It’s
midsummer at Starbucks Corporate Headquarters in Seattle, Wash., and
despite the swaths of natural light flooding the inside and the warm
August weather, a chilled Seattle vibe permeates the entire place. Café
colors cover the walls – eggplant, terracotta, burnt orange, butter
yellow, sage. The floors are laid with light, clean pine planking; the
hallways are wide, with high ceilings. In the various lounges and atria
scattered abundantly about the building, comfy chairs group together
for hanging out or for extraordinarily relaxed business meetings. It is
the perfect irony: an uncanny backdrop of calm for an utterly
caffeinated staff.
I have come to Seattle for the “Starbucks
Scholars” Consumer Packaged Goods Immersion, a two-day press conference
designed to cover just about everything that the company is doing at
the moment, both in the U.S. and worldwide. It’s the kind of event at
which, by the end of two days, the corporate Kool-Aid – or, in this
case, espresso – goes down pretty easily. In their sheer scale, their
market power, and the scope of their influence, the company has
sometimes invited comparisons to Microsoft, but at the moment, it seems
cuddlier than that here. How rough can things get, you wonder, at a
company that makes drinking chocolate?
A few months later, of course, I – and the rest of the world – will indeed
find out just how rough. The stock price will plummet, and Starbucks
will be roundly lambasted for sacrificing its core focus – fresh-brewed
coffee – in favor of store expansion. The CEO, Jim Donald, will be
shown the door by the company’s founder and Chairman, Howard Schultz,
who will return to run the show. But that’s a leap, both temporally and
in terms of subject matter, from why I have come out here.
The
reason I’m here is that Starbucks, in addition to achieving
near-ubiquity as an on-premise supplier of coffee, also single-handedly
owns the Ready-to-Drink coffee category, having achieved the same
first-mover advantage as Red Bull and Gatorade. Nowhere has the
company’s brand strength proven itself more clearly – and been
demonstrated more ably – than in ready-to-drink (RTD). It is, in fact,
the most basic definition of RTD innovation: the company created the
U.S. RTD coffee market ten years ago, from the ground up.
Today,
Starbucks’ RTDs remain the standard against which everyone else tries
to compete. Of the company’s three primary RTD offerings (bottled
Frappuccino, DoubleShot, and Iced Coffee), both Frappuccino and
DoubleShot are still No. 1 in their segments of the U.S. RTD coffee
category. The clearest example of Starbucks’ RTD predominance is the
fact that most bottled coffee products on the market today – including
competitors like Bolthouse, or Coke’s Godiva – are Frappuccino homages,
right down to their packaging. Frappuccino, of course, is what Gerry
Lopez, president of Starbucks Global Consumer Products, rightly refers
to as “the original core” of the company’s RTD business: cold,
sweetened coffee and milk, offered in a small variety of perfect
flavors, and so habit-forming that you have to wonder if it isn’t laced
with crack. It wasn’t until last year, with the launch of Java Monster,
that any other RTD coffee could even be considered a legitimate second
place brand.
Last year Starbucks’ RTD beverage products
generated $1 billion in sales in the U.S., and $12 billion enterprise
in Japan. Strictly speaking, the whole endeavor goes back slightly
earlier than a decade, to the test launch of a short-lived initial
product, Mazagran, in Philadelphia in 1994. “Thirteen years ago,
everything we did in this category was innovation – totally
transforming the way consumers think about coffee,” says Tracey
Doucette, general manager of the North American Coffee Partnership,
Starbucks’ RTD joint coffee venture with PepsiCo in the U.S. and Canada.
In
fact, during a climactic earnings announcement Schultz makes a few
months after my visit, and in a letter to every employee of the chain
about the changes that will be coming for the company, he doesn’t
mention RTD at all. When it comes to cold coffee, it seems Starbucks
has it down cold.
By January, Starbucks’ success in RTD is
set against a backdrop of crisis and change. So it’s unsurprising that
it also turns out to be one of the building blocks of the company’s
turnaround. When he first returned to the CEO seat, Schultz made it
clear that he planned to introduce more category-building innovations,
which, in the RTD space, may signal a departure from the company’s more
recent fixation with simple line extensions.
Relatively
speaking, Starbucks has been exceedingly conservative about introducing
new RTD products, having come out with only the three brand-new U.S.
offerings in the last decade. As Lopez puts it, until now the goal has
been to create “a few, powerful, distinct products.”
But that line-extension philosophy that has drawn criticism from analysts. “Innovation
has been a major disappointment over most of the last two years,” wrote
David Palmer of UBS in early 2008. “We were heartened to hear that
Starbucks plans on getting back to ‘big ideas’ much like it did during
its run from 2002 to 2005.” Analyst Nicole Miller Regan of Piper
Jaffray also has criticisms about scale. “RTD is a huge opportunity,
and they’re using just a few flavor profiles,” she says. “They have so
many things they can already expand on; they really need to get back in
touch with that.”
Yet as with everything about Starbucks,
the status of their innovation has to be viewed in context of their
unprecedented success: their bad days are still better than most
companies’ good ones. In RTD, for example, while criticisms of line
extension may be valid, that pesky $1 billion market figure keeps
cropping up, and may offer a positive indication for new products in
new categories. If, that is, they line up with the company’s longtime
innovation process.
So what is that process? How have three base products and a handful of extensions created a niche that solid?
There are five guidelines that help Starbucks innovate RTD offerings with this kind of power:
1. It’s all about the coffee – and the Starbucks experience.
Like
every other product-based decision at Starbucks, innovation originates
with and is founded on coffee excellence, the company’s original
advantage. “The first thing that guides all of our innovation is that
we need to champion the bean,” says Amy Wirtanen, Director of
Innovation for the North American Coffee Partnership. “The coffee is
the core of our business; it is the reason why we exist. And whatever
we do – from a flavor standpoint or from an offering standpoint – it
has to be the highest quality coffee that we can offer.”
In
that way, too, the company satisfies customer desires. RTD expansion,
Lopez says, “builds brand equity – it lets us continue to surprise and
delight our customers.”
Says Wirtanen, “We start with
learning from the store; the Starbucks retail experience is what we’re
trying to champion and then translate into the RTD coffee category.
What we try and do is take the best-of-the-best offerings and then
bring those to our consumers in the RTD environment.” Does Starbucks
fear the energy-drink boom? “Definitely not,” she says. “We look at all
different categories in the marketplace to gather learning, but we
don’t emulate any one category. Coffee at its purest has a lot of
equity that we can really deliver to our consumers to enhance their
day.”
2. Use packaging to evoke and support need states.
Packaging
is key throughout the RTD coffee line. “We look at all kinds of
packaging offerings or options when we are introducing a new
innovation, and mainly
we’re trying to fit the package with the
consumer experience that we’re trying to deliver,” says Wirtanen. “If
they’re going to be out and about in a very convenient, active
environment, then a can makes perfect sense because it’s lightweight
and it’s so convenient to carry.
The glass bottle for Frappuccino
has a great premium equity around it, and it’s the perfect fit with
that Frappuccino experience.”
She’s right: Frappuccino is a
beautiful little milk bottle, immediately reminiscent of what used to
appear in the silver box on the porch each day at dawn. The product
name floats across the front of the bottle in a whimsical retro font;
stars twinkle on the label, dot the “i.” It’s all about delight, an
impression that is immediately confirmed by the first sip: the stuff is
just jaw-droppingly delicious. The product is targeted to 18-44 and
skews slightly to women, depending on serving size, but at heart it’s
just an equal-opportunity indulgence. “Frappuccino is a great way to
take a break in your afternoon and kind of rejuvenate yourself,” says
Wirtanen. In that way, the product echoes the much-lauded “third place
between work-and-home” role of the Starbucks store.
Where
Frappuccino is the treat, Starbucks DoubleShot is the jolt: a tiny,
slim can of espresso and cream that’s bold, powerful, and a tad bitter
in taste. The can is correspondingly decorated in hard-edged brown
graphics and clean sans-serif fonts, with a military-looking epaulet of
a rectangle boasting two stars. “DoubleShot is definitely the one that
goes against more of an urban, active lifestyle consumer,” says
Wirtanen. “Our target is a little bit younger – 18 to 34 – and we talk
about these consumers in terms of these intensity-seekers, people who
are living life to the fullest. This is a great companion for doing
that.”
And rounding out the trio of treat and jolt is the
third need state that Starbucks markets to: a companion, something to
help customers maintain a rhythm, and that’s their Iced Coffee, offered
in a tall, slinky silver can wrapped with dawn-shaded bands of orange
or blue. “Iced Coffee is a slightly older target, 30-49,” says
Wirtanen. “This is more of a light, refreshing way to experience
coffee. It’s kind of the one that consumers go to when they’re looking
for a companion throughout their day.”
3. Make line extensions count: be more responsive to the core customer.
When
you have a small stable of blockbuster revenue-producers, it makes
sense to keep riffing on them in the most targeted ways possible.
Bottled Frappuccino now exists in flavors including coffee, mocha,
caramel, and vanilla, plus a decaf variant, and there’s even an option
for customers who want the core experience without the coffee: the
Strawberries & Crème Frappuccino. “That’s a great example of how we
borrow from the learnings of the store,” says Wirtanen. “Strawberries
& Crème in Starbucks retail stores is a very popular flavor.”
And
there’s still more surprise and delight, this time in flavor
innovation. In September the company introduced two new dark-chocolate
Frappuccino flavors: Dark Chocolate Peppermint Mocha (for the holidays,
natch!) and a permanent Dark Chocolate Mocha offering that will launch
in March 2008. No one can claim that Starbucks RTD is about nutrition –
“These are not health-and-wellness products,” Doucette quips – but dark
chocolate, which periodically gets media buzz for its healthful
properties, is an example of how public nutrition-consciousness can
filter into the company’s R&D here and there. “We definitely learn
from trends that are happening in the marketplace, and the antioxidant
value of dark chocolate helped to get it on our radar screen,” says
Wirtanen. “But it’s also just a fabulous flavor.”
Another
flavor variation on an existing product is a possible change in the
roast used for Starbucks canned Iced Coffee, currently made with
Italian Roast. Starbucks Breakfast Blend could be an option, as could
Gazebo – both ultra-refreshing tastes that Gerry Lopez says could, for
example, provide a more “summer-driven” offering. Again, it’s about the
coffee.
A different kind of revision is in diet only
products. DoubleShot, Iced Coffee, and one bottled Frappuccino have
come out in Light versions and some analysts say that, with only 1/3
fewer calories, the Frappuccino
extensions may not be light – or
responsive – enough. “We wonder if Starbucks should reintroduce the
Light version and this time ‘go all the way’ with calories,” wrote
analyst Palmer about light Frappuccinos. “If Starbucks
is going to remind consumers of the calories in the beverage, the chain should try to remove more than a
third of them.”
4. Try new delivery venues.
For
Gerry Lopez, president of Starbucks Global Consumer Products Group, the
job for the past three years has been to take the company’s act on the
road. “Our mission is building brand equity by allowing our customers
to enjoy the Starbucks brand outside our stores,” he says. “If we can
in any shape or form remind our customers about Starbucks when they are
someplace else, we think that’s a win.” That’s already succeeded, with
Starbucks’ RTD reach firmly established in supermarkets, warehouse
stores, and convenience stores. “We have RTD coffee products in
something north of 50,000 convenience stores,” says Lopez. “So these
stores already have a much bigger footprint than our stores.” In the
U.S. alone, the company added over half a billion servings of bottled
Frappuccino outside its stores in 2007.
RTD is also part of
the Center Store Café supermarket launch, a non-branded coffee-aisle
redesign that has been installed in 850 supermarkets nationwide. The
installation has already driven a total coffee-aisle dollar increases
of 9 percent and a premium coffee segment increases of 26 percent in
the Midwest. “We want to inform the coffee aisle, to make it be more of
a destination,” says Wendy Piñero-DePencier, vice president of Global
Consumer Products. “The explosion in RTD coffees as well as packaged
coffees has been immense, and sometimes when you’re down that aisle and
your behavior is to explore, it can be a bit overwhelming. The Center
Store Café makes it be a more inviting environment and a more organized
environment, so the experience can be more enjoyable.” On Center Store
Café shelves, Starbucks RTD varieties are available in four-packs, and
many displays also incorporate a RTD cooler for chilled single servings.
But
the newest Starbucks RTD innovation isn’t about chilled: it’s about
hot. Hot Vending, the company’s premier new RTD initiative, will offer
9 oz. servings of six warmed Starbucks varieties – one brewed variant,
four espressos, and a hot chocolate, priced at either $2.00 or $2.50 –
at vending machine sites to be located in all the usual places:
colleges and universities, office buildings, airports, train stations.
The
company is thrilled about the project, which went into commercial tests
in 2007 and will launch into a broader market in the first half of
2008. “This is the finest quality coffee, heated on demand at
convenience locations. It’s a transformational innovation,” says
Doucette. The system uses fully recyclable pull-tab steel cans that
keep the product warm without burning the consumer’s hands. Warming
time is 47 seconds, and all six varieties have the same shelf life as
bottled Frappuccino.
Both Doucette and Wirtanen stress that
in and of themselves, the machines and cans, which are proprietary,
represent a giant step. “This is never-been-done-before kind of
technology; we’ve had to redefine the way that you do hot coffee
vending,” says Wirtanen. “We would not be doing this if we didn’t feel
like we could do it in the highest quality way, that would match the
Starbucks equity.” It must have been an irresistible impulse for
Starbucks to want to address the grim flavor experience that is the
average American hot-coffee vending machine. “There are over a quarter
of a million hot-coffee dispensers out there. These people are
suffering!” says Lopez. “We want to transform them, and give people an
opportunity to enjoy Starbucks-quality coffee.”
5. Try new countries.
Howard
Schultz’s return as CEO brings a new push toward increased
international growth. Analysts agree it’s the right direction for the
company to take overall, and RTD is no exception. For all its success,
Starbucks’ U.S. RTD market has been dwarfed by the company’s success in
Asia. There, RTD coffee was already a frenetic category – 1 billion
U.S. vs. 12 billion in Japan – and with convenience stores in Japan
sometimes taking RTD coffee deliveries twice a day. Starbucks’ primary
RTD product in Asia, a fresh-dairy chilled-cup beverage called
Discoveries that is offered in four flavors, launched in Japan in
September 2005. On its first day, the product sold out entirely in
Tokyo by 3:00 PM.
The company has since expanded into Taiwan
and Korea, and Korea now features both Frappuccino and DoubleShot, in
slightly different formulas than the U.S. originals, in addition to
Discoveries. In November 2007, Starbucks also reached out to China,
launching bottled Frappuccino in Shanghai, Beijing, and Hong Kong.
Though the company has no plans to try to market a product like
Discoveries in the U.S., Wirtanen says that their success in Asia will
inevitably have an effect on U.S. innovation. “We will gather
inspiration from wherever we can find it,” she says. “And we definitely
look to the international markets to see what’s happening there, to see
if it’s something that we can translate for the U.S. consumer.”
For
the moment, Hot Vending will doubtless occupy much of the company’s
RTD-innovation-related time, energy, and enthusiasm. And if other Asian
countries are any predictor, the RTD expansion into China will be huge.
After that, we’ll have to wait and see what emerges in RTD as a result
of Schultz’s promises of new category-building initiatives. In the
meantime, back in Seattle everything buzzes along – the coffee
cuppings, liqueur and ice cream and premium chocolate ventures, the
newest roasts and exotic blends, the general caffeination. Amid all the
current unrest, there’s still a particular flavor of success here:
unprecedented, unreplicated, and continuing. The big, calm building
hums with it.