Starbucks CEO Jim Donald: Lessons from Brand Leaders

Spot that distinctive mermaid-in-green-circle logo above a doorway and you know exactly what to expect. Inside you’ll be greeted by the heady aroma of freshly brewed java with a subtle hint of cinnamon, or maybe mocha. You’ll pass patrons perusing newspapers, checking email on laptops or deep in conversation at warmly lit caf© tables as you approach a counter behind which baristas bustle brewing customized concoctions. Ray Charles, Joni Mitchell, Antigone Rising or any number of decidedly non- Muzak tunes might be playing softly in the background. Depending on the season and the locale, the menu might feature a pumpkin spice latte or plum pudding. But other than these insignificant variations, your Starbucks experience will be roughly similar whether you’re stateside anywhere from New York to California or in one of the coffee colossus’s 3,518 overseas locations from Sydney, Australia, to Beijing, China. And that is precisely the point, says CEO Jim Donald.

“Our advertising budget is very, very small,” he says. “In fact, my chief marketing officer would say there is no budget. And the reason is that we let our stores and partners create the message that other companies have to put out in television, radio and print advertising.”

That the Starbucks approach is not the exception that proves the rule, but rather a cornerstone of a whole new set of rules is underscored by franchises like Google, eBay and even Harley-Davidson. All four companies eschewed traditional mediums to build formidable brand power through grass roots and guerrilla marketing tactics. And it’s no accident that their CEOs ranked among the top 10 in the 2006 CEO Brand Leadership Survey. Conducted by Chief Executive in conjunction with brand consultancy firm Lippincott Mercer, the third annual brand leadership study asked 480- plus CEOs and CMOs to weigh in on which CEOs do best at brand management (see Top 25 CEO Table, ).                            

TOP 25 BRAND LEADERS

Methodology – Lippincott Mercer developed a short list of 100 CEO candidates, each of whom had earned recognition in areas such as being a most admired company, being defined as a company with high brand value, being selected for strong leadership and/or included as a brand leader or up-and-coming brand leader in the previous year’s survey. A web-based survey was completed by 480 corporate and marketing executive respondents who selected their top 10 choices for CEO brand leaders from the list of candidates, ranked their top three choices and identified the most important characteristics that led to those choices. Lippincott Mercer analyzed the results to develop the 2006 Top 25 Brand Leaders list.

“Apple and Starbucks held steady at first and second place, respectively,” says Suzanne Hogan, chief operating officer at Lippincott Mercer. “And some of the biggest advances this year were made by Google (from No. 11 to No. 3), Southwest Air (from No. 8 to No. 4) and Target (from No. 12 to No. 6). What these brands have in common is investing in their brand in new and interesting ways, which suggests recognition of the importance of taking a more holistic approach to brand image management. It’s about marketing and the customer experience, but it’s also about happy employees, reinvention through new products and services and a concerted effort to deliver an experience or product in a different, distinctive way.”

How do the best companies deliver that distinction? Begin at the beginning -with the product, suggests Karen Benezra, editor of Brandweek magazine.

Product First

Of course, a good product- even an awesome product- does not a brand make. But build a brand without a great product and what you have is a four-star flop. “Look at Vonage,” notes Benezra. “They blanketed the airwaves with orange-theme ads, but over promised and under delivered-and now everyone is questioning their model.”

“Without exception, these 25 companies all have great products,” agrees Keith Ferrazzi, the founder of marketing consulting group Ferrazzi Greenlight and former CMO of Starwood Hotels, who sees a “generous” product as the bedrock of any great brand. “I love my Starbucks experience. I love that they are everywhere and all I have to do is find the closest one. When I got a Nano, I felt like saying, ��Thank you, Apple, for changing my life by giving me this cool thing that I wear in taxis on the way to meetings and on the beach during my vacation. It gives me a way to enjoy life in a more rich way than before.'”

Beyond Broadcast

Brand management today means figuring out how to reach out to surprise and delight your customers wherever they may be-the Internet, a retail store, a bar, a street corner-rather than just through media advertising. For Starbucks, that translates to devoting zero dollars to national television or print campaigns, and a “very small amount for a company of our size” to local marketing efforts, says Donald. Instead, the company’s retail outlets serve as its ads.

It’s an extreme version of a philosophy followed by many grassrootsgrown giants: When people are rabid about a brand, advertising is superfluous. Take eBay. The online auction house’s success was founded upon diehard flea market fans who found their way to the web site, loved the buying experience and created eBay nation. “Soon we were seeing headlines in Newsweek about people selling their Barbie doll collections for a fortune,” notes Benezra. “It wasn’t until eBay wanted to add new areas like automotive sales that they did a big ad campaign. And it seems to be working; someone at my company just bought a Jaguar on eBay.”

The vast majority of megabrands, however, still rely heavily on traditional broadcast campaigns, augmenting -rather than replacing-them with viral components. Anheuser- Busch, for example, just inked a six year multi-sport agreement with NBC that media experts tag at a whopping $300 million. But the beer company is also in the midst of launching a web-based video network named Bud.tv.

“We’re creating a site where people will be able to choose from a variety of video options, from finishing our commercial to content we’re developing in partnership with Kevin Spacey and Trigger Street Productions,” explains CEO Patrick Stokes. “The media mix is gravitating toward more interactive ways to communicate with consumers. But the way people try to get their names before consumers on the Internet by bombarding them with pop-up ads and so forth tends to be irritating. So we’re trying to draw consumers to the site with content they’re interested in.”

In an effort to combat declining beer sales as the market drifts toward cocktails and hard liquor, Anheuser- Busch also upped dollars devoted to on-premise marketing to a hefty $30 million. “People’s impressions of brands will be formed in their first five years using our products,” says Stokes. “We are very interested in reaching that 21-year-old consumer, so we have to be on-premise with a strong presence.”

Anheuser-Busch CEO Patrick Stokes demonstrates the finer points of cooking with beer at  the  company’s sales convention.

Anoint Ambassadors

Avid fans and devoted employees can do more to boost a brand than the best of marketing programs. Harley-Davidson devotees are so enthralled that they routinely tattoo the company’s logo on their skin. Apple fans pay a premium for the company’s sleek, userfriendly versions of standard gear like MP3 players and computers and wait patiently-or advocate assertively- for Mac-compatible versions of popular software programs. Starbucks regulars debate the merits of new menu offerings on Starbucksgossip.com and happily and routinely fork over $4- plus per cup for a beverage that, until recently, was widely available for less than $1. All three companies have spectacularly succeeded at an elusive goal-building an intimate community, almost a cult, around a brand so that customers take ownership of and feel an affinity for it. Their brands became a reflection of their customers’ values, and those customers, in turn, became ambassadors for the brands.

How do you win that kind of loyalty? “The strongest brands develop a myth around themselves,” says Dick Martin, a former EVP of brand management at AT&T and author of Rebuilding Brand America. “Apple has had great ads, but its brand prominence stems more from the design of their products, both physically in their look and functionally in terms of simplicity for their customers. With Virgin it’s about being an iconoclast, carefree and fun loving, which is embodied by CEO Richard Branson. Whole Foods has a story that connects with people’s values-they’re seen as a company that treats the world, their suppliers and their employees well. Heck, they even treat lobsters well.”

Done well, the myth or story takes on a life of its own-one that the constituents it reaches perpetuate. “We don’t even like to use the word brand,” says Donald. “Starbucks is an experience. And once that environment is created in a store, it becomes a community that is meaningful to the people who go there. We hear people refer to my Starbucks’ all the time and that’s what they mean.”

Incessant Innovation

Decades ago, theory held that brands inevitably moved through life cycle stages- introduction, growth, maturity and decline. No more. “We don’t believe that,” says A.G. Lafley, CEO of the master brand builder P&G. “We think brands can last forever if they are properly managed.”

For Lafley that means continually tweaking household names like Tide, Crest and the relatively recently acquired Clairol to develop new iterations of favorite products. That thinking led to line extensions like Tide to Go, an instant stain remover in stick form; SpinBrush, a toothbrush with a battery-powered rotating head; and Pampers Feel n’ Learn Advanced Trainers, diapers designed to stay wet for two minutes to prompt toddlers to tinkle in the toilet.

“We have a very disciplined process to collect fragile ideas on the front end; prototype, develop and qualify them; and then to pre market test and commercialize them,” says Lafley. “We look at innovation as a portfolio that is in various stages of development, and we are quite happy to weed and feed every step of the way to make them more relevant to today’s consumers.”

Anheuser-Busch, too, focuses on innovation as a way to retain and even refine its brand glory. In addition to the celebrated launch of Bud Select, a premium version of the brand that has historically been synonymous with beer, the company has developed and acquired offerings ranging from a caffeinated beer called Tilt and the fruit-laced Peels beverage to Stone Mill and Wild Hop, two organic beers now being rolled out. “In the last five years, we have seen a need to offer a broader portfolio,” says Stokes. “We’ve signed distribution agreements with top import and specialty brands, including Tiger and Grolsch, and acquired the Rolling Rock brand. We’ve also introduced products, including seasonal draft beers.”

That legacy companies like P&G and Anheuser-Busch, 170 and 154 years old respectively, continually work to stay fresh is no surprise. But relative newbie Starbucks is equally committed to continual evolution. Already, its retail locations have the capability of producing approximately 73,000 variations of its menu beverages. But line extensions are where innovation is truly brewing. Launched on the strength of its success with CD retail, the company’s entertainment arm recently backed its firstfilm, Akeelah and the Bee, and is now marketing its first book, For One More Day, a novel by best selling author Mitch Albom.

“Our goal is to continue to stay on point for new areas of focus we can convert into beverage and food offerings and other forms of keeping the Starbucks experience out in front of everyone,” says Donald, who notes that the company vets each potential extension for appropriateness and practicality. “We have invisible guardrails that we stay between by making sure that what we put out is core to the coffeehouse experience and that it works for our partners [store employees]. A new food offering, for example, has to be something our partners can deploy without reducing the speed of service.”

Of course, it is possible to take innovation too far. “Brand extensions run amok aren’t good for any brand,” says Benezra, who notes that recent flops included a Harley-Davidson’s cake decorating kit, Sony PlayStation wine glasses and an Adidas deodorant.

Ultimately, however, debuting a debacle is perfectly fine, as long as the company in question reacts- and rebounds-swiftly. Starbucks, points out Donald, has stepped back from numerous new introductions. “We’ve had food and beverage offerings that just tanked, including carbonated coffee 10 years ago,” he says. “But we’re okay with that. What we can never stop doing is innovating and taking risks.”

The Dark Side of Big Brands

In the aftermath of exploding batteries and a subsequent 4.1-millionunit recall, it’s little surprise that Dell dropped from No. 3 in 2005 to No. 25 on this year’s list. A major catastrophe can temporarily derail the best of brands-just ask Exxon, Andersen or Audi. Remember the “sudden acceleration” that later, too much later to be of solace, turned out to be driver error?

“It’s possible to maim or even kill a strong brand,” notes Dick Martin, author of Rebuilding Brand America. “Those emotional attachments fray easily if people feel they’ve been misled or double-crossed.” In fact, a brand’s very strength can become a liability, particularly in a crisis. Expectations can rise to the point where disappointment or “brand backlash” is inevitable. In some cases, tragedy hits and prominence suddenly becomes a pitfall. But the following minor missteps are by far the more common brand crises.

The Product Flop: The New Coke saga is the poster child for the kind of resistance a bad introduction can inspire. “If a company isn’t careful, it can wander into areas that are either irrelevant to its principal phenomenon or that contradict it outright,” says Martin. “And when that happens, things get ugly.”

Can’t Live Up to the Hype: The dot-com era was particularly notable for brands that rose grandly and rapidly only to go into freefall when expectations weren’t met. Beware of being the media’s darling; instant stardom may simply set you up for brand backlash.

The Gradual Fade: Often, it’s not about what a company does wrong, but rather what it fails to do right- namely stay true to its values and retain the luster of its brand relative to competitors in the market. Jet Blue, which dropped from No. 14 in 2005 off of this year’s list, is an example. “Jet Blue built its brand by hooking customers with low prices and then keeping them with unusual service,” notes Martin. “But the combination of high fuel prices and higher maintenance costs took a toll on the company so it cut back on price discounts and service, which were the foundation of its brand.” The lesson? Rest on your laurels and a newcomer will soon grab the limelight.

NEW GROUNDS FOR STARBUCKS

Chief Executive talked with CEO Jim Donald about what’s brewing at the coffee colossus.

What are your goals for Starbucks going forward?

More stores, more positions in the supermarkets, more licensing operations and more innovation. No. 1 would be more stores. We’re averaging five stores per day, and our long-term goal is 30,000 stores, 15,000 in the U.S. and 15,000 internationally. We’re also looking at increasing our licensing operations and the number of countries we are in. Brazil, Russia and India are three international markets we’re currently working on. Our product pipeline of food and beverages is probably 18 months deep, and we are always looking at other forms of keeping the Starbucks experience out in front of everyone.

Marketing gurus say you don’t advertise. Is that true?

There is an ad budget. It’s not the budget a company our size would typically allocate and those dollars are not allocated in a typical way. The bulk of it goes toward things like promoting the film Akeelah and the Bee and toward the Make Your Mark programs we run at the store level, where we grant cash donations to nonprofit organizations based on partner and customer volunteer hours.

Starbucks has been well-received in foreign markets. What hurdles did you hit and how did you overcome them?

On a country-by-country basis, the largest hurdle we had to overcome was thinking we had to be different. There are regional differences in every market, but the main reason we are successful in the U.S. is the same as why we are successful internationally. It’s based on great beverage lineups, from coffee to frappuccinos; connections customers in Japan, the UK and Thailand have with their baristas; and great experiences. I was in a Starbucks in Kuwait a year ago and other than the language spoken, I could have been in Tacoma. There were university students with their laptops, senior citizens reading the newspaper and a hip hop back-and-forth jive with the baristas. It was a wonderful thing.

What kind of regional differences have you found?

The peak time in China is not 7 to 10 in the morning, it is 4 to 8 in the afternoon. And there are also food preferences we had to adapt to. There is the holiday Yorkshire pudding that is big in the UK but does not work in New York. Breakfast sandwiches in Germany, for example, are made up with a hard roll with sausage and tomato and served cold. So we listen hard to what our partners in a region say works.