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Saving Starbucks

The next step in the chain’s revival


A couple of months ago, I reviewed the first phase of Starbucks turnaround  plan. Howard Schultz's first act in his second stint as CEO of the retail coffee giant was to shut down operations in all locations for three hours on one day in late February to make sure Starbucks legendary coffee was being brewed and served properly.

I discussed the benefits of this strategy for customers, employees and management. Employees learned to make excellent coffee execution the No. 1 priority. Finally, all layers of management now understand that Starbucks stands or falls on its execution of coffee preparation standards. This philosophy is what I call "making the main thing the main thing."

Once operational excellence had been restored, Schultz was ready to implement phase II of the turnaround strategy; encourage trial (or retrial) by giving customers a compelling reason to shop at Starbucks. To be compelling, the offer had to center on a "core" product and the price had to be seen as extremely attractive. A third factor for success was the advertising strategy. Let's take a look at each of these components in more detail.

Offering a core product

Starbucks, of course, selected coffee as the core product offering. It introduced a new line of coffee called "Pike Place Market" as its featured selection. I personally can't tell what makes this label any different from the previous offerings. Is it a different coffee bean or does it have a different roasting method? Who cares just as long as it tastes good and is compatible with Starbucks traditional flavor profile. The point is that the compelling offer must be on a core product. Many times I see companies reluctant to make compelling offers on core products or services. They will attempt to find products that will give them the best margins. I can agree with that approach in many instances – but not a turnaround. To make the most impact in a turnaround situation,  you must go after the customer with your best "punch." That always means you must advertise the core of your business. If margins suffer temporarily, so be it. You must regain traffic counts and restore customer confidence. I always like to improve traffic first and improve margins secondarily. Once you have positive traffic counts, you can always work on improving operating margins.

Offer a compelling price

The offer I saw over and over again in USA Today was a free cup of Pike Place Market coffee with the presentation of the newspaper coupon on Wednesdays for a period of about two months. You really cannot get much more compelling than free. Because a free cup of coffee won't break the bank, a free offer made sense for Starbucks. Not all retail businesses can do that. But the point is to make the turnaround offer so attractive that customers will have to react to it.

By only offering the free cup of coffee on Wednesdays (probably one of the slowest days of the week), the damage to sales and margins are somewhat mitigated.

Advertise the compelling offer

The advertising medium I saw most often for the Starbucks offer was in newspapers. Since I travel so much, I saw the advertisements for Pike Place Market coffee day after day after day in USA Today. Starbucks must have really stepped up its advertising spend with this campaign.

Here again, the point is to spend enough in advertising to make the customer aware of the offer and compel them to shop with you. Use all of the advertising resources at your disposal to convey the message besides media. Examples include: loyalty cards, bounce-back coupons, in-store promotions, manager specials, banners, reader boards, and email clubs. One interesting feature of the Starbucks Web site is its encouragement of customer ideas. There is a button on the homepage that is almost too hard to pass up. You can present, vote on, and discuss new ideas. If selected for implementation, you can see what Starbucks is doing to roll out those ideas. The Internet is becoming more and more interactive with users (especially younger users). Many companies are now encouraging customers to become interactive with their businesses. It definitely leads customers to feel more "ownership" of the brand, which can only further instill loyalty.

In summary, the first phase of the turnaround was to get operations right. The second phase was to present a compelling offer on a core product to gain trial (or retrial). I agree with both these approaches. Let's keep track of the Starbucks' turnaround plan to see what we can learn next.

Gene Baldwin is a partner in CRG Partners Group, LLC, a national turnaround consultancy that brings new life to distressed companies through operational and financial restructuring.

Gene can be reached at 316-371-2908 or at gene.baldwin@crgpartners.com

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