Issue: Howard Schultz back as CEO of Starbucks
Commentary by: David Vinjamuri
Two news items today put a glaring light on the diminished fortunes of Starbucks. McDonalds announced that it would add baristas to its staff and serve cappuccinos, lattes and espresso as well as smoothies and frappes from stainless steel espresso machines.
Simultaneously, Starbucks announced that chairman Howard Schultz would replace Jim Donald as the company’s CEO. This amounted to an admission of very serious issues for the Seattle corporation. “We must address the challenges we face and we know what has to be done,” Mr. Schultz said in a statement.
Followers of Starbucks know that the challenges Mr. Schultz referred to have been reflected in the dismal stock performance – down 48% over the past year. The most commonly cited causes for the share performance are a decline in same store sales, saturation of the U.S. market and operational issues around new product lines.
Beneath this, however, lies a more serious branding crisis that Starbucks has faced and failed. And it may have started in the supermarket.
When Howard Schultz created the vision for Starbucks, he talked of creating a ‘third place.’ Like many creative entrepreneurs, he was synthesizing several very different trends he had observed in diverse arenas. One came from the old world – the cafe experience in Italy and the ability to find refuge in a small bar and sip a tiny cup of espresso for three hours as the world passed by. The second was from the U.S. itself. Borders and Barnes & Noble reinvented the bookstore by creating an environment where customers would feel more comfortable picking up and reading books – going so far as to put cafes into bookstore where customers were encouraged to bring books they had not yet purchased. This seemingly heretical thinking spurred sales as browsing customer turned into buyers.
Starbucks initially did a great job of creating this ‘third place.’ Baristas were well trained and well compensated. They memorized customer names and drink preferences. In urban areas, Starbucks became the preferred spot for impromptu business meetings or for students or writers whiling away a day.
But very early on, Starbucks made some fundamental decisions about brand extensions that weakened the brand. Those decisions led lesser brand leaders than Howard Schultz to take Starbucks in dangerous direction. The culprits? The frappuccino and the Starbucks cart.
The frappuccino itself was a wonderful invention, offering the Starbuck’s lover a new treat and the first blockbuster sub-brand within the Starbucks franchise. The decision to sell the Frappuccino in grocery stores under the Starbucks name, however, was a brand disaster. As was the decision to sell Starbucks coffee from carts, and later from drive-through windows. And to permit huge lines of walk-through Starbucks customers in Starbucks stores.
It would have been very difficult to argue this point a few years ago. The Frappuccino was a huge financial success and Starbucks ubiquity strategy made it a global brand. Bigger was better for Starbucks for a dozen or more years. The result, however, was to create exactly what Howard Schultz primarily despised – another fast food outlet. Year after year in small, barely noticeable ways, Starbucks retreated from being the ‘third place’ that Schultz had envisioned. It added more food, changing the atmosphere. Then other types of merchandise, from coffee mints to music, were promoted, each making Starbucks feel minutely more like a retail chain and less like a refuge. Catering to commuters further shifted the dynamic, as long lines inside the cafes made the morning an unappealing time to sit down for coffee. And the carts, supermarket items and even Starbucks coffee in hotel rooms and homes made the brand into a mass market commodity.
Starbucks points to the central difficulty with great branding in all public companies: investors want public companies to grow as quickly as possible while brands are more conservative and sensitive to change. By pursuing all opportunities, Starbucks fatally weakened its brand, and greatly diminished its unique cultural contribution.