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“customer experience” that Starbucks founder Howard D. Schultz once claimed made each location unique a decade ago has been replaced by the all-too-common trappings of a mall: branded tchotchkes, compact disks, and, worst of all, long lines.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.