Starbucks At A Crossroads

As reported in the London Observer today, Starbucks CEO Howard Schultz acknowledged recently that the company has lost its “edge” after moving from a culture of entrepreneurship and creativity to one of bureaucracy. Schultz is proposing a number of changes. 

A decade ago, the company had just over 1,000 outlets. As it expanded, there seemed to be no limit to its growth. Less than two years ago Schultz told analysts and investors that Starbucks would one day have 40,000 locations - more even than McDonald’s.

Some analysts are saying Dunkin’ Donuts could take Starbucks on.  That’s because other analysts are saying that simplicity could be Starbucks’ path to restoration. The true innovation, those analysts say, is for the company that convinced consumers to spend a hefty multiple on a latte when they could have spent far less on coffee with milk, to offer a quicker, less accessorised or complex ‘coffee experience’. In essence, dumb-down the handcrafted coffee beverages to Dunkin’ or McDonald’s.

That would be a big misstep. Why? Average check. Anyone in the coffee business knows that you don’t make a lot of money on drip coffee due to its price point so you either have to sell a heck of a lot of it or use the espresso-based beverages to raise your average check above $4.25.

People like to compare Starbucks to McDonald’s; such comparisons are ridiculous.  People don’t line up at McDonalds’s, speak another language and tip for the privilege. Starbucks was first to market gourmet specialty coffee to the masses. Starbucks did it right the first time building a brand, a lifestyle, not just a cup of coffee. As such, they will continue to get the sweetheart deals for prime locations which no one else gets. Why? They can back up any claim with real data from their 15,000+ locations. Starbucks owns the word “coffee” like McDonald’s owns “hamburger,” Dominos owns “delivery” and FedEx owns “overnight.”  

While smaller chains and one-of-a-kind local coffee houses can thrive in the wake of Starbucks, forthe larger national rivals, Starbucks’ top of mind will be hard to overcome in the specialty coffee market. Especially when disposable income is being challenged on many fronts.  

It will be interesting to see how Mr. Schultz navigates between what he knows in his heart is right and what analysts say the path to a higher stock price entails. And those store closings- not a big deal in the big scheme of things.