Starbucks and Green Mountain

New Single-Serve Deal is Preemptive Distribution on Rocket Fuel

The Robin Report - StarbucksOut of the starting gate, it appeared that Starbucks (SBUX) understood preemptive distribution until they didn’t, which resulted in a near death experience that finally jolted them awake like a strong cup of Java. Not that the misunderstanding of preemptive distribution alone brought them to near death, but it was a major factor.

During its explosive growth phase between 1995 and 2009, Starbucks grew from under a thousand stores to almost seventeen thousand. One could literally be spotted on just about every corner. And, Starbucks was not shy about its long-term goal, to reach twenty-five to thirty thousand stores. The company was so committed to this frenzied expansion that it was distracted away from its historical focus on the brand’s signature experience, that connection with consumers that had them hopelessly hooked and willing to pay premium prices (which, incidentally, earned the brand the nickname “fourbucks.”) At the point in their accelerated growth trajectory at which they opened one too many Starbucks locations, they verged on becoming ubiquitous. What consumer wants a watered down Starbucks experience on every corner?

Preemptive distribution does not mean ubiquitous distribution (everywhere, all the time). It means being precisely where your consumer wants you, when they want you, and how often they want you. And, it means being there ahead of (preempting) the hundreds of other equally compelling brands. It’s not buckshot distribution. It’s surgical, laser-like and instantaneous distribution. Therefore, it also means distribution through every electronic and physical distribution medium available that connects with the brand’s core consumers, and, it potentially means that a brand may distribute through a competitor’s medium. So, ubiquity and the loss of the brand’s “soul” began the meltdown, luring former CEO, Howard Schultz, out of retirement in 2008 to fix it. In an internal memo he criticized the loss of some of the “romance and theater” along its growth trajectory. Schultz’s assessment of the decisions he made in favor of growth was stated in the memo: “Over the past ten years, in order to achieve growth, development, and scale necessary to go from less than 1,000 stores to 13,000 and beyond, we have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience and what some might call the commoditization of our brand. Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces.”

From Ubiquity to Preemptive Distribution

Recovering Starbucks experiential DNA was job #1 for Schultz upon his return. And, simultaneous with this effort, during 2009, some 1500 stores were closed. Schultz’s efforts in reestablishing Starbucks as the “third place” unique experience has been paying off, and is becoming the biggest competitive preemptor of all for the brand. Simply, a Starbucks “addict” will travel across town for his or her “fix” when a competitive coffee shop might be right across the street, which has debunked the original thesis that a Starbucks on every corner was a preemptive advantage.

Schultz further expanded and strengthened the brand by means of social media, implementating mobile and e-commerce initiatives like a Starbucks Card eGift and creating a variety of apps, like the My Starbucks iPhone app, Rewards Program, and others. And, most recently, Starbucks is pursuing what my co-author and I have defined in our book The New Rules of Retail as part of the Third Wave of preemptive distribution: pursuing synergy-creating third party distribution mediums.

With a strategy to diversify into multi-channels and multi-brands, Starbucks launched into supermarkets with the Starbucks brand, then added its VIA Ready Brew instant coffee, Frappuccino beverages and the Tazo tea brand. These were followed by an expansion of its strategy for its subsidiary Seattle’s Best Coffee into 40,000 locations worldwide.

A Meteoric Synergy with Green Mountain

Now Starbucks could be latching onto a rocket-fueled ride to co-dominate the fastest growing coffee distribution model: single-cup brewing. Green Mountain Coffee Roasters (GMCR), with its Keurig system, owns an 80% share of the single-cup brewing market in North America, and has agreed to partner with Starbucks. Both will integrate their distribution and product portfolios in what investors have voted will be a win-win synergy and a meteoric growth opportunity.

In the single-cup market, while Green Mountain owns an 80% share, Starbucks research indicated that 80% of its customers do not yet own a single-cup brewer. Further research points out that in 2010, 86% of coffee drinkers made coffee at home, up 4% from 2009.

On top of this “low hanging fruit” Starbucks will sell the Keurig system and its own K-cup coffee packs in its 11,000 North American shops. Green Mountain projects sales of seven million brewing machines in 2012, and expects to be in 30% of U.S. homes over the next three years.

One analyst predicted the partnership will yield an additional one million brewer sales for Green Mountain and 600 million Starbucks K-cups in the first year.

Synergy-Creating Preemptive Distribution

We will begin to see an acceleration of this type of synergy-creating preemptive distribution. We have provided numerous examples in recent articles of The Robin Report where the combining of brands such as Sephora, Mango and JC Penney (JCP), Sun Glass Hut and Macy’s (M), Whole Foods (WFM) and Forever 21 and Sears (SHLD), drives fundamentally new traffic.

More recently, Kroger (KR) will be selling Bombay home furnishings in 180 of its stores. The Gilt Groupe is about to launch gourmet foods for sale on its site – not as flash sales, but 24/7. Radio Shack (RSH) is referring to itself as an “agnostic, multi-carrier” provider of prepaid and subscription cell phone services, featuring T-Mobile kiosks in its own stores. Target (TGT) will have Verizon (VZ) kiosks in its stores. For those of you who are making this strategy a priority, and are proactively (vs. opportunistically) pursuing its implementation, the win will be enormous.

In this worsening “share wars” environment, topline organic growth is near impossible. You need to steal a consumer from a competitor or get your customers to buy more from you, and more often. By combining two different, but compatible brands and/or product categories, a business can accomplish both. It’s happening.

Now it’s your turn – just do it!

Robin Lewis About Robin Lewis

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs, among others, and has consulted for dozens of retail, consumer products and other companies. In addition to his role as CEO and Editorial Director of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.