Not enough froth
Trouble at Starbucks – Jan 8th 2008, From Economist.com. AP
HOWARD SCHULTZ is not trying to pass the buck. Starbucks is in trouble and much of it is self-inflicted. “I’m here to tell you that just as we created this problem, we will fix it,” he promised on Monday January 7th. This coincided with the announcement that Starbucks was bringing back the man who presided over the coffee firm’s rapid expansion in the 1990s. He will retake the helm eight years after he stepped aside as chief executive, replacing Jim Donald, who has run the company for under three years.
The world’s biggest chain of coffee shops is in the midst of its first serious crisis. Last year Starbucks’ shares slumped by 42%, making it one of the worst performers on the NASDAQ stock exchange. In the last quarter of 2007 Starbucks served fewer customers than the year before in America, its biggest market by some distance. When analysts at Bear Stearns, an investment bank, downgraded their verdict on the company last week, its share price plunged by another 12%.
Not all of Starbucks’ poor performance is of its own making. Prices for food commodities are at an all-time high. This has forced the company to increase prices twice in recent months. But passing on added cost to customers already worried about high food and oil prices, and fearful about a recession in America, has taken its toll. A tightening of purse strings has increasingly encouraged defection to fast-food chains such as Dunkin’ Donuts or Panera Bread. They sell reasonable coffee for as little as a quarter of the price of the fancy Starbucks brew.
The biggest of all fast-food chains is also about to launch a full frontal attack on Starbucks. This year McDonald’s will help customers to wash down its burgers by installing coffee bars with “baristas” dedicated to turning out the sort of Italian-style coffees that brought Starbucks its success, in nearly 14,000 American restaurants. The addition to its menu is the biggest diversification ever attempted by the burger giant. McDonald’s has already made smaller forays into providing decent coffee, and with some success. Last February Consumer Reports, a trade magazine, rated its filter coffee more highly than the same sort of beverage served up at Starbucks.
Mr Schultz saw the crisis coming. In February 2007 he gave warning about the “commoditisation” of the brand in an internal memo to senior executives that subsequently found its way onto the internet. “Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience,” he admitted.
As an example he cited the switch from hand-operated espresso machines to the automatic variety. This helped to speed up service but also took away the “romance and theatre” provided by the shiny La Marzocca coffee machines that the new equipment replaced. The result, he conceded, was that some patrons were calling Starbucks coffee shops sterile places that no longer reflected the company’s passion about coffee.
To restore the company’s shine Mr Schultz will need to make Starbucks special again. Analysts say that the company has grown far too fast. The firm has more than 10,600 coffee shops in America—and about five new branches open every day. And while Starbucks has expanded so have its rivals. The firm’s home market seems to have reached saturation point. Until now the company was planning for 20,000 shops in America and another 20,000 around the world. That ambition now looks in doubt.
Mr Schultz says he wants to slow down the pace of expansion in America and to close struggling locations while accelerating expansion overseas. He also wants to improve the “customer experience” at American stores and streamline management. There is no “silver-bullet” he said, but rather a scaling back of the expectations of a company famously named after the coffee-loving mate of the Pequod in Herman Melville’s novel, “Moby Dick”. Ominously, Frank Starbuck comes to a sticky end when he eventually comes up against the great white whale.