Howard Schultz (starbucks) on how their success is failure

David Bollier posts on OntheCommons.org about a recent memo leaked from Starbuck's founder Howard Schultz. that is posted in the full entry, where the memo appears here first.

Starbucks chairman Howard Schultz wrote this to CEO Jim Donald earlier this month. The memo's authenticity has been confirmed by Starbucks.

From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald
Cc: Anne Saunders; Dave Pace; Dorothy Kim; Gerry Lopez; Jim Alling; Ken Lombard; Martin Coles; Michael Casey; Michelle Gass; Paula Boggs; Sandra Taylor

Subject: The Commoditization of the Starbucks Experience

As you prepare for the FY 08 strategic planning process, I want to share some of my thoughts with you.

Over the past ten 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 lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma -- perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don't have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it's time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

I have said for 20 years that our success is not an entitlement and now it's proving to be a reality. Let's be smarter about how we are spending our time, money and resources. Let's get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and the 150,000 partners and their families who are relying on our stewardship.

Finally, I would like to acknowledge all that you do for Starbucks. Without your passion and commitment, we would not be where we are today.

Onward…

OnTheCommons.org - original posting

Posted by David Bollier on Mon, 02/26/2007 - 1:28pm

Howard Schultz, the Chairman of Starbucks, is wrestling with a conundrum caused his company’s own success: the erosion of social charm and conviviality that tends to accompany market enclosure. Inspired by the lovely social experience of Italian coffee bars, Schultz in 1987 decided to try to replicate that experience in the United States. It was a risky, entrepreneurial breakthrough. Now, with more than 13,000 Starbucks outlets around the planet, and aspirations to expand to 40,000, Schultz is honest enough to recognize that the corporatization of coffeehouses is degrading the experience.

In a February 14 internal corporate memo, “The Commoditization of the Starbucks Experience,” Schultz laments how the company’s fierce expansion and efficiency measures “have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

For example, Starbucks introduced automatic espresso machines so they could serve more customers more rapidly, and so boost the ever-increasing quarterly dividends that Wall Street demands. Customers no longer get to watch baristas make coffee by hand, complains Schultz, which has “removed much of the romance and theater” of the Starbucks experience.

Now that store clerks are “no longer scooping fresh coffee from the bins and grinding it fresh in front of the customer” (because the coffee is packed in flavor-locked packaging), Starbucks stores are no longer awash in the smell of that tangy coffee aroma. This smell was “perhaps the most powerful nonverbal signal we had in our stores.” Schultz continues:

Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI [return on investment] on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can't get the message from being in our stores.

So here’s the quandary: Schultz wants his company to become the only brand that you think about when you think about coffee, and this means a relentless quest for standardization and efficiency. But Schultz cannot acknowledge that this aspiration also means weakening the very social charm and local distinctiveness that he loves.

Let’s face it: a brand is all about creating a monoculture. It is all about efficiencies, bureaucratization of process, and the marketing of a single cultural image. It is all about carefully crafting an experience and then monetizing it. The commodification of experience is the polar opposite of what a commons offers. In this case, the market is trying to replicate that which only the commons can truly generate.

Starbucks goes to such extremes in branding its "customer experience" that it used to prohibit customers from taking casual photos of each other inside of stores lest they be used to “steal” the trade dress interior design -- a story that I detail in my book Brand Name Bullies). A local coffeehouse would consider that level of social control ridiculous, if not anti-social. For Starbucks, it was essential to "protecting the brand."

I am grateful for a Starbucks when I encounter one in an airport, mall or out-of-the-way places that don’t usually have fairly good coffee. But let’s face it – Starbucks is also responsible for displacing varied, irregular, distinctively local coffeehouses with its famous global brand.

Mr. Schultz is either disingenuous or self-deceiving if he thinks that Starbucks can offer substantially the same experience as a locally owned coffee bar, whether it’s in Italy or Cambridge or Tulsa. I prefer Rao’s coffeehouse in Amherst over the nearby Starbucks precisely because it is more funky, authentic and local in feel. It does not feel like a carefully crafted stage for merchandising coolness. Starbucks is suffering from an authenticity deficit.

I see pathos in this situation because Howard Schultz is one of the most socially aware and decent executives out there. He was the reason that Starbucks has long provided health benefits to part-time employees, and offers stock options to baristas. While growing up in a New York housing project, Schultz learned how the lack of health care can affect a family; today he is an outspoken champion for universal health care for all Americans. (See Charlie Rose’s TV interview with Schultz here.)

Starbucks' enclosure of coffee is almost poignant because Howard Schultz seems to recognize that the imperatives of corporate branding and finance are degrading his original vision. He wanted to create cozy and convivial "third places" in a culture that yearns for social connection. As the Chairman of a publicly traded corporation, however, Schultz is not likely going to be able to fulfill this vision because the global branding framework is working at cross-purposes.

Perhaps I’m wrong. Major tech companies have learned to embrace open source software, for example, showing that the proprietary and the commons can achieve a different kind of equilibrium. But that just may not be possible for a brand based on standardizing the local coffeehouse experience. It will be interesting to see how Howard Schultz moves this discussion forward...or not.

Charity AMEX Card - concious consumers

Adotas » original posting

American Express has launched its Red Card by using the Internet to sign up consumers and raise funds to fight AIDS...

...

U2 front man/global diplomat Bono, chairman and founder of AIDS charity DATA, launched the initiative to raise money for humanitarian organization the Global Fund. The American Express website describes the program as “A minimum of 1% of all you spend on the Card will be paid to the Global Fund by American Express on your behalf - and we’ll raise this to 1.25% of all spend over £5,000 in one year. What’s more, if you start spending within the first month of receiving the card, we will pay an additional contribution of £5.”

Users can sign up on the American Express website, and AmEx is using a variety of online platforms and partnerships to drive registration. An Amex spokeswoman explained to Adotas how the Red Card campaign differs from past cause marketing programs, saying, ”This is an economic operation not a philanthropic operation around a group of people called ‘conscious consumers.’”

Amex’s current partners in the Red Card initiative are Converse, Giorgio Armani, and Gap. These companies have made a commitment to contribute a portion of profits from the sales of certain products, displaying the Red mark, to the Global Fund.

What is a Mission Driven business ?

• A mission-driven business is an organization for which the pursuit of growth and revenue naturally produces mission-related benefits.
• Mission-driven businesses are a subset of social enterprises, an idea that has been around for about 20 years in academic and non-profit circles, and is now capturing the interest of a more mainstream audience.
• All social enterprises generate funding from the delivery of a product or service in exchange for money. In contrast to traditional non-profit structures dependent on yearly grants, social enterprises attempt to sustain themselves by delivering goods and services and supporting themselves with the revenue.
• Mission-driven businesses are also profit-driven businesses. A social enterprise could easily be “non-profit” or “for-profit” in the technical sense. These categories are tax designations that matter to the IRS, but are otherwise not necessarily indicative of an organization’s structure or mission.

What is a mission-driven business?

The recent USA Today article on carbon offsets reminded me how many people are still unfamiliar with the concept of a mission-driven business. We’re proud of our business model at TerraPass, and it occurs to me that our audience has grown so much recently that it’s a good time to reintroduce ourselves and let people know what we stand for.

First some background and definitions.

A mission-driven business is an organization for which the pursuit of growth and revenue naturally produces mission-related benefits. In the case of TerraPass, the relationship is easy to see. The more people we are able to reach and engage, the more awareness of climate change we can build. The more TerraPasses we sell, the more carbon we are able to reduce. The more partnerships we develop, the better we are able to introduce our positive environmental message to large corporations and their customers.

Mission-driven businesses are a subset of social enterprises, an idea that has been around for about 20 years in academic and non-profit circles, and is now capturing the interest of a more mainstream audience. Muhammad Yunus’ Grameen Bank earned a Nobel Peace Prize last year. The bank, which has distributed almost 7 million micro-loans to poor women in the developing world, has been profitable for 27 of the past 30 years.

All social enterprises generate funding from the delivery of a product or service in exchange for money. In contrast to traditional non-profit structures dependent on yearly grants, social enterprises attempt to sustain themselves by delivering goods and services and supporting themselves with the revenue.

For example, after a 100 years of futile attempts to bring Western water engineering tools to Africa, social entrepreneurs created a product that successfully brought new thinking to water: a simple and affordable roundabout-powered pump that irrigates crops and doubles a farmer’s income. The farmer pays for these pumps, not a grant maker.

For many social entrepreneurs selling in the developing world, success requires using unconventional thinking to break through price barriers. The Grameen Bank issues $2 loans that use social rather than legal enforcement to ensure repayment. Others have sold simple spreadsheet-based optimization software for grain mills.

For U.S.-based social entrepreneurs, the challenge may be convincing customers to see the value in fair trade goods, or to put up their own money for micro-loans, or to purchase carbon offsets that they don’t have to.

Carbon offsets and Consumer Packaged Good

Mission-driven businesses must solve a real customer need. In some cases, the benefits are fairly easy to communicate. People who buy fair-trade coffee are already in the market for a cup of coffee. The slight premium for the fair-trade version is small compared to the total price being paid, and some consumers are happy to take the opportunity to promote social equity.

For TerraPass, the challenge is the intangibility of carbon offsets. We’ve attempted to solve this by turning our offsets into a product that you can see, feel, and measure. Everything we sell comes with something tangible that helps you say, “I’m doing my bit.” Every TerraPass is marked with a verified quanity of CO2 reductions. TerraPass is not a donation. Rather, it is a measured quantity of CO2 reductions. The physical product helps communicate that to the purchaser.

By turning these positive social benefits into tangible products, both TerraPass and fair trade vendors (such as the folks at World of Good) can sell a product that pleases the customer and pushes forward a social mission.

Why overhead ratios are overrated

One of the traditional metrics used to evaluate non-profit organizations is the overhead ratio. There are different ways of calculating the overhead ratio, but conceptually it is meant to indicate the percent of a organization’s funds that are applied to the organization’s goals. It is in some sense a measure of the efficiency with which a non-profit organization fulfills its mission.

Unfortunately, the overhead ratio is a pretty poor way of measuring efficiency. The reason donors focus on overhead ratios is that such ratios are often the only available proxy for what donors would really like to measure: the amount of good being performed by an organization.

But measuring good requires an objective standard of performance, which is often hard to come by in the non-profit world, through no fault of the organizations themselves. How would you measure the good performed by such outstanding organizations as Doctors Without Borders?

So people look to measures like overhead ratios, which might tell you how good an organization is at spending money, but not what it actually achieves with its funds. Even as a measure of efficiency, the overhead ratio isn’t all that revealing, because often the only thing excluded from the core mission allocation is the salary of the fundraising team. Such a number simply doesn’t mean all that much. (GuideStar.org provides a very helpful primer on the uses and limitations of ratios.)

Computing an overhead ratio becomes even more difficult for a mission-driven business. Fortunately, such ratios are usually not necessary for social enterprises, because it is fairly straightforward for consumers to compare the value of different services. Consider this thought experiment. Two carbon offset providers offer equivalent services, one at $20 per ton with 20% overhead and the other at $15 per ton with 40% overhead. Which one should you choose? Other things being equal, what do you really care about, the value of the service or the provider’s overhead?

Thinking beyond tax status

Mission-driven businesses are also profit-driven businesses. And being profit-driven brings a whole set of advantages that we took into consideration when we started TerraPass. In fact, we consulted with many nonprofit leaders who advised that we set up in a for-profit structure. Profit aligns us with our customers rather than with grant makers. Our focus is on delivering a great product, which means building trust, credibility, and quality. Profit allows us to hire and motivate great employees. Profit pushes us to keep our costs down. Profit allows us to attract investors and lenders, so that we can grow our business and — most importantly — fulfill our mission.

But there’s a subtle point here that is easy to miss. A social enterprise could easily be “non-profit” or “for-profit” in the technical sense. These categories are tax designations that matter to the IRS, but are otherwise not necessarily indicative of an organization’s structure or mission.

In the carbon offset industry, there are for-profit players and non-profit players, and all behave in pretty much the same way. Which makes sense — organizational behavior is determined by industry forces, not by tax status. You’ll see most members of our industry engaging in similar marketing practices, building similar web-based calculators, and pursuing similar corporate partnerships.

Which isn’t to say that we’re all identical. I still feel that TerraPass offers the best value in the industry, and of course, I should feel that way. If I didn’t, I would be working hard to increase the value we offer.

Ultimately, both you, the consumer, and the environment benefit from this dynamic. And that’s what mission-driven business is all about.