The Big Gulp at Starbucks

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One solution might be an automated syrup dispenser, which for now sits in the Starbucks R&D lab but could speed up, among other things, the production of blender-made Frappuccinos. That goal was given fresh urgency in July when same-store sales for the month rose 4%, the slowest pace in nearly five years. The reason, said management: hot weather increased demand for cold drinks, and stores couldn't keep up. Customers saw long lines and kept on walking. It was a rare financial miss, and Starbucks' stock dropped 9% on the news (it's still up more than 20% for the year)--highlighting that in the debate between handcrafted and automated, what investors care most about is results.

For Starbucks management, the decision is more difficult. "As much as we want to meet people's desire to produce beverages quickly, we also realize that people want a smile with their drink, that they don't want to feel rushed," says Jim Alling, president of Starbucks Coffee US.

Striking a balance between efficiency and atmosphere is largely why it took 3 1/2 years to roll out ovens, the biggest thing to hit Starbucks since the blender's 1995 debut. Starbucks knew there was demand--witness the bags of food carried in--but creating a good-looking oven that could cook a range of items and contain the odor--lest a store not smell first and foremost of coffee--was a challenge. Even after some breakfast sandwiches were developed, entirely new deployment routines had to be created so that employees would not slow the line. "If our espresso-only or drip-only customers suffered," says Alling, "it wouldn't be worth doing."

Hot breakfast sandwiches are a success in the handful of big cities they have reached so far, like Chicago and New York, where they add an average of $35,000 a year to the sales of each store--more than the $30,000 that comes from cold sandwiches and salads. Hot lunch sandwiches and quiche, now being tested, might someday draw a midday crowd--a real prospect for a company that currently sees 60% of its sales before 10 a.m. And while executives won't admit it, ovens also hedge against competitors like Dunkin' Donuts, McDonald's and Burger King, which have been stepping up the quality and variety of their coffees.

There's only so much stuff you can run through a 1,500-sq.-ft. retail store, although Starbucks has added everything from CDs to books to Scrabble sets. "You have to have new products. That's the retailer's dilemma," says John Glass, who covers Starbucks for CIBC World Markets. But every new item, whether edible or readable, increases the complexity of the organization, and complexity is a killer.

Mark Gottfredson, a partner at consultancy Bain & Co., studied that subject at 75 companies in 12 industries and found that as firms became more complicated, growth slowed. Companies lowest in complexity grew 1.7 times as fast as their average competitor, even when taking firm size into account. "Complexity creep is the most natural thing in the world, especially in retail," says Gottfredson. "The challenge is that while every one of those decisions seems to make sense, underneath you start building up enormous amounts of systemic cost."