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19 & 20 OCT 2022

ExCeL LONDON

SCHULTZ’S NFT STARBUCKS PIVOT IS BOLD AND IGNORANT

Starbucks CEO Howard Schultz says he is going to make Starbucks an “NFT Business… sometime before the end of this calendar year”. Schultz, who some have likened to the villain in a horror movie that, no matter how many times you shoot him, keeps coming back for one more swipe with the axe, announced the move at an Open Partner forum, which was recorded and shared on Twitter.

In the 1980s, Starbucks began selling brewed coffee and espresso beverages rather than coffee beans and equipment. This pivot was to prove a prescient and astute move by Howard Schultz. Here’s the growth story in a nutshell.

The company opened its first store outside the United States in 1987 in Vancouver, Canada. When the company went public in 1992, it had surpassed 100 locations. In 1996, the company operated 1,000 stores; by 2005, it operated 10,000, and by 2020, it operated 16,742 stores in eight countries.

Shultz is now planning to reinvent the company again? But his NFT strategy has not been thought through

NFT stands for Non-Fungible Token and has been widely promoted as a platform for investments, which we will cover later, and has been embraced by young ‘digital natives’. 

I have huge respect for Howard Schultz. But on this topic, I’ve been listening to him and his executive team talk, and they are clearly in the dark about the technology, which they say will be the foundation of the new company. In particular, they make an ill-advised claim that blockchain and sustainability go together. Watch the video below in which of their own engineers challenges that.

The engineer is partially right. Blockchain-based on bitcoins model is the exact opposite of sustainability. In fact, maintaining the blockchain consumes more electricity than the whole of Argentina. But it was, in fact, architected to be that way; there are other blockchain models that can be more sustainable. The point is that the execs at Starbucks have no idea how to answer his question, which indicates the company is not making decisions based on research but moving with their gut. This isn’t necessarily bad, and actually impressive that such a large business is willing to make risky entrepreneurial decisions.

I do have a concern over NFTs in general, which is an area in which many young people are involved, and many of them are likely to lose money buying worthless assets. The market for NFTs is already starting to crash, and I’m not sure it was a good idea for Starbucks to link their brand to the concept.

Most NFTs Operate as a Pyramid Scheme

You’re welcome to disagree with me on that statement, but you’d be wrong. The clue is even in the name – ‘NON-Fungible’, i.e. you cannot exchange this thing for money. There is a lot of confusion over what an NFT is, and the Starbucks marketing team even got it wrong when they tried to explain it, so let me sum it up with an example.

If you buy a physical painting, say a nice Rembrandt. Then you own a real object, which you hang on the wall. It is the only one of its kind. You own a unique physical thing with enforceable legal rights.

But this is not what happens when you Purchase an NFT. When you purchase, for example, the NFT of a bored ape, what you actually own is the transaction on the blockchain, which is like owning a receipt to the thing. Not the thing itself.

In fact, when it is sold on to the next buyer, courts in the US are examining what the legalities are of owning an earlier receipt. Remember a new receipt is recorded on the blockchain each time the asset is sold.

So, to be crystal clear, an NFT is a digital receipt to something that you don’t own, which has no intrinsic value, and which can only make money if you can convince someone to pay more for this worthless receipt, than you paid.

Standing out in the Crowd

Let’s face it; an individual Starbucks outlet isn’t anything special. Their main assets are their brand and their scale. This feels like an effort to differentiate itself from increasing competition and attract some of the cool mojo of the young audience that is a staple customer of the company’s sugary beverages.

In the announcement, Starbucks referred to itself as a ‘Third Place, which I actually kind of like. Although they take it too far when they refer to a “hyper-digital third place”, whatever that is.

The essence of the Third Place has always been the feeling of connection and belonging it provides. But in the hyper-digital era that we live in, the community connection that Starbucks has always created is equally powerful as we extend the Third Place Connection wherever customers experience Starbucks.

Starbucks: We’re creating the digital Third Place

On the same blogpost, the company tries to explain their vision to transform the business from a regular community to a wider digital community

What if Starbucks could create a new, global digital community – a community defined by collaboration, experiences, and shared ownership – all centered around coffee to start, and then perhaps expanded into (sic) many of the areas Starbucks has played in over the years as a coffeehouse; art, music, books and beyond?

Starbucks’ website

Their idea is to attribute some value to the NFTs by giving the owner access to rewards and special perks. But although they repeatedly refer to ‘ownership’, if they follow the NFT model, you won’t own anything other than a digital receipt that gives you access to these as yet defined, ‘special experiences’.

Besides, they already have a well-received polished rewards app, so I don’t understand how this NFT on a blockchain is going to deliver anything new.

I’d like to pose an alternative question.

“What if Starbucks went back to basics and made better coffee, improved the work environment for their employees so that they could achieve higher staff retention, and build community through actual conversations in-store, the old fashioned way?”

I think Shultz has some good ideas, like the third place, capitalising on the broader brand assets, like music and art. It can all feed into a cultural identity which might if they get it right, resonate with their audience and provide a key differentiating factor. 

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