Monday, March 23, 2009
Jonathan Henes is a corporate attorney who shepherded Wellman, a billion-dollar company that makes resins for plastic soda bottles, through its recent bankruptcy. Wellman ran into trouble more than a year ago as the economy began to slow down, finding that it couldn’t manage nearly $600 million in debt that dwarfed earnings by more than twenty times. It was an organization that, financially speaking, was upside down.
Thanks in part to Henes’ counsel, Wellman made it through its trial by fire. Much leaner now, the company will reach only $500 million in sales this year, but has much less debt and looks as if it will generate healthy earnings. In order to survive, the company had to get rid of two of its three manufacturing facilities and secure capital from new investors. Speaking of Wellman’s journey, Henes says, “I think in this era you need to shrink down to just your very best businesses. You need to just focus on your core strength and make the painful, hard decisions.”
For a time, it looked like that was what Starbucks was prepared to do as it faced its own growth crisis. Responding to the effects of the economic slowdown on Starbucks’ sales, in early March Starbucks’ CEO Howard Shultz said, “The issue at hand…is the cost of losing your core customer. It’s very hard to get them back.”
He’s right about that, of course, but that’s why his comment at the company’s annual meeting last week sounded odd to me. “Starbucks has got to demonstrate to our customers and the marketplace that we can still be a premium brand and create a premium experience,” he said, “and at the same time create a platform for value” (emphasis added).
Do you know what “a platform for value” means? Neither do I, and that’s what scares me. When companies start using the “V” word it usually means they’re going to start discounting more and cash in their hard-earned brand equity via sales promotions. That’s a natural (if unwise) reaction to trying to retain core customers, but it’s no way to protect “a premium experience.”
It makes me wonder if Starbucks is having an identity crisis, an element of the Loss of Nerve phenomenon I describe in When Growth Stalls. We’ll watch and wait.