks Experience” to
customers, which was largely driven by its frontline staff. However, as the company
expanded, there was a real concern about how to maintain this distinctive company culture.
With more locations and employees, it became difficult to preserve the personal,
community-oriented culture that had characterized the company’s success.
4. Recruiting and Retaining the Right Talent:
• Starbucks’ ability to find and retain the right people was crucial to its
continued success. The company had a strong recruitment process focused on finding
adaptable, dependable, and team-oriented individuals. However, as the company expanded,
it had to ensure it could continue to hire the right employees in sufficient numbers without
compromising quality.
IV. Specific Objectives
1. Ensure the sustainability of employee benefits:
• Starbucks needs to find a way to balance its employee-friendly policies with
the financial demands of rapid growth. This includes determining how to maintain or adjust
its benefits programs to ensure employees remain satisfied while keeping costs
manageable.
2. Manage growth without losing company culture:
• The company must develop strategies to maintain its strong company culture,
which has been central to its brand, even as it scales operations globally. This includes
fostering an environment of community and employee engagement at every level of the
company.
3. Attract and retain the right employees:
• As Starbucks continues to expand, it needs to ensure it can continue
recruiting employees who embody the company’s values and mission. This involves
maintaining a strong recruitment process and offering training and development
opportunities for new employees.
4. Balance profitability with employee satisfaction:
• Starbucks must figure out how to continue its profitable growth trajectory
without diminishing the satisfaction of its employees. This involves carefully managing costs,
particularly those related to human resources, while ensuring that the quality of service and
employee morale are not compromised.
V. Recommendation
1. Adopt Flexible Benefits Plans:
• Starbucks could explore offering a range of benefits packages to employees,
tailored to different job levels and locations. By offering more flexibility, the company could
reduce costs for part-time employees while maintaining valuable benefits for full-time
employees. This flexibility could help mitigate the financial strain of providing extensive
benefits to a growing workforce.
2. Streamline Training and Development Programs:
• While Starbucks is known for its comprehensive training programs, a more
scalable training model should be developed to accommodate a larger number of
employees. Online training modules, mentoring programs, and leadership development
tracks could be used to ensure all employees receive the support they need without
requiring significant time and resource investment from managers.
3. Create a Stronger Internal Communication System:
• To maintain company culture across all locations, Starbucks should strengthen
its internal communication system. Regular town halls, newsletters, and internal social
platforms could help employees feel connected to the company, regardless of their location
or job level. Additionally, the company could leverage technology to foster engagement and
ensure the company’s mission and values are consistently communicated.
4. Increase Focus on Employee Recognition and Growth:
• Starbucks should invest more in recognition programs that celebrate
employees’ contributions to the company. A culture of recognition could help improve
morale and reduce turnover, particularly during periods of rapid expansion. Encouraging
internal promotions and career development opportunities would also help retain employees
and provide a pathway for advancement.
5. Optimize Operational Efficiency:
• Starbucks should continue to focus on operational efficiency to reduce costs
without affecting the quality of its products or services. This could include improving supply
chain management, optimizing store layouts, and investing in technology to streamline
operations. A more efficient operation would allow the company to absorb some of the rising
costs associated with employee benefits.
By implementing these strategies, Starbucks can continue to grow while maintaining its
reputation as a great employer, ensuring that employees remain engaged and loyal even as
the company expands.
