Starbucks: What To Do When The Coffee Goes Cold

Starbucks has been going through some tough times. The economic downturn naturally hits discretionary spending hardest and, well, a $4.00 latte is nothing if not discretionary spending.

Good companies try new things during tough times. Now, that might sound counterintuitive. You'll often hear people suggest that those are the times to "stick to your knitting," "get back to basics," or, "focus on the fundamentals."

But, everyone else will be "sticking to their knitting" during a downturn, right? Isn't that the time to think about trying crochet?

Here's what I mean.

Business is all about differentiation and focus. Trust me. There are no more important words in business than those two...maybe not just in business. And the harder of the two is the first.

Finding and maintaining a strong point of difference is what has made Starbucks a winner. It's never just been about the coffee. After all, they practically invented the idea of the "third place" in the US. Betting on customer experience as your point of differentiation is especially smart.

Why?

Because most products are just "stuff."

Oh, sure, every once in a while you get one of these, but most of the time, anything you can make, your competition can make, too. If not today, then two months from today.

So, focusing on a product as the key to your differentiation strategy is dicey. You better be very, very good at innovating and at speed.

So, if product differentiation isn't the key to winning, what is?

Well, certainly not price. Again, unless you've got a lot of big yellow smiley stickers you want to smack all over everything you sell.

So, what's left? Well, don't get me wrong. You don't give up on product and price, but if you're looking for a key to differentiation, betting on customer experience at least puts the game in your own hands.

You get to decide what your "store" (or shop, or salon, or website) looks and feels like. You get to decide how you treat your customers. You get to decide how to surprise and delight them with little touches. You get to decide how to involve them in your business. You get to decide...well, you get the picture.

Back to Starbucks.

Given all the problems they're facing, they decided to...surprise...go "back to basics." But, take a look at their basics:

• Begin selling a new everyday brew, Pike Place Roast, named after Starbucks’ first location at Seattle’s famous Pike Place Market.
• Brew smaller batches of coffee to be served in 30 minutes or less.
• Phase in a new espresso machine, the Mastrena.
• Buy Coffee Equipment Co., maker of the industry-favorite Clover single-cup commercial brewer, and introduce the machines to many U.S. locations.
• Give Starbucks Card holders more benefits, including a free beverage when they buy a pound of coffee.
• Launch www.mystarbucksidea.com, a social networking site.

Notice that last bullet.

The new Starbucks social networking site is a blog for customers, a place where new ideas can be collected, discussed and voted upon.

Basics? Hmm.

Listen to CEO Howard Schultz:

By embracing our heritage, returning to our core - all things coffee - and our relentless commitment to innovation, we will reignite the emotional connection we have with our customers and transform the Starbucks experience.

So, if your company's "basics" don't include a strong focus on key differentiators, customer experience and innovation for example, maybe it's NOT time to stick to your knitting. Maybe it's time to venture out into some new territory. Maybe it's time to figure out how to use the most valuable resource at your disposal...the intelligence of your entire value-ecosystem...to discover differentiators that will last beyond the next product cycle.

Comments

[Ralf Beuker]

Hi Tom,

as a Starbucks-Fan ever since 1998 (and since 2005 in Germany as well :-) I agree with most of your analysis.

However adding to your statement "Business is all about differentiation and focus" may I refer to Michael Porter who has actually framed the two business strategies you've mentioned and added a third one: "cost leadership".

While a lot of elements of Starbucks' strategy approach appears to be differentiation with a (slightly getting broader) focus what they practice in reality seems to be more a cost leadership strategy. Please note that cost leadership (according to strategy theory) does not mean 'selling at a low price) but instead realizing a high margin (aka. producing at the lowest costs).

Therefore companies faced with this strategy paradox seem to have real problems with realizing how to differentiate while being under a cost leadership paradigm ... the only escape here is as you state it: Differentiation (but based on a thoughtful configuration of Resources and Capabilities [Robert Grant] aka. the counterpart of Porter's approach ;-)

Greetings from Germany,
Ralf.

[Tom Guarriello]

Ralf,

Thanks very much for your thoughtful comment.

Yes, I'm aware of Porter's cost leadership force. Today, I believe, supply chain efficiencies are still very important (see, Zara) but only if they are in the service of a superior product or experience force. Margin is the mother's milk of commerce but the top line still needs to be healthy for that milk to actually flow. And, today, top line is about product + experience.

I like the Resources and Capabilities notion of differentiation. Too many companies ignore the latter, which is where I, oddly enough, put human resources, because of their constitutive role in determining organizational capabilities. Without the right people, capabilities devolve. Your other resources (including brand equity) strongly determine the contextual playing field on which you might compete (hard to take on Dell by making computers in your dorm room the way Michael did when he first started). You've gotta play the hand you're dealt.

I'd enjoy having a conversation about these issues. Would you like to do a podcast?

[Mike Wagner]

I promise to listen if you and Ralf do a podcast!

Keep creating...meaningful conversations,
Mike

[Jim Egan]

Hello Tom,

I just found your March 26th, 2008 column on Starbucks. You and your readers may be interested in a piece I wrote last week in response to the Dec. 13th Financial Times story “When the coffee goes cold” (plus subsequent Letters it published on the subject).

Starbucks appears on track to excel in the USA despite worsening macro-economic conditions. While the receding financial tide shows Starbucks suffers from ‘design overshoot’, this is likely a temporary problem. Emerging patterns plus interwoven commercial, cultural and demographic trends bode well for Howard Schultz’s company.

“Once again as in olden days” Starbucks, like the ubiquitous Depression-era General Store, was designed not to compete on price but service. As our great grandparents or grandparents discovered during their eerily similar era of economic stress, ‘living cultural spaces’ helped communities anchor and invigorate social and commercial bonds. Relatively high prices were part of the societal and commercial pact.

Today, customers (like the author) regularly visit a conveniently-located Starbucks to discuss business over a favorite brew. The experiences are usually simple, predictable and comfortable. Coffee is seldom the primary rationale for busy people to agree meetings at Starbucks. It beats trying to discuss concepts or deals by phone, or in person while also tinkering with the office coffee-making machine (whose output quality varies). Plus, few have the time nowadays to experiment with a specialty coffee shop’s funky environment or fare.

Like countless other coffee-lovers I increasingly opt for Starbucks due to its unsung functions as a living cultural space, creative oasis and commercial hub. Properly handled, Mr. Schultz’s niche will be transformed by key trends which our ancestors, during their “Happy golden days of yore”, would sadly recognize amongst America’s grim near-term economic and social landscapes. Against that backdrop Starbucks will likely become an increasingly important community fixture.

Another line from Judy Garland’s 1943 version of the bittersweet ballad “Have Yourself a Merry Little Christmas” may point to Starbucks’ future of packed coffee-shops: “Someday soon we all will be together”.

Regards,

Jim Egan
Principal Partner
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