Hey, where’s my Starbucks?
The competition is heating up, has been for several years in the retail coffee industry. McDonald’s and Dunkin Donuts have aggressively implemented or improved their coffee programs. McDonald’s has McCafé branches set up in or attached to existing stores. In New Zealand and Singapore, McCafes use quality semi-automatic machines, separate grinders, and the barista actually steams the milk and can make flat whites, lattes, and cappuccinos. It is perhaps easy to say that Mc D’s and Dunkin can easily adapt their menus to accommodate specialty coffee, whereas it is very difficult, if not impossible, for Starbucks to add burger and donut menus to its culinary offerings list. The truth is, Starbucks was somewhat thrown off balance by the competition at the blue-collar end, the bottom-to-middle segment of the QSR market. It was a blow aimed squarely at the heart of the company, the coffee.
To make matters worse, all of a sudden, EE. The US has really discovered specialty coffee! From an outsider’s point of view, REAL quality specialty coffee has only started trickling in relatively recently, and then it’s pouring out of states like Oregon, Washington, and Colorado. Sure, Peets and Starbucks were, in many ways, the grandparents of the new age, smart retail approach to coffee, but it’s the Intelligentsias, Stumptowns, Allegras that are now showing just how GOOD coffee can be if sourced and roasted on a more micro scale. They are also showing the right way to turn that roasted product into amber black gold, training quality baristas.
Starbucks’ troubles began 15 years ago, when the sheer growth of the stores began to follow like Nike’s wing logo. Anyone in the roasting business knows that volume at best equals good coffee, but not exceptional. The very small batches produced on the farm, the Treasury and by small producers (Petani) in countries such as Honduras, Kenya, Colombia and Indonesia stand out. Any business with multiple stores (let alone 10,000+ stores!) knows that consistency in product delivery, service and replicating the cafe environment are key to development. A successful small chain can operate 15-30 stores and still make great coffee. As stores increase, at some point the decision must be made to build the future on more than just coffee. Long before reaching this point, Jerry Baldwin, Gordon Bowker had moved on to other caffeine-fuelled companies.
This is not for a second calling Starbucks. Their success in building a business model that works equally well in small-town America or sultry Singapore is a testament to the business acumen of the team in Seattle. All of us in the coffee industry owe a lot to Mr. Schulz for the work his company has done to bring specialty coffee to the world of non-coffee drinkers. But let’s face it, they are a company that is in trouble.
To do? In the 1990s, a large company represented by a giant clown, wearing flashy red and yellow stripes, was also in BIG trouble. Store sales were stagnant and profits were a disaster. Too many stores, loading menu items with trans fats, poor store locations, and concerns about pricing all contributed to the company having to take a big step back and take a hard look at itself. In reality, hamburgers and coffee are very different products, but when the sales system is based on volume generating profit, the similarities are more evident than the differences.
2008 saw the return of Schulz at the helm of the ship. It also saw some pretty big flaws that gave consumers something to think about, a chance to compete. First, the company announced that it would be closing all of its US stores for 5 hours to train staff on how to make the right coffee. While this on the surface was an admirable ideal, the sublime message to customers was that (on this scale) it seemed like Starbucks was admitting that it hadn’t been making good coffee for quite some time. The closure also allowed a number of inventive freelancers the opportunity to market high-quality espresso blends there. In fact, many cafes offered free coffee during the time Green Giant was closed to encourage potential new customers to try their coffee.
The second change was the debacle of the machine which, it is fair to say, continues to this day. The machines at Starbucks were for many years supplied by LaMazzocco. The pedigree of these machines is indisputable. A separate pair (or trio) of Rio Mazzer grinders were ready to feed the Italian stallion freshly ground beans. Then someone came up with the idea to replace all stores with superautomatics. The logic here was simple and related to the previous point, a machine will somehow guarantee cup consistency between stores, anywhere and everywhere. The problem was, and still is today, that a superautomatic can’t produce as good a cup as a semiautomatic or automatic run by a trained and professional barista. However, remove the “trained and professional” from the award above and the quality of the mug may be similar. Many industry experts are convinced that the quality of the company’s coffee suffered as a result of the machine change. On a positive note, bean waste was much better controlled. A machine doesn’t tamp down too much, doesn’t let excess grind fall out of the basket, etc.
The last big news of 2008 was the purchase by Starbucks of the company that makes the Cloverleaf machines. This machine is revolutionary in the fact that it makes cups of single-origin coffee quickly, and more importantly, in a way that really accentuates the origin characters of the coffee. The reason this became an issue was that the company’s coffee from this particular machine was proven by several influential coffee critics to have a number of flavor flaws. Apparently the coffee wasn’t good enough, or roasted too dark for these expensive machines to be effective.
Recent history is so recent that there is no need to dwell on it. Store closings, stagnant sales, and then more closings have put the company in the position it is in today. A position of challenge and greater opportunity if the problems facing the company can be successfully resolved. First, if Starbucks wants to be a coffee company first and foremost, it needs to go back to its old saying that it had the best coffee. The company currently has a number of joint venture farming projects in places like Sumatra that will ensure it has a quality supply from the beginning of the year into the future. This move directly addresses the problem of buying multiple brokers. It also gives Starbucks exclusivity to particular coffees, as well as (one would hope) a lot of marketing materials about single-origin partnership coffee. How this coffee is roasted is another matter, and I think I will dwell on it unexpectedly. Dark roasting coffee is usually done for very good reasons…
But is a return to the company’s coffee roots enough? The answer is no. For some time, the company has been looking to the future away from Uncle Sam’s land. The new frontiers are not the coffee strongholds of Western and Northern Europe, but brand-hungry, consumer-savvy, and disposable-income-rich emerging economies. There are other obstacles to building a chain of stores in China, Indonesia, India and perhaps Russia, Argentina and Brazil. However, the relative costs vs. the potentially lucrative rewards are great. Wait a second…isn’t that exactly the same thing McDonald’s did when they started having problems 15 years ago?
In fact, it is. However, the big difference is the age and times in which we live. When McD’s began reinventing it, economically the world was relatively stable. Asia and Europe, as well as South America, were brave saviors of the brand. Who can forget McD’s assault on French cuisine? He makes Gordon Ramsey’s invasion look tame. This time, the bite of economic doom and gloom can be seen and heard on every corner, and what’s more, many pundits and pundits are still unsure whether reinvention is first and foremost on HS’s mind.
