Differentiating a Commodity

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Next to oil it is the second most traded commodity in the world. It’s been used as a health drink and at other times been labeled a health risk. It’s been around for centuries and yet today it is one of the hottest market opportunities – coffee.

Coffee has been traded for roughly the last 1000 years. Starting in the Middle East the drink spread to Europe through the colonies to North America and then Asia. It replaced beer as the preferred breakfast drink in New York in the late1600’s and got a boost as the preferred beverage of the Americans after the famous Boston Tea Party. For much of North America’s history coffee has been a staple of the diet.

By the 1960’s, competition among the coffee distributors was fierce. Price wars were frequent as different distributors sought to build market share. With continued price wars and consolidation in the industry, manufacturers started to use less expensive coffee beans and fillers. However, cheaper coffee didn’t appear to be driving consumption. From the 1960’s to the mid 1980’s coffee consumptions fell from an average of 3.1 cups per day to less than 2 cups per day. The only coffee segment growing in the late 1980’s was specialty coffee which cost roughly double what the local brands were selling for.

Howard Schultz, a former Xerox salesman and now a salesman for a plastics company decided to travel to Seattle in 1981 to find out why his company was selling so many plastic filters to a company called Starbucks. This was Schultz’s first encounter with specialty coffees which caused him to remark he had been drinking “Swill” up until then. Schultz was so impressed with Starbucks he packed up his family and moved to Seattle to work for Starbucks in 1982.

On a buying trip to Italy Schultz was impressed with the role coffee played in the national culture. Schultz saw the relationship between coffee and friends. In Milan alone there are more than 1500 Espresso bars and Schultz felt there was an opportunity to create the same atmosphere in North America.

Back home his partners at Starbucks were unimpressed. At that point Starbucks only roasted specialty coffee – it did not brew it!

Undeterred Howard Schultz left Starbucks and started a series of coffee bars called Il Giornale which became very successful. Much of the success had to do with the quality of the coffee as it did with the quality of the staff. By 1987 Schultz had three stores (two in Seattle and one in Vancouver). At this time the owners of Starbucks were investigating other opportunities and Howard Schultz purchased Starbucks and all its assets for 3.8 million.

Starbucks was now 9 stores and over 100 employees but still only a regional success. Plans were developed and money was raised to build another 125 stores over the next five years. Schultz thought he had a narrow window of opportunity as other competitors (Gloria Jeans in Chicago, Second Cup and Tim Horton’s both based in Toronto were surfacing as strong competitors). In the late 1980’s there was no clear market leader. Schultz wanted Starbucks to become that leader. His strategy was to gain a strong foothold in each city before moving to the next.

All the while, Starbucks continued to push the specialty coffee roasting business selling via catalogues, to restaurants and later over the internet. This part of the business continued to grow and helped to build the brand awareness among coffee fanatics. These loyal fanatics became prime “word of mouth advertisers” when Starbucks coffee houses eventually entered their market. Starbuck purposely did no mass advertising but instead depended on “word of mouth”.

As business continued to expand employee training became as important as the quality of the coffee. Starbucks recognized that much of their success depended upon motivating and sustaining employee interest in Starbucks. Serving coffee it seems isn’t such a simple task.

Starbuck also instigated a “Just Say Yes” Campaign. As long as it was legal and morally ethical Starbucks did whatever it could to satisfy the customer. That included grinding a competitor’s coffee for a customer if need be.

Throughout Starbucks expansion Schultz continued to hire key personnel. He said “Many business visionaries have failed as leaders because they could not execute. Processes and systems, discipline and efficiency are needed to create a foundation before creative ideas can be implemented and entrepreneurial vision can be realized”.

By the early 1990’s Starbucks started to make a profit. It became a hang-out for Hollywood celebrities and the brand grew along with the market. As consumers sampled lattes and cappuccinos, sales of ready to drink coffee skyrocketed 3000% in the early 1990’s. Baby boomers with more disposable income associated specialty coffee with wholesome living and as an affordable luxury.

Starbucks has now expanded to Asia and Europe. They have over 3500 outlets with revenues of 2.2 billion and net income approaching $100 million.

1. Look past the obvious – if there is opportunity in a 1000 year old commodity market there is opportunity in your market.
2. A small group of dedicated people can accomplish a lot
3. Processes and systems, discipline and efficiency are needed to evaluate and act on business opportunities
4. Hire key people
5. Train your staff – the experience your customer has with your product often has as much to do with how your product is delivered as how well it performs
6. Build “word of mouth” development into your business strategy

Howard Schultz showed us that commodities can be differentiated. Who would have thought 12 years ago when coffee was 25 cents that one would pay over four dollars today. Will that be a cappuccino or a latte?

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