Hey – Where’s My Starbucks?

Competition is heating up, has been doing so for several years in the retail coffee industry. McDonald’s and Dunkin Donuts have aggressively implemented or improved their coffee programs. McDonald’s has the McCafe branches worked in or attached to existing stores. In NZ and Singapore McCafes use quality semi auto machines, separate grinders and the barista actually steams milk and can make flat whites, lattes and cappuccinos. Its perhaps easy to say that Mc D’s and Dunkin can easily adapt their menus to accommodate specialty coffee, while it is very difficult, in not impossible, for Starbucks to offer burger and donut menus to their list of cuisine offerings. The truth is Starbucks got somewhat bush-wacked by the competition at the blue collar end, lower to middle segment of the QSR market. It was a hit aimed right at the heart of the company, coffee.

To make things worse suddenly the USA has really discovered specialty coffee! From a foreigners point of view REAL quality specialty coffee has only relatively recently begun dripping, then pouring out of States like Oregon, Washington and Colorado. Sure, Peets and Starbucks were in many ways the grand daddies of the new age, retail savvy approach to coffee- but its the Intelligentsias, Stumptowns, Allegras that are now showing just how GOOD coffee can be if it is sourced and roasted on a more micro scale. They are also showing the right way to turn that roasted product into amber black gold, training quality barista.

Starbucks problems began as long as 15 years ago, when the pure growth of stores began tracking up like the logo of the Nike wing. Anyone in the roasting business knows that volume at the best equates with good, but not outstanding coffee. Outstanding is found in very small lots produced at Finca, Hacienda and by small-holders (Petani) in countries like Honduras, Kenya, Columbia and Indonesia. Any company with multiple stores (let alone over 10,000 stores!) knows that consistency of delivery of product, service and replicating the cafe environment is key to development. A successful smallish chain may be able to operate 15-30 stores while still sourcing excellent coffee. As stores increase at some point a decision has to be made to build the future on something other than coffee alone. Long before arriving at this point Jerry Baldwin, Gordon Bowker had long ago moved on to other caffeine fueled ventures.

This is not for a second knocking Starbucks. Their success in building a business model that works equally well in small town America or sultry Singapore is testimony to the business acumen of the team in Seattle. All of us in the coffee industry owe Mr Schulz big time for the work his company has done in bringing specialty coffee to the world of non coffee drinkers. But lets face it, they are a company that is in trouble.

What to do? Back in the 1990’s a huge company represented by a giant clown, wearing gaudy red and yellow stripes was also in BIG trouble. Stores sales were stagnant and profit was a mess. Too many stores, the burden of trans-fat menu items, poor store locations and pricing concerns all contributed to that company having to take a big step back and taking a look, hard look at itself. In reality burgers and coffee are very different products, but when the system of selling them is based on volume generating profit, the similarities are more apparent than the differences.

2008 saw the return of Schulz to the helm of the boat. It also saw some fairly major gaffs that gave the consumers something to think about, the competition opportunity. Firstly the company announced it was going to close down all its US stores for 5 hours to retrain staff how to make proper coffee. While this on the surface was an admirable ideal, the sublime message to customers was that (on this scale) it looked like Starbucks was admitting it had not been making good coffee for quite some time. The closure also allowed a number of inventive independents the opportunity to market there high quality espresso blends. Indeed many cafes offered free coffee during the time the Green Giant was closed to encourage potential new customers the chance to taste their coffee.

The second change was the machine debacle which, it fair to say, continues up until today. Machines in Starbucks were for many years LaMazzocco supplied. These machines pedigree is unchallenged. A separate couple (or trio) of Rio Mazzer grinders were ready to feed the Italian stallion freshly ground beans. Then someone came up with the idea to replace all stores with super-automatics. The logic here was simple and related to the point above, a machine will somewhat guarantee cup consistency between stores, anywhere and everywhere. The problem was, and still is today, that a super-automatic can not produce as good a cup as a semi or auto manned by a trained and professional barista can. However take the “trained and professional” out of the sentence above and cup quality may be similar. Many industry experts are convinced that the company’s coffee quality suffered as a result of the machine swap. On a positive I am the wastage of beans was far better controlled. A machine does not over tamp, have excess grinds fall from the basket etc.

The final big news of 08 was Starbucks purchase of the company that makes the Cloverleaf machines. This machine is revolutionary in the fact it makes cups of single origin coffee quickly and most importantly in a way that really accentuates the coffees origin characters. Why this became a problem was that several influential coffee critics who tried the company’s coffee from this particular machine picked up a number of tasting faults. Apparently the coffee was just not good enough, or roasted just too dark for these very expensive machines to be effective.

The recent history is so fresh, there is no need to dwell on it. Store closures, stagnant sales and then more closures have put the company into the position it is in today. A position of challenge and further opportunity if the issues in front of the company can be worked through successfully. Firstly if Starbucks wants to be first and foremost a coffee company, it needs to return to its early adage that it had the best coffee. At present the company has a number of joint venture growing projects in places like Sumatra that will guarantee it quality supply from year origins in the future. This move directly addresses the issue of buying from a number of brokers. It also gives Starbucks exclusivity to particular coffees, as well (one would expect) a raft of marketing materials about single origin partnership coffee. How this coffee is roasted is another matter, and one which I think unwise to dwell on. Dark roasting of coffee is generally done for very good reasons…

But is a return to the coffee roots of the company enough? The answer is no. For some time the company has been looking to the future away from the land of Uncle Sam. The new frontiers are not the bastions of coffee, Western and Northern Europe, but rather the brand hungry, consumer savvy and disposable income rich emerging economies. There are obstacles of a different kind to building a chain of stores in China, Indonesia, India and perhaps Russia, Argentina and Brazil. However the relative costs vs. the potentially lucrative rewards are great. Wait a second… is this not exactly the same thing McDonald’s did when they began having problems 15 years back?

Indeed it is. The big difference though is the age and times we live in. When McD’s began their reinvention, economically the world was relatively stable. Asia and Europe, as well as South America were all gallant saviors of the brand. Who can forget McD’s assault on French cuisine? It makes Gordon Ramsey’s invasion look tame. This time around the bite of economic doom and gloom can be seen and heard on any street corner and besides, many pundits and experts are still not sure if reinvention is yet first and foremost in H.S’s mind.