Starbucks Shining Star

It’s midsummer at Starbucks Corporate Headquarters in Seattle, Wash., and despite the swaths of natural light flooding the inside and the warm August weather, a chilled Seattle vibe permeates the entire place. Café colors cover the walls – eggplant, terracotta, burnt orange, butter yellow, sage. The floors are laid with light, clean pine planking; the hallways are wide, with high ceilings. In the various lounges and atria scattered abundantly about the building, comfy chairs group together for hanging out or for extraordinarily relaxed business meetings. It is the perfect irony: an uncanny backdrop of calm for an utterly caffeinated staff.

I have come to Seattle for the “Starbucks Scholars” Consumer Packaged Goods Immersion, a two-day press conference designed to cover just about everything that the company is doing at the moment, both in the U.S. and worldwide. It’s the kind of event at which, by the end of two days, the corporate Kool-Aid – or, in this case, espresso – goes down pretty easily. In their sheer scale, their market power, and the scope of their influence, the company has sometimes invited comparisons to Microsoft, but at the moment, it seems cuddlier than that here. How rough can things get, you wonder, at a company that makes drinking chocolate?

A few months later, of course, I – and the rest of the world – will indeed find out just how rough. The stock price will plummet, and Starbucks will be roundly lambasted for sacrificing its core focus – fresh-brewed coffee – in favor of store expansion. The CEO, Jim Donald, will be shown the door by the company’s founder and Chairman, Howard Schultz, who will return to run the show. But that’s a leap, both temporally and in terms of subject matter, from why I have come out here.

The reason I’m here is that Starbucks, in addition to achieving near-ubiquity as an on-premise supplier of coffee, also single-handedly owns the Ready-to-Drink coffee category, having achieved the same first-mover advantage as Red Bull and Gatorade. Nowhere has the company’s brand strength proven itself more clearly – and been demonstrated more ably – than in ready-to-drink (RTD). It is, in fact, the most basic definition of RTD innovation: the company created the U.S. RTD coffee market ten years ago, from the ground up.

Today, Starbucks’ RTDs remain the standard against which everyone else tries to compete. Of the company’s three primary RTD offerings (bottled Frappuccino, DoubleShot, and Iced Coffee), both Frappuccino and DoubleShot are still No. 1 in their segments of the U.S. RTD coffee category. The clearest example of Starbucks’ RTD predominance is the fact that most bottled coffee products on the market today – including competitors like Bolthouse, or Coke’s Godiva – are Frappuccino homages, right down to their packaging. Frappuccino, of course, is what Gerry Lopez, president of Starbucks Global Consumer Products, rightly refers to as “the original core” of the company’s RTD business: cold, sweetened coffee and milk, offered in a small variety of perfect flavors, and so habit-forming that you have to wonder if it isn’t laced with crack. It wasn’t until last year, with the launch of Java Monster, that any other RTD coffee could even be considered a legitimate second place brand.

Last year Starbucks’ RTD beverage products generated $1 billion in sales in the U.S., and $12 billion enterprise in Japan. Strictly speaking, the whole endeavor goes back slightly earlier than a decade, to the test launch of a short-lived initial product, Mazagran, in Philadelphia in 1994. “Thirteen years ago, everything we did in this category was innovation – totally transforming the way consumers think about coffee,” says Tracey Doucette, general manager of the North American Coffee Partnership, Starbucks’ RTD joint coffee venture with PepsiCo in the U.S. and Canada.

In fact, during a climactic earnings announcement Schultz makes a few months after my visit, and in a letter to every employee of the chain about the changes that will be coming for the company, he doesn’t mention RTD at all. When it comes to cold coffee, it seems Starbucks has it down cold.

By January, Starbucks’ success in RTD is set against a backdrop of crisis and change. So it’s unsurprising that it also turns out to be one of the building blocks of the company’s turnaround. When he first returned to the CEO seat, Schultz made it clear that he planned to introduce more category-building innovations, which, in the RTD space, may signal a departure from the company’s more recent fixation with simple line extensions.

Relatively speaking, Starbucks has been exceedingly conservative about introducing new RTD products, having come out with only the three brand-new U.S. offerings in the last decade. As Lopez puts it, until now the goal has been to create “a few, powerful, distinct products.”

But that line-extension philosophy that has drawn criticism from analysts. “Innovation has been a major disappointment over most of the last two years,” wrote David Palmer of UBS in early 2008. “We were heartened to hear that Starbucks plans on getting back to ‘big ideas’ much like it did during its run from 2002 to 2005.” Analyst Nicole Miller Regan of Piper Jaffray also has criticisms about scale. “RTD is a huge opportunity, and they’re using just a few flavor profiles,” she says. “They have so many things they can already expand on; they really need to get back in touch with that.”

Yet as with everything about Starbucks, the status of their innovation has to be viewed in context of their unprecedented success: their bad days are still better than most companies’ good ones. In RTD, for example, while criticisms of line extension may be valid, that pesky $1 billion market figure keeps cropping up, and may offer a positive indication for new products in new categories. If, that is, they line up with the company’s longtime innovation process.So what is that process? How have three base products and a handful of extensions created a niche that solid?

There are five guidelines that help Starbucks innovate RTD offerings with this kind of power:

1. It’s all about the coffee – and the Starbucks experience.

Like every other product-based decision at Starbucks, innovation originates with and is founded on coffee excellence, the company’s original advantage. “The first thing that guides all of our innovation is that we need to champion the bean,” says Amy Wirtanen, Director of Innovation for the North American Coffee Partnership. “The coffee is the core of our business; it is the reason why we exist. And whatever we do – from a flavor standpoint or from an offering standpoint – it has to be the highest quality coffee that we can offer.”

In that way, too, the company satisfies customer desires. RTD expansion, Lopez says, “builds brand equity – it lets us continue to surprise and delight our customers.”

Says Wirtanen, “We start with learning from the store; the Starbucks retail experience is what we’re trying to champion and then translate into the RTD coffee category. What we try and do is take the best-of-the-best offerings and then bring those to our consumers in the RTD environment.” Does Starbucks fear the energy-drink boom? “Definitely not,” she says. “We look at all different categories in the marketplace to gather learning, but we don’t emulate any one category. Coffee at its purest has a lot of equity that we can really deliver to our consumers to enhance their day.”

2. Use packaging to evoke and support need states.

Packaging is key throughout the RTD coffee line. “We look at all kinds of packaging offerings or options when we are introducing a new innovation, and mainly
we’re trying to fit the package with the consumer experience that we’re trying to deliver,” says Wirtanen. “If they’re going to be out and about in a very convenient, active environment, then a can makes perfect sense because it’s lightweight and it’s so convenient to carry.
The glass bottle for Frappuccino has a great premium equity around it, and it’s the perfect fit with that Frappuccino experience.”

She’s right: Frappuccino is a beautiful little milk bottle, immediately reminiscent of what used to appear in the silver box on the porch each day at dawn. The product name floats across the front of the bottle in a whimsical retro font; stars twinkle on the label, dot the “i.” It’s all about delight, an impression that is immediately confirmed by the first sip: the stuff is just jaw-droppingly delicious. The product is targeted to 18-44 and skews slightly to women, depending on serving size, but at heart it’s just an equal-opportunity indulgence. “Frappuccino is a great way to take a break in your afternoon and kind of rejuvenate yourself,” says Wirtanen. In that way, the product echoes the much-lauded “third place between work-and-home” role of the Starbucks store.

Where Frappuccino is the treat, Starbucks DoubleShot is the jolt: a tiny, slim can of espresso and cream that’s bold, powerful, and a tad bitter in taste. The can is correspondingly decorated in hard-edged brown graphics and clean sans-serif fonts, with a military-looking epaulet of a rectangle boasting two stars. “DoubleShot is definitely the one that goes against more of an urban, active lifestyle consumer,” says Wirtanen. “Our target is a little bit younger – 18 to 34 – and we talk about these consumers in terms of these intensity-seekers, people who are living life to the fullest. This is a great companion for doing that.”

And rounding out the trio of treat and jolt is the third need state that Starbucks markets to: a companion, something to help customers maintain a rhythm, and that’s their Iced Coffee, offered in a tall, slinky silver can wrapped with dawn-shaded bands of orange or blue. “Iced Coffee is a slightly older target, 30-49,” says Wirtanen. “This is more of a light, refreshing way to experience coffee. It’s kind of the one that consumers go to when they’re looking for a companion throughout their day.”

3. Make line extensions count: be more responsive to the core customer.

When you have a small stable of blockbuster revenue-producers, it makes sense to keep riffing on them in the most targeted ways possible. Bottled Frappuccino now exists in flavors including coffee, mocha, caramel, and vanilla, plus a decaf variant, and there’s even an option for customers who want the core experience without the coffee: the Strawberries & Crème Frappuccino. “That’s a great example of how we borrow from the learnings of the store,” says Wirtanen. “Strawberries & Crème in Starbucks retail stores is a very popular flavor.”

And there’s still more surprise and delight, this time in flavor innovation. In September the company introduced two new dark-chocolate Frappuccino flavors: Dark Chocolate Peppermint Mocha (for the holidays, natch!) and a permanent Dark Chocolate Mocha offering that will launch in March 2008. No one can claim that Starbucks RTD is about nutrition – “These are not health-and-wellness products,” Doucette quips – but dark chocolate, which periodically gets media buzz for its healthful properties, is an example of how public nutrition-consciousness can filter into the company’s R&D here and there. “We definitely learn from trends that are happening in the marketplace, and the antioxidant value of dark chocolate helped to get it on our radar screen,” says Wirtanen. “But it’s also just a fabulous flavor.”

Another flavor variation on an existing product is a possible change in the roast used for Starbucks canned Iced Coffee, currently made with Italian Roast. Starbucks Breakfast Blend could be an option, as could Gazebo – both ultra-refreshing tastes that Gerry Lopez says could, for example, provide a more “summer-driven” offering. Again, it’s about the coffee.

A different kind of revision is in diet only products. DoubleShot, Iced Coffee, and one bottled Frappuccino have come out in Light versions and some analysts say that, with only 1/3 fewer calories, the Frappuccino
extensions may not be light – or responsive – enough. “We wonder if Starbucks should reintroduce the Light version and this time ‘go all the way’ with calories,” wrote analyst Palmer about light Frappuccinos. “If Starbucks
is going to remind consumers of the calories in the beverage, the chain should try to remove more than a
third of them.” 4. Try new delivery venues.

For Gerry Lopez, president of Starbucks Global Consumer Products Group, the job for the past three years has been to take the company’s act on the road. “Our mission is building brand equity by allowing our customers to enjoy the Starbucks brand outside our stores,” he says. “If we can in any shape or form remind our customers about Starbucks when they are someplace else, we think that’s a win.” That’s already succeeded, with Starbucks’ RTD reach firmly established in supermarkets, warehouse stores, and convenience stores. “We have RTD coffee products in something north of 50,000 convenience stores,” says Lopez. “So these stores already have a much bigger footprint than our stores.” In the U.S. alone, the company added over half a billion servings of bottled Frappuccino outside its stores in 2007.

RTD is also part of the Center Store Café supermarket launch, a non-branded coffee-aisle redesign that has been installed in 850 supermarkets nationwide. The installation has already driven a total coffee-aisle dollar increases of 9 percent and a premium coffee segment increases of 26 percent in the Midwest. “We want to inform the coffee aisle, to make it be more of a destination,” says Wendy Piñero-DePencier, vice president of Global Consumer Products. “The explosion in RTD coffees as well as packaged coffees has been immense, and sometimes when you’re down that aisle and your behavior is to explore, it can be a bit overwhelming. The Center Store Café makes it be a more inviting environment and a more organized environment, so the experience can be more enjoyable.” On Center Store Café shelves, Starbucks RTD varieties are available in four-packs, and many displays also incorporate a RTD cooler for chilled single servings.

But the newest Starbucks RTD innovation isn’t about chilled: it’s about hot. Hot Vending, the company’s premier new RTD initiative, will offer 9 oz. servings of six warmed Starbucks varieties – one brewed variant, four espressos, and a hot chocolate, priced at either $2.00 or $2.50 – at vending machine sites to be located in all the usual places: colleges and universities, office buildings, airports, train stations.

The company is thrilled about the project, which went into commercial tests in 2007 and will launch into a broader market in the first half of 2008. “This is the finest quality coffee, heated on demand at convenience locations. It’s a transformational innovation,” says Doucette. The system uses fully recyclable pull-tab steel cans that keep the product warm without burning the consumer’s hands. Warming time is 47 seconds, and all six varieties have the same shelf life as bottled Frappuccino.

Both Doucette and Wirtanen stress that in and of themselves, the machines and cans, which are proprietary, represent a giant step. “This is never-been-done-before kind of technology; we’ve had to redefine the way that you do hot coffee vending,” says Wirtanen. “We would not be doing this if we didn’t feel like we could do it in the highest quality way, that would match the Starbucks equity.” It must have been an irresistible impulse for Starbucks to want to address the grim flavor experience that is the average American hot-coffee vending machine. “There are over a quarter of a million hot-coffee dispensers out there. These people are suffering!” says Lopez. “We want to transform them, and give people an opportunity to enjoy Starbucks-quality coffee.”

5. Try new countries.

Howard Schultz’s return as CEO brings a new push toward increased international growth. Analysts agree it’s the right direction for the company to take overall, and RTD is no exception. For all its success, Starbucks’ U.S. RTD market has been dwarfed by the company’s success in Asia. There, RTD coffee was already a frenetic category – 1 billion U.S. vs. 12 billion in Japan – and with convenience stores in Japan sometimes taking RTD coffee deliveries twice a day. Starbucks’ primary RTD product in Asia, a fresh-dairy chilled-cup beverage called Discoveries that is offered in four flavors, launched in Japan in September 2005. On its first day, the product sold out entirely in Tokyo by 3:00 PM.

The company has since expanded into Taiwan and Korea, and Korea now features both Frappuccino and DoubleShot, in slightly different formulas than the U.S. originals, in addition to Discoveries. In November 2007, Starbucks also reached out to China, launching bottled Frappuccino in Shanghai, Beijing, and Hong Kong. Though the company has no plans to try to market a product like Discoveries in the U.S., Wirtanen says that their success in Asia will inevitably have an effect on U.S. innovation. “We will gather inspiration from wherever we can find it,” she says. “And we definitely look to the international markets to see what’s happening there, to see if it’s something that we can translate for the U.S. consumer.”

For the moment, Hot Vending will doubtless occupy much of the company’s RTD-innovation-related time, energy, and enthusiasm. And if other Asian countries are any predictor, the RTD expansion into China will be huge. After that, we’ll have to wait and see what emerges in RTD as a result of Schultz’s promises of new category-building initiatives. In the meantime, back in Seattle everything buzzes along – the coffee cuppings, liqueur and ice cream and premium chocolate ventures, the newest roasts and exotic blends, the general caffeination. Amid all the current unrest, there’s still a particular flavor of success here: unprecedented, unreplicated, and continuing. The big, calm building hums with it.