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Solution to Starbucks' problems: try selling coffee
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Solution to Starbucks' problems: try selling coffee Print
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News - Hugh's Views
Written by Hugh McManus   

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Thursday, 11 September 2008 06:00

On the face of it, a coffee shop selling actual coffee seems like a no brainer, but recently, Starbucks seems [NASDAQ:SBUX] to have abandoned that practice.

The company has floundered lately; for the past twelve months, the stock has fallen from about $28 a share to around $15: a lot way from its long-time high of $40 in late 2006.  The value of the stock is now back where it was over five years ago.  The company appears to have fundamental operational issues.  While revenues continue to grow, the rate of growth is slowing.  Earnings growth is declining too.  In fact, for the quarter that ended on June 29, the company posted a loss.

Starbucks is hurting.   Earlier this summer, the company announced the closure of 500 stores in addition to the one hundred already planned.   Starbucks' problems seemed to have been self-inflicted.  The company expanded rapidly; the majority of the closures are for stores opened in the past two to three years.  The lesson learned may be that Starbucks reached and passed the point of saturation, yielding declining marginal returns from its new outlets.

On the face of it, having two stores on opposite sides of a street corner makes no sense.  However, in the US, since most Starbucks' customers drive rather than walk to the coffee shop, positioning stores so that people don't have to negotiate a U turn actually helps revenues.   People walking to a store, typically don't want to have to go more than three blocks, hence the seemingly absurd strategy of blanketing a city with the coffee shops.  That strategy works.  Opening stores in marginal locations, which Starbucks was seemingly forced to do in the past few years, doesn't.

The economy just might play a role too.  For a while, customers were prepared to pay a premium for coffee, a significant premium.  While Starbucks always did appear to be the quintessential growth company; it does seem to have been hurt in the recent slowdown.

Starbucks hit on something that other companies missed.  Don't just sell coffee, sell an experience.  In 1992, I got an A in an MBA paper that detailed why Starbucks would fail.  At the time, the logic seemed flawless.  Over eighty percent of office employees got free coffee at work.  The average cost of a cup of a coffee at a diner was under 20 cents, refills being free.  The mom and pop coffee houses just weren't successful.  In many places, such as New York City, Irish bars sold more coffee than did shops dedicated to that purpose.  To add insult to injury, Starbucks priced coffee at four to five times what appeared to be the market offering in a given city.  In the words of one wag, Starbucks priced their coffee so that someone could fill a cup with half-and-half and still make a profit.  As it turns out, Starbucks sold an experience; they developed a new language; they drew people in to this novel way of buying and drinking an old beverage.  That's the secret of Starbucks.  It's why the company could sell coffee at a premium, a significant premium, which helped fuel the dramatic growth experienced by the company and its stock.  Starbucks sold an experience and customers shelled out funds to participate.

The coffee is part of that experience.  If coffee is missing, the experience isn't complete.  My experience over the past twelve months is that Starbucks doesn't sell coffee anymore—at least, not the decaffeinated variety.   I have made well over one-hundred attempts t buy decaf' coffee at local Starbucks and in the vast majority of cases, there's none brewed.  I have heard that (i) people don't drink decaffeinated coffee in the morning; (ii) there isn't a demand for decaf in the afternoon, and, must to my surprise have heard a few times that (iii) no one drinks coffee in the evenings.  Starbucks should probably just pull decaf from its menu all together.

Now PhDs are trained to do three things: collect data, organize and interpret it, then publish it.  We're now at the publication stage of the game.  The Starbucks stores that are part of this study are

Sierra Madre Villa & Foothill
3429 East Foothill Blvd.
Pasadena, CA 91107
(626)351-8065

Hastings Ranch
3699 E Foothill Blvd
Pasadena, CA 91107
(626)351-9994

Hill & Walnut, East Pasadena
161 N. Hill Avenue
Pasadena, CA 91106
(626)440-1282

Huntington Drive & San Gabriel
3007 Huntington Drive
Pasadena, CA 91107
(626)792-7111

San Marino
2265 Huntington Drive
San Marino, CA 91108
(626)683-0807

The results are a little scary, because it shows that in most cases, Starbucks doesn't appear to be interested in selling coffee to its customers.  The table below lists the results for each of the five stores.  For the purposes of comparison, the local Peet's Coffee is included in the last row.  The columns show the name of the store; the number of visits made to the store; the number of times decaffeinated coffee was brewed and ready for purchase; the next columns details the number of times it wasn't ready; then the last two columns detail the percentage of successful and unsuccessful visits, respectively.

Store name

Total Visits

Successful Visits

Failed Visits

Percent Success

Percent Fail

Sierra Madre Villa & Foothill

11

5

6

45%

55%

Hastings Ranch

47

31

16

66%

34%

Hill & Walnut

14

8

6

57%

43%

Huntington Drive & San Gabriel

24

8

16

33%

67%

San Marino

17

11

6

65%

35%

Peet's Coffee Foothill, Pasadena

23

20

3

87%

13%

Of the one hundred thirteen visits to local Starbucks in the past twelve months, in forty-four instances, decaffeinated coffee wasn't brewed.  The time of day made no difference.   The results are pretty typical of Starbucks I have visited elsewhere in LA, in San Diego, San Francisco, Seattle, yep Seattle, Houston, Dallas, Phoenix, Chicago, New York, various locations in New Jersey, Philadelphia, Boston and New Orleans though not Zürich.  I have asked for decaffeinated well over a dozen times in Zürich: I have never had to wait.

For a company that prides itself on selling coffee, these results are surprising.  I expect to wait for some of the more exotic, made-to-order coffee and non-coffee based beverages, but for a staple of the chain—good old honest coffee—I find the situation unacceptable.  I discovered Peet's because I couldn't rely on Starbucks.  I don't know if the Peet's in East Pasadena is typical, but at least I have discovered that if you walk in, you can actually buy, well, coffee!

So Starbucks, I realize you're refocusing the company in an effort to bounce back to your former days of glory.  Here's a suggestion: try selling coffee!