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Originally published Sunday, November 1, 2009 at 12:23 AM

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Starbucks focuses on relevance over cool as 4Q earnings loom

The once-hot Starbucks brand takes stock of more lasting strengths. A seventh same-store sales drop is expected in the fourth-quarter earnings release Thursday.

Seattle Times business reporter

Starbucks by the numbers

Employees: About 176,000 total, including 6,500 in King County, 3,000 of them headquarters employees.

Stores: About 16,730 total, including 287 in King County.

Test market: Starbucks often uses Seattle as a test market, most recently for its Via instant coffee and stores without the Starbucks name like 15th Avenue Coffee and Tea.

Sales and profit: Starbucks earned $241 million on revenues of $7.4 billion in the nine months ended June 28. It will release its fiscal year financials Thursday.

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Many coffee drinkers all over the country remember their first Starbucks.

They know which street it was on, who went with them there and when it opened, because that's when they told Seattle friends and family to stop shipping Starbucks coffee cross-country.

"It wasn't about the beans," explains Bill McEwen, a senior strategic consultant in brand management for Gallup who remembers when Starbucks arrived near his office in San Francisco some 20 years ago.

"Yeah, the beans are special, but it was about the total experience," he said. "They didn't have people serving you coffee; they had baristas. I didn't know what a barista was but I soon found out."

As Starbucks opened in new national and international markets, it gained cachet among a growing clientele that even learned a new language for ordering coffee: grande, latte, Frappuccino.

But any high-schooler can tell you that cachet does not last forever.

CEO Howard Schultz knows it. He told shareholders at Starbucks' annual meeting earlier this year, "We don't want to be cool. We want to be relevant."

Longtime Seattle customers know it, having seen the company grow and change many times in its 38 years.

Seattle customer Melody Overton remembers in the late '90s throwing away her Starbucks coffee-tasting diaries — called passports — in which she had collected stickers for each Starbucks brew she tried over the years.

"I tossed them out in a fit of anger," she said, for so many reasons: the elimination of a second sales counter for whole-bean coffee, the move from loose beans scooped from bins to coffee sealed in flavor-locked bags, and the decision to pull 8-ounce espresso drinks from menus in favor of super-sized venti (20- and 24-ounce) drinks.

"You get into a relationship with coffee and you don't want your coffee company to change," Overton said over coffee and a cheese plate at 15th Avenue Coffee and Tea, a new Starbucks shop on Capitol Hill without the Starbucks name. By the time she became disenchanted with Starbucks' big-company moves, the town's burgeoning coffee scene offered plenty of alternatives, including Espresso Vivace and Zoka Coffee Roaster & Tea.

Back then, Starbucks was still a hip-chain-on-the-move in places like New York and West Palm Beach, Fla.

The question is how much its sales depend on the cool factor.

Starbucks' number of transactions at U.S. stores began to decline in mid-2007, when the economy was still growing and the company was opening seven stores a day.

Its early falloff could have been a sign of Starbucks reaching a saturation point with customers — or a host of other factors, including bad real-estate choices and a product that consumers saw as a luxury they were willing to trim when their pocketbooks shrank.

Since then, Starbucks has posted its first quarterly loss as a public company and Thursday could report its seventh straight quarter of same-store sales declines.

Seattle investor Bill Smead, whose Smead Capital counts Starbucks among its mutual fund's largest holdings, believes the long decline of Starbucks' stock price compounded its traffic and sales problems.

Shares trade around $20, about twice its year-ago price, but they have yet to return to their 2006 highs near $40.

"When your stock breaks, you lose your cult," Smead said. "That affects how cool people think something is immensely."

He is betting Starbucks will make a comeback.

"It might never be able to get [back to] the new-company, hip, cool, superfly nature of what it was in the mid- to late- '90s, but it can create a whole new cool," Smead said.

"When Harvard Business School does a case study on how to revive the cachet around a branded company, they will use what Howard Schultz has done the last year and a half as a textbook."

Schultz's changes include closing nearly 800 U.S. stores, dramatically scaling back growth and introducing new products like Via, Starbucks' new instant coffee.

John Quelch, a Harvard Business School marketing professor who did a case study of Starbucks in 2006, said in an interview that lost trendiness does equate to lost sales.

Starbucks did not understand the brand implications of its rapid growth, he said.

"Starbucks pursued almost a Coca-Cola strategy of being within arm's reach of desire," he said. "You cannot achieve cool status if you are within arm's reach of desire unless you work very hard on supportive brand imagery and invest considerably in media advertising."

Plenty of companies make up for lost trendiness by emphasizing other strengths.

McEwen, the Gallup consultant, worked on an advertising campaign for Coors beer after it became available in the eastern U.S.

Until then, Coors was the hip beer to drink, largely because it was so scarce.

"It meant you were cool, you could ski and all kinds of things," McEwen recalled.

After it went national, he said, "the challenge was how to make something that was once a badge of specialness find a niche that made it the kind of thing you'd want to consume on a regular basis, despite the fact that it's available."

Coors wound up focusing its ads on customers' expectation that it be made with cold, clear water, McEwen said.

Starbucks can do that, too, if it understands what, beyond being cool, made it successful, he said. (Gallup led an employee survey for Starbucks several years ago.)

"It wasn't necessarily just the fact that they weren't everywhere," McEwen said.

"If the reason people went to Starbucks was because it was a welcoming third place in their lives with people who acknowledged you and knew a little something more about coffee than you did, and were able to do it with a smile and in a way that made you feel a little moment of relaxation in an otherwise hectic day and hectic world, that's the part you want to maintain."

The difference between cool and relevant is not just semantics, says Kris Engskov, regional vice president for Starbucks in the Northwest, including its 127 stores in Seattle.

"Cool is about trendy, and cool can be fleeting," Engskov said. By contrast, Starbucks' coffee, in-store spaces, employees and community engagement are aspects of being relevant to customers.

"In building a sustainable business, those are way more important that just being cool," Engskov said.

In Seattle, where Starbucks became ubiquitous long ago, Engskov knows he has particularly discerning customers.

"Starbucks has been here a long time, and I'm sure we've had varying relationships with people over time," Engskov said. "They expect a lot, and I love that."

Overton, the customer who threw away her coffee diaries, became reacquainted with Starbucks while attending law school in San Francisco.

Now Overton works as a lawyer in downtown Seattle and is such a regular, and interested, customer that she recently started a blog called StarbucksMelody.com.

She thinks the experience at Starbucks stores has eroded, most recently with time demands on baristas that keep them from interacting with customers as much as they used to.

As a customer who remembers when, two decades ago, a Starbucks barista spent 20 minutes explaining why she should use a French press at home, she misses the old days.

Overton frequents the few but growing number of Starbucks stores that have the company's specialized Clover machines, partly because baristas can chat while they wait for the coffee to brew.

"That's where Starbucks needs to recover," she said.

"People will buy beans that have been sitting in packages for six months, but you can't connect with someone when you've only been allotted 45 seconds to speak with them."

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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