Industry News | February 11, 2009
Why You Win if Starbucks Survives
In an exclusive interview with QSR she explains why.
Starbucks has put a lot of local coffee shops out of business. Why is it in everyone’s best interest to see it survive its current crisis?
DY: Although I do understand the common perception that Starbucks is the enemy, I think there are a lot of lessons to be learned from what Starbucks has done. The first reason is they provide a real-life R&D lab for innovation. Because they don’t have a franchise community that scrutinizes their efforts and they have quite a bit of cash, they’re able to take innovations to their stores more easily than other quick-serve chains. By watching what they do and carefully analyzing what works and what doesn’t, other quick-serves benefit. It’s like having a lab that you don’t have to spend the money on.
But doesn’t it stifle creativity from other brands when Starbucks is churning out Chai Teas?
DY: There’s a risk in that. I think it’s important to not say, “Let’s let Starbucks do all the innovating, we’ll just sit back and see what they do.” For the high-risk, higher-cost innovations it makes sense to let Starbucks try it and succeed or fail and avoid the risk. For the less-risky innovations, that’s the kind of thing all brands should be pursuing right now in this time of stifled growth.
Besides the free R&D, what else does Starbucks do to help the industry as a whole?
DY: Before Starbucks came on the scene, I think everyone thought that the most you could get someone to pay for coffee was $1 or $2. Now it’s common to see beverages selling for $4 or $5 at all sorts of places. They’ve gone further than coffee beverages, though. They’ve shown you can sell cookies that are not baked on the premise or breakfast pastries that aren’t sold by a bakery. Those are examples of things that in the past there was the perception that quick-serves couldn’t do or couldn’t do and charge a high price for. Starbucks has shown that there’s consumer demand for that type of thing. They’ve almost trained consumers that those products are worth paying that for.
A lot of brands are taking advantage of that and undercutting Starbucks’ high menu prices.
DY: Starbucks has set this high bar and so consumers are saying I’m not going to treat myself to the $4 latte today, but I will go to McDonald's and get a $2.50 latte there. So they’re a point of reference for consumers to determine how much they’re willing to pay.
What’s going to happen to those brands if Starbucks survives?
DY: The risk for other quick-serves is that you don’t want to be perceived as the low-cost alternative when people really want Starbucks. As soon as the economy rebounds, which I’m confident it will, people are going to go back to Starbucks if they don’t see the added value you provide beyond just the lower price. A good example is the McDonald’s McCafé initiative. The prices are lower but they’re also emphasizing their faster service and consistent quality. Even the less-attitude position they’ve presented in their advertising makes consumers think about the value they get from McDonald’s beyond the lower price. In doing so I think they worked the Starbucks strategy to their advantage.
What is Starbucks going to have to do to turn the company around?
DY: What I’ve read recently about their strategy, I don’t think is the right direction. Howard Schultz sent out a memo when they cut their staff dramatically, saying there was a misperception about their perceived value and that they were going to try to offer a value meal. I’m concerned about that because I think that degrades the brand perception people have of Starbucks being a treat. It detracts from the differentiation that they have in comparison to the other quick-serves that are built on value.
One way to do it right is to have a value menu, but not call it that. The word “piccolo” in Italian means small and they might be able to put together a small tasting menu that allows consumers to indulge in a little bit of Starbucks for a lower price, and in doing so, it reinforces the differentiation of Starbucks being a special treat while bringing down the average check price.
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