Starbucks' Lessons for Premium Brands.
By John Quelch
Tuesday, 30th September 2008
Starbucks' announcement that it will close 600 stores in the United States is a long-overdue admission that there are limits to growth.

In February 2007, a leaked internal memo written by founder Howard Schultz showed that he recognized the problem that his own 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."

Starbucks tried to add value through innovation, offering wi-fi service and creating and selling its own music. More recently, Starbucks attempted to put the focus back on coffee, revitalizing the quality of its standard beverages.

But none of these moves addressed the fundamental problem: Starbucks is a mass brand attempting to command a premium price for an experience that is no longer special.

Either you have to cut price (and that implies a commensurate cut in the cost structure) or you have to cut distribution to restore the exclusivity of the brand. Expect the 600 store closings to be the first of a series of downsizing announcements.

Sometimes, in the world of marketing, less is more.

Schultz sought, admirably, to bring good coffee and the Italian coffeehouse experience to the American mass market. Wall Street bought into the vision of Starbucks as the "third place" after home and work. New store openings and new product launches fueled the stock price.

But sooner or later chasing quarterly earnings growth targets undermined the Starbucks brand in three ways.

First, the early adopters who valued the club-like atmosphere of relaxing over a quality cup of coffee found themselves in a minority.

To grow, Starbucks increasingly appealed to grab and go customers for whom service meant speed of order delivery rather than recognition by and conversation with a barista. Starbucks introduced new store formats like Express to try to cater to this second segment without undermining the first.

But many Starbucks veterans have now switched to Peets, Caribou, and other more exclusive brands.

Second, Starbucks introduced many new products to broaden its appeal. These new products undercut the integrity of the Starbucks brand for coffee purists. They also challenged the baristas who had to wrestle with an ever-more-complicated menu of drinks.

With over half of customers customizing their drinks, baristas, hired for their social skills and passion for coffee, no longer had time to dialogue with customers. The brand experience declined as waiting times increased.

Moreover, the price premium for a Starbucks coffee seemed less justifiable for grab and go customers as McDonald's and Dunkin Donuts improved their coffee offerings at much lower prices.

Third, opening new stores and launching a blizzard of new products create only superficial growth. Such strategies take top management's eye off of improving same store sales year-on-year.

This is the heavy lifting of retailing, where a local store manager has to earn brand loyalty and increase purchase frequency in his or her neighborhood one customer at a time. That store manager's efforts are undercut when additional stores are opened nearby.

Eventually, the point of saturation is reached and cannibalization of existing store sales undermines not just brand health but also manager morale.

None of this need have happened if Starbucks had stayed private and grown at a more controlled pace. To continue to be a premium-priced brand while trading as a public company is very challenging. Tiffany faces a similar problem. That's why many luxury brands like Prada remain family businesses or are controlled by private investors.

They can stay small, exclusive, and premium-priced by limiting their distribution to selected stores in the major international cities.

Join the discussion on Harvard Business Online: http://discussionleader.hbsp.com/quelch

About the author
Professor John Quelch of Harvard Business School is author of Greater Good; "How Good Marketing Makes For Better Democracy"
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