Insight Starbucks The recent trials at Starbucks are an illustration of what can happen if a brand loses sight of its core values, and touch with its customers, says Ray Algar
Looking through the froth ‘Brands with a cause’ was my recent plea (What does my brand stand for? Leisure Report January 2008). Let us ignore the companies bordering on the irrelevant and connect with those that genuinely stand for something. Life is too short to waste on companies that are fickle, fake, or those peddling mediocrity. Once customers find their corporate soul mates, then organisations can stop fixating on short-term campaigns and convoluted incentives because there now exists a real and deep sense of connection. The types of organisations where genuine customer and corporate synchronicity exists will vary. For some it will be the local organic butcher, where the provenance and welfare of animals is paramount. It may also be the health club, which has triggered a remarkable transformation in an individual’s health and well-being, or the ambience of the local café, which has the extraordinary ability to pause life. However, when we scratch away the surface of these businesses, what do we discover? Perhaps there is no enduring cause after all, but simply a business that through its geographic proximity has found some custom.
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How deep is a cause? During a recent interview with Joe Cirulli, the founder of the Gainesville Health and Fitness Centre in Florida, which has previously been voted one of the world’s best health clubs, I vividly recall something he said while we were discussing Gainesville’s core values: “We define integrity as always doing the right thing even when no one is looking.” It was the ‘when no one is looking’ part which resonated with me. This is the real acid test. When a company’s moral compass gets tested, and where some organisations are revealed as peddling a superficial campaign under the guide of a cause. Gainesville is guided by the Mark Twain maxim: “When in doubt, tell the truth.” This deep-rooted sense of integrity has helped Gainesville to retain some members for over 30 years and to become a genuine ‘third place’ in members’ lives. Last year the Honda Motor Company recalled 167,000 lawn mowers with a retail value of $138m (£69m) after discovering a potential safety issue with the blades. So what, you may be asking, product recalls are a daily occurrence in many industries.
Significantly, in the Honda recall, there had not been a single consumer incident prior to the recall. What does this convey about Honda’s integrity? How many companies that aim to stand for safety would have waited for customers to lose fingers and toes before taking action? Coincidentally, Starbucks was forced last year to voluntarily recall 167,000 plastic coffee mugs selling in their American stores for $11 following 23 separate incidents of handles breaking off. Nine customers suffered burns. What should we read into this incident? An unfortunate quality control episode which the company dealt with by fully refunding customers, at a cost of $1.8m, and a free cup of coffee, or a company rushing to grow at all costs?
The Starbucks story The Starbucks brand approaches the sprightly age of 40 in three years’ time. With 15,756 owned and licensed stores, it is now the global leader in serving premium coffee to discerning customers. From a humble store in Seattle’s Pike Place Market, Starbucks initial business in 1971 was retailing Swedish
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coffee machines and roasted beans; espresso-based hot drinks did not feature in the early customer proposition. It was the arrival of Howard Schultz in 1982 as director of retail operations that inspired the strategic shift. His thinking was triggered by experiencing the Milan coffee bar culture during a business trip in 1983. A second Seattle store was set up in 1984 to test the espresso-bar concept and from this modest trial, a further 15,754 owned and licensed outlets in 43 countries have followed. Starbucks revenue is now heading towards $10bn and the company continues to expand to capture an ever-increasing share of the estimated two billion cups of coffee that global citizens consume each day.
What does Starbucks stand for? Starbucks has relentlessly pursued the mission to become the elusive ‘third space’ in customer’s lives; the intersect between home and work. A place where customers seek sanctuary, to connect, to share and experience a sense of community. As the latest annual report states: life happens over coffee. Many organisations pursue the third space; think churches, health clubs, libraries, schools and pubs. All can claim to be local ‘community anchors’, but some lack the credence of regular attendance and broad representation. Once-weekly gym attendance by 11% of the UK population for example, is often viewed as a chore, compared to the anticipation of a café visit. Starbucks meets the characteristics of a third space: embedded at a community’s heart; purveyor of simple food and drink; facilities that enable people to connect and communicate, and a sense of familiarity. Perhaps, Starbucks is a distant relative of the famous Cheers bar set in Boston, the ‘place where everybody knows your name’. Starbucks also meets the third space characteristic of attracting highly regular attendance. Customers average nearly ten monthly visits, while a significant minority of very-high frequency customers are closer to twenty monthly visits. Many ‘third space’ contenders can only dream of such attendance. So, what does Starbucks stand for? When it was a small, private Seattle based company, the company simply wanted to sell the finest Arabica coffee beans in the world. It was passionately committed to educating customers about discovering an authentic coffee experience. They knew that once a customer had sipped the finest Sumatran coffee, they would never revert to inferior alternatives. Today the Starbucks cause is articulated as: providing an uplifting experience that enriches people’s lives one moment, one human being, one extraordinary cup of coffee at a time. Or as the company says: “At our core, we celebrate the interaction between us and our customers through the coffee experience.”
Spreading the café culture As the Starbucks timeline (see facing page) illustrates, the company’s first international move was to Vancouver, Canada in 1987, when at 17 stores. It was a further nine years before further international expansion took place in Japan, Hawaii and Singapore. The company was a late entrant to the UK market, but in 1998, it entered with a bang after paying £51m for the 65 Seattle Coffee Company outlets. Further deals followed with Madisons Coffee and Coffee Republic, adding a further 21 outlets.
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Organic own-store growth and concession deals with Sainsbury’s and Borders meant there were 600 UK and Irish stores at the end of 2007. Schultz was excited by the Seattle acquisition as it was seen as the company’s springboard into Europe. Starbucks is now Europe’s largest branded coffee company (by outlets), operating in 13 countries. Only Caffè Ritazza, its rival, operates in more European markets. During 2007, seven new Starbucks stores were opening every day around the globe. There are six in my home city of Brighton (population 247,000). London has more than 200. At last count, Manhattan had 171 Starbucks stores and last year, Mark Malkoff, a filmmaker set a challenge of buying and part-consuming a drink in every one in a single day (see www.171starbucks.com). He succeeded. Doctors have advised that he should stop shaking in around three months.
The rush for growth Coffee lovers relish the first sip from the morning’s first cup. It represents a unique daily experience, after which another full day has to pass. The second sip, let alone the second cup, never tastes the same. Often, the second cup disappoints. Perhaps, the same is true with the policy of saturating an area with Starbucks stores. The arrival of the first Starbucks to a town is normally met with excited anticipation and pride, akin to the Waitrose-affect. However, as more arrive, it may raise questions; do we need another Starbucks and how does it affect the retail mix of what we already have? An overrepresentation may undermine the ability to choose a smaller independent coffee house. The Starbucks rush for growth has also collided with the company’s mission to ‘develop enthusiastically satisfied customers all of the time’. For example, many Starbucks outlets now use automated espresso machines, driven by the need to decrease order-to-drink time. Schultz now looks back on the decision with regret: “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 Marzocco machines.” These taller machines and the use of pre-ground coffee meant that the interplay between customer and barista was lost. The educational values that underpinned the early Seattle stores are now undermined by the need to open stores, recruit staff and efficiently serve drinks. The sign could read; sorry, today’s coffee performance has been cancelled.
The froth goes flat During the quarter ending September 2007, something unexpected happened at Starbucks. Customer numbers fell at its American stores for the first time in the company‘s history. Various explanations began circulating. Was it caused by a 9-cents-a-cup mid-year price increase, the cannibalising of competing Starbucks stores, or rivals such as McDonalds and Dunkin’ Donuts, raising their game with new gourmet coffees? Rising dairy and energy costs both drove operating margins down and Jim Donald, chief executive, out of the door. He abruptly departed Starbucks this January after seeing a 45% decline in the firm’s 52-week share price. Schultz
has now returned as chief executive, announcing an immediate 34% reduction in net new American store openings for 2008 (1,175 US stores now planned) and less than 1,000 for 2009. 100 underperforming US stores will now be closed. Schultz wants to focus on overseas growth, while also working out a new recipe for winning customers back. Reigniting the ‘romance of the coffee experience’ is the longer-term aspiration.
Our romance with Starbucks Starbucks UK celebrates its 10th anniversary this year. Expansion to its present 600 UK and Irish stores has been rapid, sometimes too rapid. This has led to occasional scuffles with local authorities. Reigate and Banstead planners got into a full-fat froth last year after Starbucks began trading without the correct planning consents. Not the best way for Starbucks to conduct community relations. Starbucks sometimes suffers from the ’marmite effect’; it is either loved or loathed. Starbucks came bottom of a recent Which? report conducted by an expert mystery shopper into the big three coffee houses – Starbucks, Café Nero and Costa Coffee. Scoring just 1.5 out of five, its drinks were described as ‘weak’, ‘too long’ and with ‘too much froth’. I wonder what was left to justify giving it 1.5? However, Center Parcs loves the brand, having signed a deal to offer Starbucks at its UK holiday villages. A second Which? report also found that Starbucks was the UK’s most expensive branded coffee house. This report has now ignited a fight-back from the independent coffee house sector which believes it has an opportunity to reclaim the third space status, by focusing on a ‘made on-site with loving devotion’ proposition. Independents can also get fully behind Fairtrade coffee, which increasing numbers of customers now request. Starbucks does not offer a Fairtrade espresso-based drink. Presently, Starbucks is facing a student revolt at the University of Nottingham where a new licensed outlet is being boycotted by students. The students object to Starbucks coffee being served to US soldiers at Guantanamo Bay. However, Starbucks UK staff feel differently about the company having just voted it one of the UK’s top 10 places to work according to the Great Place to Work Institute UK. Take time to look deep inside your local Starbucks store and you should discover several genuinely motivated community-centred initiatives. From book collection schemes for local libraries, coffee briefings for school projects and commission-free gallery space for local artists, the company is trying to connect into its neighbourhood. The challenge for Starbucks is that as it grows, the more it will have to ramp up its social responsibilities to off-set the perception among some community stakeholders that it takes more than it gives. So, do you sense a compelling and worthy cause at Starbucks? A sense that as you sip your decaf ’ caramel macchiato, that something special for a Columbian coffee farmer or a local school is about to take place? If not, I will see you in another third space. Ray Algar, MBA is managing director of Oxygen Consulting (www.oxygen-consulting.co.uk), a company that provides compelling strategic insight to organisations serving the global ‘active’ leisure industry. Ray can be contacted on +44 (0)1273 885 998 or e-mail ray@oxygen-consulting.co.uk.
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