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Tuesday, 27 June 2017 9:48

Starbucks: A Lesson in What NOT to Do

By - Michael Rader

 When is too much of a good thing – too much? This is the question any business owner who is considering expansion must deal with. For some of you, expansion may mean opening a store at a second location; while for others, expansion may mean tens or even hundreds of new stores. For those owners, the question becomes, is it better to have 10 exceptional stores or 20 marginal ones? That is the type of question that is currently plaguing the popular coffee chain Starbucks.

People used to joke that you knew you were in the city when you could find a liquor store and a Starbucks on every corner. Since opening its doors as a small roastery/coffee shop in Seattle, Washington in 1985, the company has exploded. So much so, in fact, that there are currently over 25,000 Starbucks locations around the world.

Starbucks made a name for itself because it provided customers with an excellent product and top-of-the-line customer service. Over the past few years, however, many would argue that the high-level expectations that made Starbucks what it was have since fallen off, leaving a coffee shop more akin to a McDonalds than an elevated restaurant.

What Starbucks is saying

According to its 2016 financial report, Starbucks has identified maintaining its standing as one of the most recognized and respected brands in the world, one of its primary goals.

“To achieve this, we are continuing the disciplined expansion of our global store base, adding stores in both existing, developed markets such as the U.S., and in newer, higher growth markets such as China, as well as optimizing the mix of company-operated and licensed stores in each market,” the report says.

In other words, the company plans to continue to add stores to its family. This may seem like a good thing, but it is only going to lead to more atomization of the already watered-down “Starbucks experience,” the thing that once made the restaurant so popular. In the beginning, Starbucks was seen as a hip and trendy restaurant that understood the needs of its customers. Its baristas were coffee experts, providing a product so sophisticated that they snuffed out its competition. That is no longer the case.

The reality of Starbucks

Anyone who has ever been to a run-of-the-mill fast food restaurant understands atomization. Go to a McDonalds in Florida and one in Idaho and you are likely going to get the same type of product. There is no personalization or flair, nothing that makes the experience stand out. Consumers go to a McDonalds to get a burger that they fully expect to be plain and no-frill. They go to a sit-down restaurant to bet one that has the potential to “wow” them. McDonalds doesn’t wow and isn’t expected to.

Starbucks is entering the same space. Consumers are no longer going to Starbucks to be “wowed.” Instead, it is all about function. They have come to expect a plain product with no-frills, because that is what they have become accustomed to at the coffee chain. It is no longer about the product, but instead the ability to churn out coffee at a rapid pace – like the McDonald’s burger.

When too much branding becomes too much

In the 2016 report, Starbucks acknowledged that their success “depends substantially on the value of our brands” and that failure to preserve the value of that brand “could have a negative impact on our financial results.” The company identified one of the threats to future success as a scenario in which, “We may not be successful in implementing important strategic initiatives or effectively managing growth, which may have an adverse impact on our business and financial results.”

Many would say that such a scenario is already here. As of 2016, there were currently 15,607 licensed and company-operated stores in the United States. There were also 6,443 in China and the Asian Pacific and 2,642 in Europe, the Middle East, and Africa. Starbucks has made it clear to its investors that it plans to continue expansion both abroad and in the states. The company has already lost control of their brand and adding more stores may look good on paper, but it will further hurt the value of that brand.

Starbuck’s net revenue

Although Starbuck’s net revenue has steadily increased, it is not necessarily a rosy picture when one takes another look. In the quarter ending January 1, transactions were down by 2%. In a small coffee shop that has 50-75 transactions a day, that number may not seem that significant. When we are talking about millions of daily transactions around the world, a drop of 2% is tremendous.

startbucks revenue

The only reason this decrease hasn’t appeared as a drop in revenue is that Starbucks implemented a 5% increase in the price of its products over the same time. In other words, less people are frequenting the coffee chain, and Starbucks has had to raise prices to compensate. It won’t be long before consumers will rail against the increased prices and transactions will subsequently decrease even further.

Starbucks may be able to spin the numbers to their advantage, but the market doesn’t lie. For five consecutive quarters, Starbucks has missed expectations for same-store sales in the US. In fact, in 2016, company shares fell 8%, the first decrease since 2008. The overall market during this same period jumped 10%.

Why is this happening?

The bottom line is that Starbucks stopped treating customers like they were family and instead adopted a cookie-cutter approach to both its products and its customer service. Coffee drinkers are moving to small, owner-operated coffee shops where the product is an art, not a system. These local coffee shops are like the the craft beers of the beer industry. Consumers are looking for the “coffee experience,” and they aren’t finding it at Starbucks anymore. 

There was a time when Starbucks employees were revered to some degree. That period is gone. Employees are hired with little to no coffee experience, used simply to fill the massive amount of positions available. As a result, there is less pride shown within their many locations.

Similar to McDonald's, cleanliness has also fallen by the wayside, as demonstrated in a recent visit to the chain. I recently asked a Starbucks employee if she could clean my table because it was sticky. She scoffed at me and said, “That’s what you’re talking about?” as if the mess was insignificant. After she quickly wiped it once, I asked for the rag to do it myself. She threw the rag on the table and simply walked away. You would never find this type of behavior at a local coffee shop where every visitor is a valued customer.

It appears the company is taking less pride in their locations as well. Comfortable seating and tables used to be a staple of Starbucks, which has now been replace by cheap and impersonal furniture. It isn’t uncommon to see cardboard coffee sleeves propped under legs to stabilize the tables. The message the company is increasingly sending to its customers is “get in and get out.” If people want to frequent a coffee shop that enables them to sit and visit in an inviting and welcoming atmosphere, they most certainly don’t go to Starbucks.

What does this mean for you?

It may seem like Starbucks is a flagship company in terms of its ability to expand across the globe. Its profit margins over the past decade are impressive to say the least. The company should be looked at as a warning, however. Bigger doesn’t always mean better and more is not always good. Yes, Starbucks has expanded to locations all over the world, but at what expense? It appears that customers have already begun to move away from the chain and there doesn’t seem to be a reason to believe that won’t continue. The “Starbucks experience” is a thing of the past. As the old saying goes, “Don’t forget the people who get you here.”

Last modified on Tuesday, 27 June 2017 10:20

Michael Rader

With over ten years in web development and design, Michael Rader has expertise and technical know-how. But more than a skilled technician, he is an entrepreneur and innovator who helps startup’s and new businesses identify and define their future with a unique, brandable business name. Michael Rader is the founder and CEO of Brandroot®, a leading .com domain name marketplace. He currently lives in Kailua-Kona, Hawaii where he operates the business and authors a blog dedicated to naming and brand name establishment.