Saturday, February 24, 2007

Starbucks memo

"In a blunt Feb. 14 memo, Howard Schultz warned executives that the chain may be commoditizing its brand and making itself more vulnerable to competition from other coffee shops and fast-food chains." - WSJ, 2/24/07

When I initially read this memo, I thought Schultz sounded like a schmuck. All this nostalgic talk of "what was" and the breezy picture of yesteryear appeared to be the rumblings of, at worst, a rambling luddite. See below for a copy of the actual memo.

But a few observations make this memo an interesting piece:
His comment on small, gradual changes having a large impact on the overall system. There's a fair amount of research (cited in Origin of Wealth and Six Degrees) which suggests small preferences or adjustments can lead to massive epidemics or "cascades," due to the interconnectedness of the players involved. Now I don't know if Schultz is a big reader of complexity economics or network theory, or is just extremely intuitive, but his concerns of these small changes strongly affecting the value perception of the Starbucks brand seem closely analogous.
As mentioned before, his concerns sound legitimate, though the explanations seem weak. For the most part, the Starbucks brand is not a static concept, constantly changing depending on consumer tastes and opportunities for innovation (like automatic machines and flavor sealing packs). While the core concept of high value (and subsequently, high priced) coffee is under attack, can't innovation be targeted toward achieving those aims? I don't think the issue, as he mentioned, is making coffee slower or smell better: if anything, I want those baristas to make my chai latte as fast as humanly possible. What's missing is the compelling reason to stay. As an avid Starbucks fan (from spending time reading and studying GMAT at various locations in Manhattan), once I get my drink, unless I have a book on me or am meeting friends, there isn't much in the nicely laid out patio area to convince me to stay. Maybe it's video games, the ability to reserve tables for study groups, or even mini-concerts, but once the coffee/tea/latte is purchased, what's really to do?

On a completely irrelevent side note, isn't it interesting how Amazon has become the de facto imdb of books? Every blog I read which reviews a book always links to the Amazon page for that book. Now I'm generally fine with that because the page, besides purchasing ability, also has reviews and even excerpts for viewing. But shouldn't such a "homepage" for books be less, well, commercial? And can't they fix the damn URL's to include more metadata, rather an endless string of random characters and numbers? Just a thought.

From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald
Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra Taylor

Subject: The Commoditization of the Starbucks Experience

As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts with you.

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don't have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

I have said for 20 years that our success is not an entitlement and now it's proving to be a reality. Let's be smarter about how we are spending our time, money and resources. Let's get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.

Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.


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