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Starbucks Grounds Zero

Posted by iBlog on July 6, 2008

Jul 3rd 2008 | NEW YORK
From The Economist print edition

FOR years it seemed that American consumers’ demand for liquid fuel was price inelastic—whether it was to drive their cars or get their brains going in the morning. Yet $4 seems to have been the price at which demand becomes elastic, for both petrol and a frothy latte. As a result, baristas at Starbucks coffee shops around America are starting to get a taste of what it feels like to be a carworker in Detroit. On July 1st the coffee retailer, based in Seattle, said it would close a further 500 stores in America (in addition to the 100 closures it announced earlier this year), and reduce its workforce of roughly 172,000 by around 7%.

A remarkable 70% of the stores due to close were opened after 2005, which seems to confirm the comment made by Howard Schultz, when he returned to the helm of the company in January, that most of Starbucks’ wounds were self-inflicted. As it expanded at a breakneck pace, the company opened too many Starbucks in subprime locations. But the deteriorating American economy is doing further damage. As a premium-priced supplier, Starbucks is suffering from the same trading down that is sending shoppers rushing from Target to Wal-Mart. McDonald’s, it seems, has perfectly timed its decision to start selling coffee that is pleasant to drink.

Shares in Starbucks are now trading at barely one-third of their peak value from two years ago. Yet, rather than being a sign of panic, the closures may be evidence that Mr Schultz means to return the company to its focus on quality, rather than growth. After closing all its American stores simultaneously for a brief retraining session a few months ago, there are plans for further improvements in the staff’s competence and demeanour, and in the cleanliness and comfort of its shops.

There are also innovations in the works, ranging from healthy smoothies, to a mysterious (and so far unnamed) Italian drink, to further automation. In March Starbucks bought the Coffee Equipment Company, a small outfit that produces a hugely expensive coffee-making machine called the Clover. It is now testing the machines in a handful of its American shops.

Admittedly, there have been some complaints about the introduction of the milder “Pike Place” filter-coffee blend. But on the firm’s popular new customer website, MyStarbucksIdea.com, the main concerns are about the quality of the food sold by Starbucks and, above all, its prices. Encouragingly for Mr Schultz, there are also many positive suggestions, from serving vegan food to introducing a loyalty card, which suggests that plenty of customers still care for Starbucks enough to give him a chance to win them back—recession or no recession.

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