The Starbucks bottled Frappuccino business model

Posted on by Bart Doorneweert

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 value chain in transition

Posted on by Bart Doorneweert

My team and I recently conducted fieldwork in Kenya. The purpose of our stay was to gain a deeper understanding of the use and adoption of information technologies amongst farmers. We aimed to map out the agricultural value chain, so as to grasp the structures and systems of information exchange which underpin its workings.

When we were mapping out the value chain we came to an important realization. The patterns that appeared in our maps did not in any way resemble what we learn from the text books. In our text books we are presented orderly abstracted value chain setups, also referred to as governance configurations in wordy terms.

When mapping out the true system in Kenya, we produced something that appears a lot more messy and complex than the text book would lead us to expect. Kenya appears to have a very decentralized distribution landscape, where there are three types of zones that trade amongst each other, net demand, net supply, and the urban zones. Connections between people in each of these zones are flexible, and reach out to a variety of other connections in other (including more remote) zones.

A market is not just a place where the local buyer meets the local seller. Rather, it is a place where people come in from all over, and where grading, (re)packaging, distribution, forwarding, input purchase, as well as grocery and clothes shopping etc, all happen. The market is a multiple purpose, flexible node in a web of human interaction and exchange of goods, rather than a shackle in the value chain. The picture below captures but a glimpse of this complexity.

Kagio Market

Interestingly we not only encountered this pattern of complexity in Kenya. We also saw it in the context of Maharashtra in India, where we ran a parallel inquiry. It thus appears that we can’t apply the model of a value chain to capture these contexts. The classic, orderly pattern of exchange in value chain form, based on a hierarchy in power residing downstream, has been disrupted.

I was really surprised by the observation, but if you think of it, this change is only the natural result of the ubiquity of (mobile) communication technology, which is expanding the possibilities of coordination for the individual. No longer does the power to coordinate reside exclusively with the downstream players. Small brokers, and farmers now have tools available that can increase their reach to the market, bypassing incumbent trade channels if they prove to be a barrier or insufficient. And, they’re not afraid to use them! New technology has put the landscape in transition, and we now have to tap into a value web to get ourselves organized on the market, rather than a value chain. The prevalent notion of a value chain is a relic from a bygone era of industrial organization.

——————

This is the sixth piece in a continuing series of posts (starting here) on what the role of human-centered design could be in development work. I’m working on this together with Niti Bhan, who will also be posting her observations at her Perspective blog. Posts are categorized as VCD