Strategy: Starbucks' Next Chapter
The Context
Starbucks hired a superstar CEO recently from Chipotle.
Brian Niccol took the reins at Chipotle in 2018 and supercharged the brand’s growth.
In the past decade, Starbucks has had a revolving door of CEOs.
During this time, the company has lost ground to more nimble competitors as well as being upended by the pandemic.
A variety of strategic and market forces led to Starbucks losing their sense of value with the customer, and this resulting loss of value has caused stagnating progress and lost market share.
How Starbucks Lost Their Value
Most market share loss in one way or another can tie back to a company losing their value proposition.
Value is different than price unless the value proposition is lowest cost (think: Walmart).
Starbucks doesn’t have the best coffee.
Customers value them for:
Unique & time-bound (seasonal) flavors
Convenience (best locations)
Loyalty program ecosystem
Starbucks has lost an edge in all 3 of these. The cumulative effect, combined with external market factors, led to an eroding value proposition that hasn’t recovered.
On top of this, Starbucks lost their value because they didn’t correctly identify where customers see value in them today.
Higher Price, Lower Rewards
Starbucks doesn’t win on lowest cost, but cost still matters.
They operate somewhere between at home (lowest cost), Dunkin (low cost), local coffee shops (comparable), and specialty chains.
If they push too far up the cost scale - which I believe they have - they’ll drive a portion of customers away either toward a lower cost at-home option or a similarly priced local shop.
They’ve also devalued their rewards program twice in the past 5 years.
Making a customer redeem more points for the same reward is an easy calculation to do in a spreadsheet to save money.
However, over time, it disincentivizes “fringe” customers.
Loyal customers visit for a reason outside of the rewards program (convenience, taste, etc.) and benefit from the rewards.
These changes won’t change their behavior.
Fringe customers make the incremental purchase with Starbucks because they’re right on the cusp of a reward or see one in sight.
Making these rewards harder to get slowly drives those customers away.
For a company with repeat purchases like a coffee shop, incrementality matters.
Every customer pushed away isn’t one purchase, it could be as high as 50+ purchases per year (more on this later).
A Misguided Identity: The Third Place
The company talks about itself as the “third place” but this vision is misplaced.
Ask people why they go to Starbucks and I’d guess that few, if any, talk about the value of a third place.
Instead, you’ll hear customers saying something like “It’s right on my way to work / school”, “I love earning free drinks”, or “I love their flavors / seasonal drinks”.
This “third place” is a romanticized view of the brand that’s projected externally from the company but not valued by customers.
The third place doesn’t matter to Starbucks customers today.
Trying to be a third place while customers don’t value that part of their brand takes attention away from the places that should be more directly in their focus.
Speed > Connection
On top of this, a push toward mobile ordering, on-the-go orders, and drive through ran contrary to this “third place” vision.
Speed and efficiency took priority over intimate customer connections.
If you want people to value the place, make the place the focal point of the experience.
If you want people to value the product, make it as easy as possible to order and get it to the customer as quickly as possible.
Ease of ordering, speed of service, and serving as many customers as possible per store per day is a perfectly valid strategy (and usually a pretty good one).
It’s just not a “third place” strategy. A third place strategy prioritizes customer connection and spaces designed to be stayed in.
And, COVID Happened
A value proposition built around convenience falls apart when people no longer pass through those areas.
Starbucks has long been known for having the best locations in the business. These locations revolved around offices, schools, and other highly trafficked areas.
Being in high car and foot traffic areas creates routines. COVID broke those routines.
Customers found themselves (1) away from their normal areas and (2) in a position to make a new choice, such as making coffee for themselves.
Some returned to their old routines and purchases, others stuck with the new routine.
Just the Tip of the Iceberg
These problems just scratch the surface. A few others off the top of my head are:
Local and national coffee shops are mimicking flavors (i.e. pumpkin spice) making these offerings less unique.
International challenges (i.e. China) are weighing on the brand.
The relationship with baristas is creating negative brand equity
Big companies are a force of momentum. Nothing changes quickly and by the time a trend plays out, a brand can quickly find itself behind the times and slow to respond.
This is where Starbucks is today - a strong brand with best-in-the-business locations but slow to find their new identity for 2024 and beyond.
What Happens Next: Create Routines
Starbucks needs to re-orient around customer lifetime value. Increasing price has been a short-term fix at the detriment of long-term value.
Consider a customer that buys just a single hot coffee once a week.
This customer generates $3 x $52 = $156 in revenue per year
Now let’s say the company increases price by 5%.
The new revenue per customer is: $3.15 x 52 = $163.80 in revenue per year
Starbucks gained $7.80 per customer per year.
If they lose a single customer because of this new price, they must retain 20 customers to make up that lost revenue ($156 / 7.80 gain).
This calculation assumes the bare minimum purchase.
What if the customer is a cold brew drinker ($4+ per drink)?
What if they buy breakfast sandwiches or pastries ($10+ total ticket size)?
Every lost customer isn’t losing a single purchase, it’s losing either (1) every purchase they’ll make if they’ve given up on the brand or (2) a portion of purchases if the customer visits less often.
Stack these customers on top of each other and you have a big revenue gap.
Re-orienting around lifetime value means narrowing the focus on creating new customer routines and keeping current customer routines.
It’s not about a purchase, it’s about a routine.
This routine should be created by using their already strong loyalty program. Here are a couple ideas:
Develop a phased incentive for the first 10 orders (1st order free, 2nd order 80% off, 3rd order 60% off, 4th order 40% off, 6-10th order 10% off) for new Rewards members
Develop a game around visiting a Starbucks in different locations (in a Target, in a grocery store, company owned store, airport, etc.)
Buck the trend and make rewards points more valuable
Surprise customers with more frequent personalized promotions (i.e. Free upgrade to a specialty cold brew for customers that normally order a regular cold brew)
For new customers, it’s about finding a way to get Starbucks into their routine For existing customers, it’s about giving them a reason to not look elsewhere.
Personalized rewards and behavioral nudges should be so strong that the customer has no reason to look elsewhere.
It’s not about the revenue in a single purchase. The revenue per purchase is relatively inconsequential - a $3 coffee purchase doesn’t move the needle.
It’s about developing lifetime value. The revenue per customer per year is critical.
The Takeaway
A misguided identity and lack of focus on customer lifetime value has caused stagnating revenue and fragmented strategic direction. Re-orienting around the long-term value of a customer will lead to more sustained success.