I’ll be the first to say it, Starbucks is dead. Full disclosure: I’m a Starbucks shareholder — not because I believe in the company, or the way they do business, but because it’s going to be a rock solid investment. Going to be is the operative here.
Here’s why: I’ve spent years researching the life cycle of brands. Brands come, brands conquer, and brands go. It happens to all of them, and the one certainty of branding is simply that all brands eventually die — that doesn’t mean that they all go away the instant they die, many in fact are reincarnated (Salon Selectives) or resuscitated (Dove) or put on life support (Ovaltine). (My buddy Rob Walker recently wrote a stellar piece that appeared in the New York Times about old brands that have come back from the dead, click here to read it.) Some do, fortunately or unfortunately, die (Pan Am).
Retail brands are a slightly different breed. Typically retail “brands” are really just rehashed or extended corporate identities, which really aren’t brands… but for the sake of length, I’ll use the term brand to refer to any trade name or identity countenance.
Everyone from my next door neighbor to the folks at Pentagram [click here to read James Biber’s Starbucks Redux] are talking about the unbelievably rapid demise of the Starbucks brand as we know it. As I was walking down Holland Park Avenue in London a few weeks ago with with my friend, design superstar and, brand afficianado Frank we were discussing how and why Starbucks tumbled so hard and so quickly. Everyone has an opinion as to why Starbucks is stumbling [click here Google “Starbucks Stumbling” and read News articles hearlding the demise of Starbucks], and the reasons vary wildly. For the record, I think that the new management at Starbucks has mad some serious missteps. I also believe that the economy is just rough overall. I believe there has been a change in consumption and buying habits that will likely be permanent (or at least long-term). I would guess that this is likely only the tip of the iceberg… but none of those things are the reason why Starbucks fell from grace so quickly: it’s karma.
Everyone knows that — love them or hate them — Starbucks was aggressive when it came to expansion. So much so that they actually started to canabilize their own chains (in fact, some claim, that’s how they knew that their expansion strategy was working: when sales from a newly opened Starbucks outlet started to dig in to the sales of an existing outlet.) Many mom-and-pop coffee shops really found it difficult to compete [click here for an interesting MSNBC article about how Starbucks actually forced its competition to be better competitors]. These aggressive expansion tactics caused many (or at least anyone with an ethical heart) to consider whether or not Starbucks was “good” or “evil.” The reality, is that deep down, most folks realized that Starbucks WAS evil and like many of its corporate cousins was actually damaging the urban and retail fabric of this country. The paradox, in my opinion, is that the coffee was just so damn good, that most folks were more than willing to overlook the fact that Starbucks essentially robbed South American and African coffee plantations, paying farmers fractions of a penny per kilo for coffee. Likewise, the coffee was so damn good that many folks were willing to overlook the fact that there was a Starbucks on every other street corner, and that many long-established mom and pop coffee shops went out of business as a result. The coffee was so damn good that many folks were willing to look the other way when Starbucks cut health benefits for its employees. The coffee was just so damn good that investors were induced to ignore unbelievably egotistical comments by Starbucks corporate leaders that mocked the competition and belittled the independents. (The list goes on and on and on.) The problem all along: the coffee ain’t really that damn good. It tastes burned (remember the first time you tried it?) And it’s expensive (nearly 6x more expensive than what you can brew at home.) And it’s really not convenient (yeah, you do stand in line 3x a day for more than 10 minutes.) The list… goes on and on.
So what it all boils down to is that the general public has snapped to attention as the economy has faltered, and realized what it’s really known all along: it’s not the coffee, stupid, it’s the brand. We’ve been buying a BRAND.
And thats where the trouble starts.
The Starbucks brand — as we currently know it — the green logo, the burned, but oddly addictive coffee, the earth-tone-y stores, the CDs and mugs, is dead. The folks at Pentagram (which, incidentally is arguably one of the top branding firms in the world) already know it.
This management team has made some serious missteps in managing (or arguably damaging) the Starbucks brand. Every time they tried to “make it better” they diluted the unbelievably strong brand equity a tiny bit. With every tiny erosion, the reality became infinitely more clear and as a result, the writing is certainly on the wall. As the brand juggled, folks realized: the coffee isn’t really all that special or different…the Made in China junk that’s for sale doesn’t set Starbucks apart from its competition…and the service sure isn’t anything to brag about. However, the Starbucks store environment… is, well, iconic. It’s the physical embodiment of the brand, and likely one of the main reasons people react so strongly to the Starbucks brand The Starbucks aesthetic is an emblem of allegiance, of belonging to a group of like-minded individuals. However (and here’s the sick irony), this same interior space that made the Starbucks brand what is was a year ago will soon be an endangered species. There will be 600 ready-to-go counterfeit/look-alike Starbucks shops across the country. See, Starbucks doesn’t own many of their shops, they lease the space, decorate it, brew some joe, and get to business. When they shutter a shop, they simply take the equipment and the beans and lock the door. The counters, the funny lighting, and sometimes even the furniture stays behind. Clearly, as Starbucks is in a bit of a financial pinch, (otherwise, they wouldn’t be shuttering 600 stores) which will likely require that Starbucks close the stores quickly and efficiently (if not hastily). That financial squeeze will almost certainly guarantee that the stores will simply be locked and left. Ready for any mom and pop to inhabit, brew some joe and get to business. It will look just like Starbucks, and act like Starbucks, but it won’t be. The fact that 10% of Starbucks outlets will likely continue to be coffee joints, that look, smell, and act like Starbucks will more than definitely dilute the Starbucks brand further.
Starbucks is confronted with a tough choice: change up the interior, or risk having a copycat on every corner (that ironically is of its own making). So a bad roll of the karma wheel for Starbucks, in that the very mom and pop organizations that they sought to put out of business will likely now inherit a ready-to-go Starbucks franchise without all the corporate strings attached.
Consumers will be confused.
Investors will be mad.
The Starbucks brand will be damaged.
Corporate heads will probably roll.
And then the air will clear (and here’s why it’s a good investment.) Consumers have a short memory, and before long many will be pining for a cup of Starbucks joe. The pendulum will swing, and again we’ll forget that Starbucks is a big, nasty corporation, or that its coffee tastes burned. By then, new management will lead a damaged but reinvigorated company in a new direction. Stores will be renovated, and a new logo will appear. People will claim the coffee is better than ever, and the company will gain steam, faster, and stronger than it had in this last run of 10 years.
Think that’s a pipe dream? Think again. Remember Apple in 1995? No one does. It was nearly bankrupt, and off most consumers radar. The heyday of the Apple IIe and Mac were over, and the machines were clunky, slow, and losing ground to the rapidly expanding Microsoft. Fast forward 10 years, and Mac is stronger than ever (literally), and the consumer perception of the Apple brand, however damaged, sheltered the company as it reinvented itself, and dusted the colored striped from its Rob Janoff-designed masterpiece logo, even as many apple-philes defected to Windows 95 and 98.
Starbucks will make it. It won’t be nice, and it won’t be pretty, but eventually the brand will emerge stronger than ever, and that makes SBUX a prime investment opportunity — but, for the long haul.