The Anti-Marketer

Has Starbucks Gone Far Enough?

'Bean' there before

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.)

And what has Schultz done?

source: How Stuff Works 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)
• Loyalty rewards added to Starbucks cards. (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.

What do you think?

Related Stories

• Starbucks wakes up, smells the coffee
• Starbucks has lost its magic touch
• Some coffee fans get grim delight in Starbucks woes
• Starbucks' 600 Mistakes?
• Starbucks Closes 600 Stores; It's NOT the Economy this Time

The Disruption of American Idol

Ok, I'll admit it.  I too have guilty pleasures.  American Idol is one of them.

Back when AI first began, I studiously ignored it.  My wife got hooked by the third or fourth show, but I thought the whole idea was dumb and never bothered.  The first show I sat through was the finale of the first season, which I thought was pretty pathetic.  I hated both singers.  They were too amateurish, and although Kelly Clarkson was clearly better, that was only because her competitor was soooooo bad.

Then came the second season.  My suspicions confirmed by the first season finale, I ignored the first 5 or 6 weeks.  Then for some inexplicable reason, probably boredom, I sat through a show because my wife was watching it.  Then I got hooked.

It was still like watching a train wreck happen for many of the below average contestants who couldn't sing in tune or remember their words, but the Ruben - Clay thing was kind of interesting, and I enjoyed seeing the bad singers get voted off one by one.  I think that was about when AI started to become the ratings juggernaut and pop star-making phenomenon that it is now.

So, I haven't watched every show since then (not a total addict), but I have come to anticipate my regular fix.

Becoming "The Establishment"

Over the past several years, American Idol has grown in strength, kicking the butt of every show that dares to go against it.  America got more and more hooked.  Viewership for some regular season shows now approaches Superbowl ratings, and the finale has become so big that it completely encapsulates pop culture.  Prince's appearance on last year's finale confirmed the acceptance of AI as part of the establishment and TV royalty.  Other than the Superbowl and Y2K New Year's Eve party, what other shows has Prince participated in in recent memory?

Pop stars line up to release new songs or new albums or rejunvenate dead careers on the show.  Other TV shows covet the spots before and after AI's time slot, and all FOX has to do to create a new hit is let it follow AI for a few days.  New movies are released by offering boondoggles for Idol participants.  Actors with new movies out show up in the audience just to be seen.  And, they'll pay anything just to secure a seat in the studio audience if they haven't got something to promote.  The Today Show, the leading morning Infotainment program routinely reports the previous night's Idol results as one of the top three lead news items of the day -- results from a competing network's "reality" show! Virtually every major media outlet now announces the American Idol results on a weekly basis.

Yes, American Idol rules the roost, but trouble is on the horizon.

The Sweet Sound of Disruption

So, with all the money and star power and publicity and seemingly ever-increasing ratings, how can I say that American Idol is being disrupted?  Simple -- the best pure singer the show has ever had, with a voice equal to any pops-topper of the past 40 years, was voted off last week.  Amazing.  How could this happen?

Why I Might Be Wrong

Many will say that the voters are always right.  If the two left are the ones who collected the most votes, then they must be the best, or the most exciting, or have attracted the best following.  Especially with over 60M votes being cast -- more than the totals for any presidential election ever.

But realistically, is that possible?  Or more to the point, why did Sanjaya last so long?  Clearly he forgot words, sang out of tune, and was often just ridiculous.  Yes, lots of little girls liked him.  Yes, he had a built-in core demographic of Indian voters who had never had one of their own to vote for before.  But would that have been big enough to keep him aloft into the top 7?

Why Did Sanjaya Last So Long?

So what explains it then?  An unholy alliance.  The crying little girls were part of it, and so was the Indian demographic.  So was a group who truly found him entertaining and refreshing and thought he as a good singer.  But the influence that tipped the balance could only have come from a blog which encouraged its readers to all get behind the very worst performer left and try to keep them alive week after week.

Vote for the Worst was a little subversive blog site that started in 2004.  Having all the right qualities to grow with viral explosiveness, it now has a readership that at its peak this season averaged 500,000 hits per day (coincidentally, that peak occurred in the period when Sanjaya seemed to be invincible, and the media started questioning why such a bad singer was able to survive week after week, while better singers were being voted off. 

The graph above clearly indicates that votefortheworst.com had the intended affect, and was responsible for ensuring that Sanjaya survived for several weeks past when he should have.  So, they had their good fun, and with the vote distributed between lots of candidates and those near the bottom being particularly vulnerable, a small boost in vote is plenty to alter the result and keep the weakest contender alive. But that doesn't explain the ouster of Melinda, clearly the best and a strong judges' favorite.  As the vote totals rise, and the number of finalists goes down, shouldn't that increasingly favor the best?

Moreover, what proof do I have that the vote was close?

The extra information we need comes from DialIdol.com.  DialIdol provides software which enables avid voters to speed dial their Idol votes from their computers. In addition to helping fanatical young voters get the maximum number of votes recorded for their choice in the allotted time, DialIdol also records how often a busy signal is obtained when trying to vote, and uses this to predict the most likely winner and loser on the theory that the more often the number is busy, the more people are trying to cast votes for that individual.

Close Voting Favors the Disruptor

In the week that Sanjaya was voted off, DialIdol accurately predicted the bottom three, including that Sanjaya would be loser. In all preceeding weeks, he was safely in the middle. Last week, as the graph above indicates, the voting was too close to predict vote ranking for anyone.  So, either the audience didnt agree with the unanimous assessment of the judges and most observers that Melinda knocked it out of the park, or something was helping the poorest singer to stay alive.

Impact of AI Disruption

FOX network at first denied that VFTW was having any impact.  Then, when it was clear that they were having an impact, FOX called them "hateful" and "mean-spirited".  Ironic accusations from the show that deliberately calls out the most delusional and sometimes mentally-challenged entrants to callously make fun of them in the beginning-of-season reject shows.  But mean-spiritedness is surely what the FOX execs feel who rightly understand that the long-term health of the franchise is at stake, and that the sham that American Idol built upon is being exposed and therefore the business model threatened.

What sham?

American Idol is positioned as a contest to find the best undiscovered young (amateur) singer in America, thereby "discovering" them and making them into a star.  But that basic idea is a lie.  The audition process is not designed to find the best singers, but the best contestants for a reality show.

Of course, the producers want a decent singer to win at the end, so they put "judges" in place to try to guide and influence the public voting.  In any given year, there are about 3 or 4 who are actually good enough singers to deserve a recording contract, so as long as the show eventually whittles down to 2 or 3 of that group still standing, and generates a built-in fan base and familiarity to sell records they've won.  In the mean time, the show needs to provide entertainment, and a pure singing competition would get awful boring awful fast. Admit it -- we all watch because we like the train-wrecks, because there are crazies who make things funny, because we like to see bad singers insulted by Simon, and we like to see them insult Simon back and then take their medicine by getting voted off.

But, and this is a very important 'but', it isn't a real singing competition until all but the last 2 or 3 have been eliminated.

Here's another way of looking at it.  Does anyone really believe that out of more than 100,000 auditions, there are only 4 or 5 people who can carry a tune moderately well?  In the general population, there are at least 2 or 3 per hundred selected at random who can sing.  If those 100,000 were selected randomly, there should be a couple of thousand potential contestants.  But they self-select, which means they either believe they have some talent or just want to be on TV, but that still means that the ratio should be more like 4 or 5 out of 100.

But, the audition process skims most of the crowd, looking either for good personalities for the finals, or oddball personalities for the "audition" rounds, which are highly staged for TV.  Either way, it is TV presence that matters, not singing ability.  After all, out of 15 to 20 thousand people in any given city, only about 10-15 get on TV, and most of those get the TV spot so we can laugh at how bad they are.  But the show would have us believe that outside of the few who are picked for Hollywood, everyone else is mediocre or less. 

VFTW exposes this sham.  They recognize that American Idol wants train wrecks in the final 12 to keep the show entertaining while we get to know the "real" finalists.  Which is why there are so many in the top 12 who can't sing.  VFTW agree that it's funny, so they want to keep the train wrecks on as long as possible, and in the process they are slowly but surely eroding the premise that the show is based on by exposing the lie that it really isn't about finding the best singer.  And, they need almost no resources, no money, little time -- just a small blog to undermine the show's foundation.

That's why poor Melinda lost last week.  That's a personal slap at her, but it may end up being the straw that broke the camel's back as far as the show is concerned.  AI didn't care who she sang against, but everyone wanted the best singer to be in the final. 

So, the real cost of disruption is that America starts to realize there is a wizard behind the curtains trying to manipulate them into picking who they always wanted us to pick, and once we realize we've been fooled, we lose interest, they lose their star-making machine and the billions of advertising dollars and promotional opportunities that the show has spawned.

And the outcome may be that VFTW forces a change in process which makes the show more honest but less interesting.  That's a real world example of the power of disruption -- either way it costs and it may kill the target if the response to the threat isn't met successfully. 

Nobody said that all disruption was good.

Food for Thought

• Could FOX or American Idol's producers have anticipated this?
• How should they have reacted to the disruptive threat?
• Is there anything they could still do to neutralize it before next season?
• How would you know if the crown jewel of your business was about to be disrupted?
• Can you deliberately create disruption like this to upset your competitors (in an ethical and legal way)?

Visit The Disruption Group website for more innovative ideas on disruption.

More Conventional Opinions

• http://www.buddytv.com/articles/american-idol/american-idol-was-melindas-eli-6559.aspx
• http://www.tvgasm.com/newsgasm/news/american-idol/melinda-what-happened.php
• http://www.foxesonidol.com/cgi-bin/ae.pl?mode=1&article=article2119.art&page=1
• http://nymag.com/daily/entertainment/2007/05/american_idol_lets_get_political.html
• http://nymag.com/daily/entertainment/2007/05/has_american_idol_jumped_the_s.html
• http://www.cinemablend.com/television/American-Idol-Melinda-Is-Eliminated-4266.html
• http://www.point-spreads.com/content/view/1807/2/

Sites Mentioned in This Article

• http://www.votefortheworst.com
• http://www.dialidol.com
• http://www.alexa.com/data/details/traffic_details?url=http%3A%2F%2Fwww.votefortheworst.com

Starbucks: Ripe for disruption, or already disrupted?

I suspect most people have heard by now of the kerfuffle about an internal memo, leaked through a popular Starbucks fan blogsite and ultimately covered by BusinessWeek, The Wall Street Journal, Forbes, CNN, etc., which was penned by the founder and chairman of Starbucks, Howard Schultz. Certainly the blogosphere is a-buzz with the come-to-Jesus nature of Schultz's personal revelation that Starbucks may have lost its mystique. I counted hundreds of blog postings - right up there with Britney Spears haircut and Anna Nicole Smith in popularity.

The memo itself was an interesting document that raises eyebrows and questions: although addressed to the president and other senior execs, was it always intended to be leaked via social media, into the mainstream press and back to the blogosphere?  It has certainly created a lot of passionate commentary and free advertising for Starbucks. Was it really intended to tell the public that Starbucks knows that people are complaining and that the competitive sands are shifting? Was it a message to investors that the company needs to slow growth and fix the experience to save the brand and that it's going to cost a bundle? Or was it just the confessions of a founder and Chairman, purging feelings of guilt about a loss of soul, and a plea to executives for salvation? (Which, incidentally made Starbucks look good while rallying those who are still passionate about the brand experience to Starbucks' defense?)

No matter which of these it was, it was a brilliant document, but it may be too little too late.

Too Little, Too Latte? Starbucks is the World's Pre-eminent Coffee Brand: How Can it Be So?

It really depends on whether the executives realize that disruption is afoot, and that there's much more going on here than the diminution of brand experience. To properly address this question, and explain why disruption is the real problem, it helps to go back to the beginning, and define the innovation that led to Starbucks becoming a household name approaching 15,000 stores around the world.

What problem did Starbucks solve for its customers?

Anyone who travelled in Europe BS (Before Starbucks) would have marvelled at the quality and variety of coffee, and the cafe culture there. Especially in places like Italy and France. The coffees were strong, but fresh, well-prepared and a perfect complement to a day of sitting on a sidewalk under an umbrella people-watching, or to end a perfect meal, or a delightful jolt to start the day with a pain chocolat or even just toast and eggs. You would have wondered how everywhere you went, coffee could taste so strong, yet be so delicious and universally good. On this side of the pond (outside of your favorite Little Italy restaurant), it was almost impossible to get a decent cup of coffee, and especially to get a strong cup that was drinkable. I remember wondering after every trip why it was that good coffee on our side of the pond was an oxymoron whilst on their side, it was impossible to get a bad one.

It wasn't just that most (North) American coffees were made from Robusta versus the superior Arabica beans. It also had to do with poor roasting, poor quality control, and the fact that we got used to crappy coffee during the second world war when everything was rationed and/or watered down. By the 50s, everything was about speed and automation, and so we made matters worse by going from percolated to instant to freeze dried to Coffee-Mate powdered creamer (another oxymoron). We drank it by the gallon, rotting our stomachs, taste buds and brains in the process. It was purely about the caffeine and the speed. (Wonder why we never distilled out the caffeine and dispensed it straight via injection?)

Yes, in a few big cities, you could find that rare place that would serve a great European-style coffee, and sometimes even with a bit of the ambiance, but that was so small a percentage of consumption that it barely qualified as an exception to the rule.

The story is apocryphal, and published on Starbucks website, and in Schultz's book, about how Schultz felt exactly this way on visits to Milano, and decided that it was time Americans got to upgrade their coffee experience. And, not just create a better cup of coffee, but the same smell and feel and cultured experience and ambiance that you felt in a great Italian coffee bar. That was the beginning of Starbucks as we know it.

We'd been upgrading the experience for ourselves, as much as we could with drip coffee becoming more the norm in the 70s and 80s versus instant, but the vast majority of Americans had never had a quality cup of coffee nor enjoyed the sensuality of the European coffee culture. So, when Starbucks hit Seattle, we were ready for something different.

So What About Disruption?

Disruption theory says that products or services evolve incrementally to better meet the needs of the most demanding customers, but eventually overshoot the needs of most consumers. In this process, the incumbents that dominate the existing market build processes and operational efficiencies that enable them to maximize profitability and continually introduce new "sustaining innovations". In the short term, these series of decisions that improve processes and efficiency are seen as good management, delivering better profits. In the long term, however, they create the opportunity for a disruptive innovator to enter the scene.

At the time when Starbucks began, the big coffee suppliers had enormously overshot the needs of their customers for a cheap, fast cup of coffee. Yet, each "innovation" they introduced kept on making the product either cheaper or faster to prepare, stripping the product of the original reasons we became addicted to it - its flavor first and foremost, but also its ability to facilitate social interaction, savor a great meal, sit and relax, etc.

So Starbucks was a disruptive innovator. It brought flavor, a friendly social setting (the "third place"), quality, plus the consistency that only a chain can do. They brought back the smells, the sensuality, and introduced to Americans a "European experience" -- and, what Schultz has described as the sense of theater.

But, you might be saying, Starbucks introduced a high-end innovation -- disruptive innovations typically are aimed at the low end markets and low end needs.  Well, you'd be right, but the question is: what needs were low end, or more accurately underserved. The characteristic that initially made Starbucks a small niche disruption was the speed. The big producers were optimized for speed above all else, not flavor and certainly not the organic pleasure of a gathering place with great smells where you hang out with your friends.

The characteristic of Starbucks' innovation that was just good enough for the original niche of coffee culture appreciators was the speed.  They were happy to sacrifice the speed of picking up a pot of coffee off the Bunn burner (ironic that they called these things burners, because that's what they did/do to most pots left longer than 5 minutes) and pouring it straight to the cup and from there to the lips, in order to drink something they truly enjoyed, and to experience the coffee bar ambiance.

Initially, potential competitors to Starbucks ignored them because the market wasn't big enough for Dunkin Donuts or McDonalds to care about. To them, Starbucks coffee drinkers were aficionados -- a tiny specialized segment that had nothing to do with the mainstream, who they perceived still mostly wanted speed.

This ignorance is typical (and logical) to mainstream vendors who aim to maximize profit by serving the largest market as efficiently as possible. It also allowed Starbucks to "fly under the radar" for a long time -- over 20 years of strong growth -- allowing them to build their market unimpeded by real competition (yes, there are smaller chain coffee brands, like Caribou and Peets, etc., but their presence serves to expand the market for all specialty coffee vendors, and benefits the leader, i.e. Starbucks, disproportionately) until they became the mainstream and were perceived to be a real threat to the foodservice business of other big companies.

But Starbucks is the leader and still growing. What's this about Disruption?

As noted, disruption can take a long time to play out, and the seeds are sown long before the heavy damage is done. As Starbucks has grown, they have focused on operational efficiencies to grow faster and more profitably. Efficiencies such as automatic espresso machines, flavor-sealed packaging (which eliminates the great smell of a real coffee shop), and expanding merchandise options ("would you like some fries with that doppio mocha latte half-caf with low fat milk?") to extract every last penny of same-store sales growth. In the process, they have incrementally sacrificed seemingly small parts of the experience -- the smell, the theater, the ambiance (who wants a line snaking around the tables while you're trying to relax or have a conversation over a cuppa?), the service quality (rapid growth almost always comes with higher turnover and poorer training -- by now, we've all experienced the surly baristas who won't go the extra mile, but still make too many mistakes), etc. In the process, they've reduced themselves to serving a pretty-good-but-not-outstanding cup of coffee, too slowly and at too high a price.

And, more importantly, they've overshot the needs of their customers, and are ripe for disruption. To speed up coffee service in order to sell everything else too, they installed automatic machines. Automatic machines can be more consistent, especially for inexperienced operators, but they also reduce the flavor and the authenticity of the experience, and show competitors how they too can produce a cup just as good as Starbucks (i.e. open themselves to commoditization). This was an unnecessary and ill-advised "innovation".  Customers didn't ask for it, would probably agree that they didn't need it, and in general would feel that they are getting less for their money. Do I really need a bacon and egg (McMuffin) breakfast with my espresso? Again, the more I overlap with my competition, the more I illustrate to them how to compete with me.  And now I smell eggs cooking, not coffee beans and fresh espresso.  Not wise. Most fanatical customers who still are, were more fanatical 10 years ago, so what have these innovations added?

In becoming ubiquitous, the mystique is demystified, the coffee which was the central feature has become a means to sell myriad other food items and irrelevant merchandise (t-shirts anyone?), and the taste and smell and comfort have all been diminished. Yet, the high price remains. And, therein lie the seeds for potential disruption.

Because now, wanting a good cup of coffee has become mainstream, and Starbucks has become focused on speed (but not really), and efficiency, and foodservice, and add-on sales and rapid growth, they now face a new reality. Its easy to add a pretty good cup of coffee to the menu. Especially for companies like McDonalds and Dunkin Donuts who already served coffee.  All they have to do is add middle-of-the-road or better automatic machines to their operation, and they're almost as good. But, they excel at real speed and efficiency, and are optimized to process customers in seconds or at most a minute or two, whereas Starbucks will never get that fast without redesigning every store and adding a lot more baristas. Moreover, they are value-oriented -- i.e. cheap. For McDonalds, $1.25 for coffee is an improvement in margin, but for Starbucks, it's impossible to go that low. So, if I can get something almost as good for 1/3 the price, is that 'good enough'? Heck, even the the local QuikTrip service stations can create a relatively decent cup of coffee or espresso now.

And, more than commoditization, Starbucks' real problem now is that the competition is 'good enough' to be disruptive and undermine their business. But here's the real conundrum Starbucks faces. It will be almost impossible to go back.

Replacing the automatic machines with better quality semi-automatic or manual, and fresh ground and hand-tamped shots means throwing out a lot of expensive machines. It means they will go a bit slower for each coffee, which also means they'll need more people and more space for brewing. And, they'll need to increase their training expense enormously.

It will be hard to explain to investors why all the superfluous merchandise needs to come out of the stores, and why same-store sales will likely decrease. It will be even harder to recognize that for the mainstream coffee consumer, a $1.25 cup of coffee is good enough, even if I can't quite bring myself to visit McDonalds, and so there will be increasing downward pressure on price. If they don't want to compete on price, then they probably already have too many stores, because the average consumer won't continue to spend a premium price for a commodity that is only marginally better than the competition.

Coffee Customization at Its Finest

To Schultz's credit, he recognizes that all is not well. And, he's recognizing it at a time of apparent strength. Starbucks just announced another record year where revenue grew 23%, 1177 new stores were added, and same-store sales increased 6% over the previous year (although the rate of increase is slowing, these are still impressive numbers for a $6.7B company. If he can convince his executives and board and investors that a strategic overhaul is required to address the looming disruption, then he may well be able to avert it, but it isn't as simple now as returning to the good old days of better quality machines, better service, less merchandise, whole beans scooped out of bins rather than prepackaged in flavor-sealed bags, more uniqueness in each store, etc. They will need a plan designed specifically to address the disruption Starbucks faces from new competitors, or else the disruptor will become the disruptee.

Acknowledging that the market has changed irrevocably, and is now attracting disruptive 'good enough' solutions for quality coffee, but at a lower price and faster pace, what would you do to re-energize Starbucks and fend off a loss of leadership position in the coming years?

Links for coffee fans

Koffee Korner - coffee history and culture
CoffeeResearch.org - the science of coffee
Wikipedia - coffee history
Wikipedia (2) - all about coffee
Starbucks Gossip - blog that broke the story

There is a follow up article to this post here: Has Starbucks gone far enough?

Brand Mismanagement: How to Double Screw a Customer Without Really Trying

Maytag and Whirlpool Combine to Damage Two Brands Irreparably

Most of my observations have so far been from a safely removed distance of objectivity. Unfortunately, I must say that this exposure to stupid marketing and pathetic corporate decision making comes from first hand experience.

Maytag: The Rise and Fall of an American Icon

I'm guessing that many of you are aware of the problems that Maytag has had over the past few years. But, for generations before that, Maytag was reputed and advertised as the maker of top quality washers and dryers.

Maytag was known for solid dependability, long service and good old American values. So much so that the company engendered a fanclub dedicated to preserving Maytag collectibles and memorabilia.

The company grew quickly on its reputation for quality washing machines, and by 1924, 1 in 5 washers sold was a Maytag. This enthusiasm for Maytag products survived the Depression, with Maytag remaining profitable throughout, and through the transition from Maytag family control in the 1960s to professional managers with no family affiliation. But by the early 1980s, Maytag went on a acquisition spree and lost touch with its past, becoming just another conglomerate.

Never really an innovation leader, in 1997, Maytag aimed to reinvigorate their long since commoditized washer and dryer line with a new line of "high end" front load washers branded Neptune. Although front load machines had long been offered in Europe, they had mostly disappeared from the North American market by the 1960s.

Maytag's new brand used 40% less water and 65% less electricity than traditional models, and although expensive compared to an American-made top load machine, was significantly less than the premium European brands, and ideal as an eco-friendly upgrade for the mass consumer market. Well, that was the idea anyway.

Not so High End

It quickly became apparent that Maytag's innovative new machine was flawed and that its wax motor, electronic door latch and circuit board control unit were defective in design. Thousands of owners were reporting the same problems, sometimes multiple times for the same machine after it was repaired, including:

• door lock not engaging
• washer will not enter spin cycle to drain water from clothes
• large amount of water remains in the wash drum
• washer will not complete wash cycle
• odor, mold and mildew problems forming inside machine due to mechanical malfunctions

A class action lawsuit ensued, and Maytag negotiated a settlement (of course, with the requisite denial of design flaws). The cash portion of the settlement totalled $10,250,000 with $8,250,000 going to attorneys, and the remaining $2M going to consumers as compensation for repairs. The settlement also called for free repairs (including redesigned replacement parts, although the original parts design was, of course, not defective!) for class members and/or purchase certificates for replacement machines.

All this distraction and loss of reputation cost Maytag dearly in new sales across all their brands, and ultimately led to significant losses in market share, earnings and share price which were exacerbated by problems consolidating their acquisitions and competition from better quality lower-priced imports. The result was the end of the line for Maytag as an independent company, and after a long battle between different suitors, including the Chinese giant Haier, for control, and they were acquired by Whirlpool in 2006.

The iconic image of a lonely Maytag repairman opining about never getting a call because the machines were too well made stuck to this brand for two generations. It was the brand your mother wanted to own, and her mother, and her mother's mother.

My Story

I have a Maytag Neptune washer and dryer. One of the models affected by the class action, in fact. Unfortunately, we didn't use the machine quite as much as other class members, and so our machine failed from the exact problems described above just a few weeks ago. The class action settlement was agreed to almost 2 years ago, and the claims deadline was August 9, 2005, just over 1 year ago.

For whatever reason, I did not receive any notice of the class action, and didn't know anything about it until the service person we had out to diagnose the problem told me he had fixed hundreds of machines with the same problem and that Maytag had been sued over it. I went searching on the Internet for the peculiar symptons we were having, and sure enough, there it was, exactly my problem described in lurid detail along with information about the lawsuit.

Call to Maytag/Whirlpool

Although the claim deadline had passed, I called Maytag's Neptune service hotline thinking surely they would help out with this well known problem. How naive I was.

The chat went like this.

Me: I have a Maytag Neptune washer, model number MAH3000AWW, one of the ones affected by the class action lawsuit, and I have experienced exactly the failure described by the suit -- my door won't lock, the spin cycle won't start, the water won't drain -- basically I can't finish the wash cycle.

Them: I'm sorry sir. Claims were closed against that lawsuit a year ago. I can't help you.

Me: Yes, I saw that when I researched the problem on the Internet. There are literally thousands of people posting complaints about these machines and the defective design of the affected parts. But, I never received the notice of the suit that you sent out, so I didn't know that I was a member of the class.

Them: But you are a member of the class, and you didn't file a claim.

Me: You're right. I didn't file a claim because I didn't receive the package and didn't even know about the lawsuit or my rights to compensation.

Them: I'm sorry, but the terms of the settlement said that you had to file a claim by August of 2005. You didn't opt out of the settlement, therefore you are bound by its terms.

Me: But, I didn't receive the information that you sent to everyone else, so I didn't know there was a lawsuit, or that I had to make a claim by a particular date or opt out of the settlement. I didn't even know there was a settlement.

Them: Yes, but you were a member of the class, so there's nothing I can do to help you.

Me: What!?

Them: Legally, we are bound by the terms of the settlement. Since you didn't make a claim, you aren't entitled to compensation.

Me: But you sent the package to everyone else. I see from the documents online that you mailed them out to members of the class. You didn't mail a package to me. Since I never received them, I never had an opportunity to make a claim or opt out.

Them: There's nothing I can do sir.

Me: What do you mean there's nothing you can do? I have the exact model that the suit names as having design defects in the parts. Those parts have failed in my machine, and I am experiencing exactly the problems that the lawsuit claimed compensation for. I was quoted almost $400 for repairs. In settling the suit, you acknowledged that there were problems -- how can you say "There's nothing I can do?"

Them: I can't do anything sir.

Me: You could offer me replacement parts.

Them: No sir, I can't.

Me: Why not?

Them: Because we legally can't.

Me: That's ridiculous. Of course you can. I'm not making a claim against the lawsuit, I'm saying that you've already acknowledged a design defect in these parts in settling the suit, and I shouldn't have to pay half the cost of the machine to replace those parts. Why would I ever go out on my own and pay for those parts, knowing that they were designed with a defect and that this could happen again in another year?

Them: We didn't acknowledge that the design was defective. We settled the claim to avoid the risk of going to court. However, those parts have been redesigned and no longer have the problem you are having.

Me: So, if the design wasn't defective, why did you redesign the parts to avoid the problem? That sounds like a lot of doubletalk to me.

Them: You said you didn't know if the parts would fail again in a year. They've been redesigned, so you shouldn't have that problem again.

Me: Right. So the parts in my machine had a design defect, and failed because of it. My machine doesn't work anymore. You claim that you have redesigned those parts to solve the problem that you don't acknowledge that you had, but even though my parts were defective, you won't replace them with parts that aren't?

Them: I've already told you sir. We aren't legally allowed to replace your parts.

Me: Of course you can. There is nothing "legal" about this. I'm not making a claim under the lawsuit. I'm just asking you to do the right thing and replace these defective parts. Automakers don't issue recalls on defective parts and then stop replacing the bad parts because not everyone brought their car in when asked. They do the right thing and replace the parts when the car comes in for service.

Them: We didn't issue a recall.

Me: I understand that. But you built my machine with major components that you have acknowledged to be defective. My wax motor has failed and because of it, moisture has gotten in the control circuitry. As a result, the door won't lock, the machine won't start the spin cycle to drain the water, and the wash cycle won't finish. The clothes end up sitting in 4 inches of water. That is exactly the set of problems that the lawsuit you agreed to settle describes. You have redesigned the affected parts, to avoid the problems that you don't acknowledge were caused by the defective parts. So why don't you do the ethical thing and issue the repair shop a set of complementary parts. This has nothing to do with your lawsuit. It is about living up to your brand promise. I bought a premium machine because it was a dependable Maytag. But, it turns out it was a lemon, and you knew it was a lemon, and you were sued because it was a lemon and you redesigned the parts because it was a lemon. But you won't help me fix my lemon?

Them: I'm sorry sir, there's nothing I can do. Is there anything else I can help you with?

Me: What do you mean "Is there anything else? You haven't helped me with the only thing I've asked that you could help me with."

Them: We can't replace your parts for free.

Me: You understand that if you don't, you haven't lived up to my expectation for the brand nor to my expectation of ethical treatment of a customer, and I will never buy another Maytag again, nor will I ever buy any Whirlpool product of any kind? You are trying to save pennies, but you're committing brand suicide.

Them: I'm sorry you feel that way sir. I can't do anything.

Me: Can I speak to your manager.

Them: Yes sir. But they will tell you exactly the same thing.

Me: Let me talk to the manager please.

So, eventually they let me speak to the manager, and the conversation largely repeated itself, except that I asked that my displeasure be noted officially and that the top executives should understand that however many millions of dollars they were spending on marketing, it was all wasted if they treated customers like this. Of course, no comment.

So, What Could/Should They Have Done?

Well, for starters, they kept a polite customer on the phone a long time, only to end up with him blogging about his negative experience and telling the world that:

• No one should ever buy a Maytag. Ever. They are not only not the reliable, dependable machines of yesterday, the company refuses to stand behind the machines, even when they've acknowledged selling them with defective parts. If you need help, you'll get legal mumbo jumbo, not service.
• Whirlpool is about cutting costs, not about solving customer problems. It is not a company or brand to be trusted. Customer service people, and even the management are not empowered to do what is right. Caveat emptor. Buyer beware. This is not a company that stands behind its products.

Obviously, not a very smart outcome.

At the minimum, offering replacement parts was the reasonable thing to do, and not nearly as expensive for them to provide as they are for me to buy. That's the least they could do, but it doesn't leave me with a warm fuzzy feeling. Especially after listening to 1/2 hour of legal doublegoodspeak.

But this was not a case where the minimum was the smart thing to do. A smart marketing company would have looked at this problem situation and figured out how to turn it to their advantage. I was a purchaser of the most expensive wash machine that Maytag sold. Someone who had purchased two Maytags before that. Now, I will never buy another, nor will I buy any Whirlpool brand. Ever. Consider the long-term cost of a deeply dissatisfied customer.

I didn't think of suggesting this at the time, because I was too caught up in the Catch 22 Kafkaesque nonsense of a customer no-service person telling me why it was my fault that I had a machine with defective parts that had failed. But, what if Whirlpool had said:

"Alright sir. We understand your frustration, and we can see that you purchased a top of the line model. You had a right to expect that it would perform as promised. Let me offer you one of two choices. First, we'll replace the parts with the new design, and we'll also cover the service cost to install them. Alternatively, we understand that you might not feel comfortable with your Maytag machine any longer, and the machine you have is already a few years old. So, I'd like to offer you your choice of brand new front load Whirlpool models for half price."

Marketing Opportunity Missed

So, there you have it. A simple solution. Ultimately, had Whirlpool offered this, I would have opted for the 1/2 price machine, which is probably pretty close to their cost, so in effect it would have cost them nothing. Instead, they have soured me on their ethics as a company and their willingness to stand behind their products. And, the result is that not only will I never buy another of their products, I will tell as many people as I can of my experience, and advise them to do the same. Besides, I understand that the Chinese and Korean brands have now passed them in quality.

Had they done the right thing, they would have me trumpeting their brand for treating a customer beyond his expectation, and continuing to consider other Whirlpool brands when making major appliance purchases.

A lesson in brandicide. It should be a crime.

DRM Update: Microsoft Doesn't Get It

Medialoper reports in Zune’s Big Innovation: Viral DRM that if you use Zune's wireless music sharing feature, it will automatically wrap tunes with its DRM technology, even if the music was acquired with a Creative Commons license and was DRM-free to begin with.

Microsoft employee Cesar Menendez (and Zune team member) says that the information he originally gave that Medialoper reported on was incorrect, Zune doesn't add DRM to the music file, but it still only allows another Zune to play it 3 times in 3 days. Nice semantics. It's not file-based DRM, it's device-based DRM

I think I wasn't harsh enough in labelling Microsoft's DRM-team as intentional evil doers (see below). It's worse than that -- they're trying to sell something that is horribly consumer unfriendly, and maybe even breaks the law, as if it was a benefit. And the paeons they have doing the work don't seem to have a clue.

Here's a marketing strategy! Why not refuse to implement DRM under any conditions and make a big deal about it in a public statement and in marketing programs?  Microsoft is big enough to challenge the music and movie industries, and if they made a principled stand by simply releasing Zune without DRM restrictions, they could actually have a disruptive innovator's chance of whipping Apple at their own game.  Not only that, they'd push the industry into something that's good for them -- lower priced goods distributed 100% digitally. 

It might take a while, but when the industry saw how popular the devices were with consumers, they'd get on board. Nature abhors a vacuum: we'll switch to a completely different business model for getting our music, bypassing the industry entirely, or suck up tons of bootlegged material since no one wants to sell it to us legally at a reasonable price.

History has shown over and over again that unencumbered, or with reasonable licensing, every technical advance original feared and fought by copyright holders has actually created greater opportunity for profit. There's no reason to think this is any different.

Other Related Zune Notes

Urlocker is skeptical that Zune has what it takes to "change the game". Correctly points out that unless Microsoft disrupts the market, it will not attract sufficient users to make it viable, let alone successful. Definitely no disruptive innovations here.

eHomeUpgrade say it can't believe that Microsoft is so arrogant to have designed Zune to be not PlaysForSure compatible, meaning that any old content wrapped using Windows Media technology and purchased through Microsoft partners such as Napster, Rhapsody or Movielink will not be playable. This definitively illustrates my point that DRM is a poisonous and evil technology that will eventually bite us all. It also proves beyond any doubt that any vendor that has that kind of control will eventually use it to harm their customers, regardless of what they say publicly.

On a more humorous note, thedigitalmusicweblog passes on that the meaning of Zune in Hebrew is a word not for delicate ears, and something akin to what its DRM technology is doing to customers. How appropriate is that?!