Can Starbucks Remain a Success Story?

| About: Starbucks Corporation (SBUX)

The New York Times' Leslie Wayne wrote a piece on Starbucks (NASDAQ:SBUX) entitled "Starbucks Chairman Fears Tradition is Fading."

My punch line: Howard Schultz, Chairman of Starbucks, is the one guy that can help bring it back to its roots, even in the face of pressure to continue its global expansion drive. And he has the passion, vision and credibility necessary to do the job. I wrote about some worrying signs at Starbucks some months back, in a 11/26/2006 post about a little coffee shop in my Greenwich Village neighborhood called Joe. I cited five reasons why Joe was successful in a crowded field with much larger, more powerful competitors:

1. Unbridled Confidence
2. Obsessive Attention to Detail
3. In Touch with the Market
4. Condescending Competitors (read: Starbucks)
5. Ruthless Focus on Quality

I went on to conclude the following:

At this phase of Joe's existence Jonathan is right. Better to focus on refining and perfecting the model than expanding rapidly. Get the model right, learn how to scale and do so - deliberately. This will drive a stake into the heart of the marginal Starbucks, Cosi and other crappy-experience stores. Why would anyone in their right mind go to one of the mega-chains that have lost touch with their customers versus a place like Joe? Answer: they wouldn't.

This is classic Schumpeter creative destruction in action, admittedly on a micro-scale as we speak. I've written a lot about this and believe strongly that creative destruction is a healthy, and unavoidable, fixture of economic development and a natural part of the company life cycle. Success, without question, sows the seeds of failure, as rapid growth has diluted the Starbucks culture and experience and rendered them vulnerable to a down-home, grass roots entrant like Joe. Further, times change, value propositions shift, and the $5 for a consistent venti skim latte just doesn't exist any more. Yeah, people are now spending $5 for this when they don't have many good alternatives, but what about when more Joe's (or places like them) spring up around town? Invariably, they will. I'll tell you one thing - I'd sooner spend my $5 at Joe or even at a Dean and Deluca than I would a Starbucks any day. Better preparation, better experience, and I feel better giving a smaller establishment my money than the Seattle behemoth.

Well, it seems as if my concerns were not without merit, given Mr. Schultz's recent note to Company executives:

The last thing that Starbucks wants is watered-down coffee.

It may not have that. But in a passionate internal memorandum to Starbucks executives, the company chairman said that a drive for efficiency has led to a “watering down of the Starbucks experience.”

Rapid expansion, the chairman, Howard Schultz, said, has led to a “commoditization of our brand” that makes the company more vulnerable to competitors. Specifically, he cited several decisions that, he said, may have been right at the time, but which, in retrospect, have led to a “dilution” of the coffeehouse experience that he wanted to foster.

The memorandum was sent on Feb. 14, and first appeared on the Web site It also reflects one issue that Mr. Schultz has identified over the years — the delicate balance between expanding into a global brand while maintaining the intimate communal experience that led to success.

A Starbucks spokeswoman, Valerie O’Neil, confirmed the memorandum and said yesterday that it reflected “that we are mindful of our responsibility to do better.”

Do Howard's concerns sound familiar? He clearly gets it; something I could casually observe in my own little world is something being perceived by him on a much broader scale. I give him tremendous credit by wanting to shake things up a little for the good of the brand, the Company and its shareholders. By the way, this Valerie O'Neil is the same one who said the following back in November when speaking about successful upstart coffeehouses like Joe:

Starbucks said it welcomed the competition. “There is room for many coffeehouses in the marketplace that can meet different customers’ needs,” said a spokeswoman, Valerie O’Neil.

I'll say now what I said then: that was a stupid thing to say. As a shareholder, do I want to hear this? No. I want my company to crush the competition. But the way to do this is by working to constantly improve the product and the experience and, in the case of Starbucks, to build and preserve the value of the brand that has been so carefully cultivated throughout its existence. This can't be done by implying "We're big, we're successful, let other competitors come in and chip away at our brand," which is effectively what has happened with a small shop like Joe, which started at one location and how has three. And I'm sure before long it will be five, then seven, then...

Good thing Howard is weighing in. He gets the issue of culture and brand, which is really what has made Starbucks one of the great American success stories of the past 20 years. Hopefully his words will fall upon open ears; otherwise, creative destruction may take hold sooner than you think.

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