A Marketing Spill on Starbucks' Hands

Management writer Thomas Stewart once remarked that Peter Drucker's prose tends to be so pithy, "managers can sip his wisdom with their morning coffee every day."

The question du jour is: How many of them are now doing their coffee drinking at Starbucks (SBUX), and how many will still be sitting—and sipping—there tomorrow?

Among Drucker's maxims, spelled out in his 1954 book The Practice of Management, was that "any business enterprise has two—and only these two—basic functions: marketing and innovation."

This week, I believe, Drucker couldn't help but question whether Starbucks, by goofing up the former, might wind up undermining the latter.

Instant-Brew Innovation?

The Seattle-based company has been in the news a lot lately. Among other things, it announced that it would soon introduce discounted pairings of coffee and breakfast food. It also launched a new line of instant Joe. The company has taken some pains to separate the two developments, but it's hard to imagine that one won't affect the other.

In isolation, peddling packets of VIA Ready Brew would be a chancy—but potentially rewarding—move for Starbucks. Marked by what some taste-testers have described as a rich aroma and flavor, the product clearly aims to meet one of Drucker's primary definitions of innovation: "changing the value and satisfaction obtained from resources by the consumer." "We are going to reinvent…the [instant coffee] category," Howard Schultz, Starbucks' chairman and chief executive, told Wall Street analysts.

Innovation, Drucker taught, typically grows out of one of several distinct opportunities, including "the incongruity between perceived and actual customer values and expectations." If Starbucks succeeds with VIA, it could very well shatter the notion that people who are content to drink instant coffee don't really care about quality.

But the company's effort could be tripped up by its other recent goal: Persuading recession-weary consumers that its offerings are, in fact, light on the wallet. One way Starbucks has tried to convey this is through its new $3.95 value meals. Meanwhile, baristas are reportedly being trained to reassure customers that the average price of a Starbucks drink is less than $3. At my own neighborhood store in Los Angeles this week, a big SALE sign was posted in the front window, trumpeting that if you bought six pounds of coffee, you'd get a seventh for free. I had to look twice to make sure I was stepping into a Starbucks, not a Dunkin' Donuts.

Schultz has underscored the low cost of the instant coffee, as well, noting that it goes for less than a dollar per cup. Though VIA was in the works for many years, Schultz said, its unveiling "happens to fortuitously coincide with the downturn of the economy."

"Confusing the Brand"

But all of this makes for a dissonant message. Rather than spreading a little bit of Starbucks' sparkle into the instant-coffee market, it feels as if the company is simply trying to reposition itself as a place to find a "good deal"—an image that, in many ways, runs directly counter to what made it so special to begin with.

"I think they run the risk of confusing the brand," says Jenny Darroch, a professor of marketing at Claremont Graduate University's Drucker School of Management (and a colleague of mine). "If markets and market boundaries are defined by products that satisfy the same customer need, then Starbucks no longer competes in the coffee connoisseur market. Instead, it competes in the convenience market—a very cluttered and highly competitive space."

The temptation to try to reel in penny-pinching consumers is certainly understandable. Starbucks' sales are off, and it's closing hundreds of stores. In this environment, it only makes sense that people must be looking to save a buck or two at every turn—that cash matters more than cachet. But whenever an executive "tries to impose what he considers rational on an apparent irrationality…he is likely to lose the customer," Drucker cautioned.

This is precisely the danger for Starbucks. While the company may attract some folks with its new approach, it could alienate just as many—or more—who feel as if Starbucks has compromised its character. What Starbucks should do, even in this downbeat economy, is to keep prices where they are and focus instead on retaining its fast-fading luster.

Where's the Affordable Luxury?

Part of what has always defined Starbucks, after all, is that customers could go there and feel like they were indulging—without actually breaking the bank. It gave them a "sense of affordable luxury," as Joseph Michelli put it in his book The Starbucks Experience. Yet by openly reminding them just how affordable it is—and discounting on top of that—Starbucks stands to rob them of this pleasure.

"The aim of marketing is to make selling superfluous," Drucker wrote. "The aim of marketing is to know and understand the customer so well that the product or service fits him and sells itself."

Perhaps most puzzling is that Schultz seemed to grasp this not long ago. In February 2007 he issued a memo to senior managers, warning that the company's rapid growth had led to "what some might call the commoditization of the brand." Noting how so many things had changed over the previous decade—from the manner in which Starbucks roasted its coffee to the way it laid out its stores—Schultz expressed concern that its thousands of locations lacked "the soul of the past" and felt "sterile." He then called on his team to "evoke the heritage, the tradition" of Starbucks. Just a year ago, as he reclaimed the post of CEO, Schultz again talked about reigniting "the romance, warmth, and theater" that Starbucks once provided.

Maybe if Schultz won't heed Peter Drucker's words, he should try listening to someone else: himself.

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