The decline of the empire of Starbucks

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

Even allowing for the credit crunch, the stock has been hammered. From a peak of $40 in 2006, it has dropped all the way back to $14. Nobody is expecting a swift recovery. Nicole Miller Regan, an analyst at the US securities firm Piper Jaffray, concedes that Starbucks management is now tackling the decline but says, ‘we do not expect those strategies to have a meaningful impact in the short term’.

So what went wrong? One problem is that the chain simply became too hyper (maybe it was all the caffeine). In Manhattan, for example, there are 185 stores, eight per square mile. Even New Yorkers find that a bit excessive. As an analysis by Harvard Business School pointed out, Starbucks was guilty of too much expansion. ‘To grow, Starbucks increasingly appealed to grab-and-go customers for whom service meant speed of order delivery rather than recognition by and conversation with a barista,’ it argued. Indeed, in another leaked memo last year, Schultz himself acknowledged the problem: ‘Stores no longer have the soul of the past and reflect a chain of stores versus the warm feeling of a neighbourhood store.’

Rather like McDonald’s, a company it increasingly resembles, Starbucks has been revamping its menu. It has just introduced fruit smoothies in the US and will roll them out around the world. Earlier this year it closed its entire American chain for part of a day to retrain staff in the craft of coffee-making. It is trying to get back to the idea of a personally created coffee, delivered with a shot of friendly conversation. The trouble is, once you become a giant corporation, that’s very hard to do. Most mega-corporations sell on price, convenience, or innovation: they don’t try to sell on service for the simple reason that they know they are not much good at it. The coffee house was meant to be small, local and intimate. Trying to take it global may well have been an absurdly over-ambitious idea in the first place. As it became bigger, it became soulless. And that was always going to be its downfall in the end.

For Starbucks, there may be a darker possibility as well. If coffee is a bull-market drink, then it may well deflate along with the financial markets. The credit crunch has, quite simply, blown the cappuccino froth off a global brand that perfectly encapsulated the easy-money, easy-living era.