Starbucks: What went wrong?

Posted by Daniel Palmer on 31st July 2008

Coffee cups on table - Starbucks

The reputation of global coffee chain leader Starbucks has taken a hit in recent months, with declining sales leading to 600 store closures in America and a further 61 in Australia (more than two-thirds of their Australian outlets).

The company is by no means in dire straits, quarterly revenue of US$2.57 billion highlights that point, but things certainly don’t look as rosy as they did just a couple of years ago. Starbucks posted their first quarterly loss on Wednesday since going public in 1992, but are still going to post a profit this year and maintain guidance that 2009 will reap earnings per share of $0.90 to $1.

The company has reported that the worsening economic conditions in the US and some poor real estate decisions have been behind the issues plaguing the company at the moment. Others have suggested that increased competition from the likes of McDonald’s has contributed to the decline.

But surely there is more to it than that.

The success
The company successfully brought café culture to Americans for the first time and introduced people, who had never even liked or tried coffee, into the culture by providing a diverse range of options never before seen. The brand was widely accepted and became, to an extent, a symbol of status.

It was as an upper class coffee chain that they first made their mark and was what defined the success of the company. Sure people were aware that the beverages at Starbucks were more expensive than at many cafés but they still frequented the outlets, as it was a place ‘to see and be seen’.

Recent turbulence
Starbucks were, however, intent on rapid expansion and kept a remarkable pace of opening at least one new store a day, on average, throughout the 90s and early 00s, leading to the company now operating about 15,000 stores worldwide. It is likely that this quick growth has led to the recent turbulence.

Setting up a brand as a symbol of status has served many companies well but if the company becomes too commercial and widely used it will lose much of its’ initial appeal. After all, if every second person appeared to be wearing Armani clothing, would anyone pay $400 for an Armani shirt?

Once their growth really took hold they gradually gained a greater reliance on less-affluent consumers. Consequently, the reason for the decline at a time of disappointing economic growth highlights that their customer base is now predominantly the middle and lower wealth classes who have sought to save in times of trying conditions.

Australian troubles
They didn’t cut over two-thirds of their American stores, so why is it that their struggles have been exacerbated here in Australia?

Primarily it is due to the fact that a firmly entrenched café culture was already present in Australia when they set up shop in Australia eight years ago.

Associate Professor Nick Wailes, expert in strategic management in the Faculty of Economics and Business at the University of Sydney, believes that organisations such as Starbucks, who lose sight of what initially made the business successful and fail to recognise the importance of local culture, will always fail in the Australian market.

“There are a number of important business lessons that can be learned from this situation,” advised Wailes. “Unfortunately, Starbucks failed to truly understand Australia’s cafe culture and has become an example of the big corporate machine it originally tried to differentiate itself from.”

“Part of the problem is that Starbucks original business model just doesn’t translate across markets. Starbucks original success had a lot to do with the fact that it introduced European coffee culture to a market that didn’t have this tradition. Australia has a fantastic and rich coffee culture and companies like Starbucks really struggle to compete with that,” Wailes concluded.

Store closures
Starbucks announced the locations of the 61 Australian store closures earlier today, with the eight stores across South Australia, the ACT and Tasmania to close leaving them with representation in only the three states of Victoria, Queensland and New South Wales. The remaining 23 stores are in and around the capital cities of these states following a decrease in store numbers of 28 in NSW, 8 in Queensland and 17 in Victoria (store closure details can be found at

The future for the company appears bleak in Australia for the time being considering they have closed over two-thirds of their 84 stores this week and CEO, President and Chairman of Starbucks, Howard Schultz outlined that the “challenges presented in Australia are unique”. However, a restructure or “transformation” of their international operations should see the company succeed in the future. Schultz appears particularly confident that their vision will return strong growth long-term and sees “light at the end of the tunnel”.

“… when we look at the opportunities that we have, coupled with some of the mistakes that have been made and the headwind of the economy, we believe strongly, unequivocally in the model, in the brand, and have great confidence that we can return a much higher long-term value to the shareholders,” Schultz told analysts.

Some of the changes they have announced include the introduction of a “new food platform” as they seek to tap into the health and wellness trend, while the reduction of smell caused by sandwiches is to be addressed to ensure the coffee aroma in the stores can return and the popular Starbucks card will be enhanced.