Paul Hunt, managing director of Phoebus Software, is bemused by Starbucks
Howard Schultz, the CEO of Starbucks introduces in his latest book the company’s newest offering – instant coffee. The product sounds fantastic. According to Schultz, the instant stuff tastes just as good, but it sells for only a tenth of the in-store price.
But this seems strange. Surely, if the instant product is as good as the coffee made using elaborate machines and highly trained baristas, it must be pretty expensive. Either the instant product isn’t as good as we’re told, or Schultz is admitting the coffee in his cafes is no better than you could make in your office or kitchen. Assuming he’s right about the taste of the granulated offering, Schultz is telling the world that 90% of what you spend in a Starbucks coffee house goes on the not quite indispensable privileges of having a bored teenager pouring your drink and having a roof over your head. He’s admitting he’s all hat, no cattle.
So what is it about Starbucks? If its coffee is either overpriced or of a very poor quality, why do people go there? That, I suppose, is Schultz’ genius. Building a brand that allows you to overcharge customers for coffee that is – by Schultz’ own admission – no better than could be made using instant granules is truly a magnificent corporate achievement. But it’s only possible when you’re dealing with very high volumes of consumers and selling a (relatively) cheap product. Purchasing decisions made primarily on the basis of convenience tend not to mean consumers are getting the best deal.
As a provider of mortgage software, Phoebus lives by rather different rules. Software systems are a big investment and we don’t sell to thirsty and tired individuals on their way to work but to discerning leaders of business. The relationship between cost and quality determines whether we succeed or fail – not branding or gimmicks. We can’t afford to take our clients for granted by offering an instant software system at a bistro price.
If a mortgage lender or servicer’s computer system fails, the costs could be enormous in terms of both finance and reputation. That’s why we spend 25% of our turnover on research and development, to ensure we are able to innovate and stay ahead of the curve and our competitors. We also look after every client’s specific needs, developing bespoke programming depending on how they wish to use their data. Making our technology the best on the market and tending to our customers’ needs is what we do. Losing sight of this as our central objective would be catastrophic for our business.
Even consumer-facing companies which trade as much on brand as on product need to take value and satisfaction seriously. Otherwise, your brand becomes synonymous with disappointed customers. Even a juggernaut like Starbucks can go to the wall if its reputation is tarnished to that extent. A company which operates under the assumption that customers will be drawn as much by its name as its product is risking its survival. That’s why it is such a surprise to see Schultz happily denigrating the value of his core product. No matter what you sell, the fundamentals in any business are the same. If you don’t offer your customers value, they will find someone else who does – no matter how strong your brand. No matter how good you are at talking the talk, it’s walking the walk that ultimately counts.
So, given that it defies normal financial logic, the story of Starbucks really is a remarkable one. But reality may yet bite. Starbucks have never revealed whether or not their operation in the UK is profitable, instead releasing very healthy global figures which aren’t split by national market. Having once been associated with urbanity and excess disposable income, Starbucks may be about to become the coffee world’s equivalent of Chicken Cottage.
