Wake up and smell the coffee

Starbucks Coffee is in trouble, according to its chairman and founder, Howard Schultz.

After firing his CEO, Schultz is back at the helm, following a decline in same-store revenue growth coupled with a 40 percent-plus drop in Starbucks' share price.

Starbucks' situation is likely to worsen. With McDonald's, a favorite of the take-out breakfast crowd, about to launch high-end coffee beverages, Schultz should be worried, but not surprised. The same forces that enabled Starbucks' rapid growth are also shaping its decline.

Starbucks started out as a local Seattle coffee shop at a time when independent coffee shops were repositioning coffee as an affordable luxury, combining superior taste with an upscale drinking experience.

Built enduring brand

Unlike many competitors, however, Starbucks rushed to spread out geographically, creating 10,000 U.S. and 5,000 international storefronts and turning premium coffee into an everyday beverage. In the process, Starbucks built an enduring brand.

Free markets provide the capital and employees that enable businesses with winning formulas, like Starbucks, to grow explosively.

The same free market forces place all competitors in a railroad car, on a downhill track headed toward commodity competition's treacherous cliff where price and convenience drive customer choice. Brand loyalty slows - but can't stop - free market forces.

It would have been challenging therefore for Starbucks to avoid the commoditization that is hurting same-store revenue growth. As the premium coffee market became saturated, competition was inevitable.

Product differentiation

For Starbucks to remain one-of-one, it would have had to continue to differentiate its products and experience by evolving its store concept, thereby retaining brand loyalty. Its failure to do so is informative.

In its drive to dominate the coffee market, Starbucks focused on operational management to maintain consistency and quality across all stores and manage costs. As a result, coffee cakes and cookies look and taste manufactured and preserved, not freshly (i.e., locally) baked.

To increase worker productivity, espressos were automatically brewed using beans that spent a lot more time in a warehouse than beans at a locally owned coffee shop, freshly ground seconds before joining foamed milk. Starbucks' merchandise has the look and feel of the uniform merchandise found in every airport.

In addition, very rapid growth (1,700 new stores in 2007 alone) led to quality slips that created long lines.

In other words, in managing rapid growth, Starbucks lost superiority of experience at the same time as premium coffee became available in a lot more places.

Starbucks' only differentiation was its plethora of locations, an advantage McDonald's 14,000 U.S. stores (all with take-out windows) will eliminate.

In the world of national food chain competition, price and efficiency will become even more important, pushing Starbucks' brand even deeper into commodity competition.

New products needed

Starbucks could inject more uniqueness into its formula if leadership gave frontline workers a lot more power and freedom to individualize their stores to local markets. Or Schultz could redefine Starbucks to serve yet another new role in our lives.

New products - McDonald's recent success formula - would be needed. To accomplish any of these changes, Starbucks' leadership would need to think and act far more strategically and creatively.

Can Howard Schultz - a legendary leader who managed skyrocketing growth through repetitiveness and mastery of operational management - make this shift?

What would you do if your company needed a different type of leadership than you've provided?

Kay Plantes is a Madison economist, strategy consultant and executive educator.