The Starbucks bottled Frappuccino business model

In the early 1990’s, as Starbucks started taking off as a company, Howard Schulz (CEO) was looking out for new opportunities to leverage the brand. One of the options which the company pursued was to enter the (supermarket) retail segment. The idea was to bring cold dairy-based ready to drink coffee to the shelves. The potential for bringing the Starbucks experience to the retail shelves was great, yet this terrain without espresso machines and baristas was also unfamiliar to the company. Starbucks needed to develop an entirely new business model for entry, and forge a key partnership to do so. In this post I will sketch out this business model, and its partnership using my recently published Partnership Proposition Canvas (v0.4).

The business model
After a period of trial and error with cold coffee drinks in the then dawning market for such products, Starbucks made a fit with a bottled version of their infamous Frappuccino. This product proved to be a hit in the Starbucks outlets in the summertime. From 1995 onwards Frappuccino would immediately be available in every home and office with a fridge.

Starbucks Frappuccino business model

The Frappuccino business model

Although it would seem straightforward for Starbucks to manifest itself in this market with its own production line and channels to customers, it realized it didn’t have what it took to pull it off. Starbucks had no capabilities to develop and mass-produce bottled or canned dairy-based coffee drinks, nor to distribute them through the supermarket retail channel. The company knew it needed a partner.

The PepsiCo partnership
In order to launch its Frappuccino product, Starbucks sealed a partnership with PepsiCo (then known as Pepsi Cola) a year earlier in 1994. This partnership was of tremendous value for Starbucks’ new venture. PepsiCo had solid experience in product development, and an extensive sales and distribution network in the retail segment. Also, PepsiCo had access to a dairy bottling plant network through its partnership with Dairy Farmers of America (DFA).

In return, Starbucks could offer PepsiCo a first foothold in the growing non-carbonated soft drinks market, with its brand, and experience in processing quality coffee. Using the Partnership Proposition Canvas (v0.4) the construction of the partnership between Starbucks and PepsiCo can be visualized

The Partnership Proposition Canvas (CC+ license) for the Starbucks PepsiCo partnership.

When overlooking all the pieces of this partnership, it’s interesting to see that Starbucks could potentially have made do with arms-length relations for processing, marketing and sales, as well as distribution. That is job work. It could have been contracted out under an exclusive agreement.

The critical factor determining the close nature of the partnership appears to be that of product development (marked in blue above). Starbucks has the knowledge on coffee, but PepsiCo has better capabilities for developing canned and bottled beverages. Such dependency in product development creates a notoriously vague and sensitive situation in the exchange between companies. Intellectual property boundaries are highly uncertain.

The logical outcome of the tension in the partnership was thus to create 50/50 joint venture between Starbucks and PepsiCo, which was named the North American Coffee Partnership (NACP). Under this construction both companies would be assured that each would profit from the fruits of their product innovations.

The North American Coffee Partnership business model
So it appears that we’re not dealing with a Starbucks exclusive business model with a PepsiCo partnership, but with a whole new company, with its own business model. The NACP is a dedicated company for developing and marketing ready to drink Starbucks-branded coffee.

To make things more complicated, both Starbucks and PepsiCo function as key partners in the NACP business model (below). Starbucks provides a license to its brand. PepsiCo has a more extensive partner contribution. It covers production, advertising, distribution, sales. This last role is significant as PepsiCo takes physical ownership of the product. In effect, NACP only has PepsiCo as paying customer. DFA has the role of processing the product.

The North American Coffee Partnership business model

Since its founding, NACP is continuously developing its portfolio, launching new products like the DoubleShot, and Starbucks coffee beans. Through the PepsiCo network, the joint venture is also expanding to new markets, teaming up for instance with European dairy giant Arla, in the same way as DFA in the United States. Currently the joint venture accounts for about 60% of a global billion dollar growing market for ready to drink coffee; an impressive feat for two companies that started off exploring new terrain.

Key take-aways:

  1. When an existing company designs a new business model to add to its portfolio, it usually enters a whole new market and value network. Partnerships can be used to accelerate and improve on execution
  2. A joint venture is a very tricky type of partnership. Actually, it isn’t even a partnership. A joint venture is an organizational form for a stand-alone business model
  3. The Partnership Proposition Canvas can be used to figure out what value your options for partnering hold, and at what point it starts making sense to share equity with your partner

The Business to Business of Customer Development

Selling your work in progress product or service as a startup to an incumbent company is very hard. You can find yourself offering a value proposition that competes head-on with existing products, for instance on price or efficiency benefits. In that position you have to elbow your way into an existing value network that is already servicing your designated customer at a satisfactory level. In contrast, you can also find yourself in a position that you actually have no competition, because there is no reference to the solution you have developed. That is equally difficult as muscling your way into an existing market, but a different challenge: how are you going to convince your customer to change their existing value network relations based on a solution for which they have no clear conception of a problem? In this post I’ll share some of my first-hand experiences on this issue.

Creating a new value proposition
My experience in business to business work stems from the cotton processing and marketing company I co-founded in early 2006 in India, Zameen Organic. Our idea was to set up a farmer-owned company that could supply top branding customers with a sustainability ambition like Marks & Spencer’s and H&M.

We saw that these customers were interested in Fair-Trade and Organic certified produce. At that time the market for Fair-Trade and organic was growing explosively. Cotton production was nowhere near the growth rate of demand. Our proposition in this market was thus to provide a professionally run company of farmers that would be able to grow at the rate of the market, and supply the demanded quality. This was in a time when organizing trade relations between big brands and small producers was mostly the domain of NGO’s.

In developing our proposition we also saw that enabling our customers to put a label like Fair-Trade and Organic on their products was not a unique enough proposition to capture the value we intended to create. Lots of suppliers were doing that. That wouldn’t make us unique. We thus set the bar for our marketing ambitions a bit higher than just creating access to brands. We wanted to also develop systems of co-branding, where brands could affiliate themselves with social and environmental progress of their supplying smallholder producers. In return for supplying quality produce and growing supply, we wanted to let our company and our farmers in on the value that was captured downstream in the consumer market.

Selling ‘new’ in an existing market
Filled with ambition, I set up several meetings with potential big brand customers to discuss our idea. I started off with just the guy from procurement at the table. Unfortunately he didn’t want to take the discussion further than product price, quality, and quantity specs. My conclusion was that this guy apparently was not authorized to set any kind of innovation into motion. So I conjured my way into follow-up meetings with procurement, CSR, and marketing around the table, hoping to make each part of our proposition understandable to each relevant silo within the company. Hopefully they would come to an ‘aha!’ moment together, and that would get the ball rolling…

…But no such luck! There was no emotive response from any of the parties at the table. No recognition that our story could latch on to the problem they were facing. Why? Well, purchasing was only told to procure certified produce at the lowest possible price and secure the supply that the company required, regardless of working against odds of tight supply in the market. CSR’s job was focussed on making up the reports that showed the company was seriously picking up its responsibility. This department wasn’t involved in actual company decision making. And marketing, well marketing was not much into the business of understanding how the supply chain operated. Rather they preferred to put creative thinking into how to put the brand into a positive limelight with the end consumer. So, none of the people at the table could properly assess the value of the proposition we were trying to sell.

Selling ‘new’ in a new market
Our proposition didn’t connect with our larger customers. But on the other hand, we also serviced a segment of smaller apparel branding companies who were dedicated solely to ethically produced garments. One of our more successful branding customers was Pants to Poverty, a non-profit awareness raising company on equitable trade, under leadership of Ben Ramsden. Pants to Poverty had released a line of undergarments, conveniently lifting on Nelson Mandela’s campaigning to Make Poverty History which made the Pants brand go viral.

Ben understood the proposition of co-branding, and securing the supply for their operations. With him, we were able to set up a branding initiative advertising the link between Zameen farmers, and the underwear made from their fibers. Pants’ website till date still uses images of the Zameen Organic farmers holding up their product, demanding riddance of poverty.

Zameen farmer Pants to Poverty

Zameen Farmer Pants to Poverty Man

Zameen farmer showing ‘their’ pants

Pants to Poverty was able to create a unique value proposition to the consumer market by showing their direct contact and collaboration with farmers. Our collaboration gave PtP a more secure position in the supplying market, amidst bigger competing buyers. Farmers in return were able to negotiate better terms of trade, also including farmer training on cultivation practices in pricing, as well pre payments, on top of the regular investment of the Fair-Trade premium in meaningful projects for community development.

Existing vs. New
So what made the difference? For one it’s the fact that PtP was looking for our proposition. There was no other supplier out there that could provide the same kind of consumer marketing opportunity. Zameen enabled them to do it. But the more interesting distinction is that we succeeded to form the collaboration because Ben embodied the function of purchasing, CSR, and marketing all in one. Ben was a fully integrated customer, better able to critically assess the performance contribution that our proposition might bring. This made life much easier in pitching the idea for making Zameen part of the PtP value network.

What we saw in our other discussion with the larger companies was the symptom of dealing with a new proposition and a dispersed customer. Even though the reality of the market of short supply begged for a change in assessment of relations in their supply chain, there was no way that our large customers could recognize the value we intended to provide. They did not have the joint understanding and feedback mechanisms in their own internal cooperation that would allow them to properly assess the proposition. Nor did they feel in any way inclined to discuss the opportunity with their superiors. The proposition was too new. Hence they preferred the possibility of leaving value lying on the table and sending us home over taking a chance with us and assessing the actual potential of Zameen as a supplier on its merit.

Conclusion
The story above describes a challenge that entrepreneurs often face (social entrepreneurs almost by definition). It happens when you’re so very early to market with a solution, that people generally would dismiss it as a market opportunity. This is what Bright B Simons refers to as the struggle of creating “a new value class”.

In our Zameen case, things got rolling when we shifted focus to working with smaller companies. With these companies it was easier to come to an integrated assessment of our proposition with the people who fulfill the critical roles of user, purchaser, and beneficiary. They were organized informally enough to have a validly critical discussion about our proposition in relation to their performance priorities. At the least it ensured us that our product wouldn’t be dismissed based on false-negative arguments.

My key learning from this experience is that the more a product or service relates to the norms within an existing value network, the better you can deal with the dispersed customer. The further a product or service is removed from that network, the more you’ll need to look for your integrated customer to get a substantial discussion going. As a rule of thumb, I would say that your chances of finding integrated customers is highest with companies with up to a billion euro in revenue. Over a billion in revenue, things get layered and segmented, and you’re likely not to get a proper early assessment of your product’s market potential. Start your proof of principle with smaller companies. They might provide you with the insights and reputation that allow you to enter the big league after.