Saturday, 21 February 2009

From the FT: Reaching for the Starbucks

We have decided to republish this article directly from the FT in full, as it says the same as what we have been saying ad nauseum. That is to say, Starbucks is not about espresso. We have placed the key paragraphs in bold and italics.

By Christopher Caldwell

Published: February 20 2009 19:17 | Last updated: February 20 2009 19:17

The decision of Starbucks to begin marketing Via, its own brand of instant coffee, is a powerful symbol of something – either of the unexpected resilience of innovative companies or the collapse of the whole logic of the consumer economy.

The struggles of Starbucks are well known. Its stock lost half its value last year, and store sales were off 9 per cent in the most recent quarter. The company announced in January that it would shed 6,700 jobs and close 300 more outlets, after shuttering 600 last year. Other espresso chains are nipping at its heels, some with better services (such as Caribou in the US, where high-speed internet is free), some with lower prices (such as Dunkin’ Donuts). Home-grown competitors are rising in important markets – for example Costa Coffee and Caffè Nero in Britain. People differ on whether Starbucks has expanded too fast – losing sight of the bohemian ambience that was its main selling point – or whether peddling coffee for several dollars, or pounds, a cup is a non-starter in this straitened economy.

Whatever the problem is, it is hard to see how instant coffee could be the way out of it. One prong in the Via marketing strategy is to sell it through the discount retailers Target and Costco for about $1 a sachet. That is a lot of money. While there is a logic in selling premium coffee at a premium, there seems to be little in selling so-so coffee at five times the price of other so-so coffee. The second prong is to sell it, starting in March, in Starbucks stores in three cities – Seattle, Chicago and London. That makes sense: 81 per cent of the coffee drunk in Britain is instant, and the world instant coffee market generates $17bn (€13.5bn, £11.9bn) in sales. So perhaps Starbucks can sell enough in prestige markets to convince shoppers elsewhere to buy it in bulk.

That would be in character. Ever since it began expanding, Starbucks has worked by paradox and misdirection. It is supposed to be a chain of espresso bars but, in the US at least, it has been years since most Starbucks have stocked proper espresso cups. A shot of espresso comes as a little puddle rolling back and forth at the bottom of a pint paper cup meant to hold some other concoction, most likely one with lots of steamed milk and syrup. Starbucks is basically a malt shop and this should not surprise us. Creamy foods are always popular in booms. The great food fad of the 1920s, the historian Frederick Lewis Allen tells us, was “Eskimo Pie”, and US ice cream production rose 45 per cent in the seven years to 1926. The genius of Starbucks is to keep its identity as a coffee shop, letting its customers feel more virtuous than if the place they habitually nip off to at 10:15am were called the Dairy Tub, or something like that.

This makes the shift to instant coffee easier. If you are selling milkshakes, the quality of the coffee is not that important, any more than the quality of scotch is important to someone whose favourite drink is scotch-and-coke. But there is a problem with instant, too. Part of what Starbucks founder Howard Schultz calls “the Starbucks experience” has always been a matter of class. Starbucks has managed to give its customers the feeling they are “in” in two ways.

The first is through its reputation as a “responsible corporate citizen”. Starbucks offers health insurance to employees who work 20 hours a week or more and has been punctilious about trading only with ethical coffee growers. These choices are defrayed through higher retail prices. Since people who care about corporate responsibility tend to be well-educated, and hence well-paid, caring is a class marker. Corporate responsibility and conspicuous consumption are near relations. You can “feel good” about ordering Starbucks in more ways than one.

The second link to class is through real estate. This may hold the key to the company’s difficulties. Starbucks has had a genius for sizing up properties and picking locations. The company starts, according to the writer Taylor Clark with “a database ranking every US metropolitan area according to the qualities Starbucks found especially desirable – high income, high population and high education”. In plotting its expansion this way, Starbucks not only collected information but generated it. An up-and-coming neighbourhood would have a Starbucks: a superficially similar but stagnant one would not. In the very act of its site selection it became a sort of rating agency. One extraordinary side-effect of Starbucks’ retrenchment is that, as outlets have closed – particularly in struggling cities such as Newark, New Jersey – protests have arisen to “Save Our Starbucks”. Naturally! A closed Starbucks signals a downgrading of the neighbourhood. But picking real-estate winners is not as lucrative now as it was a couple years ago.

Starbucks may have come up against the limits of its model. The chain will have to serve a different function in the bust economy than in the boom. Maybe espresso bars could thrive as purveyors of “cheap luxury”, the way cinemas did in the 1930s. A lot of people thought that the collapse of phoney equity values would make people turn to healthy, high-value food. But, really, that almost never happens – the natural food craze of the late 1970s was a cultural coincidence, not an economic effect. As this paper has reported, people today are turning to fast food, fish and chips and other comfort foods. “The less money you have, the less inclined you feel to spend it on wholesome food,” George Orwell wrote in The Road to Wigan Pier. “When you are unemployed, which is to say when you are underfed, harassed, bored and miserable, you don’t want to eat dull wholesome food. You want something a little bit ‘tasty’.” The taste for the kind of sweet drinks Starbucks serves is unlikely to wane any time soon.

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