Starbucks' 'venti' problem

COFFEE ADDICTS WERE SHAKEN, and stirred, recently when a memo written by Starbucks Corp. founder and Chairman Howard Schultz was posted on the Internet. Noting with a mixture of pride and horror that Starbucks has gone from 1,000 to 13,000 stores in 10 years, Schultz expressed regret over a "series of decisions that, in retrospect, have led to the watering down of the Starbucks experience and what some might call the commoditization of our brand."

"Some people," Schultz wrote, "even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee."

The memo was seen as a rare example of brutal executive candor. Of course, to this Starbuck's habitué (doppio espresso, no sugar) it would have been more timely, say, five years ago, back when there was still a block in midtown Manhattan that didn't have a Starbucks.

But the Schultz memo is interesting and useful nonetheless, because it shows that even an iconic company that serves a highly addictive product can water down the immense value of its brand by expanding too far and too fast and in too many directions at once. Sadly, this is a fate that befalls many American companies. Time and again in recent years, we've seen small, cutting-edge and quirky brands gain critical mass — only to lose their charm and customer appeal after they engage in breakneck expansion.

Why does this happen? Companies can't help it, in part because the huge macroeconomic forces that dictate corporate behavior impel them to expand too fast and too wide. But at the same time, the powerful psychological forces that dictate consumer behavior can cause customers to recoil from the chains they once loved.

Many of America's best-known chains came of age in a period in which it was easy for companies to go public at a comparatively young age. And publicly held companies, whether they make turbines or tiramisu, are programmed to maximize efficiency and increase sales every quarter — no matter what. Inevitably, this mentality leads to the cutting of corners.

In his memo, Schultz noted that increasing the scale of Starbucks had led to a number of necessary corner-cuts: For instance, the introduction of "flavor-locked packaging" that has caused stores to lose their distinctive aroma, or the decision to install automatic espresso machines. "We solved a major problem in terms of speed of service and efficiency," Schultz noted, but "overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the [La Marzocco] machines."

Consumers can quickly punish companies that water down their offerings too much for the sake of scale. Consider the sad case of Krispy Kreme. A beloved icon of the South, Krispy Kreme's chief selling point was a limited selection of sickly sweet doughnuts, made fresh on the premises. When the chain began to expand along the East Coast in the 1990s, exiled Southerners and salivating locals queued on the chilly sidewalks, waiting for the red light to signal fresh glazed gut-bombs.

But after Krispy Kreme went public in 2000, the company, eager to supercharge sales, started making doughnuts in central locations and distributing them, hours or even days later, for sale in convenience and grocery stores. Feh! The store-bought sugar rings quickly got stale. And so did Krispy Kreme. Soon after it was flogged on the cover of Fortune as "America's hottest brand" in July 2003, the stock collapsed.

In today's flat, borderless world, managers and investors now expect that a great business idea will — and can — instantly turn into a great global presence. These days, a suddenly hot company believes that it should be expanding in Canton, Ohio, at the same time it is expanding in Canton province in China. And that inevitably leads companies to engineer the individuality gene out of the company's DNA.

Schultz noted that the need to build so many outlets at once has resulted in "stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store." In other words, in order to turn into a Fortune 500 company, Starbucks had to start thinking and acting like one. And nothing saps the essence out of a creative, quirky brand faster than a bunch of senior vice presidents at a Fortune 500 company.

Snapple, for instance, rode from obscurity to household name in the early 1990s based on its funky flavors and offbeat advertising campaign, which featured Wendy Kaufman, a heavyset employee of the company with a thick Long Island accent. The company's impressive growth attracted the attention of the conglomerate Quaker Oats Co., which paid a whopping $1.7 billion to buy Snapple in 1994.

Of course, the Quaker Oats crowd decided the suddenly big brand needed advertising that was more professional and high-concept. In 1996, when the company unceremoniously canned the Snapple Lady, the backlash in the marketplace was almost instantaneous. Sales plummeted, and in May 1997, Quaker Oats sold Snapple at a fire sale price of $300 million. One of the first acts of the acquirer, Triarc Companies, was to bring back Kaufman as a spokesperson.

The Snapple case illustrates how important consumer psychology is to the well-being of brands. Part of the original lure of Starbucks was that its arrival bestowed a certain cultural significance on one's town or neighborhood. No longer. When a chain becomes of every place, it's no longer of any place.

The first California Pizza Kitchen, which opened in Beverly Hills in 1985, with its thenexotic wood-burning ovens and Thai pizza, became part of the local, only-in-L.A. experience. But now that noshers can order mango tandoori chicken pizza at 180 outlets across the country, Angelenos no longer take pride in the chain. There's very little California in the California Pizza Kitchen any more.

One of the greatest traps into which rapidly growing chains fall is expanding beyond their natural habitat into inhospitable climes. The first Restoration Hardware was founded in 1980, in Eureka, Calif., and became a haven for yuppies interested in retro home furnishings. It grew slowly, mostly in California, and by 1998, the year it went public, it had 47 stores.

But then, pow! Within three years, the number of stores more than doubled as the company expanded into places such as Oklahoma, Mississippi and Missouri. This was like planting palm trees in Montana. It didn't take. Selling expensive retro light fixtures was a brilliant business model when it was confined to a few markets, but a failure when extended beyond the coasts. In recent years, Restoration Hardware has retrenched and closed stores.

Of course, not all offbeat brands succumb to the temptations of rapid growth and public capital. Several California-based firms have managed to expand at a reasonable pace without compromising their integrity or charm.

Trader Joe's, the quirky grocer whose first outlet opened in Pasadena in 1967, was acquired in 1979 by the family that owns the German grocer Aldi. Expanding methodically and slowly — there are now more than 250 outlets all over the country — Trader Joe's has maintained its combination of low prices, off-beat offerings and funky marketing materials.

In-N-Out Burger, which is privately held, has maintained a cult following, in large part because it has insisted on not turning burgers into an industrial process, all while expanding gingerly in California, Arizona and Nevada. As a result, it remains a destination, a privilege, a brand that is owned by the minority of Americans who have regular access to it.

The overriding imperative of American business is to give customers what they want, whenever and wherever they want it. That's precisely what Starbucks has done in recent years. And that's precisely what is causing the barista-in-chief so much angst.