Corporate Governance

Starbucks, Social Responsibility, and Profit Maximization

By J. Robert Brown

Starbucks is in trouble.  Per store earnings are falling.  Competition is on the horizon, with McDonalds planning to insert baristas into its 20,000 franchises.  Starbucks coffee, as a commodity, will find the competition from McDonalds stiff, with the fast food giant likely to be able to make high quality coffee drinks at competitive prices in often more convenient locations.

Starbucks has become a commodity.  80% of the orders are consumed off premises.  In other words, most people coming into Starbucks are not coming in for the experience.  The company seems to recognize the consequences of this approach, deciding to expand more rapidly overseas where the statistics are the reverse.  80% of orders are consumed on premises.  In foreign countries, where homes and apartments are smaller and open spaces at a premium, Starbucks likely provides a meeting place that causes people to collect there and, concomitantly, buy and consume Starbucks products.  This is not true in the United States.

As we have noted, Starbucks is increasingly an outlier in the US because it does not offer free Internet access (Peaberry's in Denver does, Caribou Coffee does, so does almost every independent coffee shop I've entered).  This discourages those ubiquitous laptop users from planting themselves in the shop and buying product throughout the day.  Do a small survey.  Go into a variety of coffee shops (including Starbucks) and count the number of open laptops.  Over any protracted period of time, Starbucks will lose. 

How is the company responding?  Starbucks has started a loyalty program, allowing for the purchase of cards that provide modest benefits (free flavors, two hours of Internet usage).  In other words, as a commodity, they are trying to retain customer loyalty by offering small discounts.  This is a strategy that can be easily matched by competitors and does nothing to reward repeat customers or encourage coffee drinkers to stay on the premises.

It is the opinion of this Blog that to maximize profits, Starbucks needs to differentiate itself from competitors, not offer small economic emoluments that can be easily matched.  The answer is at Chipotle, the burrito company started here in Denver.  Chipotle is not cheap, with an ordinary burrito easily costing about $6 -$7 dollars.  Yet the company has robust growth in part because of the experience associated with eating in the establishment.  It is hard not to know that the burrito is made with free range chicken and organic ingredients, socially responsible and healthy.  Indeed, the company has just announced that it will begin to buy produce from local producers.  See Denver Post, June 19, 2008 ("This summer, Chipotle is purchasing 25 percent of at least one produce item for each of its stores from small and midsize farms within about 200 miles."). 

Chipotle has no loyalty program, no free guacamole.  But it does have increased earnings.  Rather than foregoing payments for flavors or soy milk, would Starbucks be better off using the funds to engage in more socially responsible activity and let customers know that the purchase of each latte results in a social good?  Ought Starbucks to place greater emphasis on employees (the company apparently already provides health benefits and options to part time employees) and let its customers know that each latte goes to the payment of a living wage?  This Blog thinks that it should and that the behavior will help earnings more than free soy milk. 

Full post as published by The Race to the Bottom on June 20, 2008 (boomark / email).