Starbucks: No Perking Up

The recent closing of 600 stores is just the beginning of the fall for this bloated coffee chain. Pro or con?

Pro: Grinding to a Halt

Once upon a time, Starbucks (SBUX) had star quality. Twelve months after going public in 1992, the Seattle-based retailer opened its 275th location. A decade later, the brand was a bona fide phenomenon: From Brazil to Bahrain, millions of coffee fiends were falling for Frappuccinos, macchiatos, and “skinny” lattes.

But honestly, I’m over it. And apparently, so are you.

The company’s current brouhaha, 600 store closings, is just the latest in a series of public stumbles. In February 2007, Consumer Reports magazine rated McDonald’s (MDC) drip brew (roughly $1.35) as better tasting than Starbucks’ “burnt and bitter” original blend (roughly $1.55). A few months later, Dunkin Donuts chimed in, lampooning Starbucks snobbish “Fritalian” menu through a series of well-received TV spots.

Now, other premium coffee shops, like Emeryville, (Calif.)-based Peet’s Coffee & Tea and Minneapolis-based Caribou Coffee, are planning to expand. Inevitably, they’ll court Starbucks’ higher-end customers.

Granted, with more than 15,000 locations in 44 countries, Starbucks is still making billions. But this year, second-quarter profits fell 28%, to $108.7 million, marking the chain’s weakest quarter since going public. And on July 15, shares sank to $13.58, a 52-week low. Tack on rising commodity costs and dwindling consumer income, and the once-mighty Starbucks seems far from stellar.

Here’s to hoping CEO Howard Schultz can say “turnaround” in Fritalian.

Con: Still Hot and Potent

Starbucks is here to stay. There’s really no getting around that fact.

While the coffee giant has announced it will close 600 stores this year, most of which are located in major population centers including California, New York, Florida, and Texas, those stores represent only 8.4% of the company’s total U.S. business and a miniscule 4% of its worldwide holdings.

To be sure, closing a few stores is not going to cure what ails Starbucks. Yes, McDonalds, Dunkin Donuts, and other latecomers to the coffee game are luring the chain’s loyal customers away with cheaper alternatives to the $5 venti latte. And the “customer experience” that Starbucks founder Howard D. Schultz once claimed made each location unique a decade ago has been replaced by the all-too-common trappings of a mall: branded tchotchkes, compact disks, and, worst of all, long lines.

But, despite all the sturm und drang surrounding the recent closings, the chain is doing a brisk business. Starbucks total net revenues are up 12% from the second quarter of last year. The company’s total debt is down 0.6%, to $8.8 million. And, according to figures compiled from the London–based International Coffee Organization, the price of one pound of coffee has decreased by as much as 14 cents this month alone.

Starbucks may never recapture the glory days of the 1990s when the company made designer coffee chic. There have been and will continue to be shakeups, executive departures, and perhaps even more closings. But the brand will survive and thrive, albeit in a leaner and meaner form.

In the meantime, coffee connoisseurs such as those who patronize the Starbucks at 1375 Peachtree Street, NE, in downtown Atlanta will have to move to the other Starbucks, conveniently located down the street at 240 Peachtree Street, NW.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

lanark

I visited San Francisco last year, and Starbucks had a store at each end of one city block. I thought at the time that someone had their nose too deep within the roasting pan. I guess I was right.

Robin P

I agree with Carl, despite some setbacks, Starbucks is here to stay. About the taste, it's always a very individual thing; I've tried McDonald's coffee, and only in its dreams is it superior to Starbucks', in my humble opinion. Yes, it's cheaper, but more satisfying? I don't think so. I work from home, where I drink a lot of espresso, but whenever I have a chance, I drop by one of the Starbucks to get my Venti (original, no fancy mixes). Last year, my wife and I went to Europe and after a week of having espressos, we were very happy to find a Starbucks shop in Barcelona. Another more recent episode was when I was told not to bring my Venti into a Borders--easy, an empty cup of Seattle's Best hid the Starbucks brew. That is the allure.

Matt S

First, I'd like to say that both of these were really entertaining, a big step up from some previous weeks. But I'm not sure who to agree with. I think Starbucks has definitely over-expanded (thus the store closings), but it's still a powerful brand, and it'll be around for quite some time. I don't like paying four bucks for coffee, but I'm not planning to stop buying frappuccinos anytime soon.

KA

Yes, Starbucks overextended itself and is now having to close stores, but what analysts have failed to mention is the "brand" they have created. Yes, Dunkin' Donuts and McDonald's are making coffee now, but no other coffee company also makes quality ice cream and candy bars. What Starbucks as a company has done is create a brand that people can depend on for quality. Whether it's coffee, ice cream, candy, or beans, people know they are getting a good product when they buy Starbucks, and while people may spend less through this economic downturn on things like coffee and ice cream, Starbucks will continue to be reliable when wallets start loosening up when the economy turns the corner.

Tim Flowers

I'm not sure why so many people like to attack Starbucks. There seems to be a large number of Americans who go into assault mode whenever a company manages to become hugely successful. Jealously, perhaps? Granted, some big companies deserve a bit of negative publicity, but Starbucks isn't one of them. Starbucks made it possible for local coffee shops to launch and thrive, and they also paved the way for competitors like Caribou to find their own level of success. Let's find a corporate target that is more worthy of scorn and leave Starbucks alone for a while.

AJS

As with many pioneer companies, their innovative business model has been co-opted. We can laugh at their "three stores per city block" approach, but as long as competition was limited, it worked. They'll survive, but won't achieve the highs of past years, simply because there are too many competitors and their product line is limited in nature. How many different types of coffee beverages can they sell to people?

Robert Batt

With all the comments about Starbucks, nobody is saying that their product is just plain overpriced.
R.Batt

Midwest

Starbucks is a phenomenon of a bloated economy built on credit card over usage and foolish consumers. Although Starbucks will likely survive the economic downturn, it will also partially be a victim of its own excesses. Specifically, the avarice and shortsightedness of its CEO who thought he could talk the world into buying a product that is little more than a prosaic beverage, at an outrageously set premium price. Coffee is neither exceptional or even slightly rare. The supply line is solid and the overpriced product Starbucks popularized is not much more than a status symbol of wired fools worldwide. Coffee was once a dime for a reason. Because it was easy to get and to make and the coffee bean was inexpensive. It's still pretty much the same way today.

Rick

Starbucks is a coffee bubble, like the dot-com bubble, but the convergence of computing, Internet, and telephone did not go away. Starbucks is a club, like Northwest Airlines World Clubs. It's a personal traveling office and meeting place. The new McDonald's coffee, even in China, is very good coffee, but McDonald's is not a place to set a meeting or even get a quick lunch alone. Starbucks is McDonald's but for a definite market segment. Rick

HelmiAzhar

My 2 cents, price is totally not a big deal when you talk about the inelastically addictive-necessity "quality" coffee.

Starbucks itself is a family lounge, a meeting spot, and a reading corner.

In my humble opinion, Starbucks and the "fast-food" McDonald's are not substituting each other. The significant rivals should come from the other coffee chains such as Nero, Costa, Coffee Bean, etc.

Personally, here in London I am growing closely attached to the Costa brand. Maybe because of the concept it brings to complement Waterstones in targeting the reader market.

Starbucks is a legend. Legend lives in the past.

Barbara Holtzman

"New" McDonalds coffee? You've got to be kidding. All they did was advertise it, raise the price in conformance with increases worldwide (and in using Fair Trade, which they have to do in any attempt to gain sophisticated customers), and do some upscale marketing. Not even Caribou, Peet's, or Seattle coffee has the same cache of Starbucks. Dunkin' Donuts has pretty good coffee, and a nice selection of snack foods, but compared to Starbucks, it's just not as good. As has already been said, I'm not meeting a prospect in a Dunkin's for an impromptu meeting. Forget about McDonald's, where I haven't gone since my kids outgrew McNuggets at the drive-through. In Manhattan, there are many places where there are stores across the street from one another--and most times of the day, they are SRO. If I'd change anything, I'd make some stores larger or even put in private meeting rooms or booths to encourage meetings (and beverage, snack, and meal purchases), and I'd definitely bring back free wi-fi. They have to have it for corporate uploading, so why not let people use the bandwidth during the day? Maybe put up a sign, "Please feel free to use our wi-fi, but help us out by buying a coffee, OK?" No, you can't force people to do it, but it works at other places (like Panera)--although like I said, at so many Starbucks it's SRO already. Where are we going to sit with free wi-fi?

Jack

I don't understand how people can compare McDonald's to Starbucks. It's like comparing Long John Silver's to Red Lobster. They are totally different classes of coffee, quality, and clientele. I go in and chat with Starbucks employees, and I can't remember the last time I had any interest in talking with a McDonald's employee. Ultimately, I think the companies that should be scared of McCafe's are 7-11 coffee and Dunkin' Donuts--not Starbucks. Time will tell.

Sometimes trimming the fat is a great thing to do for a stagnant company. That's what this 600-store closure is all about. They have some stores directly across the street from one another. Sure, close one--it makes sense to me.

Matthew

This is a correction that every booming business experiences. At some point the consumer becomes bored. Kudos to Starbucks for recognizing it. They tried the Pike Place brand (which by all accounts is a flop). Now they're facing reality. They'll get a little leaner, but they are a powerful brand. They will find another way to keep the wheels turning.

Joe

I like Starbucks when I have no other choice for quality coffee. The problem is that the "customer experience" has faded with stores looking basically the same with no local individuality. And the baked goods and sandwiches look like and often taste like they're from a 7-11. Invest in employees and store managers and unleash their creative energies.

Earl Barnett III

I love Starbucks. I feel like when I go to a Starbucks, what I'm buying more so is the Starbucks experience. I can go to McDonald's and get some bland coffee and a line, maybe even a bad experience and smell a little grease at same time.

When I go to Starbucks, it feels like a treat, due to the experience itself. It's upscale, and most of the customers around me are upscale. The same goes when I buy clothes from a Banana Republic.

Starbucks is more than the coffee. It's a great brand and great feeling when I'm there.

jack

Inside info, Starbucks will go bankrupt very soon. Just watch their stocks and you will see what is going on. Yes, only time will tell.

m.r.

Time will tell. No concept stays fresh and well forever. There is far too much competition out there. We are living in fast-changing times. Also, perhaps Starbucks has overbuilt.

Matt S

Henry Diz

I am an american living in spain where expresso is a way of life and there hundreds of thousands of cafe´s and yet starbucks is making here as well. Theoriginal idea was tremendous, specially in the US where a good expresso was almost impossible to get. I think they over expanded in the US and they are right in closing some shops. In the end they will survice and the pie will for sure be devided but they are still the first and the best and will continue to grow overseas. Great concept for sure, I love a sunday with my newspaper and a a Latte in one of their cozy shops.

DW

Oh my, it's just coffee. It's nothing else, and if you need a place to read, try a library. I can't believe anyone cares what happens to a place that mixes water with ground beans. Funny and too sad. Get a life.

Joe B

I agree with those of you commenting about the atmosphere and all. We have a local coffee shop in our small town whose product beats all, and is a great place where friends meet. But when I travel, I seek out the Starbucks for a very important reason: consistency. No matter where I travel, any country, any state, any city, the dry cap will always be the drink I'm expecting. Not so with Caribou or any others I've tried. You just never know what you'll get. And if there is anything worse than paying top price for your favorite coffee drink, it's paying the price and getting stung with a terrible concoction.

Bob Mulligan

Starbucks was the original, like Bo Diddley. They can do some amazing stuff with coffee. They can "frap" it, they "achino" it, they can "extra shot" it, Venti it, Latte it, and what they can do to it is almost endless, and someone is always there to buy it. There are cute and high quality tasty treats in the display case for your mouth to water over before you get to order your special blend of wake-me-up or re-vive-me. Now others have seen the light and tailored their product to gather in their share of the market. I don't see how this means anything other than the heyday is over. Dropping market share isn't death; it's dropping market share. Time to retool and readjust the "empire" and settle down and do business. They have reaped the harvest. Now it's time to replant. As Ray Kroc--the McDonald's pilot of old who expressed his one desire to be the first to sell a hamburger on the moon--once said when asked about the new boy on the block, Burger King: "There's always room for one more." Well said, Ray.

Aroma Man

Starbucks counter teens had an arrogant air of sophistication without a high school education--a.k.a., rude. Two years later when I come back to use a gift card, now they are polite and smile. The store closings did some good, but why should it take so many words to order coffee? It's just coffee, albeit with nice decor and fewer kids than McDonald's.

Andrew Odom Jr.

I get your point, Mr. Mulligan, but Bo Diddley was just one of many originators of rock and roll. Don't buy all his bitter self-hype, but RIP just the same.

I agree that Starbucks needs to re-plant--and hope their franchise hangs on. I can live with local knock-offs just as well but agree they upped the ante for better coffee in nearly every burg in the USA.

Margaret Nahmias

McDonald's and Dunkin' Donuts are just as good if not better, for less. Starbucks built it reputation on experience. Schultz's aim was to bring the European coffee bar experience to the U.S. There is no difference in taste. Many time the laggards overtake the leaders. Does anyone remember Visi-Calc or Lotus 1-2-3? I go to Starbucks occasionally, but would more likely go to McDonald's or Dunkin' Donuts (which, by the way, always had coffee; they just improved to compete with Starbucks).

Drelly Rios

Well, McDonald's has more locations and a lower price point for premium coffee, and the value of Starbucks shares are based almost entirely on same-store growth and its goal to eventually have 40,000 stores worldwide (even with the recent closings). But they are totally different classes of coffee, quality, and clientele. I don't understand how people can compare McDonald's to Starbucks. Cheaper or satisfying?

Cy Brown

Starbucks is here to stay, although undoubtedly it will be a leaner organization. The 600 store closings are probably just the beginning...perhaps double that number before it's all over. However, Starbucks is not just a coffee shop; it is a destination, home away from home, office away from the office, etc., which is why it will survive.

Hirsch L.

Here is something to chew on. Starbucks, this highly successful coffee retailer, is making one of the dumbest business decisions I ever heard. They are closing a location in St. Paul, Minn., on August 30. No big deal, you say. Wrong. This location is 1 1/2 blocks from the Xcel Center, which on September 1, will host 50,000 people for the Republican Convention. I understand that some businesses are renting their space for hundreds of thousands of dollars just for the week. I can't believe they can be that stupid. By the way, I know even more on this deal, so don't excuse their lease expiring, which it isn't.

pradeep

However, Starbuck's coffeee is good enough.

Bob Mulligan

Hirsch L.,
Let's do some loose math: 50,000 conventioneers x mmmm oh 5 bucks a pop = a potential revenue of 1/4 million. (If everyone goes there to have a cup-o-coffee). This of course wouldn't include all that sat there for extended periods and had more then one cup and all the tasty treats, finger food, and the anti-Bush, anti neo-con, Earth in the lurch literature and publications displayed prominently for the devotees of the neo-lib Java hut.

Bob Mulligan

Aroma Man, when I buy a cup of coffee in an establishment that shuttles people through as fast as they can, (for whatever reason), the very last thing my 5-plus bucks cares about is the undereducated clerk that serves it. Whether "snotty: or not, is she or he clean? And if "snotty," giving me my change will be the world's longest "second" they ever experienced.

jimbo

How can I compare McDonalds to Starbucks? Well, because I can and I am. To charge $4 for a cup of coffee or fraps or lattes or whatever one calls it is ridiculous. Coffee is coffee, and I love coffee.

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