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.