Harvard Business Review

much better job of attracting these particular customers. As a result, the company managed to sustain flat comps while its competitors suffered double-digit declines, thus strengthening its market position and slowing the effects of a rapidly weakening overall market.

RULE 2
Close the Needs-Offer Gap

In our experience, most retailers have a lot of customers who could be spending more money at their stores than they are. The challenge is to entice them to do so. This is both easier and harder than it would seem. It’s easy because all you need to do is give them what they want. But it’s hard because what they want is not more of what you’re currently providing. And to fill the gap between what they’re looking for and what you’re offering, you must forsake the incremental “last year, plus-or-minus” optimization approach that may have served you well in headier times.

Such “needs-offer gaps” can take any number of different forms. They can reside not only in the makeup of your product mix but also in your service levels, in-store environments, or the brand positioning itself. For Starbucks, the proliferation of new stores, together with the emergence of new competition,

has created an enormous gap between the experience customers want from the company and the experience they get. For some, it takes too long to buy a simple cup of coffee. For others, Starbucks’s plain vanilla format, particularly in suburbia, makes it difficult to justify the premium they pay there relative to independent coffeehouses, local coffeehouse chains, and even McDonald’s and Dunkin’ Donuts. Many coffee drinkers want a self-serve food experience much like that offered by such outlets as Pret A Manger. Coffee connoisseurs want the espressos, cappuccinos, and experience that can be found in Italy’s best coffee bars. And many just want their original Starbucks back – the socially responsible “third place” between the office and home. Needs-offer gaps such as these explain not only why half of Starbucks’s customers are now spending more of their coffee-related dollars at competitors than at Starbucks but also how the company can change that.

To survive a downturn, retailers must constantly work to identify and close their needs-offer gaps to win as much of their headroom as they can. This is how they gain share and offset the sales they must inevitably lose when their most loyal customers reduce spending. In our experience, though,

many retailers do not do that work. Ironically, this is largely owing to an unintended consequence of the explosion of information technology. Most retailers can track on a daily basis what items are selling in which store – and often even to whom and when during the day. But while this information has led to much greater efficiency in inventory management and purchasing, it conditions merchants and store managers to stock up on what’s selling well and pare down on what’s not. This then leads to big gaps between a retailer’s offer and what customers want precisely where the headroom is greatest, since it says nothing about what customers might be buying elsewhere.

This was a trap profitably avoided by one department store retailer we studied. Its apparel sales had been declining, so space productivity (sales and profit per square foot) had fallen below what it was in the rest of the store. The optimization mind-set – ration space according to what is selling the best – would have suggested reallocating the areas devoted to apparel on the floor and in the stockroom to more productive departments, such as handbags and accessories. However, this retailer’s

“HEADROOM” Market share you don’t have minus market share you won’t get.

“SWITCHERS” Customers loyal neither to you nor to your competitors.

The Real Opportunity for Starbucks

Starbucks already has almost 90% of the business of its most loyal customers. Not much room for growth there. And it’s not likely to get much business from people who are loyal to competitors. So it needs to focus on the sizable group of “switchers” – those who go both to its shops and to others. By giving these customers more of what they need, Starbucks can dramatically turn around its business, even if its most loyal customers are cutting back.