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.

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12 Responses

  1. Hi Steve. Welcome. I guess the thing that Starbucks, Gloria Jeans, and the other coffee chains have done over the past eight years is move people from drinking instant coffee to full bean/espresso coffee. I haven’t got the figures but the consumption is up. The quality is also up – and I credit Starbucks and Gloria Jeans for this – compared to what we used to get in, as you say, places other than Potts Point and Newtown (etc etc). Other outlets have had to up their competition, live on dregs or die.

  2. Well I can’t say that I like Starbucks any more than the rest of you, but I can say that not all of Sydney is like Potts Point and Newtown. I’m afraid that where I work (Kingswood) Starbucks would probably rate pretty well.

    (I hope my aunt doesn’t see this and recognize me: she lives in Seattle and won’t hear a word against Starbucks, Microsoft, or Amazon.)

  3. Linda would never kick anyone out of Moose!

  4. Hi Kathleen, full house then! I agree muchly on the size issue. There’s some kind of over compensation going on, I think. Maybe try a jurisprudence text at Moose and see how they react… C.

  5. Ok, under severe peer pressure I am responding. First, Starbucks upmarket? With a name like that? Sounds like a cross between a Eurovision band and a highschool football team in a teen movie. Yes, yes, I know it’s allegedly named after a character in Moby Dick, but it still sounds silly. And for me, I could never get past the Hillsong/Christian association, and that goes double for Gloria Jeans. And the flavoured syrups and the big sizes were a huge deterrent to anyone who knew anything about coffee or had an appreciation for it. An unfortunate Starbucks legacy though is that now whenever I buy a takeaway coffee they ask me if I would like a small or a large. It’s not small!! It’s just normal!!

    Oh, and Michael, I sat in Moose cafe for an hour and a half on Monday reading my litigation textbook and received nary a glare. Perhaps the law commands more respect than philosophy in modern society.

  6. Hi Michael Michael. I have to say that I too would be very PO if a cafe owner asked me to leave because I was just sitting there reading, writing or thinking about ancient texts. But this has never happened to me. I have lived for many years in places like Surry Hills and Potts Point and never been confronted by this type of absurd behaviour. I feel sorry for your friend who was driven to Starbucks by, possibly, an unfortunate, chance encounter with a crazed, caffeinated lunatic. Maybe one day, if you ever meet Brendan, you’ll find he is a kind barista who is happy for people to sit in his cafe all day with nothing but a short black and glass of water. (All I need now is a comment from K.) Best, C.

  7. A mate of mine love(s/d) Starbucks, but for a very specific reason: he had a bizarre fetish for doing uni work in a cafe/city environment, y’see, but clods like Barista Brendan would kick any patron out of a regular coffee shop if they wanted to stay more than 10 minutes after draining the last sip of their coffee – syrup or no syrup.

    Starbucks employees, on the other hand – he claimed – really didn’t care two jots if he stayed there for 4 hours at a stretch, reading his Plautus and his Boethius, whilst ordering maybe two coffees the whole time.

    Sure, in this regard my mate resembles a homeless person much more than he does a hipster doofus (if that was ever Starbuck’s market in Oz), but nevertheless it’s true that Starbucks did offer an alternative to the often ridiculous arrogance/bluster/nastiness/Soup Nazism of your typical small-businessman barista.

    Having said that, Starbucks has always confused and scared me, mainly cos how am I to know whether I want to add coconut or caramel or fenugreek to my coffee?

  8. Thanks Brendan! Really interesting to here about your experience as a barista and your boss being driven to try flavoured syrups in the face of competition from a multinational. Great case study. Cheers, Chris

  9. OK, so I don’t have any data or marketing nous in wading into this debate, but I just couldn’t help adding a little anecdotal evidence and my own thoughts – maybe it’s because such good news has put me in a great mood!

    I know that I (and my friends and family) hardly represent the average Starbucks customer, but I would argue that going to Starbucks was NEVER seen as cool, even in the early days. There may have been some initial fascination with a brand we had all heard of for years (as you say) through Hollywood et al, but no one I know who has bought Starbucks (one off or regularly) did so for image reasons.

    Rather, I think it’s popularity was/is largely the McDonalds factor – you go there cos you know what to expect (regardless how below par that is) and because they have locations in bizarre places where there were no cafes before (convenience) and (the biggest factor in my very specific experience) they had long, McDonalds style opening hours. The Circular Quay branch was always full of people queueing for take aways at 11:30pm, any night of the week.

    As a result, I would put it down to/agree that its due to over extension in their expansion strategy (which even just watching them spring up everywhere – as lampooned in the Simpsons) was never sustainable, and copy-cat tactics from your more traditional cafes – I remember when I was shocked as a barista when my boss walked in one day with a clutch of syrup bottles.

    As you mention, even with Starbucks’ relentless promotion of its “way of coffee” – the syrup/whipped cream/spice and two spoonfulls of nutella – was always going to have a limited audience here, and i think that the majority of consumers of that style are moving on to the next “thing”.

    Finally, how long did those syrup bottles in my former work last? I think in 3 months, we used them 4, maybe 5 times. They ended up down the sink. I’m glad to Starbucks follow!

  10. […] on BeyondDigitalMedia, Chris Bishops posted an interesting examination of the challenges Starbucks has faced in the Australian market and goes on to predict that Gloria […]

  11. Thanks Sean, Oh yeah, that “half caf venti vanilla latte extra hot with three pumps of strawberry” scares the hell out me. However, I think you’ll find they have a premium pricing strategy in Australia, as does Gloria Jeans ($3 compared $2.70 and $2.90 in Edgecliff for small take away) and the other practice Starbucks pioneered in coffee sales – which a number of smaller places have taken up – is enforced upsizing. The standard regular takeaway size that Australian’s are used to does not exist in Starbucks. Their smallest size is significantly larger, more expensive and thereby pumps up the caffeine intake of customers.

  12. While Australians are certainly addicted to caffeine, I wonder whether the fancy (and expensive) varieties, which are a key part of the Starbucks success in the US, failed to take off here. I suspect people here exercise choice across a range that encompasses flat white, latter, cap, short-back macchiato and, most radically, moccha but perhaps not a “half caf venti vanilla latte extra hot with three pumps of strawberry”.

    Bryant Simon says that Starbucks is calibrated to look expensive–I don’t really see that in many of the Australian outlets.

    Bryant also talks about the importance of the Starbucks language, which I don’t think has caught on here.

    Finally, it is important to the analysis of Starbucks in the US that their coffees are more expensive than alternatives, giving it a premium edge. I don’t think that it ths case here (although I can’t be sure as I don’t buy my coffees there!).

    Anyway, from my point of view, I am one of those people Bryant refers to who expresses my values by not going to Starbucks (unless I’m in the London office!), so Starbucks in Australia won’t be missed by me, although based on the list of closures the outlets in the Sydney CBD are here to stay….for now.

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