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Starbucks Starting to Lose Customers in U.S.

  • Wall St gets palpitations over caffeine fuelled growth
    Earnings are still strong but American customers may be starting to trickle away
    By Andrew Clark
    The Guardian, January 7, 2008
    Straight to the Source

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."

Full Story: http://www.guardian.co.uk/business/2008/jan/07/starbucks.useconomy

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