Will Starbucks’ push into tea hurt its coffee shops?

JUDGMENT CALL

October 30, 2013 12:07 am

Will Starbucks’ push into tea hurt its coffee shops?

The Teavana bar’s opening raises questions about how to avoid competing with the original business

THE PROBLEM

Starbucks opened its first Teavana bar in New York last week. CEO Howard Schultz said he was not worried about cannibalising the coffee chain because “most people who are tea drinkers are not crossing over to coffee”. When launching similar products, how do you avoid competing with your original business?THE ADVICE

The marketing expert: Tim Calkins

Companies have to be very careful in introducing new brands. While they might seem like a good idea, they may well cannibalise the existing brand. A bigger problem is that the brand portfolio may become difficult to manage. Companies with many brands in the same space can really struggle. General Motors is a perfect example of what happens when a portfolio becomes unwieldy.

It is best to launch a brand only if its positioning is very different from the existing one, the opportunity is compelling and you have the resources to support all the brands. Starbucks clearly has the resources. The challenge will be keeping Teavana distinct.

Tim Calkins is a marketing professor at the Kellogg School of Management, Northwestern University

The author: Freek Vermeulen

Howard Schultz might be right, and coffee drinkers don’t cross over, but it is also irrelevant. If it is going to cannibalise your business, perhaps that is exactly the reason to do it. Business history shows that companies often refuse to adopt a new product to avoid cannibalisation – until someone else does.

Firestone hung on to bias tyres until the radial tyre all but annihilated them. It was a Swiss engineer who invented quartz technology, which Far Eastern competitors used to outcompete the Swiss mechanical watchmakers. If you can think of a disruptive product that cannibalises your business, someone else can too. Don’t wait for others to take the bite.

Freek Vermeulen is author of Business Exposed and an associate professor at London Business School

The entrepreneur: Tim Martin

History is against Starbucks. The outstanding success in the restaurant world by miles is McDonald’s. While it has been criticised for what it offers, I think it has got over that because it does only one thing and has been able to upgrade – or try to upgrade – every aspect of its business. Compared to anyone else, including Wetherspoon, it has a very simple business.

If you look at the international successes, they have stuck to their knitting. A good example of that is Starbucks. It has an almost ludicrously narrow offer but it has done very well. My estimate is not so much that it will cannibalise existing trade. It’s more about dilution of the effort of the company.

Tim Martin is founder and chairman of the UK pub chain JD Wetherspoon

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About Koon Boon Kee
Bamboo Innovator Institute is set up to establish the thought leadership of resilient value creators around the world. KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia. The Moat Report is developed together with our European partners The Manual of Ideas (www.manualofideas.com), the idea-oriented acclaimed monthly research publication for institutional and private investors. The MRA’s paid-subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities and savvy private individual investors. KB has presented his thought leadership as a keynote speaker in global investing conferences with speakers including famed serious investors Donald Yacktman, Howard Marks, Jean-Marie Eveillard etc. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, macroeconomic and industry trends in Singapore, HK and China. KB has been rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm since 2002. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Mirae Asset Global Investments, Korea’s largest mutual fund company. He holds a Masters in Finance and degrees in Accountancy and Business Management, summa cum laude, from the Singapore Management University (SMU). He had also taught accounting at the SMU. He had published cutting-edge empirical research in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary of the Boğaziçi Journal, Review of Social and Economic Studies, as well as wrote articles about value investing and corporate governance in the media.

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