Business Strategies: Starbucks hopes to buck the trend

Howard D. Schultz, CEO of Starbucks, is in a tizz. He has already commented on the dangers of saturation in the US market with Starbucks being as ubiquitous as McDonald's but with more chain-store direct competitors.

The company has come late to the Fair Trade concept, after considerable publicity in 2003 that its point of sale prices had increased significantly whilst the amount it paid for its coffee had been forced down as the company became big enough to move markets.

Schultz admits that the footfall in the self (for which read "no") service coffee lounges is falling. His answer is to spend money. However, what he is spending money on is buying a company that makes a coffee brewing machine - and supplying to US shops a Swiss-Made express machine, the main feature of which is that it has a lower physical profile. This will mean that customers forced to wait for their coffee - even after having to stand in a queue to order it - will be able to see it being made.

On a scale of one to impressive, it hardly rivals a visit to the Aston Martin factory to watch your car being built.

However, one announcement that did catch the eye - the production of a stronger blend. It's about time Starbucks started making coffee that tastes like coffee. Schultz may have seen the queues outside independent Italian coffee shops or even Cafe Nero and wondered what the factor was in their success.

The answer, says our Group Head who is a coffee nut, is simple: he says that US coffee chains are like US burger bars - it's all about homogenisation to a standard that won't offend those who don't want to try something new. "They just don't get it," said Nigel Morris-Cotterill. "Here's the point: it's about the coffee, stupid."

In truth, Schultz's plan to see Starbucks through the recession that is now seemingly inevitable and is already reducing both numbers and spend in his shops follows his coffee ideas: more froth, more new names but nothing new underneath.

For example, there will be a "partnership" with Conservation International. Not, note, Fair Trade. Conservation International will confirm that expresso beans are produced by environmentally friendly policies.

The new machines will make express and filtered coffee - but the point to note here is that franchisees - who are, of course, seeing their own margins squeezed - will probably have to pay for them - and remembering that Starbucks policies for outlets generally mean high-rent in high-traffic areas, the introduction into three quarters of shops over the next 18 months or so will put pressure on franchise outlets - which will by then be in competition not just with coffee shops, and not just with fast food outlets that are introducing expresso but in competition with food and clothing for the increasingly elusive dollar.

Schultz said yesterday " “This is the first time the U.S. business is under pressure ... It’s a character test. But it’s not about the economy. We don’t want to use that as an excuse. And it’s not about the competition. Don’t believe the media hype, there’s no coffee war going on. This is about us ... We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy.”

In central Kuala Lumpur, our Group Head walks past US coffee chains and into a scruffy Chinese coffee shop. It has grubby plastic tables, sporadic seating and often the cups are chipped. He sits down and someone comes and asks him what he would like to drink. It's freshly made for him, from ground beans, locally produced and locally roasted, by the spooning of ground beans into what looks like the foot of an old stocking and it's dipped into scalding water several times, then the grounds are thrown away. The coffee arrives, often slopped in the saucer. He sits back and sips and a huge grin breaks across his face. His coffee costs the equivalent of USD 25 cents. Walking back to the office, he passes Starbucks. It charges five times more for a filtered coffee which is weak and barely recognisable as the same beverage as he's just had. Oh, and everyone sitting there has a laptop out, using the free wifi - but no coffee in their cups.

To be fair to Schultz, he had given up his hands-on role and came back to Starbucks as CEO only three months ago. And some of his changes will make a difference - no filter coffee sitting on a hot plate for up to two hours - it will have to be replaced every thirty minutes. He says that this should ensure smaller, fresher batches. But, of course, it also increases wastage and therefore throughput of the coffee to franchisees, again increasing pressure. He's abandoned selling toasted sandwiches - the smell of hot ciabatta detracted from the smell of coffee, apparently.

There will be a loyalty scheme under which members will be able to order coffee the way they like it at no extra charge. That's not exactly what he said, but it's a valid interpretation of his comment that soya milk will be a no cost option.

But seemingly, Schultz intends to go back to Starbuck's roots - that of producing gimmicky drinks with fancy names and charging premium prices such as the "Frappuccino" - a coffee flavoured frozen milk shake.

He wants to improve "the coffee experience."

First, he needs to improve the coffee. And the price list. At least that's what our boss says and who are we to argue?

Postcript: 5 May 2008: we've just found a book by Howard Behar called "It's Not About the Coffee: Leadership Principles from a Life at Starbucks." Behar's website describes himself as having "many years as a senior executive at Starbucks."