Introduction
As many have undoubtedly heard by now Starbucks has decided to enter the instant coffee market segment. Most recently there has also been news of Starbucks offering combination breakfasts for $3.95 as indicated in a New York Times article, “Starbucks Addresses The Price Issue, And Breakfast”. According to the article this represents “Starbucks’ latest effort to recast itself as an affordable brand.” What does this mean for fans of Starbucks and is this a good idea?

Market Motivation
So what is the motivation behind Starbucks’ latest entries? The chief executive, Howard Schultz, cites adding value and a desire to appeal to new customers as indicated by the following statements in the Times article:

“If we are a premium brand, it doesn’t mean we can’t provide value. We believe when we come out of this, we will be stronger because we maintained our core customers and, through providing value, will bring on new customers.”

As with most companies in the struggling economy, Starbucks is attempting to stop a revenue loss. On July 1, 2008, Starbucks announced that it would close 600 stores, my assumption is that these new offerings are meant to stop the revenue bleeding and maintain the strength of the business. At least for the instant coffee offering – dubbed VIA , the company maintained that this offering has been in the works for years and cites a breakthrough in instant coffee. My guess is that the timing is hardly coincidental.

What Is Value?
The most interesting aspect about the statement from Howard Schultz is that of the aspect of value – “If we are a premium brand, it doesn’t mean we can’t provide value.” But what exactly is value? Value is different things to different people. Let’s start with the Wikipedia definition of value as provided in a marketing context:

“Value of a product within the context of marketing means the relationship between the consumer’s expectations of product quality to the actual amount paid for it.”

So value does in fact have a different meaning to different people. Ask a room full of diverse individuals how much they are willing to pay for a cup of coffee and you will likely receive a roomful of answers. Ask the same individuals what quality means to them and you will likely receive an even wider array of answers – if they can even pinpoint the quality. Since value is different from person to person, I will start by offering my own interpretation of value in relation to Starbucks. Being a fan of Starbucks and frequent customer I will list the attributes that I deem as adding value from most to least:

1. Environment
2. Selection
3. Product

Although Starbucks is obviously known for their coffee, it ranks last on my list for adding value. For me the draw to Starbucks has been the environment. In general, each Starbucks location is quaint, relatively quiet, offers a nice environment to work when away from the office or on travel, offers Internet access and for the most part, friendly service – although this admittedly has varied some by location.

Lynda Resnick in her book Rubies In The Orchard emphasizes the importance of the experience to the Starbucks brand:

“Starbucks’ early success came from its understanding that it was delivering more than a cup of expensive coffee. It created a carefully calibrated social environment with meticulously selected music and a warm, friendly, and distinctively intelligent atmosphere. The coffee is premium, the experience is premium-plus.”

Number two on my list is selection. When traveling or in need of a quick breakfast I would often visit a Starbucks as they had a reasonable selection of drinks, snacks, and limited meal offerings – I find this specifically convenient in airports. Some of these offerings are even relatively healthy when compared to, especially lower priced competitors. Knowing that I could pick up something really quickly on the go and not feel unhealthy after eating or drinking the purchased item was relatively comforting and therefore added value.

Lastly I have listed the quality of the product as offering value. My ranking of this item should not indicate to readers that I do not believe that Starbucks does not offer high quality, or even that it is not important – quite the contrary. What I am implying is that quality is high, and it is a base requirement in this instance. High quality is required just to compete. As a result it is least important when compared to the other items. That being said, if the coffee quality was poor, the preceding two items would be irrelevant, at least to some extent.

Delving further into product value – I enjoy Starbuck’s coffee as well as their other product offerings. However, in and of itself I do not believe it is worth $4, especially when compared to other coffee’s that may cost $1. It is better though – or at least my mind perceives it to be, just not quite $3 worth of better – however I would not even begin to know how to quantify this. What the difference between low cost ($1) and high cost ($4) is accounting for is the product selection, and most importantly the experience. My fear is that by charging $1 for a cup of coffee you will cheapen the overall experience, thereby hurting the brand.

Value Convergence
So what exactly is Starbucks attempting to do here? Are they further concentrating on the premium market niche or the discount market? Strangely enough they seem to be doing a little of both – they are attempting to slide into this new segment, while maintaining their foothold in the premium market – a tricky balancing act. This awkward convergence of premium and discount will be interesting to witness – I will certainly be watching to see how things play out.

Going back to the Lynda Resnick’s statement about Starbucks cited above, she goes on to say the following:

“Recently Starbucks has lost its focus and become more like a large packaged goods company; growing too fast, slipping on its core values, driving the business for quarterly earnings instead of long-term sustainability.”

Keep in mind that these references from “Rubies In The Orchard” were just published in 2009, so are very relevant and timely, at least at the time of this article. Other passages of this book outline this trend of trading the experience for quarterly Wall Street earnings. My gut reaction on the recent announcements of VIA and the value breakfast combinations made me think this was the case. Only the senior leadership of Starbucks know the true motivation behind the decision to enter the new market which should become apparent over time, but my immediate guess is that it is to satisfy investors.

So what does this convergence of values between premium and discount hold in store? It is difficult to say, but I have found in my experience it is impossible to be all things to all people. Conventional wisdom is that a business should pick a market segment and pursue it while ignoring others. However, being that we are in a time of discontinuous change, the current economy hardly calls for conventional measures – so Starbucks could be on to something, again – only time will tell.

My largest concern is what is going to happen after the dust settles from the economic downturn. The decisions to offer instant coffee and discount breakfast combinations will undoubtedly increase revenue in the short term, but the real question lies in the long term. Will this stop the bleeding (reduce store closures) and lead to long term revenue growth or will it merely be a flash in the pan resulting in a spike in revenue followed by a sharp decline shortly thereafter? As I discussed in my “Web Traffic Summary, February 2009” article, abnormalities are a bad thing – particularly for revenue reporting, and especially if you are a public company beholden to Wall Street.

A Possible Scenario
Is long term brand equity being traded form short term profitability? Consider the following scenario: fast forward a few years from now. The recession has passed, Starbucks continues to lessen the exclusivity of its brand and make it more inclusive. All of a sudden everyone loves this place. But wait – the economy has rebounded, wealth is being generated on a mass scale. Now those who initially sought out Starbucks for the environment and the $4 coffee are now wondering where to go as their brand has been hijacked (not by consumers – which is often a good thing, but by senior leadership – which is a bad thing). This opens the door for a new competitor to step in and offer premium coffee at $8/cup. Sure they sell less coffee, but they offer an exclusive environment and charge a premium for this. And by the way, the new competitor can review lessons learned from Starbucks as documented in previously released news articles and books which documents the rise and decline of the brand.

Starbucks attempts to recover, mainly by releasing press releases stating that they are now returning to their heritage as a premium brand and eliminating the discount offerings. They even raise prices to make it look authentic, but unfortunately the damage has been done, their brand has been soiled by the stigma of the discount offerings, and the consumers who have acquired new wealth no longer wish to be associated with the brand. The new entrants to the marketplace, who specifically target that segment will not have the history, or accompanying baggage to contend with, they are after all, new to the game – however history will be a resource for them to draw upon. Who will these new entrants be? Perhaps a brand equivalent to Starbucks, but my guess would be a new line of boutique coffee shops who purposefully limit their growth to purposefully limit supply and therefore driving demand.

I could be exaggerating, however I do not think so – only time will tell. My personal concern is the number one item on my list – the environment. Will the convergence of values result in a new environment which lessens the experience? I find Starbucks to be a great place to grab a cup of coffee with friends and chat, I also find it a great place to break away from the office and do some work on my laptop while watching the world go by. Regardless of the location, I am guaranteed a clean, quiet environment which is conducive to relaxation and working – at least for now. I also associate with the brand – a $4 cup of coffee, as I would a more expensive Apple computer. By displaying the brand it is displaying my willingness to pay a higher price for quality, and not sacrifice quality for price. I would rather go without than pay less for an inferior product. My hope is that the experience will not be sacrificed. What I currently envision is that by converging value a strange mixing of environments will result which will be difficult to recover from.

What Is Value?
Will the new direction of Starbucks result in the death of the brand? Probably not. However it could drastically change it’s brand image, which in turn will likely change its customer demographic. Lynda Resnick discusses a few differences in her book, noting changes in quality that occurred over time. As a relative newcomer to the brand – perhaps the past five years or so, I had not witnessed the transition over time. The first Starbucks location was opened in 1971 – and likely much has occurred since then. Change is inevitable, however change should be carefully thought out and administered, it will be interesting to see what changes are in store for Starbucks and it’s customer base.

In closing, I must state that this is not intended to be an opportunity to bash Starbucks. As stated in a previous article, Starbucks is one of my favorite brands and ranks in my top three. In general people are most critical of the things and people they care most about – and brands are no different. I am fiercely loyal to my selected brands, but I am also fiercely critical. My hope is that my fears are unwarranted and that Starbucks will emerge from the recession as a stronger brand – only time will tell.

Manage your brand in terms of value to a specific market niche!

-John R. Sedivy of Cape Cod Branding

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