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Starbucks' 'venti' problem

Expanding too far too fast can turn companies from offbeat to bland.

March 04, 2007|Daniel Gross | Daniel Gross writes the Moneybox column for Slate.

COFFEE ADDICTS WERE SHAKEN, and stirred, recently when a memo written by Starbucks Corp. founder and Chairman Howard Schultz was posted on the Internet. Noting with a mixture of pride and horror that Starbucks has gone from 1,000 to 13,000 stores in 10 years, Schultz expressed regret over a "series of decisions that, in retrospect, have led to the watering down of the Starbucks experience and what some might call the commoditization of our brand."

"Some people," Schultz wrote, "even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee."

The memo was seen as a rare example of brutal executive candor. Of course, to this Starbuck's habitue (doppio espresso, no sugar) it would have been more timely, say, five years ago, back when there was still a block in midtown Manhattan that didn't have a Starbucks.

But the Schultz memo is interesting and useful nonetheless, because it shows that even an iconic company that serves a highly addictive product can water down the immense value of its brand by expanding too far and too fast and in too many directions at once. Sadly, this is a fate that befalls many American companies. Time and again in recent years, we've seen small, cutting-edge and quirky brands gain critical mass -- only to lose their charm and customer appeal after they engage in breakneck expansion.

Why does this happen? Companies can't help it, in part because the huge macroeconomic forces that dictate corporate behavior impel them to expand too fast and too wide. But at the same time, the powerful psychological forces that dictate consumer behavior can cause customers to recoil from the chains they once loved.

Many of America's best-known chains came of age in a period in which it was easy for companies to go public at a comparatively young age. And publicly held companies, whether they make turbines or tiramisu, are programmed to maximize efficiency and increase sales every quarter -- no matter what. Inevitably, this mentality leads to the cutting of corners.

In his memo, Schultz noted that increasing the scale of Starbucks had led to a number of necessary corner-cuts: For instance, the introduction of "flavor-locked packaging" that has caused stores to lose their distinctive aroma, or the decision to install automatic espresso machines. "We solved a major problem in terms of speed of service and efficiency," Schultz noted, but "overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the [La Marzocco] machines."

Consumers can quickly punish companies that water down their offerings too much for the sake of scale. Consider the sad case of Krispy Kreme. A beloved icon of the South, Krispy Kreme's chief selling point was a limited selection of sickly sweet doughnuts, made fresh on the premises. When the chain began to expand along the East Coast in the 1990s, exiled Southerners and salivating locals queued on the chilly sidewalks, waiting for the red light to signal fresh glazed gut-bombs.

But after Krispy Kreme went public in 2000, the company, eager to supercharge sales, started making doughnuts in central locations and distributing them, hours or even days later, for sale in convenience and grocery stores. Feh! The store-bought sugar rings quickly got stale. And so did Krispy Kreme. Soon after it was flogged on the cover of Fortune as "America's hottest brand" in July 2003, the stock collapsed.

In today's flat, borderless world, managers and investors now expect that a great business idea will -- and can -- instantly turn into a great global presence. These days, a suddenly hot company believes that it should be expanding in Canton, Ohio, at the same time it is expanding in Canton province in China. And that inevitably leads companies to engineer the individuality gene out of the company's DNA.

Schultz noted that the need to build so many outlets at once has resulted in "stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." In other words, in order to turn into a Fortune 500 company, Starbucks had to start thinking and acting like one. And nothing saps the essence out of a creative, quirky brand faster than a bunch of senior vice presidents at a Fortune 500 company.

Snapple, for instance, rode from obscurity to household name in the early 1990s based on its funky flavors and offbeat advertising campaign, which featured Wendy Kaufman, a heavyset employee of the company with a thick Long Island accent. The company's impressive growth attracted the attention of the conglomerate Quaker Oats Co., which paid a whopping $1.7 billion to buy Snapple in 1994.

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