Why Mess with Success?

Starbucks redefined America’s coffee shop. It was the first brand to focus on being a European-style coffee house. The first coffee shop to just sell only coffee albeit high quality coffee, at outrageously high prices served in a friendly, warm, comfortable environment. It has been a fantastic recipe for success. A success story dozens of me-too brands have been unable to duplicate from Seattle’s Best Coffee (recently purchased by Starbucks) to Caribou Coffee. With 6,300 Starbucks coffee shops now open, running on a gross margin of 58% why would they mess with success?

And yet they are. Today, Starbucks is rolling out a plan to expand its food offerings into oven-heated foods. In October of this year, 80 Seattle Starbucks outlets began offering $3 hot sandwiches like bacon-and-egg and spinach-and-egg muffins. The roll-out suggests that Starbucks feel the Seattle test was a success.

Read the story on bloomberg.com and at the Daily News.

Short term vs. long term.

But a three month test? Our line-extension research suggests there is a difference between the short term and the long term. In the short term, a line extension can be successful. It’s new. It’s different. And there are plenty of people willing to give a new and different product a try.

But in the long term, reality sets in. A line extension often undermines what the brand stands for. Starbucks means coffee, not bacon-and-egg sandwiches.

This isn’t the first time that Starbucks had tried to move beyond coffee. Remember Café Starbucks, a proposed chain of fast-food shops that was going to feature chicken pot pie?

Then there is Starbucks ice cream, Starbucks coffee liqueur, Starbucks bottled frapuccino drinks and of course, Starbucks coffee beans sold in supermarkets.

Growth at what cost.

Most companies feel the pressure to grow. As the opportunity to open more and more outlets diminishes for Starbucks, CEO Howard Schultz is looking for other ways to increase revenue. But by adding more and more items to the menu. By making operation and cost of running the store more expensive. By making customers wait even longer in line for a cup of coffee. By diluting the meaning of the brand. Not to mention diluting the aroma in the store. (Nothing is going to spoil the wonderful coffee aroma like the smells of bacon, sausage and eggs. Yuck! Might as well just get your coffee at McDonald’s.) Starbucks risks destroying the brand.

It is the same thing that happened to McDonald’s. McDonald’s was the first hamburger brand. They sold hamburgers, French fries, soda and milkshakes. They were wildly successful, wildly profitable and eventually expanded into every town in America. Then they went crazy with expansion. The menu grew and grew with items like pizza, chicken, fish, veggie burgers, arch deluxe, breakfast, ice cream, salad etc.

When McDonald’s first started they had 11 items on the menu, counting all flavors and sizes. Today, a typical McDonald’s has more than 80 items on the menu. Have sales gone up eight-fold? Not exactly. Factoring in inflation, sales have been relatively flat.

In 1966, the average McDonald’s did $275,000 in annual sales. Factoring in inflation that would be $1,533,000 in 2003 dollars. Considering the fact that the average McDonald’s did just $1,633,00 in sales last year, it’s hard to see the advantage of adding those dozen of additional products.

The answer is not to mess with success. Strong brands stay focused. Strong brands stand for singular ideas in the mind. Starbucks should stay focused on coffee. Look at the success of their recent Pumpkin coffee promotion. So forget the egg muffins Howard and stick to the great coffee.

Comments

[Emma]

I agree with pretty much everything that has been said. I think that expansion is good but smart expansion. I did not mind the bottled frappucino and the ice cream. That makes sense. Bacon and egg sandwiches sniff of trying to outdo Dunkin Donuts at the breakfast game. I thought that the whole point of Starbucks is that coffee drinking is an experience and one that is not always a "gone in 60 seconds one"?

[Linas Simonis]

In the long run it will generate less profit. So, why shareholders of Starbuck don't put Shultz to trial?

Another thing is, if it is shareholder's pressure to grow. In this case it is like slow suicide. And after such suicide American motors died. General Motors is still in agony. It seems, that it is much harder to kill old, established dinosaur. How many time it takes to Starbuck?

[Tyler]

Nice post. I love starbuck and everything, but what with they do to increase business doesn't reallt effect me, but anyway like you said why mess with success?

[Jakub Petrina]

To Stephen's point:

My take is you need to broaden the portfolio somewhat and that McDonald's have gone too far and in a bit unfocused way. Did they have to go into salads? Number of ice-creams?

But maybe McDonalds's positioning is no longer a fast food hamburger chain, but "No 1 fastfood", period. They have the name, they have the distribution.

But once you start serving everything, you become generalist. Once you become generalist, you are no longer an expert and if you are not the expert, you CAN'T CHARGE PREMIUM!

I suspect they have more customers than years ago (?) but relatively lower prices. More customers also mean higher costs - together with lower prices shrinking the profit margin.

This is very likely to happen to Starbucks if they go down the same route.

58% margins will soon be history.

[BJ]

For Starbucks: I believe that the food move may facilitate more drink sales. If people stay to eat, they may have longer meetings/studying time (because they can now eat there) and/or consume more drinks while eating at the location.

For McDonalds: They also had almost no competition in the marketplace when they entered it. The concept of the fast food restaurant was pretty much pioneered by McDondalds. As competitors entered the market they decided to diversify the menu. If I remember the SuperSize movie correctly, McDonalds has a couple of times as many locations as all the other fast food restaurants combined. Not a bad path to follow...

[Don The Idea Guy]

Some related info from the Starbucks Gossip Blog:
http://starbucksgossip.typepad.com/_/2004/12/student_starbuc.html

~D.

[johnmoore (from Brand Autopsy)]

To be 100% accurate …

Howard Schultz is Starbucks chairman and chief global strategist
Orin Smith is Starbucks outgoing chief executive officer (retiring in March 2005)
Jim Donald is Starbucks incoming chief executive officer

[Alex]

Howard Schultz is Starbucks' chairman, not CEO. The CEO is Orin Smith.

[Jim Brown]

Laura,

You may be interested in reading this article by Joel on software pricing:

http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

[Gordon]

Another great article on the dangers and seduction of stretching the brand! When considering this topic, I always ask myself the following question though: "What should a focussed firm (and a highly focussed brand) do when what it stands for starts to lose its relevancy?

Thanks Laura!

PS. The book "Focus" was a big inspiration for me in many ways -- loved it, and it still makes a lot of sense!

[Rich...!]

Brand arrogance: It's a killer, and it happens when CEOs believe their marketers, who believe their ad agencies, who believe, rightly, that they'll get paid regardless of the outcome...!

[Stephen Macklin]

Of course the flip side of the McDonald's question is would they have been able to maintain the essentially flat numbers you cite if they had not expanded the menu?

As for Starbucks, they are probably faced with the reality that there is a limit to the segment of the market that will pay $3.00 for a cup of coffee. They are not likely to win over they guy or gal who is perfectly happy with a large coffee for $1.50 from the quickstop where they buy their gas. Thus their only avenue for growth is to coax a few more dollars from their existing customer base.

[johnmoore (from Brand Autopsy)]

Yeah … I’m not too keen on Starbucks going into areas outside their comfortable home of coffee. But Wall Street seems to demand it. Ain’t nothing sexy to Wall Street on basing a growth strategy around selling coffee. Wall Street demands more ‘transformational’ growth strategies and not ‘incremental’ growth strategies.

As you mentioned, Starbucks has ventured outside of their core many times before … Joe Magazine, internet portal venture, Circadia [trendy nightclub-like espresso bar serving alcoholic drinks], Starbucks Café, selling fancy office supplies/accessories, and now they seem all over the CD-burning opportunity.

Yet no matter where they wander outside of their comfortable coffee home, Starbucks always seems to scurry back to their comfort zone and renew its focus on coffee to drive sales.

As a former long-time Starbucks marketer, I recall one senior Starbucks executive summing past failed forays into lifestyle brand extensions by saying, “Sometimes you have to leave home to realize how sweet home really is.”

BTW … Starbucks has been trying for years, at least since 1997, to build a lunch business. It didn’t work in 1997 and it ain’t gonna work in 2004/2005.

[Don The Idea Guy]

Excellent, excellent points Laura!
You are right on the money -- how could they do this?

Mark the date and time folks, if Starbucks doesn't revert to their core brand focus, Laura is going to be proved right within the next year or two.

[Laura]

Thanks Michael! Al is still fuming about American Motors. "If they had just thrown out the Eagle cars and focused on Jeep, they could have owned the SUV category." Oh well.

Like Jeep, long term Starbucks could face a more focued competitor in the coffee market. The way McDonald's has been broadsided by In-and-Out Burger in hamburgers. Taking your eye off the ball and your core strengh is always dangerous.

I appreciate that you have been reading our stuff over the years and will send your best wishes to Al as well. Thanks!

[Michael]

Laura, I really enjoy reading stuff from you and Al. This one on Starbucks reminds me of what Al once said about Chrysler - that they should have changed the name to American Motors Corp and focused on Jeeps only. If they'd done that, they would've been sunk by the brutal competition in that category today. With Starbucks, I just don't know but I suspect you're right in this case... the smells would be total chaos!