Sunday, February 3, 2008

Starbucks' Steaming Slump

A bitter brew has spilled at Starbucks, and the taste of its coffee has, for the moment, lost some of its sweetness. Once billed as the "Third Place", a venue that's in between home and office where one could relax, be with friends, work or study quietly; the Starbucks image as a locale of choice has declined. Its elitist reputation as the place to be for the uppity crowd, where yuppies and fashionista students could be seen tapping at their laptops and other gadgets while sipping their latte's, has been downgraded to a level mentioned in the same vein as McDonalds and Burger King. The smug tag "The Starbucks Experience" that it nurtured for itself has gone cold, and it now finds itself in third place behind Caribou Coffee and Peet's Coffee & Tea where its core business is concerned.

A shake-up was undertaken by the organization last month with the sacking of its Chief Executive Jim Donald, giving the reins back to its Chairman and former CEO Howard Schultz. The company that started in 1990 with 84 stores, increasing to 1,000 by 1996, and seeing it grow to 10,000 outlets in 2008; is taking the 50% drop in its share values last year very seriously. CEO Schultz has admitted that Starbucks has lost its focus and has set out to conduct a makeover involving 5 main promotional strategies focused on the consumer. The steaming slump threatens to erode all that Starbucks has worked for in revolutionizing the way Americans and other citizens of the world drink their coffee. It may vaporize the patronage of their once core market, which has seen a heavy shift towards its upscale competitors.

The decline has been attributed to reduced consumer spending and competition. This may be partly true, however, with the surge in Starbucks outlets, the store has lost its glamor and has been likened to an ordinary convenience store. Outlets have sprouted to an extent where these compete with each other within a block. Worse, the rise in the number of outlets has proportionately seen a drop in the quality of service. Competition from McDonalds and Dunkin Donuts, who have both improved their brews and selling for US$1 have given consumers a choice over the US$ 2 to US$ 6 Starbucks blend. The migration of its once higher income customers to more exclusive competitors, and the choice of its blue collar clientele shifting to cheaper and improved blends of working class outlets to save precious dollars, has created a double loss in patronage for Starbucks.

Schultz has announced a reduction by 100 outlets from the planned store openings in the US, and an increase in the number of foreign outlets which has provided a better semblance of growth. This may not work out as intended. Indigenous stores have opened aggressively in other countries, taking advantage of this new trend in coffee drinking. The touted Starbucks ambience can easily be replicated and its brews can be simply renamed and/or produced and reformulated with added flavors. Without the franchise fee added to its cost, competitors in host countries may give Starbucks a run for its money, and see the fluffy foam on its brew sink to the bottom of the cup.

Certain trials are being planned including free refills and a brew with a price tag of US$ 1.00. This may attract a blue collar client who may want a better motif for his relaxation, but if he wants to take coffee with a burger or a donut, the better place would be the competitor that offers these munchies.

Starbucks has become too successful for its own good, and has been swamped by competition offering the same blends, atmosphere, and more, for a lot less. There is no differential advantage in ambience to speak of, no smug connoisseur mentality for its patrons as a bragging right, and no elevation from the ordinary working class coffee drinker in price. Its lead has been dissipated and its attraction diminished by its own ordinariness as a neighborhood soda fountain serving coffee in various forms. It is in hot water. It may soon be renamed Starbust.



The Immortal said...

I like that term "Starbust". This issue is the only thing that remains hot for this coffee shop.

The foreign market competition will melt them faster than they can brew their latte's.

durano lawayan a.k.a. brad spit said...

Hi Immortal,

Nice name. I see it that way and I believe it will happen faster than they can respond, especially in Asia. China will perhaps be its only profit bearing franchise.

Thanks for dropping by. --Durano, done!

The Fitness Diva said...

Interesting turn of events, this.
I remember when I was daytrading a few years ago, and the price of Starbuck's was around $23 a share. I didn't buy at that time.
This past year or so I was kicking myself for not buying and holding. Well look what came back around! Funny how the cycle turns.

Anyhow, I knew that Starbuck's was in trouble when their business model began to be copied by many small mom and pop type coffee houses, and also when Dunkin Donuts and McDonald's began offering similar coffee based products. It was inevitable that the giant would fall. Or at least slip on a banana peel or two.

The push to expand more into foreign markets is a good idea. They took to Mickey D's, so why not Starbucks too? And remember, the tourist factor in some of those places. People would love to brag that they 'went to the Starbucks's in Prague'.
I think that there is still no Starbuck's in Italy (the Italians I spoke to scoffed at the idea), but I bet that a Starbuck's in Venice, which is so heavily tourist, would break sales records in that region. If ya could only get the Venetians to warm up to the idea....

Wonder if it might be worth the gamble to take a crack at some Starbuck's stock right about now? Hmmmmm...... I dunno

durano lawayan a.k.a. brad spit said...

Hi Fitness Diva,

It may be a bit risky to invest in Starbucks at the moment. Wait till April for the announcement on the 5 programs they intend to launch. After you've heard this, make your evaluation if it will fly or fall.

Italians warming up to the idea of Starbucks? It's like asking the Swiss to eat kraft cheese. They could scoff at the idea of expresso made in America! The Europeans are so culturally inclined that a change of culture as sudden as a Starbucks invasion could be met with hostility. We may find out soon enough. --Durano, done!

ZenDenizen said...

Starburst, love it! I can honestly say I've never enjoyed their products.

durano lawayan a.k.a. brad spit said...

Hi Zen,

Me too, it's too sweet for my taste, expensive to boot! --Durano, done!

Mr Munchkin said...

Apparently the other DD noticed Starbust's image issue as well. Check out this PSA and the ad on their main page. Hilarious!

**Public Service Announcement**
Your Fix Is In:

A certain upscale, green-logo'd mackaccino chain will be closing its doors on Tuesday night, February 26, for a mass barista training exercise (stop inhaling the retail, kids?).

You can tell your friends most likely to explode into a caffeine-withdrawal freak-fit that Dunkin' Donuts will be filling in with a 99¢ latte/cappuccino special from 1-10PM. And you know, chocolate-glaze donuts with pink sprinkles, 24-7.