Starbucks founder’s leaked memo reflects fears about brand dilution

Rivals gain ground as Schultz sees ‘sterile’ stores lacking coffee aroma

Starbucks Corp. chairman and co-founder Howard Schultz’s controversial internal memo, questioning whether the chain has watered down its brand for the sake of growth, reflects the concerns of many foodservice companies intent on expansion.

Though few rivals may achieve the kind of popularity that has made the coffeehouse giant a $6 billion-a-year enterprise, rivals nonetheless wonder how to grow a concept without altering its identity and original characteristics or giving up ground to imitators.

In a Feb. 14 memo to Starbucks senior executives that was leaked to a blog, Schultz wondered if some of the decisions of the past 10 years that helped the chain advance from fewer than 1,000 to more than 13,000 locations worldwide had led to a “commoditization of our brand.”
He lamented more “sterile, cookie-cutter” store environments, their loss of coffee aroma since the adoption of flavor-lock bags, and the diminished service theatrics that came with a switch to robotic espresso machines.

Schultz also acknowledged that the chain is facing stiffer competition from doughnut shops and numerous other fast-food chains that have upgraded their coffee offerings.

Just last month, for example, Consumer Reports magazine reported its test finding that McDonald’s new coffee was tastier and cheaper than Starbucks’ standard brew. Perhaps equally worrisome to Starbucks are reports this month that McDonald’s outlets have begun installing big, black machines to produce espresso-based caffe lattes and flavored cappuccinos.

Also, a forthcoming trend report by an industry consulting firm is to conclude that coffee consumers have toppled Starbucks from its No. 1 spot in favor of Dunkin’ Donuts. “Companies like Dunkin’ Donuts are ratcheting up their branding efforts, and that’s resonating pretty well with folks,” said Robert Passikoff, founder and president of New York-based brand loyalty consulting firm Brand Keys.

In Brand Keys’ soon-to-be-published 2007 Consumer Loyalty Engagement Survey of more than 20,000 consumers, Starbucks won’t retain the No. 1 spot it had held for five years. That distinction instead will go to Dunkin’ Donuts, the Canton, Mass.-based chain that has more than 7,200 stores. The doughnut chain also recently signed a deal with Procter & Gamble to distribute its coffee to supermarkets.

Schultz acknowledged the growing threat of competition.

“While the current state of affairs for the most part is self-induced, that has led to competitors of all kinds, small and large coffee companies, fast-food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.”

The memo was leaked to the website http://www.starbucksgossip.com/, and Starbucks later issued a confirmation. That statement also contained the company’s pledge to maintain “the authenticity of the Starbucks experience.”

Some analysts and industry veterans lauded Schultz for raising the issue of preserving Starbucks’ culture before any image erosion becomes irreversible.

“It’s not that they are losing ground,” said Al Ries, chairman of Atlanta-based Ries & Ries, a marketing strategy firm. “Their per-unit sales probably will continue to increase. That’s why [the memo] was courageous—usually you do not see these kinds of memos until a company is in trouble.”

Staying focused on the core details that distinguish one operation from another is critical for restaurants as they try to build stores and sales, according to veteran operators, analysts and industry observers. Schultz’s memo to Starbucks’ senior leadership served as an example of some of the unintended consequences of expansion.

“One of the things that happen to a lot of restaurants is a loss of focus,” said Chris Arnold, a spokesman for Chipotle Mexican Grill, the Denver-based chain that has grown rapidly to more than 600 locations. “When you lose that focus, that is when you are at the greatest risk of losing that ‘cool’ or mystique.”

As companies grow, they need to have a clearly defined mission and know what it is that makes them unique, says consultant and author John Moore, a former Starbucks marketing executive.
“All businesses that would like to get bigger need to write down four to five things they will never compromise—absolutely never compromise,” Moore said. “As a company gets bigger, if it compromises any of those four or five things, that’s when they start to lose who they are.”

A recent study on how the physical environment of restaurants affects customer satisfaction gives credence to Schultz’s concerns about how the public might begin to respond to a “commoditized” Starbucks that he said had sacrificed a warm, neighborhood feel for streamlined store designs.

“For Starbucks, it’s not just selling the coffee, but selling the experience,” said Eileen Wall, associate professor in the Bill Greehey School of Business at St. Mary’s University of Texas in San Antonio. “If the environment is not what the customer is expecting, they are setting themselves up for a downfall. You have to be sensitive to the right things.”

Wall, along with Leonard Berry, a marketing professor at Mays Business School at Texas A&M University in College Station, Texas, studied consumer responses to restaurants’ physical environment, food quality and service for a recent article in the Cornell Hotel and Restaurant Administration Quarterly.

The professors videotaped both good and bad service scenarios in two different units of an unnamed seafood restaurant chain. One store was newly remodeled and the other was an older-looking branch.

Participants who watched the videos gave higher ratings to the restaurant with the better service, regardless of its physical appearance, but the one with the better design and ambiance and better service was rated highest overall.

“Customers are like detectives, looking for clues on how good the service and food will be,” Wall said. “The first thing they see is how it looks. The environment impacts expectations, once you get in there, that’s where the people clues take over.”

Getting the people and environment clues right is as important as getting the food right, she said. “These are your differentiators,” Wall said. “These are what has traditionally made [Starbucks] special, but everyone has jumped in the ball game and taken away from that. Schultz is saying, ‘We’ve got to use our environment to differentiate us again.’ ”