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01.30.2008

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Pouring Heart Back into Starbucks

It has been labeled a “coffee war” by many food and retail industry analysts and pundits keeping a watchful eye on Starbucks and McDonald's these days. We, too, are keeping a close eye on the marketplace and view the focus on competition between Starbucks, McDonald’s and Dunkin’ Donuts, in the name of coffee, as slightly misplaced, if not greatly exaggerated. This is to say, what if this battle for the most affordable or best tasting coffee isn’t about the coffee?

Culturally, coffee has been part of the American consumer's DNA. Going back decades, coffee has been the center of social interaction and a part of our social fiber: We sit around and socialize over a cup of coffee; we go on coffee breaks to chat with colleagues, etc. However, even though Starbucks was able to successfully build its world around the coffee culture, coffee is not going to send the world of McDonald’s into orbit in the years to come. In fact, we think Starbucks may actually have more to gain, than lose, when others try to “re-image” their consumer experience in an attempt to emulate the Starbucks “experience.”

When consumers are seeking an emotional connection, the more likely they are to seek authenticity. Back in the day, when Starbucks was in its infancy in Seattle, it was undeniably unique and authentic. As it grew by leaps and bounds across the country and the globe, its ubiquity devalued its unique experience. The bigger it became, the more it lost its claim to being an authentic, unique place to hang out; in short, it’s no longer the distinct experience it once was.

Starbucks built its business and brand on a unique kind of experience, one that forged an emotional bond between consumer and company. One of the challenges of a lifestyle brand, like Starbucks, is when you become so ubiquitous you become meaningless. If everyone, for example, drove a BMW, it may be great for BMW, but it no longer makes for a very unique product experience.

It’s the Experience Mr. Schultz

We hear from consumers that the kind of experience one gets at a McDonald’s or a Dunkin’ Donuts is “flat,” “empty,” or not particularly compelling, especially when compared with Starbucks. In many cases consumers refer to McDonald’s as the place to take your kids to let them loose on the playground while you sit and read the paper or talk to a friend. All told, we find consumers generally saying they don't really look forward to going out and hanging out at McDonald’s or for that matter Dunkin' Donuts—this is especially true when we talk to health and wellness consumers.

McDonald’s is still relevant to consumers, and it serves a purpose. BUT it is not relevant in the same way it was 30 or 40 years ago—which is to say that consumers are increasingly using the McDonald’s drive-through. The drive-through at McDonald’s is a bigger part of their business today, which says that people don’t want to hang out inside the restaurant either as a family or with friends. In the 1950s and 1960s you went and hung out there in the parking lot as a way to get away from home. Today, it’s not a place consumers say they want to be.

When McDonald’s announced that it was adding premium coffee not so long ago, it stirred up speculation on how Starbucks would be affected. Howard Schultz, in a recent Fortune magazine interview, said, “We need to reinvent food at Starbucks. Less could be more. There are no sacred cows.” All this rhetoric from both camps seems to place so much emphasis on the product as opposed to the experience. In other words, it’s as if industry observers assume there’s a fixed need that people have to put coffee products into there bellies and they don't really care where they get it so they’ll get it wherever they can or wherever it is convenient.

Unless that were the case, we don't see how McDonald's can compete with Starbucks just to provide coffee products. If we consider that McDonald's is going to provide baristas, it doesn't seem intuitive that a new selection of coffee products and lattes would cause people to bypass the current framed experience for latte’s as delivered by Starbucks—or as delivered by independent coffee houses. Starbucks competition is not so much McDonald’s or Dunkin’ Donuts and their ability to sell lattes at lower prices, at more outlets (after all 7-Eleven sells lattes—it just isn't the same place). Grocery stores (like Wegman’s) and neighborhood community experiences seem more competitive with Starbucks than the McDonald’s of the world. In many ways, even a community park is more of a competitive threat to Starbucks than McDonald’s. The real competitors to Starbucks are those local companies providing higher quality experiences, much the same way Starbucks itself did back in the day.

The Long Road Back

The path back to the top for Starbucks will be paved with high quality experiences. Sure high quality coffee and food products will be play an important role in the value proposition as they always have. It’s just that Starbucks high-quality experiences will trump McDonald’s low-cost offerings and basic no-frills service.

Starbucks has fallen into the same trap as so many successful companies before it have. The trap is this: The more successful you become, the more you strive to please Wall Street and the consumer takes a backseat. Yet, it is the consumer who ultimately determines a company’s success. In this way, focusing closely on what pleases Wall Street and taking one’s eye off the consumers’ changing tastes actually is a recipe that delivers diminishing returns to consumers and eventually shareholders. It doesn't have to be this way.

Costco has long eschewed Wall Street analysts and critics and focused on customer and employee relationships as the pathway to maintain and increase shareholder value. Their track record speaks for itself. They know that often times what Wall Street demands actually lessens the value proposition with consumers.

For Starbucks to find its lost soul, to pour heart back into its brand once again, it must create a story around their brand. This is a narrative that got lost in the 20-year process of commoditizing itself into a quick-serve espresso shop. Today, how many Starbucks consumers even have a clue about the original Pike Place store, let alone what happened there that began the company they now know as Starbucks? Starbucks brand power never was in selling coffee beans; it was in creating that unique experience which is so often referred to as an “oasis” or “third place.”

To reclaim its soul, Starbucks will need to reclaim its status as master of authentic coffee experiences; something no other mass distributor of coffee drinks can really claim this (e.g., McDonald’s). For example:

  • Coffee master narrative: play up sourcing of fine coffee; emphasize the Starbucks’ Master Roasters. This would help defend against drip sales from McDonald’s and other low-cost retailers.
  • Espresso Expertise narrative: Play up the training given to Starbucks’ baristas and the art of handcrafted drinks—something they basically invented (or at least brought to mainstream consumer culture).

The point is not to satisfy hard core coffee lovers with these claims, they will simply laugh. The point is to maintain a point of differentiation from McDonald’s and others, which they don’t have right now for the average consumer who drinks at Starbucks, wants to drink “good coffee” but doesn’t know much about coffee/espresso beyond “it should be that Arabica stuff.” They need to climb out of the Periphery or maintain top quality within it.

As Starbucks builds momentum on sales of high quality food, hasn’t it always seemed easier (and more profitable) for brands that were created as premium to extend their products and services when compared to those who try and dress themselves up to be something they aren’t “quite” or never have been?

While we have talked extensively about experience, we think the break down is quite simple: where would you rather while away some down time? Starbucks (where you can surf the web, listen to music, or read while enjoying a hot beverage and pastry) or McDonald’s?

Starbucks has long been rooted in consumer culture. But what exactly do we mean by “culture?” Next week, we conclude our three-part series with “Understanding Culture.”



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