What makes a company successful?...

... delivering products and services that are relevant and create impact among consumers.

I combine my expertise as a Marketing executive in a Fortune 500 company and my passion as an investor to find the Companies that I think have "cracked the code" with consumers. Advertising does work. When I see a new product that fits relevant consumer trends, and that is supported with a campaign that I find particularly shrewd and innovative, I know that Company is potentially a great investment.

One of the great investors of all times, Peter Lynch, recommends to "buy what you know". You watch TV, go to the supermarket and walk around everyday. Observe... look around: what you see can make you money in the stock market. Now, let's be clear: a Company is not good just because it advertises. What we have to look for is great products supported with -and enhanced by- great advertising. The principle is simple: if something is good enough to draw your interest, it will be of interest to millions of persons just like you.

It is my goal to share with the reader my findings in the world of marketing which I think will turn into great returns for investors. Profit from it!

Monday, May 26, 2008

Sweet prospects for Starbucks

Last July, Starbucks (SBUX) announced that it had signed a deal with Hershey Co. (HSY) to create a new line of premium chocolate products. This weekend I finally saw on TV the commercial launching the announced Starbucks Chocolate line.

I was pleased with what I saw. The TV ad was very appealing, and highlighted the unique marriage between two indulgent darlings, coffee and chocolate, that only the expertise of Starbucks could achieve. There was an organic, slightly distressed feel to the commercial that connoted craftsmanship and heritage, but with a modern feel. Well done!

This initiative begs the question, though: is this right for the troubled coffee company? Is this in line with Starbucks’ CEO Howard Schultz’ pledge to go back to basics and refocusing on the core business to turnaround the ailing chain?

I attribute Starbucks woes to three factors:

a) The “commoditization” of good coffee. Starbucks not only taught Americans how to drink coffee; it also taught competitors how to prepare it. Now the chain is facing competition from a myriad of different sources, from McDonalds to Dunkin Donuts and convenience stores. All good, tasty alternatives at a far better price. Not only that: those competitors are also talking the talk, proudly touting their own array of exotic variants, from the Costa Rican Tarrazu blend to the 100% Indonesian Arabica decaf brew.

b) The grinding economic situation, that puts consumers in the position to choose between a cup of Starbucks’ double-shot Latte and a gallon of gas.

c) The clear erosion in Starbucks quality, against which Schultz warned and that he is trying to address with his back-to-basics mantra.

In order for Starbucks to return to a path of profitable growth, it will have to address all these factors. I would not worry about the economic situation. Yes, it will be a hindrance for a number of quarters, but sooner or later, things will get better. Actually, rightly leveraged, it could even help, as will be discussed later. It is the other two factors that are fundamental problems that Starbucks will have to address.

Starbucks will have to not only improve its quality: they must also re-build the conviction among consumers that their quality is superior to any other coffee expert wanna-be out there, and therefore, worth the effort and price for a superior experience. Starbucks must re-assert its position as the absolute expert in coffee. A level of expertise and connoisseurship that guarantees that, when looking for the well-deserved, ultimate coffee indulgence, consumers consider Starbucks as the only possible purveyor.

Here is where the chocolate line comes into play and why it makes so much business sense for Starbucks at this juncture. In a tight economic situation, consumers are forced to cut back in superfluous expenditures. Splurging in big-tickets pleasures is out of the question. However, people still want to enjoy and reward themselves. Small indulgences become more important, as consumer cling to the remnants of their standard of life. You might not be able to go to the beach during this Memorial Day weekend, but surely you can afford to go to Starbucks and enjoy the sunny afternoon enjoying a well-deserved Caramel Macchiato, can’t you? I mean, it’s only five bucks versus the hundreds you just saved by staying home, right? You’ve earned it! Or for that matter, you could afford to indulge in some fine chocolates while watching that DVD, couldn’t you?
Ah, the fine things in life. Chocolate is one of them. As with any other product, consumers are nowadays expecting more from it than just the sensorial pleasure (for more on these motivations, see my post “Consumer values to look for”). The assurance that craftsmanship and sophistication bring to the experience is as important as the taste and the texture. Chocolate has joined the pantheon of products in which consumers are looking for, and demanding, a higher level of connoisseurship and artisan mastery. Just ask Godiva.

Starbucks’ introduction into the chocolate category has a double benefit for the company:

a) Starbucks expertise in the coffee business gives it instant credibility to participate in the premium chocolate category with a coffee-based offering. Not only are chocolate and coffee complementary products from the sensorial perspective: they have close affinity as product categories, in terms of their indulgent role in the consumers’ lifestyle. Chocolates is a fitting complement and a natural extension to Starbucks’ core coffee business.

b) By extending its coffee expertise into another category where mastery and premium character matters, Starbucks is just reclaiming those attributes for itself in the eyes of the consumers, which in turn should revalidate the uniqueness of the Starbucks experience and help support their core business.

This is certainly a step in the right direction, and strategically, it surely beats serving breakfast!
Disclosure: I own shares of Starbucks


Brietta said...

Great!! I too like Starbucks Store products...

swag said...

Sorry, but I have to call you on smoking your own dope with this one.

If Starbucks is out to re-invest in their core business, why are they bothering with chocolate? Isn't that just another distraction?

Furthermore, if their aim is to distinguish their brand from the commoditization of coffee, why on earth with Starbucks partner with America's biggest symbol of commoditized chocolate: Hershey's?

Hershey's is far from a luxury, elite, high quality brand. It's the thing kids get bagfulls for free every Halloween and can't get rid of fast enough.

For those two reasons alone, this strategic move was a bone-headed one for Starbuck's goals.