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Smelling the Coffee

Last week, Starbucks unveiled its strategy for profitable global growth, having taken approximately US$ 600 million out of costs in since January 2008.

About 3 years ago in a leaked memo, chairman Howard Schultz had raised concern about how, in the race to scale and to become consistent, Starbucks was losing sight of all critical things that had made it successful in the first place. (“The Commoditization of the Starbucks Experience – Soul Searching by Howard Schultz“).

In January 2008, Schultz took on an active role as CEO in a bid to stem the rot (“Leadership Change at Starbucks – The Barista Returns“).

These two years have been eventful. Shortly after Schultz stepped in, Starbucks announced that it would close 600 under-performing stores in the US. That was well before the “financial tsunami”. In 2009, another 200 in the US and 100 globally were identified for closure, and the company also scaled back on its 2009 expansion plan for 200 new stores.

At its shareholders’ meeting last week, Starbucks presented a more confident face, and outlined a return to growth with plans to expand its presence and “accelerate profitable growth in both the U.S. retail business and in key international markets”. (This profitable growth mantra was also recited in last year’s shareholder meeting.)

However, while the business is looking better, it is far from fixed.

The environment is different. Globally, consumer wallets are leaner, competitors are meaner, and Starbucks may yet need to shrink further; the fat ain’t all in the latte.

Yet, there must be much good in the business if, for all its faults, it still gets imitated around the world.

According to Starbucks, it currently has less than 4 percent of the U.S. coffee market with its 6,800 own and 4,400 licensed stores, and less than 1 percent of the global coffee market even with 2,000+ company stores and 3,500 licensed stores. The company sees that as enough headroom to grow.

Schultz has promised to put the tough lessons learned in the last two years to good use. The company currently has approximately 200 fewer stores than it did at the beginning of 2009 even after new store openings during the year. (To put the current number of 16,700+ stores in perspective, the company had a total of “only” 2,600 stores in Q1-2000.)

But there’s something to think about. If the entrepreneur needs to step back in to fix things gone horribly corporate (bland) and wrong, maybe it’s time to acknowledge that there’s a logical limit to the size and scaling-up capability of personalized experience businesses.

Or, as a friend says, scale can be a logical outcome of excellence but excellence is never the logical outcome of scale.

It remains to be seen whether this round of growth will come from the company’s natural strengths or whether Starbucks will return to growth-by-steroids as Schultz eases on the controls.

Franchising International Fashion Brands

India has been consistently rated amongst the top destinations for consumer businesses year after year. While international fashion brands had earlier entered India at a steady pace, there was a greater surge of the global brands in the Indian market since 2002.

Interestingly many international brands opted to choose the franchise route for their entry into India. There were changes in the market environment and government policies that made the business environment favourable for growth through franchising.

Firstly, as a signatory of the WTO, India reduced import duties consistently. Consequently products could be sourced from other countries at more competitive prices and international brands could create an internationally-consistent product offering, with greater control on the supply chain.

Secondly, with more international brands vying for a share of consumer’s wallet, there was a need for brands to create a distinctive brand identity. Exclusive branded outlets increasingly became a marketing tool through which the brands could not only showcase a complete product range but also create the full brand experience.

Simultaneously the real estate market grew significantly, bringing in many “investors” who did not have the capability or the desire to develop their own brand. The availability of potential master franchises ready to invest capital and real estate created an environment conducive for growth of franchising.

As per Third Eyesight’s report (“Global Fashion Brands: Tryst with India”), by the end of 2008, just under half of the brands were present through a franchise or distribution relationship.

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Unlike more developed markets where brands have sizable networks of large-format store as a launch and growth platform, in India there are still limited choices to simply “plug-and-play” using department stores or any other large-format retail network. Also, having a local partner as a franchisee provides a closer understanding of the market and the ability to adapt to changing consumer needs.

For a successful relationship it is vital that a franchisee should have an entrepreneurial mind-set. The essence of the brand needs be well understood, and the franchisee must have operational involvement rather than a “passive investment” approach.

The question is whether franchising would continue to remain the preferred entry mode as a new decade starts. Liberalisation of foreign investment norms has already led to many brands transitioning into a joint venture or subsidiaries. (See the more recent version of the report on International brands in India.)

However, while for many international brands it would be ideal to have ownership and control over the operations in a strategic market like India, direct investment does also increase their risk and the investment is not financial alone.

Therefore, for many brands, franchising would still remain the more practical choice whether by using a national master franchisee or using site-specific franchise relationships in combination with a direct wholesale presence in India.

It’s all about the format

Diwakar Kumar
Indiaretailing.com, March 2, 2010

It is an every day challenge for a retailer to satisfy the diversified demands of discerning customers. The further challenges are to reel in more customers, assure their loyalty, drive in more footfalls and the ensure the conversion rate. In order to gain more profits, retailers try to lure the customers with in-store signages, advertisements and customer-loyalty programmes. No matter how unique these strategies may be, they do not guarantee a success rate.

Thus, to ensure a minimum return on investment, the retailers need to ascertain that the format, product assortment and the location of their store assures profits. Exclusive brand outlet (EBO) does ensure that the store is never out of stock, thanks to the predominant one-brand presence. However, veterans argue that it is the multi-brand outlets (MBOs), which drives more footfalls. In the MBOs, the retailers offer wider range of merchandise but EBOs are in command with better visual merchandising, more control over the brand, customer experience etc.

In the response to the open poll question on IndiaRetailing — Exclusive brand stores may allow for greater depth and branding of merchandise, but multi-brand outlets and shop-in-shops are really the revenue drivers for a brand — 91.67 per cent of the respondents support the statement while the remaining 8.33 per cent of them negated it.

Devangshu Dutta, chief executive, Third Eyesight observes, “MBOs and shops-in-shop (SIS) can certainly help a brand build its footprint more rapidly and with lower capital than it could with only exclusive brand outlets. However, EBOs provide more control to the brand on the overall customer experience, merchandise assortment, pricing and margins."

Gopalkrishnan Sankar, chief executive, Reliance Footprint says, “MBOs and shop-in-shops give the size and scalability opportunities. Customers also look for variety of products, choice of price points all in one place. This is best captured by MBOs, particularly the ones who are positioned as destination stores.”

Sunil Sanklecha, managing partner, Nuts ‘n’ Spices maintains, “From any business perspective, the model that leads us to bottom line is the right strategy which depends on different aspects, such as, is the individual brand strong enough to survive with exclusive store format? How do we want to position our brand? Are we looking at the long-term or short-term strategy and strength of the finance on the marketing part.”

He strongly believes that EBOs have better future than MBOs or SIS format. He says, “Everyone wants the larger pie. We see the that the big stores want bigger margins and they start building their own brand. The manufacturers want their presence everywhere in the store but without sharing a larger pie.”

“A well-put together and well-located MBO is usually a destination for most of the categories that sit within it. Also by virtue of the range and brands that it encompasses, the customer engagement is strong. This ensures good footfalls and hence individual brands in MBO’s stand a far better chance of maximising revenues vis-a-vis exclusive stores,” says Viney Singh, MD, Max Hypermarket India Pvt Ltd.

T S Ashwin, managing director of Odyssey India Ltd, which has recently opened an SIS at Easyday Market comments, "This depends on what kind of brand it is. If the brand is niche and has a clear TG, then it needs more exclusive stores to showcase the width and depth of the range. Also it may really not have the market size for selling through multi-brand outlets. If the brand is not niche, then the exclusive stores help in building the brand and the multi-brand stores and shop-in-shops will help in increasing the visibility and reach of the brand as sales channels for the fast moving SKU’s in the brand."

Thomas Varghese, CEO, Aditya Birla Retail Limited says, “Exclusive brand stores have a place in the marketing strategy for a brand as they enhance visibility within the catchment, a consistent story to the consumer and a depth and breadth of merchandise. However, positioning a brand in multi-brand outlets enables the brand to enhance reach across a cross-section of customers thereby driving revenue.”

In the further analyses on the store formats in India, Dutta says, “In a market like India, brands need to follow a blended approach since in many locations MBOs or department stores suitable to the brand may not be available and the only option may be to open EBOs directly or through franchisees.”

“There is no ideal balance between EBOs, MBOs and shops-in-shop. The mix would differ from brand to brand and also change over the lifecycle of any single brand,” concludes Dutta.