Restaurants and Institutions

Chris Muller

An Alternative Plan for Starbucks' Renewal
March 21, 2008

Starbucks CEO Howard Schultz announced his five-point plan for change in the Starbucks system on March 19. While he touched on similar areas, here are the five goals I think they should pursue:

1. Franchise
2. Reposition as a “Life Style Beverage” business
3. “Slim down” its menu with healthier, active drinks
4. Become edgier and younger
5. Change its Value Proposition by broadening its menu and lowering its prices

Ray Kroc used to talk about “the genius of the system,” meaning that having 2,500 independent owners all focused on building their business--and therefore, his business--meant that McDonald’s had a competitive advantage over other restaurants. It led to a generation of innovation in menu, design and marketing while creating great wealth.

Product lifecycles are a reality, primarily because core markets age and their tastes change. Demographics have changed, and Starbucks hasn’t. Coffee (especially espresso) has been--and to a great extent, remains—Starbucks’ core-product identity. But Starbucks is a mature product offering in a significantly different marketplace. Up-market coffee is not as relevant to every portion of the consuming public as it was 10 years ago (think about it—how many times have you actually seen someone drink a straight espresso “shot” at a Starbucks?). Energy drinks, healthy menus and on-line music delivery are all factors that were not present when Starbucks caught the growth wave. Two key competitors, Dunkin’ Donuts and McDonald’s have rightly challenged Starbucks for beverage leadership by changing the key variables of price and product. Starbucks is a victim of its own success.

Much of the higher-margin products currently offered at Starbucks--e.g. Frappucino and Honey Latte--are not so much coffee/espresso drinks as they are “liquid desserts” that are made with a high butterfat or high sweetener mix to mask the bitterness of the coffee. A Mocha Latte really is a warm coffee-flavored ice cream cone. Unfortunately, it and other similar products also can be high-calorie choices. Today’s rational adults will not consume these beverages as anything more than “luxury” choices, and certainly not multiple times a day.

Here’s what Starbucks should do:

1. Starbucks should loosen its “centralized command and control” model and through aggressive franchising move control outwards through a “federalist” model: strong core values at the center with local control over local decisions. The franchises should only be offered one store at a time to current store managers and long-term employees. Starbucks used to have an informal practice of “hiring its customers” now it needs to “share ownership with its internal customers”.
2. Starbucks is in the “lifestyle” beverage business, and needs to reestablish its product offerings to connect to the core, but unfortunately, aging Baby Boom Generation (quickly turning 60). Healthy choices (lower calories, smaller portions) are clearly a driving force for this market as they enter a new cycle themselves. Starbucks needs to “slim down” and offer products that are easier to consume on a regular basis.
3. At the same time, Starbucks needs to introduce itself to the increasingly important Millennial Generation (born after 1982), many of whom do not drink coffee on a regular basis. Suggestions for this product focus include high-energy drinks other than coffee, and possibly ownership of adult chocolate beverages. This demographic cohort also is going to be focused less on an “individual” moment spent in the Third Place, and more on doing “team” based activities with a social message for their community. E-mail is out, FaceBook is in.
4. “Seattle” no longer is the cool aspirational lifestyle that it was for an older generation in the ’90s. The touchstones of a coffee buzz and the coolness of the dot-com Microsoft world are long gone. Starbucks should take a page from the Apple marketing plan and move to a “post-Internet” mindset and towards the “social networking” world. While Starbucks is doing well selling CDs of aging baby-boomer music today, a new generation of consumers is listening to iPods, using FaceBook and sending text messages. No forward-thinking executive today would suggest building a new business using old technology. “Excuse me, sir, where’s Seattle?” No one cares about this very old model.
5. Finally, maturity means dealing with reality. It means lower prices, less bitterness, and faster service across the system. It also means that the “coffee aroma” is not as meaningful as convenience of purchase. Starbucks needs to offer food—healthy, good tasting, authentic and made-for-you menu items, with low “carbon footprints.” Granting that it is very important to appeal to all five senses in the Starbucks branding model, the coffee aroma should be the very first sensory impact at the entrance area of every store. But once inside, other smells can take over. Starbucks needs to remember that 50 years ago McDonald’s only sold one protein and five total items (hamburgers, cheeseburgers, french fries, cola and a milkshake). Focus is great for efficiency and rapid growth but it will not sustain a business model as it reaches maturity and needs billions of dollars in sales.

--Chris Muller

Posted by Chris Muller on March 21, 2008 | Comments (0)