The Economics of Your Morning Buzz
ALISON STEWART, host:
Dateline Seattle, the return of a coffee warrior in the battle for your money. Earlier this week, the chairman of Starbucks announced he is firing the CEO and taking back the job for himself. Starbucks has seen its stock plummet about 50 percent over the past year. It's trading around 19 or 20 bucks now, as the chain has become under increasing pressure from competitors like McDonald's and Dunkin' Donuts.
In fact, the Golden Arches is rolling out its own line of McEspressos(ph), McLattes(ph) and McCappuccinos(ph).
BILL WOLFF, host:
STEWART: That was hard to spell, by the way.
(Soundbite of laughter)
WOLFF: Yeah. I was - I'm looking at it here, you know?
STEWART: Janet Adamy covers the restaurant beat for The Wall Street Journal.
Ms. JANET ADAMY (Columnist, The Wall Street Journal): Hi. How are you, Alison?
STEWART: I'm doing great. So written up on the Starbucks chairman - he has written quite a bit and talked to shareholders about correcting Starbucks' course. He said in a letter to shareholders, we lost our focus. So what sets Starbucks off course according to the chairman?
Ms. ADAMY: Well, I think the first thing was and, I think, many consumers notices, over the past couple of years they've been just growing so fast that the new stores that they've been building haven't been able to maintain the same sales as their older locations. I think in their drive for growth to the - they also got distracted from what they do really well, which is come up with unique drinks and offer them in an appealing environment. They got off onto tangents like movie promotion. They started selling more food in their locations. And at about the same time those things were happening, their stores just started to lose a little bit of the excitement and appeal that they used to have.
STEWART: Well, there's one on every corner. It's kind of hard to get that excited about a Starbucks.
(Soundbite of laughter)
Ms. ADAMY: That's a good point.
STEWART: So was this CEO who was fired with - the expansion, was that his baby?
Ms. ADAMY: Well, it's a good question. Howard Schultz has also pushed for expansion. So…
STEWART: That's the chairman for people who — right?
Ms. ADAMY: That's right. And he's widely considered the architect of what is the modern day Starbucks. So he had been involved in the strategy too. I think this was also one of the situations where when things start to go wrong, they - somebody has to take the axe.
STEWART: Well, just to give us a sense of another reason why this shuffle may have happen at the top, you just had McDonald's make this announcement that it's putting cafes in certain amount of its locations.
Ms. ADAMY: Yeah.
STEWART: Do you think that had an impact on the shuffle?
Ms. ADAMY: You know, I don't think it did. Apparently, this has been in the works for a little while. And to be the honest, the problems that Starbucks have been - has been having aren't really related to McDonald's because their push into specialty coffee is really just going to get started this year. I think it's true that what Howard Schultz said earlier this week, which is that their problems have really been self-inflicted.
WOLFF: This is Bill Wolff…
Ms. ADAMY: Hi, Bill.
WOLFF: …substitute co-host and husband of Alison Stewart.
(Soundbite of laughter)
WOLFF: I have read the theory that Starbucks Coffee, because, relatively speaking, is expensive - is kind of a middle-market luxury item and that some of their problems commercially have to do with the fact that the economy is sagging, and luxury items are the first thing that people stop buying. And that has hurt Starbucks, which is the home of the $2, $3, $4 cup of coffee.
STEWART: Oh, my friend calls it Fourbucks.
STEWART: You don't get out…
Ms. ADAMY: Right.
STEWART: …with less than four bucks.
WOLFF: What do you — I mean, we've spoken about their excess of expansion — but what do you think about the idea that Starbucks' slump is an indicator of a problem in the economy?
Ms. ADAMY: I think that they absolutely have been feeling some of that pressure. One of the things that's happened to them is they have expanded so rapidly over the last couple of years as their clientele has really gone from being this kind of upper-middle-class to upper-class urban customer to somebody who has a lower average income, maybe a lower education level. And so they may be more susceptible to swings in the economy. And for a long time, Starbucks always said, look, you know, our customers, this is something they need. They just don't cut back when the economy gets weak. But now that they have some customers with lower incomes, they're starting to see that.
At the same time, they've had two price increases within the past - roughly a little bit more than a year, which is more price increases than I think in the shorter period of time than they have ever taken in their history. So, at the same time, you've got their clientele becoming more price-sensitive, they're also increasing the prices higher. And I think that was something that's hurt them in the past year.
STEWART: We're speaking with Janet Adamy. She covers the restaurant beat for The Wall Street Journal. So as we're talking about price points and you have McDonald's entering the sort of the high-end coffee race, how high-end will their prices be? Is their - is the price point going to be lower and may be bleed off some of those newish customers that…
Ms. ADAMY: You know…
STEWART: …you were talking about?
Ms. ADAMY: What they have told people is that their pricing their drinks 60 to 80 cents below their competitors. One of the differences is they're not doing a specific up-charge for putting a flavor in the drink, you know, quite the same way that Starbucks is. So I think what they are hoping to get is, you know, some customers from Starbucks but also they want to bring in new people into the category, people who have been McDonald's customers.
One of their strong points is that they have these drive-thrus that people love. About two-thirds of the McDonald's business goes through the drive-thru. So they offer a lot more convenience than Starbucks does. I mean, obviously, there's going to be a core Starbucks customer who would never consider switching to McDonald's, but people like moms with a car full of kids who don't want to get out, you know, and are - have to go to McDonald's for their kids, well, they might be likely to pick up cappuccino or an iced mocha on their way.
STEWART: So, please, how about numbers? How many McDonald's are there versus Starbucks?
Ms. ADAMY: In the U.S., McDonald's has about 14,000 locations…
Ms. ADAMY: …and Starbucks has just under 11,000.
STEWART: But that's interesting when you consider how long McDonald's has been around…
Ms. ADAMY: Yeah.
STEWART: …and how long Starbucks has been around.
WOLFF: And when you consider what you can get at McDonald's, which is anything from a salad to a hot apple pie. Starbucks is mainly coffee.
STEWART: I need to talk to you about environment quickly before we run out of time. I mean, one of the Starbucks allure was the big cushy chairs and you could hang out all day. McDonald's, I'm not sure those seats are the most comfortable for hanging out all day drinking your latte.
Ms. ADAMY: Yeah. And historically, you know, McDonald's wasn't a place where people would really necessarily want to linger. But in the past couple of these years, they spent a lot of money to upgrade their restaurant and put in things like leather couches, oversized chairs. They actually have free Wi-Fi, whereas you have to pay for the Wi-Fi at Starbucks. So some of these newer locations -and there are thousands of them in the U.S. - actually, are quite a bit more comfortable for sitting around.
STEWART: Janet Adamy covers the restaurant beat for The Wall Street Journal. Thanks for walking us through the coffee wars.
Ms. ADAMY: My pleasure, Alison. You, too, Bill.
STEWART: I'm still a Dunkin' Donuts girl. You know I am deep down inside. Aside from when you make coffee.
WOLFF: I like Dunkin' Donuts and you say you can't hangout at McDonald's. Ever been to a playland?
(Soundbite of laughter)
WOLFF: Come on. The slides, jungle gym.
STEWART: I refuse to admit but yes. Yes, I have.
WOLFF: Well, much more on THE BRYANT PARK PROJECT coming up. For instance, what is Mitt Romney's next move? He's stuck in second. What has he got to do to win Michigan and win in the south?
STEWART: And a guy who turns hair into fertilizer. This is THE BRYANT PARK PROJECT from NPR News.
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