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Starbucks And Coffee Industry To Reassess Strategies

The coffee industry is poised for moderate growth in the next five years, but is warned of an emerging risk: an informed consumer, according to a recent IBISWorld report.

“Despite long-term, aggregate declines in healthy eating, consumers are more aware of health issues associated with fatty foods and are increasingly going out of their way to avoid them,” its latest Coffee & Snack Shops industry report notes. Consumers who are more aware of the nutritional information of a Starbucks Frappuccino, for example, may be less inclined to make repeat purchases. “The healthy eating index is expected to stagnate [in] 2018, but as consumers’ diets progressively improve, this driver continues to pose a threat to industry operators,” IBISWorld said.

Last week, in Starbucks’ financial release, President and CEO Kevin Johnson acknowledged his clientele’s evolving tastes. “We must move faster to address the more rapidly changing preferences and needs of our customers,” he said.

And so, with the Seattle-headquartered roaster and retailer leading the charge, the industry is expected to get creative and a bit more versatile. In its five-year forecast, IBISWorld suggests that coffee alone can no longer fuel the industry’s expansion, which is expected to stay resilient at an annualized rate of 0.9% to $51 billion. “Nontraditional, high-margin menu items, such as iced coffee drinks, breakfast items and wraps,” featured in “unsaturated markets while experimenting with different store formats,” will help generate growth, the report stated.

Furthermore, the collective habits may change everything from coffee retailers’ food and beverage offerings to their physical store layouts. The IBISWorld report stated:

Major operators, such as Starbucks and Dunkin’ Donuts, are expected to expand their menus and remodel the designs of their locations over the five years to 2023 to increase sales and draw a wider range of customers.

Assessing the Risk of Growth
The forecast was certainly prophetic, considering that Starbucks announced plans to close 150 stores due to underperformance just last week. It seems that more manageable expansion efforts will level some profit margins; where Starbucks wanted to hit 3-5% growth, 1% is more pragmatic. According to the company’s statement:

Starbucks is optimizing its U.S. store portfolio at a more rapid pace in FY19, including shifting new company-operated store growth to underpenetrated markets, slowing licensed store growth, and increasing the closure of underperforming company-operated stores in its most densely penetrated markets to approximately 150 in FY19 from a historical average of up to 50 annually. In FY19, this will result in a slightly lower growth rate in net new company-operated stores. 

Last August, Risk Management Monitor reported that Starbucks’ expansion efforts were to the point that there was almost a store on every corner—with an estimated 3.6 locations within a one-mile radius of each other. The realization marked the end of an aggressive growth strategy, in which 8,000 shops were added over a seven-year period. It was also underscored by a 1% downgrade in its share price. IBISWorld still ranks ‘Bucks as the leader of the coffee and snack shops market in the U.S. with a 23.2% market share (followed by Dunkin’ Brands at 17%), and the move is apparently part of a refocused strategy.

Michael J. Mazarr, a senior political scientist at RAND Corporation noted that reassessing Starbucks’ growth rate will help maintain its leadership status. And while businesses can learn by following the company’s example, they should ask deeper, more strategic questions.

“Clearly a major risk to a company like [Starbucks] would be even a modest swing in consumers who believe that the company has gotten too big. The fascinating questions would be: ‘To what extent did they analyze this?,’ ‘anticipate possible changes?,’ ‘think clearly about risks and outcomes?,’ and ‘did they get some assumptions or expectations slightly wrong?” Mazarr told Risk Management Monitor. “Businesses obviously have invalid expectations all the time—not all of those cases are examples of failed risk management or being blind to consequentialist thinking. Sometimes they are trying to think deeply and rigorously about consequences; they just guess wrong.”

Mazarr has contributed to Risk Management magazine with an article exploring consequence management and the “character of risk,” which you can read here.

Can You Have Too Many Coffee Shops?

The collective mood among Starbucks (SBUX) shareholders may have been dark and intense on Wednesday, following a 1% downgrade of the coffee company’s share price by BMO Capital Markets due to “store overlap.” BMO analyst Andrew Strelzik wrote: “There are now 3.6 Starbucks locations within a one-mile radius of the typical Starbucks in the U.S. relative to 3.3 and 3.2 stores in 2014 and 2012 respectively.

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That statistic does not factor in competitors, and implies that too many franchise cafes are located too closely together and are fighting for the same $2 per tall coffee.

The warning signs of overlap were acknowledged and dismissed by Starbucks CEO Howard Schultz in 2010, when he told the Harvard Business Review: “We’re not nearly close to saturation in North America, despite what the cynics or pundits might say…”

At the time of that interview, Starbucks total store numbers neared 17,000 and by the end of 2016, there were 25,085. Was seven years close enough to the saturation point to heed the warnings? Or does the old cliché about hindsight apply?

The overlap may have led to what’s known as risk failure, which Risk Management explored in a 2016 article, “The True Character of Risk.” Article author Michael J. Mazarr would characterize Starbucks’ market oversaturation as a “gray swan”—a danger that is “known, discussed and even warned about, but then discounted.”

Mazarr noted: “When senior decision-makers become immune to outcome-oriented thinking, they will not give serious consideration to risk. They may continue to give it rhetorical emphasis, talking about what could go wrong, but the trajectory of their judgment will never substantially vary.

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McDonald’s learned this same lesson the hard way in the 1990s. Although it had 19,000 worldwide locations, upper management wanted deeper market penetration and kept expanding. Cannibalization didn’t hurt the corporation at first, but investments in new locations outpaced the profits earned from increases in total sales. That led to the fast food chain closing 100 stores and unveiling the popular, but risky, offer of 55-cent Big Macs to attract and retain customers.

Unlike in 2008, when Schultz closed 600 locations overnight because he felt they weren’t meeting the Starbucks vision, the current problem is not reportedly a result of poor management or the inability to offer upscale imbibing experiences. Starbucks has just provided customers with too many options near their homes, workplaces and hangouts to get their next sandwich or caffeine fix.

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Legal Lessons from Starbucks’ Race Together Campaign

Starbucks Coffee Race Together Campaign

One aspect of Starbucks Coffee’s recent “Race Together” campaign encouraged employees to engage customers in a discussion about race. This effort—which had employees write #racetogether on customers’ cups to encourage dialogue—was well intentioned. However, the speed at which it was scrapped shows just how difficult it is to incorporate political and social discussions into the workplace.

The term “hostile work environment” often gets thrown around without any thought to what that really means. The greatest misconception is that anything hostile or abusive that happens at the workplace is illegal. Albeit inappropriate, screaming at an employee or calling him stupid is simply not illegal.

The flipside of that coin is that conduct does not necessarily have to be abusive or threatening to create a hostile environment when the subject matter is a protected category under Title VII, which prohibits discrimination by covered employers on the basis of race, color, religion, sex or national origin. Forcing employees to engage in discussions with strangers about race without any control over how the customer will respond opens an opportunity for the work environment to become incredibly uncomfortable for employees.

Employers have a duty to protect their employees from harassment based upon protected categories by customers, not just other employees. So if a customer responds to an offer to start a conversation about race with a mean-spirited joke or simply a racial epithet, the employer will have to take action against that customer. If these types of responses become repetitive, the employer would likely have an obligation to stop the source of the conflict—in other words, cease the practice of having employees start discussions about race.

There are many other pitfalls in having workplace discussions around sensitive topics that fall into protected categories under Title VII. A discussion of this sort, in spite of the best intentions of the participants to be thoughtful and candid, can easily bring to the surface differences in thought among employees, which may result in ill will. Likewise, comments made during these conversations could be used as evidence that a particular manager is prejudiced against certain types of individuals. Individuals certainly have different perceptions of the meanings of different comments and actions, so a manager might feel that comments he makes do not show any sort of prejudice, while the people hearing the conversation can come to a completely different conclusion. Should the manager then take some disciplinary or other job-related action against an employee, the conversation may be used as the basis for a discrimination lawsuit. At that point, what the speaker intended is less relevant than how the comment is perceived by a judge or jury.

Most employers today certainly haven’t taken steps to instigate this sort of discussion in the workplace. But events do arise in the news that relate to these topics and become the fodder for water cooler conversation. Most employers do not want to become the “speech police,” monitoring every communication among employees that might not relate directly to the business. Yet, these conversations can, just as the discussion on race that Starbucks initiated, become problematic. Then, the key is to make sure that employees are aware of their opportunities to report behavior that causes them discomfort. Open door and non-harassment policies attempt to encourage employees to come forward well before any workplace conduct would become a truly actionable illegal hostile environment. Encouraging use of this process can assist employers in nipping problems in the bud.

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Handling a complaint related to an uncomfortable discussion can have its own problems. Chances are that the employee being complained of did not understand that talking about what he saw on the news the night before should be grounds for his being called out. Many employees wrongly believe that the First Amendment protects the right to discuss these events at a private employer’s place of work.

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Thus, when having the conversation with the offending employee, the employer needs to be prepared to educate the employee on the differences of opinions and perceptions that different people have as well as the employer’s right to keep discussions out of the workplace.

While the conversation about the Starbucks “Race Together” campaign will likely die down, employers can continue to expect the occasional need to address misunderstandings and comments as long as the outside world is focused on these issues. In light of that, here are some steps employers can take to be prepared.

  • Train managers that they should not be engaging in conversations on non-work-related controversial topics with their employees.
  • Train employees and managers in the reporting procedures under open-door policies so they know how to raise a problem before it becomes a big issue.
  • Train employees that your nondiscrimination and harassment policy extends not just to their fellow employees, but also to customers and vendors.

Finally, and most importantly, be responsive when employees raise concerns. Not every complaint is a valid one and not every event that makes somebody uncomfortable is inappropriate. Sometimes an employee must be told that their complaint is not going to result in any changes. Failing to follow up with the complaining employee creates an atmosphere of distrust or leads to the belief that the employer does not mean what it says about preventing illegal harassment.

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