Key lessons that small and medium companies can learn from Starbucks

Around half of all startups fail within the first five years. Some companies expand too fast and overstretch their budget and supply chain, while others fail to innovate and amaze customers. Not recognising the importance of marketing and social media can also lead to business losses. Whatever the case may be, many of these mistakes can be avoided. In fact, there’s a number of thriving companies that demonstrate how to successfully navigate the world of business, one of them being  Starbucks, a coffeehouse giant with annual revenue in excess of $20 billion.

Founded in Seattle in 1971, the company didn’t always enjoy the type of growth and stability it has today and has experienced problems well known to many startups. Its supply chain, for example, used to be inefficient due to over-reliance on outsourcing and unclear division of tasks among employees. Starbucks’ logo, mission statement, and approach to marketing have evolved throughout the decades to keep up with changing market demands, while it took years of careful planning and execution to achieve the current level of customer service. Just ten years ago, the company took a hard hit during the 2008 financial crisis, closing 900 stores, laying off 6,700 employees, and seeing its profit fall by 28 per cent.

It seemed bleak, but Starbucks managed to overcome the crisis and achieve impressive growth. The lessons it has learned over the years can inspire other companies to find their own formula for success. By analysing the decisions made by Starbucks’ executives in critical periods, smaller companies can become better at negotiating with suppliers, stirring emotions in customers, and getting their marketing message across.

How to reform the supply chain and save half a billion dollars

Between October 2007 and October 2008, Starbucks’ supply chain expenses rose sharply from $750 million to $825 million. Furthermore, sales in its US stores dropped by 10 per cent, wreaking havoc on the company’s bottom line. Clearly, it was time for a change. Peter D. Gibbons was tasked with improving supply chain operations, and the first thing he did was analyse the cost structure and the ways in which the stores were serviced. He discovered, for instance, “that less than half of store orders were arriving on time”, the company was overly reliant on outsourcing, and “65 to 70 per cent of supply chain expenses resulted from outsourcing arrangements for transportation, logistics, and contract manufacturing”.

To get things in order, Gibbons first reorganised Starbucks’ supply chain department into four functional groups: plan, source, make, and deliver. In practice, this meant that, for instance, employees working in transportation or customer service were assigned to the ‘deliver’ group, while those in production planning or new product launches departments were now a part of the ‘plan’ unit. The key objectives changed as well, as all units were now tasked with finding ways to reduce cost and improve efficiency. The ‘sourcing’ group, for its part, analysed various supply contracts Starbucks signed. Gibbons explains that they “began breaking items down by ingredient rather than just purchase price. We built more effective ‘should cost’ models, including benchmarking ingredients and processes, which showed that we could negotiate better prices”. Also, the ‘make’ unit managed to reduce the time it takes for coffee beans to reach processing plants from ports by building an additional roasting plant. These efforts were critical for Starbucks, as the company was handling thousands of deliveries each day, whether it’s “coffee from Africa or merchandise from China”. And finally, Gibbons ensured the long-term success of the supply chain department by attracting talented employees and training existing staff. As a result of these measures, Starbucks’ supply chain expenses were cut by half a billion dollars.

Smaller companies can learn several lessons from this example. First, it’s highly recommended that they simplify supply chain operations as much as possible and ensure employees pursue clear goals. Also, managers are advised to carefully analyse the cost drivers behind the goods they buy. To illustrate, they could check if a freight rate might be reduced by unloading goods faster or at a different time of day. By better knowing their suppliers, companies can negotiate prices more efficiently. Also, it’s important to keep innovating and finding new ways of improving operations and removing activities that don’t add any value.

The key to success in marketing is stirring emotions

While supply chain operations help Starbucks to produce delicious coffee, marketing activities ensure that customers flock to the stores. The critical piece of Starbucks’ marketing strategy is forming an emotional connection with customers. Take, for example, the company’s mission statement that says “To inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time.” The focus of the statement is on people and the places they live in, helping Starbucks to form an emotional bond with them. Also, customers love to see their names written on a Starbucks’ cup as it makes them feel special, further strengthening their affection towards the company. Starbucks connects with customers in other ways, too. It emphasises its commitment to protecting the environment and customers in the UK, for instance, are offered a 25-penny discount if they use a reusable cup, or they have to pay an additional five pennies for single-use paper cups. Starbucks’ executives also don’t shy away from publicly stating their political opinion on a range of issues, while the company shows it cares for its employees by providing them with “100% tuition coverage for a first-time bachelor’s degree”.

In more practical terms, the coffee giant uses some well-known marketing techniques such as ‘fear of missing out’ (FOMO). Red holiday Starbucks cups are a perfect example of this. They’re available for a limited time during the holiday season and if you don’t get yours quickly, you’ve missed out. Last year, for example, many stores were running out of cups on the first day of launch. To announce the arrival of holiday cups, and to run its marketing activities in general, Starbucks makes good use of social media. There are two things worth mentioning here. First, the company always repurposes content for different platforms, and second, its social media managers maintain “short and sweet conversations with their customers”. And the strategy seems to be working. Unmetric, a social media analytics company, says that in 2017, the number of Starbucks’ followers on Facebook increased by 710,000 in “comparison to 53,500 fans that the average Restaurant & Cafe Page from North America gained”. Also, Starbucks responded “to 95% of the conversations generated by the 158 Posts they published, receiving 100% positive sentiment from their audience”.

And lastly, Starbucks deals with problems head on. For instance, it acted swiftly and issued an apology after the arrest of two black men at its store in April, 2018, and a storm of accusations for racial profiling of customers in the US. A month later, Starbucks shut down more than 8,000 of its stores and offices for an entire afternoon and organised racial bias training for 175,000 employees. This quickly turned the “majority of media buzz from negative to positive”, ensuring that the carefully honed Starbucks brand remains intact.

Startups can implement many of these lessons into their marketing operations. For one, they need to be aware that forming an emotional connection with customers is critical for long-term growth. Different types of businesses will use different tactics to achieve this, but winning over the hearts of people remains a key task. In fact, an analysis of 1,400 successful advertising campaigns shows that “those with purely emotional content performed about twice as well (31% vs. 16%) as those with only rational content”. Also, back in 2015, the most shared ads relied on four key emotions: friendship, inspiration, warmth, and happiness. Apart from this, Starbucks also shows how smaller companies can benefit by creating limited-time offers to boost their sales and use social media to its full potential. Moreover, managers are well advised to clearly state the values their companies stand for and act on it. And when employees make mistakes, leaders should admit the problem and act quickly to fix it, just like Starbucks did.

Delight customers and they’ll come back

The one area in which Starbucks especially excels is delivering outstanding customer service. After all, it couldn’t hold almost 40 per cent of the “market share for US coffee chains” and be the 5th most admired company in the world without knowing how to amaze people. The first trick Starbucks uses is ensuring customers can order products as easily as possible. For instance, if you’re in a hurry, you can order coffee through a mobile app and it’ll be ready by the time you arrive.

Also, the app will suggest new products that you might like. This is an important feature as product suggestions can significantly increase revenue. Furthermore, Starbucks made use of the fact that around 75 per cent of customers visit stores due to loyalty or reward programs. Starbucks Rewards, for instance, is a reward program that counts 15 million people and provides them with an opportunity to enjoy free refills or free items after passing certain spending thresholds. In fact, the ever-growing number of these consumers now “account for 40 per cent of sales at company-operated stores”. And Starbucks also pays close attention to creating “a pleasant atmosphere by carefully selecting things like music, seating arrangements and decorations”.

Companies with high-quality customer service are 60 per cent “more profitable than their competitors”, while almost 90 per cent of customers would pay more if “superior customer service was also guaranteed in the deal”. Clearly, great customer experience is good for the bottom line, and Starbucks is the perfect example. Deliver good products, ensure customers can easily buy them, offer reward programs, make people feel pleasant, and you’re on the path to success.

Build a company that’s more than just a money machine

Starbucks wasn’t always the market leader in the US and one of the most admired companies in the world. In fact, the coffee juggernaut had its share of problems throughout its history, but it managed to overcome them and achieve impressive success. The lessons it has learnt, especially in areas such as supply chain management, customer service, and marketing, can inspire smaller companies to find their own solutions to various challenges.

But there’s more to learn from Starbucks than this. Howard Schultz, the CEO of Starbucks from 1986 to 2000 and again from 2008 to 2017, says, “I was trying to build the kind of company my father never got a chance to work for. A company that would try and balance profit with conscience.” And this philosophy influenced the company profoundly. Starbucks’ executives publicly defend values they stand for even if it means going political, while admitting mistakes their employees make and working to solve them. The company is also an avid promoter of eco-friendly policies, and even helps its employees receive education and advance their careers. In many ways, the coffee giant provides a blueprint for startups on how to thrive and become a business that people will admire.

This article was originally published in 2019 on the Richard van Hooijdonk’s blog.