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Starbucks gets its groove back: branding and innovation at its best

November 16th, 2010 |  Published in Brands and branding

 

16 November 2010 — Slightly off-topic but two areas I like to follow:  branding and innovation.

So here is how it works (with Steve Jobs somewhat in mind):  inspirational founder leaves business (or is kicked out) in the hands of mere managers.  Overambition and innovations muddy a company’s clear cultural waters. The founder returns, makes smart decisions and reinvigorates staff. Shareholders cheer. 

Ok, that does not always go to plan.  With Steve Jobs and Apple it did.  And also Starbucks.  

Disclosure:  I am a long-time Starbucks shareholder and they have been a client of mine.  We assisted in scoping out new locations in Europe.  I learned the intricacies of retail store traffic metrics, revenue per square meter, retail ROI, etc.  Fascinating stuff.  

And Howard Schultz’s return to the helm at Starbucks appears to be working.  Results released last week confirmed that the world’s largest chain of coffee shops “has its buzz back”. Higher traffic and higher prices boosted growth and operating margins. Forecasts were raised.  As some analysts have said, the turnround is due to changes that only someone with Schultz’s credibility could accomplish. 

What has been amusing is the social media comment that has chastised Starbucks on its decision to introduce flavored coffees and the introduction of Starbucks-branded instant coffee Via (named for the Italian word for “road” suggesting you can take it with you wherever you go). But Via notched up $135m of sales in its first year, and the move to end a distribution arrangement with Kraft indicates “onward and upward” in the take-home market.  Starbucks is also dealing with competition from the fast-food chains (McDonald’s efforts to sell cappuccinos, for example) with a focus on customers prepared to spend a little more on their morning coffee.  But that all shows the expansion of the coffee market toward quality coffee, ultimately creating more demand for Starbucks’ premium product. 

The company’s planned expansion into wine and more substantive food in some prestige locations has also earned scorn on Twiter and Facebook.  But based on preliminary results it looks to be successful in extracting more cash from existing customers.  Having lived in Europe these past 6 years, I have long been able to enjoy wine and beer at Pizza Hut, and a scotch at McDonalds (some have full bars).  These stores are (surprise!) the largest revenue generators in the Pizza Hut and McDonalds chain. 

On the investment side, Starbucks’ shares have quadrupled since the 2008 low.  They trade on a higher multiple than McDonald’s has achieved at any point in the past decade.  But … the burger chain’s 31 per cent operating margin is twice that of Starbucks and sales growth is only slightly slower. As the FT has opined “inspiration only gets a story so far”. 

But  Schultz has mastered the branding and innovation “thing”.  Ok, the brand.  I know the Starbucks mantra of “one person, one cup, and one neighborhood at a time.”  People go to Starbucks for a predictably good cup of coffee and a place that’s predictably clean.    But brands must evolve or die.  And even for a world brand like Starbucks, what they plan will not be a slam dunk.  Are consumers ready to get their morning latte at Starbucks on their way to work (70% of Starbucks business happens before 2pm) and also a relaxing glass of wine on their way back home? 

I have confidence Schultz understands the evolution of the retail food market, or at least his segment.  His purpose is to attract evening customers. It is less costly for the company to expand its business into wine and food in existing stores than to open specific locations dedicated to evening traffic.  Based on initial reaction consumers seem rather agreeable to the idea of having a glass of wine at their favorite coffee place after work or after dinner.  He is adapting to the market.

But we return to innovation.  If you were to ask the average person on the street to define innovation, they would probably talk about gadgets or cutting-edge science: Google, iPads, Android, and so on. However, if you ask business people, they will often point to processes that are deceptively simple.  David Neeleman, the founder of US airline JetBlue, often tells conferences that his best innovations were putting televisions on planes and telling his staff to work at home, not in the office. In its most crude, dictionary sense, innovation is really just about embracing the new, or, for that matter, accepting change, evolution.  A slight tweaking to make the brand better. 

It is no different from the high-tech side. Nokia has tried to break its closed innovation loop by using ethnographers to observe how people use their mobile phones. In Africa they found people trading in calling card minutes, which could be redeemed for cash as a basic kind of banking. In India, they discovered servants were using their mobile phones to find new employers, thereby freeing them from indentured servitude.  Such findings have helped Nokia think about innovative ways of serving huge numbers of customers in emerging markets.  And increase their market share.

And today I swear EVERTHING is undergoing a significant “paradigm shift”.  Technology, media, the law, finance, and on and on.   And so a brand must respond to today’s reality.  The challenge of growth in mature markets is to get existing customers to accept “line extensions”.  All Starbucks has done is to look at overall market metrics, its own metrics, and performance indicators – and measure how they affect one another and adapt to the market.   These new endeavors do not dilute the brand’s original mission.  It in fact continues its brand strategy of convenience just like Starbucks grocery store distribution and Starbucks drive-thrus.  It keeps with Starbucks brand promise around quality, sustainability and community. 

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"The mind that lies fallow but a single day sprouts up follies that are only to be killed by a constant and assiduous culture."
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