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Starbucks: Alone On Top

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Complacency is costly for industry leader.

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Minyanville is excited to introduce our newest professor, Geoffrey Helt. Geoffrey has advised leaders of several Fortune 500 firms -- including Starbucks, The Ritz-Carlton and Whole Foods Market -- on transforming their store designs, product portfolios and company cultures. Please join us in welcoming Geoff!


Even when facing the hapless Knicks, it's downright impossible to maintain a large lead for the entire game. Time and time again, over the course of an 84-game season, you see the team with superior talent lose focus and intensity in the second half. Just as with NBA hoops, the "fourth-quarter fade" afflicts itself upon once-thriving corporations across every industry. And just like that, a leader's suddenly subpar performance enables the market's momentum to switch.

To be honest, I should have seen this pattern taking hold at Starbucks (SBUX).

In 2001, I had the good fortune to root around the organizational bowels of the coffee giant. I was consulting with the company on developing new product concepts. One of the exercises we went through to spur innovation was a trendspotting tour of San Francisco. After visiting some of the city's hippest hotels, restaurants, bars, retail ventures and, of course, coffee houses, one insight stood tallest for our team of ten.

Like the Zwieback buried in the back of the pantry, the Starbucks experience was stale. Seven years ago, the path of core customer migration -- where leading edge adopters coveted by every brand jump ship -- was already being trodden in the City by the Bay. While market research at the time displayed increasing customer traffic (total volume and frequency), "butts-in-seats" observations showed that the "cool cats" were making their way to the independent cafes and micro-roasters around the corner.

When you're all alone in first place -- so far ahead that there isn't a legitimate number two -- the ego tends to block out the sun. Opening thousands of units per year pads the price to earnings ratio, buoys the options package and widens the lead (or so it seems). When you're up by 30 points in market share, the executive team finds little reason to question the gameplan. Yet this is often the point when trouble sets in.

Every Hall of Fame coach knows that championships are all about tempo. Instead of allowing your opponent to lock into one style of play, the John Woodens and the Bob Knights shake up the strategy -- in the middle of the game -- to keep the competition on its heels. Translated from the hardwood to the boardroom: To win, legendary leaders know that the best time to reinvent the business is when you're on top.

Unfortunately, such precocious leadership has been in short supply at Starbucks, as well as at many other firms. Every day and every quarter you choose to do nothing differently, three game-changing shifts occur:

The Differentiation Gap Closes
Each store that Starbucks opens is an opportunity to try something new, which increases organizational capacity and customer intrigue. But, alas, the store in East Berlin is identical to the one in suburban Buffalo. Such homogeneity makes it easy for small-batch coffee roasters, as well as Dunkin Donuts, to steal share.

Unhealthy Cultural Practices Calcify
In the late 1990s, Starbucks attempted to develop a new growth platform by opening a couple of Starbucks Cafes in the Seattle area. For a number of reasons, the Cafes were met with a tepid response. Instead of reformulating the concept based on what could be learned, the leadership team branded them a failure. The rope that employees once had to experiment with new concepts snapped back like a rubber band; in its place, a palpable fear of making a mistake could be felt throughout the organization.

Star Talent and Core Customers Walk Out the Door
It's amazing how these two tribes often move in tandem. What these groups have in common is their insatiable desire to be part of a unique movement. As a product and its organization settle into the mainstream, the highly talented seek out a bolder challenge while the well-heeled look for the next cool thing. History now tells us that the market can't always "price in" such slow-moving mediocrity.

Leadership styles and organizational behaviors are a leading indicator that forever lag on the stat sheet. As many of us cheered on the breathtaking and bell-ringing ascent of Starbucks, the true tale of the tape was playing itself out on the court. Too bad Howard Schultz didn't have the audacity to get a 20-second timeout.


Hoofy and Boo discussed the explosion of seemingly identical Starbucks outlets. See their report here.

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No positions in stocks mentioned.

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