The State of Starbucks
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The State of Starbucks
Inside its existential crisis.
By Dan Mitchell
Posted Thursday, March 19, 2009 - 5:26pm
Most years, Howard Schultz, chairman and CEO of Starbucks, uses the annual shareholders meeting to introduce a major new product or a cool new piece of coffee-making equipment. Something buzzworthy.
At this year's meeting, held in Seattle on Wednesday, there was nothing in the way of buzz, and Schultz introduced nothing new, except for a focus on "value" and a fresh effort to squash the "myth" that "there is a $4 cup of coffee at Starbucks."
Problem is, it's not really a myth. Some of Starbucks' coffee drinks do cost $4 and even more. But even when they cost less, they are still an extravagance. And in a recession, extravagances are the first thing to go.
These are tough times for Starbucks. It's been closing stores by the hundreds and laying off workers by the thousands. Fewer people have been going to Starbucks. Same-store sales dropped by 3 percent in 2008. Before that, of course, Starbucks drove its business through expansion. It went way too far, "watering down the Starbucks experience," as Schultz himself once put it, and turning off customers. Now, the recession has thrust Starbucks into an existential crisis—one that is largely of its own making.
But the company can't afford to stay angsty. It has to work hard to stop customers from fleeing, it has to cut costs, and, to placate shareholders, it has to find new areas of growth.
A major problem for Starbucks is that, these days, you can get a good cup of coffee at a Chevron station. Starbucks' astounding growth—it was opening eight new stores a day just a couple of years ago—was possible because of the dearth of good coffee elsewhere.
Starbucks coffee cup
Comments
Over Priced Coffee
For years, I've considered an addiction to SB as both an indication that someone is shallow with no taste and in the case of a woman, she's high maintenance. Good riddance.
oh really
Want to know what Starbucks' problem is? Ask one of the handful of baristas who have actually stayed with the company since last February. Cuts, lies and changes of plans have driven the best baristas out of the game. Starbucks has forgotten how to take care of the baristas who take care of the customers.
Starbucks
One of the many reasons Starbucks is suffering, is the boycott by many who oppose its support of Israel. Like many other US businesses and institutions, support for Israel is a given. This is not acceptable for many people - http://bdsmovement.net/ Hopefully, this boycott will have an effect on the policy and procedure of this company, as indeed it should on the entire USA, especially in this recession. The US gives a lot and gets nothing from Israel. But it loses many friends.
This is not your father's Starbucks
We all know we have newspapers collapsing all around us and a financial press that is under fire for being complicit in the economic crisis we are now in. But every time I see Starbucks' current financial story retold, inevitably I am very disappointed by the lacking breadth of vision and am concerned by the easy lure of oversimplified reporting.
The main issue is this: Starbucks current problems are not macroeconomic (as much as their PR staff would like you to believe that). Instead, their problems are internal. If they were purely macroeconomic, then positioning their brand in a climate of more conservative consumer spending would make a lot more sense. However, this is a false presumption.
For one, Starbucks has been ailing as a company since long before the recent economic meltdown. Over a year ago, Starbucks blamed poor earnings and the announcement of store closures on consumers who were pinched by high gas prices and higher food prices (remember when that was our economic boogeyman?).
CEO Howard Schultz lamented the demise of the company in a Valentine's Day memo in 2007 -- about a year before we were close to anything of a recession. Many of the root problems identified were that, as a brand, they continued to pretend to be a luxury brand that concerned itself with quality and the highest quality coffee imaginable. But the reality was that Starbucks sold its soul over the past decade to grow at all costs: superautomatic machines, fewer suppliers of broader bean sources for consistency, less skilled employees, and everything made to grow the brand to over 15,000 cafes.
Trouble is that 15,000+ retail locations is not a luxury play. It is a convenience and value play. The disease Starbucks had, and still has, is that they invited the value-and-convenience market competition of a fast food chain while still pretending they were a handful of exclusive coffee shops with hand-crafted coffees and personalized service. Nothing could be further than the truth.
Because if this merely was the story of macroeconomics and consumer belt-tightening, how could Peet's Coffee & Tea -- a chain which taught Starbucks the business in the 1970s and still sells $4 lattes -- post 21% profit growth in their most recent, recession-bound quarter? In fact, they've been showing double-digit profit growth throughout this recession. And last month the AP ran a story about the many neighborhood cafes that were posting double-digit growth in this economy: http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=AP&d...
Starbucks wants us to believe it's the economy, stupid -- not the mismanagement, stupid. Ironically, their VIA product is the first sign we've seen that they may finally recognize they are no longer the boutique luxury cafe play they self-identified with some 20 years ago. It's time for consumers and financial analysts to recognize this as well.