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Hey, Starbucks (Nasdaq: SBUX ) , haven't you heard? Money can't buy you love -- and neither can advertising.
A brand that was built on word-of-mouth and ubiquity has now decided that mass marketing is the answer to its growth woes. An ad campaign entitled, "It's not just coffee. It's Starbucks." is supposed to awaken new customers, guilt old ones back, and make loyal drinkers spend more. According to the New York Times, the bean giant is even willing to climb into bed with MSNBC and pay an estimated $10M+ for the privilege of waking up every day with "Morning Joe."
Starbucks' promotional blitz is an admission of product failure. It's not that Starbucks makes a bad cup of coffee. Nor is brand recognition a problem -- if your street has a corner, you've passed a Starbucks. The real problem is that Howard Schultz and his team don't seem to know what their product is any more.
Everybody has their eye on Starbucks' premium-coffee business. Dunkin' Donuts dared to combat the java juggernaut. Now, McDonald's (NYSE: MCD ) is rolling out its McCafe initiative at breakneck speed, all in a quest to unseat the pre-eminent coffee purveyor. Nevertheless, Starbucks' primary competition might not even be from these two.
If Starbucks fears losing the everyday, premium-coffee drinker, it really needs to watch Green Mountain Coffee Roasters (Nasdaq: GMCR ) and the K-Cup revolution. Green Mountain has been on a tear and has taken many coffee names with it. A $1,000 investment in Diedrich Coffee (Nasdaq: DDRX ) , a K-cup licensee, as recently as March 16 would be worth over $59,000 today!
Oddly enough, while Starbucks has chosen not to address this market, it has decided to take on Kraft's (NYSE: KFT ) Maxwell House and J.M. Smucker's Folgers with an instant coffee product -- Starbucks Via. Sure, instant is big overseas and offers a $17 billion market opportunity. But, if Starbucks is truly "more than coffee," why wade into the lowest end of the pool with a just-barely-coffee product? Jumping on the K-cup bandwagon seems like a much better brand strategy.
Slow down and smell the coffee
While coffee is one thing, ambiance is another. Fast-food competitors have nothing on Starbucks when it comes to environment. Try meeting a client or getting some work done at McDonald's or Dunkin Donuts. Imagine meeting a date there? Don't buy that ring just yet, big fella. Atmosphere has been a big competitive edge for Starbucks … until now.
Have you visited a Caribou Coffee (Nasdaq: CBOU ) or Panera Bread (Nasdaq: PNRA ) lately? These companies are indirectly benefiting from the culture of coworking -- a growing movement where independent professionals work in collaborative spaces, which tend to include comfortable seating, good coffee, and free wifi. While Caribou and Panera don't specifically offer the collaborative aspect of coworking, both are capitalizing on an increasing need for accommodating community environments.
Ironically, it was Starbucks which rode the initial wave of the mobile workforce, quenching their latent thirst for a third place outside of work and home -- liberating them from both their bosses and their bathrobes. Was this by design, or was Starbucks simply lucky? Seeing current customers hunt for power outlets or struggle with the store's not-really-free wifi policy makes me side with serendipity.
So, if Starbucks wants to remain a premium brand, they may want to avoid watering down the experience by cheapening their menu and inconveniencing sit-down sippers. Armed with a proven coffee franchise, Starbucks could view wifi, atmosphere, and community as loss leaders that build social capital and customer goodwill. Ironically, if Starbucks goes the fast-serve route, it risks becoming a full-fledged rest station, attracting more nomadic visitors who only come in for a cup of water, a warm chair, and possibly a quick shower in the bathroom sink.
Brew are you?
Starbucks needs to do some corporate soul searching. Take a look at American Express. It doesn't sell credit, it sells membership. Coca-Cola doesn't sell soft drinks, it sells refreshment. Starbucks, what do you sell … besides coffee? What do you stand for? Ambiance? Community? Social consciousness? Until you figure this out, count on losing both customers and shareholders. I hate to get all philosophical, but your biggest competition is yourself. To grind own self be brew.