by Nikhil Gharekhan, Managing Partner, Presciant
The Starbucks sales slump, along with the firing of its CEO, is the latest example of what can happen if a company strays from what its brand stands for.
Starbucks – venti no more
Something has not been right with Starbucks. As of the second quarter of 2024, its stock had declined by 20% year-to-date, compared with only a 9% drop for the industry. Operating income decreased by $100M compared to the prior year. Same store sales dropped 4%. The loyalty program growth slowed to 6%, the lowest rate in years. The company stopped being ranked as one of the best places to work. Management blames the Starbucks sales slump on lower consumer visits and intense competition from value-focused players in the market. But what lies behind consumers’ decreasing love for Starbucks?
It’s the brand, stupid
Starbucks’ brand purpose has been about “Human Connections,” that ‘third place’ between home and work where you can come, relax, and spend time with friends. The brand was always about more than a cup of coffee. The plush sofas, aroma of coffee, free newspapers, background music all contributed to building the brand experience.
But Starbucks has been straying away from the brand. It introduced drive-through at many locations and on-line orders, fundamentally changing its retail nature from experience to convenience. And with DoorDash, why even come at all. But even for those that make it inside the stores, the experience is more grab-and-go, rather than sit-and-linger. It replaced sofas with wooden chairs. The coffee aroma is gone from most stores—with the use of sealed packages of beans. Baristas have no time to remember repeat customers—they are too distracted having to deal with 100,000 different combinations. Even customer names on cups are now printed, rather than hand-written. The human connection is disappearing, the third place is no more.
To make matters worse, the company offered fixes which are completely off-brand—operational efficiency moves to speed up service, and the introduction of discounts for pairing coffee with, say, a breakfast sandwich.
It is unlikely that founder Howard Schultz will come to the rescue this time. He has had three stints leading the company, each time returning to bring the company back on brand, but this time has said he is not likely to return. A new CEO has been announced, Brian Niccol, who turned around Taco Bell and Chipotle. The path to reversing the Starbucks sales slump must be through the brand.
It’s not just Starbucks
The Starbucks sales slump is not unique. History is full of brands that have lost their way from their unique purpose, diluting their distinctiveness in search of short-term sales or to conform to some prevailing cultural zeitgeist. Those that recovered had to go back to their original brand soul.
Apple famously survived near bankruptcy when Steve Jobs returned to refocus the company on its brand purpose of “enabling individual creativity and self expression”—devices that go beyond the product to deliver exciting user experiences. The iPhone is not a phone, it is an extension of the user that allows them to connect with the whole world.
Gap’s brand was positioned on a clean and timeless aesthetic, synonymous with classic American style and accessibility, targeted at younger generations. Gap has now wavered from that focus, competing with Uniqlo and Target in basic apparel, and Madewell and Zara in the fashionista arena. Gap has tried to go everywhere and ended up fitting nowhere. The result—5% drop in year-over-year revenues and a 7% decrease in same-store sales.
More recently, Bud Light strayed away from its macho, middle America brand DNA, and teamed up with TikTok personality Dylan Mulvaney, a transgender woman for a social media promotion. A year later, the brand has still not recovered from the backlash and boycott that ensued from its core consumer base.
Gucci lost focus on its brand purpose of extravagance and elitism. It introduced hit products such as the Princetown furry slippers, but then diluted their prestige by oversaturating the market with endless varieties. Gucci also started discounting products and showed up on sales racks, unlike Louis Vuitton who would rather destroy surplus stock than lower its price. There has been a material impact of straying from its brand—Gucci sales are down 20% compared to the prior year.
Use the brand as a True North
A well-thought-out brand purpose explains why the company exists, invites customers in to share that passion, and highlights what makes it unique. Building a great brand is not a one-and-done activity and is not relegated to the marketing organization and communications.
The brand purpose must serve as a True North for on-going decisions about the company’s products and services, employees, operations. It should determine how and where investment is made. Business leaders must apply a brand filter not only to advertising decisions, but also to “non-marketing” activities such as R&D (what products will fit our brand?), supply chain (will our manufacturers exploit their employees?), distribution (do the channels we are using fit with our brand?), pricing (will raising or lowering our prices hurt our brand reputation?), HR (how do we hire talent that will represent our brand?), customer service (are we handling issues in a manner consistent with our brand?) and much more.
Straying away from the brand risks loss of distinctiveness, commoditization, customer defection, and, as we have seen in the example of the Starbucks sales slump, financial doom in terms of revenues, profits and share.