Prospects for Starbucks, the once high-flying coffee giant continue to implode. The new fourth quarter 2008 earnings statement that came out Nov. 11 showed increasingly dismal performance. Earnings were 10 cents a share, 3 cents below expectations and compared to 21 cents a year earlier. The stock has slumped to under $10 a share.
What went wrong and what can we learn from Starbuck’s experience?
As Harvard’s John Quelch points out in “Starbuck’s Lessons for Premium Brands,” published in Harvarad Business School’s WORKING KNOWLEDGE (July 9, 2008) the decision to embark on an expansion and the decision to go public placed a heavy burden on Starbuck’s original and highly successful marketing model. The company initially succeeded to by bringing, according to Quelch, “the club-like atmosphere of relaxing over a quality cup of coffee.” However, he points out the pressures of growth put those early adopters in the minority. “To grow,” writes Quelch, “Starbucks increasingly appealed to the grab and go customers for whom service meant speed to order delivery rather than the recognition by and conversation with a barrista.” He adds that this led to different store formats like Express to try to cater to the grab-and-go segment without undermining the first. Quelch further points out that some of these early adopters have migrated to Peets, Caribou and other more exclusive brands.
Brand proliferation also has been a factor in Starbuck’s demise, according to Quelch. He points out the barrista is overloaded with special requests and different customized drinks. This undercuts the ability of the barrista to interact with the customer, which is one of the basic premises of Stabuck’s ambience. If it simply getting a cup of coffee is what’s needed, Dunkin Doughnuts and McDonald’s offer steadily improving quality at lower prices.
Opening up too many new stores has led Starbucks to cannibalize its market base. New store sales created only superficial growth and such expansion has simply traded new store sales growth with same store sales declines, which led to the fateful decision to close 600 stores last summer.
As Theodore Levitt pointed out in his landmark “Marketing Myopia” treatise, Stabucks has lost its way. It departed from the strategy that made it so successful. It also mistakenly believed there was no competitive substitute for its product
McDonald’s suffered a similar fate during its darker days a number of years ago where the original Ray Kroc strategy of quality, service, cleanliness and value were compromised, and McDonald’s lost sight of the changing needs of its customers. Though major management changes, McDonald’s has been able to right its ship.
Starbuck’s can and will have to do the same. New management must be brought in and the company must re-discover its roots. Downsizing and privatizing the company might make sense. The emphasis must be on value and profits and not on sales volume.
The lesson that Starbucks can teach any business organization is the need for constant scrutiny of its business and marketing models. There is a constant need for continual re-evaluation. No company can delude itself by thinking that growth “is assured” by anything. Every day is a new challenge and the successful business will regard challenge as an opportunity and not a problem.