Starbucks - The decline of the empire

Coffee is the pure brew of capitalism, says Matthew Lynn. As the credit crunch bites, no wonder the world’s most ubiquitous coffeehouse chain is heading for trouble.

In Christopher Guest’s witty canine mockumentary Best in Show, there is a line of dialogue that tells you everything you need to know about the world’s biggest coffee chain. ‘We met at Starbucks,’ says a woman character of her current romance. ‘Not the same Starbucks, but we saw each other at different Starbucks across the street from each other.’

Not many companies are so instantly recognisable that their brand names can be dropped straight into a movie without introduction. Nor are there many whose ubiquity could be the punchline for a gag. Indeed, there is probably only one: Starbucks.

But, quite possibly, not any more. For the first time since it was founded in Seattle in 1971, the company that introduced the world to the double mint mocha decaf skinny latte is on the retreat. Its stock price has been hammered. Its key founder has been hauled back to restore the old magic. It is experimenting with new products to revive flagging sales. And, most significantly, it has announced that 600 of its American shops are to close, the first major cull since it was founded. For the first time, people are starting to ask if the caffeine empire is about to fall.

If so, it will be as good a symbol as any of the closing of an era of capitalist exuberance. You could have an interesting debate about which was the most iconic business of the last couple of decades. Microsoft was the richest, and Apple probably the coolest. But, for an exercise in pure marketing, for the chutzpah involved in turning frothy milk and hot air into one of the most powerful brands in the world, it would be hard to beat Starbucks.

Economic historians have occasionally noted the connections between coffee and capitalism. Stock markets were, of course, originally coffee houses. One of the first futures markets, started in New York in 1882, traded coffee contracts. As industrialisation spread, so did coffee drinking. ‘Caffeine underpinned the dramatic rise of capitalism and its most successful offspring, globalisation,’ notes the historian Anthony Wild in Coffee: A Dark History. Indeed, with its ingredients of commodity trading, industrial process and global branding, it is the capitalist drink par excellence. So it probably shouldn’t come as any great surprise that the rampant quarter-century bull market from 1982 to 2007 should have a coffee company as one of its most emblematic successes. Starbucks certainly seems to have been aware of that. The original company was founded way back in 1971, its name borrowed from Moby Dick (Starbuck was Captain Ahab’s first mate). But it remained no more than a popular local coffee shop in Seattle until the entrepreneur Howard Schultz climbed on board in 1982 armed with a big idea.

The big idea

Coming back from Italy, he figured Americans might like a Mediterranean-style coffee house. Just as McDonald’s had taken a traditional German food item – the hamburger – and repackaged it for the US before selling it back to the rest of the world, so Schultz would take European-style café culture, reinvent it for the American market, then roll the format out worldwide. It worked a treat.

A fairly simple idea was wrapped up in the kind of messianic hyperbole in which American business specialises. ‘I wanted to blend coffee with romance, to dare to achieve what others said was impossible, to defy the odds with innovative ideas, and to do all this with elegance and style,’ wrote Schultz in his own book about the company, Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time.

The formula certainly worked. By the time Starbucks listed in 1992, it had 165 shops. It opened its first foreign store in Tokyo in 1996, and in 1998 it arrived in Britain when it bought the Seattle Coffee Company (a business largely cloned from Starbucks any- way) and rebranded its chain with the soonto- be-familiar green and white colours. Over the next decade, Starbucks mushroomed to more than 16,000 shops around the world. It even opened in France – though purists will be pleased to note that it struggled there, and shied away from Italy altogether.

There was no great mystery about the model. Starbucks, whatever it liked to claim, never really had the best coffee in the world. But, like most chains, it offered something else instead: reliability. You could drop into a Starbucks anywhere in the world and you would know what you were getting. It introduced the sort of café where you could sit around drinking coffee and reading the papers to countries where such places had never really existed before. In Britain, it was a big step up from Joe’s greasy spoon with Nescafé in a chipped mug. Likewise, to most Americans it was a step up from an oldfashioned diner.

A cultural icon

Along the way, Starbucks turned itself into a cultural icon, inspiring admiration and contempt in equal measure. There is a whole shelf of books about Starbucks: ten at the last count, including How Starbucks Saved My Life, the story of a JWT executive who goes to work at the coffee chain after getting downsized (and soon to be made into a film starring Tom Hanks). During the dotcom bubble, it became a cliché that every new business was started in Starbucks: like most clichés, there was some truth in it, and the chino-clad, Starbucks-cup-clutching entrepreneur became an archetype of the era.

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 homogenisation 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 reappointed 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.

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’.

The big bang

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.

This article has been printed with kind permission of Spectator.co.uk, July 2008.

For every devotee, 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 homogenisation of what used to be small local businesses

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 .