A plan to rescue Starbucks
Posted
Apr 10 2008, 12:44 PM
by
Anthony Mirhaydari
Pity Howard Shultz. Even after retaking the reins of his global latté-brewing behemoth, vowing to return the company to its roots and launching a six-point plan of attack, his Starbucks shares continue their sickening slide. With this week's launch of the new Pike Place Roast, he's now busily touting efforts to "reinvent brewed coffee across America." Unfortunately, brewed coffee isn’t exciting, and with a much lower-selling price than Starbucks' espresso-based drinks, its promotion will surely erode margins.
The other growth initiatives are similarly lackluster: New coffee machines, a customer rewards program, a stronger focus on environmental initiatives, and a dedicated web portal to accept new ideas from anyone who cares. The last smacks of desperation. So, being a native Seattleite, I feel obligated to offer a simple, four-point rescue plan:
1. Stop focusing exclusively on coffee: Yes, Starbucks needs to do everything it can to improve its image as a purveyor of premium coffee. The move towards pre-ground beans and automatic espresso makers left it vulnerable. This is especially true now that McDonald’s and others are offering vastly improved and in some cases superior coffee, mitigating the company’s claims to quality.
At this point, having the best beans around will only maintain the status quo for Starbucks as competitive pressures intensify and consumers reach their coffee-consumption limits. Before, in the company’s heyday, America was first being introduced to espresso-based drinks. Now, with some 15,000 stores in 44 countries, the point of saturation has been reached.
2. Expand carefully: Wildly growing the store base under the reign of previous CEO Jim Donald was a surefire way to erode the brand and distract management. Back in 2006, when shares were trading near all-time highs, the company was opening five stores per day with a goal of getting to 30,000. To be sure, ego and hubris often drives blind empire building. But moving into supermarkets should’ve set off alarms for Howard, since he’s religiously preached the “third place” concept for Starbucks.
Thankfully, things are looking up here: Today Starbucks announced it will shut down 45 coffee stands within Save Mart and Lucky Supermarkets throughout California and Nevada. Until same-store sales growth can be reestablished, likely requiring significant capital investment in existing locations, domestic and international expansion plans should be shelved.
3. Embrace your new reality: Starbucks’ management harbors a romantic self-image tied to its early years. They still see themselves as a small indie coffee house where coffee connoisseurs meet up to talk progressive politics. As you know, Starbucks has grown far, far beyond that by all measures. It’s mainstream now, becoming the kind of place those connoisseurs shun for fear of mixing it up with commoners. Moreover, the last bastion of growth lies not in the tapped out urban areas Starbucks considers its roots, but in the ignored suburban fringes.
4. Grow share of stomach: The key here is to really utilize the store base, which besides its brand is arguably Starbucks’ most valuable asset. After all, any joker with a coffee stand can sell drinks. Untold millions have been spent creating an environment of soothing music, comfy chairs, tables, and chic décor. Let’s put it to use by making Starbucks a total stomach destination -- that is, making it a destination not just for great coffee, but a great meal as well.
I’m not talking about stale pre-packaged foods. Small ovens, hot plates, and a little working station would allow baristas to sell custom Italian sandwiches, soups, fresh pastries, and baked deserts. It’s the reverse of the McCafé concept McDonald’s is wrongly pursuing. The difference here is that fast, convenient, high-quality gourmet food meshes with Starbucks’ vibe. It’ll also get those suburban customers out of the drive-thru and into the stores. I know Howard has a problem with food masking the aroma of coffee, but let’s get real: The coffee smell isn’t coming back, but a higher share price very well could.
Other voices:
New York Magazine's recent "How to Fix Starbucks" roundtable is worth checking out for other ideas.
BusinessWeek's Brand New Day ponders the implications of the Pike Place Roast promotion, and compares Starbucks to Obama.
Analyst Dan Geiman at Seattle-based McAdams Wright Ragen has a special place in his heart for the high-end Clover inverted French press coffee machine Starbucks plans to rollout: "We are quite familiar with the Clover, and agree that it produces extremely flavorful coffee. Based on our experiences, we would be surprised if it fails to develop a large, loyal following."
(Disclosure: I don't own any shares of the companies mentioned in this post.)
