April 28, 2003

Starbucks acquisition: grounds for concern?

Starbucks' planned acquisition of Seattle Coffee (parent to Seattle's Best Coffee and Torrefazione Italia) saw two reactions: joy and consternation (though not necessarily in that order).

SBC and Terrafazione aficionados mourn their losses, industry competitors see new forces looming, and anti-consolidationists cry "foul." On the other hand, Starbucks shareholders and many business analysts view the move positively. Both reactions to the Starbucks acquisition mirror global perspectives as well.

Consolidation argument

Starbucks is coming late to the acquisitions party. Most of the $3+ trillion in worldwide foreign direct investment since 1998 comes from mergers and acquisitions in a range of industries: advertising, aerospace, paper and pulp, pharmaceuticals, energy, telecommunications and steel are a few. By comparison Starbucks' $72 million domestic purchase of Seattle Coffee looks piddling. But as a symbol, it highlights growing and global concerns about industry consolidation.

Among other things, critics perceive that industry consolidation concentrates the power of global corporations. Some believe corporations leverage power to enforce wage inequalities that further enhance their wealth. It follows that weak governments, civil society, the already marginalized, etc., lose economic ground. Others believe global firms hasten cultural homogeneity.

On the other hand is evidence from Ghemawat and Ghadar whose study of globalizing industries shows industry consolidation has decreased since 1945. Starbucks purchases only 1 percent of the world's coffee beans.

We need facts as well as concerns to weigh the anti-consolidation argument. Global merger and acquisition activities have benefits: foreign direct investors pay their workers more than the national average and spend more on R&D in countries where they invest. As a foreign direct investor, Starbucks employs 62,000 people in 30 countries. They receive benefits that include employee stock ownership and training. Starbucks expands internationally by partnering with local businesses. Both jobs and partnerships stimulate economic development at home and abroad.

Companies like Starbucks demonstrate another trend among global firms. They can enhance the quality of life with community building activities. An example is the Starbucks/Conservation International partnership to encourage shade-grown coffee development. These and other activities deserve mention when weighing the pros and cons of global business expansion.

Competition argument

Firms in the wholesale coffee industry face new competition with Starbucks' planned acquisition. But this move could stimulate growth in the wholesale segment of the specialty coffee industry. At best it could follow retail growth emerging from Howard Schultz's vision for retail coffee. Let's face it: 20 years ago coffee was a declining industry, a dog. And Starbucks is largely responsible for industry growth that now generates billions in annual revenues. Starbucks is only one beneficiary of this industry that includes firms like Gloria Jean, Aroma Therapy, Coffee Republic, World Coffee, Caffe Nero, and "mom and pop" coffee stores around the world.

With lamentable exceptions, good retail coffee now is almost everywhere. But good coffee remains scarce in universities, places of worship, supermarkets, parks and other outlets served by wholesale coffee suppliers. As occurs whenever competition shifts, some existing competitors in wholesale coffee will disappear. Companies will be motivated to streamline and improve operations. New opportunities also are likely to emerge for entrepreneurs who are the backbone of this and every other economy. In this sense, competition is good for business development, and it is good for Starbucks, whose value will rest on a broader base.

Consumer argument

I am still trying to get over Swiss buyouts of both Ben and Jerry's and Dreyers' ice cream, so I can identify with consumer loss of 150 Seattle Coffee outlets. But bear in mind: Seattle Coffee is an Atlanta-based firm. Also consider that many retail coffee alternatives remain -- thanks to the power of competition in an industry that Starbucks helped build. And rejoice that institutions soon may offer better coffee.

Finally, consider that business and individual decisions of what is good or bad have more than individual and local impacts. We, as much as Starbucks, are part of a global world. In that capacity, we are obliged to look beyond local concerns to weigh facts associated with the manifestations of globalization that include mergers and acquisitions. This is not an easy process. So I am not being facetious when I write: I feel your pain.

Barbara Parker is a professor of management in the Albers School of Business and Economics at Seattle University. She is the author of "Globalization and business practices: Managing across boundaries."

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