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Yahoo story about Starbucks

http://biz.yahoo.com/bw/070215/20070215005203.html?.v=1

Just thought it was interesting

ted, while i already submit my opinion to john moore, i just want to add two concepts.
a) coffee has always been a pleasure to be sipped slowly. starbucks, which was offering this choice, lost part of its appeal when looking to cut the waiting list at any cost. this business approach creates a cultural mismatch.
b) funny enough until few weeks ago there was no or poor room to comment about starbucks. it was like commenting on a divinity with thousands of defendants ready to fight for it. the company was entangled in this feeling, too. no action until the boss says something. this is a cultural approach that created a business mismatch.

Gianandrea,
Thanks for your great insights. Sometimes highly successful brands become the victims of their own success. As you say, cutting costs by improving efficiencies may be very corporate thinking, but it causes a disconnect with the loyal customer who wants to be romanced. The Starbucks customer is being cheated of the very experience they are seeking when they enter a Starbucks coffee shop. As you say, it took the boss to point out the diconnect Starbucks is creating between their culture and the customer. Let's hope these issues become universally recognized within the company and that these "problems" get fixed.

Ted,
This reminds me of Stephen Denny's post "Rebranding at the DNA Level" from the other day. Starbucks presents a perfect example of why company management needs to take a critical look at its core brand and its brand image among its customers on an ongoing basis.

Mr. Schultz has recognized a looming problem and has rightfully addressed it with his management group. Let's see whether Starbucks gets back to its core brand soon, or whether it continues to slowly lose its customer base to competitors who seek to out-Starbucks Starbucks.

Many are missing a basic point here about the Starbucks experience. The desire for it is not universal.

Starbucks initially met a need in the market for a much better cup of coffee than was generally available, and they also offered a superior experience (much superior in the early days to what it is now). There was very low accessibility to competitive alternatives for quality coffee - the other important differentiator that Starbucks brought to the table was being a chain vs a one-of neighborhood coffee shop.

Those factors left the field wide open for Starbucks to grow very rapidly, and they could get away with "not minding the store", so to speak.

While growing, and often to facilitate faster growth, Starbucks has made some changes to their vaunted "experience" which have taken the brand downmarket, but they haven't simultaneously decreased the price. Many of these changes are irreversible. At the same time, downmarket competitors like Dunkin and McDonalds have significantly improved their quality -- maybe not to the level that a diehard Starbucks customer wants, but good enough for many who now have a substitute offering when Starbucks is too far away or too pricey for everyday consumption. And, other competitors like Caribou, Peets, Tim Hortons, Seattle's Best (actually another Starbucks brand), Coffee Beanery, and several others are in the same category as Starbucks offering alternative experiences and coffee tastes.

In other words, what used to be relatively inelastic demand for Starbucks is now very elastic depending on your preferences. There is no doubt that a hard core Starbucks fan will always prefer Starbucks until they've had one too many bad experiences there, but a very real issue for Starbucks is that the chain may already have outgrown the demand for a quality cup of coffee at that price point, given all the new competition (some of it from industry heavyweights with just as much at stake as Starbucks). That problem is not fixed by correcting the flaws in the current offering -- in fact, going back to a higher end experience will cost Starbucks a lot of money which will inevitably have to be reflected in higher prices. Higher prices will shrink the niche that Starbucks appeals to even more, so in all probability, this is not a viable solution. As a public company, Starbucks has to continue to meet the expectations of its shareholders who are in it for the return, not for the experience, and I doubt that the board will back a strategy that raises costs while shrinking the market and which requires a huge (in the billions) capital outlay to achieve.

That's what needs to be considered, not whether or not Schultz and his executive can repair the damage that's been done. Not whether a large percentage of Starbucks customers are evangelical in their support. Not whether their baristas have been properly trained. This is far more basic.

It's about knowing what market segment you serve and how big that segment is, and then serving it better than anyone else (which includes having better prices when there are equivalent or nearly equivalent products). I don't believe that Starbucks can easily absorb a large shrinkage in their margin given their current model, so the real issue is sustainability of the business model and long term survival.

Paul,
You've made some very interesting observations, and led Daily Fix readers to consider points other than the ones that have already been made.

While I agree with some of your observations, I'm not convinced about all of your points. This I am certain of: the next few months will be very telling as Starbucks posts its quarterly business performance. It will also be interesting to see how much business its major competitors pick up.

Thanks for a well-thought out, well-presented argument, Paul. I appreciate it.

Thanks Ted.

I don't want to diminish the "brand experience" problems that Schultz identifies. It was the backslide there that opened the door for traditional competitors and disruption.

However, I also think we need to look beyond the next few quarters. Disruptive innovation plays out over long periods - it's often years before the win is obvious, before they grow to take over the market or render the incumbent a niche player.

I have no doubt that in the short term, Starbucks could continue to pursue operational efficiencies as they've done for the past several years, or chain build-out in China and other new markets, and appear to be healthy and profitable with growing revenue. But while doing so, unless they fundamentally begin to adapt their business strategy to the new reality and to defend against disruptive innovators, they will continue to undermine their long term reputation and loyalty to the brand, while enabling the upstarts to overtake them. Once momentum shifts to the upstart, it is nearly impossible for the incumbent leader to respond effectively.

In a quarterly results-driven world, it is extraordinarily difficult and requires a visionary leader that the corporation respects to make these kinds of dramatic about turns. For example, does anyone doubt that it required Bill Gates to mobilize Microsoft to turn on a dime in the mid-nineties to respond to Netscape and to deliver internet-enabled products? If Steve Ballmer was in charge at that time, the battle would have been over within 2-3 years, and Microsoft would not have won it. Schultz is the right person to drive a change -- the question is, does he recognize what the change needs to be, and can he convince his board and executives that it's necessary at a time of apparent market strength.

Paul,

All wonderful arguments as you state and explain your position. You continue to add great dimension to this conversation.

You're absolutely right that in today's business climate, it takes leaders with extraordinary vision to keep their companies on course and to bring them back to center when they begin to falter. It will take time to see whether Starbucks' management can indeed do what Mr. Schultz has set out for them.

I must say that I'm impressed that while the company bulls ahead and continues very strong, Mr. Schultz has fired a warning shot across the bow of his complacent management's ship--a juggernaut that turns and moves more slowly under its own weight. It seems that many of our business leaders today fail to recognize the warning signs at all; or if they do, choose to try to ride them out, that it's nice to see the responsiveness. Has Mr. Schultz correctly identified the problems and what has to be done about them? Can Starbucks turn it around? That's the $64,000 question. As you say, Paul, it will take a while for this to unfold.

Many of Starbucks'interested employees, shareholders and customers will be keenly observing the course Starbucks takes. This is a critical time for the Starbucks brand--let's see if it rises to the challenge.