How Starbucks Will Fail

Cutting costs and a new line of fruit smoothies will not save Starbucks. Earnings are down 21%, and for the first time ever, fewer people walked thru the doors this period than last.

I like Starbucks, so I'll waive my $25,000 fee for my initial consultation, and advise Schultz what to do:

First, the problem, and I quote Starbucks management:

"The power of our brand is more evident now than ever," said Smith. "We were recently named among the 10 most impactful global brands by Brandchannel, and for the third consecutive year, we are listed among the 100 most valuable global brands by BusinessWeek magazine."

"Starbucks continues to refine the Starbucks Experience," stated Schultz.

These are Schultz's two talking points, endlessly repeated.


The solution is to ask: where is the customer? As Nassim Nicholas Taleb might say, Schultz has been fooled by randomness. Countless people tried to make it in the coffee business, but Schutlz succeeded, until now. In retrospect, the serial bubble economies of Masters of the Universe Bond Marketers of the 80's, the larger bubble dot-commers of the 90's, and the universal real estate mortgages-messers of the 00's needed industrial strength delivery of industrial strength coffee to fuel the berzerk biomass working to inflate these bubbles. Starbucks had the right system for delivering the right product to a market Schultz never anticipated. Brand and experience had nothing to do with anything.

Schultz had no more of an idea where the world was heading than anyone else, he and his cohort merely had the strategy that would work, given what was going on in the world. This strategy does reflect Schultz and his associates, and who they are and what they believe, but in another economy, one of the others entrepreneur's plan would have been the "successful one." We are entering "another economy."

If Schultz seriously thinks branding strategies and coffee experience on offer is the key to his success, he is delusional. Certain customers, in a certain era, and who Schultz is being in the right place at the right time, is the secret of Schultz's success.

The proof that brand and "Starbucks experience" do not matter is the alacrity with which his customers are abandoning both. Micky D knows this, and with fresh content ads in media they budgeted for anyway, McDonalds picks up Starbucks customers at no additional cost. So much for Starbucks brand and experience.

Since the random events of the structure of our economy is changed, the older one is over, the disintegration of Starbucks is underway. Starbucks no longer fits, or not to use too bad of a pun, Starbucks no longer serves. Schultz has no more of an idea of what his custoemrs want today than he did in 1980.

The problem a few dozen people at the top cannot possibly meet the changing needs of the millions of people who would patronize his 15000 stores.

Starbucks can survive in one of 2 ways:

1. Go upmarket. The rich are not going anywhere, but the vast majority of the present Starbucks customers are going to McDonalds eventually, or will simply no longer need the caffeine fix to get them through the day or exploiting bubble economy opportunities. Perhaps going forward, a wee bit of scotch, late in the evening, at home, is indicated. No way of knowing. Starbucks customers do not know yet, so no one can find out. Starbucks is probably too big to trim down in time, which leaves this upscale category open to an entrepreneur.

2. Stop retailing. Schultz did create a worldwide network of first rate coffee shop managers (I know Starbucks is not worldwide, but plenty of people from around the world put in 2 years at Starbucks precisely to learn how to run a shop, then went back to Burkina Faso or Hebei or Guadalajara to open up their own coffee shop, with the skills they learned).

So Starbucks announces they will divest themselves of all retail stores. Starbucks announces they will be strictly an importer/wholesaler of coffee, and coffee shop supplies. If they have 15,000 stores, they offer to sell the stores to the staff of that particular store, which may NOT retain the Starbucks brand. Certainly they might say "proudly serving Starbucks." but that would be up to the store's new owners... and obviously these newly-independent would not be Starbuck's franchises. Further, these stores may be free to buy coffee other than Starbucks. That information, in itself, would be a goldmine. These stores would be completely spun off, to respond to customers and change in any way each liked.

Starbucks gets into the business of financing to spin-off these entrepreneurs, until the process is complete. The result is overnight Starbucks is divested of the liability of 15000 leases in a disintegrating commercial real estate market, and retains the assets of 15000 wholesale customers. The 15000 thousand customers then get busy responding to the needs of of their local particular markets, free of Starbucks high commands' delusional failing brand and "coffee-experience" dictates. Not to mentioned since no one gets fired, there are now downsizing charge-offs to Starbucks.

Starbucks gets to watch 15,000 experiments in coffee retailing, and keep in mind, these experiments are in the hands of highly trained, highly motivated people.

Starbucks may find selling information back to retailers far more profitable than running shops.

The new slimmed down Starbucks can concentrate on the core function of coffee sourcing and distribution, adjust that to the changing world, and perhaps some day return to retailing. On the present course, Starbucks has about as much chance of surviving as WAMU.

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