Commoditization of Starbucks

Howard Shultz’s Mission to Make Starbucks About the Customer and the Community

Howard Shultz, the company’s founder and CEO from its founding in 1971 until the beginning of 2008, succeeded Jim Donald as CEO. Shultz had expressed worry about Starbucks’s products becoming commodities and the brand becoming less romantic and theatrical as a result. According to Schultz, Starbucks’ early objective of giving customers the “Starbucks experience” was a key factor in the company’s success. Instead of selling coffee to people, the company was in the business of selling coffee to people. On his appointment as the CEO, Schultz embarked on his mission to make Starbucks about the customer and the community. The decision to replace Jim Donald, coupled with financial recovery in the U.S and Schultz’s transformation agenda saved Starbucks from insolvency and heralded a new period of increased profitability for the company (Hannah, 2014).

Commoditization and Competition

As of 2008, Starbucks main adversaries of profitability were the commoditization of the brand and the perceived competition from McDonald’s coffee bars. These two problems were however correlated and solving the problem of commoditization reduced competition from the low priced beverages sold by McDonalds and Dunkin Donuts. In the years leading to 2008, Starbucks was focused on expanding both nationally and internationally. The company focused on reducing its operating cost. Its business strategies were reactionary and tailored to seek operational efficiency without paying heed to the company’s brand and objectives. With independent individuals and fast food chains expanding into the coffee industry, Starbucks reacted quickly to protect its market. Since these businesses were using low prices to attract customers, Starbucks managers sought to reduce the cost of operations impersonalizing the company’s products. The result of these strategies was a watering down of the Starbucks experience, which improved revenues in the short-run but in the long-run made Starbucks a weaker brand that was vulnerable to the competitive threats of cheaper coffee houses.

The Consequence of Abandoning the Starbucks Experience

All businesses seek to increase their profits and expansion is a key profit driver. For a business built on customer satisfaction, however, expansion is a sensitive process that should be approached with a view of the company’s values and objectives. The value of a brand lies in its commitment to the objectives associated with it. If the brand moves away from its mission, it loses its goodwill and its initial customer base. The expansion strategies of Starbucks in the years leading to 2008 were not unique to the best coffee maker but mimicked the strategies of any food and beverages business. The report published by Consumer Reports magazine where consumers preferred McDonald’s coffee to Starbucks’s shows that Starbucks abandoned its mission to be the premier purveyor of coffee. Nothing could stop the coffee giant’s customers from seeking cheaper alternatives.

McDonald’s, Evolution of Customer’s Taste, and Competition

According to McDonald’s CEO, their expansion into coffee was simply a reaction to the evolution of customer’s taste. With Starbucks and a good number of coffee houses serving meals alongside their coffee, customers have come to expect food alongside their drink orders and vice versa. McDonald’s turnaround strategy Plan to Win prescribed changes that would evolve the company’s brand without hurting it. The installation of coffee bars in existing McDonald’s restaurants was a key part of this strategy. McDonalds capitalized on the change in product offerings in Starbucks and other restaurants while remaining true to its brand and mission of providing fast food.

Returning to the Starbucks Experience

McDonald’s coffee would not have been a threat to Starbuck’s profitability if the company had remained true to its core mission. Starbucks offered gourmet coffee with pleasant customer service and a welcoming environment. Starbucks business was entirely different from McCafe’s even with the same product, coffee. As of now, McDonald’s is in competition with Dunkin Donuts, Burger King and other low priced non-luxury coffees as shown by their pricing wars (Whitten, 2017). Starbucks solved this problem by returning to its initial way of doing business; offering customers the Starbucks experience. The transformation Agenda removed all operational efficiencies that make the Starbucks experience impersonal e.g. removal of impersonal coffee grinding machines with customers being a part of the coffee making process. Employees are also trained to offer the best customer care, welcoming criticism and changing service for the better. Starbucks further appealed to its initial customer base, educated persons with a middle to high income, by rolling out corporate social responsibility strategies.

Corporate Social Responsibility and Commitment to Principles

Starbucks’ approach to doing business is spelt out clearly in its mission statement that reads; “To establish Starbucks as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow.” The business as remained committed to its uncompromising principles of social responsibility and providing its partners with a great working environment. The Whywhisper Collective has cited Starbucks as the American company with the most expansive and comprehensive Corporate Social Responsibility (CSR) strategy (Vandeveld, 2015). Starbucks CSR strategy covers three areas: environment, community and ethical sourcing. Starbucks pays farmers a premium price for high quality coffee beans and encourages the middlemen to be ethically responsible towards their workers paying the correct wages and avoiding child labor. The company also supports coffee farmers by providing credit seeing as the insufficiency of capital to invest in modern farming methods is a problem in the developing countries where Starbucks sources its coffee. Starbucks is also the only company in the food and beverage industry that offers its fulltime and part time employees full medical and dental cover.

Social Responsibility and Profitability

Social responsibility has meant higher costs for Starbucks, the cost of goods increased in the food industry in the 2008 period due to higher prices of farm products. The cost of goods however increased at a much higher rate for Starbucks as a result of the higher prices paid for coffee. From its founding, Starbucks has pursued socially responsible means of creating profits. The transformation Agenda proposed and implemented after Schultz appointment as CEO in 2008 was more aggressive about CSR. In 2008, the company’s net earnings were $315 million down from $672 million in 2007. Net earnings improved to 390 million and 945 million in 2009 and 2010 respectively. As of 2016, the company’s net earnings stood at $2,818 billion.

International Expansion and Cannibalization

The coffee market in the U.S is currently saturated informing Schultz’s decision to focus on international expansion. The company is assured of sales within the U.S since it has cultivated a relationship with its customers, increased revenue therefore lies outside the country. The beauty of Starbucks’ business is that the cannibalization of its products is hardly deterrent to profitability. Starbucks can switch the bulk of inputs from a declining drink to the drink in fashion effectively stabilizing the cost of goods sold while capitalizing on the existing coffee fad.

References

Vandeveld, K. (Sep 2015). Corporate Social Responsibility: How Starbucks is

Making an Impact. Retrieved from http://www.whywhisper.co/the-blog/2015/9/24/corporate-social-responsibility-how-starbucks-is-making-an-impact. Accessed 30th Nov 2017.

Whitten, S. (2017). McDonald’s McCafe is posing a major threat to Dunkin

Donuts. Retrieved from https://www.cnbc.com/2017/06/21/mcdonalds-mccafe-is-posing-a-major-threat-to-dunkin-donuts.html. Accessed 30th Nov. 2017.

Hannah, J. (2014). Starbucks, Reinvented: A Seven-Year Study On Schultz,

Strategy And Reinventing A Brilliant Brand https://www.forbes.com/sites/hbsworkingknowledge/2014/08/25/starbucks-reinvented/2/#1d98e84d4822. Accessed 30th Nov 2017