The problem with Starbucks

Last week many of us were forced to consider one question above many others: exactly who is Howard Schultz? We were left to ponder this after our esteemed business secretary Lord Mandelson – who clearly hadn’t read Pour Your Heart Into It – had rather forcefully questioned the right of the Starbucks CEO to attribute retracting sales in these parts to Britain’s downward economic “spiral”. Schultz said that Britain was the most worrying territory of all the 49 countries in which Starbucks operates, describing consumer confidence in the UK as “very, very poor”. Mandelson hit back, his rather colourful language adding to the spice, but of course the real question underlying this storm in a coffee cup was this: to what extent are Starbucks woes of its own making and how much are due to external forces? It is difficult to extrapolate one from the other but it seems that not all is well with Starbucks UK operation, and it may not just be about the economic backdrop. While nearest rivals Caffe Nero and Costa Coffee are believed to be delivering like-for-like sales around flat to marginally positive, Starbucks is thought to be in significant like-for-like decline in the UK – somewhere between 6-9%. So what has gone wrong? Sources intimate that the return of Schultz, who came riding to the rescue when the cracks first appeared just over a year ago to the helm of board, heralded a discernable change in the relationship between Starbucks Coffee Company in the UK and its parent company in the States. Roughly speaking, it equated to more control and direction from Seattle, less local marketing initiatives for the UK market, and a significant tightening of budgets, particularly on capital expenditure – this despite the fact that after years of investment in building a 700-store operation in the UK, the business was starting to emerge as a significant profit centre for its US parent. To what extent this has impacted the famous Starbucks Experience is unclear. I for one have noticed a change in the stores that I use. The product quality is still right up there but labour has clearly been cut and it comes beaming through in service standards – it is a real turn off. Whether this is a local confined problem or symptomatic of a wider malaise is unclear. Others suggest the experience is as good as ever. However, recent research suggested the consumer may be starting to favour other coffee-bar brands. A survey of branded coffee bar users by him!, the market consultancy, found that Starbucks was outscored in every single category of 10 different measures by Costa Coffee. It should be pointed out that both brands, and Caffe Nero, scored highly in the tests, and what it does perhaps show aside from the overall strength of the market, is that regular Costa customers rated Costa higher than regular Starbucks customers rated Starbucks. It is possibly too much of a leap to claim Costa is now the consumer champion. Starbucks UK sales are almost double those of Costa. It has many, many more visitors than Costa or Nero and much higher sales per store, so it is very hard to make the claim that Starbucks is not the UK’s favourite brand. What is certain is that it is a more polarising brand – some hate it, some love it. What is also clear is that Costa has emerged alongside Nero and Starbucks as a very strong brand. And there is a perception that Starbucks struggles when it has strong and direct local competition. In the States there is Starbucks and no-one else. There are cheaper alternatives like Dunkin Donuts but no head-on competitor. In Australia, where it was up against Gloria Jean’s – now making inroads in the UK – it virtually withdrew from the market, saying it did not want to be distracted given its bigger problems in the States, and elsewhere. It closed 61 of 85 stores. It is a little too soon to start questioning Starbucks future in the UK, but what is worth asking is how long can it stay ahead of its powerful competitors in the UK, particularly if it is increasingly managed from Seattle? The truth that dare not speak its name is that as a monolithic, American and largely faceless brand, there is less to love about Starbucks than its competitors. It is the perennial challenge. It has to work harder and is why its management speak so much of connecting with local people, at store level. What is certain is that Starbucks problems stretch beyond the UK economy – it appears to be having a different recession to its competitors. Of course, how all have performed will be revealed in the fullness of time via the accounts. A key challenge that many businesses in the eating and drinking-out market face at some point is when you get big, how do you keep your brand fresh? How do you strike the balance between central and local management? It is part of the problem that now confronts Starbucks. It remains to be seen if the man who has done more for the branded coffee bar business than anyone else on the planet has the answers.