The Starbucks Effect

The success of Starbucks cafés has been good for coffee distributors all over the United States. Why? Because Starbucks has given coffee a new cachet. All coffee. Not just the product sold by Starbucks (which represents only a minute fraction of the coffee drunk in the country) but also the 80 % sold in supermarkets—and all the rest. What’s more, Starbucks’ creativity has set off a chain reaction of innovation in the once-sleepy industry. Kraft’s Maxwell House now markets a slew of new brands, including Italian Espresso Roast, Rich French Roast, Master Blend, and Colombian Supreme, and it has also successfully expanded its upscale mail-order business, Gevalia. Coffee’s greater cachet has had a big effect on the bottom line. Ten years ago, only 3 % of all coffee sold in the United States was priced at a premium—at least 25 % higher than value brands. Today, 40 % of coffee is sold at premium prices. Over the past decade, we have tracked the cachet of 39 categories of fast-moving consumer goods measured as the percentage of the product category sold at a premium over value brands. We’ve found plenty of evidence of the Starbucks effect. When individual companies increase the perceived “premiumness” of a product through innovations in the product itself or the way it’s delivered, the entire category can reap higher prices and profits. Yogurt is another good example. By the 1980s, yogurt had lost its status as an exotic, healthful product. But between 1991 and 1994, Dannon introduced a spree of innovations, including crunch-top packaging and pop-out spoons, raising both its market share and its average price. General Mills followed with Trix yogurt, Yoplait Adventure Pack, and Go-Gurt yogurt in a tube, aimed at creating a new kids’ yogurt niche. Dannon has recently tested a drinkable yogurt. This burst of creativity, plus a big investment in complementary advertising, has begun to push up the sales of premium brands throughout the category. Dannon, for example, has increased its profit margin by five percentage points between 1990 and 1997. Unfortunately, the Starbucks effect can be taken to an extreme. The cachet of spaghetti sauce and facial tissues has eroded in recent years, largely as a result of focusing too much on the superpremium end and letting the main brands drift toward the private label. Unilever, for example, failed to capitalize on the cachet of its superpremium Five Brothers brand by under-investing in Ragu, which for some time had been a premium product. If you lose the focus on building cachet for the entire category, you can expect your earnings to take a fall as well.

The Starbucks Effect

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