In 2008, Starbucks founder Howard Schultz realised he had made a painful mistake and needed to close 600 stores, with possibly more shutting down over the next year.
His error was common enough among businesses. After achieving a clear mandate for growth, the company expanded too quickly and along the way lost some of the secret sauce that made it so popular. Customers were getting frustrated with how the company had become so “mass market” and were leaving in large numbers.
Schultz summed up the problem in an announcement to shareholders. He worried that the “stores no longer have the soul of the past and reflect a chain of stores versus the warm feeling of a neighbourhood store.”
Starbucks is one of the great business success stories. Growing from 11 Seattle stores in 1987 to a worldwide phenomenon with more than 20,000 locations in 62 countries, Starbucks has defined an entire industry. The formula was clearly working and it was unclear why Schultz felt it should change.
He eventually regretted the new add-ons such as wifi hotspots and a more “modern” décor. What seemed like a good idea at the time – trying to brew a fresh batch of clientele with mass-market offerings – ended up diluting a major factor that made the Starbucks brand special.
That brand is based on a strange idea that makes a lot of sense upon closer inspection.
Throughout history, villages and towns had specific gathering spaces that historians call “third locations.” These included the town square, pubs, bars or even coffee houses. They offered townsfolk an option during the day at which they could congregate that was neither their home nor workplace.
Schultz proudly described Starbucks’ strategy in precisely these terms when he called the outlets “a place for conversation and a sense of community. A third place between work and home.”
He both took advantage of and offered salvation for the way modern cities and suburbs had atomised the American culture. People still desired to exist in places where they could discuss the day’s events with friends. Starbucks made great coffee, but its success was because it rewarded a very real desire for community.
Yet despite being explicit in this goal, the company slowly lost sight of its original mission as it let the siren song of money guide its decision-making. Starbucks was meant to offer a welcoming atmosphere and excellent barista service and Schultz knew he had to get back to that, somehow.
However, Starbucks had been a listed company since 1992 and as such it now had the pressure of increasing shareholder value, not simply running a coffee chain.
To survive, the company had to find a balance. It could no longer limit itself by catering only to those who wanted a “third location” since there were far too few such people. Yet the grab-and-go culture of American fast food was also a crucial market segment and potentially highly lucrative for Starbucks. Moving closer to either group’s preferences would inevitably alienate the other.
Schultz had no other option. Starbucks had to find a Goldilocks Zone between being a niche “third location” and a fast-food store.
Fast-forward 15 years and Starbucks seems to have found the right balance. The company not only has a market capitalisation of $US123.5 billion and generated $US32.3 billion in the fiscal year 2022, but it also expects to continue growing at about 9% for at least the next three years.
On top of its financial success, Starbucks in 2023 was recognised by Brand Finance as the world’s most valuable restaurant brand at $US53.4 billion. Starbucks has held this position for the past seven years. By comparison, the second-strongest restaurant brand, McDonald’s, was valued at $US36.9 billion.
The term “brand” generally refers to all the ways people can identify a company or product, including the use of identifying markers and trademarks. Deployed correctly, brand can be among a company’s most important intangible assets.
A robust brand valuation enables a company to understand how the brand impacts the whole enterprise, helps determine financial results and can be crucial for identifying optimal investment strategies. And once a brand’s value is clearly defined, partnerships will be easier to sign and acquisition opportunities will become more visible.
Schultz’s strategy with Starbucks focused on a handful of key components of the brand, including:
- An unwavering focus on the customers’ need for convenience and easy accessibility. The result of this strategy is that the nearest Starbucks outlet is never too far away in a major city – and sometimes a second store is directly across the street;
- It encourages each franchisee to use the same homely ambience and careful attention to detail, yet it also allows for a sprinkle of uniqueness at each location. This goes a long way to achieving Schultz’s harmony of merging the niche with the mass market;
- On top of that, Starbucks personalises the customer experience by training its staff to remember people’s names and coffee preferences. While this may add more steps to the average order preparation process, it increases repeat business;
- Finally, Starbucks has built an instantly recognisable logo and colour scheme, along with a commitment to social responsibility, making it easier for the company to attract new customers who are both coffee aficionados and socially conscious.
Remembering what the brand was all about was the most important part of Schultz’s turnaround plan. He worked hard over the next decade to return Starbucks to its former glory.
It’s a good question to ask if the pressure of being a listed company made it more difficult for Starbucks to maintain its brand.
Would a different strategy that prioritised steady growth and closer alignment with the brand have been more effective under private ownership? Perhaps. Private ownership is partially why Prada and other luxury brands have remained so valuable over the decades.
But for every five privately-owned companies with a strong brand, there are 50 listed companies with equally strong public perception. So, it’s hard to be sure if public ownership was a major factor in the dilution of Starbucks’ brand in the early 2000s.
The biggest factor was that Starbucks let growth override what made the company special in the first place. That’s a good lesson for other companies. Scale is great, but it shouldn’t come at the cost of watering down your unique flavour.
Do you know what makes your company’s brand unique and powerful?
A version of this story was published on IAM
Free 1hr Consultation
Intangible assets are a company’s greatest source of hidden value and hidden risk. Make the valuable visible in your organisation.
Sign-up for a free 1-hour consultation today.