Q&A: Why Starbucks got dunked

BY JAMES BERNSTEIN | james.bernstein@newsday.com

7:05 PM EDT, July 2, 2008

Starbucks' announcement that it is shuttering 600 stores marks an end to what seemed to be the company's continual upward climb and invincibility in the retail coffee shop industry. Two market-research experts spoke yesterday about the world-famous company with Newsday staff writer James Bernstein.

Q: What happened to Starbucks?

A: Several things, said the analysts. For years, Starbucks has been exceptionally profitable and was a darling of Wall Street. But it expanded too rapidly: "You can expand so much," said Robert K. Passikoff, founder and president of Manhattan-based market-research firm Brand Keys Inc.

Q: Did the excitement wear off?

A: Pretty much, said Harry Balzer, a vice president of Port Washington-based market research NDP Group Inc. "They \[Starbucks\] certainly had a nice run," Balzer said. "I've been doing this for 30 years, and I don't think I've seen anybody do it better. But there's nothing like success to bring on competition. Nobody says you can have the whole market forever."

Q: What else went wrong?

A: Passikoff said Starbucks tried to migrate its coffee brand into a lifestyle brand. "They came out with the movies and the books in the stores. There's nothing wrong with that aspiration. But as part of this, they essentially took a step away from the core quality of the brand, which was the coffeehouse experience, which they imported from Europe and turned into an American experience. For awhile, no one was grinding beans. The place didn't sound like the coffeehouse and didn't smell like the coffeehouse anymore," Passikoff said.

Q: Bad marketing decisions?

A: Yes. The experts said their stores were getting too crowded with furniture, said Passikoff. The couches went. "What essentially they did overall was re-engineer the experience right out of the stores. So customers were standing on line, and there was no experience anymore. They were too much like everyone else," Passikoff said.

Q: They still looked a little different, right?

A: Yes, but for awhile, they were offering breakfast sandwiches. If you close your eyes and order coffee and someone offers you a breakfast sandwich, where are you? You could be anywhere, said Passikoff, people even complained about it.

Q: How much of Starbucks' decline is related to the economy?

A: Passikoff argues not that much, that Starbucks market share began to decline a year ago. "In our tests last year, they came out No. 2 to Dunkin' Donuts. This year, Dunkin' is No. 1, McDonald's is No. 2 and Starbucks No. 3 in our market surveys." But Balzer said the entire restaurant industry has been negatively affected by the bad economy.

Q: Should Starbucks have stuck with its original strategy of being just a coffee house?

A: Yes, said Passikoff. "You don't walk away from a successful brand strategy, not when you're making money."

Q: Can Starbucks come back to what it was?

A: Passikoff doubts it. "Customer values have shifted so dramatically. They are what they are." Balzer said Starbucks still has a lot of marketing power left, however. "They have got to do new things," he said.