Paul asked me to write about the Flip Camera. And as his last article stated, I have been a big fan of the Flip Camera for a very long time now. Here I present my case for why I believe the Flip Camera (and the type of product it represents) is more than a blip on the radar.
Q: How is the Flip camera "good enough" to cause unexpected market disruption?
The first thing I look at is what you CAN'T do with a device. If the list is long or "critical" enough, the odds are that the rest of the industry won't see it as a competitor and will be blind to the disruption that it represents.
You can't plug in a professional external microphone
You can't change the aperture or adjust the levels in any way (video or audio)
The zoom is too feeble to enable any filming from any real distance. You basically have to be in their face
You can't add in new lenses or later expand the camera
You can't take "professional" quality footage with it
Looking at the list above, I realize why so many dismissed the camera. But then I think of YouTube. Watched anything on there lately? Most of the videos on there are shot with a WebCam that has WORSE quality, no controls and mediocre audio at best. Hmmm.
Let's look at what this device CAN do.
The pricepoint has driven the entire market lower ($135).
Size is critical. It fits in a pocket or a purse and doesn't add much weight. You can ALWAYS have it on hand (not quite as easy as if it was on your cellphone)
Ease of use is critical. Turn it on and you are ready to record
in less than 2 seconds. Just press one button and the same button to
stop.
Quality is NOT critical, but must be "good enough" and I believe the Flip is just that. Good enough. Limited zoom and full frame rate, 640 by 480 video with decent audio.
The software that comes with the camera is anything but the greatest editor. But the fact that you can edit clips together and upload right to YouTube is quite neat for many users.
Q: Where is the Flip driving new innovation and creating new value/opportunities?
More and more cameras record to a chip nowadays. And just about
every manufacturer is working to make getting the photos or footage
into your computer easier. Cables are generally included with the
camera. Some cameras offer accessories for you to remove the chip,
plug it into a device and then plug the device into your USB port.
Flick a switch on the Flip and the USB connector emerges. You plug the camera directly into your computer. Done.
But this is not the innovation I want to speak of. This is a cool feature, but the real innovation is that the Flip Camera comes with the software to edit your videos embedded on the camera itself. There's no CD to install. You connect the camera and everything you need is on it. You launch the application off the camera.
What the Flip does represent is a rather significant potential to revolutionize how we think about products in the electronics category - (I took a stab at this on my blog). To date, electronic products have been either a piece of software or a piece of hardware. Many pieces of hardware came with software or drivers to enable us to interact with them, but the feeling was that we were purchasing the hardware and the software was often not a required component.
The Flip offers a glimpse of a future where software is seen to be an integral part of a device because it is fully contained within the product. I can easily see a future where we start interacting with products and not the other way around. The day when our PC's capabilities are actually ENHANCED by owning a piece of electronics. My new Bravia Entertainment Platinum TV now allows me to access live streams of new shows a day early off any computer in my house. Or the fact that I bought a new scanner means I have access to enhanced faxing and photo editing from any machine on my network, without having to install any software. The software just appears because the purchased device is on my network. Electronic devices become a gateway into enhanced functionality that is related to the device but operable on other platforms and tasks.
We talk about the blogosphere as being a conversation, and when it approaches that, it gets really interesting because there's something about the interaction of ideas and differing opinions that makes us learn more than listening to the master speak. But, truth be told, most blogging is more like listening to the master than it is engaging in conversation.
I think part of that is because it always starts with the author's ideas, and we don't know and trust and relate to the person on the other side of the conversation so much, so even when you get commenters actively participating, it's still more like a teacher and a classroom, with the original blogger owning the discussion. Except in the classroom, flamers and haters and fanboys and lurkers aren't tolerated. But that's another story.
Meet Sean
So, on a completely unrelated thought, I had been talking with a blogger friend Mr. Craphammer Sean Howard several months ago about the Flip Video camera and why it was pretty cool and why he thought it was probably a disruptive innovation.
Sean is a marketing/branding/digital and social media maven who has started to grok disruption, and he gets pretty passionate about stuff that interests him, so we've had some very interesting discussions about what enables disruption, when and how it happens, whether a company or product is or isn't, etc. I've often thought that it would be pretty cool to capture us sitting over a couple of beers shooting a disruptive breeze because there's a lot of creative energy and interesting ideas that come out. Or, it could also just be that after a few of those 8% beers from Quebec, everything seems more interesting. It's hard to tell.
So, Sean was pretty excited about the Flip and was using it for a project he was working on, and intellectually I could see it, but it wasn't my cup of tea. I'm a guy who likes full control, hi-def and all the knobs and dials of a full-featured video camera, so the stunning simplicity of Flip was interesting in the abstract, in the way you say "That's interesting" to someone when you want to change the subject. But then I got thinking -- why not ask Sean to talk about the Flip on my blog. He knows what's cool about it, and understands disruption well enough to offer an interesting perspective.
But, when I asked him, he said "No dude. You frame it. You know this stuff and write it so well. How about I just provide quotes and insights as a user?". Hmmm. Well maybe, but that didn't seem nearly as compelling as having the guy who gets it write about it.
Then a Conversation Started
So he sent me a bunch of stuff by email, and I responded with some "yeah, buts..." and we went back and forth and then spoke some (yup, a real live telephone chat for those who can barely remember when we actually used to speak to people and call that a conversation), and then I thought -- hey, this is pretty neat. Why don't we do this online and open it up for others to listen in and participate with comments and questions.
So that's what we decided to do. I made Sean a guest author, and he's going to post the original notes he sent me, and then I'll post what I said back in a day or so, and we'll try to carry on the conversation through comments and back and forth posts.
I'm looking forward to seeing what kinds of thoughts and questions get raised, and wondering whether there will be disagreements or other ideas thrown in the pot.
decided that he wanted to use his marketing talents on 'do good' and public works types of projects, which is what he does exclusively now as a free agent
Warning: this blog post is going to get political.
A common problem I've noticed with potential disruptors is that they have initial success breaking through the noise with a disruptive idea or a disruptive message supported by underlying authentic persona or product, yet as soon as they get the attention they so desired, they start to be criticized by the mainstream pundits for being different or lacking in some respect. So, they immediately tone down the disruption and start trying to appear mainstream, middle-of-the-road, mediocre and above all, not different.
This happens with companies all the time as they mature. They do what MBA schools everywhere teach you to do. You had a disruption. You quickly moved to market leader. Now milk it for maximum profit.
To many, this means optimizing internal efficiency of the business, stripping out costs and uniqueness (because uniqueness carries a cost) to produce goods and services with the highest (theoretical) margins possible. There is a rush by competitors in a marketplace to copy each other's features in a race to the middle where all rough edges are sanded off, nothing is controversial, nothing is extreme. Everyone runs focus groups (which, by the way are worse than useless for pointing to the future and helping with disruption), and all the focus groups tell them exactly the same thing, so they adjust their messages and features and benefits to conform to a mass mediocrity with features that no one really values. All this to maximize their market and appeal to the broadest possible audience. Ironic, isn't it?
This is the conventional wisdom. Get noticed for being different. Move to the middle mainstream as fast as possible. Unfortunately, when it comes to disruption, the conventional wisdom is almost always wrong.
OK Mr. Anti-Marketer, Give Us Some Examples We Can Understand
In this presidential election season, we have two outstanding examples that almost everyone should be able to identify with: Senator Barack Obama and Governor Sarah Palin.
Without a doubt, if Mr. Obama wins the presidency, he will usher in a new post-racial era in American socialization. It will be no small accomplishment for the first African-American candidate to reach the pinnacle, and become the world's most powerful leader. He has promised change, and certainly in the early days of his campaign, the media and methods by which he delivered that message seemed to resonate as authentic and pure. He had disruptive convictions, and disrupted the primary process. He came from behind as the dark horse visionary, upsetting the Democratic party establishment to win the nomination. He got people excited.
All was going swimmingly, when suddenly a new disruptive force was thrown into the fray. Governor Palin has succeeded by disrupting and disarming at each step of her political career. Unseating incumbents for mayoralty and governorship, taking on her own party's establishment by going direct to the people and espousing a populist message that resonated. Unseat corrupt politicians. Throw out fat cats. A hockey mom indeed, with both charm and grit. If the McCain ticket wins, she'll be the first female vice-president, a populist voice from an outsider state, and will change presidential politics forever just as Obama will if he wins.
Both Obama and Palin were effective in disrupting not just because of their color or sex (although those characteristics are highly symbolic of the change each represented), but because there was authenticity behind the message and symbolism. Neither sought approval of the political establishment, but went direct to the people with powerful ideas representing radically different directions.
Enter Mainstream Spin Doctors and "Handlers"
When disruption is successful, it starts with an unmet or underserved need in the market. The electorate is tired not just of the idiotic "sound bite" bickering in Washington, not just of George Bush, not just of the inability of Congress to get anything done except make sure they break for holidays on time and get their indexed paychecks and pensions, but increasingly of the lack of vision, lack of principle, and destructive actions or inactions that have gotten the country into the mess it is.
Perhaps the most intensely partisan don't feel this way, but certainly everyone without party allegiance does, and many who identify themselves as conservative or liberal, republican or democrat, do as well.
How bad is it?
For the past two weeks, our country's financial system has been on the verge of a train wreck, mostly caused by Congress pushing Fannie Mae and Freddie Mac to be social tools of government, putting poor and high-risk people in houses they couldn't afford. This pressure from Congress resulted in a bonus system set up in those quasi-governmental corporations which highly incentivized executives for the number of loans underwritten to the poor, rather than the financial prudence of those loans, which of course led to massive corruption and a blind regulatory eye. Corruption in false appraisals, unethical mortgage brokering, fraudulent resale of bad paper, and the packaging and hiding the trail of all those bad loans into securitized products that we all got suckered into buying unknowingly through our 401(k)s and mutual funds. Criminal all around, and not much different from the engineer of a passenger train in LA who caused the worst train accident in American history by texting on his cell phone instead of watching the signals.
While this financial train wreck has been gathering steam, political "leaders" have tried to put together a bailout package, initially that completely picked the pockets of the American taxpayer, but without any upside or guarantees that credit markets would unfreeze. Going through several iterations, it's now almost palatable, but still a horrific penalty for those of us who had nothing to do with it to pay. People like me, in fact, who borrowed responsibly, had significant equity, didn't use my house as a piggy bank, and will never get a penny of relief -- the great hard-working and responsible middle-class being ripped off by both the rich and the poor. And, for what has seemed like an eternity, and with another 10-15% of stock market value erased, politicians have dithered, spending their time blaming each other while claiming to seek a bi-partisan solution.
I suspect there are a lot like me who would just as soon seen the entire house and senate fired and replaced with new blood. Unfortunately, that can't happen. But that zeitgeist is what creates the great unmet and underserved needs of the voters.
We need honesty, integrity, authenticity, people who are working for us rather than themselves. People who aren't trying to line their pockets with lobbyist dollars. People who genuinely want to fix Social Security and the tax system, eliminate corruption, defend the country and its freedoms appropriately, regulate as necessary to ensure fairness and consumer protection, but not over-regulate. Eliminate the dependence on foreign energy supplies that not only threatens national security, but introduces immense instability into our financial markets whenever some tinpot dictator wants to throw his weight around. Throw the entire health system in the garbage and start over. And lead with vision, creativity, thoughtfulness and energy.
We need disruptive change.
So that's the foment into which we have not one, but two potentially disruptive choices thrown. At first, Obama seemed fresh, new, articulate, genuine, of the people. He used modern tools like blogs and texting to go direct to the people, bypassing the political establishment. As a result, he generated excitement and fanatical fervor. He disrupted the Democratic party establishment and ultimately won the nomination over the hands-down favorite, Hilary Clinton.
McCain, yesterday's maverick, lacked energy and appeared dispirited and fast on the way to losing. Of course, he had an albatross necktie in George Bush, the most unpopular president ever, but that didn't account for his own relegation to the sidelines as old news while Barack seemed the heir apparent.
McCain knew that he needed a disruption of his own, and went with the brilliant choice of Governor Palin as his running mate. Another fresh face, untainted by Washington politics. High energy. Another historic choice, guaranteeing that no matter who wins the election, we will either have the first black president or first woman vice president. She shook things up quickly with her personality and charm and track record.
Then they got "crammed" by the mainstream
Obama was first. He became imperious, arrogant, above the people not of the people, elitist, clamping down on innovation, touting the party line and the same repetitious negative mantras we've come to hear from every politician before him. When questioned about specifics, he dodged the questions, having been advised by handlers apparently that all he had to do was say nothing to win. Saying something affirmative about his plans was a risk. When challenged, he began changing his position on every issue of significance, moving towards the middle, but in a non-specific enough way that we now have no idea what his intentions are if he wins. All the positive energy of change, the disruption of authenticity, of talking and listening to the people, of any semblance of integrity was lost in very short order. The mainstream owns Obama, and any likelihood of disruptive change was flushed down the toilet. He's just another political hack who wants to win at any cost.
Next was Palin. This has been painful to watch because it's happened so quickly. She was disruptive because she was of the people. Her accent was annoying to many, but undeniably of a place. Many mocked her as sounding stupid, or said she was inexperienced, but in reality it was mainstream carping, both from the political establishment and the media. Her accomplishments actually were the sort that matter to the electorate. Balancing the budget, reducing expenditures, selling off unnecessary luxury assets, attacking corruption. All the while succeeding against the odds -- unseating an incumbent governor from her own party from the position of mayor of a small town. Palin was the living embodiment of Ms. Smith Goes to Washington.
Most of all, what the people, as opposed to the elites, liked about her was her authenticity. She didn't know everything, by any stretch, but that didn't matter. She was trustworthy, not because she had 30 years of experience with foreign governments or because she knew how to work the backrooms and do corrupt deals to move legislation along, but because she didn't. Amazingly accomplished in her short career, untainted, she had demonstrated real leadership, and an ability to take on challenges bigger than herself and win. The kind of leadership that's been missing in Washington for a few generations. Heck, she could have been running for president for all the masses cared.
But then the handlers got a hold of her. She wasn't allowed to change her convention speech script, which quickly made her sound contrived and programmed. She was locked away from the media to be groomed so she'd know exactly what to say and how to handle the gotcha questions. And the net effect? When finally allowed out of the room to do an interview, she didn't sound herself. She was too cautious, too much "on message", too scripted, yet not well enough prepared. In a few short weeks, the mainstreamers stripped her of the number one quality that made her popular -- her genuineness, her hockey-momness, her rural up-country sound and attitude, her authenticity.
Dissatisfaction is Run Amok
So, the things we most liked about Obama and about Palin are mostly gone now. Obama has no chance of redemption -- he is thoroughly a politician, cut from the same cloth as all that came before. Disingenuous, contrived, manipulative, truth distorting, vote chasing, deceiving, power-hungry, willing to say or do anything to win. No longer any potential to disrupt in any way. We saw this most plainly in his and House Speaker Nancy Pelosi's message manipulation around the financial crisis to finger point at the republicans while claiming they were the ones being bipartisan. Excuse me, Ms. Pelosi -- bipartisanship, by definition, is a two-way street, both sides share in credit and/or blame. You can't be bipartisan if you're blaming the other side. I resent you playing games with the financial health of my country to gain political points. And, rather than assume a leadership role, which would have involved some risk, and by the way, proved that he had what it takes to be president, Mr. Obama chose to "phone it in". They just don't get it.
Ms. Palin has gone a long way down the same path, as her stumbling in the media interviews clearly demonstrates. But she has one last chance to disrupt this election in the vice presidential debate tonight. If she returns to being herself, is willing to speak off the cuff, throws off all the trash that's been loaded on to her by McCain's handlers, and is willing to make a mistake or two to make a point, then she will disrupt, and I predict the McCain ticket will win because of it. If she does not, they will lose.
Hard to believe it all comes down to this, but that's the way disruption works. You gotta be authentic. You gotta know what you are and be true to it. You can't be everything to everyone, unless you want to be nothing to anyone. Yup, I said it first. This is Governor Palin's election to win or lose, and it all comes down to whether she's given in to the mainstream, or whether she chooses to go with what got her there in the first place and disrupt the status quo.
My advice to Sarah? There is no shame in being who you are and making a mistake that takes you down in defeat. There is a lot to be ashamed of if you sacrifice your integrity because you think that's what it takes to win. Go back to square one, and be yourself. The electorate still wants change, and will vote for the side they think can deliver it and truly represent them with, regardless of the last two weeks. If neither side offers genuine change, then the Democrats win by default, because it was always theirs to lose.
It Works the Same for Disruptive Innovators in Business
You have to start with a product that resonates. You have to meet an unmet or under-served need. Both Obama and Palin resonated with the electorate, although in very different ways. Then, you've got to stay true to your message. If you are the creator of the most desired and elegant products on the planet, as Apple has become, then you have to keep doing it. That's what your audience values, and it's why they buy from you. If Apple were to drop a bomb on the market like Microsoft's Vista, how long do you think we'd respect them for? You can't race to the mainstream middle and still be a disruptor. You have to continue to resonate.
Full Disclosure Section
I am a supporter of neither republicans nor democrats. I'm that elusive independent sort that everyone is chasing. And, that's why all this matters. Those who are allied to one or the other party have already made up their minds, and they are split 50-50. And, that's why disruption is playing a role. It's people like me that are going to decide this thing, and we don't care about political dogma, in fact, we despise it. The sooner you stop repeating the same tired lines, drop the "speaking points" and tell us what we want to know, the more likely you are to win. And, don't forget the genuineness, authenticity, integrity, trustworthiness, leadership, and being willing to stand for something and mean it.
Over time, The Anti-Marketer has evolved from being a catch-all for anything about marketing to being more about disruption, disruptive business strategy and analysis of disruptors. While related to what I want to cover here, that was never supposed to become the main focus. This is supposed to be about disruptive marketing strategy and what not. On the other hand, I have an increasing amount I want to cover on identifying and scoring disruptive potential. So, we had to do something about that.
If you've noticed the bigger spaces between recent posts, part of that has been because I've been working on a solution to the above problem and launching some new projects at the same time. Now I'm officially announcing the first outcome of that thinking and work. A new blog, Disrupt This, was begun about a week and a half ago. It seems to be stable, with the moving parts connected, so I want to let everyone know and encourage you to have a look.
More focus
The biggest reason for starting Disrupt This was to increase focus. Basically I felt that the subject of marketing strategy for disruption was getting short shrift, because to tell the whole story, I needed to go into expansive detail about the connection to business strategy, and I wanted to give a "disruptive or not" assessment, which required a lot of explanation, and often very long articles when covering something holistically.
But the business side wasn't getting full coverage either. For example, I wasn't spending any time discussing why disruption is important -- what does it mean to entrepreneurs, investors, companies whose industries are being disrupted, shareholders and employees. I needed a place to talk about the value created by disruption, and how business strategy creates that value. And, I wanted to provide more of a framework for assessing and scoring disruptors objectively.
So, Disrupt This will be that place for objective business analysis: scoring, investment opportunities, connection to business strategy, disruptive or not assessments, and how disruption works.
And The Anti-Marketer?
The Anti-Marketer is still going to talk about disruption, but increasingly the marketing side: how marketing strategy drives disruption, techniques and handy tools, and examples of companies doing it right and wrong. From time-to-time, it will stray off subject into the broader world context, but mostly it will be about disruptive marketing.
There's more about it over at Disrupt This. In fact, there's already a couple of posts there to catch up on. I hope you'll like it as well as you've enjoyed reading The Anti-Marketer, but I'm guessing some will prefer the content here and others will move to the new blog and bookmark it as your favorite source for disruptive content. And, if it works out, you should start enjoying some shorter, more focused articles.
Be sure to join in the conversation and let me know what you think.
A little over a year ago, Howard Schultz, then chairman of Starbucks wrote an internal memo lamenting the loss of Starbucks' distinctiveness and wondering whether in the mad rush to expand and grow ever more operationally efficient (as measured by speed and same-store sales increases, rather than quality of experience), the company had lost a bit of its soul. This memo was reported in all the major business papers and spurred a flood of blog postings from Starbucks critics and fans as Schultz seemed to have captured what was on everyone's minds, although still at that time, a largely unspoken feeling.
I too wrote an article taking a very different slant and documenting how and why Starbucks had allowed itself to evolve from being the market disruptor to the disruptee as a number of major foodservice chains began to compete on many of the now commoditized (and watered-down) features of the Starbucks experience -- better quality coffee, much lower price, more inviting workspaces to stay the afternoon and work or lounge, free WiFi, faster service and so on.
Through the remainder of 2007, it became increasingly clear that the days of heady growth, at least in North America, were indeed over, and that Starbucks competitors were taking direct aim at the weaknesses in Starbucks' business model armor that had crept into their operations over the preceding 10 years. The company still looked healthy on paper, with year-over-year revenues in 2007 22% ahead of 2006 and record net income (profit), but trouble signs included dramatically slowing same-store sales growth which had clearly reached a limit, and a large number of customers opting for the improved, more widely available and cheaper coffee solutions of the competition as I predicted in last year's article.
Additionally, by the end of 2007, long-time Starbucks loyalists were increasingly grumbling about what was wrong with the company and voting for change by going less frequently, or going elsewhere entirely.
Hello. My name is Howard. Remember me?
As if sensing that the tide of success was turning against his prodigy, Schultz moved back into the driver's seat at the company he built in January 2008, reassuming the CEO role and announcing a return to the basics of Starbucks vision and identity. While acknowledging that the competitive landscape was different, Schultz asserted that the problems at Starbucks were internally generated for the most part, and that the solution lay in self-examination, putting the primacy of the customer experience first again, and getting back to the core mission that had made Starbucks successful in the first place.
Since January, Schultz has been busy righting the ship with a number of dramatic changes, many of which were easy to predict and well-designed to rally the faithful. Last week, the most significant (economic) announcement was made, with 600 store closings and up to 12,000 layoffs coming, and it caught the attention of the business media, partly as a bellwether indicator of the down economy. Certainly that's the way Starbucks spun it, but is it the whole story (or even the right story)?
Slow train coming
In last year's article I identified several signs of disruption and difficult decisions for Starbucks to avert or at least parry with the competition disruption that Starbucks own mistakes had enabled (although in their defense and viewed from an internal "operations" perspective, these would have been perfectly logical innovations to improve efficiency, profitability and leverage the brand through extensions). These included:
pre-bagging coffee beans to preserve freshness (in the process, killing the distinctive coffee smell of an authentic neighborhood coffee bar, and the sensuality of sounds and sights such as scooping of beans, weighing and pouring them into custom bags, etc.)
expansion of chain to be almost as ubiquitous as McDonalds (turning them into a "true chain" experience, common but still expensive)
conversion from manual expresso machines to automatic to improve speed, efficiency and consistency of coffee making (at the expense of smells, theatre and "hand-made" quality)
dilution of brand experience due to rapid expansion, higher staff turnover and lower training standards, resulting in surly and uncaring baristas
introduction of warmed breakfast sandwiches and other foodservice items as a further brand extension (more brand and customer experience dilution)
expansion of music retailing operations (more brand and experience dilution)
expansion of branded non-food and non-music retail operations (more brand and experience dilution)
new "low end" competitors entering market serving "good enough" coffee options (upgraded coffee roasts, espresso and capuccino, "third place" alternatives) at significantly lower prices
Our recommendations included:
undoing the conversion of coffee bars into retail emporiums, restoring the "third place" ambiance and experience
improving training
getting rid of automatic espresso machines that made Starbucks just equal (in perception) to the lower-priced competitive options for many consumers
acknowledging that new "low-end" disruptors (McDonalds, Dunkin Donuts, local gas stations) selling fresh-brewed espresso at 25% of Starbucks price changed the game and required a specific competitive response
closing stores because the "coffee aficionado" market was already over-served (in the US market) given "good enough" competition at much lower price points
It's important to note that a few of these are counter-intuitive (at least to most by-the-book MBAs), and options that most businesses wouldn't consider. For example, when I discussed the installation of automatic espresso machines last year, it was noted that the original decision to do this had cost millions of dollars, and replacing them would potentially both slow down service and retire perfectly good equipment before it was fully depreciated and had reached its natural end of life (although the equipment was a "sunk cost", most businesses that had made such a decision in the first place would not easily reverse it and incur additional expenses to restore an "experience" and recreate the lost competitive differentiation.)
The Clover Coffee Machine will elevate the quality and freshness of regular brewed coffee to the premium level that coffee enthusiasts expect, but not so for Starbucks espresso coffees, which will be even more automated than before with the Mastrena, reducing baristas to button pushers. Click on the image to read how the Clover system works.
get rid of breakfast sandwiches by end of 2008 (announced Jan 30), to eliminate strong smells that compete with coffee
slow pace of new openings and close 100 underperforming stores in US (announced Jan 30)
stop reporting on year over year same-store sales growth (announced Jan 30), which could only be achieved in long term by continued dilution of brand experience through increased retailing options
upgrade "partner" (i.e. barista, counter clerks, store management) training to re-focus on exceeding customer expectations and improve the overall experience (announced Jan 30)
acquisition of The Coffee Equipment Company for its Clover brewing system -- a method which creates a vacuum to suck the steeping coffee through a filter to create an individually brewed cup similar to French press (which pushes the filter through the steeping coffee) to create a superior flavored cup of "traditionally" brewed coffee, with enhanced richness and body (announced Mar 19)
introduce Mastrena espresso makers to replace current generation of automatic machines. (Although Schultz announced this, development of this machine, exclusive to Starbucks, was underway for 5 years.) Billed as enhancing the theater (because you can once again see the barista over its lower profile, and offering more control, it is still an automatic machine whose exclusivity doesn't address the quality and theatre lost with the old manual machines. (announced Mar 19)
Close 600 under-performing stores (up from only 100 under-performing stores in January). 12,000 employees will lose their jobs. (announced July 01)
Overall, the emphasis of these changes is essentially the same as the recommendations I made last year, with the exception of two key points, which I'll discuss below. The stated purpose has been to bring back the sense of theater, enhance the Starbucks experience consistent with brand expectations, put the emphasis back on coffee and hopefully undilute the brand identity. Unquestionably for drinkers of traditionally brewed coffee, the use of Clover machines to individually brew whatever you want from fresh ground beans (rather than chose from one of the three pre-selected coffees of the day) is a large improvement. Closing stores was expected because Starbucks was overbuilt, although Starbucks is blaming closures on the economy.
Is it the economy stupid, or is it really disruption?
For the first time ever, Starbucks has experienced a year-over-year decline in same store sales. The economy explanation has been picked up and widely reported in the media (because it fits the story that they want to report), but we have a hard time believing that Starbucks drinkers are consuming less coffee because of the price of gas. More likely the economy is providing an incentive to the most price sensitive of Starbucks customers to switch to cheaper McDonalds or Dunkin Donuts alternatives, accelerating a trend that would have inevitably have happened anyway, due to the increasing availability of good enough low-end alternatives. Starbucks claims to have done research that disproves this, but we think they'd be wise to ignore the research, which is harder to prove than this more rational explanation. Once people make peace with the mental switch from a high-end to low-end disruptive product rationalizing that the low-end low cost alternative is good enough, they rarely go back.
The two things in the list of strategic changes that Schultz has implemented that are still at odds with "undisrupting" Starbucks are the switch to Mastrena ultra-automatic machines and not fully addressing the low-end threat for what it is.
While the Mastrena may be an improvement in visibility of the barista and enabling them to participate in the experience for the customer, it is still an automatic machine. In fact, it automates more of the process, not less. The supposed expertise of the barista is therefore non-evident -- they can't do any more to improve the espresso shot than can the cashier at McDonalds. The emphasis of the Mastrena is on higher volume (operating efficiency), and any qualitative difference in the cup of coffee between it and the Verisimo machine is so minimal, it is unlikely to be noticed by the majority of caffeine addicts patronizing Starbucks.
This is a key element, because in no way does the replacement of old machines with the Mastrenas differentiate the end product or in the consumers' mind justify the higher price for Starbucks versus their competition. Proprietary is not equal to different, and this is a sustaining innovation that reinforces that Starbucks has overshot the needs of their customers, but yet still underperforms on a key dimension -- the expectation of a quality hand-crafted coffee. An expectation that Starbucks created, but has now walked away from.
Secondly, Starbucks gives the appearance of continuing to be in denial that speed and price are performance criteria that a large percentage of their customers deem important, and that many will sacrifice the brand image of Starbucks to get a good enough cup at McDonalds. Admittedly, this is a very tough line to hold, since through its chain-store ubiquity, Starbucks has ceased to be a unique neighborhood place, becoming instead the middle-of-the-road McDonalds of premium coffee. The only problem is, McDonalds is better suited and better able to be the McDonalds of premium coffee.
How then can Starbucks respond? Can it be different enough to continue commanding a huge price premium over its competition? If not, will business continue to siphoned off by low-end disruptors? Is there a counter-disruptive response that allows Starbucks to not concede the low-end to McDonalds and Dunkin Donuts while maintaining its higher end niche for hard-core loyalists? Will Starbucks realize that the Mastrena is masking the real problem and that by positioning it as an improvement to the coffee experience, may actually lose more customers as it rolls out (if there is no taste difference, has Starbucks reached the limits of innovation in the core experience). Will they recognize that purists want a manual shot pulled, or minimally a semi-automatic (because the barista has more control than with a fully automatic)? Can all these needs co-exist?
While we must praise Schultz for the aggressive return to Starbucks origins and a stronger vision, the question now is has he gone far enough, or is the past year a harbinger of much greater disruption to come? Or, has he recognized that disruption is the problem, and there are more surprising announcements to come as a result?
More importantly for investors, is this the end of Starbucks as a growth stock (SBUX - click to see performance over past year compared with Dow Jone and S+P 500), or at about 1/2 the valuation of a year ago, and still dropping, is it a buying opportunity? Wall Street has been betting against a return to the days of heady growth, but does it have to be that way? I don't think so, but it requires disruptive imagination to see a way out. Perhaps Schultz sees it too.
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