A tale of the struggles of two iconic brands - Starbucks and Nike
Nike and Starbucks are two iconic consumer brands that have been pioneers in brewing large scale disruption, at scale, in their respective industries. To get you a quick idea about their scale and the scale of their primary industry, here are some basic stats -
Starbucks has an annual revenue of about $36 billion and Nike has an annual revenue of about $51 billion
Starbucks sells over 4 billion cups of coffee a year in over 38000 stores with nearly half of these located in the USA. Nike is estimated to sell over 700 million pieces of footwear per year
The USA market for coffee is estimated to be at around $110 billion while the market for shoes is estimated to be around $90 billion
Nike and Starbucks are in the news off late - largely for the wrong reasons. A quick glance at their stock price trajectory will tell you as much.
Nike's stock price hit a high in 2021-22 but tanked in the 2 years after that. I'll cover reasons for both later in this article.
Starbucks' stock price hit a been a huge laggard in the last 5 years as seen below but went up by nearly 20% last week - I'll tell you why later on
Nike’s fall from grace - a self inflicted wound
Nike is associated with being a pioneer in the world of sports and athletics and has come out with iconic products like the Air Jordan or iconic ads like this this and this.
If you have read Phil Knight’s autobiography "Shoe Dog”, which is one of the greatest business autobiographies ever, you will know that Nike’s DNA was all about product innovation and moving fast at a time when large incumbents like Adidas worked like typical hierarchical corporations. It focused on athletes first and the core messaging of their iconic ads was always about breaking the barriers and winning. So where did Nike go wrong?
In 2020, Nike appointed their new CEO John Donahoe, an outsider and consulting veteran from Bain who was also an executive in companies like eBay and ServiceNow. He was an outsider, also in the sense that he did not have any experience in the world of fashion and apparel. This time also saw an exit of company veterans in the design and marketing function.
Remember, this was a time of Covid lockdowns and the online world was booming and so Mr. Donahoe did what any consultant would advice, focus on the online world, especially on Nike’s d2c app and site. They set a target of generating 50% of Nike’s revenue through it’s d2c app/site. At the same time, it also focussed a lot on its retro sneakers and given this narrow focus and the exit of senior personnel in design, innovation and new product launches stagnated.
Nike became so focussed on the d2c app that it also cut down a lot of relationships with their offline retail partners.
It also started focussing heavily on performance marketing and their pipeline of iconic ads took a back seat.
They also let go of many athletes and sportspersons from their contracts. Remember - it was tie ups with athletes like Tiger Woods, Michael Jordan, Roger Federer, Serena Williams and Cristiano Ronaldo that gave the brand so much brand recall and a premium amongst its customers.
Nike was a pioneer in creating artificial scarcity in their product launches. Shoes were sold out in seconds after launch and this led to a huge re-seller market, especially for products like Air Jordan. However, given a never ending line of retro sneakers and a huge inventory glut, that led to falling inventory turnover, killed this artificial scarcity and Nike’s product were simply not as coveted as before.
The image above shows the huge drop in re-seller premium after the 2020-21 covid led online boom. The image below shows how Nike's operational efficiency has been going down over the last 15 years.
Competition, especially new age brands like On, Hoka and New Balance, were faster in launching innovative product lines and were happy to take up the retail space that Nike had vacated. This connection with the offline world also led to a feedback loop that helped further improve their product.
Remember - no matter how tech savvy your population is - there will always be a large part of the consumer market that prefers buying offline - do NOT alienate that segment or else they will happily choose other brands that are available to themFinally, competition in key geographies such as China really heated up and that, mixed with China’s economic troubles, led to a drop in demand for Nike. Add, to that, Nike got embroiled in a nationalist controversy regarding Xinjiang, leading to calls for a boycott in Chinese social media channels
A storm has been brewing at Starbucks
Starbucks is another aspirational brand that has set the benchmark for innovation in the coffee and beverages industry for over 4 decades. It’s important to understand that unlike India, where Starbucks is largely used for meet and greets and catchups, or for some people who like working from cafes, Starbucks’ thrives on the coffee-on-the-go culture that is so prevelent in the US. Customers visit the Starbucks store, say in the morning, as a part of their daily routine to pick up their beverage and maybe a breakfast item alongside.
What has gone wrong?
Just like Amazon’s DNA is customer obsession, Starbucks’ has a DNA of the experience -especially the interaction between the Barista and the customer. The idea was that visiting a store should be experiential and not transactional. Due to various reasons that I will try mentioning next, Starbucks’s has lost some of that DNA over the last few years
Starbucks was amongst the first retailers to launch an app for ordering more than a decade ago. The idea was that a customer can simply open the app, look for the nearest store, place an order and get an estimated time of preparation. Unfortunately, Starbucks did not focus enough on the operational aspect of this where consumers either got a waiting time that was too long or got a misleading estimate - the estimate may have said that it would take 5 minutes, but in reality, it would take more than 15 minutes.
Remember, the US has a huge pick-and-go culture and such delays, especially amongst regular customers, would inevitably lead to alienation and dissatisfaction.
Starbucks lost some of its innovation DNA and faced intense competition from artisanal coffee shops and chains and also from a booming energy drink market that was wooing customers away from coffee.
In China, where it took some time for Starbucks to become successful, it faced a fast moving coffee startup called Luckin that doubled its store count in just one year.Both these factors led to a further deterioration in a key metric called same-store sales.
Same store sales is also a key metric that is tracked in India retail and QSR companies such as Jubilant Foodworks (Dominos) or Sapphire Foods
Unlike Amazon though, Starbucks truly made its employees feel important and called them as partners - this especially applies for its Baristas -dressed in that iconic green aprons. It launched a pioneering stock option program amongst its employees, including baristas, before its IPO in 1991.
Unfortunately, employees felt increasingly unhappy and alienated in the last few years due to stagnant wages and unfair pressure that was directed towards them due to the huge backlog of orders via their app. A large number of stores unionized and led a strike against the management demanding better pay and work conditions. Remember- unionizing is frowned upon in the capitalist utopia that is the US and companies like Amazon are paranoid about unions and dismantle them at root.
Starbucks' legendary founder and ex-CEO Howard Schultz, did not hold back in his criticism of the Starbucks management and wrote this viral post a few months agoStarbucks also suffered due to rising costs, especially that of coffee beans which it then passed on to consumers. Consumers who were price conscious, either reduced their visits or switched to cheaper alternatives like McCafe.
Finally, Starbucks faced widespread boycott and the wrath of social media due a post made by a unaffiliated union as seen below. The post caught fire and Starbucks was stuck in a political quagmire where both - the woke and the conservative sections started boycotting Starbucks to their “political messaging” or even the lack of it.
Common themes between the struggles of both Nike and Starbucks
While many issues are unique to each company, a lot of issues are also common between both
Both companies lost touch with its DNA - in Nike’s case it was the brand’s positioning and product innovation and in Starbucks’ case, it was product innovation and the experiential treatment at its stores
Both companies focussed excessively on their d2c apps that either lost them a host of customers or severely deteriorated the purchase experience. Nike also focussed way too much on performance marketing in order to boost it’s app reach but remember - performance marketing only captures a market share but does not expand your market reach that brand marketing is supposed to do.
Both companies got embroiled in political controversies and boycott movements
Both companies hired outsider CEOs who did not understand the company’s DNA and who alienated a chunk of the employee base, be it the ground staff at Starbucks or the veteran executives at Nike
Both companies faced massive headwinds in China - where a toxic cocktail of nationalism, stagnant growth and increased competition from local brands led to a serious challenge in their second largest market after the US
Both companies, especially Starbucks, have a hangover from the original management team, especially the founders and should have groomed internal talent for a smoother succession plan
As I come to the end of this little article, the nature of the predicament that both these companies face remind me so much about those case studies that we used to analyse back in my b-school days that went something like -
“Looking outside his window that gave a stunning view of Central Park in middle Manhattan, the new CEO of XYZ had a tough choice to make - should he do ABC or DEF? He then took a deep breathe and called his secretary……..”
This predicament is classic example of what I like to called “Don’t try to break something that works well for you” or in the words of Dolores Umbridge “Progress for the sake of progress must be discouraged!”
Insightful read!
Just a nitpick - If the world population is less than 8 billion, 4 billion cups per day seems high.