Starbucks Falls Apart: How Arrogance and Ignorance Paved Their Road

One of the great collapse stories of the last two years in American business is Starbucks Corp. Once a high-flying company, opening more than a store a day throughout the world, with a stock price soaring to $40 per share early in 2006, Starbucks is now mired down with a stock price of $17.80--which it has not really explored since early in 2004 (oops, it just fell under $16.00 in after-hours trading after posting terrible numbers). While the story of Starbucks' fall will be told by a business historian in the future, I would like to take one example of their arrogance and ignorance that shows why they should justly fall. It has to do with Starbucks' venture into chocolate, both in 2005 and 2007.

Let's set the tone. In Fall 2004 Starbucks could do no wrong. The stock was climbing vertiginously, stores were opening daily, same-store sales were climbing over the previous year in some cases to double-digit numbers, etc. Starbucks was exploring a phenomenon which I think is crucial for businesses that want to become premier businesses in the "life-style" category--i.e., they must be perceived not just to be selling a product but purveying a lifestyle. Like Nike before them, so Starbucks was trying to present itself as the "third spot" for the busy modern worker--home, work and Starbucks. Thus, s/he would be willing to drop $4 for a cup of coffee because of the intangible atmosphere that Starbucks would create. Sip a Starbucks, talk with a colleague, write a report, sip more Starbucks, and that is life.

For a while it almost seemed as if they would succeed in this. Long lines formed at each Starbucks, friendly associates served up a variety of steamy drinks to the demands of the customers, new generations of kids seemed to be caught up in the Starbucks "lifestyle" of paying $4 for coffee or other drink. Pastries and breakfast sandwiches appeared. You could buy gift certificates, books, CDs, kitchen appliances. You could, in Evangelical terms, invite Starbucks into your life as Savior and Lord, paying homage to its temple each day (or maybe twice a day) as your Lord and your God.

How Did Starbucks Respond?

With its glowing success and promise of even higher revenues because of people's perceiving Starbucks as a "lifestyle" choice, Starbucks decided to become even more arrogant than previously. In Fall 2004 they announced a steaming hot beverage made with cocoa butter and whole milk which they dubbed Chantico (Shan TEE ko), after the Aztec goddess of the hearth. Right. Aztec goddesses. Right. As if any of the sweats-wearing, indulgent Starbucks crowd would care one iota about Aztec culture or goddesses. A 6-oz. cup had 390 calories, 21 grams of fat and 51 carbs. When nutrition experts hit the ceiling on this one, Starbucks arrogantly responded that after three years of post-9/11 privations, Americans wanted to explore decadence, and that overdosing on chocolate would be just the means to do it. Starbucks was going to enter the chocolate category in a very big way, according to the-then "Director of Hot Beverages" at the company.

But our poor Aztec goddess-named drink turned out to be a magnificent flop. Early in February 2006, one year after Chantico debuted, Starbucks announced that it would stop selling the drink because "it was not adaptable to different customer tastes." That is, you couldn't get it with bunches of chocolate in the bottom and light cream on top--or in 100 different ways, just like you order all the rest of your drinks. Starbucks, who had created the monster of individual tastes, had now been bitten by its same monster. You could only serve Chantico in one form. People wanted "soy Chantico" or "sugar-free" Chantico or "caramel" Chantico. But Starbucks couldn't respond.

So, they sheepisly denied reality even as they withdrew the drink. As their corporate spokesman explained, "It was something that customers did like, but they wanted to be able to do something else with it. We wanted to go back and give customers what they are looking for." Huh? How do you give them what they are looking for by pulling the product? But then comes the arrogance. They planned, at least in early 2006, to put out a new chocolate-based product that wouldn't exactly be a Chantico replacement but would be the:

"next evolution of what an indulgent product woud be at Starbucks."

That says it all, doesn't it? It says without equivocation that Starbucks was so caught up in the decadent-game, in the race towards indulgence and comfort and complete frivolity and frills that it would just continue to explore indulgence. After all, it could do that, couldn't it? Its stock price was soaring in the stratosphere. Everything looked wonderful. The only thing that it hadn't explored fully was indulgence.

The next essay explains how Starbucks crashed.

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