Waseem Sayegh

I have to confess, I am not a coffee drinker. By that I mean the last time I drank a cup of coffee was over seven years ago and even then I drank coffee once every other month. Since I do not drink coffee, does that imply that I have never heard about Starbucks and I am at a disadvantage here because I am analyzing a case about the biggest coffee chain in the world? The answer is no. On the contrary, I frequent Starbucks regularly. Contrary to conventional wisdom Starbucks’ main product is not coffee, instead Starbucks’ main product is the “Starbucks Experience.” The “Starbucks Experience” can be described as the “romance”, “theatre” or “uplift” that a customer feels once they enter a Starbucks store.

Starbucks Growth
In the 90’s Starbucks was growing at a rapid pace in the United States and Canada. With a Starbucks stores as a percentage of total possible stores at 33% of the top 100 US and Canadian Market, Starbucks was able to benefit from economies of scale. Though, I believe that this rather sporadic growth came at a huge cost. Not only did Starbucks cannibalize its own market with several stores on the same street, but it also diluted its brand name. As a result of this rapid expansion the “Starbucks Experience” was replaced by a rather fast foodish/commodity like expectation.
Starbucks growth should never come at the cost of its highest barrier of entry: “its product differentiation” represented by the “Starbucks Experience”. Anyone can open up a coffee shop, but not anyone can replicate that experience. The 90’s should have been a decade when Starbucks grew its store numbers at a slower pace thus enabling Starbucks to focus on enhancing the “Starbucks Experience”. I am sure that people can drive the extra mile or walk the extra block to get to a Starbucks, rather than being bombarded with a Starbucks everywhere.
Economies of scale allow Starbucks to save on the cost of preparing a cup of coffee. Product differentiation allows Starbucks to be a coffee cup price giver. The cost of a coffee cup could never go to zero, though on the other end, price of a coffee cup can tend to infinity. When given the choice of cutting cost or setting your own price, Starbucks needs to value the latter more than the prior.
Mr. Schultz should take the “Starbucks Experience” to the next level. By the next level I mean that instead of having an experience that is common amongst all Starbucks stores nationwide, this experience should be unique for each store. The “romance”, “theatre” and “uplift” should not be thrown out of the door. Instead the romance that a customer feels when entering the Starbucks in downtown Montreal should be different than that of their store in Laval or for that matter any other Starbucks store. Starbucks should know what its customers want from that specific location and customize its services, music and decorations around its local customer. For example the downtown Montreal store most probably is frequented by university students. Customize that location to appeal to university students. Why not offer free internet? Maybe decorate the store with bookcases filled with reference books. How about having specially designed tables that are more comfortable for laptop use? Maybe the Laval location is frequented by families. Customize that location to have children toys. This level of customized experience will set Starbucks’ product differentiation miles apart from its next competitor.

McDonald’s Enters the Market, So we Panic
In late 2007 McDonald’s entered the flavored coffee market. How should Starbucks react to this news? Again, Starbucks’ unique competitive advantage is its product differentiation, and should keep its focus on improving that. Besides, McDonald’s can replicate Starbucks’ economies of scale in a heartbeat. Furthermore, Starbucks should not become McDonald’s. For that reason Starbucks should stop making breakfast, your customers didn’t ask for that change, and close your drive-thru windows because you do not want to be perceived as a fast food joint.
One can comfortably infer that customers that frequent Starbucks typically do not frequent McDonald’s. This is made clear in the Wall Street Journal article McDonald’s Takes on a Weakened Starbucks. Two points stand out in that article. First, McDonald’s customers are being educated about lattes. Second, teenagers are now being seen at McDonald’s after school. A Starbucks customer surely knows what a latte is, and a teenager would not even think twice about entering a Starbucks. In other words McDonald’s is not taking customers away from Starbucks. McDonald’s is introducing a whole new type of customers to specialty coffee. Starbucks’ value proposition to those new McDonald’s customers should be: “Now that you’ve had a taste of specialty coffee at McDonald’s, we are sure that you’ll be able to move up to better coffee and a better experience at Starbucks.”

Baristas Know Starbucks More than Starbucks Managers
Starbucks Managers should solicit feedback from their baristas and stop reacting to news and making decisions in a vacuum. It seems that Starbucks’ Baristas know Starbucks more than their managers. The Starbucks Barista that faces customers must be one of the biggest untapped resource Starbucks has. The person behind the counter in Starbucks is different than that of McDonald’s and Dunkin Donuts. The barista tend to be in either a college or university, while competitors’ customer facing workers are either in school or at most only have a high school diploma. Thus, Management should talk more frequently to its baristas and learn on how to improve the Starbucks experience. After all, the baristas are educated and will give useful recommendations.