What Business?

Don’t go away, it’s time to play! WHAT BUSINESS ARE THEY IN? Some time ago I explained the concept that the business a company appears to be in (and sometimes even the business that they think they are in) are different from the one(s) they are actually in. For example, a generic coffee house (like a Starbuck’s or a Peet’s Coffee) may appear to be selling you coffee and inexpensive food, but since the coffee they’re selling you for $3 would cost you less than 40 cents at home, and the muffins and rolls are four times what you’d pay in the market, clearly that isn’t the basis for this type of business model. Starbucks and their competitors are selling you convenience, not food, as their primary business; consider that one of those home coffee makers that pours brew directly into a travel mug would pay for itself in less than a month (you’d save $2.50 every time you used it) and generate a very large savings over its two-to-three-year service life – but you’d still have to set it up, clean it, buy the beans (and milk and sugar and so on), wash out your cup, and so on. At a Starbucks, you are effectively paying somebody else to do all of that for you, and for a lot of people, that seems to be an acceptable deal…

What a Starbucks is not is the sort of non-exclusive neighborhood social club that the coffee house started out as, and which supposedly still represents their single most dangerous class of competitor. People will practically live in a good neighborhood coffee house; they’ll buy dozens of meals and drinks there every week and never go home unless they have to. No matter how hard they try, Starbucks can not sell you a social experience, a community, or a life-style; even in cases where they have no direct competition in your neighborhood, you just can’t develop that sort of atmosphere in a corporate-owned shop that looks just like 8,000 other locations worldwide, has the same décor, equipment and furniture, and sells the same product as every other shop in the chain. But if you thought that was going to stop them, you really haven’t been paying attention, either to the Starbucks Corporation or to this blog…

For the past couple of weeks we’ve been hearing reports like this one about a new Starbucks operation called “15th Avenue Coffee and Tea” which is intended to provide a completely different experience from your neighborhood Starbucks. In addition to obvious things like recycled wood and metal furnishings and decorations, the new shop will also sell beer and wine, offer bread and pastries from a local artisan bakery, sell restaurant-style food, and feature various community tie-in efforts. It’s a very clear effort to re-brand a Starbuck’s as one of the neighborhood coffee houses they’ve been trying to drive out of business pretty much since their corporate expansion began, and a lot of people in Seattle are already posting skeptical comments about it, but to me it brings up two more immediate issues…

First, what business is this new operation supposed to be in? It’s not making money on markup, like a regular corporate coffee shop, and it’s not likely to generate the sort of local following that keeps a real neighborhood coffee house in business. Moreover, people don’t go to the coffee house for beer, wine or restaurant-style food. It’s possible, of course, that this new operation will find (or generate) its own clientele, creating an entirely new niche within the food service industry, but it’s hard to imagine how this would integrate well with the rest of the company’s operations. Which brings us to the other question: will adding higher-priced items to their menu and spending money on expensive store renovations really help a company that is being clobbered by the current economic downturn and the corresponding drop in disposable income? Is the neighborhood coffee house really the threat Starbuck’s should be gunning for, or will the much cheaper coffee products being offered by McDonalds (and convenience-store chains like Circle-K, 7-11 and Speedway) be the competition that does them in? It should be interesting to see how this turns out…