Starbucks commanded a price premium and built its brand around offering high quality coffee along with a unique in store experience.
In 2006 Starbucks announced its massive expansion plans of growing to 40000 worldwide stores, the next day Starbucks' shares climbed $2.73 to close at $38.69, up 7.6 percent. Anne Saunders, Senior VP of global brand strategy and communications said Starbucks no longer thinks of its main competition as just high-end coffee retailers. Instead, the company is targeting every cup of coffee consumed in the United States. To be a premium-priced brand and continue on a high growth trajectory required of a public company is very challenging and Starbucks fell into that trap. In keeping with its aggressive growth plan Starbucks moved away from its focus on coffee and concentrated on adding value through innovation.
Where did they go wrong?
Starbucks opened thousands of stores including ones directly across the street from each other to make it easier for loyalists to quickly stop in for a latte on the way to work. This ubiquitous presence of Starbucks made it a mass brand and also led to cannibalizing of sales between stores only a short distance from each other.
To improve speed of service and have fresh grounded coffee available in all its location Starbucks introduced the flavor locked packages and automatic espresso machines. This resulted in the erosion of Starbucks tradition where customers would have the coffee beans freshly ground and bagged in front of them. The loss of aroma from not having fresh coffee beans sitting in bins robbed Starbucks of what Schultz suggests was the most powerful non-verbal signal they had in their stores. The automatic vending machines achieved the same as customers could no longer watch their coffee being brewed.
The new streamlined store designs may have helped optimize their investments but the stores lost their neighborhood store feeling. Customers complained that the in-store merchandise like games were inconsistent with the core business of coffee. Brand extensions into breakfast food menu in the hope of enhancing the Starbucks experience unfortunately diluted the brand and moved them closer to becoming a fast food restaurant. And brand extensions into sales and promotion of movies and music further deteriorated the brand value.
The result
Early 2007 a leaked internal memo from founder Howard Schultz showed that he recognized the problem his growth strategy had created: "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." In an attempt to correct this Starbucks has focused its attention back on creating high quality beverages. But the core issue is not lack of focus, in its attempt to grow quickly Starbucks moved away from providing a unique experience to becoming a mass brand still commanding a price premium.
How can Starbucks retain its eroded brand value? Should they drop prices now that they no longer have the uniqueness that commanded the price premium. I think not. Starbucks built its brand on a unique experience combined with high quality coffee. Dropping prices would completely undermine its brand value and everything it stands for. Instead Starbucks needs to refocus on its core value proposition and offer unique customer experience at all its touch points.
What should they do?
Place smaller kiosks staffed by one or two people in high traffic areas instead of having multiple Starbucks stores in the same area and diluting the brand.
Improve the in-store experience by going back to basics with comfortable seating, restricting in-store merchandise to coffee accessories like coffee grinders, French presses and coffee filters, reducing the queuing of customers by optimizing the coffee making process and having fewer but more high-quality food options. Get rid of the automatic espresso machines and move back to coffee machines that make better quality coffee.
Move away from side businesses of selling and promoting movies and music and selling breakfast. Concentrate marketing efforts on improving same store sales rather than opening new ones.
In 2006 Starbucks announced its massive expansion plans of growing to 40000 worldwide stores, the next day Starbucks' shares climbed $2.73 to close at $38.69, up 7.6 percent. Anne Saunders, Senior VP of global brand strategy and communications said Starbucks no longer thinks of its main competition as just high-end coffee retailers. Instead, the company is targeting every cup of coffee consumed in the United States. To be a premium-priced brand and continue on a high growth trajectory required of a public company is very challenging and Starbucks fell into that trap. In keeping with its aggressive growth plan Starbucks moved away from its focus on coffee and concentrated on adding value through innovation.
Where did they go wrong?
Starbucks opened thousands of stores including ones directly across the street from each other to make it easier for loyalists to quickly stop in for a latte on the way to work. This ubiquitous presence of Starbucks made it a mass brand and also led to cannibalizing of sales between stores only a short distance from each other.
To improve speed of service and have fresh grounded coffee available in all its location Starbucks introduced the flavor locked packages and automatic espresso machines. This resulted in the erosion of Starbucks tradition where customers would have the coffee beans freshly ground and bagged in front of them. The loss of aroma from not having fresh coffee beans sitting in bins robbed Starbucks of what Schultz suggests was the most powerful non-verbal signal they had in their stores. The automatic vending machines achieved the same as customers could no longer watch their coffee being brewed.
The new streamlined store designs may have helped optimize their investments but the stores lost their neighborhood store feeling. Customers complained that the in-store merchandise like games were inconsistent with the core business of coffee. Brand extensions into breakfast food menu in the hope of enhancing the Starbucks experience unfortunately diluted the brand and moved them closer to becoming a fast food restaurant. And brand extensions into sales and promotion of movies and music further deteriorated the brand value.
The result
Early 2007 a leaked internal memo from founder Howard Schultz showed that he recognized the problem his growth strategy had created: "Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." In an attempt to correct this Starbucks has focused its attention back on creating high quality beverages. But the core issue is not lack of focus, in its attempt to grow quickly Starbucks moved away from providing a unique experience to becoming a mass brand still commanding a price premium.
How can Starbucks retain its eroded brand value? Should they drop prices now that they no longer have the uniqueness that commanded the price premium. I think not. Starbucks built its brand on a unique experience combined with high quality coffee. Dropping prices would completely undermine its brand value and everything it stands for. Instead Starbucks needs to refocus on its core value proposition and offer unique customer experience at all its touch points.
What should they do?
Place smaller kiosks staffed by one or two people in high traffic areas instead of having multiple Starbucks stores in the same area and diluting the brand.
Improve the in-store experience by going back to basics with comfortable seating, restricting in-store merchandise to coffee accessories like coffee grinders, French presses and coffee filters, reducing the queuing of customers by optimizing the coffee making process and having fewer but more high-quality food options. Get rid of the automatic espresso machines and move back to coffee machines that make better quality coffee.
Move away from side businesses of selling and promoting movies and music and selling breakfast. Concentrate marketing efforts on improving same store sales rather than opening new ones.
