Instead of trying to offer its customers 'romance and theatre', Starbucks needs to stop opening so many new branches and start making better coffee
January 15, 2008 6:30 PM
I spend a good portion of my waking life in Starbucks, and am sensitive to its changes. One came along about a month ago: for the first time, I was asked if I wanted "room for dairy" in my coffee. The request was too inelegant to be spontaneous - "room for dairy"? - and after some highly scientific research into the matter (I talked to a couple of idle employees) an anonymous barista revealed that the orders came from on high: "We're supposed to start making the patrons feel like they are a crucial part of the beverage-making process."
If it sounded at the time like a bizarre and desperate new policy, the desperation became a little more understandable in light of last week's headlines. Starbucks' share price dropped in 2007 by more than 40%, and Bear Stearns lowered its rating of the company's stock from "outperform" to "peer perform" - which is a way of saying the company has gone from being as frothy as a Frappuccino to flat as a cup of regular joe.
If that wasn't enough to convince you that the company is in trouble, its chairman also dumped the chief executive - along with two other execs - and installed himself at the helm. And, just to pile on a few more challenges, an article in the Wall Street Journal revealed that McDonald's is about to challenge the long-dominant Starbucks by offering specialty coffee beverages. It's a regular David versus Goliath contest - until you realize that David has 15,000 US locations and $21.6bn in annual sales. All said, it was a bad year capped off by a worse week.
So what went wrong? Many things. Starbucks was no doubt hurt by a general slowdown in consumer spending: the same shoppers who cut back on luxury goods at Tiffany's probably cut back on their venti macchiatos, too. Then there are the little details. The Wi-Fi access at Starbucks still isn't free - despite the fact that readily available high-quality internet is swiftly becoming the norm for the US coffee-shop set - and much of the new in-house music is as annoying as it comes. And let's not forget the general brand-dilution that attends trying to sell everything under the sun. My neighbourhood Starbucks sells board games, which seems like a product that is no more obvious to market in a coffee shop than, say, toilet plungers.
But, most importantly, the company is choking on its own growth. According to the Financial Times, Starbucks added 2,500 stores last year, which amounts to about one-sixth of its global total and well over six stores a day. There is a widespread sense that quantity has come at the expense of quality. Training a large enough workforce and keeping each interior fresh and clean is a bit more difficult when the number of stores jumps an order of magnitude every few years. Or, as the Onion put it, "New Starbucks Opens In Rest Room Of Existing Starbucks."
At least chairman and now chief executive Howard Schultz seems to be aware that this is the case. When Schultz writes in a recent memo that the company is "emerging from a period in which we invested in infrastructure ahead of the growth curve" and needs to "shift our emphasis back onto customer-facing initiatives," I take him to mean (minus the business jargon) that Starbucks needs to stop opening stores that feel like restrooms and start making customers want to walk through the doors of the ones that already exist.
Still, Schultz should be worried that 80% of Starbucks' purchases are consumed outside the store, if only because the carry-out crowd is what McDonald's is going to want to pick off - since exactly zero people go to Micky D's for the ambience. (McDonald's learned that the hard way: no one remembers it now, but the turn of the century saw the rise and meteoric demise of the "McCafe," an attempt to add coffee-shop corners to existing McDonald's.) And Schultz also has a tendency to describe his company's problems in increasingly bizarre terms. A widely mocked memo from last year asked for changes that "evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience," an experience that Schultz wrote includes the "romance and theatre" of the coffee-making process and an "intimate experience with the barista" - which sounds a little lewd, if not illegal.
Of course, all institutions have their founding myths, and Starbucks' dates back to a 1983 trip that Howard Schultz made to Italy, where (so it goes) he discovered a mysterious and apparently little-known beverage called "the latte". Like a knight with the holy grail, Schultz stole out of the foreign lands with this "latte" and returned triumphant to an American market that was equal parts grateful and amazed. The rest, as they say, is history.
Well thanks, now everyone knows what a latte is. We can safely assume that novelty isn't going to keep the dollars rolling in, and neither is some half-theatrical, half -transcendental experience with the barista. Romance isn't going to save Starbucks, but maybe competence is: good coffee, a comfortable place to read the newspaper, and employees that can summon just enough intimacy, romance and theatre to make the experience worthwhile. Or maybe just the first two.