Starbucks Transformational Agenda

Since I have lots of HMOs (hot marketing opinions) about Starbucks, reckon I should share my take on today’s major goings-on with the company. Since there’s lots to talk about, I’ve arranged my thoughts in a “WHAT | SO WHAT | WHAT TO THINK” format.

** WARNING … LONG POST **

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WHAT?
At its 2008 Shareholders Meeting, Starbucks announced six initiatives designed to: (a) improve the current state of its U.S. business, (b) reignite the emotional connection with customers, and (c) invest for long-term success.

The six initiatives are:
1 | New Espresso Machines
2 | Ethically-Sourced Coffees
3 | A Social Media Strategy
4 | A Customer Rewards Program
5 | Improved Brewed Coffee
6 | Acquisition of the Clover Brewing machine

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SO WHAT?
1 | New Espresso Machines
Starbucks will phase out its current automated espresso machine, known as the Verisimo, for a higher-quality automated machine. The new Mastrena machine is also an automated machine, but Starbucks believes the quality of espresso and steamed milk is superior to that of their current machine. Starbucks plans to have the Mastreno in 30% of U.S. locations by the end of 2008 and in 70% of U.S. locations by 2010.

2 | Ethically Sourced Coffees
Starbucks will further its relationship with Conservation International in a variety of ways. Customers will notice this relationship with a certification seal on select coffees judged to have been grown and sourced using stringent standards. By the end of 2009, every Starbucks espresso drink prepared around the world will be used with coffee beans certified by Conservation International as being ethically grown and sourced.

3 | Social Media Strategy
Starbucks is following the lead of companies like Dell by introducing a website where customers can submit their ideas on how Starbucks can improve its business. MyStarbucksIdea.com is the company’s first meaningful foray into social media. Howard Schultz will blog here and 48 Starbucks employees will be assigned to engage in conversations with customers on the website.

4 | Customer Rewards Program
Customers with registered Starbucks Cards will able to receive free syrups and free milk options (soy, half & half) when they order espresso drinks. In other words, customers using their registered Starbucks Card will only have to pay for a Grande Latte when they order a Grande Extra Vanilla Light Hazelnut Soy Latte. (The free modifiers do not include shots of espresso.)

Additionally, Starbucks Card customers will also receive 2-hours of free daily in-store wi-fi, free refills on brewed coffee, and a free 12-oz. beverage (espresso, coffee, or Frappuccino) when they buy a pound of whole bean coffee. These are only the initial rewards Starbucks Card holders are set to receive in April. The company plans to add-on more rewards in the months to come.

5 | Improved Brewed Coffee
Starbucks is changing its policies for brewing coffee in-store. They will be brewing in smaller batches and reducing the hold time for brewed coffee from 60-minutes to 30-minutes. Plus, the company will no longer rely on pre-packaged ground coffee filter packs and instead, grind whole bean coffees in-store to brew as drip coffee. A new blend, Pike Place Roast, will be introduced and brewed as an everyday coffee.

6 | Acquisition of the Clover Brewing machine
Coffee geeks rave about the Clover Brewer and high-end coffee shops have been using the Clover Brewer to brew richer, more flavorful coffee. Starbucks has been selling brewed coffee using the Clover Brewer in selected locations in Seattle and Boston. Results of the test have been promising. So promising, Starbucks is acquiring the Coffee Equipment Company, makers of the Clover Brewer. Starbucks has plans to rollout the Clover Brewer to a limited number of locations.

UPDATE: to watch the Clover Brewer in action, click here.

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WHAT TO THINK?
We were promised to learn of transformational initiatives that would reverse the negatives trends impacting the company. We learned of six initiatives. I'm not sure how transformational these initiatives will be.

Let’s judge these transformational initiatives against the objectives Starbucks outlined at the Shareholders Meetings. Will these six ideas (a) improve the current state of its US business, (b) reignite the emotional connection with customers, and (c) invest for long-term success.

1 | New Espresso Machines
The introduction of the Mastrena espresso machine is clearly an investment for long-term success. Starbucks says they will roll-out this new machine to 30% of its U.S. locations by year’s end. We’re talking over 2,000 locations—that’s highly aggressive. Given all the issues of production, distribution, installation, and employee training, Starbucks will be fortunate to have the Mastrena espresso machine in 1,000 locations by year’s end.

Expect this new espresso machine to have little financial impact on Starbucks business in 2008. As for reigniting the emotional connection with customers … that’s hard to measure. Let’s just say friendlier Starbucks baristas will reignite the emotional connection with customers more than an espresso machine ever could.

2 | Ethically Sourced Coffees
It’ll be 2009, when espresso drinks are made with Conservation International certified coffees, before this initiative can improve Starbucks U.S. business. With customers that value environmental issues and origin country matters, this initiative will help to build a stronger emotional connection with them. I’m not sure how many Starbucks customers are emotionally-tied to such issues. However, any activity designed to be friendlier to the environment and to coffee origin countries will be a good long-term investment.

3 | Social Media Strategy
Hmm … I applaud Starbucks for diving into the social media waters. (Really, I do.) I’m just concerned they haven’t done their homework. Chris Bruzzo, Starbucks chief technology officer, made the following statement when introducing the MyStarbucksIdea.com website, “I am not aware of another organization that is investing in making this kind of a commitment to integrate customers and their ideas and their insights into the products and experiences that they develop.”

So we are to believe Starbucks is unaware of Dell’s social media activities with Direct2Dell and more importantly, IdeaStorm. Starbucks can learn a lot from what Dell has done and is doing with social media to better connect with customers.

This marks a major cultural shift within the company. Starbucks has never participated in the online conversational media. It’s not like they can flip the switch to on. Its not that easy. (Just ask Dell.)

Time will tell if Starbucks customers are engaged by this online activity. Time will also tell if Starbucks corporate culture will adapt to social media and when (or if) Starbucks will implement customer ideas. Right now the most popular customer generated idea is for the company to implement a Buy 9 Drinks Get 1 Free punch card. That’s a marketing activity the company abolished a long time ago. How will Starbucks respond now?

4 | A Customer Rewards Program
Clearly, Starbucks is seeking to drive sales by getting current customers to buy more, more often. Offering Starbucks Card customers free syrups and free refills is just the first step in what looks to be a more involved “loyalty program.” This has the potential to drive sales in 2008 and to reignite the connection with customers. The future is a different story. Once Starbucks heads down the path of offering customers discounts, they will have a hard time ever reversing course.

5 | Improved Brewed Coffee
The vast majority of beverage sales at Starbucks, as measured by total dollars, come from espresso drinks, not brewed coffee. Improving their brewed coffee policies is a positive move that the company should have made years ago. Will these changes, including the introduction of Pike Place Roast as an everyday coffee, move the sales needle? No. Improve the emotional connection with customers? No. Be a sound investment for the future? Yes.

6 | Acquisition of the Clover Brewing machine
These new high-end brewers will only impact a small number of stores. Since these brewers make single cups of coffee on-demand, volume selling of drip coffee will not be possible. The Clover brewer will not have an immediate impact on sales in 2008. It does have the potential to impact the future business of Starbucks. Because this appeals to only coffee connoisseurs, I’m not convinced the typical Starbucks customer will care.

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Where do we stand? Let’s take a look at the Transformational Agenda Scorecard…

It appears these six initiatives will have an impact on the long-term Starbucks business, but the short-term impact is minimal. That’s my take. What’s yours?

And yes, I do need to get a life.

Comments

[Homebizseo.com]

Starbucks need to transform to continue growth. Starbucks has over saturated the market with their Pepsi knock off in every store. Any gas station can brew a better product for less money.

[NW Guy]

Shouldn't the new espresso machines help the baristas engage with customers more? I thought that the low profile of the machine helped open up the store.

Isn't this one of the points you made in earlier suggestions to Starbucks. (my apologies for not going back to previous posts to verify).

Wish I had the insights/pull to get a slot on the Starbucks social media team.

[johnmoore (from Brand Autopsy)]

NW Guy ... the lower-profile espresso machine is an idea Paul Williams and I discussed last year as something Starbucks could do to improve its business.

It will help Baristas to see their customers and for customers to see the Barista making their beverage. Improving the sight lines helps one aspect of connecting with customers. Another, bigger aspect, is making sure Baristas are friendly.

Because making a better connection with customers is complex, I'm saying the Mastrena espresso machine has the potential to help here. That's why I judged this initiative as "MAYBE" in solving for improving the connection to customers.

NW Guy ... maybe one of your ideas for MyStarbucksIdea should be for the company the hire a whip-sharp social media maven like yourself. Because they have no meaningful experience in social media, they could use some help.

[Phil Myers]

I'd actually be a little more bullish on this than you John. Seems to me Starbucks is in the same state that IBM was in the early 90's, Apple was in the late 90's and HP was just a few years back. Shultz is doing what Gerstner, Jobs and Hurd have done in focusing the company back on the value it delivers and bringing the experience up a level. They're getting away from a bunch of stupid inside-out, revenue-driven initiatives like putting breakfast sandwiches and lunch in the stores and getting back to improving their core. Won't happen overnight and any one of these six things may be the one that tips them or be a non-issue. It's the perspective of all of them that I like because it shows that the company is tuning in again.

[johnmoore (from Brand Autopsy)]

Phil ... I am bullish these initiatives will improve the Starbucks business. I'm bearish these initiatives will TRANSFORM the Starbucks business. That's a lot to ask. Dig?

The decisions to upgrade the espresso machine is long overdue. The operational policies to improve the quality/freshness of brewed coffee are long overdue. These decisions will indeed improve the core business at SBUX.

With regards to the MyStarbucksIdea.com initiative ... I'm not convinced the corporate culture at Starbucks is ready to evolve to fully realize the benefits of customer-generated ideas. Starbucks is very much a command and control company. The company culture isn't conducive to accepting ideas from "outsiders." Lots of potential here. Time will tell if that potential is realized.

[Ria Kennedy]

I think something important is that these changes could re-energize the people that work at Starbucks and this could have a profound impact on the success of these changes.

Is it possible this could be part of the strategy and thus re-galvanized employees will create a better experience leading to a turn-around in profits?

[Martin Bishop]

First of all you certainly don't need to get a life. You have one. It's this! A really excellent post.

I am with Phil and also more bullish about these initiatives. Transformational? I'm not sure but certainly a significant change in direction, as evidenced by your scorecard which shows that all the initiatives are more long term than short term focused.

Out go the breakfast sandwiches and other ways of trying to increase short term sales and in come significant investments into equipment and customer relationships. These are all likely to actually decrease profitability in the short term.

I have no idea whether the social media strategy will work. But I did get to hear Bob Pearson from Dell speak at The Economist marketing conference last week. He is responsible for all their digital media activities and was extremely impressive. Hopefully Starbucks will have someone of this caliber on board. Perhaps NW Guy can be the man?

(My review of the Economist conference: http://brandmix.blogspot.com/2008/03/10-takeaways-from-2008-economist.html for anyone interested.)

[Jackie Huba]

John,
This is excellent work! I agree with you that discounts is not the answer. I hoping that the MyStarbucksIdea.com site yields some good customer feedback. I'm a little skeptical as many of the ideas are around frequent use and getting free stuff.

[Pat Nerr]

John... in the social media arena, I'm not sure that MyStarbucksIdea is the "fun, innovative, progressive" approach that's really needed to engage partners and customers with the company... I see no fun whatsoever in the initial rollout of this and that's what they needed... A blog post from Howard showing how "fun" the concept will be... Right now, it's just a big Mission Review/Customer Comment tank of the same ideas over and over again. I hope they didn't think people wouldn't notice... like when the Italians came up with the radio and tried to pass it off as the TV

[Joe Caruso]

John... Great post.(& blog) I respectfully disagree with some of it. I do think the Clover machine will bring a dramatic change to the current brew that rots in a hot machine.(many people complain about Starbucks coffee taste burnt) Although I haven't sampled coffee from this machine, I've heard that it produces an amazing cup of coffee.

I'm glad to see the breakfast sandwiches are going. I feel they lost their identity when burnt bread invaded my nostrils before the aroma of some great java. I think these changes will have a synergistic effect that will ultimately make the Starbucks customer happier for their purchases.

I agree with you on their foray into social media. I personally think they could've went the blog route. Having to register is a pain, and it seems like it's just a vehicle to eavesdrop on their customers thoughts and get some good ideas to boot. It's just a little to overt for my taste.

Overall, I'm really jazzed that Schultz is back and making some major changes. As an avid coffee drinker & stockholder, these changes are all big pluses...

[johnmoore (from Brand Autopsy)]

Joe … I enjoyed two cups of Clover brewed coffee today. Fabulous!!! The Clover brews coffee to taste like Press Pot brewed coffee without the gritty bean residue. A fabulous tasting cup of coffee.

Brewed coffee freaks will love Clover brewed coffee. But how many Brewed Coffee connoisseurs go to Starbucks for the absolute best-tasting coffee? 10-years ago they did because they didn’t have options. Starbucks was the only game in town. Today is a different story in many cities as many independent coffee shops cater to Brewed Coffee freaks.

The biggest issue I see for Starbucks with the Clover Brewer is with Operations. To brew an on-demand single-cup of coffee using the Clover is time-intensive. The barista needs to:
(1) select the beans
(2) weigh the beans
(3) grind the beans
(4) place the beans in the Clover
(5) push the “brew button”
(6) stir the beans steeping in the water
(7) serve the coffee

This 7-step process is time-wise intensive and labor intensive. We’re talking a minimum of 3-to-4 minutes for a cup of Clover brewed coffee. Now imagine a line of customers at Starbucks and say 5 people order a Clover brewed coffee. It could take 15-minutes for customer #5 to get their Clover brewed coffee. Will enough Starbucks customers wait that long?

Labor-wise, Starbucks will need to dedicate a Barista to man the Clover brewing station. That can get spendy fast.

The Clover will help Starbucks brand reputation within the specialty coffee industry. We’ll have to see how Starbucks Operations deals with the add complexity of brewing Clover coffee at your neighborhood Starbucks. Remember, Starbucks is setup for volume selling ,not boutique brewing.

[Richard Band]

John - first off, your blog is a great resource for anyone involved with the Starbucks brand - thanks for your thorough posts. Regarding these main changes and others (including removing the breakfast sandwiches from the menu), I'm in agreement with Phil. Each of them in isolation may have a small effect in the short term (and who can tell in the long term), but together they speak about an attitude shift at the company back towards the fundamentals of what made the brand great. You mention in your response to Phil that the company is very much a "command and control company" who may not be open to accepting ideas from outsiders. That may be the case, but I see all these changes as a proactive response to that fact that many people have fallen out of love with the brand. The actual ideas may not be coming from outsiders (and despite the "mystarbucksidea" initiative, they may never will), but the main point is that the company seems to be listening to what people are complaining about and doing something about it.

[johnmoore (from Brand Autopsy)]

Richard ... maybe my final sentence got lost in the mix where I said the short-term impact of these initiatives is minimal but the long-term impact looks promising.

It'll be interesting to see what develops in the next 12-months with the SBUX Card and the so-called loyalty program components. I'm not sure discounts are the trigger to get current customers to buy more, more often. That hasn't been part of the mix in the past. We'll see.

[Stephanie Wood]

John - I have been somewhat obsessed by this, having hawked the first Starbucks french-press coffee on Connecticut Ave. in Washington DC about 15 years ago when Schultz was in charge and no one knew what Starbucks was on the east coast (hence the street sampling). Now, as a marketing communications executive having watched the evolution of the brand since then, I eagerly anticipated the board announcements teased in the WSJ -- but I was largely underwhelmed. Starbucks education of the market and successful creation of demand/desire for espresso drinks is the exact reason that it cannot go back to the old days of the art of the barista when, let's face it, "good enough" is fine for many American palattes who value convenience and price over perfection. With so many other big brands now in the game DD and dare I say, the Golden Arches, dropping the breakfast sandwich may actually be problematic. If I am a "good enough" person (which Starbucks needs to attaract, to keep volume needed due to store proliferation)I will probably not stop at 2 places -- one for coffee/espresso and one for breakfast sandwich. I'll go where I can get both. I fall into the opposite category -- I would never go to DD or McD --I go to Starbucks every morning and NEVER ordered anything other than my drink because the pastries, etc. are not very appealing. However, the premium breakfast sandwiches tempted me on more than one occassion and I did not find there to be a negative aroma (and I am keen on this) -- but truthfully, even before the introduction of the breakfast sandwiches -- there hand't been that fresh ground coffee aroma for awhile. I do think Starbucks will be better served by improving consistency among its locations as quality does vary wildly at this point. I guess I had been hoping for more of a "wow" factor in the short-term solutions.