The Coffee Wars

by John Gerzema on May 19, 2009

I saw in this morning’s NY Times an article about a new ad campaign from Starbucks who is fighting to regain the specialness that made it a remarkable entrepreneurial story, a marketing case study and an icon.

As I write about what made Starbucks special, I can’t help but think that those same characteristics could be used to describe McDonalds, Starbucks’ rapidly emerging competitor in the coffee beverage category. McDonalds, like Starbucks now, faced its own brand devaluation that culminated in the early 2000’s, but McDonald’s regained its swagger through disciplined operations, simplified product offerings and protecting its main vulnerability (e.g. Unhealthy).  That swagger lead to the showdown we have today with Starbucks’ as each vies for control of the lucrative breakfast market.

Let me first state, I think that Starbucks’ greatest challenge is to transition consumers to a more sustainable product, which in my mind is the coffee, espresso and latte’s that are at the core of the coffeehouse experience. But food items and real estate detracted from that vision. (Do you want to look at a tuna sandwich at 8am, or hang out a place that has less square feet than a Manhattan apartment?) Starbucks’ greatest asset is its original conception of Starbucks as “The Third Place“. In the past few years you’ve seen a drift from the Third Place as the core marketing tool, to a series of product driven innovations that in the fat years drove profits per store up and satisfied impatient investors, but what was lost was that focus upon the initial innovation which was, how to scale up the feel, sounds and smells of the coffee house. Ironically this was McDonald’s problem in the mid-90’s with a series of swings and misses, namely McDlt, McRib and Arch Deluxe.

Starbucks’ is in a challenging spot, but when the economy brightens, will the McDonald’s shine wear off? If the Starbucks management team aligns their product and messaging around what makes Starbucks truly special (the experience) rather than be drawn into a fight on McDonald’s turf, I think you can expect a return to excellence and in fact we may call Starbucks the turnaround story of the 2010’s. Starbuck’s should look at Coca-Cola, who after been lured into the taste challenge against Pepsi, regained its composure and its values and remembered it was the ‘real thing’.

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Viewing 5 Comments

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    John,
    Nice post, and agree with your points. I believe in the case of Starbucks, they do have some fundamental issues both in their business and brand approach. When economy is good, every brand in DOW and SP500 looks like geniuses. They may have done some great branding with cool products ultimately it must stand the test of time and shift in perceived value.

    Today it's different, times like this it's about survival and reinventing the brand strategy. What worked previously was a push from the brand to consumers, brands were in control. Now it's consumers pulling, in the driver seat demanding value.

    Brands must keep trying in order to find the "new edge" a higher level value. They will learn from their failures, at least that's what McDonald’s and Coke did. Starbucks is going through their regrouping phase now and hopfully from this experience they can reemerge in the future by delivering higher "3rd space" experience with the same core values.
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    Eric excellent points, all. Starbuck's definitely has to up its game on delivering the third place. Your point about shifting perceived value goes to the heart of their current challenge:
    How do they remain irresistible in a time when indulgences are under scrutiny?

    As I wrote in my book The Brand Bubble, a brand is no longer a place, it's a direction. In today's climate, brands have to deliver value and values by continuously innovating around their core beliefs in order to remind people of the value in the experience and why it matters even more today for people seeking to take some comfort in today's environment. John
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    • v
    Good analysis. Let me add two observations.

    I think part of Starbuck's problem was that while they talked about the European café experience and being a third place, in the pursuit of growth they consistently did things to undermine the concept.

    For years they tried to move into the fast food space that McDonald's rules by adding food items. Now McDonald's has moved into their space with their coffee offerings. Starbuck's doesn't just have the problem of waiting for an economic upturn. They also have the problem that McDonald's has good a pretty good product for less money. And you can throw in an Egg McMuffin.
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    Your argument against Starbucks' tuna sandwiches more aptly applies to McDonald's current McCafe strategy in my opinion.

    In the long term, McDonald's is diluting its brand with McCafe, just as they did with all the other Mc-xyz product extensions.

    Given McDonald's huge distribution infrastructure, they could introduce gas pumps and probably do quite well. If you put something people want in their face, they'll buy it. But long term, it hurts their identity.

    There's a reason why In-and-Out burger is so successful -- they have adopted the old McDonald's model and developed a strong core identity around it. It's just burgers and fries.
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    • v
    John -- I read part of your book, which gave me a better understanding of your logic with regard to McDonalds.

    As I understand it , the value of a brand is based on its ability to be dynamic and change. And the constant is the company's core values.

    At the end of the day, what are core values? And how does a company own its values? So many companies have very similar values that it is incredibly hard to differentiate.

    Without values, according to your thesis, there seems to be no real brand as the products are constantly changing with new innovations. I hope you will address some of these more philosophical issues in your next book.

    I like hearing from people who are thinking differently in marketing, so I hope you keep up your blogs and writing.
 

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