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July 02, 2008

Starbucks is Pruning

Big news went down yesterday. Starbucks is closing 600 existing locations, cutting new store openings even further, and significantly reducing its workforce. This is on top of recently announcing a major reduction in their Starbucks Entertainment foray.

It’s official … Starbucks is no longer in growth mode. They are in PRUNE MODE.

We’ve talked about the need for Starbucks to prune its unwieldy garden before. And that vintage post from March 2007 takes on new relevance today. To better understand why Starbucks is in PRUNE MODE, re-read this post from the Brand Autopsy archives…


first posted: March 17, 2007

Loss_of_identity
"I have said for 20 years that our success is not an entitlement and now it's proving to be a reality. Let's be smarter about how we are spending our time, money and resources. Let's get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others." -- Howard Schultz email

Paul Williams began this conversation about restoring Starbucks “coffee” identity by using the analogy of restoring antique furniture to its original state. He says Starbucks should strip off the extra layers of paint that have collected over the years. From there, he recommends Starbucks sandpaper away the rough spots and then apply a durable finish to intensify and highlight the unique grain of the Starbucks core. Interesting …

Maintaining the Starbucks Garden
Paul’s analogy to restoring the Starbucks brand luster, like one would restore antique furniture, got me thinking about gardening. Paul and I once played around with this gardening analogy back in the day. We were probably chomping on a Briazz sandwich at Starbucks HQ when we began drawing the connections between the role of gardener and our role as marketers.

When you look at it, the Starbucks business resembles a garden landscape. Hear me out …

The seeds of the business were first planted in 1971 with the three original founders of Starbucks playing the role of company gardener. As company gardeners, they carefully worked with the soil in the Pacific Northwest until it became fertile ground. At first, the soil wasn’t fertile enough for the roots of the company to take hold and grow. But after years of dedication and daily nurturing, the hard soil became fertile and Starbucks began to not only grow deep, healthy roots—it also began to blossom. By 1992, the Starbucks garden landscape was thriving with new growth happening. Throughout the 90s, Starbucks flowers were always in full bloom and its garden landscape was growing, and growing, and growing.

Today, the Starbucks garden is still growing, but its growth is unwieldy. Company gardeners are having a hard time managing the garden’s growth. An increasing number of new plants have sprouted in the Starbucks garden that do not belong there. Coffee plants have always grown in the Starbucks garden but today, there are more and more plants in the garden that resemble nothing like coffee. The Starbucks garden has become so cluttered by wildflowers and weeds that it’s hard to recognize where the coffee plants are. Because of the wildflower and weed clutter, the Starbucks garden has lost its identity.

It’s become apparent—the Starbucks garden needs major maintenance. It needs pruning.

Pruning promotes healthy growth. By pruning, gardeners are able to remove unwanted, unneeded, and unhealthy plants as well as limbs from trees. This reduction of plants and tree limbs will allow for more light and air into the garden, thus allowing for wanted and needed plants to grow in a healthy, sustainable manner.

To promote healthy growth, Starbucks needs to prune its business by removing unwanted, unneeded, and unhealthy elements from its business. Prune its Merchandise assortment. Prune its Entertainment division. Prune its New Store expansion. Prune its Automation Efficiency projects. Prune its partnership with Jim Beam. Prune everything that is causing Starbucks to lose its identity of sourcing, roasting, and serving the highest-quality coffee.

These pruning efforts will allow for Starbucks to rejuvenate its soul and refertilize its reason for existing. Then, and only then, will the Starbucks garden be able to grow in a much healthier, sustainable manner.

*** Read the full post here ***

For those seeking extra credit, read the entire SOLVING STARBUCKS PROBLEMS series of posts.

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Comments

Pruning is a good thing when done properly, as you mention. Pruning by just cutting things willy-nilly harms the tree and stunts the growth. There must be a plan. Let's hope Starbucks is doing this in a planned fashion and not just resorting to "times are tough, let's cut costs and get rid of employees".

Thank you for the thoughtful posts, John. You rock!

Becky ... given SBUX's purposeful ways and track record of attention to details (they have done very little "willy-nilly"), the company has a plan.

From my vantage point, SBUX doesn't strike me as a "times are tough, let's cut costs and get rid of employees" type of company.

They are facing a crisis and the company's competitive nature means they will face the crisis head-on and make difficult decisions to revive growth.

Becky, you've studied Starbucks and posted many insights into how the company delivers its in-store experience, do you believe Starbucks has a plan and isn't doing this willy-nilly style?

The decision by Starbucks to scale back comes at no surprise given the monopolistically competitive market and economic downturn. Starbucks successfully used market characteristics and consumer behavior to its advantage over the years. But the slump has a reverberating effect on consumers’ price sensitivity across virtually all goods and services, as many are switching away from luxury items to inferior goods, which I’ve discussed on http://peppercomblog.typepad.com/ in greater detail.

John, I do believe they have a plan and are not doing it as a knee-jerk reaction to stock prices. However, I am not sure this was the original plan from earlier in their "transformation".

I am glad to hear you say that they are not a "cut costs because times are tough" kind of company, but that is a little bit how it appears from the outside.

I am pulling for Starbucks and want to see them succeed with their transformation, focusing on getting back to their roots of great coffee with a great experience.

Becky ... its a case of "drastic times call for drastic measures." I'm not sure any company has plans to cut thousands of jobs. SBUX has never had job cuts as drastic as they are doing now. (Unlike many other established companies where the ebb and flow of growth means a cycle of hiring and cycle of firing employees.)

SBUX is guilty of over-selling their "Transformation" as a somewhat quick solve. It's gonna take more than new espresso machines, fewer new store openings, closing low-volume locations, and introducing the Clover brewer to turn things around at SBUX. This is a multi-year plan to rebuild the company's business in North America.

We all forget that Internationally, the SBUX is healthy and those growing markets will help to offset the stagnant growth in US/Canada.

John, Like Becky, I believe the SBUX plan has changed since Howard took over. This is probably not his original plan. He talked a lot about the experience early on and has since tempered that emphasis.

And like you, I agree that pruning needed to be done. It's just very difficult to believe that this action was not somehow related to stock price resuscitation. Let's face it, had Starbucks stock price not been in the tank Howard would probably not have returned to take over the company.

Demean and kill anything that doesn't come from "the creatives." We all know clients are dumb ass, soul-less corporate tools. Cultivate the myth. Even though your MBA clients might want to see 20 different logo treatments, narrow everything down to three choices. Then stare smugly and force them to choose. You won't believe how easy it is- www.adagencysecretformula.com

Jay ... I don't think the plan has really changed. All that has been shared publicly are product-focused initiatives ... there are many other agenda items that haven't been shared publicly. We also need to remember that SBUX began cutting jobs last Fall and this most recent announcement of job cuts continues what has already been set in motion.

Was the plan all along to close 600 low-performing stores and cut thousands of jobs? Not exactly. The announced plan was to close 100 low-performing stores. These additional cuts show us all how unhealthy the SBUX business is.

In an email conversation with former SBUX colleague of mine, he used a different analogy to describe what SBUX is doing: CONTROLLED BURN. Meaning, like with forest fires, Starbucks is burning some of its undergrowth that is clogging up the store forest in order for the healthy stores to grow better. I like that angle.

Regarding all this being done to pump up a slogging stock price. My experience at SBUX tells me pumping up the stock price ain't the biggest concern. Shoring up the health of the company is the biggest concern. My casual eye on the stock market tells me beloved stocks get rewarded when they make major moves to cut costs. Seems like investors like it when a growth company prunes to shore up business and prepare for the next growth spurt.

I have to say I've followed the Starbucks crisis closely and my general belief is that the company is in a real downward spiral, not pruning mode.

For one thing, the company is an extremely attractive takeover target if its stock price sinks lower. It just seems to me that it'd be very easy to fold the Starbucks "brand" into a commodity drink that is sold anywhere and everywhere, as opposed to rebuilding (at this point practically from scratch) the holistic experience of a "Third Place" that was sullied by years of over-building and over-diversifying.

Plus I think Starbucks has extreme cost structure problems now that their brand is sullied. Because they have trouble differentiating, they are competing directly with McDonald's and its ilk. The big fast food chains can sell you a latte while they sell you a burger. Starbucks has to hire a barista to do nothing but sell lattes. That's a huge disadvantage -- especially if, ultimately, people stop seeing the difference between McCafe and Starbucks.

My analogy at this point would be not to gardening per se, but perhaps to a big overgrowth of kudzu followed by frenzied slash-and-burn. Starbucks is reversing big decisions -- like breakfast sandwiches -- that they introduced only very recently. That doesn't suggest pruning of gradual overgrowth in an otherwise well-maintained garden; but rather, disastrously poor direction setting by the head gardener himself (specifically Jim Donald).

Let's hope they pull through. It's a brand with a lot of potential. But I have to ask -- if their stock dips below $10/share, what are the chances they aren't taken over?

JMW, agreed ... SBUX could be a takeover target. I do not agree that they are in a downward spiral.

They've hit the wall. All growth companies hit the wall at some point. While Starbucks doesn't want to compare itself to McDonald's, they share a lot in common as it relates to store growth. McDonald's has done this grow (open stores) and retract (close stores) dance many times in its life.

We are all forgetting that it is only the North American business that isn't healthy. The International business at SBUX is healthy and growing.

If the International business was also not healthy then I would be bearish on SBUX long-time prospects.

@Milos. People are indeed trading down, and the economy is a factor but not the primary one. Starbucks initially attracted a number of customers as the only reliable decent coffee option. Both McDonalds and Dunkin Donuts have upgraded their coffee to the point that it is a "good enough" substitute, and for a significant number of them (perhaps 40 to 50% of their previously loyal customers) the price elasticity of demand is insufficient to scale the extra cost of Starbucks products, and the rest of the experience has been downgraded sufficiently that other chains are perfectly adequate "3rd places", and often they're superior if you get free Wi-Fi. Most of Schultz's changes make perfect sense, including this one, but the company is still experiencing an unacknowledged low-end disruption which hasn't been fully addressed. Sacrificing the low-end and retreating to the high-end is a long-term losing strategy.

@Johnny. I don't think SBUX is guilty of over-selling the transformation plan as a quick fix. This "pruning" is mostly of stores opened in the last two years, the majority of which were in poor locations and should never have been opened. Whether short or long term, the only effect these locations had was to siphon business from other close locations. While markets initially reacted positively, they have since continued the downward pressure on SBUX stock, and this is a long-term reality if investors believe that the company can no longer deliver the kind of growth that it used to. The stock price always discounts the expected future growth rate, and if expected future growth is lower, then earnings multiples will fall to the levels of standard blue chip stocks (or lower if analysts believe that a premium brand like Starbucks can't weather a long economic downturn). This is simply a necessary operational decision, not a short-term fix to prop up the stock price. Also, you mention that rapid growth continues overseas, but it is rapid growth in store locations, not earnings, as overseas margins are razor thin, averaging only 3% according to some reports. Margins in the US are much higher, so overseas expansion will not offset slowing growth in the US for the foreseeable future.

@Jay. The Starbucks stock price has fallen by more than half since Howard wrote his infamous memo last year. Half of that fall was before he resumed control, and half is since. It is falling at twice the rate of fall in the S+P500 and Dow Jones indices. I am actually an idealist who believes that Schultz was increasingly edgy about what appeared to be a series of perfectly logical operational decisions to improve efficiency and extend the brand, at least from the traditional MBA perspective, but each of those changes diluted the essence of the Starbucks experience which he had worked so hard to create in the first place. I believe that he believed he was the only person capable of reviving Starbucks soul, which in the long term would affect stock price, but not the short term. This was about saving his baby, and the long term health of the company.

@Johnny. Absolutely agree with you that this is about long term health. To bean counters (pun intended), most of Howard's changes so far would seem counter-intuitive, but without a vision of what the experience should be, there is no way to sustain the historically high prices and margins that Starbucks has had. Nor will it be as enjoyable a place to visit as it was 10 years ago.

@JMW. You've hit it exactly. If the competitive difference isn't valued by the customer, then they won't pay the higher price. While McDonalds and Dunkin and others aren't exactly comparable to Starbucks, they have come a long way, and they are both more widely available, faster at customer service and a lot cheaper. That is the classic definition of low-end disruption, and it is coming from industy heavyweights. Starbucks must have a strategy to deal with this disruption, and not ignore it or dismiss it until it is too late.

See: http://www.anti-marketer.com/2008/07/has-starbucks-g.html for my perspective on all this.

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