Cutting Its Costs, Starbucks Brand Begins to Bleed

Re: To Starbucks, a Closing; To Newark, a Trauma, NYTimes, July 23, 2008

Starbucks explains the planned closing of its Broad Street, Newark store very candidly: ““We used several criteria to determine stores for closure, including identifying locations that were not profitable at a store level and not believed to provide acceptable returns in the foreseeable future.” Where's the assessment of the impact of a store closing on the company's reputation, on the Starbucks brand? 

Clearly, financial criteria are important to the consideration. Surprisingly, for a business that is so brand driven and profits so much from its investment in its brand,   there is no indication that a brand strategy is playing any role in planning the Starbucks retrenchment. To be sure, Mr. Schulz, clothed his comeback in the language of “brand values” and “return to the brand’s roots”.  But, where's the meat? In fact, no brand planning has surfaced as of today. Instead, Starbucks is cannibalizing its brand and sacrificing it on the altar of satisfying the financial goals imposed by Wall Street.

Some very smart person once said, “it’s not whether you fail but how you deal with your failure that reveals who you are.” And that’s true of brands as well. These times will reveal much about Starbucks and will set the foundation for its future success or failure.

Starbucks sold itself as a “different” type of coffee company. It was the American adaptation of the European coffee house, the neighborhood coffee house. People friendly, the café’s were stocked with newspapers and periodicals and invited customers to linger while enjoying their quality coffee time. It was also a company that was good to its people: good salaries, advancement possibilities, good ingredients in its foods, good coffee purchased from the right parts of the world. Starbucks was a trend-setter which “proved” during its rise that you can be a good corporate citizen as well as a highly successfully company. These were some of its hard earned brand equities.

People felt good when they sipped their Starbucks; they were part of a good thing. Who can measure how much of the premium they knowingly paid for their Starbucks was for the better roast, or coffee bean and how much for the privilege of participating in this "good", "positive" feeling.

It’s now clear that in its giddy days, the Company embraced some ridiculous expansion policies. It played to its financial analyst audience and has paid the price in hits to its profits caused by foolishly chosen, duplicative locations and other wasteful expenditures.

But while claiming to be focused squarely on the protection of its base, its core, its brand, its current tactics reveal a serious misunderstanding of what the Starbucks brand is all about. Ignore the people on Newark’s Broad Street, if you like; what are the rest of Starbucks followers going to think when their “different” kind of company turns its back on the community development it once prided itself as being part of? What is the next local zoning board going to think when Starbucks needs a variance to successfully replace the old, local coffee shop with a brand new Starbucks café? How much of a premium will coffee drinkers pay for a cup of coffee from a regular corporate coffee shop?

How much is a company’s credibility worth? Well if you leave it exclusively to the numbers crunchers tasked with reducing costs by a target percentage within a specified time frame, “not much”. There may not be a line item in the company’s financial statement for “brand equity” but intelligent, forward looking leaders of brand driven companies surely understand its value.

How about you, Mr. Schulz?

 

 

 

 

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The High Price of Opacity

Re: Why No Outrage? Wall Street Journal, July 19, 2008

Great question, but that’s where it stops. James Grant’s answer: blame the victims, bad answer. 

In this illuminating chronicle of financial misdeeds, Grant presents a long list of reasons why the American public should be outraged at the state of the economy, at the condition of the vast majority of Americans, and at the seemingly near unanimous willingness of those in power to do nothing to correct the situation. He asks, given that this is an election year and these problems are well publicized why don’t we see any signs of public outrage. He answers: Americans don’t care.

This article is only one of a growing number of inquiries into why, at a time when we Americans are awash in information, various groups within our society consistently behave against their self-interests. In your spare time, read What's the Matter with Kansas by Thomas Frank.

“Things have become too complicated.” “It’s harder to connect the dots.” “The US and global economies have become so inter connected that it’s difficult to discern cause and effect relationships.” We are regularly showered with lists of reasons why not to understand a situation.  Add to this our penchant for the sound-bite and 100 word news analysis and it’s clear why many will tell you that any concept which can’t be explained within these parameters is probably not a concept worth understanding.

But there’s more. This is not an entirely benign situation. It didn’t just happen.

We have developed an unsettling pattern in our national culture: We provide government assistance to the poor and middle sectors of society through direct assistance programs and we provide government assistance to the affluent and corporate sectors indirectly through opaque systems of credits, tax incentives and indirect benefits. There may be nothing sinister here, it may just have developed this way for historical reasons, but the costs of this opacity have become enormous.

By way of illustration, we have school lunch programs through which the federal and local governments provide direct assistance to schools to provide healthful lunches to our students. If someone were interested, one could compute the amount of money that the government provides through this program. If one day, it were discovered that some local officials were misappropriating the food intended for the students and instead selling it, in addition to the deserved outrage, we could take remedial action. We understand the flow of the money through the program, how much money is involved, who should handle it etc. We could fix this problem.

Now take the example of how hedge fund managers are compensated. Generally, they receive most of their compensation through a construct called a carried interest. The reason for this is that their tax advisors have advised that a carried interest qualifies them for capital gains treatment for the money they are paid for their work and it is therefore subject to a maximum tax rate of 15%.  One day, someone writes an article in the Wall Street Journal noting that while hedge fund managers typically make in the tens of millions of dollars per year, unlike the rest of the American public, they are taxed at a maximum rate of only 15%.  There is the expected outrage and the public says: “fix this”. But the fix is no longer direct, it’s no longer easy. Why, because the fix involves changing the tax provisions which in this case were used to incentivize people to take investment risks. The argument from their lobbyists: if you tax these poor hedge fund managers on the same basis as we do the rest of us, they will not take the risks (what risks) and they might even move to the Cayman Islands where they have set up their funds.  The argument essentially is: we can’t afford to lose these guys.

Imagine if we had paid some ordinary person $50,000,000 and his contribution was to burden our business with billions of dollars of worthless debt that we now have to reckon with. Would anyone be screaming, “don’t cancel his bonus, he might leave?”

T. Boone Pickens is now publicizing his alternative energy plan to end the US dependency on foreign oil. The plan will entail tens of billions of dollars of government assistance.  Mr. Pickens is lobbying for government assistance. It might very well be a good plan; he might deserve the government assistance.  But if I were going to help, I would want to know how much I’m giving, how it’s being spent and what can I expect in return.

But under our current system, the assistance will come through very indirect and hard to measure programs like energy credits, research and development tax credits, the use of government eminent domain powers and numerous other incentives. In the end noone will know how much public money was spent. Noone will know how much was given to Mr. Pickens.  No one will be able to calculate what we, the public, have gotten in return. 

There is no accountability for public money given to the affluent and to corporate America. Many don’t even acknowledge the subsidies exist; many don’t assume any responsibility for providing the public with a return on its investment.

There is no appreciable public debate on the subject because the welfare and other assistance programs for the affluent have been kept out of the public’s view. The price for keeping them out of public view is that they are not measurable, it is difficult to tell if they are accomplishing the goals for which they were created, and there is no accountability. Our leaders preach the benefits of free market capitalism, of transparency and of accountability. It's time that we insist that these principles be applied to all of the members of our society.  

 

 

 

 

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Brand Repair: Fresh Views Breathe New Life Into Inbred Brands

Re: Nelson Peltz, Activist Marketer, Fortune Magazine, July 10,2008

Brand strategy is shrouded in secrecy by most brand driven companies. And the more successful the brand is, the more likely it is that the group responsible for its creation remains around for a long time, each successful year growing more confident, and frequently less open to opinions from outsiders. We see this phenomenon in our politics and we see it in our businesses. Insularity and smugness kill brands.

When businesses falter, how frequently do they go back to the business's founder or early leaders seeking to be rescued by those who had the "original formula" down right? Sometimes, I think the reason why this strategy works at times is because the founder has been disassociated with the business long enough to have seen it from the outside, not because he possess the deep, hidden secrets on which he built his original success.   Steve Jobs is certainly credited with turning Apple around and Howard Schultz was brought back to Starbucks with great fanfare. The jury is still out to determine what Schultz learned while away from his creation.

So, this little article about activist investor, Nelson Pelz, has an important message. But it's not that Mr. Pelz is or is not a wonderful marketer. The message is how valuable it can be to bring some fresh air into the insular brand strategy and marketing thinking of established brand driven companies . In Pelz's case, he has bought his own ticket to the party by owning more than 5% of the company's with whom he shares his advice. Management could hardly afford to ignore his views. 

But one would hope that enlightened brand managers would seek the views of those who are sometimes outside of their inner circle. Someone has to tell us when the emperor is wearing no clothes!

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Buying For Less May Be Trading Up

Re: The Wall Street Journal, July 11, 2008, “US Consumers Trade Down As Economic Angst Grows”

Focus on consumers buying less expensive things is missing the point. Price alone is not the issue. The questions for the brand marketer are: 1. Is the consumer redefining the “value proposition” he desires, 2. How can we deliver that “value”; and, 3. Is the consumer willing to trade up to acquire that “value”.

In our desire to identify indicators to predict consumer behavior in the economic downturn, we instinctively revert to pulling out the tired lists of full priced retailers, discounters, club (warehouse) discounters and comparing sales figures over like periods. But what these gross figures don’t reveal is why the consumer is making the choices reflected in the comparisons.

From the point of view of the product manager or the marketing strategist, it is very different whether the consumer is merely seeking the refuge of “lowest price” or whether traditional notions of value factor into the buying equation. Is the consumer asking “will this item last longer?,  “will it cost less to maintain” “is the style likely to survive the shifts in fads or trends and be wearable longer?” Clearly if the consumer is taking value propositions, other than pure price, into account, this is information that is highly useful to the brand driven business, particularly in times of economic duress.

When utilizing this information, though, the company should be very careful not to treat this entirely, or even principally, as a marketing challenge. Value starts with the product and the value proposition being offered to the consumer must be product or service driven if it is to be real. Inventing a great story, launching a great marketing message for inferior products, or products that don’t meet the consumers’ expectations, are flawed strategies and will not work.

This a moment for brand driven companies to reassess their product lines, to edit those items that may have crept in during the sloppy, frothy, high rolling times, and to ask themselves, "What do we stand for? and "What do we want to stand for?" To the extent there is a difference, a realignment is in order.

 

 

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American Universities: Let Me Count the Ways in Which You Overcharge Us

 Anytime I write about education policy, I get myself into trouble. But when I finished reading today’s Wall Street Journal article on “custom” textbooks and thought, “this is unbelievable”, I knew it was only a matter of minutes before I reached for my computer to write this post.

It seems that a “custom textbook” is one of the more recently developed techniques through which our institutions of higher learning are short-changing our students. A custom textbook is apparently a widely produced text book, which is "customized" for a university by including freely available information, perhaps a different, customized binding, and often stamped, “This book may not be bought or sold used”. In other respects, many of these text books are identical to the ones that are distributed as non-customized. No matter that the prohibition on resale is acknowledged to be legally unenforceable, our schools think this is sufficient to deter most of the students from re-selling their custom books. So, from the point of view of selling more books, this is mission accomplished.

Adding insult to this injury, the books are priced higher than the non-customized versions (which have the same substantive text) and the educational institutions for which the books have been customized have contracted to share in the proceeds from the sale of these books! That’s right, our colleges have conspired with privately owned, for profit, publishers to charge their students an artificially high price for textbooks, which the schools require their students to buy, and then block the students ability to sell his or her book, once used, or to buy a used copy.

To be sure, many universities who originally found this fund raising gimmick attractive, have rethought their original position, and decided that cheating their students was not the right thing to do. I hope the rest of our educational establishment will quickly follow suit.

 

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Starbucks: Why Was it the Real Estate, Stupid?

“Lax Real Estate Decisions Hurt Starbucks” reports today’s The New York Times. Not hard to figure out four days after the company announced the closing of 600 stores!  But the store closings are the symptom, not the cause, of Starbucks’ problems.

In my previous post, I alluded to some of the company’s research, which supported its aggressive and patently foolish march to place a Starbucks on every available inch of available real estate. It’s worth repeating: 1. long lines at existing stores led to the conclusion that to ease the wait, the company should add another location within a stone’s throw of the successful store; and 2. research that showed that customers would not cross the street to buy Starbucks’ premium coffee, the same coffee for which they would pay $4 per cup and for which they would forgo the fee cup of coffee often awaiting them in their work place or home.

Isn’t it amazing that no-one looked at these conclusions and screamed, “the emperor has no clothes” ?

Well maybe not, if we give some serious thought to what drives endless (and too often, mindless) corporate expansion. It’s probably no coincidence that the pace of store openings increased dramatically in the weeks and months before the close of each fiscal period.

Why might this happen? Is it possible that the corporate expansion strategy is targeted as much to satisfying the expectations of the financial analysts as it is to keeping the company competitive and healthy?  You know, it’s funny, if you place the typical successful CEO in a room with a bunch of average people who offer suggestions as to how to run his/her company, he might politely listen but few would expect him to return to his corporate suite and implement each suggestion. But when Wall street analysts lay out expansion targets, articulate strategies for global expansion, to offerings on the new menu or the music that might be played as a backdrop to the sipping of Starbucks black gold, somehow management took copious notes and couldn’t move fast enough to implement these untested (and unsolicited) suggestions.

I was hoping that a fellow like Schultz, who has much more than a financial stake in seeing his company flourish again might have the backbone to tell the financial community that maybe there are limits to the number of Starbucks stores that the world will support, that Starbucks might attract more business by looking deep into the company’s core to find additional offerings. I was hoping that Schultz would do more than the tired Wall Street two –step of cutting employees and shuttering stores. The company has a stellar reputation for how it treats its people and its customers. Now, it's time to live up to its own values, not those imposed by others.

I am still hopeful, Mr. Schultz. At one time you built a truly world class brand. Let’s see what you can do if you put your mind to it!

 

 

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eBay and Trademarked Goods: A Better Solution

From our archives: Originally published in November of 2007

On November 14, 2007, the Wall Street Journal ran an article describing the beginning of a long-anticipated trial, being litigated in the Southern District Federal court, in which Tiffany & Co. is claiming very substantial damages from eBay. Tiffany alleges that eBay bears responsibility to regulate the sale of counterfeit Tiffany branded products on its site. Other prominent trademark holders have filed similar actions against eBay. It seems that while these two goliaths wage their war, the public interest in maintaining a fair and informed market place on the Internet might be neglected.

A much simpler solution than the broken system now in place between eBay and trademark holders would be to simply require those who wish to sell trademarked goods on eBay to register with eBay, as sellers of trademarked goods, and to provide a verifiable identity and (terrestrial) address. While it's virtually impossible to authenticate goods in a virtual marketplace, it is feasible to identify and regulate those who gain access to that market.

Generally, our legal system works when there is in place a system of meaningful checks and balances. To maintain this equilibrium, the trademark holder is given a legal monopoly over the use of its rights and the person who might be affected by the assertion of those rights has the right to protect himself from abusive enforcement behavior. He has the rights to review any assertion of illegality, is provided with the opportunity to answer claims and is given the right to seek compensation if the rights holder acts abusively. When the legal system grants a legal monopoly, like a trademark, to a party, it does so cautiously, and generally imposes responsibilities on the monopoly holder designed to safeguard the public interest. In the area of trademarks, these responsibilities include a duty to protect one’s trademark, to maintain its distinctiveness and to enforce the trademark against those who infringe it. But there is no right given to the trademark holder to interfere with the lawful sale or resale of products bearing its mark.

In the terrestrial world, trademark holders police the use of their marks. When confronted with suspicious activity, the trademark holder traditionally begins enforcement by sending a notice to the infringer, a demand that the activity be stopped. He may sue for infringement and damages, and in certain circumstance he may resort to extraordinary measures like injunctive relief, to prevent a sale, or to the seizure of the counterfeit or gray market goods. When the law provides for extraordinary measures, it attempts to level the playing field by requiring that a bond be posted. This is designed to protect the targeted party and to induce the trademark holder to act responsibly.  In all instances, the trademark holder acts at his peril; if he mistakenly seizes legitimate goods, or erroneously closes a selling establishment, he bears responsibility for the financial consequences of his actions.

On the Internet, this equilibrium is threatened by the broken system now in place with online auction sites like eBay and the trademark holders. EBay’s existing policy is to remove specific listings when it is notified by a trademark holder that the listing violates trademark law. There is no requirement that the holder establish that his claim is valid or even that it is likely to be upheld by a court.

Tiffany and other trademark holders, engaged in similar lawsuits, are seeking to deputize Ebay to become their trademark rights enforcer. They would like eBay to act even more aggressively to independently remove trademarked items that are offered for sale, whether or not the trademark holder calls these listings to eBay’s attention. In effect, the trademark holders would like to eliminate all of the usual checks and balances, which protect the public, and assume the position of judge and enforcer by deputizing eBay to do their enforcement work.

Where is the public interest in this scheme? Is it reasonable to assume that an individual eBay seller will pursue his remedies against abusive trademark enforcement through the legal system? Given the global nature of the Internet, an eBay seller in New York might be faced with challenging the actions of a trademark holder in Europe or Asia in order to re-list his items or sell similar items on eBay in the future. This is not very likely to occur. And, the trademark holder may unwittingly alienate its loyal customers, some of whom may have purchased the trademarked goods, relying on the owners promises that they are worth more, eventually become collectibles, and ultimately hold or increase their value. EBay  looses potential revenues by reducing the volume of legitimate sales. So, no one really benefits from this regime.

It would be simpler and more in keeping with existing trademark law and practices if eBay would institute a registration procedure through which a seller who desires to offer trademarked goods for sale on the site, would be required to register with eBay. The seller would provide a verifiable address and identification. With this simple procedure, the trademark holder would be left to police potential sales over the Internet in the same manner it now does in the terrestrial world: it would be charged with implementing a monitoring and enforcement program to detect suspicious activity and to enforce its rights against those violating the law.

If the suspicious activity occurred on the Internet, the rights holder could either obtain the identity from eBay or eBay could contact the seller on behalf of the rights holder and make the normal demands. All parties would be left with their traditional legal remedies in tact. And, equally important, the public, in this case the eBay seller, would have the opportunity to meaningfully defend itself against inaccurate claims by the rights holder. Each party, eBay, the trademark holder and the public seller would have protections and remedies that are consistent with the economic consequences of their activity and therefor likely to be pursued.

 

 

 

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Ebay, Poor Advocate For Public Interest, Loses Our Case

Just some initial thoughts; more to come.

Today’s Wall Street Journal story reads: “EBay Fined Over Selling Counterfeits”; and stories in yesterday’s editions of The New York Times and Women’s Wear Daily were headlined,  “EBay Ordered to Pay $61 Million in Sale of Counterfeit Goods” and  “Battle of the Titans: LVMH Awarded $61.3M In EBay Counterfeit Case” respectively. EBay has been prominently associated with “counterfeits”.

Can you think of anything that could be more damaging to the reputation of an Internet marketplace? EBay should have gone to extraordinary lengths to explain to the public that its interest in this dispute is the public’s interest as well.

There should be no question that foisting counterfeit trademarked goods on the public is a bad thing and should be punished. The trademark laws generally impose upon the trademark owner the responsibility to police the market and bring infractions to the attention of the governing authority. These laws generally recognize that governments usually have very limited capacity to recognize a fake, to regulate it and to determine who is selling it. That’s one reason why the owner, who is awarded the premium on the sale of its branded goods, is expected to underwrite the cost of enforcement as a cost of doing business.

But these cases involved far more than the sale of fake goods and it is in these areas, in particular, that the impact of this French decision, if extended to other courts and jurisdictions, would be devastating to the Internet market place.

EBay might have educated the public to know that the so-called “counterfeit goods” that were the subject of this lawsuit include genuine branded goods (like the LVMH fragrances) which are being sold by vendors outside the authorized LVMH distribution system. There is nothing fake or counterfeit about these goods. The consumer is not being defrauded in these sales. The trademark on the goods is a proper indication that the goods originate from a source common with goods purchased in the LVMH distribution.

EBay might have educated the public to know that often times these goods are being sold on eBay by independent sellers, people like you and me, who may be selling a legitimate branded item which we have bought or have been given and which we cannot return, and who believe we can do better selling these items through an auction rather than by giving them away.

EBay might have educated the public to know that many of the sales are sales of used branded items, which are also now prohibited by this ruling.

Most importantly, eBay should have educated the public that the virtual world of the Internet, the world in which eBay operates, is in many respects different from the terrestrial world in which most luxury goods have grown and perfected their marketing. Consequently, before imposing trademark, distribution and competition rules for this new world, we have a responsibility to examine their likely impact.

Trademark laws generally impose upon the owner of the mark, the brand owner, the responsibility to police the proper use of its mark. The legal rational is that the monopoly, which the law grants to the trademark owner is justified by the benefit to which the consumer gains from knowing and relying on the fact that all products bearing the same mark emanate from a common source. Unlike copyright laws, which are about property, intellectual property, trademark laws are about business, consumer protection and orderly marketplaces.

One of eBay’s raison d’etres is that it empowers ordinary people to become buyers and sellers in a reliable market place. Turning this marketplace over to the interests of the large and financially powerful brand owners runs in many ways counter to the justification for establishing market places like eBay in the first place.

While I am often not an ardent fan of eBay, in this instance they walk on the side of the angels. Its interests in these lawsuits are very much aligned with the public interest, with the interests of ordinary, honest buyers and sellers who patronize eBay.  But those people handling eBay’s public relations, those who are entrusted with its brand, permitted the brand owners to publicly marry eBay to the devil. And this association may ultimately prove more damaging to eBay than the setback of the underlying lawsuits.

 

 

 

 

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Disappointing Starbucks Redux: Fix the Brand? No, Just Sell the Real Estate

This morning’s Wall Street Journal article reporting the closure of 500 additional Starbucks stores got me thinking about how naïve I was when I actually believed what I read in the original Starbucks story.

When the news about Starbucks’ financial problems began to surface last year, accompanied by the leaking of the now infamous memo from its founder, Howard Schultz, detailing how the brand had lost its way and needed to return to its core, I actually believed that he had identified some of the causes of the company’s reversal of fortune.  In fact, I copied and distributed to my class on branding, copies of the initial articles and of his memo.

While Mr. Schultz’s admonitions to respect the company’s roots and return to the principles, which supported its success, provided great jumping off points for academic discussion, they apparently did not identify what really ailed the company. While his statements supported his purist and maverick public status, made for good press, and might have even eased his return to the helm of his weakened enterprise, they now appear to have been little more than window dressing for a fairly standard cost cutting Wall Street approach to fixing a business. 

Even at the time, I was puzzled by his assertion that rapid growth was the company’s biggest enemy. Why, I asked, was having a large number of locations an impediment to delivering an authentic European coffee house experience at each location? It may be that growth was unhealthy but it was not the growth, I thought, that caused the company to lose its focus on its special coffee house experience.

But now, as we witness the company’s actions, not their public relations inspired pronouncements, we begin to glimpse what really went wrong with the Starbucks experiment.  Now, it makes more sense that its real estate expansion is a principal culprit.

According to the Wall Street Journal article two real estate principles supported its march to ever increasing numbers of locations: long lines at existing stores and research that showed that customers, presumably thirsting for the taste of Starbucks premium priced coffee and eager to pay twice or three times the cost for one cup, somehow would not cross the street to find their treasure. Crossing the street, the research concluded, was enough of a deterrent to send the customer sipping an inferior alternative. Both these principles supported the strategy that Starbucks needed more stores, sometimes down the block, sometimes across the street from its existing locations.

While the absurdity of these strategic conclusions should raise serious questions about the competence of the experts who came up with this stuff, and those who executed the strategies which were developed to respond to these perceived threats, it seems an unfortunate, but safe bet that Starbucks will not be one of those businesses which re-examines its core brand values and returns to health by understanding the sources of its strength.

 

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