Friday, January 11, 2008

Fighting the gravity of commoditization

Starbucks is one of my favorite companies - and I don't even like coffee all that much.

But I admire it as a company that did the seemingly impossible: it took a centuries old commodity - coffee - and turned it into a brand. In the process it founded a cult following that was willing to pay four times the commodity price for the "Starbucks Experience".

Such gravity-defying feats do not come easy. They are born from some fundamental shift in demographics or customer habits, or from the identification of some inherent needs that the consumer did not even know existed. In case of Starbucks it was born fundamentally from the passion of a man and his desire and determination to share this passion with others. You really have to read the book: Pour you heart into it to get a flavor of what this company was all about and how sharing the coffee experience was its prime driving force while profit and growth were just the results of this passion.

But as it has grown, it has continuously had to fight off the gravity of commoditization. In 2007 it seems to have crossed the line where it's desire for expansion overtook its passion for coffee, and the results are in: Articles like thisWSJ blog are common which trace the share price and the results of this situation.

But perhaps the most telling sign that something is amiss came in this Memo:"The Commoditization of the Starbucks Experience" from Shultz himself, warning his company of the risks of losing its soul and its connection with its customers. As he says:
"Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand."

"Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces."

"While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers."

"I have said for 20 years that our success is not an entitlement and now it's proving to be a reality."
As things have turned out, this memo which was sent out in Feb 2007 does not appear to have been heeded, and now the CEO has been removed and Shultz himself is returning to actively running his company. It might already be too late as McDonals is gearing up for a major war on this front.

Can Starbucks defy gravity again ? or will the force of commoditization finally pull it down to earth? it will be a fascinating battle !

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