I had a conversation with a commodities trader recently about Starbucks and how their results have been so impressive over the last year or two. He said that the main reason the stock had done so well was that they were enjoying the financial advantages of depressed commodity prices for coffee. He thought their recent growth was all about their cost structure which frankly – in his opinion - was more a matter of great good luck than anything that they had actively done to manage for this outcome or to achieve these results. I guess when you’re a hammer, everything looks like a nail.
I told him that he was totally missing the boat and looking at the wrong metrics and that – because his perspective was off - he wasn’t giving the company and their management team anywhere near the credit that they deserved. Interestingly enough, we’re drowning in data today, but the sheer increase in available information isn’t improving our analytical abilities or helping us (as much as it should) to make better decisions. You can be so focused on particular numbers that it’s easy to lose sight of the bigger picture. We think we know what’s going on and why, but - on closer examination - it turns out that we’re looking in the wrong direction or commending or complaining to our managers about things that are often beyond their control.
Just because some things may look differently these days doesn’t mean that anything has actually changed. The bottom line of any good business still grows because its revenues are increased (without an offsetting rise in operating expenses) or because its costs are materially reduced without any sacrifice in the level of its sales. This is the immutable math of margins and it has been ever thus. Nonetheless, it’s surprising how often confusion sneaks into this basic equation, alters the correct calculations, and results in inaccurate causal attribution. It may be math, but it’s got to be good math and the right metrics to matter.
And even the sharpest managers are guilty of applying versions of the same faulty logic and erroneous explanations - especially when it’s in their near-term best interests to do so. In good earnings periods, they’re more than happy to take plenty of credit for benefits beyond their bailiwick and in tough times they’re pretty quick to blame poor outcomes on bad actors and external forces. I remember when I was selling my computerized resume service to colleges that, in good economic times, the schools bragged on their “job placement” centers, but, in hard times, those same folks took to calling themselves “career guidance” counselors. Actual jobs weren’t any longer a part of their jurisdiction.
A lot of this is just human nature, but when you start focusing on or blaming third parties and outside events for your successes or your difficulties, you give up the power to make the kinds of changes which are necessary to continue to improve the situation. Similarly, when you’re looking in all the wrong locations for the explanations; you’re never going to end up in the right place. The most important job is to illuminate the correct causes so you can eliminate the real problems and so you can also accelerate your commitments to and investments in the things that are actually moving your business forward.
In our conversation, I went on to say, just for starters, that Starbucks had recently raised their prices and that – notwithstanding the sticker shock (as if anyone really noticed or cared except the press) - their customer counts (and, of course, their top line revenues) were still growing. They weren’t trying to save their way to success. (See http://www.inc.com/howard-tullman/saving-your-way-to-success-why-you-cant-do-it.html ).
Frankly, if you’re going to take advantage of improved operating efficiencies or available short-term cost savings due to market movements, the smart play is generally to pass those savings on to your customers by reducing your prices to draw more customers in, not to jack your prices up and try to soak the current group. This is the approach which Walmart and Costco have clearly mastered.
And yet, Starbucks seems at the moment to have the best of both worlds. I told my trader buddy that there had to be a better explanation than commodity costs for the kind of pricing power (and price elasticity) that Starbucks continues to demonstrate. My view was that what was improving their overall results was a series of initiatives that the company continued to aggressively advance and that the commodity cost savings were simply additive to, not dispositive of, their overall earnings momentum.
I felt that there were 3 areas where they were just hitting it out of the park and that these were the kind of long-term growth drivers that were driving the continuing appreciation in the Starbucks stock price as well. These are some of the same levers and tools that every startup can also use and which every one of them needs to be addressing as early as possible in their own growth plans.
First, I said that I was impressed with the fact that the number of participants in the Starbucks reward program has grown to over 10 million people and that these “members” spent on average 3 times as much as non-members do. There is nothing better for the bottom line than growing the average ticket of your existing customers. (See http://www.inc.com/howard-tullman/why-knocking-on-old-doors-is-the-best-sales-strategy.html ).
They’re already inside the tent and now you’ve just got to show them more attractive opportunities to increase their spend with you while they’re there. Virtually no marketing costs and a direct benefit to the bottom line. And loyalty programs continue to pay multiple dividends beyond straight dollars – they drive powerful word of mouth, authentic endorsements, community growth, social media amplification, etc. Every new startup from Day One needs to understand that building a real business is about capturing and retaining the lifetime value of each of those customers which you spend big (and scarce) bucks to acquire and that membership is about much more than just privileges, it’s critical to profits as well.
Second, purchases thru the Starbucks mobile app are now accounting for more than 20% of the daily in-store sales. Saves time, saves personnel costs, improves speed and satisfaction – what’s not to love? Starbucks (and many other retailers) are rapidly heading in the direction of having their products ready and waiting for you to pick up rather than having you wait for the stuff once you get there. And, of course, it’s all about connectivity and mobility. In Europe, the hottest trend (“click and pick”) is to order online and then drive to the store to pick up your purchases – often from a drive-thru window. But incorporating a viable mobile solution into your order fulfillment and payment streams isn’t as easy as it seems either inside your company (for obvious legacy and enterprise-wide issues) or, more importantly, outside of your company’s four walls because it’s VERY tough to get the typical consumer these days to add any proprietary app to their already crowded and cluttered phones. You’ve got to show them a really good reason or try to figure out how to fold your functions into an app that’s already there. (See http://www.inc.com/howard-tullman/want-your-app-to-succeed-get-it-out-there.html ).
This is why Starbucks has such a leg up (with 10 million rewards members) on businesses like McDonald’s, for example, who’s just trying to get into the game and doesn’t really understand the major barriers to adoption which they’re facing. The truth is that no one these days really needs another app.
And third, Starbucks keeps adding new complementary products and services offered by on-brand channel partners (NY Times, Spotify, Lyft, etc.) who are dying to get at their affluent and highly-consumptive customers. Having made the acquisition investment, this is a great way to amortize some of their sunk and ongoing costs and still keep growing the overall pie at the same time. It’s a lot easier (and much less costly and risky) for third parties to pay Starbucks for this access than it is for them to try to lay their own pipe and reach all of these customers themselves. If the bundles are well done, they can clearly benefit both marketing parties and the consumer. Any business that can become the go-to channel for already assembled concentrations of ready-to-buy customers is in exactly the right place these days to reap the rewards that inure to the gatekeepers and toll takers sitting astride the mobile web. But, here again, you have to be careful that the experience is additive and appreciated by the customers or it’s not worth the incremental revenue for your business.
Everything today is about the overall experience and trying to add too much to the process can be a real buzz kill as well as a persistent problem especially when nothing matters more to the customer than getting in and getting out of the place as fast as possible. I want to grab a Venti and vamoose! There’s a lot to love about that dolce latte; but my time’s much more valuable than your caffe mocha.
