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Last Updated: Friday, 1 February 2008, 00:06 GMT
Why Starbucks' sales have gone cold
By Will Smale
Business reporter, BBC News

Starbucks store in central London
The Starbucks logo dominates many city centres

The coffee isn't tasting too sweet at Starbucks at the moment.

Recently coming bottom in an independent UK taste test of the main coffee chains, the US giant has seen its sales fall in its main home market for the second quarter in succession.

With its share price also having declined more than 40% over the past year, the Seattle company's founder, Howard Schultz, returned to the chief executive role last month to try to turn around the firm's fortunes.

While Starbucks is undoubtedly being hit by the wider slowdown in consumer spending in the US, analysts say the problems at the company run much deeper.

'Cannibalising'

Mr Schultz has himself been brutally honest about where Starbucks has gone wrong, admitting that it now has too many outlets in the US, which is "cannibalising" sales between branches only a short distance from each other.

It was all but inevitable that after such aggressive expansion that its sales growth would eventually stagnate
Brian Morgan, Cardiff School of Management

Also bemoaning a dilution of the "Starbucks experience", he said the firm had lost its focus.

"When you succeed at this level for so long... you get a little soft," says Mr Schultz.

"We have to get back to what made this company great, and that is to have the courage and curiosity, and commitment, to do things that have not been done before."

Ubiquitous

The core problem for Starbucks is that its stellar expansion of the past decade has tarnished the exclusive, upmarket image that made it so popular in the first place.

Starbucks chairman and chief executive Howard Schultz
Mr Schultz has vowed to turnaround the firm's fortunes

Once a happy, even smug refuge for go-getting professionals and fashionable students tapping at their laptops over a venti Frappuccino, Starbucks billed itself as the "third place".

It wasn't home or the office, but a combination of the two - a good place to relax or work.

From 84 US stores in 1990 to 1,000 in 1996, it is not an overstatement to say Starbucks revolutionised how Americans drank coffee and how much they were prepared to pay - rather a lot.

Fast-forward 12 years, and Starbucks now has more than 10,000 American outlets. In the big US cities they are seemingly everywhere.

Image problem

Such market saturation has changed how Starbucks is viewed, with many consumers now mentioning it in the same breath as McDonald's and Burger King.

Starbucks share graph

It may not sell burgers and fries, but the perception is that the bigger and more corporate Starbucks has become, the worse customer service and quality have become.

As a result, once loyal US customers have migrated to its growing army of competitors, such as smaller but more fashionable chains Caribou Coffee and Peet's Coffee & Tea, despite Starbucks also expanding into selling CDs.

Mr Schultz himself has admitted that the brand risked becoming a mere commodity, and needed to better focus on the consumer.

Starbucks has further been hit by the likes of McDonald's and Dunkin' Donuts greatly improving the quality of their own coffee, which is generally also cheaper.

So while Starbucks' white collar American customers are moving to more exclusive coffee chains, blue collar drinkers are getting their posh coffees cheaper at the fast-food chains at a time of growing fears of recession in the US.

Mr Schultz appears to want to win back both sets of customers.

In addition to saying he wants to return the "romance and theatre" to Starbucks branches, the company has also started to trial a cut-price $1 (51 pence) cup of coffee as it battles a consumer recession "headwind".

It is also closing under-performing US branches and slowing back on new store openings in its home market.

But will it be enough?

'Easy to copy'

"Branding is so elusive a concept, it takes years to build up a brand, but you can lose it over night," says Brian Morgan, professor of entrepreneurship at the Cardiff School of Management.

"Starbucks had such a great concept of quality coffees and decent store ambience, but it was also of course such an easy idea to copy.

"It was also all but inevitable that after such aggressive expansion that its sales growth would eventually stagnate. Especially in the face of ever more competitors.

Because coffee was at the heart of their brand, they made their customers feel like discerning connoisseurs, they were proud to be associated with Starbucks
Jim Boulton, a partner at Story Worldwide

"It now desperately needs some new innovations to reconnect with customers."

Mr Morgan is also sceptical about Starbucks' continuing emphasis on overseas expansion, saying it faces exactly the same image problem in European markets as it does in the US, and that it already had a large number of stores in China's main cities.

Brand expert Jim Boulton, a partner at advertising agency Story Worldwide, agrees that Starbucks needs to find a new way of setting itself apart from its competitors.

"Because coffee was at the heart of their brand, they made their customers feel like discerning connoisseurs, they were proud to be associated with Starbucks," he says.

"Now, with so many coffee chains around they have no point of differentiation, there's nothing clever about going to Starbucks."

Mr Schultz says Starbucks will now unveil its transformation plan, including "five bold innovations" at its annual shareholders meeting on 19 March.



SEE ALSO
Starbucks to open fewer US stores
30 Jan 08 |  Business
Starbucks brews $1 cup of coffee
23 Jan 08 |  Business
Starbucks in Ethiopia coffee vow
21 Jun 07 |  Business
China central to Starbucks growth
14 Feb 06 |  Business
Starbucks sacks chief executive
08 Jan 08 |  Business

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