The decline of the empire of Starbucks

Matthew Lynn

26 July 2008

Matthew Lynn says coffee is the pure brew of capitalism — as the credit crunch bites, no wonder the world’s most ubiquitous coffee-house chain is heading for trouble

For every devotee, however, there is an equally passionate detractor. During the anti-globalisation riots in Seattle, Starbucks was one of the main targets — smashed up for symbolising the bland, corporate homo-genisation of what used to be small local businesses. The chain was singled out by Naomi Klein, high priestess of the anti-globalisation movement, in her book No Logo: ‘Starbucks seemed to understand brand names at a level even deeper than Madison Avenue, incorporating marketing into every fibre of its corporate concept — from the chain’s strategic association with books, blues and jazz to its Euro-latte lingo,’ she wrote.

Yet what both fans and enemies failed to spot was that, like many companies before it, Starbucks was simply growing too big for its own good. In reality, very few companies get to take over the universe, and Starbucks has proved no exception to that rule. In the last year, it has found business turning as cold as a frappuccino.

In 2000, Schultz had stepped aside from day-to-day management of the chain. But in January this year, he was re-appointed chief executive after customer traffic in established Starbucks outlets was reported to have fallen for the first time ever and the stock price dived. In America, Starbucks’ profits were in retreat, in part because of competition from McDonald’s and Dunkin’ Donuts, which both started selling respectable coffee at lower prices. In memos to staff, Schultz fretted about the ‘commoditisation of our brand’, and worried that automated espresso machines and pre-bagged coffee beans had made stores more efficient but removed the ‘romance and theatre’. Now 600 cafés across the US are being shut down, while analysts estimate that as many as half of the stores opened since 2003 don’t make any money. The first 50 will have been shut by the end of this month.