Starbucks took about a double espresso-fueled heartbeat to go from innovative retail icon to just another chain struggling to keep up with growth expectations. But the reasons for its decline cannot be attributed totally to the soft economy. I see some deeper, more fundamental problems that all retailers should study and learn from as they start out on an expansion plan.
Harvard Business School professor John Quelch wrote a great article on over-expansion issues that Starbucks in a recent issue of Harvard Working Knowledge newsletter. However, I think there are other factors at play here. So without further ado, here is a highly caffeinated look at the recent developments at Starbucks:
Cup One: Grande Finance: This layoff-store-closing and store opening cancellation had nothing to do with the economy. Now I know there have been some industry pundits and Wall Street analysts that have said the opposite. Starbucks has managed to build a very profitable business by getting people like me and you to spend $4 a day, $20 a week and $80 a month on coffee. And that might be a light month for most people. The per store revenue growth for Q2 was around five percent, according to Starbucks financials, not enough to merit closing 600 stores.
Cup Two: Double Espresso What did it have to do with? Overcaffeinated expansion plans. That’s the biggest lesson to learn from Starbucks, no more; no less. You simply cannot overpopulate any market the way Starbucks has. On Market Street in San Francisco there is literally a Starbucks across the street from a Starbucks. Didn’t that tip anybody off? I think you’ll see the drug store retail business suffer from overpopulation in a similar fashion before the end of next year. CVS has 6,300 retail locations. Walgreens has 6,252. On July 7, Moody’s Investors Service floated a plan to cut credit ratings on Walgreen citing “slowing same-store sales growth, modest margin pressures and unfavorable domestic economic conditions.”
Cup Three: Underaccino: Those overcaffeniated plans were fueled by some of the very people who now criticize Starbucks as an underperforming company. Those are Wall Street analysts and I would argue that Howard Schultz needs to spend a bit less time obsessing with them. Schultz is a great retailer in my opinion. He is not an investor relations executive. I think he should have realized earlier on that there is a limit to store growth, both same store growth and in new openings. Retailing, and that’s what we’re talking about here, is not an unlimited growth game.
Cup Four: CEO Roast: Big lesson here. Nothing, not a celebrity CEO, not exclusive CDs, not Venti Half-caf-fraps-with-a double shot and whipped cream on top, will give you the kind of growth that Wall Street wants. It is a zero-sum game. Nothing will keep you from the boom-bust-return to sanity cycle that Starbucks played in.
Cup Five: Serious Mood Swings: Let’s not forget that this is a retailer that provides health care, obsesses about retail training, pays more than a passing nod to customer experience, and continually looks to innovate. Applause.
Cup Six: Post-caffeine anxiety. Outside of the Wall Street play, there’s one thing Starbucks completely missed, and I don’t know how, and that’s an online presence. I thought they could have been a great morning news, opinion and culture portal back in the day, but that day’s over. Starbucks is looking at the limits of its company and it will be a lesson for us all to watch.