Opinion / Beware the high cost of rapid growth

Many burgeoning coffee enterprises may seek to emulate Starbucks’ success – but should they? | Photo credit: Twalmedia

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“The only real mistake is the one from which we learn nothing,” Henry Ford once wisely said. That sentiment was probably in good supply at Starbucks HQ as new CEO Brian Niccol took the helm in October 2024 with a pledge to return the business to its ‘roots as a community coffee house’.

As the world’s largest coffee chain, Starbucks is frequently the focus of much speculation, and after Laxman Narasimhan’s brief leadership, many will be wondering just how – and whether – the former Chipotle boss can profitably return Starbucks to its coffee house roots.

When it comes to the price of achieving colossal scale, there are some valuable lessons to be gained. Many burgeoning coffee enterprises may seek to emulate Starbucks’ success – but should they? When I launched my first coffee business, I was bequeathed some friendly advice: “Beware of growing too fast”. Like any entrepreneur I didn’t see myself starting a business for it to stay small – I was starting an empire and growing fast was exactly what I wanted!

I dismissed the warning, but I was wrong. You can grow too fast – and it can kill you quicker than just about anything else in business. Why? Because you aren’t scaled or financed enough to handle cash flow demands ahead of revenues, and you’re too new to bring on investment without losing your shirt.

Starbucks’ latest reinvention isn’t the first time it has had to rethink things. In 2008, the coffee chain began shuttering around 900 stores across the US, but despite suggesting the closures were caused by increasing operational costs, in my view they were largely the result of huge growth demanded by investors in the 1990s.

The fast-track approach to gaining market share and squeezing out competitors left Starbucks with two coffee shops on high streets that previously supported just one. That’s twice the rent, business rates, fit-out costs, utilities and staff overheads per high street while dividing one espresso bar’s potential revenues between two. I’m not a mathematician but even I realised that those sums would never add up.
 

“Burgeoning coffee enterprises may seek to emulate Starbucks’ success – but should they?”

Starbucks also had to rethink its strategy in Australia, where in 2015 the closure of 90 stores due to a lack of consumer demand almost saw it exit the market. However, fast forward to 2024 and Starbucks Australia is on the ascent with its first annual profit and more than 70 sites of the ‘right size and scale’.

I’m not picking on Starbucks, honestly. After all, they’ve given our industry lots of positive business lessons. Starbucks almost singlehandedly changed premium coffee from a ‘white-collar’ luxury to a ‘blue collar’ standard. This broadened the demographic appeal and market scale, which the whole coffee industry has benefited from.

Big business has a lot to teach smaller businesses. Equally, small business mentality, especially in our highly ‘personalised’ coffee industry, remains important to big business strategy.

Starbucks’ share value increased 17% following Niccol’s appointment, but shareholders would do well to prioritise coffee quality and customer experience alongside financial returns. Fortunately, this is exactly what Niccol has proposed to do. I certainly don’t have all the answers, and my opinions will differ from many others, but here are a few of my own encapsulated insights:

Customer first: Customers are where profits come from. Deliver what they want. If you have no customer interest in a target market, don’t waste money going there.

Taste: It’s the taste that keeps customers coming back for more. Repeat customers are not only your best customers, they’re also your most cost-effective – but only if they like your brews.

History informs strategy: Looking back at coffee industry history can provide incredibly valuable lessons for what we might do in the future.

Don’t dismiss our industry history – it’s what got us all where we are today. Italy launched a ‘trend’ in 1903 that saw Italian coffee standards lead the global popularisation of espresso over the past 120 years. With most coffee trends only lasting five-seven years, one that has gone from strength to strength over the last century is surely worth some consideration.
 

“Big coffee businesses must be credited with driving the incredible increase in the popularity of coffee over the past 30 years”

Diversification: What else can you do with the skills and products you’ve already got? There’s probably more profit to be had.

Ethics: Insolvency tools make it easy for new businesses to launch, grow, fail and then escape their debts – and this frequently results in financial damage to the broader industry. Few of us would ever admit to not being ethical, but if you want to try again, consider everything possible to avoid failure and leaving those who helped you grow shouldering the cost.

Industry sustainability starts in the coffee shop: Keep percup pricing affordable. Don’t raise prices every time the Financial Times or The Wall Street Journal publishes news of a frost in Brazil, a hurricane in Vietnam or a truck driver strike in Colombia, without bringing them down again once the crisis has passed. If coffee becomes unaffordable our industry will lose customers, and ultimately farmers will stop growing it. It’s worth noting that higher coffee prices in the US cost Starbucks a 6% drop in orders last quarter.

Adequate finance: Don’t launch aggressive expansion plans unless you’ve got the funding lined up to finance growth cash flow needs, which will always come before your profits do. Be accountable.

Finally, as we grow our coffee businesses, it’s important to consider how expansion over-reach might affect brand identity.

Don’t mistake your logo for your brand. A logo is just a design, while your brand is what your logo stands for. Brand is earned, not created in a studio. It’s identified by what you deliver consistently, faithfully and unfailingly. When a business stops delivering its core values, it suffers dilution, then a loss of brand identity.

Healthy competition has always been a good thing. Independents often see large coffee chains as a threat, but big coffee businesses must be credited with driving the incredible increase in the popularity of coffee over the past 30 years.

Competing with them has forced the independent segment to make better products and create new opportunities to prosper. As long as the juggernauts keep doing what they’re doing, independents will keep innovating to better serve the increasingly sophisticated and demanding tastes of coffee consumers of the world. 
 

Andrew Richardson has over 30 years of experience in the global FMCG coffee sector and is a passionate advocate for sustainable innovation and quality in the coffee industry. Having held senior roles at Nespresso and Whittard, Richardson was described as “probably the most widely consulted coffee encapsulation expert, in the world” by Gerson Lehrman Group, and has served as CEO of coffee consultancy Whitebeans Global for more than 17 years.

This article was first published in Issue 22 of 5THWAVE magazine.

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