Starbucks CEO sees ‘seismic shift’ to online shopping
On last week’s conference call for Starbuck’s first-quarter earnings, Howard Schultz, president and CEO, made some waves by claiming brick & mortar retail was at an "inflection point" in losing traffic to e-commerce shopping.
In wrapping up his company’s initial comments, Mr. Schultz said he heard many traditional brick and mortar retailers blame their holiday shortfalls on factors such as the shortened holiday shopping season, a beleaguered consumer and the U.S. government shutdown. But he believes many left out "a larger fundamental truth" around the growing influence of the internet.
"No longer are many retailers only required to compete with stores on the other side of the street," said Mr. Schultz. "They are now required to compete with stores on the other side of the country. Navigating the seismic shift will continue to be very, very difficult for me."
In particular, traffic and comp growth softened in December, which he agreed may be partly due to weather but also because people were spending more time on the web during the traditional "gift giving time"’ than ever before.
Mr. Schultz believes the shift will be skewed toward mall-based retailers and will represent a "real sea change for many, many retailers." It also "will not be a December-ish problem" but an "an ongoing issue and it’s going to hit them faster than people think in terms of the way people are shopping and how they are spending their time, and the value that you can get on the web."
The Starbuck’s chief exec spelled out how the company’s unique experience, loyal following and ongoing digital investments will offset expected ongoing losses in traditional retail traffic.
Mr. Schultz’s comments follow a Jan. 16 Wall Street Journal article entitled, "Stores Confront New World of Reduced Shopper Traffic," that said Best Buy was among those seeing a drop-off in traffic after Thanksgiving with more people shopping online. The article indicated that shoppers aren’t browsing as much in stores but "seem to be figuring out what they want online then making targeted trips to pick it up from retailers that offer the best price."
The article cited ShopperTrak data that showed that holiday traffic in 2013 was about half of the traffic in 2010, and overall shoppers visit an average of three stores per mall trip now, down from five in 2007.
- Starbucks Reports Record Q1 Results and Reaffirms FY14 Growth Targets – Starbucks
- Q1 FY14 Starbucks Earnings Conference Call – Starbucks
- Why Starbucks Worries About Retailers’ Dwindling Foot Traffic – Bloomberg Businessweek
- Stores Confront New World of Reduced Shopper Traffic – The Wall Street Journal (sub. required)
- Retailers See Fourth Consecutive Annual Sales Increase During 2013 Holiday Season, According to ShopperTrak – ShopperTrak
Discussion Questions
Do you think other top retail executives are finding it difficult “navigating the seismic shift” to online as admitted by Howard Schultz? Does online represent a greater threat or opportunity for Starbucks?
Mr. Schultz is absolutely right about the shift, and he has a right to be concerned about the strength of his mall-based locations although his business is less vulnerable than a conventional retailer selling general merchandise.
Part of the “omnichannel” challenge is for retail executives to figure out how to leverage their tangible assets (storefronts and inventory) more effectively, given consumers’ migration to e-commerce. For some stores (Macy’s, for example), their forward-looking strategies are delivering results. For others (such as Best Buy) it’s a continuing struggle despite their efforts to execute the fundamentals better.
Absolutely, leaders are struggling with the shift. It’s the classic innovator’s dilemma. If brick & mortar excellence is what got you into your leadership role, it’s a huge ask to expect you to lead the transformation to a new paradigm. None of the ice harvesters become ice factories, and none of the ice factories become refrigerator firms.
That being said, some companies and leaders have been able to make the difficult leap. IBM shifted from mainframes to personal computers and again to services. Intel shifted from memory to CPUs.
These epic shifts are simultaneously threats and opportunities. Expect to see winners and losers, but don’t expect to see business as usual.
It’s more complicated than that. Brick-and-mortar retailers are challenged to provide the same or better customer service as e-Commerce retailers; at the same time brick-and-mortar continues to deliver the greatest percentage of final sales. But mobile technology is now influencing sales, both online and in-store. The challenge for all retailers is to figure out how to provide a unique and excellent in-store customer experience and deliver a consistent brand experience across channels. It’s vital for retailers to consider all challenges “opportunities” rather than “threats,” in order to move forward successfully.
Many retail executives are finding it difficult to navigate the shift to online. This is evident in the lack of seamlessness between their online and brick and mortar stores. For example, Gap, one of the nation’s largest clothing companies, still has different pricing between online and in-store and will not match pricing. Consumers are tired of out-of-stocks at retailers like Target. And while Wall Street is racking up big profits and paying huge salaries and bonuses, Main Street is still suffering from the recession and looking for value.
Starbucks is selling an experience, not just coffee. Its customers meet at their stores to share or go there individually to get out of the house, and perhaps, to be online. The challenge for Starbucks will be to stay abreast of consumer trends and be there for consumers as technology changes their lives, such as with the Starbucks app.
Mr. Shultz’s use of the phrase “inflection point” is an understatement. There isn’t a brick & mortar retail executive worth their salary who isn’t losing sleep over how to navigate this “seismic shift.” “How do we keep our investment relevant for today’s digitally empowered shoppers?” is a question dancing in each of their heads.
All the excuses and “spin” blaming, weather, government shutdowns, etc. are just distractions to appease Wall Street and to mask the simply fact that these retail executives don’t have a map (or a strategy!) to navigate these uncharted waters.
There is opportunity, but to seize that opportunity one has to grasp the reality and start with a clean white board! However, learn from Mr. Johnson’s experience at JCPenney and make certain you build a bridge for your existing (core!) customers to follow you to the new chapter.
Those retailers with “minds of the unforgotten” are having difficulty with the shift to “online glories.” Technological and a new — albeit uncertain — culture is changing not only how retailing is trending, but also the world.
Yes, Howard Schultz faces a threat from online, but he has proved he can successfully manage such threats. Remember when he converted a 50-cents-a-pound commodity into one of the most fashionable and high priced events in history?
Mobile technology is a key factor missing in Howard Schultz’s statements. It is easy to assume “online” and “web” means someone sitting in front of a desktop computer clicking away on an e-commerce site.
In 2014, mobile devices are connected to the web and people are on the go. Retailers can tap into location-based marketing, QR code shopping posters in subways and real-time inventory check and endless aisle capability. In addition, retailers can provide specialized apps to help consumers shop with augmented features on their mobile device.
Let’s be honest – there are really two choices to a transaction. Buy it at a store and take it out of a store that day, or spend the next 3-7 business days typing in your ship track code to see if the package shipped from the e-commerce warehouse.
Brick and mortar retailers have the clear advantage to leverage mobile connectivity to drive consumers to their stores and deliver products and service immediately.
Mr. Schultz’ comments follow a pattern that strikes me as odd every time I see it: referring to “brick and mortar” and “e-commerce” as though retailers still operate in one model rather than both. The seismic shift to online may or may not equate to a shift from one retailer to another. Therein lies the challenge and opportunity. I see many retailers addressing this by opening small format stores, accelerating/refining site-to-store capabilities while expanding online marketplaces. Retailers such as Walmart, Staples and Best Buy are working hard to leverage their physical scale rather than allowing it to become a liability.
As for Starbucks, brands have traditionally expanded through category extensions. Going forward, they will expand more rapidly through new business models. Starbucks is wisely pursuing both which only reinforces the multi-model dynamic/advantage.
Schultz is definitely right about the “inflection point” and it’s not just limited to retailers, it can affect brands too. Last week, P&G blamed soft results at Gillette on the trendiness of beards, but I suspect that they are starting to feel the low-end disruption of online competitors like Dollar Shave Club and Harry’s.
Retailers that are doing the really hard work of integrating their digital and physical experiences in ways that surprise and delight customers and ease the purchase process are the ones who will be best positioned to create an opportunity instead of worrying about a threat.
Yes. Online is a greater threat for merchandise based retailers, however, service and food focused retailers are fairly secure in focusing their competitive efforts at more traditional brick and mortar competitors.
Who still believes that online retail is a fad? Who thinks it won’t continue to grow? This is no longer new. The growth of online retail will continue to grow. The brick and mortar retailers will have to adapt (or die).
Starbucks knows they have an opportunity in front of them. They can have a great online presence while continuing to deliver the exceptional in-store experience. After all, that is what people pay for – the Starbucks experience. Beyond a cup of coffee, Starbucks has entered into other areas of retail; music, gift items, packaged coffee and more. Starbucks has proved to be innovative and without doubt will continue to do so, taking advantage of on-premise and online opportunities.
I think Starbucks and RW should consider a joint promotion: comment on 5 SBUX articles (with at least 1 recommendation on each) and get 25% off a whatever-you-want Grande; but seriously, what, exactly, makes Mr. Schultz an expert in the challenges of online retailing? I’m not saying his observation doesn’t have validity; on the contrary, it’s so obvious(ly true) I can’t imagine someone disagreeing with it.
As for what impact the transition will have on SBUX, that depends on how much they’ve piggybacked off of the foot traffic of casual shoppers…certainly they’ve gone to the nth degree to be destinations themselves.
I believe Starbucks has a winning strategy and is already well positioned for the rise in online purchasing. Recall that Starbucks ground coffee and coffee beans is a leading brand at grocery and can be bought online. They are already pretty omnichannel. People will still want to get out of the house for some fresh air and Starbucks is a destination…the third place.
Many brick and mortar retailers are finding it difficult to navigate as online shopping gathers momentum. It was no surprise Cyber Monday sales broke records. Online grows as consumer trust builds in products, service and fulfillment.
Starbucks will find a way to make this an opportunity – perhaps through greater online presence and promotion of retail products or something truly new. They developed an innovative strategy with VIA instant to create an in home “Starbucks experience” with an appropriate price point to succeed during lean economic times.
Heck yeah it’s a problem for retailers! (can I swear on RW?) The number I saw was that Holiday foot traffic was down about 15% to last year, yet revenue was up. Amazon being a big beneficiary of that as well as retailers’ own web sites.
Here’s the problem in layman’s terms: most big retailers spent a good 20 years (’88 – ’08) opening stores. These stores cost money in terms of inventory, associates, build out costs, etc. And now, in the blink of a retail eye, they’re not utilized. Many will have to close. That’s not a little problem.
So, the big questions are: how many stores do I have to close and what do I have to do to make those left open ‘worthy’ of a visit? Those answers have huge ramifications to everyone in the industry, from a part time sales associate to the CMO. Exciting times.
Re: Starbucks; they rely on foot traffic so, if there’s decreased foot traffic – that’s a huge problem too, although not as much of one as most retailers face.
Finger pointing is was and will be a distraction for those interested in results. The e-commerce boom is a means for consumers to lower costs. Brick & Mortar only is arresting companies’ ability to sell into a cost conscious and reduced credit consumer economy.
If I were the owner/investor of a coffee concession, my eyes would be on the growth of the K-CUP industry. This competitor keeps the consumer away from lines and poor weather conditions with lots of fast consumable options. It is interesting to note that K-CUP prices are relatively similar both in stores and on line. Blaming the calendar, the internet or any other uncontrollable factor discloses a need for investors to review the controllable factors a little closer. For instance, one might question if the company in question has created any policies or procedures that are unattractive to potentially large numbers of of the company’s clientele. Another positive investigative process would be to see how effective is the company’s site selection as well as looking at the site footprint effectiveness. And so on and so forth.
Starbuck’s investors might be better looking to the controllable for issues and answers rather than placing confidence in management by magic 8 ball methods and statements.
Over dinner with about 30 top IT leaders at the NRF show, I asked the group what would happen to malls where the anchor store(s) had walked away. One ventured “Amazon distribution center?”
America has been over-stored for decades, and the continued increase in online shopping necessarily means less traffic in stores. Retailers are going to have to work hard to create differentiating experiences to lure customers in.
Consumers have already decided that they will buy what they want, when they want it, from whoever…. Until all retail executives embrace that, they will find it impossible to “navigate the seismic shift.” For generations, retailers have been operating with the objective of getting consumers to buy what the retailer has to offer and the store they have it in. No matter what they say, that mindset is still rampant. Stop measuring same-store sales and start measuring sales.
Seismic waves travel at different velocities depending on the density and elasticity of the medium. For bricks and mortar, the density equals the market share in an area, and for elasticity, let’s call that the likelihood of customers returning back to normal bricks and mortar behaviors when the online wave travels through the region.
So far, we have had a number of rumbles, but the lights are still on in the stores. So I suggest that retailers, move now to create evacuation plans to move their most important assets to higher ground, namely: their customers.
All those people, who come in and out of your stores, are more than an email address or a POS transaction. It’s not about multi-channel, it’s about serving people’s needs, which reminds me of the following joke:
“A priest and pastor from the local parishes are standing by the side of the road holding up a sign that reads, “The End is Near! Turn yourself around now before it’s too late!” They planned to hold up the sign to each passing car.
“Leave us alone you religious nuts!” yelled the first driver as he sped by. From around the curve they heard screeching tires and a big splash.
“Do you think,” said one clergy to the other, “we should just put up a sign that says ‘Bridge Out’ instead?”
If Howard Schultz believes and follows through as he says, then he will be proactive and shift newer locations from malls to capture business traffic away from Dunkin’ Donuts and convenience stores. In addition, he may want to win prime spots near heavy traffic supermarkets. He’s still selling experience + quality + healthier choices for snacks and sandwiches and so far this strategy has keep up with market trends.
The sad thing is this. The Internet has been around and its potential has been realized for quite some time. It’s been long enough to have put yourself in a better position by now. CEOs who are not ignorant are losing sleep, and many will lose their companies if they can’t re-scale their brick & mortar business, or ramp up their online business. We all saw this coming and watched.
I think Schultz should take a look at his business. Until Amazon can deliver a hot beverage to my driver-side window in under ten minutes, he shouldn’t have a problem. If he is concerned about his attempt to move into “new” areas, then he has to take net competition into consideration.
The biggest question he should answer is why he is creating problems for himself. Why develop a coffee maker instead of investing the R&D into making Keureg work for him, or delivering ground coffee or beans at a reasonable price? Face facts, if Starbucks would price itself more reasonably, its retail products would do much better. Heck, Starbucks pricing opened the door for Dunkin’ Coffee in my neck of the woods, and I would bet Dunkin’ is outselling Starbucks at retail.
Schultz may be a major factor in forcing seismic shifts due to his insensitivity to the ever discretionary consumer.
Clearly, many retail executives are having a tough time navigating although “seismic shift” seems to imply this has been a sudden and virtually unpredictable shift, like an earthquake. I’d suggest this shift is more like the slow, grinding motion of plate tectonics, since we’ve had 20 years warning since the founding of Amazon.com.
Living as I do in San Francisco, we know a big quake is coming and we do what we can to prepare for it: better construction methods, retrofits to old buildings, building a new Bay Bridge and tearing down the old one.
I’d like to suggest that retail executives get serious about some of their own seismic retrofits before they fall victim to “The Big One” and it’s not a question of if, it’s a question of when:
* Are your eCommerce and brick-and-mortar businesses two separate business units? The consumer sees your business as one brand and expects a single, seamless, delightful experience. Until these operate as a single unit with everyone’s goals and incentives aligned, the rough seams with chafe at the consumer and you’ll be at risk.
* Are you enabling consumers to do what they want, or are you trying to make them to do what you want? Just ask former music industry executives how the latter strategy worked out before Apple swooped in and ate their entire industry by providing what consumers really wanted.
* Are you pressing your brick-and-mortar advantages and using them against the pure-play enemy? Are your associates providing customer-friendly, helpful, relationship-focused service? Does your store environment provide inspiration and entertainment value they can’t get online? Are you encouraging a hands-on product experience that online can’t match?
This battle is far from over, and it’s not inevitably going to be won by pure-play etailers. Some have stepped up their game, but most retailers need to move much more decisively, aggressive, and quickly.
For Starbucks it seems like a growth opportunity whether they sell direct to consumers or through third party online channels. They have the in-store attractiveness thing nailed given the experience they create in a way similar to the Apple Store so online would represent net new sales opportunities. Plus, they are also the manufacturer in the equation so they have an advantage over typical retailers.
The long term prognosis for brick/mortar retail as a business model doesn’t look very good unless something substantial changes in terms of where efforts are focused. Especially with pure online channels like Amazon offering the convenience of same day or near same day delivery, reasons to travel to a physical store seem few. It will be interesting to see if retailers work on leveraging their existing locations and inventories to support a similar model while trying to develop new compelling reasons for consumers to shop in person.
It’s all about the refusal of retail executives to embrace change. Regardless of their traditional target demographic, every C-level retailer should be focus on the generation of shoppers after the Millennials (aka Gen Z or Next Gen) who will have no first-hand knowledge of an analog world.
I still contend that retailers focused on intertwining the best of a hands-on experience with the ease of online shopping will create the right atmosphere for shoppers and gain more overall wallet share. However, in order for this to happen, the siloed approach to in-store vs. online lines of business within a retailer must end – now.
I think the problem for a service company like Starbucks is, if the mall traffic is down and the business traffic is down, you know they aren’t coming to the mall just for you. It might be better for Starbucks to develop the supermarket product instead because the times when people had time to go to the mall and just “shop” are over. Ain’t nobody got time for that! The lady who lunches is now in a nursing home in Boca, her daughter is scrambling to find a job post-divorce, and her grandkids are struggling with student debt. You only buy what you have to!
There is, for me, one key factor in the issue of bricks and mortar versus web. It comes down to the emotional experience. One example – a smart dress shop, on and offline – knows that the job a woman ultimately needs to have done with clothing is selection of a complete wardrobe, and goes out of its way to offer advice and products and services that supply that integrated wardrobe (“This goes with that, at Suzanne” was a popular Australian jingle.) You thus ensure multiple visits and additional opportunities to companion sell – but more importantly to help that customer get the complete job done more perfectly. A happy Heidi then showers her friends with glowing referrals.
All of these benefits are possible from website or store, but what the retail outlet should be focusing on is the additional training of sales staff to ensure they know what they are talking about to help generate trust and emotional partnerships – in this case for example, suitable styles for the job, colour coordination, fabric wear benefits, fit for purpose options – and buyers to get the right mix.
Staff, merchandising and facilities in these job-focused retail outlets are (or should be) aimed at helping Heidi understand the options and the relative benefits for each outcome in helping her get her job done. Can your sales assistant sit down with her in comfortable seats, Starbucks coffee to hand, to generate a planned wardrobe, with the incentives to return? Or are your staff just glorified checkout chicks and ready candidates to be replaced by the online shopping cart checkout alternative?