How Chasing A Wrong Growth Metric Almost Screwed Up Starbucks!

The metric was same-store sales growth.

Starbucks used to track quarter-on-quarter same-store sales  comparisons (a.k.a. comps). Stock Analysts expected this metric to be reported publicly. The stock market expected the comps to be positive.

Fortunately, the company had witnessed a consistent and long period of positive comps. Its stock price was high too. This was 2007.

Yet, in January 2008, Starbucks fired its CEO Jim Donald.

Howard Schultz (who had founded the company in 1982 and had left the CEO role in 2000) was back as CEO.

Why? Especially after such impressive results!

The reason: Too fast growth, driven by the wrong metric of same-store sales growth (or comps).

In the words of Starbucks founder Howard Schultz:

“They (same store sales comparisons or comps) were a dangerous enemy in the battle to transform the company. We’d had almost 200 straight months of positive comps, unheard-of momentum in retail. And as we grew at a faster and faster clip during 2006 and 2007, maintaining that positive comp growth history drove poor business decisions that veered us away from our core”.

But how could this seemingly innocuous metric lead to poor decisions? And how come the symptoms were still all positive?

I believe the greatness of Howard Schultz also lies in diagnosing the growth before the symptoms became too manifest!

Before I tell you how he did that, let me tell you what muddies the waters in business life. There is a lag between actions and results in Business.

So, today’s good results may be owing to yesterday’s good decisions. Even if today you are taking a lot of bad decisions, you can still ride on the good deeds of the past. For instance, if the founders have done all the things right in the past in developing the Starbucks brand, even if today someone takes some poor decisions, the momentum of the legacy will be in play for sometime.

This is exactly what Howard Schultz diagnosed.

I admire his synthesis skills. First he was able to create the coffee bar concept in US in 1980s. And then, in 2007, he was able to recognize early on that things were beginning to decline, when most obvious symptoms were actually positive!

But, what did he actually observe and diagnose?

In the words of Howard Schultz:

“In 2006, as I visited hundreds of Starbucks stores in cities around the world, the entrepreneurial merchant in me sensed something intrinsic to Starbucks’ brand was missing. An aura. A spirit. At first I couldn’t put my finger on it. No one thing was sapping the stores of a certain soul. Rather, the unintended consequences resulting from the absence of several things that had distinguished our brand were, I feared, silently deflating it…”

In February 2007, as chairman, he decided to write the a detailed memo to his Board, outlining his growing concerns. See an excerpt below:

“Over the past 10 years, in order to achieve the growth, development and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make 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…” 

What Starbucks experience was he taking about?

Well let us first understand that Starbucks’ key value-proposition is not its coffee as a drink. Its value-proposition is its coffee as an experience.

In his own words:

“If home is the primary or “first” place where a person connects with others, and if work is a person’s “second place,” then a public space such as a coffeehouse—such as Starbucks—is what I have always referred to as the “third place.” A social yet personal environment between one’s house and job, where people can connect with others and reconnect with themselves. From the beginning, Starbucks set out to provide just such an invaluable opportunity”.

Let us now see how the same-store sales comps led to the watering down of the Starbucks experience:

  1. Tall espresso machines: New espresso machines that were installed in stores, while effectively increasing efficiency, were too tall. This unforeseen barrier prevented customers on one side of the coffee bar from watching baristas on the other side create their beverages. The height also kept baristas from engaging with customers. This removed much of the romance and theater that was in play!
  2. Sandwiches: The more popular the sandwiches became, the more the baristas had to heat them in our warming ovens. And when they did, the sandwiches’ cheese would inevitably drip and then sizzle in the ovens, releasing a pungent smell. Whatever rich, hearty coffee aroma remained in the store was overwhelmed by singed mozzarella and cheddar. The smell further chipped away at the Starbucks narrative.
  3. Packed coffee beans: The full-bodied, suggestive, rich aroma of freshly ground coffee had become weak to nonexistent, due in large part to how Starbucks now shipped and stored coffee grounds. This led to the loss of aroma and the loss of people scooping fresh coffee from the bins and grinding it fresh in front of the customer—perhaps the most powerful non-verbal signal Starbucks had in its stores!
  4. Store design: The new and more efficient designs seemed to lack the warm, cozy feeling of a neighborhood gathering place. Some people called those interior spaces cookie-cutter or sterile. The streamlined store design led to efficiencies of scale . . . but one of the results was that stores no longer had the soul of the past.

In Howard’s own words:

“A merchant’s success depends on his or her ability to tell a story. What people see or hear or smell or do when they enter a space guides their feelings, enticing them to celebrate whatever the seller has to offer.”

So, what did Howard do to recreate the Starbucks experience?

Well, I will not go into his turnaround strategy in this post.

But, just 1 strong instance: One Tuesday afternoon in February 2008, Starbucks closed all of its US stores. A note posted on 7,100 locked doors explained the reason:

“We’re taking time to perfect our espresso. Great espresso requires practice. That’s why we’re dedicating ourselves to honing our craft.”

How did the baristas hone their craft?

Well, the quote below from Howard captures the drift of the training the baristas then went through:

“If poured too fast from the spout into a shot glass, like water flowing from a faucet, the espresso’s flavor will be weak and the body will be thin. A shot poured too slow means the grind is too fine, and the flavor will be bitter. The perfect shot looks like honey pouring from a spoon. It is dense and tastes caramely sweet”.

If the espresso was not good enough, Howard told everyone at the end of the video, they had his permission to pour it out and begin again.

This is what excellence is about!

In Howard’s own words:

“A well-built brand is the culmination of intangibles that do not directly flow to the revenue or profitability of a company, but contribute to its texture. Forsaking them can take a subtle, collective toll.”

This is LOVE!

Better not to capture it in Metrics…

Note: To know more do consider reading Howard Schultz’s own book: Onward, on which which this post is based.

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