December 06, 2007

Starbucks Today

Starbucks recently made announcements regarding its corporate strategy and new advertising initiative. From the Wall Street Journal:

Chief Executive Jim Donald said Starbucks is getting into TV advertising because "as we grow our stores, we're trying to reach out to this broader audience that maybe [has] not had the chance to experience Starbucks."

Regardless of what the company says, this is a direct response to the following developement:

The average number of transactions in Starbucks U.S. stores fell for the first time during the most recent quarter...

Ignoring the advertising initiative and focusing on the company's broader strategy, a few observations come to mind. Hardly a victim, the success of Starbucks will force the company to make further changes to its business model and target market. My experience with Starbucks is limited to the recent past. I am not familiar with its early stores or original culture. However, I have witnessed changes within the company. The most obvious changes are related to the environment of its stores and the ubiquity of the brand.

Despite the evolution of the business, management clings to tennants of the original strategy.

Starbucks likes to think of itself as a collection of thousands of corner cafes that sponsor the local zoo and have baristas who know their customers' favorite drinks

While this strategy provided the catalyst for its impressive growth, it has now reached a point where that game will no longer work. "Thousands of corner cafes" is inherently oxymoronic and the company is too large to maintain a local feel. This is particularly true when the "corner cafe" is hawking espresso machines, DVDs, CDs, packaged coffee, cups, etc, etc. Most Starbucks stores no longer resemble a cafe, maybe a "Coffee Wal-Mart", but not a cafe.

Now, compound the changes in environment with the ubiquity of the brand. Living near the center of Houston, I could locate at least 5-7 Starbucks stores in the time it would take to locate 1 McDonalds. If the cafe theme is still a goal, how is this prevalence aiding the company in meeting its objectives? The corporate feel of the stores is sharply enhanced by the corporate image invoked by seeing a Starbucks on every corner (or two on every corner, circled here on West Gray Street in Houston).

The money quote from the Wall Street Journal article hints at the fate of Starbucks.

"There is a huge battle of the coffee brands and everyone is encroaching on Starbucks's turf," says Dean Crutchfield of Wolff Olins, a branding firm owned by Onmicom Group. "The competitiveness is diluting and commoditizing the entire coffee category, so it's critical that Starbucks maintains its message in the marketplace."

The most interesting thing about this observation is his focus on the commoditized portion of the market. I believe he is referring to McDonalds and Dunkin Donuts and ultimately comparing Starbucks to these down-market competitors. Starbucks has not maintained its message to the marketplace and therefore will be forced to compete with the national chains. The quality of the coffee will most likely begin to resemble these chains rather than the local coffee shops and cafes. A lower quality product, marketed to the masses is inevitable. The corporate strategy has deviated too far its the original intent to return now. Also, the logistics of supplying thousands of stores with coffee does not allow for local or heterogeneous experiences.

The size and culture of Starbucks indicate further shifting in strategy. I believe this shift will be toward the lower end of the coffee market and allow local coffee shops and cafes to fill the "corner cafe" gap left behind. Hopefully that means a few more places like the one below.


Carol Ott said...

I own a small coffeehouse in Baltimore, Maryland, and so far our neighborhood is blissfully free of Starbucks and other fast-food chain restaurants. I liked your piece on Starbucks -- thanks for writing it!

Anonymous said...

Hello There. I own Cortez coffee roasters in Tempe Arizona. We are a local wholesaler of coffee that currently serves about 60 independent coffee houses in the Arizona market. Your article was fenomenal and precicely done. Great job,

Ron Cortez