CRM at Starbucks: Retaining the Right Customers

David Sims : First Coffee
David Sims
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CRM at Starbucks: Retaining the Right Customers

The Wall Street Journal has printed the full text of a rather impressive memo Starbucks Chairman Howard Schultz e-mailed to company executives on Valentine's Day. In it Schultz laments the fact that Starbucks' rapid expansion -- " from less [sic] than 1,000 stores to 13,000 stores and beyond" in the past ten years, as he writes -- has necessarily included a dilution in the quality of "the Starbucks experience."

Amen. You simply can't have 13,000 stores, be shooting for 40,000 around the world, and expect everything to be the same as it was in your first store in Seattle. It will lead, as Schultz says, to "the watering down" and "commoditization" of the brand. My friend, if you're opening in airports and Barnes & Noble stores as fast as possible, you're not controlling quality too closely, you're keeping the profits rolling in.

The questions and concerns Schultz raises in the memo amount to "How can we expand to 40,000 stores and still be 'Starbucks?'" His yardstick is the customer and how Starbucks relates to that customer -- and is that customer getting the experience Schultz yearns for him to have in Starbucks somewhere else these days?

Schultz points out that competitors are piecing off Starbucks customers -- " small and large coffee companies, fast food operators, and mom and pops." The strong implication in the memo is that if Starbucks simply gets back to the Starbucks way of doing things, such competitors will, in his term, be "eradicated."

But as the Journal notes, it might be too late: "… in recent years, as [McDonald's and Dunkin' Donuts] have added Starbucks-like touches, Starbucks has become more like a fast-food chain, adding drive-through windows, hot food and promotions for movies on its lattes." Once you're banking money it's hard to discontinue profitable ideas.

Some of Schultz's points are almost prosaically specific: "When we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency," he writes. The sort of speed and efficiency you need to metastasize to thousands upon thousands of outlets, yes. 

"At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista."

Taking the customer's response as judgment, the loss of such "intimate experiences" are, evidently, considered acceptable tradeoffs. This nags at Schultz.

The memo details more substantial concerns. When Starbucks decided to use "flavor locked" packaged coffee instead of fresh-grinding all drinks it was "necessary for rapid expansion," but as Schultz adds correctly, "I believe we overlooked the cause and the affect [sic] of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer."

Again, what do the customers say? The Starbucks along Istiklal Caddesi here in Istanbul birthed another one, then a third one, and there are stores along Bagdat Caddesi, in Besiktas and Nisantasi. The customers don’t seem to mind.

In point of fact, Starbucks doesn't seem to be losing overall customers. Schultz knows this. What they very well might be losing, however, is a certain kind of customer near and dear to Schultz's heart -- the one who is drawn by the aroma of fresh-ground coffee, one who considers watching a barista prepare a coffee drink an "intimate experience," and who appreciated hand-pulled espresso shots. That guy doesn't feel much at home in a Starbucks anymore.

For the most part, Schultz's fears have been realized. Starbucks is, for most, simply another franchise outlet in the airport, the mall, along the street -- "where d'ya wanna go, Starbucks or McDonald's?" "Ah, you pick." Yet it remains profitable, so there's little momentum to do much but tinker with such a successful business model.

Execs other than Schultz pay lip service to the loss of Starbucks' innocence. "If we just become about products, and not about the people side, I think the experience changes, and changes for the worse," Jim Alling, president of Starbucks' U.S. business, told the Journal in early February. "We never want to lose sight of where we came from."

Sure you're not going to lose sight of it, it'll always be that sepia-toned photograph in the frame on the wall above the manager's office door. And notice, without reading too much into a snippet of a quote, that Alling didn't necessarily say the worse experience would be less profitable for the company. Manifestly it is not.

As the Journal reports, "Starbucks' steady sales and earnings growth have made the company's shares soar since it went public in 1992. Starbucks said net income for the quarter ended Dec. 31 came to $205 million, or 26 cents a share, up 18 percent from $174.2 million, or 22 cents a share, a year earlier. Sales rose 22 percent to $2.36 billion from $1.93 billion." Shares have fallen off a bit in the past year.

But Schultz, as the guy who spent time in Italy loving the espresso bars, who to his eternal credit had the vision that you could do that in America, he doesn't want to see the coffee connoisseur walk past the door of a Starbucks for another café where they still pull espresso shots by hand, still offer fresh-ground coffee on premises. No doubt any other Starbucks executive or shareholder would prefer to see six teenage girls come in to get their frappuccinos if it means the connoisseur goes somewhere else to nurse an espresso or two while reading Stendhal for the rest of the afternoon.

The problem: Can you hold on to your premium customers in a store with prepackaged espresso shots, drive-in windows and breakfast sandwiches? Can the earnest associate professor of Early Renaissance Literature enjoying the aroma of an austere double espresso coexist with the cell phone chatterers slurping caramel macchiatos? I think so:

The trick is to (re-)establish a premium Starbucks. Face it, folks, Starbuckers do know how to make coffee, and they've pretty much single-handedly raised Americans' taste discrimination in coffee to the point where even McDonald's has been shamed into serving quality java, and Dunkin' Donuts coffee, once considered the finest coffee to be had in any fast-food outlet, is improving.

So why not open a second counter in Starbucks stores? Walk in, there's the huge menu with the coffee equivalents of those fruity bar drinks with all the umbrellas and straws -- your frappuccinos, Mocha Strawberry-Hazelnut Caramel Latte-Chinos or whatever, milk and syrup drinks you could leave the actual coffee out of and nobody'd notice. Fine. Go ahead and keep your shareholders happy there.

But walk past that line, in the back of the store there's the La Marzocca espresso machine and a barista who knows what she's doing. She pulls your espresso shots by hand, she grinds the beans fresh for every cup, all she does is coffees and espressos -- but they're done right. It's not the bulk service of up front, it's coffee the intimate experience with the barista, hand-pulled espresso, fresh-ground beans Starbucks way.

Make 'em into second stores, mini-rooms off the main rooms of Starbucks, or smaller counters in a corner of the room, whatever. The point is that's where you keep your true coffee lover, the one Howard Schultz is desperate to retain. Economies of scale would also apply so Starbucks would still be competitive with the specialty shop down the street on both price and quality.

I offer this suggestion as one who shares Schultz's love of the Italian coffee experience, of fresh-ground coffee aroma, hand-pulled espresso, although I'm not so jazzed about "intimate experiences" with baristas. And I also share his concern that those are no longer an expected part of the Starbucks experience.

"Let's get back to the core," Schultz pleads in his memo. "Push for innovation and do the things necessary to once again differentiate Starbucks from all others."

This idea succeeds on both counts, while maintaining the sales volume Schultz needs to achieve his other vision, that of 40,000 stores around the world, without becoming just another logo on the fast-food landscape.

Hey if you can do it some other way, please, be my guest. But Howard, for the sake of us old-timers, the guys you'd like to think still prefer Starbucks for the coffee quality, do something.

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