Lessons From Starbucks’ Product Managers: How To Protect Your Product’s Rear

by drjim on August 9, 2010

Does The World Need Another Brand Of Coffee?

Does The World Need Another Brand Of Coffee?

So there you are product manager, sitting on the top of the world in charge of the #1 selling brand of coffee and you’re pulling in something like $4 a cup. Then all of a sudden: blam! The global economy falls off a cliff and suddenly there are a whole bunch of competitors who start to poach your customers by offering premium coffee at a much lower price. What’s a product manager to do?

Starbucks’ Low-End Problem

Everyone knows about Starbucks coffee – it seems like there is a Starbucks store on every corner right now and new ones seem to be popping up all the time. Well, according to the Starbucks product managers, that’s not enough.

Lately McDonald’s, Dunkin Doughnuts, and just about every other fast food chain out there have started to offer espresso-based coffee products. Oh, and they’ve been doing it at prices that are lower than Starbucks. The Starbucks product managers have seen this happening, but they have been constrained from doing anything because by necessity Starbucks has a limited menu (in order to keep things moving quickly) and the majority of their business is done in the morning.

While all of this has been going on, the number of Americans who drink premium coffee has increased. In fact, in just the last three years alone the number doing so has jumped from 29% to 35%. Great, so what’s a coffee product manager to do?

Is It Time For A New Brand?

Seven years ago Starbucks bought one of their competitors: Seattle’s Best Coffee. They haven’t done that much with them since then, but thanks to the Starbucks product managers that will soon be changing.

Starbucks plans on rolling out a second coffee brand, you guessed it, Seattle’s Best Coffee. This is the brand that they are going to use in order to compete with the lower-priced fast food coffee offerings that have been nipping at their heels.

This is where the real product management innovation will occur: this new brand is going to be sold everywhere. That means that you’re going to start to see it in about 30,000 different locations ranging from fast-food outlets, supermarkets, bookstores, and even vending machines.

Can We Talk About Risk?

I can almost hear some of you starting to mumble concerns about this approach. You’ve got a good point. Since Starbucks is going to be selling most of the Seattle’s Best Coffee through franchisees they are going to have a significant quality control issue. Additionally, the coffee that is sold though vending machines is generally the worst coffee out there – what is Starbucks thinking?

The product managers at Starbucks point out that they really don’t have all that much to risk. Right now Starbucks has less than 4% of the U.S. market for brewed coffee. There’s no place to go but up. Additionally, the engineers at Seattle’s Best have created a new type of vending machine that they believe can actually deliver a good cup of coffee.

What All Of This Means For You

Starbucks finds itself in a difficult spot: it’s got the #1 selling coffee product; however, the competition is coming on strong. The product managers at Starbucks realize that if the competition is successful at taking away the lower end of their customer base, then there will be nothing to stop them from moving up and capturing more and more customers over time.

Starbucks is taking the novel approach of launching another brand: Seattle’s Best Coffee. They hope that by distributing this product everywhere they will be able to take some of the wind out of the sails of their competition (and money out of their pockets).

For product managers everywhere we have been given a front row seat to a major product strategy move. If you keep your eyes open and see what Starbucks does and how their competition reacts, then you’ll be able to find out how this story turns out…

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World Product Management Skills™

Question For You: Do you think that Starbucks should have just lowered their prices to keep more customers?

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What We’ll Be Talking About Next Time

Way back when you were just a green product manager and you were still learning the marketing ropes, I’m going to bet that someone once upon a time sat you down and told you that sometimes when there is not enough of your hot product to meet customer’s demand, this can be a good thing. Well, it turns out that they were wrong and I’m going to tell you why…

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{ 8 comments… read them below or add one }

Ryan Hart August 9, 2010 at 10:28 am

Presumably, Starbucks initially bought Seattle’s Best because it was a premium brand of its own. I think that SB stores are very nice and serve a top-quality product. That brand is necessarily going to be forced down-market if it is to be sold at fast-food joints and vending machines. This will eventually hurt the ability of existing SB stores to charge Starbucks-like prices. So, turning SB into a “fighter brand” may neutralize threats to the Starbucks brand, but it is not without its costs…

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Dr. Jim Anderson August 13, 2010 at 3:44 pm

Ryan: what makes this story even more interesting is that there is a lot going on in the world of coffee today. McDonald’s must be on Starbucks mind (and maybe Dunkin Doughnuts also). It should be interesting to see how SB does as it goes up against both of these low-end powerhouses…

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W. Alejandro Polanco August 21, 2010 at 9:50 am

To Ryan’s point above, I think the bigger risk here cannibalization of the SB brand and product. What do you think is going to happen when people start realizing that they are overpaying for a product that is comparable — in fact that is part of the same brand — offered through another channel (those who have not realized it yet that is). You guessed it… they will very quickly migrate to that new sub-brand. We’re not talking about cars here. Honda doesn’t cannibalize their Accura line by offering a good product with the Honda Accord. This is coffee, a short-lived consumer good with 1 or two purposes at max.

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Dr. Jim Anderson August 27, 2010 at 2:13 pm

Alejandro: ah ha! You’ve hit the main challenge that the SB product managers must be facing right now! Somehow they are going to have to make the in-store experience worth $4 / cup for people who buy it. It could be convenience, or it could be the availability of food at the same purchase point. No matter what they end up doing, we should all be able to learn from this by watching closely…!

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W. Alejandro Polanco August 30, 2010 at 10:02 am

Seems like they’ve already started down that path. By offering high-quality food items – yes those cupcakes are insanely delicious, and the sandwiches and other snacks are pretty good too – they’re trying to ensure that consumers go for more than just the coffee even if that’s where the bulk of their profit resides. Not to mention wifi. Their customer-base is changing from on-the-run professional on their way to work, to relaxed professional with a laptop or iPad catching up on a book/email/newspaper during breakfast or lunch.

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Ryan Hart August 30, 2010 at 5:15 pm

Seattle’s Best stores aren’t nearly as numerous as Starbucks’ are, so turning Seattle’s Best into a fighter brand is probably not a bad idea. The Seattle’s Best name, which was a premium name, will not be as premium, but That’s a small price for Starbucks to pay to protect the flagship brand.

If Seattle’s Best can keep a strong presence in mid-market coffee, then it will not only crowd out (to the extent possible) other brands that might get ideas about moving up-market to challenge Starbucks in the future. The fighter brand can also keep them at bay by beating them in the mid-market tier so that they don’t ever amass the resources to go after Starbucks.

Sure, consumers will learn that Seattle’s Best is a Starbucks brand, but if Starbucks does its job right, they will perceive the subtle differences in value proposition that justify the $4/cup premium price.

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lilan Li September 16, 2010 at 2:29 am

what marketing metrics should starbucks be capturing?

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Dr. Jim Anderson September 24, 2010 at 11:24 am

Lilan: I’m sure that Starbucks has a huge number of metrics that they collect, but here’s a quick overview of the types that are important. First, does the new low-end type of coffee sell? Does it take market share away from other low-end brands? Does it take market share away from Starbucks high-end brands? What is the impact on the number of people who come to Starbucks stores? Do they know about the new brand? Do they know that it’s from Starbucks? Once they try it, do people like the new brand? Do they end up buying more? Etc…

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