Howard Schultz has decided to come back. He feels Starbucks is losing its ‘value’. Replacing the incumbent Jim Donald, Howard S. is openly declaring a state of emergency for Starbucks. According to the rumor mills [I have not had any confirmation about the authenticity of this memo], Howard S. sent a memo to Jim D. which went something like this:
From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald
Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra TaylorSubject: The Commoditization of the Starbucks Experience
As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts with you.
Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.
Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can’t get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don’t have coffee grinders, French presses from Bodum, or even coffee filters.Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.
I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality. Let’s be smarter about how we are spending our time, money and resources. Let’s get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.
Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.Onward…
Has Starbucks been commoditized ?
Simple answer : NO.
The brand is still one of the most widely recognized in the world. Notice also the fact that starbucks does not advertise as much as other well known brands from the food industry like Tim Horton and McDonald.
Starbucks is a trail blazer……
because they created the concept of the ‘third place’ - leather couches, jazz music piping through the speakers, a place where friends could meet and just laze around. The value proposition for the average joe was unbeatable. Among my circle of socially savvy and intellectually accomplished friends, ‘lets meet at a starbucks to discuss our strategy’ became the most used statement. I have spent countless hours at a starbucks talking to my boss, my business partners and my wife.
But they have opened the doors for others to follow. They have proved to their competitors that if you open a coffee joint, make good coffee and allow people to think of the place as a place free from the other stresses of life - they will come. Howard S. has noted this point in his memo.
Using classic game theory….
and first mover advantage, its easy to say that the competition, even though it was not unable to instantly replicate the Starbucks factor, had enough opportunity to see what went right for them and what went wrong
Top executives have a plan to grow by 20% per year……..
and gain as much market share and retail space as they can by elbowing out any competitors. In order to stop this competition from growing, Starbucks has been spending way too much money on opening new stores on every nook and cranny they can find. Each new store costs around 350,000 USD to open and with more than one store in close proximity, its can be said that not all stores in a zip code are getting the level of foot traffic that helps churn positive cash flows.
Howard S. believes the economy is not to blame….
and I think he is wrong. The economy has a lot to do with the current decline in Starbucks share prices. It is one expensive cup of Joe and if for literally half the price I can hop over to another provider of good ground beans, I will. Premium coffee has till now not become a staple part of our lives primarily due to price.
So what next ?
McDonald’s venture into the premium coffee market can only spell further headache for Starbucks. McDonalds coffee is going to be cheaper and , by some accounts, is of comparable quality to Starbucks. Its a 8.3 billion market and everyone wants their share. Comparing Starbucks to McDonald’s, assuming the taste differential between the two is not too big and accounting for the economic conditions brewing, lets just say that lower prices are going to be the choice of the town.
[These statements are made based on analysis on consumption styles of myself and my circle of friends].
According to analysts, stock prices starting….
first quarter 2009 will show more upward momentum and with earnings estimates increasing for 2009 and 2010, Starbucks is taking the first steps to recovery. The recovery, however, cannot be assigned entirely to any steps Starbucks has taken and some effect of a cash infused economy have/will also play a yet to be explicitly identified role.
Growth for the sake of growth has to stop
The keyword for Starbucks is profitable growth. That should be cornerstone of any strategic initiative. Profits and gains have to be sacrificed if they have a short term benefit and long term stability and growth should become Starbucks new working mantra. Starbucks has to seriously consider either halting US store growth or even worse, shut some down low profit outlets [Howard S. mentioned this as one of the key initiatives to be taken to restore some stability to Starbucks]. They can pursue growth internationally by providing franchising opportunities in countries like India and China where US customs and cultures are readily accepted.
Howard S. has made nay sayers eat their words in the past. There is no reason he should not be able to do so again. He however has to realize that with Starbucks he has created a monster which lays golden eggs. Everyone in the world wants some piece of the action and Starbucks can no longer consider the playing level as being empty.
