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Tuesday, March 06, 2007

Lessons from Starbucks?

I personally do not favor Starbucks. I think their coffee is generally a bit to bitter and acidic for my taste. I also do not like the "latte externality." Being of rather pedestrian tastes, I don't go for anything more than just a cup of coffee. Unfortunately, I always seem to end up behind two people who order such a complicated drink that I wait minutes in line - I usually get better service at a crowded bar.

I don't follow the fortunes of Starbucks's on a daily basis, but since Novembe 2006 the company's shares have lost about 25% of their value ($39 to $29).

That seems to have prompted Advertising Age story with "advice" from various marketing and business executives. Some of the advice is appropriate for any firm, while some seems to be doublespeak:
Joseph Michelli, author of "The Starbucks Experience: Five Principles for Turning Ordinary into Extraordinary": "They can make sure the sensory experience at Starbucks is rich" by bringing back coffee aromas with fresh grinding and reinforcing the notion of affordable luxury by making sure knowledgeable baristas French-press coffee. It also means nixing plastic chairs and bringing back the living-room feel. "It is all the details of the physical environment."
I think I see what Mr. Michelli is getting at, but I am not sure if the coffee aroma alone is what draws people into a Starbucks.

How about this one:
Larry Wu, VP-consumer strategist food and beverage, Iconoculture: Of all the experts we polled, perhaps Mr. Wu knows the brand best. A former director of research and development for Starbucks, he said, "It used to be about great service, knowledgeable expertise and love of coffee. Now it's about love of profit, margin and growth." He said stores are too small and understaffed: "That's why [baristas] make shortcuts now." The chain "should look at capacity instead of just speed." Finally, he said, Starbucks "should pull back on the food and make coffee the core again."
Every firm has a love of profits. However, it is true that shareholder pressure might make the public firm, and one time darling of the market, feel extra pressure to keep profits within expectations. If this motivates short-cuts in product quality and service, firms tend to feel the repercussions down the road - see General Motors and Ford.

Much of this is beyond the scope of economics. However, the problems facing Starbucks likely have more to do with market entry - whether that is Seattle's Best, Dunkin' Donuts, or whoever - than whether Starbucks has plastic chairs. When a company makes positive profits in a market where free entry is possible, it is likely that the firm's profits will be eroded in the future.

Whether Starbucks can protect its market share and its ability to price above marginal cost has some connection to marketing but it would seem a difficult road for Starbucks.

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