Starbucks Fights Back

In my previous blog entry, I discussed the struggles of Starbucks and how the innovation bell curve predicted this. Their early response to increased pressure from McDonald’s and Dunkin’ Donuts was to reduce prices by bundling. Not a good move.

The other day they announced their new instant coffee.

Their press release describes VIA™ as “a transformational instant coffee that replicates the body and flavor of Starbucks® coffee in an instant form…(It) is made by adding hot (or cold) water to a cup, which brews the coffee in an instant.”

It comes in individual packets that cost under $1 each.

I like this idea because if the product is truly a high quality coffee and the price makes it more attractive, they will effectively leverage their brand while appealing to the left-hand side of the bell curve.  Instant coffee represents 40% of coffee sales, so it is a nice target market.

However, time will tell if this is a good extension of their brand, or if it dilutes their cachet.

P.S. In my previous article, I discussed McDonald’s forey into the higher-end coffee world with their McCafe offerings. Feedback from Starbucks junkies is that their products are as good – albeit appealing to a more mass-market palette.

P.P.S. My client gave me a Dolce Gusto machine. This capsule-based coffee machine makes cappuccinos, lattes, and espressos in no time with no effort or clean-up. Drinks range from $.50 to $1 each. The verdict? The cappuccinos are as delicious as those that cost many times more.  Much better than any instant coffee could ever be.  The only downside is that you have to invest in the machine.

The New Innovation Bell Curve

The old model of innovation is dead…and a new model has emerged.

For months now, I have been writing about the Innovation Bell Curve.  If you read between the lines, you quickly realize that it is no longer a bell curve but rather more of a bimodal distribution.

Therefore I have re-drawn my frequently used graphic and replaced it with the new innovation bell curve.

The Value Brands are rapidly improving their quality to the point where they are displacing mid-market brands.  And, with the tough economic times, mid-market buyers are seeking greater value and shifting to the left, exacerbating this impact.  Premium Brands remain differentiated (albeit sometimes niched) and always appeal to high-end, more sophisticated consumers.  As the recession lingers on, these premium brands now offer lower cost versions of their products, further squishing the mid-market.

If you have not done so, please read all of my articles on the Innovation Bell Curve.

Is Your Career Doomed? Mine Might Be.

I spend most of my days thinking about the “innovation bell curve.”  The concept is simple, yet profound.

Budget brands will continue to prosper as mid-market consumers move left to save money.

Although premium brands may suffer slightly, there will still be strong demand for high-end products and services.

It is the middle of the bell curve, the “mid-market brands” that are getting squished as consumers move toward greater value and premium brands reposition themselves (a bit more) toward the mid-market customer.

I’ve been thinking about this model as it relates to my career – giving speeches about innovation

On the right-hand side of this model are the “celebrity” speakers.  These individuals include Harvard Business School Professors (e.g., Clayton Christensen), former CEOs of big companies (e.g., Jack Welch), and major best-selling authors (e.g., Seth Godin).  These individuals charge MUCH more than I do.  But they are also a draw.  For large events, having one of the speakers on the platform will get butts in seats.

On the left-hand side of this model are the “vendor” speakers.  These individuals work for large companies who view speaking as great marketing.  These speakers are often not only free, sometimes they even pay sponsorship dollars to be on the platform.  VPs of Innovation for large consulting firms or presidents of innovation software vendors fall into this category.  They have something to sell the audience.

Where does this leave me?  It certainly leaves me rethinking my business model.  Then again, I am always rethinking my business model.

I am continuing to put more energy into books and products like Innovation Personality Poker®.  These move me towards the left-hand side of the model.  You can take me home for a fraction of the cost of one of my speeches.

I am also staying focused on the corporate market (rather than large conferences) because there is still great demand here.  With group sizes of 50 – 300, celebrity speakers are prohibitively expensive.  And given the small event size, the marketing opportunity is not as great for vendor speakers.  My business continues to boom in this area.

Finally, I am shooting the pilot for my TV show in April.  If all goes well, I may be able to re-position myself in the right-hand side of the chart – a celebrity speaker.  But of course, time will tell.

Where are you positioned?  Who is squishing you out of business?  How can you reposition yourself?

P.S. In a previous blog entry, when discussing the innovation bell curve, I talked about the wisdom of Mr. Miyagi in the Karate Kid.  He talks about those in the middle getting “squished like grape.”  I thought you might like to see the YouTube video…

[youtube]http://www.youtube.com/watch?v=3PycZtfns_U[/youtube]

Starbucks and the Bell Curve

It was just announced that Starbucks is now selling a coffee and breakfast for under $4. It’s true.  According to CNN You can get a 12-ounce coffee with a breakfast sandwich or roll or a 12-ounce latte with either oatmeal or a coffee cake.

According to CNN, “the move may be…targeted to drawing back business lost to more cost efficient retailers like McDonald’s and Dunkin’ Donuts.”

This is another examples of the “squeeze” of the players in the middle of the bell curve.  If you are not familiar with it, read  my articles on the bell curve of innovation.  Dunkin’ Donuts (DD) is a great example of a coffee shop budget brand.  As they expanded their offerings, they started to compete (at least in terms of coffee quality) with Starbucks.  Although some think of Starbucks as a premium coffee, most real coffee snobs (and I know quite a few of them) turn their noses up at Starbucks.  It has always been in the middle of the bell curve.   In the past, the middle of the bell curve was a great place to be.  No longer.

Last week I did a speech for the beverage division of a large food company.  This division is largely comprised of “make at home” coffee products, including instant coffee.  Business is booming.  They now have easy to use coffee, espresso, and latte machines.  These products represent an emerging “budget” entry.  For a relatively low cost, these machines produce a high quality, single hot drink with little effort.  There are no messy powders (uses simple capsules), no grinding, no cleanup.  Accessibility at its best.

I realize that Starbucks is more than coffee, it is an experience.  Unfortunately, today, people are less likely to pay for these experiences if other alternatives exist.

Are your products/services getting “squished?”  Can you make them more affordable?  More accessible? This may be the key to survival in this market.

EVA, SVA, and the Economy

While at Accenture, one of our analytical tools was Shareholder Value Analysis (SVA) – a tool based on Economic Value Added.  The premise is that by looking at a company’s financials, we can determine where to best target our innovation efforts.  The analysis can show us, for example, if reducing SG&A will have a greater impact on EVA than, let’s say, COGS.  It will tell us the impact on EVA if we increase sales by a certain amount.   It is a very powerful tool.  You can see the general model by clicking the image on the right.  The analysis is obviously a lot more complex.

This model works nicely in good times.  But does it work today?  What is it telling us?

I asked two of my ex-Accenture colleagues who are experts on SVA the following question:

Cost of Capital is part of the EVA equation. Given the credit crisis, how has this impacted EVA? Is cost of capital going up? If so, what does that mean in terms of where companies should invest then efforts? Or is it going down because the prime rate is so low? What does this mean that from a targeting perspective?

Here are the two responses:

Response #1: On the EVA question, theoretically the Cost of Capital is down given the prime.  But actually it’s up given the credit markets — the Libor is a good proxy (the rate at which banks lend to each other). The B2B rates are even worse, hence all the talk about the credit markets freezing up. In terms of targeting Cost of Capital, that’s a tougher question. Most of the action in EVA around the Weighted Average Cost of Capital (WACC) is related to more or less leverage. So targeting it would mean more leverage and there’s not too many companies that want to go in this direction now. In fact, we may have determined a “ceiling” on how far you can push on that lever.

Response #2: From a mathematical perspective, marginal cost of capital is fairly low these days. The availability of capital, however, is the real issue. In the current market it is difficult to raise capital. Therefore if an enterprise can generate excess cash and can identify opportunities with good returns they should certainly invest. It is no different for an individual. Assuming that a major catastrophe is not looming on the horizon and assuming that one has available cash, this is the time to invest. I should hasten to add that the “classical” capital market theories upon which WACC and EVA are based are NOT, in my opinion, quite valid in a tumultuous market where risk free rates are almost zero and people are simply keeping cash “under the mattress.”

Interesting thoughts.

My follow up question is, “Assumiung WACC is up, what is the relative impact of cost reduction versus revenue growth on EVA?”

What do you think?  I’d love to get many different perspectives on this topic.

P.S. I leave these financial calculations to the data experts (“spades”) and focus my energies on new ideas that solve problems (“diamonds”).

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