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Business - Written by on Monday, July 28, 2008 15:09 - 12 Comments

Wikinomics Report Card: Starbucks

Can Wikinomics Create a Fifth Street Corner?

This week I will profile the Seattle based coffeehouse giant Starbucks. In case you missed my last report card on De Beers; you can find it here. You can now find all my previous entries, and posts relating to them on the new Regular Features tab on the top left side of the page. Like all my previous entries, I will be evaluating Starbucks on the Wikinomics principles of being open, peering, sharing, and acting globally.

Company Background: The original Starbucks was opened in Pike Place Market in Seattle, Washington, in 1971 by three partners. They sold coffee beans and high end coffee equipment, but didn’t sell any actual coffee. Entrepreneur Howard Schultz (current President and CEO) joined the company in 1983, and after trip to Milan, Italy, suggested that they sell coffee and espresso drinks in addition to beans. The original owners disagreed with this new direction, and sold the company to Schultz in 1987. By the time the company went public in 1992, it had grown to over 165 locations across North America. In 1996, Starbucks opened its first international location when it opened in Tokyo, and opened in London in 1998. Today, Starbucks has over 16,000 stores in 44 countries including over 11,000 in the U.S. alone. However, the company recently announced that it was closing down 600 underperforming company-owned stores in the U.S., effectively ending the era of prolific growth and expansion.

Being Open: Starbucks ranked 7th on the Fortune 100 list of Best Companies to Work For 2008. Although friends of mine may tell you differently, Starbucks treats its employees very well. They offer health, dental, eye-care benefits to all employees who work an average of 20 hours per week over a three month period in addition to a 30% discount on drinks and merchandise. While Starbucks treats its employees well, it has been the target of much public controversy. While Starbucks claims that all their beans are purchased through fair trade, groups such as organicconsumers.org say that only 6% of Starbucks coffee is certified free trade. While they say the amount Starbucks ultimately pays for its beans is fairly comparable to free trade prices, Starbucks does its transactions through middlemen rather than with the farmers directly. Starbucks claims to sell “rare, exotic, cherished” beans from a remote plantation in Ethiopia that Starbucks advertising says is grown in ways good for the environment – and for local people too. However, this eco and poverty friendly sales pitch falls flat when the farmers are paid $1 a day and the plantation is located in a threatened mountain rainforest. Instead of committing to an accountable and respected third-party certifying system, Starbucks has created in internal “corporate responsibility” model that is expensive for coffee farmers, non-transparent and strictly voluntary.

Grade: B-

Peering: My colleague David Cameron wrote about My Starbucks Idea on the blog a few months ago. The idea is quite similar to Dell’s Ideastorm, most recently blogged about by Justin Papermaster here. The basic idea is that Starbucks customers submit ideas, and then discuss and vote on them. Starbucks then tries to implement the best ideas, and you can now follow their implementation progress on Twitter. This is a great idea that both generates great feedback and does a great job at engaging customers.

Grade A

Sharing: Starbucks does its best to try and control its intellectual property. Starbucks owns most of its stores, and only franchises or enters into joint ventures in certain circumstances. From the Starbucks website, “A qualified high volume/high traffic retail or foodservice operation can own and operate a Starbucks licensed store.” However, Starbucks will only license its name and operations in places like airports, college campuses, or hospitals where they would otherwise have no access. While it violates some Wikinomics principles, it is hard to criticize Starbucks for going this path. Even without franchising, and sharing its intellectual property, Starbucks has completely saturated the U.S. market. However, Starbucks is smartly entering foreign markets through joint ventures, partnerships, and licensing agreements.

Grade: B+

Acting Globally: Starbucks is profitably expanding internationally. With increasing news about store closures in the United States, Starbucks’ international expansion is more important than ever. So far, it has been very successful in penetrating markets traditionally opposed to American coffee, or coffee in general. While Starbucks is having a hard time convincing the older generations in France to abandon cafes, younger generations are joining American tourists in embracing frappuccinos and caramel flavored coffee. Starbucks is also expanding aggressively in tea-drinking nation of China. Starbucks is trying to overcome this by empowering China’s emerging middle class to show off their new lifestyle, and purchasing Western luxuries like Starbucks coffee. While Starbucks’ international expansion has gone well thus far, it still faces public protest for what it represents in a similar way to McDonald’s. Starbucks has been boycotted by antiwar protesters in Lebanon and criticized by New Zealand advocates seeking higher coffee prices for farmers. Faced with the possibility of terrorist attacks, they pulled out of Israel. However, these are minor bumps that are expected with international success.

Grade: A-

Overall Verdict: Despite its recent ailings due to a suffering American economy, Starbucks is an international success story. In the 20+ years since being sold to Howard Schultz, the company has had unprecedented growth. It is harnessing the power of Wikinomics through its use of peering with My Starbucks Idea, and is taking steps to becoming a bigger advocate of free trade and organic coffee.

Overall Grade: A-

I am not a coffee drinker or a frequent Starbucks customer, but I applaud what they have done as a company. I was wondering what fans of Starbucks had to say. Have you submitted anything on My Starbucks Idea? Do you think they should be more of a leader in the free trade movement? Do you drink Starbucks coffee when you go on vacation in Europe?

Any and all comments are welcome!



12 Comments

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Denis Hancock
Jul 29, 2008 8:22

Starbuck’s role the evolution of the music industry also deserves some attention. I wrote about their deal with Paul McCartney (June 2007 – http://www.wikinomics.com/blog/index.php/2007/06/12/paul-mccartney-is-still-needed-at-64/), and you can also check out their hearmusic.com site. While the company hasn’t quite pushed as far in this space as I had hoped, they’re light years ahead of many others connected to the music industry…

Ben Letalik
Jul 29, 2008 9:52

Denis,

Thanks for the comment. You are certainly right about the cool things Starbucks is doing with the music industry.

Starbucks’ partnership with Apple is also very promising. You can now buy Starbucks-like music on the iTunes store. In addition, the iTunes Music Store will automatically detect the current and last 10 songs playing in a Starbucks and offer users connected to the store’s wireless network the opportunity to download the tracks.

I think this is another step towards making Starbucks “the third place” where people hang out and relax in between home and work.

Albert Ross
Jul 29, 2008 9:56

They’re outta here or at least most of them are.

In a tribute to the discerning taste buds of Australians Starbucks has just announced that it is “to close 61 of its 84 stores across Australia by Sunday, shedding 685 jobs in an effort to shore up its international business.”

That the product looked mostly like strained dishwater did not go to well with Australians who like their coffee mad from fresh beans properly roasted and ground, made with care and served properly.

http://www.abc.net.au/news/stories/2008/07/29/2318072.htm?section=justin (URL may change)

Anali
Jul 29, 2008 11:14

Hi Ben- thanks for the blog. I work at Starbucks and I appreciate your insight. I was glad to see your post about MyStarbucksIdea and wanted to share Starbucks social network with you called Starbucks V2V (v2v.net/starbucks). I encourage you to check it out and see what impact it might have on ‘peering’ in our report card. Thanks again for the post! Hope to hear from you soon.

Ben Letalik
Jul 29, 2008 12:06

Thanks for the great comments and up to date information. With all this new information, an update to the report card will be needed soon.

Albert: Thanks for the heads up. With the Starbucks quarterly earnings coming out this week, the Australian closures may be the first of many more to come around the world.

Anali: Thank you for sharing this with the Wikinomics community. I am not only very impressed that Starbucks is the first global partner of V2V, but also that Starbucks has such dedicated employees that patrol the blogosphere, promote the company, and get involved in initiatives such as V2V. I suppose this is why Starbucks in #7 on the Fortune 100 list.

I’m interested to see how this new community volunteer initiative will work. Starbucks has been blamed in the past for Wal-Mart syndrome as it displaced neighborhood coffee shops. It looks like Starbucks will try to recreate the community feel of a coffee shop, but on a global level. Very cool.

Anali
Jul 29, 2008 15:11

Ben: I’m glad to hear that your first touch of V2V has been positive. While it only has ~3200 members, it is an amazingly healthy and global online community. Keep up the report card concept- I love it!

Starbucks, I never knew you … and now I never will « Occident Prone
Jul 29, 2008 23:28

[...] Wikinomics [...]

Rex Lee
Jul 30, 2008 21:02

Hi Ben, Although I like where Starbucks is trying to go with their “My Starbucks Idea”, they could do much more by understanding the engagement factors around motivation, opportunity & capability.

Here is my blog post that delves into how they could improve.

http://www.socialmediatoday.com/SMC/32633

Ben Letalik
Jul 31, 2008 9:35

Rex,

Great blog post! I think you raise a lot of great points about the limitations of My Starbucks Idea.

You are right in that the most popular ideas don’t really offer any disruptive changes, but I still think the little ideas have value.

A lot of suggestions are for different food items, or certain recycling tips. While these alone are useful, I think Starbucks could also PROPOSE their own ideas for community discussion. Starbucks now has a mechanism for testing new food and drinks or community initiatives without paying for costly market research.

I feel the greatest value of My Starbucks Idea isn’t from ideas that customers propose (though they are useful), but the community surrounding those ideas. Imagine the positive word-of-mouth marketing resulting from a person who’s idea was “under review” by Starbucks. The fact that you can now follow the implementation team on Twitter only increases the two way communication.

Finally, if the majority of ideas (complaints) are about high prices, or wanting more free stuff, Starbucks is doing things right. There isn’t a need for disruptive change, and the fact that the community isn’t suggesting any helps prove that.

Rex Lee
Jul 31, 2008 10:28

Thanks Ben.

I agree completely with two of your points (little ideas are valueable & the value of the community may outweigh the value of the actual ideas).

I partially agree with the value of “introducing concepts to the community”. I think it’s valueable, but may be misleading depending on what you are trying to accomplish. If you are looking to attract “new” customers, but only ask existing customers you may miss out on insight. Had Nintendo asked hardcore gamers what they wanted, I wonder if they would have suggested the Wii (which has a slower processor and lower-res graphics)?

Unless I misunderstand your final point, I respectfully disagree with the logic around “If community doesn’t ask for something therefore PROVES no need for disruptive change.” I am pretty sure it wasn’t the Apple community that asked Apple to create the IPod.

To quote Steve Jobs, quoting Henry Ford… ‘So you can’t go out and ask people, you know, what the next big [thing.] There’s a great quote by Henry Ford, right? He said, ‘If I’d have asked my customers what they wanted, they would have told me “A faster horse.”

http://rexsthoughtspot.blogspot.com/2008/03/lessons-on-innovation-collaboration.html

Don’t get me wrong. The My Starbucks Idea is a good start. They can go even further with this though.

Ben Letalik
Jul 31, 2008 16:01

Rex,

My main point about “If the community doesn’t ask for something, it proves there is no need for disruptive change” is more along the lines of complaints.

Starbucks customers are complaining about high prices rather than something which needs immediate attention. This is a good thing. However, you are right in that Starbucks still needs to realize that even if customers aren’t suggesting disruptive change, that disruptive change shouldn’t be explored for future opportunity. My point is that Starbucks’ current offering is adequate. However, by sticking with that offering, growth will stagnate and therefore for future growth opportunities, they need to explore disruptive changes.

I really like your Wii analogy. It has attracted a whole new demographic of gamers (definitely not hardcore). It could be argued that the whole Starbucks concept was a disruptive change for the coffee industry in North America. Before Starbucks, many people were happy with instant coffee in the morning, or cheaper coffee and donut shop alternatives like Tim Hortons. Premium coffee and espressos are a disruptive change to the industry in North America.

I think you are right that the next disruptive change likely won’t come exclusively from My Starbucks Idea, and that the best innovation will use a combination of the “wisdom of crowds” and the “expert”.

Wikinomics » Blog Archive » Wikinomics Roundup: Week in Review
Aug 1, 2008 14:31

[...] they pass with flying colours or get a sheet full of red ink? Find out @ Wikinomics Report Card: Starbucks On July 28, 2008…Dan Herman talks about China’s 253 million net users and what that means [...]

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