Starbucks eats itself

Today Starbucks named the stores that will be closed in Australia – 61 of their 84 outlets. Earlier this month they announced that they would be closing 600 stores, or 5% of their outlets, in the US, due to poor performance, letting go 12,000 staff.

Has Starbucks, the company that was to rule the world, a ubiquitous image in Hollywood films and TV comedies from Sleepless in Seattle to Sex and the City for nearly two decades, run its course? (Update: see A Tipping Point for Starbucks by Sean Carmody for an analysis of the store closure figures. Good stuff.)

So what’s gone wrong? Its marketing strategy has been analysed and held up as a shining light in so many articles, blogs, papers, and university courses that the ‘Starbucks’ Way’ is a standard primer for any company wanting to move into the coffee store or, indeed, corporate strategy business (case in point, Tom Ehrenfeld’s article in Booz Allen Hamilton’s Strategy+Business – free access after registration). Is this, ironically, Starbucks’ problem? Has Starbucks become a victim of its own success, having created a massive market of espresso-coffee consumers and taught everybody else how to milk it?

A new participant in the industry can now use the Starbucks strategy at any point of the business life cycle – new entrant, growth / expansion, and mature competition. The most comprehensive analysis of the Starbucks strategy I’ve seen is the lecture given by Bryant Simon, embedded below.

The Seattle Times article says that in the US:

Most customers whose Starbucks stores close will be a short walk from a caffeine fix, the company said, because many of the unprofitable stores were being cannibalized by nearby Starbucks locations.

In her book No Logo, Naomi Klein identified that Starbucks had been highly criticised for the strategy of opening several stores as loss-making operations close to successful cafés to put them out of business –  then closing the unprofitable Starbucks stores and taking the prime location of the previously successful café they had targeted. Klein also identified that Starbucks practised a geographic domination strategy, where they would only open stores in cities they believed they could dominate entirely, rather than open a few stores in cities widely spread across the country. This competitive model may have led to opening excessive outlets aiming to drive down competition and create barriers to entry.

In a country like the USA, with thousands of towns and cities, where most people had never drunk espresso coffee before, this strategy may have seemed feasible – if ultimately dangerous.

In Australia, where we have far fewer people and far fewer towns, and a much greater heritage of espresso-coffee drinking, the strategy needed to be even more aggressive in the face of stiffer, established competition. I remember being shocked to see the first Starbucks open on Collins Street in Melbourne – and seeing people inside.

So what happened to the market?
As Bryant Simon says, “What we drink says something about who we are” – and, indeed, where we drink it does too. When Starbucks started pumping out highly caffeinated, European-style coffee to Americans, they fell for it hook, line and sinker. Why? Watch the video. Same in Australia, for anyone who hadn’t been used to drinking espresso coffee, or who got hooked by the syrups – but ALSO because of all the emotional connection from the value-add such as leather lounges, newspapers, Wi-Fi et al. And because in the beginning it was foreign and new! Yet, the coffee was expensive, upsized and not great (really not good – in my opinion, of course).

However, in both countries, Starbucks had successfully converted millions of people to espresso coffee and to using cafés. They had created an entire culture. And they had shown an entire generation of café entrepreneurs how to market to these new coffee-drinking, paper-reading, Wi-Fi-using clients.

What was happening to the drinkers? They were getting addicted to caffeine and needing coffee, but they also understood that “what we drink says something about who we are”. And they were looking for a differentiated, richer, more personal experience. Starbucks had promised an intimate, upmarket experience and it had now, because of its massive expansion program, become a common, mass-market brand. No longer the “the third place”.

And what was happening to the vendors? If you walk though any suburb in Sydney or Melbourne or through the city streets, there is an absolute proliferation of cafés, espresso coffee stalls, coffee machines poking out of bars and restaurants – and McCafés to boot. There has been an explosion of café culture over the past ten years, and a massive increase in quality of product and environment. I would argue that this has been led by a need to compete with organisations like Starbucks and Gloria Jeans. Now, why would you pay a premium to go to Starbucks if you want to be cool? Starbucks is NOT cool any more. It is a mass-market phenomenon for people who don’t know the local scene.

It is this dual phenomenon, changes in the habits of drinkers and more aggressive competition, which has eaten into the Starbucks business model – regardless and on top of any economic impact.

What has this got to do with digital media?

Well this blog is Beyond Digital Media, and coffee is a critical element of any digital strategy.  But seriously, whether you have a business online or offline, you must understand the implications of your strategy into the future. And we’re not talking that far into the future. Building huge businesses that remove engagement with the customer and turn out cookie-cutter results destroy relationships and ultimately your entire reason for being. Starbucks’ relies entirely on customers emotional connection with the brand (watch the video). When that is lost because small, more agile competitors can connect with agenda-setters and then their market, it is very hard to re-establish their brand-proposition.

By the way, my prediction is that Gloria Jeans will ultimately go the same way, it’s just that they are not under the same fiscal pressures and have not overextended themselves, having benefited from the franchise model. Does this mean it is impossible to have a mass-market chain of coffee stores? I don’t know about you, but I don’t go into a café because of its mainstream advertising. I go for the atmosphere and the coffee – and perhaps because I know the people. I know that, more than the bean being used, the quality of the coffee turned out relies on the skill of the barista.

I think it was Australian millionaire entrepreneur Dick Smith who said, “the easiest way to make money is find a successful business, open up next door, and do it better” (or something like that – can’t find the quote on Google). Large businesses stay large and successful because they create barriers to entry from smaller, more agile competitors. Getting cheaper coffee, and being able to mass-market their brand is not a substantial or significant barrier to entry in the café market.

Love to hear your thoughts – especially from Starbucks’ and Gloria Jeans’ devotees.


AFR obfuscation strategy

In my post Why the subscription model is hard to lose, I wrote about media companies often having two different brands – one subscription-driven and one advertising-driven – riding off the same content in order to maximise overall revenue without cannibalising existing income streams. In this post I want to look at the specific example of the Australian Financial Review and their cunning obfuscation strategy!

In my post I suggested that the AFR‘s advertising-driven / free brands were the Sydney Morning Herald and The Age. This, from a corporate perspective, is true, however, from the brand level, the AFR also pumps content through to other AFR brands such as technology magazine, MIS. This content is somewhat protected through an “obfuscation” technology that makes it unreadable if it is selected to copy. Part of a hard-core copyright protection strategy to bring maximum traffic to the site for viewing content and advertising, perhaps?



Sarah Stokley from LifeHacker had this to say:

This is bizarre – often people like to cut and paste to read later, or to email to a friend to tell them about the article, or to quote in their blog. Enter the Deobfusticator – a website created by Lindsay Evans which lets you enter an AFR URL and get a page of readable text in return. Thanks for helping us keep the Fin somewhat user friendly, Lindsay. :)

However, when I checked the comments on Sarah’s post, I noticed that Sean Carmody found the Deobfusticator no longer functioning. I checked, and also found it on the blink. Is the Deobfusticator broken or is Fairfax onto it and changing code.

Is the AFR trialling a free advertising-driven model with the technologists who read MIS? When will the next deobfuscator arise? Is obfuscation necessary?

The Grim Reaper of print

Just a quick post about an article I read in an e-newsletter called Publishing Executive. It’s about an anonymous blogger called The Grim Reaper who regularly predicts and analyses the fall of major magazine titles through the blog, TheMagazineDeathPool. Quite successful, apparently. In an interview with PE he/she outlines what gets analysed before the mag makes the list. Often just making the list contributes to the magazine’s demise. It’s a good article for digital media marketers because a major contributor to a title’s collapse is often the impact of the internet. The Reaper points to being caught in a market dominated by online information as negative. Poor strategic vision when bringing the brand and content onto the web, without a solid revenue plan, is also a killer.

Here is the Publishing Executive article in full.

Twitter misunderstood by marketing press

I receive Digital Media magazine in print and e-newsletter format, which I generally enjoy. Today, I was reading through some past issues of the e-newsletter and came across this:

Twitter has purchased Twitter search engine Summize for a reported US$15 million in a cash and Twitter stock deal. The announcement comes after weeks of outages- caused by increased demand that forced the social stalking site to pull back on service features in a bid to keep the platform running. Twitter is believed to have 1 million total users, 200,000 active users per week and 3 million messages daily. The Summize acquisition may help Twitter extract value from its burgeoning audience and shape some sort of business model out of what seems to be a social networking site looking for the big monetization solution.

Twitter users are familiar with this news by now, however, I was disturbed by the phrase “the social stalking site”. Using Google, the only other place I could find this phrase was on the satirical blog, AJNN, where they used it to refer to Facebook.

Marketers, and those writing about marketing in the digital space, should be well aware of the power of micro-blogging sites. They can help you stay in touch with the market, learn from and communicate with thought-leaders, gather information quickly, promote your ideas to thinkers operating at the bleeding-edge – and all the rest. I’m not going to create a list of reasons to use Twitter because a thousand other blogs and articles have done that. What I want to say is, if you write for or edit a digital media publication and you think a social media or micro-blogging site is a “social stalking site”, you need to come up to speed, fast! As Stephen Collins might say, “This is your five minute warning”.

Why the subscription model is hard to lose

This post was inspired by Sean Carmody’s comment on my last post about subscription versus advertising business models on the web.

His observations initiated an important discussion about businesses in decline and those in their ascendancy. For businesses that are receiving significant cash flow from a declining/stagnant brand, it is difficult to forgo this income to gamble on a completely new approach to revenue. It seems that in the online publishing world the declining model is that of subscription and the model in the ascendancy is that driven by advertising, precisely because of the nature of the net and its multitudes – and the huge forecasts in online advertising growth in coming years. VC companies have had an affair with free content / advertising-driven models for some time now, much to the chagrin of those entrepreneurs with different ideas.

Web 2.0 is largely funded by advertising. Advertising is an AUDIENCE business. So, when Paul Graham is telling his companies to worry about building audience first, that’s actually a good point of view to take. It’s like building a magazine. If you don’t have any readers you won’t get any advertisers.

Robert Scoble – Scobleizer

However, subscription sites will continue into the future. An online media business with a significant subscription base would be loath to write off the resulting revenue to bank on it being replaced by advertising – even if that subscription business is markedly in decline.

The strategic end of those subscription-based media businesses caught in this quandary, such as the Australian Financial Review (under threat from Murdoch’s Dow Jones/Wall Street Journal purchase) and other major B2B organisations I have dealt with, either have related advertising-only businesses (such as the Sydney Morning Herald and The Age) or are investing in free, advertising-only models that service the same market under different brands, to hedge themselves.

As content creators and publishers determine who is best placed to do what over the coming years, we will see businesses managing the subscription and advertising models to maximise revenue from their assets.

Monetising future content

I was at the Future of Media Summit 08 on Tuesday and one of the discussion groups I attended focused on business models going forward as media organisations attempted to rationalise the continued breakdown of their traditional content models.

The move away from subscription-based and ‘pay for content’ systems was questioned as potentially due to a weakness in current technology, rather than an intrinsic and systemic change in the media environment and consumer needs.

Dr Stephen Hollings, CEO of News Digital Careers, asked whether the internet simply had not delivered the right form of micro-payment system that provided the required flexibility to all parties.

This is an important question. In a modern environment of information overload, will participants (and by this I mean those who read, interact and give feedback to media and content providers through comments, uploads and other connections – as outlined by Chris Saad in his presentation at the Summit) ever pay for anything again? Commentators cast the digital generations as having shorter attention spans, wanting greater diversity of views and perspectives, shorter pithier articles, videos and audio pieces. In short, they want to consume smaller things more ravenously – and be acknowledged for their contribution to the cycle of creation. This new media momentum is not stopping.

If this is true, complete subscriptions to publications of which few articles are read will be a hard-sell to participants who surf the web or, rather, take feeds from multitudinous sources to aggregators like Google Reader.

In the absence of an adequate micro-payments system, is advertising the only real source of revenue for online content creators? And if so, how do we organise ourselves into powerful engaging entities that will deliver relevant, salient information to transient participants and what will be the acceptable formats for advertisers?

(Update: Ross Dawson, who organised the comprehensive trans-Pacific Future of Media Summit, has just posted a list of 16 blogs covering the event.)