Starbucks’ Cup Now Runneth Under

Written by Evan Schuman
November 15th, 2007

When Starbucks this week reported—for the first time in years—that the number of customers visiting it’s stores had dropped, the coffee reseller announced plans to send more managers into the field. Company officials pointed to recent price increases (because of milk price hikes) and denied store saturation.

But there’s something else going on here. Starbucks has been retail’s best example of a company that truly understands social networking and how to make a retail outlet a destination. Starbuck’s prices are quite high for coffee and other independent coffee shops—and even some chains, such as McDonald’s and Dunkin’ Donuts—offer what some consider to be better tasting coffee.

But consumer choose to go to Starbucks to meet with friends, do business meetings and sometimes just hang out. More unexpected: the chain that has so skillfully mastered social networking has a Web site that is fine, but not great. It has virtually no community section and it goes out of its way to not promote what it has.

This is a company that has decidedly made the Web a very low priority. Could Starbucks be learning that man doesn’t live by bricks alone? That a well-crafted Web presence doesn’t merely generate pageviews and generate a little E-Commerce revenue. (The chain does permit consumers to purchase their coffee making equipment online. How touching.)

An intelligent Web strategy uses the site to generate excitement and to send more people to the store, where they start discussions that they can continue online. Integrated, it allows community building locally and globally. On their own, though, the stores will eventually lose their buzz and traffic will drop off.

Starbucks CEO Jim Donald is quoted in Friday’s Wall Street Journal as saying that Starbucks has decided to open 100 fewer stores next year than it has projected this fall because the chain is "taking a little more deliberate approach." Perhaps had they taken a more strategic approach with its Web approach, this more deliberate approach—a deliberate retreat—might not have been necessary.


One Comment | Read Starbucks’ Cup Now Runneth Under

  1. Dr. Satya R. Pantham Says:

    Evan Schuman indicates in this article that there is a drop in the number of customers for Starbucks leading to decreased revenues. He also points out that with the size of customer base Starbucks has it can leverage an online business to boost its revenues.

    When an analysis is made, starting an online business is altogether a different business option. It is significantly different from what Starbucks is currently doing. However, it is true with the kind of base Starbucks has it has very good potential for online business.

    The present problem of decreased revenues is centered around a different reason such as the deficiency in the current business tactics or strategy. So the company has to focus on problem identification by realizing the key drivers that are responsible to the event. Next the company has to perform the analysis of these factors on how and to what extend they are related to impact the business, i.e., derive the business intelligence. Then they have to arrive at tactical metrics based on their costs and then create a strategy based on these metrics in a scientific manner.

    A solution of this sort will provide success for Starbucks because now it utilizes both the time-based sensitivity of demand as well as the demand generated by winning in the competitive landscape. For instance, now Starbuck knows how to optimize the demand on a weekend through tactical planning as well as beat the competitors through strategic planning.

    The Starbucks management feels that the revenues are due to the increased costs of supplies. So the fundamental question is that when the costs increase, increasing the price is the right solution? Through my experience, the answer is simply no. Impulsively one may think to increase prices. In fact it needs deeper understanding of the phenomena. Once simple bad effect of increasing the price when your costs increase is that you loose demand because the number of customers now decrease and so you will lose more business. It is cumulative effect unless you have very good tactical plan based on your costs.

    After all, the business environment is so dynamic today that you never know when somebody will topple you completely unless you have some advanced and sophisticated thinking. Numerous instances show that the companies with lower costs will easily win unless the large businesses have a great strategy.


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