Starbucks: A Falling Star?

It looks like things are tightening up in Latte Land. The economy and competition are making Starbucks’ glorious run a lot more difficult to sustain.

The first sign of trouble came from the stock market. Starbucks’ share price has been cut in half in the last year after more than a decade of nearly continuous growth.

The next sign was the firing of its CEO who is to be replaced by the man who built the business from just four stores, Howard Schultz. Now it has 15,000 locations in 43 countries. What Schultz is learning is that the bigger you are, the harder it is to manage. He promoted rapid growth and he now has to clean up the problems he fostered by probably building far too many stores.

On the competitive front, Dunkin Donuts and now McDonald’s are threatening to take more and more business by offering a good cup of coffee at considerably less than those $3 to $4 a cup that you pay at Starbucks.

I find it interesting that Schultz is not too concerned about competition. He feels that the problem is with Starbucks itself and all he needs is to fix it. In many ways he is right but I’m not sure that he is focused on the right problem.

As I see it, when you are selling a very expensive product compared with the competition you are always faced with having to supply your customer with a rationale about why it is worth the extra money. When someone buys a $60,000 Mercedes to impress his or her friends and neighbors, you have to rationalize this purchase by telling your prospect that this car has amazing engineering that is worth the money. If you are selling a $10,000 Rolex you have to point out that each Rolex takes a year to build. People don’t want to feel they are being ripped off even though they may be.

Starbucks never had real competition so it felt no pressure to tell people why its coffee costs so much. It figured if it opens more stores people will come. Well, recent sales suggest people are beginning to not come, probably because of the economy. In fact, Starbucks was so successful it didn’t even feel the need to advertise and has only started to do this recently.

Unfortunately, its ads haven’t said very much about its coffee. And if McDonald’s does a reasonable job with its latte, the question of “Why pay so much?” could become a big issue. I’m not saying that a Starbucks customer would be happy in a Dunkin Donuts or, heaven forbid, a McDonald’s. But, if it comes up with even an almost-as-good product, questions will be asked about the value of those expensive cups of coffee.

Ironically, Howard Schultz wrote a memo to the CEO in 2007 entitled “The Commoditization of the Starbucks Experience.” While it was about “watering down of the Starbucks experience,” I feel that he had the right word in “commoditization.” If its customers don’t begin to hear from Starbucks about why its coffee is worth the money, they’ll begin to think that coffees and lattes are becoming commoditized. McDonald’s has a fancy machine similar to Starbucks’ machine. So why should they pay so much more for the coffee from a Starbucks machine? Aren’t all the machines producing similar coffee? Is it just a matter of machines? Hey, for that matter, I can now buy an expensive coffee machine and do it myself.

You see the problem. Starbucks has been so busy building stores that it failed to build perception about why its coffee is better and worth the money. I suspect there is a story there but it has failed to tell it with drama. There’s an old axiom in marketing, “What you advertise, what you sell and what you make your money on can be three different things.” I’m going to Starbucks for the coffee, not CDs or movies or even food. That’s why its coffee is what they should advertise.

What Schultz has to do is obvious. By not telling its coffee story, it has a potential commoditization problem. Now he has to fix it by telling that story.

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