Consider the recent news for Starbuck's:
- Overall transactions per store were down in the last quarter for the first time ever
- Dairy prices have significantly increased, negatively impacting margins
- Economic woes have consumers spending money on $3 a gallon gas instead of $4 lattes
- McDonald's has decided to throw itself completely into the coffee business; Dunkin Donuts continues its nationwide expansion
- Share price in the past year has been cut in half
Starbucks response to these market conditions was to fire its CEO and restore Howard Schultz to his throne as CEO. With his return Schultz sent a message to all employees that stated:
"We will be refocusing our entire organisation on the Starbucks experience, by going back to our heritage and what made us so successful in the first place. 'We are going to play to our strengths ... ethically sourcing and roasting the highest-quality coffee in the world; the relentless focus on our customers; the trust we have built with our people; and the smart, entrepreneurial risk-taking, innovation and creativity that are the hallmarks of our company."
Recognizing that the Company had been growing too fast, Schultz's first move was to announce that they were going to slow down the number of store openings this year. Good first move. His second move was announced this week - in the Seattle market the Company is test marketing the introduction of an 8oz cup of coffee for $1 and free refills. NO!
Wait a second - I'm upset about a company that I patronize almost everyday cutting their price? Yes I am! While it might be nice to get my Breakfast Blend for half price I'm extremely disappointed because its a very bad strategic move. Let me explain. You can argue that Starbuck's is a poster child of the Blue Ocean Strategy. It built its entire business on overcharging for a commodity and convincing us that overpaying was a good idea because the Starbuck's experience was worth it. It revolutionized the coffee house business and no competitor has been close in matching it. Now, at the first sign of trouble the Company's first real strategic move is to take a classic red ocean approach - lower prices, give the product away! Rather than focus on what made Starbuck's successful - customer experience, great coffee consistent customer service and innovative products its going the McDonald's and Wendy's dollar menu route.
The most overpriced mass consumer product in the history of the world is suddenly selling for a dollar with free refills? Great news you say its just one product and it shows they are focused on making the customer happy. Wrong - believe it or not, rather than build goodwill with its loyal caffeine addicted customers it sends the opposite message. Whether anyone realizes it or not, with this move Starbuck's is coming clean and acknowledging that they have lied to us for all these years. Even though we knew that coffee and lattes really didn't need to cost $4 we bought into it because we believed in Starbuck's, believed in the experience. and embraced the brand. There was a small part of us that wore our Starbuck's patronage on our sleeve. Being a Starbucks customer showed we were smarter than others because we had a knowledge of coffee and we were proud of our ability to pay ridiculous prices for a cup of coffee. Now, we find out that Starbuck's knew all along that they were price gouging and that there was nothing special about their product. After all, if I can get a bottomless cup of coffee for a buck at any local diner why should I go to Starbuck's anymore?
And, don't think it stops with a cup of coffee. In making this move Starbuck's has announced that price is an important factor in making your coffee purchasing decision. It will become ingrained in the mind of the consumer and soon it will impact other products. Once one price falls, the next product is bound to fall as well. Its the cold war domino theory modified for the breakfast wars!
Sadly, by pursuing this strategy, they are playing into McDonald's and Dunkin Donuts hands. Starbuck's currently has the upper hand in the coffee wars because of its market share and value its built as a brand. Before this move, there was no way that I would to to McDonald's for coffee, no matter what the price - its McDonald's and as we know about McDonalds, you get what you pay for. Now, I'll consider it because Starbuck's has informed me that if they can sell their product for the same price as McDonald's then there can't be much different. By engaging in a price war, its allowed its competitors to choose the field of battle. Price wars are those guys forte - they are transactional in nature and providing their product as cheap as possible is ingrained in their corporate DNA. That's not the case with Starbucks who have had an institutional arrogance about their importance for years and have been living off of huge margins. This decision reinforces that point. Smart companies don't engage in price wars unless they are positioned to win a price war.
Sadly, I fear that if this move goes company wide it will signal the beginning of the end of the Starbucks era. While it will try and try it will never return to its glory days when customers lined up to spend $4 on a double mocha latte. With one bad strategic move Starbuck's will acknowledge to the market that coffee is a commodity. Welcome to the red ocean Mr. Schultz.
By the way, on the day the $1 coffee and free refill was announced, Starbucks shares jumped 7%
"We will be refocusing our entire organisation on the Starbucks experience, by going back to our heritage and what made us so successful in the first place. 'We are going to play to our strengths ... ethically sourcing and roasting the highest-quality coffee in the world; the relentless focus on our customers; the trust we have built with our people; and the smart, entrepreneurial risk-taking, innovation and creativity that are the hallmarks of our company."
Recognizing that the Company had been growing too fast, Schultz's first move was to announce that they were going to slow down the number of store openings this year. Good first move. His second move was announced this week - in the Seattle market the Company is test marketing the introduction of an 8oz cup of coffee for $1 and free refills. NO!
Wait a second - I'm upset about a company that I patronize almost everyday cutting their price? Yes I am! While it might be nice to get my Breakfast Blend for half price I'm extremely disappointed because its a very bad strategic move. Let me explain. You can argue that Starbuck's is a poster child of the Blue Ocean Strategy. It built its entire business on overcharging for a commodity and convincing us that overpaying was a good idea because the Starbuck's experience was worth it. It revolutionized the coffee house business and no competitor has been close in matching it. Now, at the first sign of trouble the Company's first real strategic move is to take a classic red ocean approach - lower prices, give the product away! Rather than focus on what made Starbuck's successful - customer experience, great coffee consistent customer service and innovative products its going the McDonald's and Wendy's dollar menu route.
The most overpriced mass consumer product in the history of the world is suddenly selling for a dollar with free refills? Great news you say its just one product and it shows they are focused on making the customer happy. Wrong - believe it or not, rather than build goodwill with its loyal caffeine addicted customers it sends the opposite message. Whether anyone realizes it or not, with this move Starbuck's is coming clean and acknowledging that they have lied to us for all these years. Even though we knew that coffee and lattes really didn't need to cost $4 we bought into it because we believed in Starbuck's, believed in the experience. and embraced the brand. There was a small part of us that wore our Starbuck's patronage on our sleeve. Being a Starbucks customer showed we were smarter than others because we had a knowledge of coffee and we were proud of our ability to pay ridiculous prices for a cup of coffee. Now, we find out that Starbuck's knew all along that they were price gouging and that there was nothing special about their product. After all, if I can get a bottomless cup of coffee for a buck at any local diner why should I go to Starbuck's anymore?
And, don't think it stops with a cup of coffee. In making this move Starbuck's has announced that price is an important factor in making your coffee purchasing decision. It will become ingrained in the mind of the consumer and soon it will impact other products. Once one price falls, the next product is bound to fall as well. Its the cold war domino theory modified for the breakfast wars!
Sadly, by pursuing this strategy, they are playing into McDonald's and Dunkin Donuts hands. Starbuck's currently has the upper hand in the coffee wars because of its market share and value its built as a brand. Before this move, there was no way that I would to to McDonald's for coffee, no matter what the price - its McDonald's and as we know about McDonalds, you get what you pay for. Now, I'll consider it because Starbuck's has informed me that if they can sell their product for the same price as McDonald's then there can't be much different. By engaging in a price war, its allowed its competitors to choose the field of battle. Price wars are those guys forte - they are transactional in nature and providing their product as cheap as possible is ingrained in their corporate DNA. That's not the case with Starbucks who have had an institutional arrogance about their importance for years and have been living off of huge margins. This decision reinforces that point. Smart companies don't engage in price wars unless they are positioned to win a price war.
Sadly, I fear that if this move goes company wide it will signal the beginning of the end of the Starbucks era. While it will try and try it will never return to its glory days when customers lined up to spend $4 on a double mocha latte. With one bad strategic move Starbuck's will acknowledge to the market that coffee is a commodity. Welcome to the red ocean Mr. Schultz.
By the way, on the day the $1 coffee and free refill was announced, Starbucks shares jumped 7%
