How could a hero of market creation become so staid?
This question has been asked frequently of Starbucks, which once up-ended traditional assumptions about coffee.
From 1993 to 2006, the company rose from obscurity to ubiquity, in the process driving a stock price appreciation of 80,000%. It proved that people would pay vastly more than historical prices for coffee, because it was selling an experience as much as a beverage. In the process, the company claimed an important space for itself on the landscape of jobs that consumers are trying to get done (Harvard’s Clayton Christensen originated this way of examining the market, and applied it to Starbucks here). When people are looking to fill time or be productive outside of the home or office, Starbucks gets the job done exceedingly well. Similarly, if people are looking for a morning treat to make themselves feel special, an ultra-customized Starbucks beverage does the trick. Although the company’s coffee ranked lower than Folgers Crystals in a Consumer Reports blind taste test, Starbucks’ success was driven not by superior flavor, but through deep understanding of what jobs people want to get done in their lives.
Then the company seemed to lose the plot. In the pursuit of operational efficiency and incremental sales, Starbucks automated processes, pushed Point of Sale items like stuffed “Bearistas,” and generally succeeded in ekeing out gains quarter by quarter. Simultaneously, the company gutted the experience that had created such loyal customers, losing the labor-intensive elements of “coffee theater,” reducing coffee aromas, and seeming more and more like the massive corporation it had become. Patrons ultimately defected.
Starbucks also fell victim to the same malady that had afflicted coffee shops prior to the company’s ascent: it defined its business too narrowly. While Starbucks focused on pumping out sales through its famous shops, competitor Green Mountain Coffee Roasters attacked from a totally different direction. The company generally avoided coffee bars and emphasized a vast array of other institutions trying to get a piece of the lucrative action: gasoline stations, supermarkets, restaurants, and more. It also purchased a once-obscure company called Keurig that helped to pioneer a new business model of renting a low-cost brewing machine for homes and offices, while selling high-cost single-serve coffee cartridges that offered both convenience and customization. Keurig’s revenues were $728 million in 2010 — not bad for a company purchased for just $104 million in 2006. The purchase has helped power Green Mountain’s tremendous ascent. Since the start of 2007, Starbucks shares are down 6%, while Green Mountain has gained over 1100%.
Starbucks announced this week a partnership with a rival to Keurig that focuses on hotel properties, and it is facing pressure from analysts to buy Keurig or Green Mountain. Perhaps, however, the company should be looking to pioneer more new markets. How else can the company bring the concept of morning treat to the home or office? Can it spruce up morning commuting time with in-car equipment? What other jobs are people trying to get done where the Starbucks brand has a right to play? In all the talk about trying to regain the Starbucks appeal of the past, or of buying a rival, there seems to be little focus on the future. Yet creatively defining new markets is how Starbucks and Green Mountain succeeded to begin with.
Story by Steve Wunker.