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Summer 2005 5 at the Top

Starbucks

Until the mid-1980s, coffee was considered a commodity in the US: nothing “special” about it. Perhaps that’s why consumption had been declining for more than 20 years. Still, millions drank it at home, at the office, in restaurants and drive-throughs. Although prices varied, few places other than upscale restaurants sold it for more than $1 a cup. And that often included a refill. Then came Starbucks.

Today, coffee is an $18 billion a year industry. Eight out of 10 adults drink coffee, averaging 3.4 cups a day, reports Jennifer Grogan (Columbia News Service, 2/15/05). That’s approximately 54 percent of Americans, according to the National Coffee Assn.’s National Coffee-Drinking Trends 2005 report, each spending an average of $164.71 a year. That makes the US the world’s largest consumer of coffee.

Starbucks was founded in Seattle in 1986, and its locations were designed to resemble the espresso bars that CEO Howard Schultz found on every corner in Milan. His vision was to educate American consumers on top-quality coffee, and then sell them cups of it in a relaxed social setting. In doing so, he redefined coffee as an experience, not just a beverage.

Although Schultz employed many savvy strategies, two had the biggest impact on what Starbucks is today: re-branding, and access. He re-branded coffee as an upscale drink (with attitude, some say), and made it available in a modern neighborhood gathering place.

Repositioning coffee as an affordable luxury, Starbucks charges consumers $3 and up for many of its concoctions—far more than a traditional cup of java. In that sense, Starbucks is like Evian, the company that successfully introduced the upscale bottled-water concept (and pricey French water, at that) to a public that drank tap water only, which cost just about nothing. Evian went one better and made bottled water trendy—a commodity transformed into a lifestyle—and, soon enough, made carrying a bottle with the distinctive Evian logo a symbol of hipness. And so, marketing successfully by means of informing and educating the buying public, Evian created its market.

Starbucks followed much the same pattern and trajectory—and success. And there’s no end in sight to the market’s growth potential, and therefore the company’s. In 2004, Starbucks generated $5.3 billion in revenue, a 30-percent jump over 2003.

But remember, coffee is only half of the Starbucks success equation. Creating a modern, semi-artsy, uniform environment with a friendly, leisurely, quasi-Euro atmosphere is the other—and a key element in Starbucks’ mission.

Instead of rushing customers in and out, which was coffee-selling SOP just about everywhere, Starbucks took the opposite approach: slow and friendly. They created a hip (but not edgy), comfortable place where customers can buy a cup of coffee (and maybe some biscotti or buns) and, if they want, stay there, relax and socialize.

From the start, Starbucks encouraged customers to have a seat in a comfy armchair or at a bistro-type table, and linger—to chat or read or write or work as they listen to low-key jazz or world music in the background (CDs of which Starbucks eventually began selling at the register). Laptops are certainly welcome, and new wireless Internet connections in many locations give Starbucks customers another reason to come in, stay a while, and order another latte.

Target

Target is simultaneously a leader and a follower—breaking new ground with its alliance with name designers as it closely monitors trends to stay behind, not ahead of, the curve.

Once considered an also-ran discount retailer behind the likes of Wal-Mart and Kmart, Minneapolis-based Target has successfully, and lucratively, positioned itself as the champion of cheap chic. Where Wal-Mart promises rock-bottom prices and Kmart is the place for Martha Stewart goods, Target promises good (sometimes great) value on many well-designed, attractive, trendy products, and continually raises the bar.

Designer appeal at affordable prices continues to boost business. The $46 billion company now has more than 1,300 stores and 300,000 employees in 47 states.

Target’s hold on the retail market began in 1962, the same year Wal-Mart and Kmart were founded, incidentally. But where other stores (including some long gone) forced their customers to endure dim, dirty, rundown stores and spotty service in exchange for a bargain, Target offered quality products at low prices in a bright, clean, organized environment. Even the aisles were wider.

And Target’s shoppers—aka “guests”—are more upscale themselves: a 2002 USA Today/CNN/Gallop poll reported that customers with higher incomes generally prefer Target over its competitors. No surprise, then, that the designer gambit was a hit.

Target’s reliance on design as its hallmark began in earnest in 1999 when Target collaborated with noted architect Michael Graves. They commissioned him to create 300 home-décor products, appliances, kitchen accessories and more. Suddenly customers in all income brackets could afford smart, sophisticated designer home goods, and Graves’ designs flew off the shelves.

The success of that partnership, which continues today, spurred Target to form alliances with more designers, such as Mossimo Giannulli, who designs a clothing line for them; Sonia Kashuk, a cosmetics line; and Todd Oldham, who designed a home-furnishings line. Rather than partnering with an established, big-name designer, Target is more apt to choose one who is lesser-known, an up-and-comer or niche designer, to make sure that the designer’s name doesn’t eclipse the company’s. (Target has since added Isaac Mizrahi, Rachel Ashwell/Shabby Chic and others to the line-up.) Customers responded from the start, buying up the new stock at break-neck pace.

The speed of the stores’ inventory turnover is extraordinary, creating a dual-edged sense of urgency among its customers. First, they’re more apt to buy now than wait, for fear that they won’t have a second opportunity to buy short-lived seasonal items. And second, because the merchandise turns over so quickly, they visit the store more often to check on what’s new. Both of which keep Target cash registers ringing up double-digit annual growth.

To keep it going, the company also sponsors an annual design competition to identify the stars of tomorrow—and put first dibs on their talent. In addition, Target constantly looks ahead to emerging fashion trends. In On Target by Laura Rowley, Cynthia Cohen of Strategic Mindshare explains that although Target routinely breaks new ground in retailing, they aim to be a follower. “When trendspotters identify [a trend], they want to come just after, just before it gets to the masses.” Target wants to be “leading edge, not bleeding edge.” And so they are.

Google

Google, unlike Target or Starbucks, worked to be way out front in terms of technology. Google got there and successfully stayed there, much to the consternation of Microsoft, which seems to be losing some of its best and brightest employees to them.

Google, based in Mountain View, CA, is a quintessential example of a company with laser-sharp focus. Google as the Internet software product was developed in 1998 to help Internet users find information online. It was designed to be a “search engine” and today, more than seven years later, it still is. Competing search engines like Excite and Yahoo—which didn’t see a way to make money that way—decided their survival depended on morphing into “portals” that amass content, shopping services, and the like in one spot. But Google is still a free tool for finding information online. And it’s making money, lots of it, especially after its successful IPO last August.

What Google did differently from its search-engine brethren was to stay committed to improving the process, rather than branching out into new territory, such as selling banner ads or rankings. Creators Larry Page and Sergey Brin hated banner ads as much as the rest of us do, and vowed never to irritate users with them. That said, they had to find a way to generate revenue, since early search engines made nearly all their money through advertising. The solution: clearly marked paid listings, which they call Sponsored Links, that appear in a simple, text-only column to the right of the search results. It worked.

In 2004, Google’s total ad revenue was $3.1 billion, representing nearly the entire $3.2 billion the company generated that year, which was up 118 percent over 2003. Google’s profits of $640 million, which rose 20 percent last year, are a strong indicator that the company is here for the long haul.

Aside from the money, Google is also the undisputed leader: search engine number one. No other can claim to search more than eight billion webpages, nor do they have a chance of catching up. In fact, most websites that incorporate a search feature of their own simply use Google’s engine (you’ll see the logo) rather than reinvent the crankshaft. Simply put, Google is the industry standard.

Southwest Airlines

You know you’re doing something right when customers write letters pleading with you to open shop where they live. That’s the enviable position Southwest Airlines is in: cities nationwide are trying to lure the airline to their airports. The airline is in tremendous demand because of its low fares and fun flights. (Where else might a flight attendant pop out of an overhead bin just for laughs?)

When Herb Kelleher and Rollin King founded Southwest Airlines in 1971 in Dallas, their vision was a short-haul, Texas-based airline. They started with four planes serving three cities, and had revenues of $2 million that year. The combination of cheap fares and excellent service won the hearts of nearly everyone who flew the airline, despite the fact that passengers received no extras, like meals. The airline was profitable within two years of start-up; by 1995, 224 planes served 45 cities, and revenues reached almost $3 billion. And the company has made a profit every year since 1973, a remarkable achievement no other airline can rival.

While Kelleher is credited with creating the company’s fun-loving corporate culture, the outgoing employees are responsible for implementing it. (At the start, flight attendants were encouraged to entertain the passengers—and those flights, although short, are said to be memorable.) For that reason, hiring is an involved, intense and highly competitive process. In 2004, more than 225,895 people applied for 1,706 openings. Generally, openings occur only in new markets the airline enters, because few employees leave. Southwest’s employee turnover rate is the lowest in the industry.

In 2004, Southwest Airlines took in revenues of $6.5 billion from shuttling nearly 71 million passengers to their destinations. The average fare is just $88.57 for flights that average 753 miles to and from its 60 airports.

The company is able to keep its fares so low because of its operational efficiency. It builds hubs at smaller airports, where the congestion is minimal and delays less common. Flights are point-to-point rather than traditional hub-and-spoke, on the airline’s 417 planes, which the airline works to fill to capacity.

But what keeps customers coming back is the “Whatever It Takes” policy of customer satisfaction. Southwest’s employees have helped the airline earn the distinction of having the fewest customer complaints industry-wide every year since 1987. Southwest has clear employee guidelines but few hard-and-fast rules. Instead, it gives employees the authority to do what they consider necessary to help a customer in a given situation—such as driving an elderly passenger home when no one could meet him at the airport, or getting passengers to change seats (happily) so that a family can sit together. The company wants not just “satisfied” customers but happy customers. To achieve that goal, Southwest will do just about anything—”whatever it takes” for fun and profit.

The Container Store

The Container Store is there to help customers organize and stow all the stuff they’ve accumulated. And stylishly, too.

Based in Dallas, The Container Store sells organizational products for nearly every use imaginable, fulfilling its mission to simplify customers’ lives. Founded in 1978 by Kip Tindell and Garrett Boone, the $425 million company has just 34 US locations (plus website), but its reputation belies its size. Its secret of success is two-fold: treating its customers well, and treating its employees even better. Fortune Magazine put The Container Store at or near the top of its “100 Best Companies to Work For” list for six consecutive years.

People come to The Container Store because among the 10,000 or so boxes, trays, racks, baskets and shelves for sale, they know they’re likely to find exactly what they need to organize and store their things. And those products are carefully designed: Each item must provide visibility, so users can see what they stored in it; accessibility, so users can get to what’s in it; and flexibility, so they can use the item in ways that meet their needs. It’s about more than just the products, though. The company is equally committed to—and adept at—helping customers cut through the clutter.

But the size, breadth and beauty of its inventory and problem-solving/design service aren’t the company’s greatest edge: its employees are. The company has earned kudos for its helpful employees, who are always on hand to propose the best storage and organization products for a customer’s specific situation.

Employees don’t work on commission. They receive salaries that are at least 50 percent more than the industry’s going rate, plus benefits (even part-time employees, called “prime-timers,” are entitled to health benefits, a rarity in most companies), a generous 401(k) plan, family-friendly shifts and policies, and excellent training and communication. Employees are thrilled to work for The Container Store. It shows in the service they give—and on the company’s bottom line.

Taking it to the top

For some companies, positioning and re-branding makes or breaks them, as with Starbucks. For others, it’s a revolutionary service, as with Google. Some companies win by leading; some like Target, get ahead by following—one step behind the leaders but a giant step ahead of everyone else. And other companies make their mark with their corporate culture, such as The Container Store and Southwest Airlines, whose success is all about excellent service—a direct result empowering their employees to meet customer needs completely.

In truth, that’s what these five companies have in common: extreme customer satisfaction. Each in its own way meets customer needs we may not even know we had till they were met. Target sells affordable, stylish designer goods. Starbucks provides the American caf√© and sells top-notch coffee. Google provides a way for Internet users to find the information they’re looking for-simply and ingeniously, no matter how obscure, and it’s still free. Southwest Airlines charges extreme low fares, and pleases-even entertains-its customers en route and beyond. The Container Store helps customers clear the clutter by selling the right form-follows-function products for the job.

The results? That’s something else these five companies have in common: Higher sales, higher profits, lower employee turnover, loyal customers who love them, and solid long-term prospects. In a word, success.


Marcia Layton Turner

MarciaLaytonTurner.com -- Turner writes frequently for business publications. Her work has appeared in Business Week, Business 2.0, MyBusiness and numerous trade magazines. She is also the author of Emeril! (John Wiley & Sons, 2004).

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