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.