Generic brands are gunning for Starbucks' bottled products business. And this can teach us a lot about the power of distribution.

Generic brands are gunning for Starbucks' bottled products business. And this can teach us a lot about the power of distribution.

I was in the US on a business trip when I walked into one of my favourite grocery stores over a lazy’ish weekend. This was a large regional chain that has hundreds of locations and huge stores. The variety of products they carry is pretty wide ranging and I usually find I can get everything I need in one trip, so I prefer going there when I can spare the time. Now, one of my regular purchases are those 4-packs of Starbucks bottled coffee that I typically enjoy with breakfast. When I visited the aisle where they stock these, I was greeted by something rather amusing: the big grocery store chain was still carrying Starbucks, of course, but right next to it there were almost identically packaged products being sold under the grocery store’s generic brand. The bottles were shaped almost exactly the same and though the package had different colours, the form factor of the package was identical. But that wasn’t the least of it. On top were bright yellow coupons which said, “Buy one Starbucks 4-pack and get our coffee 4-pack free!”. So in other words, everyone who buys Starbucks bottled coffee would be absolutely crazy not to try this… I certainly did.

When I got home I was initially hesitant to try the generic brand because I’ve tried them a couple of times and they usually don’t pan out so well. And in fact, the first coffee I consumed was in fact the Starbucks brand. However, the next one, out of curiosity, was the generic brand. The moment I took a sip I realized that there was hardly any difference between the two. If anything, I sort of preferred the generic brand. Surprising. Net-net, I was hooked and had been¬†successfully¬†converted! Eventually when they start charging money for the generic bottled coffee I am sure it will be at a 20-40% discount off the highly priced Starbucks product. And most people, I would guess, will have the reaction I just did. Starbucks is in trouble. So what are the lessons to be learned from this story?

First, as I said, Starbucks is in trouble. They have been for a while, but if it is indeed this easy to replicate the Starbucks taste for 40-50% less cost in an identical package, then I think their channel business (i.e. distribution through other people’s stores) is going down. Short them if you like. (Disclosure: I do not directly manage any portfolio in which Starbucks is a component nor, to my knowledge, have any funds I participate in, shorted Starbucks).

Second, this is the power of distribution in play! If you control the delivery to the end customer (and you have a decent product) you can, to a large extent, dictate success or failure. In this case, the grocery chain placed their product right next to the competitive product. They added an incentive (coupon) right next to the product placement so you just couldn’t miss it. And best of all, the margin they make off selling Starbucks is what is paying for the subsidy on the generic brand! So they are using their distribution of Starbucks to kill Starbucks and replace it with a product they own and make *all* the margin on. How’s that for leverage and power?

Third, placement is key and if you can attach yourself to your competition so that when word about them gets out, you are mentioned automagically, then good for you, because you just upped your odds for success. Ultimately, for every brand, there are the pro camps and the con camps. There are the Pepsi lovers and the Coke fanatics. So in large markets, there is usually room for a few players. If you are small and can do something to attach yourself to a large competitor’s messaging, you’ve done yourself and your product a great favour.

Fourth, if you want to enter a particular product category it may make sense for you to enter indirectly by participating in the delivery chain for a competitive product before launching your own. If you can become a trusted delivery vehicle for a particular product, you will own a segment of the customer base. Your success may be due to the product you will ultimately replace and you will learn a lot about what customers like, are willing to pay and need in future. This will inform your own product development process. This applies to physical and virtual goods, like software. For example, if you want to build an ERP solution, how about first becoming an implementation partner for Oracle or SAP. If you can use these gigantic companies to get to a few customers, leveraging the credibility of Oracle, as compared to your own non-existent credibility, you can develop a sense for whether you can get these folks to eventually migrate to your platform when you develop it in future. You will know exactly what they pay, exactly what they like about Oracle and what they hate. You will also know, across your customer base, the 20-40% feature-set most customers use. Don’t waste your time with the 60-80% functionality your clients don’t use. This ofcourse is just an illustrative example. ERP is not an easy area to break into, but you get the point.

Fifth, as the grocery store demonstrates, distribution can be an enabler and important to the success of your products even when you aren’t making a ton of money off the distribution itself. It’s exactly why Apple is so protective of their iTunes store even though it is not – in relative terms – a huge money maker for them. But by owning the distribution they have leverage with content providers, and they use that leverage to make their products the most attractive delivery vehicles for the content. Thus, they gain competitive advantage. How can you think about this and apply it to your business? Can you leverage the power of distribution?

Finally, what this also reminds us about is that business strategies are unfolding around us 24×7, every second of the day. And we all have the opportunity to witness hundreds of excellent, fair and pathetic models cobbled together in fancy board rooms, in execution right in front of us. The world is a lab, so to speak, and merely with a keen sense of observation we can get dozens of good ideas a day about how to optimize our own business further. I trust that our readership is made up of exactly this type of keen observer who learns and profits from the environment around him or her.

Good luck in your ventures!

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