Do you drink Starbucks or do you prefer your coffee without marshmallows and cream?

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.

5 thoughts on “Do you drink Starbucks or do you prefer your coffee without marshmallows and cream?

  1. Claire Xu

    I don’t drink coffee with marshmallows (marshmallow is for chocolate drink), but I like drinking coffee with nice froth. Starbuck has lost its “special attraction” to me couple years ago. Its fast expansion and “commiditisation” (like Mr. Schultz mentioned) make it look cheap.

    Maxists predicted that working class’s low wages would cause under-consumption, and finally push capitalist to explore overseas market. It doesn’t happen on Starbuck. On the contrary, the underconsumption of Starbuck is caused by its over- expansion, domestically and globally, driven by profit. Starbuck’s identity has lost its promising quality to support it.

    I would like to use Keohane and Nye’s ‘sensitivity’ and ‘vulnerability’ theory to predict Starbuck’s possible future. Beverage and food chains are all sensitive towards the increasing price of food commodities. It is normal to cost Starbuck more when the price of milk increases. But let’s look at McDonald. McDonald is even sensitive towards media and public’s criticism of its ‘fat factor’. But McDonald quickly changed its policy, adding more healthy choices, such as salad (it doesn’t matter how fat is the dressing, at least there is something green on the table) alongside its burger list. Do you notice that Macdonald is opening 24 hours now? Media criticism and public demonstration did not kick it out of the market, but rather make its marketing more aggressive. Sure, McDonald is sensitive but not vulnerable under external pressure.

    It would be interesting to see whether Mr. Schultz could bring the cosy-feeling of Starbuck back through changing its marketing policy. How much it will cost to swift machine-making coffee to hand-making coffee (the training cost of staff)? Can barista who serve hand-making coffee be efficient enough to cope with customer in busy hours? But, with a big market of coffee drinkers, especially those with fuzzy taste and those with moral sensitivity (who support fair-trade coffee), Starbuck won’t be short of customers.

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  2. romi

    To start with I despise Starbucks. The brand alone makes me very angry. I have not consumed the product in over 8 years. I wouldn’t enter the premises if my life depended on it. I have also managed to get my 3 friends to stop going to Starbucks (or Columbus).

    The reason being is that they use slave labour coffee beans. Starbucks makes millions in profits and pay the coffee bean suppliers such a tiny amount. For this reason alone I loathe them.

    I don’t think any business strategy they apply to one or all of their Starbucks stores will ever make me go there. Unless of course they increase the amount paid to the coffee bean suppliers. My sister (the great big right-wing pro-globalization baboon) bought a coffee from there last year and brought home the takeaway cup to show me what was written on it. I read it and laughed so hard. I have a short term memory so I can’t remember the exact details, however it stated something about Starbucks giving money to one of their Asian supplier’s community to increase healthcare etc. I don’t exactly believe anything I hear coming from a (greedy) multinational enterprise. If they had given money for healthcare to a developing nation I would have found it on the Oxfam website. No? I’m a member of Oxfam’s email newsletters and at no point do I recall such news. Although I do have a short term memory, so please correct me if I’m wrong on this matter.

    However I don’t see how giving such a small amount will make any difference. Sure something is better than nothing; however wouldn’t it also be fairer and nicer if the rich corporate giant paid fair prices.

    If a Western state produced coffee beans would Starbucks be able to get away with such small amount of payments to its Western suppliers?

    And what about the communities of Latin America? They too are the suppliers to Starbucks.

    The reason behind the under consumption of Starbucks (in my opinion) is because people like me don’t support businesses like them. (I also don’t purchase products of Nike, McDonalds, or any other brand). The only business strategy they should employ is the increase in payments to their suppliers. Although shutting down of several Starbucks stores is a great idea. I’ll support that!! : )

    I thought that due to global expansion, competition amongst capitalists increased; therefore the price of the good would decrease. Global expansion results from seeking lower production costs? To be fair shouldn’t the selling price of the good be only a little more than the cost of production? So why are they charging such a hideously high amount per cup of coffee?

    Because Starbucks is a greedy capitalist that only cares about profits (in my opinion). I really despise Starbucks. I don’t this will make it on to the blog, but I had great fun writing it.

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  3. LizShaw

    When I think of Starbucks and McDonalds going head to head to fight for the cafe market I instantly think that the quality will decline due to the time constraints and mass production, just like the quality of their burgers.

    Personally I prefer to go to small coffee shops, and find the quality to be much greater, but that’s just me. The majority of people are influenced by price.

    Based on this, I think that the competition between two major chains will lead to a lowering of prices, but it will come at the expense of quality and at the expense of the little guy entering the market, but that’s supply and demand for you…

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  4. Mel Dempsey-Hogben

    Ah, the old ‘Starbucks is evil argument’. Now don’t get me wrong I also loathe Starbucks for many of the reasons listed above but (and some of you might not remember life before Starbucks) the company did at one time offer something new to the market. A place that you could sit down in comfort on big squashy sofa’s rather than an overcrowded cafe and enjoy a very large coffee at your leisure without being hurried along. Of course other companies soon cottoned on and now we have copy-cat cafes all over the place which should be no surprise to Starbucks when complaining about loss of market share.

    Suddenly old is new again and people, it could be argued, are looking for a more authentic coffee experience. Hence the revival of hand operated coffee machines, and smaller cafes who give people a more traditional experience.

    I will admit that I love coffee, and I can’t say I take a strong enough stand at times when requiring ‘a fix’. Yes the coffee growers deserve a much better deal, but unless we make a concerted effort to ask for Fair Trade coffee each time we purchase a latte, it is not going to change that quickly.

    For me it is about quality and taste and Starbucks does not really interest my taste buds. Interestingly having spent some time living in a small town in Ireland a couple of years ago where there was no Starbucks (hooray), the best place to get a great latte was McDonalds. This also went against our sensibilities but there was no doubt it was the best tasting coffee and it was far cheaper than any cafe in town. We like to support local businesses when we can, but its difficult to drink horrid coffee. So again, like Liz says it will come down to the consumer their assessment of price, quality, accessability and experience.

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