Caffeine, Commerce and Culture

Mention the word Starbucks to a barista at any independent coffeehouse, and you'll most likely receive a scowl or a screed.

After all, the mega-chain is responsible for flooding the market with its cookie-cutter approach to coffee; by 2000, it had opened more than 3,500 outlets, and its current goal is to reach the 40,000 mark.

With outlets as far flung as Beijing and Guantanamo Bay in Cuba, the chain may be responsible for its own venti-size brand of cultural imperialism.

The unparalleled success of mom-and-pop cafes all over the world is tied directly to the explosive rise of the Starbucks siren, as the chain successfully transformed espresso from a specialty item into an American staple.

In the process, it cracked open an enormous market for a host of imitators, many of whom capitalized on the antipathy of Starbucks-haters worldwide.

From its humble Seattle beginnings in 1971 as a specialty tea and coffee shop to its present role as an omnipresent monolith, Starbucks is a cultural and economic phenomenon.

The common complaints against Starbucks run from accusations that it deals unfairly with coffee growers to its seemingly bottomless appetite for growth.

then there's the chain's unique approach to vocabulary, one that has forever altered the concept of a simple small, medium and large scale:

"Starbucks vanquished those dark ages, ushering in a world where customers had to keep detailed records of the various languages that stores required them to use before receiving goods and services . . .

"Starbucks has even trademarked the name of its largest size, 'venti,' despite the fact that it is the Italian word for 20 (that is, 20-ounce cup).

"One day, I expect to pick up La Repubblica and learn that Starbucks has purchased the entire Italian language,' said Bruce Milletto, a coffee consultant. "It's insanity."

'Venti' Capitalism [Original]

With its green logo, enticing muffins and semi-Italian vocabulary, Starbucks is a familiar haven to coffee lovers around the world. But as new outlets open on street corners at a dizzying rate, doubts are mounting on Wall Street about just how many "venti frappuccinos" the public can stomach.

Rising dairy prices, an economic downturn in America and a cut-price caffeine onslaught from McDonald's and Dunkin' Donuts have set alarm bells ringing about the prospects for the ubiquitous Seattle-based chain.

Once a reliable investment for the firm's constant growth, Starbucks shares slumped by 42% during 2007, making them one of the worst large-cap performers on the Nasdaq exchange. A downgrade by analysts at investment bank Bear Stearns prompted a further 11% plunge last week.

In the final quarter of the year, Starbucks revealed what many had feared: although business remains strong in Britain and other overseas markets, footfall at Starbucks' 10,500 American outlets is slowing down. The average number of transactions per US store was down by 1%.

"They have to slow their growth - they've been growing far too fast," says Howard Penney, a restaurants analyst at broker Friedman, Billings, Ramsey in New York. He says Starbucks is following a path familiar from Coca-Cola and McDonald's and is in danger of facing a revolt by shareholders.

"Act one - a great concept starts and grows, becomes a global behemoth and ultimately grows too fast. It takes two or three CEOs to realise they've hit a level of maturity that means they've got to adjust."

Named after the coffee-loving first mate in the novel Moby-Dick, the Starbucks empire can be traced back to a single outlet in Seattle's Pike Place Market in 1971. Its expansion was driven through the 1980s and 1990s by Howard Schultz, who remains chairman and "chief global strategist".

With larger drinks routinely priced at £2.50 or above, Starbucks was traditionally a haunt for affluent middle-class cappuccino quaffers.

But with 15,011 stores now worldwide, the social mix has broadened - which means the company is increasingly vulnerable to belt-tightening by poorer clientele when times get tough.

In a research note, Bear Stearns analyst Joseph Buckley said Starbucks' fortunes now mirror those of mass-market, high-street retailers:

"We attribute this new cyclical sensitivity to the success the company has had in past years broadening its customer base to include more blue-collar, less affluent consumers who are more likely to react to economic pressures by scaling back visit frequency."

Romance

Worries about Starbucks' magic fading have been brewing for some time. In a memo leaked early last year, the company's own chairman fretted that outlets were losing their "romance and theatre".

He pointed out that the distinctive aroma of fresh coffee was less evident because of the advent of vacuum-sealed, flavour-locked packaging.

New machines mean customers cannot see their drinks being prepared - eliminating an "intimate experience" with the barista.

"We have had to make a series of decisions that, in retrospect, have led to the watering down of the Starbucks experience and what some might call the commoditisation of our brand," said Schultz.

By most standards, Starbucks' earnings remain decidedly robust. Revenue was up 21% to $9.4bn in the year to September and profits rose by 19% to $564m. But the sub-prime mortgage crisis has weakened the US economy at a point when competitors are coming in as fast as they can.

McDonald's is introducing cappuccinos, lattes and mochas to its 13,000 American restaurants at prices typically 15% cheaper than those at Starbucks. Dunkin' Donuts is energetically touting its breakfast drinks, while a Canadian chain, Tim Hortons, is expanding across the border.

"They're going to have to slow the rate of new store openings - definitely in the US and perhaps overseas as well," says Robert Toomey, an analyst at E K Riley Investments in Seattle. "It goes back to the issues of a diluted experience and a saturated market."

An American website, Foodio54.com, has begun measuring "Starbucks saturation" by postcode. In the centre of New York, for example, it reckons there is one Starbucks every 0.07 square miles. In Beverly Hills, the ratio is one every 4.7 square miles.

Starbucks maintains that the potential for expansion remains enormous. Its ambition is to have 20,000 American stores and a further 20,000 overseas. The company has reacted to straitened economic conditions by trimming its planned openings by a modest 100 stores in 2008.

Skinny

In a break with tradition, it began airing television commercials in November and is heavily promoting a new range of "skinny" drinks, made with sugar-free syrup.

Brandon Borrman, a spokesman at the firm's Seattle headquarters, says the company will continue to build on its strengths - the quality of its coffee, the in-store experience and the adeptness of its baristas. He points out there are increasingly popular offerings such as books and music recordings.

"We look at what we're hearing from our customers, we know what our customers want from us," said Borrman. "We intend to focus on our points of difference - the things that set Starbucks apart."

He added that Britain, Canada and Japan are delivering particularly strong results, suggesting foreign expansion is delivering dividends even in relatively mature coffee markets.

Starbucks shares ended the week at a four-year low of $18.08, compared with $36 a year ago, and patience is wearing thin among investors.

"If senior management does not make the appropriate changes soon, losing control of the company is a real possibility," warned Friedman, Billings, Ramsey in a recent note, adding ominously: "Many private equity firms are still in business."

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