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A leading innovation and marketing blog from Braden Kelley of Business Strategy Innovation

Saturday, August 19, 2006

Starbucks and Big Tobacco

Back in the 1950's smoking was glamorous, and just about everybody who was anybody smoked cigarettes. Then came the discovery, to the shock of millions, that sucking smoke into your lungs might not be good for you. Then came another revelation that one of the substances in tobacco, nicotine, which was used as a poison by the Egyptians during the times of the Great Pyramids, is addictive. People then began a mass exodus from the consumption of nicotine via inhaled smoke.

Goverments now felt permission to introduce 'sin taxes' to raise tax revenue while discouraging consumption. Today, 'sin taxes' push the cost of a pack of cigarettes to more than $5 in most places. Smoking was then prohibited on public places like airplanes, goverment buildings; in some states and countries it was banned in all public places, including bars and restaurants. Taxed out, shut out, and scared away from smoking, where were people to go for their feel good, legal drug fix?

In one word, they go for "coffee" ...

In the United States, and increasingly the world, they go to Starbucks. Starbucks has become a huge global corporation from its headquarters in Seattle, Washington, by relentlessly focusing on delivering an expected, uniform, mass-customized product regardless of geography (the McDonald's model). Starbucks is credited, wrongly, for turning coffee drinking into an experience. Attempting to create a more European coffee experience is what they have really done.

But why was Starbucks' success suddenly possible when it wasn't before?

The answer is that three trends came together at roughly the same time, creating a perfect storm:
  1. The rise in demand for "affordable luxury"
  2. The decline of smoking
  3. The increasing variability in the quality of a cup of coffee
So where is the innovation?

The provocative answer is that there was none. Starbucks smartly applied the McDonald's consistency focus to coffee, combined it with a more European ambience (a place to socialize on an everyday basis, an extension of one's living room), and created scale. Scale has allowed Starbucks to build a brand, and scale has allowed them to expand their distribution as a result. The troubles that Starbucks is starting to face are because of their inability to create innovation capable of sustaining their competitive differentiation.

The latest news headlines ("Heat wave boosts cold drink sales, slowing profitable hot drink sales") would have you believe that Starbucks' flattening growth is due to their own innovation. The difficulties that Starbucks is beginning to face, and will continue to face, are common to all companies who grow beyond the steep part of the growth curve (which has somewhat of an 's' shape). Once you reach that point as a retailer, then growth from increasing the number of stores is insufficient to drive share price appreciation by itself. The now large installed base of stores becomes more important to stock analysts through the measure of year-on-year same store results. Starbucks is struggling to drive same store sales growth, and to find innovations.

This is why they have brought in Geoffrey Moore of "Crossing the Chasm" and "Inside the Tornado" fame to advise them. I respect Geoffrey Moore's work and think his latest book "Dealing with Darwin" provides a useful framework for selecting an innovation focus to shape a company's strategy - that's why we list his books on our Pearls of Wisdom page here on the Business Strategy Innovation site.

What Starbucks needs however is to move beyond seeking product innovation - which to this point has included the addition of food or media (music, books, etc.) to a lukewarm reception. Starbucks needs to move beyond being known as the gold standard for coffee, towards the creation of a business model innovation and even towards changing their industry. This is of course our specific innovation consulting focus.

Starbucks is a phenomenally successful company, the envy of all coffee retailers, and with good reason. To get to the next level in share price appreciation, however, it needs to expand beyond the "consistent coffee experience" they have developed and create additional must haves in people's daily routines, beyond providing their latest caffeine fix to get them through the day.

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