(Published in the Financial Express, 10 May 2016)

In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.

In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!

CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.

Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.

CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.

CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.

Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.

The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.

An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.

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.

At the end of 2006, in an article about market segmentation, I’d proposed a customer segment called “Cafe Workers” who look at coffee-shops as inexpensive real-estate to work out of.  These include professionals, start-up entrepreneurs, small businesspeople and travellers into a city. (Click here to open the PDF file of the article “Slicing the Market“.)

But now, amidst the recession, apparently it is one positioning that some coffee shops don’t want to buy into. The Wall Street Journal reports that there is a backlash from many coffee shops towards customers who enjoy the use of free wi-fi and spend hours occupying tables that should be turning over more. (No More Perks: Coffee Shops Pull the Plug on Laptop Users). Many of the comments on the article are sympathetic towards the cafe owners, calling such customers “moochers”.

While the dismay of cafe owners over customers who abuse the facilities is understandable, could they be doing themselves harm by actively discouraging laptop use? Wi-fi is just one of the sticky aspects of a ‘hanging-around’ culture that the cafes have encouraged in the first place as part of their business model.

By and large, wi-fi enabled cafes around the world are more expensive than the ones which are not. Wi-fi goes along with the more premium positioning, and they should be able to balance the space premium lost on long-term wi-fi users with the grab-and-go customers who are paying higher prices without using the facilities.

That said, in specific cafes or at specific times of day or days of the week when there is a bottleneck, they should be able to limit the length of the IP-lease.

All it takes is a bit of thought and a tiny application of technology, not total disruption of the business model.

Last year in an impassioned memo, Starbucks’ Howard Schultz identified several strategic and operational decisions that, according to him, were responsible for a deteriorating customer experience at Starbucks.

Starbucks faced the classic problem of any company scaling up (especially a retail brand) – how to be large without being bureaucratic, how to be efficient without losing the soul of the brand, how to be consistent without losing the differentiation edge.

The problem created by Starbucks taking the certain decisions was compounded by the fact that competitors have not stood still either. Competition has improved its core products (coffee), as well as the augmented product (store ambience, service, wait time etc.), and in comparison Starbucks has possibly stood still or slipped back.

Now, almost a year after that memo, Starbucks begins 2008 with Schultz stepping back into the CEO role. It’ll be interesting to see how his passion for the brand is infused back into the stores and the operations in the coming months.

On a separate note, the classic “founder vs. professional” conundrum also comes to mind, along with the notable examples of Apple (Steve Jobs), The Body Shop (Anita Roddick) and others. (Though Howard Schultz was not strictly the founder of Starbucks – the company was founded in 1971, and Schultz bought the company in 1987 when there were less than 20 stores in the chain – he is pretty close to being one.)

The question is: for iconic brands that are more than just the physical product or service being sold, can a ‘professional CEO’ ever take the place of the founder(s), replicate their passion & vision and maintain the integrity of the brand? I believe there are examples to support both answers: ‘Yes’ and ‘No’.

What do YOU think?

A few weeks ago there was an immense buzz about an email that was apparently leaked from Starbucks. Chairman Howard Schultz apparently had written this to CEO Jim Donald, and there was immense speculation about whether it was fake or a genuine leak.

Well, Starbucks itself put that mystery to rest by confirming the e-mail’s authenticity, and that makes it even more interesting. The soul-searching shared by Schultz in the memo, reflects the criticism that Starbucks has faced in recent years.

As a pioneer of “the third place” experience, it must be especially painful for Schultz to admit that the quality of experience now is below what the consumer would (or should) expect. In the quest for scale and efficiency, he says:

“…we have had to make a series of decisions that have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

He acknowledges ownership for the decisions, which he says…

“…were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is unfortunately much more damaging than the individual pieces.”

As a brand with over 13,000 locations, clearly Starbucks needs to be able to work with a model which is consistent across locations, can be implemented quickly, and delivers the product quickly and at controlled costs. Automation and packaging are two major areas that have given it that capability, but have also become the weak point of the experience from the perspective of coffee connoisseurs, or even people who would just enjoy a “rich and personal” experience.

Schultz quotes some specific cases that are especially powerful illustrators of what is right AND wrong with the business model.

“…when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency but removed much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista.”

Clearly the automatic machines improve the consistency of coffee delivered in each cup of Starbucks, and also reduce time the customer waits (a huge issue in many of the stores where peak-hour traffic can result in customer queues right to the door). But it is that much more generic an experience. And one would imagine that the barista behind the counter is also just that bit less involved (dare we say, less passionate) about the cup.

Creating a process (and better still, automating it) reduces the dependency on individual skill in any business, and is a strategy followed by all businesses that want to scale up without losing quality. However, an experience that is supposed to be “personal” and unique, needs to retain the human touch to a far greater degree.

Schultz talks about moving to flavour-locked packaging – again a great decision to retain the quality of the product across the chain of stores, while creating an efficient supply chain from procurement, through roasting, bagging and shipment to stores. Each of the outlets receive the coffee with a optimal shelf life left in the product. However, as Schultz says,

“…I believe we overlooked the cause and the affect of flavour lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage?”

When Schultz took over Starbucks there were hardly any significant competitors – it was either personalised, neighbourhood cafes or fast food joints serving low-grade motor oil masquerading as a beverage. The product itself that Schultz wanted to sell was not just the coffee, but the possibility of someone having a beverage in a relaxed environment outside home or a bar.

Today, Starbucks has itself upgraded the customer’s tastes and expectations, but risks losing that product leadership to smaller competitors, even as the fast food chains are improving the coffee that is served on the go, at prices often cheaper than Starbucks, and also as other “third place” options emerge.

It is the closing of the memo that shows a ray of light…

“…we desperately need to realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. I have said for 20 years that our success is not an entitlement and now it’s proving to be a reality…Let’s get back to the core. Push for innovation and do the things necessary to once again differentiate Starbucks from all others. We source and buy the highest quality coffee. We have built the most trusted brand in coffee in the world, and we have an enormous responsibility to both the people who have come before us and 150,000 partners and their families who are relying on our stewardship.”

From reactions from various quarters, it seems that a lot of people not only agree with Schultz, but also admire him for his frank assessment of Starbucks’ weakening brand leadership and authenticity. When the leadership is honest with itself, there must be hope for the brand and the company.

An acquaintance who works with Starbucks expressed it eloquently when she identified the challenge of “staying small, while growing big” and said, “I’m glad our leadership hasn’t forgotten the qualities that have made us who we are.”

Starbucks remains a market leader by far, in terms of retail footprint worldwide and can only grow stronger by sorting out these issues which are at the core of the business.