Where Starbucks Went Wrong

Ok, I have to chime in on this topic.

Starbucks (SBUX) has lost its mojo. Customers are not coming back with the same frequency and new customers are proving harder to find. The world’s leading drug company unintentionally brought this on themselves when they forgot who they were.

Prevailing thoughts point to a high price being the main issue. In a down economy price plays into some of the problems. However, this is a symptom of the real problem, not the problem itself. Let me tell you how Starbucks lost its way.

I was a loyal Starbucks customer for 7 years. I wasn’t someone who went in for a special treat once in a while. Rather, I made the company a part of my morning routine on the way to work. Get up, brush your teeth, put on clothes, stop at Starbucks, goto work. I was their dream customer.

Over the years the lines started to get longer as the company struggled to make lattes fast enough to keep up with demand. I willingly waited, as I knew my drink would be made just for me. The Barista — the coffee expert behind the counter — would grind some espresso, pausing to press it, before pouring a perfectly timed shot. If the shot was too long - it would be bitter. In this case, the Barista, striving for the perfect shot, would remake it without customers even knowing. Milk would be freshly steamed to just the right temperature. Quality was everything. More than a coffee, Starbucks and I shared a morning connection. One day it all changed.

I’m sure it didn’t change overnight, but I failed to notice the small, telltale, signs leading up to heartbreak. At first, everything seemed normal. I walked in, the pleasant person at the front cash, recognizing me, called out my drink for the Barista on the bar. By the time I swiped my Visa my drink was waiting for me. Amused at this frighteningly quick process, I stuck around to watch the next person order. How did they do that so quickly?

Unfortunately, there was nobody in line. That didn’t seem to stop the Barista from steaming some milk. Curiously, I wondered for whom? Wait, is that a new espresso machine? Why does it look so high-tech? I waited. My answers would come as soon as the next customer came in.

After a few moments my wish was granted as customer fumbled for change while ordering a drink. Like a hawk my eyes focused on the Barista. He quickly pressed a button and the espresso machine automatically dispensed a shot of espresso.The Barista used preheated milk rather than heat milk for this individual drink after the customer ordered. The drink was awaiting the customer before he had finished finding enough change to pay for it. Gone were the hand-fresh grinds, perfect shots, and freshly steamed milk.

All of the sudden, the Starbucks experience felt different. My drink tasted different. The romance of my morning coffee was gone. Of course, chemically my drink had the same composition. (Often however the milk tasted burnt - a by-product of preheating milk that has to stay warm longer while it waits for a customer.)

If you remove the romance, Starbucks reverts to selling a simple, easily substitutable, commodity. After a few mornings of unromantic experiences, I wondered why I was forking out money for a latte that tasted so blah and I stopped going.

It took a few years, but I’ve recently found a great little coffee shop that makes the best lattes in town. The company offer fresh hand-measured (and timed) espresso shots, individually heated milk regardless of how many customers are waiting, and fancy designs on their lattes. They offer the romance I was missing.

Money and speed never played a factor in my decision - Starbucks fails to understand that. As evidence I submit a recent ad campaign. The promise? Better Coffee. Faster.

The company is now openly admitting they are selling a commodity. In the place of romance they are offering operational excellence. Starbucks only thinks they sell better coffee. True coffee lovers — the ones that can tell you where the beans are from just by sipping the coffee — avoid the company.

Starbucks sold romance, and that made their coffee better for all the people that could not tell the difference.

Howard Schultz, the head bean, warned in an employee memo last year that the commoditization of the Starbucks experience was the company’s biggest threat.

Most of the company’s problems are a direct result of failing to understand what they were selling.

Rapid expansion eroded the romance - something needs to be somewhat scarce to be romantic. A store on every corner is not romantic.

At Starbucks, coffee making was a highly visible process. It was a buildup; it was wanting something and having to wait for it. Rarely did I ever witness customers becoming impatient as a result of Starbucks making a custom coffee just for them. (There are a few exceptions.)

Borrowing a concept from poorly run factories, our beloved coffee company recently started using expediters. Again, this shows a clear lack of understanding of what the company ’sells’. The new Starbucks experience, true to the expediter, resembles a factory with a myopic focus on throughput. Without the romance, customers — slowly realizing they are now buying a commodity — are wondering why the prices are so high.

It’s only a matter of time before the brand becomes less relevant unless things change.

Starbucks, if you are reading this, it’s not too late. I’ll be happy to do some consulting for you and put my MBA to some use.

Disclosure: none

Comments

[MrCoffee:]

Along with all that you stated I believe the "barista" became an employee with all of the expansion. There were so many new staff waiting for stores to open, and that created idle time; and gossip about both customers and other workers followed. There was no passion for the coffee or the customer.... the whole experience was lost. I first noticed this in September of 2006, and the stock began to tank soon after.

2008 Aug 18 07:40 AM

[MichaelNW:]

I too remember when the new espresso machine arrived. The barrista who took pride in his great shots rolled his eyes and asked what I would like in a soto-robo voice. He knew his skill was no longer relevant. He knew the coffee wasn't going to be as good. He did what he could. It just wasn't enough.

2008 Aug 18 09:46 AM

[Jeff from PA:]

One unfortunate thing was that as much as I hated the new automatic machine, it was a necessary evil. The motion of pulling the espresso shot was causing too many injuries, especially having to do it 6 times for one drink. In my store alone, out of 20 people, 6 at some point had wrist problems that they needed medical treatment for. We would make sure that no one spent more than an hour in a row pulling shots, but I know my wrists were still sore after a shift. So the new machines, although they do take some of the Romance out, were necessary.

The biggest thing that I think took the romance out for me was the drive-thru. It took away Starbucks main commodity - the idea of it being a third place (home, work, Starbucks). When I first started, we were told that was more important than the coffee - how can you keep that atmosphere with a drive thru? Of course, the drive thru was too tempting on the business end - our weekly profits doubled! But, as I could no longer have a conversation with the customer up front because I was talking to someone coming up the drive, I knew that something had changed. In my mind - that was the main failure of Starbucks - it not being a third place anymore.

A second aspect of this was their attempt to charge for wireless service. Why pay for something that you can get at an independent store for free? And what would make a third place better, then it being a third place where you could hop on the internet? Next to the drive-thru, this was their second biggest mistake.

Now, I have moved to a small town, found an amazing local coffee shop and even met my wife there. Now, people may say that the coffee is not as good, but I argue - when was the last time that you had a coffee from Starbucks where the bean had been roasted 24 hours ago? At Starbucks, it is often six months or more - now I have beans no more than 2 or 3 days after roasting, usually within 24 hours - and there is nothing like it.

So, when Starbucks moved into town, i stuck with the local place - especially because they had a drive-thru! I will say, I do respect them as a company a lot - they treat their workers well, good benefits, and do a lot of charity work. But, when i worked for them, I never saw them as a company, now I definitely do... Which is where they went wrong.

2008 Aug 18 10:14 AM

[User 244979:]

I never had been a Starbucks regular, but bought the buzz about the wonderful coffee they sold. My first cup of regular, not a latte, etc., Starbucks coffee, was my last. It was very bitter and strong, couldn't add enough cream and sugar to taste good. I guess that is why they sell the specialty drinks, to cut the taste.

2008 Aug 18 11:29 AM

[Wompus9:]

I've been a barista at Starbucks for over two years and have been there through the changes mentioned. The expediter thing really threw me when it first started. I actually didn't realize it was a company thing until reading this and just thought my supervisors didn't understand customers. I would see marked cups piling up for drinks to be made while a queue began to form at the pick-up. I told my manager that I thought people would be much happier to wait to place their order than wait for the drink they had already paid for and he agreed. The "expediting" continued, however.

What I've seen from Starbucks leadership is a bunch of unfortunately typical business school nonsense applied to a business model despite the obvious detrimental effects. Starbucks is a ship without a captain and without a rudder; the company is reacting to its competitors and has totally lost its edge.

There are still many people who come to my store out of habit but to a person they lament the loss of the experience it used to be. There may be no going back.

2008 Aug 18 01:08 PM

[swagv:]

When Peet's Coffee & Tea, Starbucks' initial mentor, posted a 59% increase in Q2 profits three weeks ago, you knew that the Emperor was exposed for its nakedness.

No: it's not high prices (Peet's charges about as much). It's not gas prices or food prices making people tighten their belts.

Starbucks, it's YOU.

2008 Aug 18 02:29 PM

[notsosmart:]

there are actually areas of this world where people arising in the morning dont know where their next drink of water or morsel of food will be found.whats that got to do with anything? you ask.

2008 Aug 18 03:06 PM

[Former Sbux...:]

In addition to selling a commodity, senior leadership started treating employees as a commodity to be used and discarded. Product and environment can be replicated leaving employees as the only point of differentiation. Sbux recent layoffs were not made with who takes care of the customer the best but who made the most money. Those that had the employees best interest at heart knowing that would lead to better service, were let go. How is that a way to run a business? Mark my words, the employee experience is going to continue to be marginalized over the coming months all in hopes of keeping the stock price from really tanking. It is a self-defeating strategy in the long run. Welcome to the world of fast food Mr. Schultz.

2008 Aug 18 11:55 PM

[nolatte4me:]

I enjoy Starbucks, sometimes. I used to go to Dunkin Donuts almost ever morning as Starbucks was not as popular and not available on every corner as it now is. I found myself spending 40-60 dollars per month. Then, I started making coffee at home. Starbucks problem is not just what you ahveall mentioned but, greed. Their pricing was high and they were successful. Other companies want a piece of that success. More competition equals a smaller slice of the pie for Starbucks. And, a faltering economy tightens everyones belts. Think about how many people don't even go to work anymore so, no stopping at a Starbucks. Nope, what Starbucks needs to do is what Subway and Quiznos are doing, lower prices ,give quality and advertise those facts. People are quick to forget and forgive when they save a buck!

2008 Aug 19 09:20 PM

[User 245876:]

Bravo !!! Finally someone says it, as a former Starbucks loyalist - I too have moved on in search of that perfect shot in the morning.

In addition to these super automated machines, there is ZERO consistency both within and between the different stores, they have forgotten there is a difference between cappucinnos and latte's - one is just milk foam and one is milk + foam, they have started over roasting their beans and all in all the experience is like drinking diluted dishwater. And worst of all the bathrooms reek - cardinal rule for QSR, clean bathrooms.

As a dissapointed shareholder - I hope Shultz wakes up and brings it back it the old days where it wasn't a commodity but the bright spot in my day

2008 Aug 19 11:05 PM

[RPK:]

Starbuck's did the right thing in closing unprofitable stores and stores that were cannibalizing sales from other stores. SBUX expanded too fast and had too many stores leading to poor execution, a reduction in quality, a lack of focus on the customer, and a dilution of the brand. This is similar to the problems suffered by McDonald's several year's back. However, SBUX can recover as the problems the company suffers from are only operational in combination with a poor economy.

2008 Aug 22 10:25 PM