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March 04, 2007


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i agree with most of your piece, but you don't understand some of the details of coffee retail or the coffee space, which causes you to make some small errors, for example about the role of dunkin.

howard easily has a way forward, not backward. but to see it i guess requires knowing some finer points of coffee retail -- coffee has some unique properties. so perhaps i shouldn't be surprised that few see what howard needs to do.

howard, call me!



Thanks for adding your comment. I am curious what you mean though, since I've said nothing about the role of Dunkin Donuts, other than Starbucks' cheapening of their "experience", i.e. the move down-market, and the move into foodservice, has enabled Dunkin to become a competitor. That's a business reality which has nothing to do with coffee.

But rather than debate whether or not I understand coffee retail or the coffee space, it would be helpful to readers to tell us what you think "the way forward" is. You seem to believe that you know -- the floor is yours.

Sean Howard

Wow! Talk about a textbook case of disruption (based on your definition.) And this is an amazingly detailed case review.

I love this post. I love the new direction. I love coffee. It's a win/win/win all around! more! more! ;)

You lost me on this bit:

"The characteristic of Starbucks' innovation that was just good enough for the original niche of coffee culture appreciators was the speed. "

Can you explain the "just good enough" concept in regards to disruption? Interesting use of the phrase and I'm not quite following.

And I LOVE this quote: "And, more importantly, they've overshot the needs of their customers, and are ripe for disruption." Wow. The very concept of overshooting ones customers and their expectations as a normal part of business efficiencies and growth is a sobering one.

One last question for you. Do you see the potential Starbucks disrupters as being other large chains like you mention (McD's, Dunkin, etc.) that can meet Starbucks quality now at a lower price and higher margin or would you see it as being a smaller group flying under the radar?

It seems to me that lower price is likely not the disrupter most likely to attach Starbucks. ie: I'm willing to be a higher or at least equal price for a better experience as a coffee lover...

Teach me!! ;)

Doug Keeley

Great story, great discussion.

Some day this will be a textbook case in marketing departments. How well can the power of a brand sustain a company through turbulent times? How much equity has Starbucks created (with little or no advertising)?

I am betting that Starbucks will change successfully. Everything they have done with their n so far has been extremely well thought out and executed. And their fans are almost as loyal as Mac addicts.

Sure McD can make a coffee out of a machine, and so could Wal-Mart, but neither of then has a clue about creating experiences that adults want and will pay premium prices for.

GM, Ford and Chrysler have spent a lot of money going after BMW's brand position and so far, all they have to show for it is red ink.

And I wonder, if it was that easy to make a good coffee out of a machine, how come McDonalds makes the worst coffee in the western world?

I, for one, will bet on Schultz and the evolving Starbucks experience. And as long as he and the senior team are still worried about the experience, I don't think those of us who love Starbucks have much to worry about.

Rohan Jayasekera

@Doug Keeley: Whether large numbers of people "will pay premium prices for" Starbucks is very dependent on the general social mood, in particular as reflected in how the economy is doing. In the 1920s tea houses were big, but when the Great Depression hit they pretty much disappeared. When times are tough, most people either make their own coffee/tea or else go somewhere they can buy it at a non-premium price. Sure, the true coffee connoisseurs will continue to appreciate Starbucks and will sacrifice to go there, but their numbers are limited. The only thing holding up Starbucks is that today so many people are feeling rich enough that they'll pay for a connoisseur experience even if they're not connoisseurs.

Cam Beck

This is a well researched, informative, insightful article that made me think about Starbucks' situation a little differently. I'll be coming back to read more of your stuff.


Hi Sean:

Thanks for the kind words.

re: good enough.

Good enough is a key concept in disruption theory, as discussed at length in a series of books by Clayton Christensen, a professor at Harvard. These books include The Innovator's Dilemma, The Innovator's Solution, and Seeing What's Next.

As you read this answer to your questions, it would be helpful to click on the graph in the initial posting - it will size up to something more readable and will help you visualize what I'm describing.

To start with, there are two kinds of disruption that Christensen describes: "low end" and "new market".

Low end disruptors

Low end disruption targets customers that don't need the "performance" that high end customers value. Walmart was a low end disruptor.

Low end disruptors focus on the least profitable customers in the beginning. These customers don't value the high end features than incumbents have added to their products over time, and they are happy with a product which is "good enough", but low cost. They will not pay a premium for enhancements, so often are not buying anything in the current scenario (pre-disruptor).

Once a disruptor gains traction in such a low end niche, it starts looking to improve margins by targeting a slightly higher end segment where customers will pay more for quality. This requires a "sustaining innovation" to satisfy the customer whose needs are somewhat greater. Incumbents, not seeing gain in fighting a low cost competitor in a low margin market start retreating up market -- eventually selling only to the most profitable customers, but as the disruptor continues moving up market eventually there is no place for the incumbent to go and they must fight. These battles can be bruising, and last years, but usually the disruptor, with its lower cost basis and market share momentum ends up winning and taking over the incumbent position.

Although McDonalds and Dunkin have been in the foodservice business a long time and served below fit-for-human-consumption grade coffee for a long time (i.e. they aren't new market entrants) their offerings were so far below the "experience" that Starbucks was selling that they were effectively no threat. However, they are optimized for speed and cost-efficiency, have much broader distribution networks, can leverage high levels of traditional marketing expertise, and appeal to a much broader base of consumers.

By the simple installation of better quality coffee making equipment, McDonalds has upgraded their coffee so much that Consumer Reports ranks it superior to Starbucks.

Yet their price is several dollars less. If all I cared about was a better (I don't mean better than Starbucks, because I don't agree with CR) quality coffee, but didn't really have the need for "the best", and didn't have the patience for Starbucks slowness, or wasn't willing to drive out of my way to find one, McDonalds has suddenly become "good enough" for a vast swath of the market that used to feel Starbucks was the only place to go. (Note, many McDonalds now provide free wireless service, and have radically upgraded the decor and comfort so that they also compete with Starbucks' "third place" idea.)

Does this take away Starbucks customers tomorrow? No, of course not. But, it does shrink the Total Available Market (TAM) for Starbucks considerably, and one wonders whether there is room for continued expansion in North America. Several entrants are now pursuing that mid-market customer whose needs are overshot by Starbucks. Can Starbucks remain as big as they already are if their segment is shrunk to only the luxury market, especially when they've downgraded the experience incrementally over time to be far below luxury?

I can name several neighborhood one-of coffee shops that have an authentic experience, with better smells (the coffee is roasted in the store several times a week, and stored in bins, not flavor-sealed packs), enthusiastic staff, who make the espresso the old manual way on the best equipment, and their coffee is the same price or less than Starbucks. These I will drive several miles out of my way for if I'm in the mood.

The only real differentiator Starbucks has is the level of customization and branded drinks.

New market disruption

New market disruption offers a solution to customers that incumbent providers cannot serve profitably, or that incumbents do not initially perceive there to be a market for, so they ignore it. Typically, new market disruptors are technology providers, such as Google.

Over time, products undergo constant "sustaining innovation". Basically, this is straight line incremental enhancement to the existing product to meet higher and higher level needs. Think about microwave ovens. The first microwave heating systems weren't even enclosed (they didn't realize microwave radiation could be dangerous.)

Then we had the massive oven-sized machines that had one power setting, which would be
pretty low power today, and you controlled heating with a timer dial. Then they became digital, with the ability to punch in a time setting directly, and choose different power levels. Oven sizes multiplied from under-the-cabinet small apartment sized, to
built into the wall deluxe models.

Features continued to be added like Defrost, and Popcorn, and Reheat. At some point, the needs of virtually every consumer were overshot.

My parents and parents-in-law still use only the most basic features and don't understand why anyone needs a popcorn button (that's the feature I use the most, other than reheat). If they didn't have to set the clock for the microwave to work, it would still be flashing like the VCR always did. Most of us are somewhere in the middle -- we use about half the features available to us, but don't need or ever learn how to use everything.

Sustaining innovations help market leaders maintain brand dominance, and are how they maintain differentiation and price margins through the early years. They optimize their operations from market research to supply chain management to manufacturing to marketing and distribution to support this continuing evolution, minimizing their costs and building up expertise. Sustaining innovations do not create markets, but they do protect and grow them. Initially, microwaves were new market disruptive innovations (some people don't have a traditional oven anymore). Then, along came the Koreans who we all thought made junk, but their products were aimed at the low end of the market and priced hundreds of dollars below what the Japanese (who used to be dominant) could make them for. The Korean manufacturers improved over time, and moved upmarket but with a lower cost basis and pretty much put the incumbents out of business. That was a low end disruptive innovation. Now, the Chinese are doing it.

But other than cost advantage which enables low end disruption, microwave oven technology long ago reached maturity and exceeded the needs of its customers. All the manufacturers are pretty much able to build the same products and have optimized their processes to be very efficient. This is the definition of commodity.

New market disruptors also use the "good enough" paradigm. Only in their case, it often has features so different from the incumbent technology that the incumbent doesn't even recognize it as a potential threat in the beginning. The features that differentiate it enable a market that incumbents can't serve at all, and that's the early niche for a new market disruptor.

Think about blogging for example. Every blogger is essentially publishing a dis-integrated column or section of a newspaper electronically. A blog is not a whole newspaper, usually isn't done by a trained journalist, but is accessible to anyone with a PC or even just access to a PC. A newspaper requires a huge capital investment in printing equipment, distribution network, writers, advertising sales, and is expected to provide full coverage of all important events daily. Blogging is cheap or often free, depending on what service you sign up for and what limitations you'll accept. Initially newspapers dismissed bloggers as irrelevant. Now reporters often maintain blogs, but the news organizations try to co-opt the technology within a format they understand, and it doesn't work. The community of bloggers, most unpaid, have severely undermined the potential subscriber base and revenue source for newspapers and have become a direct threat to the survival of the industry.

I've probably over-explained this now, so let me address the specific points you asked about:

re: speed being just "good enough" at Starbucks

The incumbents did not think there was a market for better coffee. They were focused entirely on speed, low cost and the lowest common denominator. There was a "luxury" market before Starbucks, but it was a micro-niche. Most cities had at most, one or two places you could go outside of a great Italian restaurant for a superb cup of coffee. To the incumbents this was a very low volume, high cost niche -- could you imagine Maxwell House trying to serve this segment, or a foodservice operator like McDonalds? Starbucks demonstrated that there was demand, and that mainstream customers would not only pay a lot more for coffee, they would wait to get it. So, their offering was not fast, but with training, and automatic machines (instead of more staff), they were able to make it "fast enough" to keep people coming back. Putting coffee into flavor-sealed packs also meant that staff didn't have to scoop and weigh coffee beans, which is a big time saver.

re: overshooting customer needs

This concept is really just taking market segmentation and turning it upside down.

When we segment markets and target specific customer needs and pricing in the products created for that market, we are implicitly considering what is the minimum and maximum requirement of a customer in that segment. To overshoot is simply to add features until you've exceeded the maximum needs of the segment. If you keep on adding features, even after you've met the needs of the most demanding customers, then the majority of the markets you serve could have their needs met perfectly well by a product with less functionality and a lower price.

re: who are the disruptors

Certainly it could be anybody, but its likely to be somebody we already know. The low end disruptors with the most resources and the highest motivation are in the game, but that still leaves Wendy's, Burger King, gas station convenience stores, and all the other quickservice operators that are located at every highway exit. They will either force Starbucks prices down, or take away some market share. Either way, that would affect the stock price dramatically which would severely impede their ability to keep growing quickly, even if they can find untapped markets overseas. While Starbucks is distracted fighting on that front, they don't want to lose sight that there are several comparable but much smaller chains. If any of those went the "super premium" route, and replicated the experience Starbucks had 10 years ago, they could steal much of the very high end and most profitable luxury market. There's also the possibility of a foreign entrant -- the Italians did invent the idea that Schultz copied after all. A company such as Illy has the resources, a strong brand in their home market to grow from, a source (i.e. Italy) that has a lot of brand cachet, and already sells premium coffee. That would leave Starbucks occupying the same mid-high end tier as Buick, and I'm not sure that market is big enough for anyone (it certainly is proving not that profitable for GM) -- we seem to be heading more and more towards either the very best, or the least we can spend to meet our needs. But, it also depends on how Starbucks responds. There is a way to beat back disruption, but it is like a chess game, and you have to first admit that it is happening.

re: is low-price disruption a real threat to Starbucks

Usually, the initial customers for low end disruption are those who either don't participate at all (unserved), or who are underserved (would use more if the good or service was cheaper). There is some spillover into adjacent segments where convenience or speed or other attributes matter more. So, in the early days no, it isn't, unless Starbucks is already too big for the available market or doesn't respond effectively to the threat. But longer term, the general pattern is for low end disruptors to continue to move up market. That does tend to squeeze the incumbent into a smaller and smaller niche. There are many people like you, and today, most say they would never switch. But here's another issue for a luxury service provider: I like a good coffee too, but we were spending so much at Starbucks, that for us, a super high quality machine for home was a worthwhile investment, and now I can make a much better drink than I can buy. It takes surprisingly little time to pay that back if you use it enough.

Here's another way that habits change: Two years ago, it was almost impossible to find a good coffee at a highway exit (it's always baffled me that Starbucks ignored this huge opportunity for people making medium to long drives between cities who often are looking for a shot of caffeine to stay awake). We would not have even considered a place like McDonalds, preferring to get a Coke if we couldn't find a good coffee. We knew every stop along I-75 where there was a Starbucks within 2-3 miles of the highway, and would hold out and drive out of our way to go there. But, in a moment of desperation, and having heard the ads that McDonalds had gone through a significant upgrade, we thought "What the heck -- it's a dollar. If it's really bad, we can just dump it on the pavement". So, we tried it, and discovered that it wasn't horrible. We now have a low price alternative that we can consider if we really feel the need.

That's what demand elasticity is all about -- what does it take to make you consider a substitute.

Su Doyle

I read your article in today's Marketing Profs and it led me here. A critical customer experience element that Starbucks is missing is community. Most locations lack the "personal touch" -- with a couple of exceptions. I recently hung an art show at a local Starbucks (Lexington Center, MA), and this particular location was as close to a corner coffee shop or local pub as one could get. Regular customers were recognized and their coffee preferences embedded in the baristas' brains. Newbies and tourists were greeted like old friends. Artists like me (I'm a CMO the rest of the time) were welcomed to show their work, borrow hanging tools and talk with customers. Despite the winter weather, it was a warm place, indeed.


Hi Sue:

I agree that community, which is a big part of what Starbucks was, is missing in most of their locations today. Much has been sacrificed in the race to get big, but the question is, can they go back without raising prices and closing stores.

The stores aren't designed to enhance community and the staff turnover and training, as well as how many work a given shift all affect this aspect of the experience. To fix this would cost an extraordinary amount of money that shareholders are unlikely to support.

This is why I believe Starbucks is being disrupted, and why without strategic changes in business model and plans, they will eventually fall on their sword.

Thanks for your comment. I'm sure Schultz would be glad to hear that the experience is still alive somewhere, and wonders how to get your enthusiasm back everywhere.

Sean Howard


I'm speechless, Paul.

You went WAY beyond the call of duty in answering my questions and I am moved beyond words.

So, I'll settle for "thank you" and a nod to your expertise and insight in this area. I look forward to reading more!

P.S. I'm back! ;)

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