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Wednesday, August 26, 2009

15th Ave. Coffee and Tea: What's a Brand Worth?

Last month Starbucks opened a new store. For a company that opens almost two stores a day, this usually doesn’t make the news. The location that Starbucks opened last July, however, wasn’t just another store, it was a coffee house called 15th Ave. Coffee and Tea. The new coffee house offers coffee tasting sessions each morning, serves beer and wine, and prides itself on its involvement in the local community. The interior décor features a swarthy mercantile theme and is constructed of almost entirely recycled materials.
What is Starbucks doing? Are they giving up their brand to pursue the indie market? Are they finally capitulating to the Starbucks-haters? What does this mean for the value we place on brands and their power to sell products? Isn’t brand supposed to be a differentiator?
Starbucks boldly states in its annual report, “The Company’s objective is to establish Starbucks as one of the most recognized and respected brands in the world." They’re on their way to accomplishing this goal as the two-tailed mermaid is one of the planet’s most recognizable icons. Why is the company giving up its brand to grow its business? Starbucks has successfully leveraged its branding power into adjacent markets like ice cream, coffee hardware, and music and film publishing. Much of the value in Starbucks emanates from the strong and recognizable brand the company has created. Logical revenue growth opportunities lie in cross selling additional products and services to their massive base of foot traffic and expanding into adjacent spaces where the brand can be made relevant. The 15th Ave. store makes you wonder what management is thinking, because rest assured, they won’t make a dent in the indie coffee market.
Starbucks 15th Ave. store is part of a larger identity crisis and turn-around story that encompasses the dilution of the Starbucks experience, slowing top line growth at what Wall Street wanted to call a “growth company,” and founder Howard Schultz’s retaking of the CEO helm. During the 2000s, Starbucks’ comparable store sales peaked at over 11% in 2004, a stunning growth rate fueled by seemingly insatiable consumer demand, higher drink prices, and successful cross-sell efforts in the food category. These tactics proved to be lucrative but came at a cost: the repulsive smell of melted cheese from grilled paninis permeating the entire store. Comparable store sales growth, a good measure of retail health, has since dropped to a meager 4% in 2007 and to a negative 5% in 2008. In short, Starbucks went from being a high-end specialty coffee shop in the late 1990s to being a direct competitor of McDonald’s.
So why 15th Ave. Coffee and Tea? How does this replenish the Starbucks experience and ultimately grow sales? The re-branded store is a desperate experiment aimed to demonstrate that the company hasn’t lost its innovative core. According to management, the 15th Ave. store is part of a “global redesign strategy” aimed at reviving the coffee heritage, focusing on local communities, and practicing sustainable business. Management explains that “by introducing fresh design ideas that celebrate local materials and incorporate reused and recycled elements, we’re bringing a new layer of creativity and design innovation to our business.”
These qualities, specifically the local and sustainable rhetoric, have been a part of the Starbucks message for years. The design qualities aren’t new either—many of the company’s stores conform nicely to local architecture and micro-cultures. In short, Starbucks is wasting their time creating off-brand coffee shops. The design innovation and management attention that these stores are getting could be put to better use by reinvigorating the flagship Starbucks stores. Masquerading as an independent coffee shop is deceptive and unproductive—instead the company should act on their commitments to sustainability, non-market trade practices, and great employee relations. Following through with these commitments will silence many of the company’s detractors and provide scalable value for the brand that has lasting impact.

11 comments:

aileen said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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sdotparka said...

Coca Cola Classic. Diet Coke. Caffeine Free Diet Coke. Cherry Coke. Diet Cherry Coke. Diet Coke w/ Lime.

Why so much brand expansion? Taking more room up on the shelf leads to a greater chance that a consumer will pick a Coke product.

Starbucks, 15th Ave., Starbucks Deluxe, Organics only. This may be just the beginning.

Nice post. Swarthy.

J. Karpas said...

@sdotparka I think the Coke case makes sense because they are leveraging the existing brand to go after other customer segments.

Building a companion brand or another flavor of Starbucks would make sense but it doesn't look like this is what they're doing. Starbucks Gossip just announced that they're opening another stealth store called Roy St. Coffee (http://starbucksgossip.typepad.com/_/2009/08/starbucks-memo-says-its-next-seattle-stealth-store-will-be-called-roy-street-coffee-tea.html)

Aoibheall said...

What if Starbucks is just reaching out to a new market segment? Old Navy/Gap/Banana Republic have a similar sort of divide-and-conquer approach to the clothing market, and don't forget that when Gap bought Banana Republic, that chain was selling actual safari clothes. This is likely the first foray into a slightly different market, and I don't expect Starbucks to get it right immediately. Economics and retail are nothing if not Darwinian.

Will Hambly said...

@Aoibheall I think you've got a good point--Seattle's Best is a SBUX brand that would fit your theory--they're going after a different market. Car manufacturers use this strategy to appeal to different segments (Toyota / Lexus).

What Starbucks is doing is different--they're creating these stealth locations. CHS Capitol Hill Blog leaked a memo stating that SBUX was creating another location called Roy Street Coffee. http://seattletimes.nwsource.com/html/coffeecity/2009758074_blog_publishes_starbucks_memo.html?syndication=rss

sdotparka said...

@ J. Karpas. I think that Starbucks is moving into typical brand expansion where "share of self" is an offensive strike against the competitor. Here, there are multiple competitors. Starbucks' competition includes rival chains, independent stores, and the store-bought generic coffee. By creating new brand experiences, they are providing new venues for the consumer to not choose the competition. What do u think?

Zweng said...

I think it is a strong move in the right direction ETHICALLY. Initially they will at least gain press (hence your article) and come off as a company striving to push the Green envelope. How is will play out in 2 years? You may be right.

Melody said...

I recall reading your blog earlier but I don't think I left a comment. I blogged about this 'under-cover' Starbucks too on my blog - www.starbucksmelody.com - The bottom line is that I think it's a little experiment to test things that can't be done at the scale of 7000 company-operated stores. We could have great conversation over coffee - Maybe at Roy Street Coffee when it opens in early November? ;-) You can follow Roy Street on twitter @RoyStreetCoffee but there is nothing there yet.

Will Hambly said...

@Melody Your new blog is great and I've always liked your comments on Jim's. Next time I'm up in Seattle I'll drop you a Tweet.

Marshall J Yuan said...

cool blog, will. it's well written and insightful. I'll probably be visiting more often

Will Hambly said...

Marshall, Thanks. I have some web marketing SEO and PPC stuff in the backlog that I need to publish. Cheers!