Recession has Finally Hit Latte Land

Posted by: David Kiley on April 23, 2008

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More evidence of Recession. People are feeling sufficiently pinched (it costs about $50.00 to fill up even the tank of a Toyota Prius) that they are cutting back on $4.00 lattes.

Starbucks said it expects first-quarter earnings per share of 15 cents, compared with the 21 cents Wall Street analysts were expecting. In the same period last year, Starbucks earned 19 cents a share.

Starbucks says it now expects full-year earnings per share to be “somewhat lower” than the 87 cents per share recorded the previous year. That would be the first annual decline in profits in eight years. Analysts expected a profit of 97 cents per share. The company said sales in stores open at least a year fell in the mid-single-digit range in the U.S., due to a decline in traffic. Restructuring costs also hurt earnings by 3 cents per share in the second quarter.
Starbucks shares were down 11 percent in late Nasdaq trading. Shares closed at $17.85. The chain’s 52-week high for its share price is $32.30.

Chief Executive Howard Schultz said in a statement that “the current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers.”

Especially hard hit have been key Starbucks markets California and Florida. With steep housing declines, people are feeling less flush than they used to when rising home values and home equity lines were like ATM machines.

People have been silly enough to buy Taco Bell with a credit card, perhaps some were writing home equity checks for a Frapuccino?

Schultz is trying to shake new life into Starbucks with a new, permanent everyday coffee, couponing, a bit more advertising than the chain is used to, retraining of baristas and new brewing standards.

On a personal note, I have cut back my purchases of lattes outside my house to coincide with the prices I am paying at the pump and for home heating and cooling energy. And find Starbucks’ Pike Place everyday coffee a fine substitute for only about $1.50 a cup. And I didnt say that because Schultz once sent me a Starbucks card.

Reader Comments

Midwest

April 23, 2008 9:41 PM

I have often noted to friends that Starbucks was headed for problems once consumers realized they couldn't afford a credit card subsidized lifestyle. Nobody requires a $4 cup of joe to survive and the fat lady might just be singing the Starbucks blues.

In fact, I think Starbucks' success is nothing more than a symptom of foolish spending by consumers. There's no reason why Starbucks should even be a success story. They sell COFFEE and we've all been suckered into overpaying for what used to be a very inexpensive beverage.

America, get ready to weep for yourself as inflation, deflation and rising energy costs are about to clothesline your lifestyle. To the frugal goes the victory and to those that presumed their $4 Starbucks was a right, not a privilege, goes foreclosures, bankruptcies and a very rude awakening.

ex starbucks empoyee

April 23, 2008 10:38 PM

I was a former Starbucks empoyee for 5 years and customer doesn't even know we gave them left overs coffees.

Dr. Murray Trillionaire

April 23, 2008 11:06 PM

Go have that Mocha Latte Grande! Do your kids really need to go to college?

Murray Trillionaire
http://blog.murraytrillionaire.com

Rich

April 23, 2008 11:11 PM

My impression is that Starbucks coffee (the bottled kind) now has the bitter and burned taste that other people have mentioned - where a few years ago the coffee was absolutely smooth and great tasting. I'm wondering how much this change may have impacted Starbucks' earnings.

Dave Taylor

April 23, 2008 11:51 PM

Sorry to nitpick, but the Prius has an 11.9 gallon tank, so even if it's bone dry and you drive into a gas station in Hawaii (where I've found the most expensive gas in the nation, at $3.96/gal) you'd still only be looking at $47. That's an extreme situation. My typical visit to the gas station here in Colorado to fill up my Prius runs about $30.

Yeah, I realize it's idiotic to worry about that one detail in an otherwise smart blog entry, David, but that's what ya get with citizen journalism, eh? :-)

More to the point, I find it interesting that Shultz didn't say anything about market saturation. Here in Colorado, there are spots where all four corners of a busy intersection have a Starbucks, with another just down the street in either direction.

One mall just down the street (Flatiron Crossings) has three Starbucks and a fourth under construction. Maybe it's not the price of a frappuccino, but the fact that there are too many Baristas per square foot?

FROM KILEY----Dude....Let's round up to a 12 gallon tank...in some parts of the country, gas is $4.00. That's about $48.00. Yes...gas prices vary....but cut me some slack , will ya?

Starbucks Needs to be the First to Go!

April 24, 2008 12:36 AM

Of ALL of the ridiculous wasteful spending that people need to cut out – the first to go should be Starbucks. I’ve watched for years how the cult of coffee has grown into a multi-billion dollar industry in complete amazement.

Nothing irks me more than when my clients or employee’s want me to meet them at Starbucks so that I can expense $20-$30 worth of lattes, it’s just nuts. My CFO told me that our single office expensed tens of thousands of dollars in Starbucks charges last year – we need a new corporate policy banning Starbucks. How anyone can complain about $4 gasoline prices when they willingly turn around and spend $4 for a cup of coffee is just bizarre.

When is the government going to start regulating caffeine like they are beginning to get serious about nicotine and stop this madness? Can you imagine what a better world this would be if all of the money spent on Starbucks over-priced coffee went to something important like world hunger? Give me a break!

The Small Biz. Guru

April 24, 2008 11:00 AM

I guess even the atmosphere and overall experience cannot hide the fact $5.00 for a double mochoa latte skim milk with soy, boiled at 105.5 degrees and shaken, not stirred, is nuts.

I prefer the hot chocolate...

~the GURU

Nevada

April 24, 2008 12:08 PM

Hard times. No more Frapuccinos for me. $3 gets me a small cup of Pike Place coffee, the New York Times, 9 cents for tip and free use of the bathroom.

I

What?

April 24, 2008 1:41 PM

Businessweek's rejection of readers comments makes me feel like I live in Russia!

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News, opinions, inflammatory meanderings and occasional ravings about the world of advertising, marketing and media. By marketing editor Burt Helm, Innovation Editor Helen Walters, and senior correspondent Michael Arndt.

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