Why haven't Starbuck's competitors done more damage?

[LongHaul]

Why haven't Starbuck's competitors done more damage?

 

I am curious why Starbucks has done so well when they are really just a fancy coffee shop.  I would have thought that competitors would have moved in and taken more market share and hurt them.  For comparison, the restaurant industry is extremely difficult.  I don't drink coffee, so am disadvantaged in trying to figure this one out.

[siddharth18]

I don't drink coffee either, so this may be speculation on my part, but I think that it's part of the brand strength. When Buffett talks about Disney, Coke, etc owning consumer's mind, it's more than just price or quality or value. It's the overall experience that's created and nurtured by company over the years that no mom-and-pop company can replicate easily.

 

Similar to how Panera Bread does it. I think Panera is hugely expensive (and nothing that they serve is hard to make) but the ambiance, the lighting, the music, the wallpapers, their video ads, the exotic product names, etc just come together to convince you to pay almost $10 for half a sandwich sandwich and small bag of chips.

[Parsad]

The competitors haven't been able to emulate the product well enough.  Like Coke, Pepsi and generic soft drink makers. 

 

You said you don't drink coffee, so you probably won't be able to taste the difference, but Starbucks coffee and their constant desire to improve the product, is still unmatched by its competitors.  You have the big chains that offer perhaps one type of premium coffee, and then you have the smaller snobby shops that eschew the giant...yet the quality of Starbucks coffee overall is still better than their competitors.  Thus you develop a powerful brand based on the quality of what you are purchasing and how accessible it is.

 

Then you have the store model and systems like McDonalds...albeit significantly higher end.  You go to a Starbucks in Vancouver, Seattle, New York, Dubai or Sydney, and you will get the same quality coffee, specialty drink, etc, at each of those stores.  Why?  Because the training and systems the baristas go through, not unlike the food prep lines at McDonalds.  Their advertising is also very specialized, especially to their customers through their "Rewards" program, and email, online and print advertising. 

 

Finally, while they slowly expand the line of products offered at a Starbucks store, the main focus is always around the core...coffee and food.  And the prices around those items are aimed directly at the more premium market, not down market, so their margins are always steady.  Cheers!   

[gg]

I think most coffee drinkers and Starbucks customers will tell you that Starbucks is NOT their favorite brand of coffee.

 

I think what brings people back is the consistency. Consistency of the quality, service, look and feel, etc. They have done a great job at maintaining their brand's quality and image while growing rapidly  throughout the world. Often times, brands that expand that quickly falter in quality, but Starbucks has  done a good job of maintaining consistency throughout their empire.

 

In addition to that, their rewards programs and use of technology is one of the best I've seen in retail. They have a great, simple phone app and they figured out a good balance of rewarding their most valued customers while still doing a great job of servicing their less frequent customers.

[turar]

Funny story. In Seattle, the self-proclaimed capital of coffee, there are tons of boutique coffee shops and their loyal customers, who look down on corporate Starbucks, and think their coffee is shit. One large Seattle-based corp was routinely stocking Starbucks in their break rooms and there were constant complaints that they should dump them and choose one of the better local coffee providers. So they obliged and did a blind test/study to try to figure which of the local coffee places to go with. But they also included Starbucks in that test. Guess who won the blind test.  ;D

[Valuebo]

Correct Sanjeev. But systems or not,  a few days ago they still managed to accidentally give me a free extra latte coffee and they didn't charge for a brownie. :D

 

Did anyone read that book on starbucks, Onward? Bought it for £3.59 recently but haven't read it yet.

[mvalue]

+1 on consistency and comparing to McDonald's. You walk into a random coffee shop anywhere and it's hit or miss on the product, experience, and speed. You know exactly what Starbucks will be and it's solid enough on all those to trump taking a risk on the unknown.

[StubbleJumper]

IMO, consumers are irrational.  Everybody knows that a cup of coffee is not worth $5 and that the difference between SBUX and any number of competitors is marginal.  But I chalk it up to a simple application of Veblen's theory of pecuniary expression and theory of pecuniary emulation.  It's hard to act rich on major purchases, but it's easy to do so with minor purchases.

 

Am I cynical, or do I just have no taste in coffee?

 

 

SJ

[Guest wellmont]

no matter where they are in the world, people know exactly what they are going to get when they go into a Starbucks!

[tengen]

Starbucks has an incredible brand and is very well run.

[Valuebo]

+1 on consistency and comparing to McDonald's. You walk into a random coffee shop anywhere and it's hit or miss on the product, experience, and speed. You know exactly what Starbucks will be and it's solid enough on all those to trump taking a risk on the unknown.

 

As Ray Kroc used to say: "quality, service, cleanliness and value!"

[VAL9000]

You can do a lot when you charge $2 for a cup of coffee.

 

Add that coffee is addictive

Add that Starbucks are everywhere

Add that all Starbucks offer the same thing

Looks like a pretty good moat if you ask me

 

Let's flip the question - how could you beat Starbucks?  I'd start with figuring out how to make the coffee taste even better and hit 'em where it hurts.

 

Non-coffee drinkers are missing out IMO.

 

[CorpRaider]

I like DNKN better.  Its interesting:  Sbux wasn't doing so hot without Schultz; DNKN wasn't doing so hot before PE shop came in and served its highly useful societal purpose.  Crazy how much Texas Pacific Group must have made on the DNKN deal.  They deserve every penny in this case.

[ItsAValueTrap]

Did anyone read that book on starbucks, Onward? Bought it for £3.59 recently but haven't read it yet.

 

I'd read both of them.  It's interesting to see how things he says in the earlier book turn out to be untrue in the second book.

 

Why haven't Starbuck's competitors done more damage?

I think that the restaurant business is largely management-driven.  Starbucks tended to have better CEOs than its competitors.

 

I don't think that branding is that important in the restaurant business. 

 

With soft drinks, a brand can make one product taste better even though it tastes worse in blind tests.  Pepsi tastes better than Coke.  New Coke tastes better than Coke.  I'm pretty sure these megacorporations have done blind taste tests.  Yet people think that Coke tastes better because of the brand.  I don't think that restaurants exhibit the same effect.  Certainly the presentation of the food and the decor makes a difference... but I don't think that brand matters.  Maybe reputation matters, but big chains rarely keep a high reputation (unlike an independent restaurant with a Michelin star or something like that).

[Guest valueInv]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

[turar]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

They won't be the first to try.

http://en.wikipedia.org/wiki/Tully%27s_Coffee

 

[racemize]

Well, I'm not a coffee drinker, but my wife is, and I asked her the same question.  Here's her response, which is somewhat represented by the thread already:

 

Well, there was one comment that said the SBUX is not people's favorite coffee, which is true, BUT, the consistency argument is key:

 

#1 They are everywhere.

#2 I will get pretty much exactly what I want

#3 I don't have to read a menu

#4 I KNOW that they will make me my grande-three-shot-non-fat-two-pump-pumpkin-spice-latte-no-whip-extra-hot without looking at me twice

#5 they are freaking fast

 

The problem with more boutique coffee shops is that they SAVOUR the coffee --- the baristas aren't pumping it out generally for the working stiffs just trying to get their caffeine fix, they're pouring for the coffee lover, which I get, but it can be really annoying when you have a meeting in 10 mins.

 

but yeah --- i guess it all boils down to convenience, comfort, and consistency.  Their roasted coffee really is pretty good.  It's their lattes that can't really measure up all the time, but at least they are consistent.

 

 

So there you have it, I know she has spent a long time thinking about this, as she gave me that answer in less than a minute.

[mikazo]

I agree with Starbucks not being my favourite normal roast coffee. For that, I go to whatever particular local coffee shop that makes coffee best. When I go to Starbucks, it's for the specialty coffees and lattes because they're better than anywhere else. Plus if you even hint that it tastes funny or something, they just take the blame right away and insist on making you a new one, free of charge. 

[Guest longinvestor]

Starbucks has an incredible brand and is very well run.

 

Soon the WiFi at Starbucks is going to see a Level(3) boost. Enjoy!

What this means to Level(3)'s revenue, who knows but we shareholders of (3) like to feel good about something.

 

Had to get it out.  :'(

[racemize]

Starbucks has an incredible brand and is very well run.

 

Soon the WiFi at Starbucks is going to see a Level(3) boost. Enjoy!

What this means to Level(3)'s revenue, who knows but we shareholders of (3) like to feel good about something.

 

Had to get it out.  :'(

 

Needs more ALL CAPS!

[Parsad]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers!   

[tengen]

[lot's of good stuff deleted ...]

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

I think that's the investment thesis for SCUP.

[jeffmori7]

Coffee is also habit forming.

 

There is a new breed of coffee shops coming out of the Bay Area that are kicking Starbucks butt here.

 

They've just raised money and are beginning to expand nationally.

 

I wouldn't be surprised to see Starbucks challenged in a few years.

 

Will not happen.  Even if Schulz passes away or something, it will take a decade to even make a dent, and over two decades to supplant them.  I would like to see the margins at those stores, and exactly how much cash they are generating. 

 

As well, Starbucks controls the amount of premium coffee being developed in the world through their huge orders to producers, and the moat is not about to be hurt by small retail shops that are sprouting up.  It's like saying that Walmart's buying power is going to be displaced by retailers in certain markets that are doing reasonably well.  Won't happen.

 

The only chains that could hurt Starbucks, are the ones that already have a huge footprint and excellent brand recognition...McDonalds, Subway, etc.  But two things will stop them:

 

- They cannot get enough premium coffee from farmers already producing for Starbucks, so they may be able to provide one or two blends of premium coffee, but nowhere near the variety of beans that Starbucks can, nor the same variety of mixed handmade drinks unless they change their operations.

- If they try to offer that same variety, they may end up being distracted and hurt existing moats in the food/sandwich category.

 

We have some very good chains and independent coffee stores, on par or better than any in Seattle and San Francisco.  They do ok competing head on, but none will displace Starbucks...ever...at least in my lifetime!  Coffee culture is huge here...in fact, the first Starbucks stores outside of Seattle opened in Vancouver some 25+ years ago.  I'm a hard-core coffee aficionado for over 15 years and watched the market grow here and in the Pacific Northwest, as I spend a lot of time in Seattle.  I drink daily, both the premium stuff and non-premium stuff, but I'll tell you...I go to Starbucks every time I want consistent, premium coffee or mixed drinks.  Too much inconsistency in the smaller artisian shops, and not enough variety in the other chains.     

 

Lastly, eventually when any competitors start doing well or start getting into trouble in any particular region, Starbucks will just buy them out like they have in the past.  Cheers! 

 

Cheers! 

 

And what about a Tim Hortons in Canada, who reach for different customers? They seem to resist well to Starbucks?

[LC]

The only way to kill Starbucks is to make the mass consumer think coffee cafe's aren't cool.

[HJ]

Interest discussion. 

 

I happen to have glimpsed at the first third or so of his book "Onward".  In addition to coffee, he talks about creating an environment just for people to hang out, the "Starbucks Experience".  So for example, he took out the breakfast sandwich when he came back as the CEO, and that's just when McDonald was starting to serve coffee, at the time perceived as a big threat.  The reason is he thought the smell of burnt cheese detracted from the smell of coffee, integral to the coffee experience.  Does the smell of cheese really cheapen the experience?  I don't know.  But one thing is for sure.  When my friend and I meet up at some random place, it's invariably a Starbucks, not McDonald or Dunking Doughnut.  Those guys can have their customers, and Starbucks will have theirs.  Stuff like free wifi, when he first started it, all are integral to the experience.

 

Incidentally, I also happen to catch Danny Meyers, the restauranteur on Bloomberg TV once, talking about the tremendous success of "Shake Shack", the New York burger hang out when he first created it at Madison Square Park.  It was literally just a shack in the park.  In the summer, people line up for hours.  He mentioned that return on investment wise, it's the single best investment across anything he's done, and that's from a guy who created some of the most premium fine dining experience in the world.  And the secret?  He thinks people are there just to hang out and watch other people while enjoying a burger under the sun.

 

When you think about it, coffee shop is the one place people (who drink coffee) go to pretty much every day, order more or less the same thing.  How much of that is habit and how much is conscious choice?

 

I wouldn't call  "Onward" the greatest business book you'll read, and a lot of it is wishy washy stuff, but for guys who build brands for a living, there are lots of interesting nuggets.