Behind the spin: Starbucks

THE DILEMMA

by
Last Updated: 06 Nov 2012

Where would we be without Starbucks? No frappuccinos and no tall skinny lattes for a start. Actually, people are less bothered now about the ubiquity of the coffee chain (founded in Seattle in 1971) than they used to be - at least, on its home turf. In the last quarter of 2007, the average number of transactions per US outlet (of which there are 10,500) fell 1%. This has never happened before. Add to this setback rising milk prices and the arrival of McDonald's on the premium coffee scene and things are getting tense. Chairman Howard Schultz, who expanded the coffee chain aggressively in the '80s and '90s, has fired chief exec of three years Jim Donald and grabbed back the reins. Starbucks' share price has fallen 45% over the past year.

THE SPIN

Schultz believes Starbucks is a victim of its own success. In a letter posted to customers on the company website, he said: 'Twenty-five years ago, I walked into Starbucks' first store and I fell in love - with the coffee I tasted, with the passion of the people working there, and with how it looked, smelled and felt.' It's time, it seems, to wake up and smell the coffee again, because the 'Starbucks experience' today isn't what it used to be.

THE STRAIGHT TALK

Schultz's recovery strategy is textbook. First, he's going to slow down store expansion in the US, where there is a Starbucks store for every 30,000 people, and close under-performing stores. In an attempt to re-engage customers, he's introducing new products and sprucing up stores. To offset the slowdown in the US, Schultz is stepping up the action overseas, including the UK, where Starbucks has 630 stores. Admits Schultz: 'The most serious challenges we face are of our own doing. We invested in infrastructure ahead of the growth curve and, although necessary, it led to bureaucracy ... There are no silver bullets or overnight fixes. It will take time.' In a leaked memo, he said the brand was at risk of becoming commoditised, with the sense of theatre and romance in stores disappearing.

THE VERDICT

Starbucks will watch the consumer slowdown with eagle eyes. Recent growth has been fuelled by blue-collar workers, and they'd be the first to stop buying their daily cappuccino. Starbucks grew from an 84-store chain in 1990 to more than 15,000 owned or licensed outlets worldwide, and it plans another 10,000 in the next four years. The temporary glitch is unlikely to halt the march of this coffee titan, but it won't stop Wall Street giving Starbucks a roasting in the meantime.

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