Starbucks’ Double Shot: Speed and Variety at the Expense of Quality

For the second time in a row, I’ve decided to write about coffee—an escapism of sorts. 

Luckily, there have been several interesting developments, particularly concerning Starbucks (which you must know by now is one of my favorite topics…). One such development, although not the most significant, is the 20th anniversary of the pumpkin spice latte. While opinions on this milestone vary, it holds relatively little relevance for today’s post.

A recent article from Bloomberg highlighted that Starbucks is undergoing a significant shift in its operations: 

“Starbucks Corp is responding with what Howard Schultz the guiding light of the company since he bought it in 1987, describes as ‘reinventing’ the operation. It’s spending billions of dollars to shave seconds from the process of making nearly everything—revamping how it brews each cup of coffee, whips up Frappuccinos and blends the wildly popular cold foam. It’s even shifting to smaller ice cubes because they’re easier to scoop. The plan, which at its core amounts to bringing ingredients closer together and streamlining operations behind the counter, is the ‘biggest overhaul we’ve ever had,’ Chief Financial Officer Rachel Ruggeri told investors in June.”

We have read about some of these “reinventions” before, but what is it about this time? Does it include better coffee? For that, you will need to read on… 

Starbucks and Queues: A Venti-sized Journey Through Time

Historically, Starbucks has focused more on the experience they offer, rather than the variety and speed at which they offer it. This wasn’t an inherent weakness; it was just the approach they chose. It’s not possible to become that “Third Place” if the ambiance is that of an assembly line. Over the years however, there’s been a noticeable enhancement in their variety, adding more cold, foamed, and pink-colored drinks. But we’ve discussed this evolution before. 

Now, Starbucks is shifting gears by focusing gradually on speeding up their service and expanding their variety further. This transition isn’t arbitrary and is primarily driven by advancements in technology. In the past, customers would place their orders and wait patiently. But as technology evolves, so do customer expectations and the capabilities of businesses to meet those expectations. The integration of technology has reshaped the Starbucks experience, streamlining operations and enhancing variety to cater to the modern consumer’s needs.

But how have recent technological changes put a strain on the system’s variety and speed? To understand this, we must look at how Starbucks’ in-person experience differs from its online counterpart. When visiting a physical store, the vast array of choices may not always be at the forefront of your memory. For instance, if you have a penchant for sprinkles on your coffee, it might not always be a salient option when ordering in person. When browsing online however, these personalized preferences can be presented more vividly or reminded, tailoring the online experience to each individual’s preferences.

Furthermore, at a physical location, waiting times were often not viewed as a major concern. This might seem counterintuitive, but the environment of the café played a role. Take a look at the following image: 

In this diagram, you can see numerous points where rather than standing in line, customers are floating in a cloud-like queue. 

After placing an order, customers find themselves in what can metaphorically be described as a “cloud” – a holding area where they await their drink. However, this waiting time isn’t just a passive experience. It’s filled with activities like engaging in conversations with fellow customers, browsing sparkly coffee cups, glancing around to gauge the distance to a boarding gate (when at the airport), or perhaps consuming a snack – all these little activities make the wait seem shorter and more pleasant.

So, this systematic approach to handling in-person orders was a part of the Starbucks experience. But it contrasts with the online realm, where efficiency and speed are paramount, and any delay becomes immediately salient. Connecting this to Starbucks’ decision to change gears, it further emphasizes the firm’s need to recalibrate its operations, balancing the in-store ambiance with the speed and efficiency that modern technology and customer expectations demand.

It’s also worth noting that the queue is dynamic since the apparent length isn’t always an accurate representation of the wait time. Some customers may be in line for a quick drink or a simple meal, meaning their transactions are faster. This dynamic nature and the ambiance of the store ensure that customers remain occupied, diminishing the emphasis on waiting time. Linking back to the firm’s initial focus, this ambiance is a pivotal part of the Starbucks experience, and it emphasizes the challenge of integrating speed with the leisurely pace of a traditional café.

From Beans to Bytes: Starbucks’ Tech-Infused Leap for Speed and Variety

Enter online ordering and drive-thrus. Online ordering puts more emphasis on speed since you know exactly how long you’ve waited —you either have a time stamp on your screen or you can see how many cars are in front of you.

“Narasimhan, who sometimes works shifts at stores to better understand the operation, faces the more fundamental question of what Starbucks even is. The company long highlighted its version of Italian espresso culture, a place where people could linger, read the paper and chitchat with baristas. But now, 74% of orders are drive-thru, mobile or delivery, and cold drinks account for three-quarters of its business. The chain even has pickup-only stores with no seating. ‘We fully acknowledge a need to evolve and modernize,’ Narasimhan told investors in May.”

To understand why online ordering makes such a difference, you must realize that every add-on, every customization, every sprinkle and dollop becomes glaringly obvious. As anyone who’s spent a minute too long on an ordering app knows, it’s dangerously easy to go overboard. “Oh, whipped cream? Sure. Extra caramel drizzle? Why not? A hint of hazelnut? Let’s go all out!” While there are no official stats to back this claim, it's safe to say that the number of customized options online far exceeds what people would order in person. The internet’s anonymity does wonders for our adventurous side.

But here’s the catch: with great choice comes great responsibility – for Starbucks, at least. More options mean more ingredients to stock up on, more combinations to get right, and ultimately, more time per order. Thankfully, Starbucks seems to have embraced the modular approach. They’re not scrambling to maintain capacity for each little addition individually. It’s more about smartly managing components that can easily be combined. It’s efficient, it’s smart, and it’s... well, very Starbucks. This is them adapting to the digital age, albeit with the slight turbulence one would expect on such a journey. The following is an amazing image, illustrating the 300+ Billion possibilities available at Starbucks:

The impact on time is not trivial:

“The time from placing an order to being served now tops five minutes for more than a third of customers, surveys from researcher Technomic indicate. That’s mainly because of a sprawling menu and increasingly customized drinks with various squirts, shots and cold foams—which add up to more than 383 billion different possibilities just for a latte. The myriad combinations have been overwhelming workers for years, helping ignite a union movement at the company. Chief Marketing Officer Brady Brewer last year acknowledged the problem, telling investors he asks his kids to simplify their elaborate orders, ‘because I feel bad for the person who has to make it.’”

From Grande Goals to Tall Returns: Starbucks’ Business Brew for Investment

In the ever-evolving world of Starbucks, there’s an increasing emphasis on crafting drinks that aren’t your everyday cup of joe. The demand is for those bespoke, intricate concoctions that take just a tad bit longer to whip up. While I’ve often given Starbucks a gentle nudge (read: critique) for not always being on the ball with continuous improvement, I must admit they have their moments…those lightbulb moments where they recognize the need for an overhaul. This is one of those moments.

For Starbucks, this revelation has taken a rather tech-centric turn. They’re diving deep into their pockets, pulling out a whopping 1 billion dollars to invest in a myriad of ‘innovative’ solutions. But let’s not kid ourselves. Before imagining that the next cup of Starbucks will transport you to coffee nirvana; temper your expectations. This isn’t about achieving a transcendent coffee experience. The goal here isn’t necessarily better coffee but faster service, more choices, with a high degree of personalization. Basically, they’re focusing on giving you a cup of... whatever you choose to call that concoction you order, that’s “more you.”

Is splurging a billion bucks on these innovations really a wise move for Starbucks? Before we jump to conclusions, let’s talk numbers. Drawing from my own research, even a 1% improvement in market share can be monumental. Now, for a fun hypothetical exercise, if we were to poll my readership about the findings of my studies, I bet the answers would be quite enlightening.

Consider this: The numbers get tantalizing if we estimate Starbucks’ current market share and then project the potential gains from a mere 1% increase. But – and this is a big but – we must remember that this hypothetical 1% gain could come from various sources. Maybe it’s siphoned off from other coffee chains, perhaps from fast food joints. It’s the age-old debate – are you Team Starbucks or Team Dunkin'? Or perhaps you’re in the Starbucks vs. Pete’s Coffee camp? (Personally, it depends on the day for me.)

However, viewing this 1% with a grain of salt is essential. It’s a ballpark figure, an approximation at best. For Starbucks’ billion-dollar investment to truly pay off, they’d probably need to nab a tad more than this 1% from the coffee market or, at the very least, ensure that the returns from this investment are spread out over several years. 

Let’s further flesh out the numbers. A recent report by Daily Coffee News, by Roast Magazine, dropped a rather intriguing statistic: nearly four out of every five coffee shops in the U.S. now belong to one of three major players – Starbucks, Dunkin', or JAB Brands. Quite the oligopoly we’ve got brewing here, don’t you think?

Diving deeper, the World Coffee Portal, a market research firm, and Allegra Events, a marketing and event organizing firm, present an annual report on the estimated $47.5 billion U.S. coffee shop market. The past year saw a 3.3% growth, which translates to a total of 37,274 branded coffee shops and coffee-centric restaurants. In addition, sales marked an even more impressive 4.3% growth. It’s worth noting that chain coffee shops represent the most substantial growth segment, boasting an increase of 3.9% in outlets over the past year.

But here’s the real kicker: Starbucks holds a dominating 40% share of the U.S. coffee market. They boast 14,875 stores, with a net increase of 585 stores. So, if we circle back to our earlier speculation about that 1% market share gain, it becomes even more riveting. Since approximately 78% of U.S. coffee shops fall under Starbucks, Dunkin', or JAB brands, even a minor shift in market dynamics could have significant financial ramifications.

In this context, the billion-dollar question (quite literally) becomes clearer. If Starbucks can effectively tap into this market, given its existing dominance and the overall trends in the coffee shop industry, it could indeed be a game-changer. That 1% doesn’t seem so insignificant after all.

The Operational Changes

Bloomberg’s article documents many changes the chain is making. Most notably, an innovative bar setup named the Siren System. This system is designed to simplify the cold drink-making process by positioning essential tools closer together. Baristas can now dispense milk or ice at the push of a button and have blenders and syrup pumps within hand’s reach. However, the rollout of the Siren System is methodical, aiming to equip 40% of U.S. outlets by 2026. Some investors anticipated a faster pace, but this approach mirrors significant upgrades in comparable chains. As Bank of America Corp. analyst Sara Senatore highlights, a deliberate rollout is essential, emphasizing the importance of minimizing store closures during upgrades.

Another notable introduction is the portable cold foamer. This tool streamlines the frothy milk topping process, which once demanded a busy countertop blender that led to inefficiencies and barista congestion.

The firm is also focusing on enhancing the user experience on its app by offering more accurate wait-time estimates, leveraging data from individual stores instead of a broad company model. It’s also experimenting with digital menu boards that signal patrons when their orders are up and is on the brink of launching a method to condense the cold brew-making process from overnight to just a few minutes. 

Finally, the company is also showcasing the Clover Vertica, a state-of-the-art reverse French press machine. This gadget can grind beans and brew coffee in a mere 30 seconds, vastly outperforming the traditional half-hourly urn brewing process. The device is slated for presence in about two-fifths of U.S. company-owned outlets by October. Its rollout, however, has been tempered due to its intricate design, featuring 200 parts, but Starbucks is committed to refining its parts supply chain.

This is something worth delving deeper into and really understanding the operational implications. Afterall, this is a supply chain, scaling, and operations newsletter. Not a coffee one. But I will be remiss if I don’t get into the tradeoff of coffee quality and time. 

Good coffee takes time, whether this is about immersion or percolation.

Here is a study by Jonathan Gange, one of the most important coffee scholars: 

In other words, a significant increase in the bloom time can have a significant impact on the extraction yield and, with it, on the taste. If you’re wondering why the extraction yield matters, the following graph explains:

On the Y-axis, you have TDS (Total Dissolvable Solids) on the X-axis is the extraction yield. The lines represent the brewing ratios people use. There is a small window of extraction yield (between 18% and 22%) where the coffee is not over or under-extracted. Overly extracted means bitter (which is what you tend to get at Starbucks or most places in the U.S.). Under extraction means sour. So, combining these two graphs, it’s evident that making good coffee takes both time and precision. 

The question is, can you achieve the same quality even with 45 seconds of brew time? And the answer is: “Yes, if you have a good grinder,” as the following figure shows:

The Clover costs $11K, which I hope means it has a very good grinder. And what are its other benefits? Less waste (driven by the batch nature of the current variety) and more variety since you can have different cups from different varieties. 

So, when it comes to coffee, Starbucks may end up doing better than before. 

Note: This sentence was really hard to write. 

From Roast to Results: The Last Drop of Starbucks’ Strategic Blueprint

When people pose the question, “What exactly is operations strategy?” I often describe it as the delicate reconciliation process between market demand, technology, and a firm’s inherent operational capabilities. Its about aligning these elements in harmony. Starbucks’ journey provides a compelling case study in this regard.

This alignment or reconciliation, as I like to call it, isn’t something that magically falls into place. Nor is it an infrequent activity. It demands regular introspection and recalibration, especially in industries characterized by rapid shifts and evolution.

Starbucks’ proactive approach to operational excellence stands out. While there have been hiccups and disputes along the way, the coffee giant’s consistent efforts to harmonize market demand with technology and operations are commendable. They don’t simply react; they anticipate and innovate, striving for a harmonious balance between these crucial aspects. This proactive mindset and their continuous endeavors to bridge gaps truly underscores their commitment to operational excellence. If only their coffee was as good as their strategy…