Monday, April 26, 2010

Starbucks Makes Me Nervous!

Why Starbucks Makes me Nervous

I like the atmosphere at Starbucks especially when I get one of the big comfortable chairs. I feel cooler than I am when I am there. The cocoa that I drink there is made to measure with just the right sweetness and cocoa flavourings. The big cup fits my hands and the lemon poppy seed cake is scrumptious. I love their commitment to their employees. So why does Starbuck’s business model make me nervous?

First, I have to admit to a little history. In the early 1990s I helped to start a real estate company. My Prof in the certification courses chose me as a friend and a partner in the business that she planned to start. After a short stint with the company she was working for we both decided to go out as a team. Unfortunately, her brother who was recently fired from the firm also got involved at the last moment and brought in his buddies, self perceived tycoons. The project went from a two partner business concept to a glitz and glamour place called “Realty Force” and THE Force was not with us. They spent a ton of money on the lobby with marble and original art when most people came in from the parking lot entrance in a working class town. I was lucky enough to get out almost before I got in and those that stayed sued the houses from one another and lost a lot of money. So perhaps it is just the big push to greatness and the echoes of the past that scare me about Starbucks. After all they are successful in the extreme and I am just a small time Canadian woman.

Howard Schultz is a man who runs with his vision even when everyone around him is shouting warnings. (Sometimes the people that are shouting need to be listened to so that is factor one in accounting for my nervousness). He also is a man who leads with his convictions that doing the right thing leads to the right outcome. (This approach has gotten me into trouble more than a few times so this is factor 2 of my nervousness.) Factor 3 is that he majored in Public speaking and Communications and I wonder if he has something of substance to say or if he is just a man who says things well. Is it substance or just style? Sport scholarship students and sales experts like Schultz always make me nervous about the business outcome!

One factor that does not make me nervous about his business model is that he is selling coffee. It is a very profitable business as I learned when we started a coffee fund where we sold coffee in our General Motors skilled trade shop (I was the first woman to take a skilled trade at GM Canada back in the 70s). We financed our benevolent fund and fully funded our social activities all from the proceeds of coffee made in our own area for 50 cents a cup and we almost had more money than we could spend. Thus I do know that coffee sales are profitable and Shultz proved that with his first stores even after he had repeated the “glitz and glamour” spending of $125,000 initial decorating investment just like my real estate crash and burn temporary partners.

I got over my nervousness about another thing with Starbucks too. Shultz seems to really understand that people who feel like part of the company, who know that ‘people as greatest resource’ is not just as slogan in their workplace are happier and more productive workers who stay. The fact that he did his homework and knew that turnover costs $3000 dollars calms me too. His benefit program for everyone who works over 20 hours per week makes him more than a message hocking jock to me. His love of his product and of its quality in the development of the shrink wrapping of coffee for distant stores also calm my shakes (even as a non coffee drinker) and the fact that he cares about how the stores smell makes me think that he just might really have more substance than just a caffeine soaked expansion adrenaline mainliner.

However, I gain back all the nervousness I surrendered when I see all of the times he went back to the financing trough even after the IPO. What is it, I ask myself, that he sees and why does it all have to be done right now? Then, in a burst of insight, I get it!

He is working what I now see as the ‘milkweed pod’ model of business. I see it as very organic and season specific. What he knew (not just thought- but knew) from the beginning is that the seed of his marketing plan only had a certain window of opportunity and he had to have his seed in the ground and sprouting in every area before someone else claimed the field and the future revenue stream. The future of the profitability of the market had a long future horizon because people were learning about and loving better coffee and coffee consumption was increasing. In becoming a brand and giving the key guarantee of a consistent comfortable experience, the likelihood of survival and long term loyalty increase. Once the pod explodes the time is now.

The key to what Shultz knew is that market was almost equally ready for his product everywhere- spring is spring and no other season will yield the miracles of the season. Either he established his dominance there or someone else would provide a similar experience and addict that area to their coffee and experience. The Starbucks’ reverse jinx (Hartley, p39) would work just as well for someone else who set the model for the region.

The problem or natural consequence of the ‘milkweed pod” business model is that you have to be prepared for what will happen in drought, in winter, and in stony fields and recessions. In all organic growth from the branches of trees to the dendrites of the brain there are seasons of jubilant growth that are followed by times of die back or pruning. I think that Starbucks is in this stage now.

The good news is that the tree and the brain do not normally die in the process but they are changed in shape and capacity. The fit branches remain well nourished and the tree grows on that side but the weaker branches fall off in the driving rain or wind storm. Our pain in the business experience is that this disrupts people’s lives when they lose their jobs when a Starbucks outlet closes down or they cannot make ends meet with fewer hours. The good news (often for someone else) is that spring comes again and that often brings new growth.

Another piece of good news is that like the growth of the dendrites in a human brain, each experience makes Starbuck’s smarter. The worry about cannibalization is almost spurious because growth and area coverage is what the process is about. When customers prefer one store over another it tells us something important about geography or fertility of the area for supporting the business. In organic growth, the tree branches reach to find more sun for more fuel where ever they can. “A recent Wall Street Journal article suggested that additional Starbucks, far from cannibalizing, may instead expand the total market for coffee to the entire community so that all benefit.” (Hartley, p 39). There does come a time where it cannot grow any more but I do not believe that point has been reached. When it is fully mature, it then does something different. It sends out messengers into the future in the form of new seed for new fields of business.

All of the points that made me nervous and all of the points that calmed me down are the skills that made Schultz a great entrepreneur. Schultz built Starbucks without much in the way of advertising because he understood that Starbucks is more of a feeling and an experience than an idea. It is almost an urge. I am feeling much calmer about Starbucks now and in fact, might go for a cup of cocoa.

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