One strategy of competitive advantage is to afford a unique experience that is preferred by the customer. Food or beverages are good examples of the type of product that can represent this type of familiar, sought after experience because they are intimately experienced by the user, and can become part of the customer’s personal life habits. In order to possess a competitive advantage the food or beverage must be of a quality unique enough so that it cannot be easily duplicated. In order to possess pricing power, the quality must be both unique and recognized as being outstanding. For food/beverage purchased in a restaurant, the atmosphere, clientele and location of the restaurant are part of the experience. The restaurant environment is controlled to convey a specific experience and this strengthens the consistent branded experience. Lacking this complex tool to control the customer experience, the packaged beverage industry is extremely competitive. Brands fight to establish a vivid appeal based on their packaging or advertising.
However, the packaged beverage industry can have relatively high margins. Assuming the product’s appeal can secure pricing power, margins can be healthy for what is essentially a relatively cheap product based on commodities (sugar, coffee, flavorings…) with some degree of intellectual property in the recipe. Meanwhile, the restaurant bears the costs of real estate which can be high in sought after locations, as well as costs of the retail operation which are relatively high, particularly for fresh or very high quality product. So the packaged product is relatively profitable, but struggles to make more than a fleeting connection with the customer. Meanwhile, the restaurant can foster a bonding experience with the target customer, but bears the costs of real estate and the retail operation.
What if a company could have both appealing restaurants which served delicious and excellent beverages and foods, and also widely marketed packaged products? The restaurant experience could establish a bond with the customer. The relatively higher margin packaged product could benefit from the bond that was forged in the more deliberately pleasurable experience of the restaurant. This bond could never be duplicated in the grocery, supermarket or convenience store aisle. The company would therefore have a competitive advantage over rivals who do not have that restaurant experience brand building mechanism. It is said that Brand confers a competitive advantage. In fact a strong Brand results from a superior product, including the experience by the customer of the product. What a strong Brand does make possible is pricing power. In the present example, the unique restaurant experience enables pricing power for the packaged product.
This is a strategy that Starbucks is using to continue developing its brand experience, while building out a relatively high margin packaged good product that will extend Starbucks sales far more widely than would be possible merely by increasing the number of its restaurants. Of note, roughly 80% of coffee is drunk out of restaurants, at home. This market must be addressed with packaged coffee and coffee beverages.
There is another issue with relying solely on a strategy of expanding the base of restaurants in order to grow sales. A high rate of restaurant expansion risks impairing the quality of the experience, through poorly trained staff or mediocre product. In order to maintain the quality experience which is crucial in order to nurture the relationship with customers, the quality of the restaurant experience must be preserved and itself nurtured. The restaurant experience builds the brand, and the packaged product monetizes it.