Hurdles Mount for Starbucks as Economy Sputters

There's no doubt that Starbucks is having problems. It's just a matter of whether they're grande or venti. Store sales are flagging. And the economic downturn could make matters worse if consumers decide that "affordable" luxuries like lattes aren't so affordable anymore.

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Starbucks' stock price is down roughly half from a year ago. The question is whether this trouble is grande or venti.

After decades of growth, profits are down. And later today the company reports more earnings, which will not be pretty. Neither is the forecast for the rest of the year. NPR's Wendy Kaufman reports that Starbucks CEO Howard Schultz has his work cut out for him.

WENDY KAUFMAN: It was a curious sight at the company-sponsored event outside the original Starbucks store. There was Howard Schultz being mobbed like a rock star. A throng of rain-soaked employees were thrusting mugs and Starbucks cards at him, hoping for an autograph.

Mr. HOWARD SCHULTZ (Starbucks CEO): (Unintelligible) we're just getting started.

KAUFMAN: The tall and trim executive who turned Starbucks into a coffee juggernaut stepped down as CEO several years ago, though he remained chairman of the board. Now he's back, running the company on a day-to-day basis.

Mr. SCHULTZ: Coming back as CEO feels very comfortable, and I really feel at home.

KAUFMAN: People who know you say you seem full of energy.

Mr. SCHULTZ: Well, I was on an exercise program for the past year, but I didn't know it was going to be to get me in shape for this new opportunity. But I think it's helped me.

KAUFMAN: And help is something he'll need lots of. Sales in existing stores, especially in California and Florida, are down. And Schultz says the economic pressures facing the company aren't a short term problem.

Mr. SCHULTZ: It's just something we have to manage through. Starbucks has been in business for 37 years, and during that time we have managed through many different types of economic cycles, this one being one of the worst we've seen.

KAUFMAN: But it's more complicated than that. The novelty value of Starbucks that helped sustain the company through previous downturns no longer exists. And some former Starbucks customers have switched to independent coffee houses. Others, like Seattle-area resident Chris Carroll, are going to McDonald's.

Ms. CHRIS CARROLL: I think it's good. The atmosphere's - it's OK. I'm only going through the drive-thru. But McDonald's coffee I get three times as much coffee for half the price.

KAUFMAN: David Reibstein, a marketing professor at the University of Pennsylvania's Wharton School, says Starbucks' problems go way beyond the economy, and many are self-inflicted. He says in an effort to make shareholders happy the company pushed growth and along the way squandered its more valuable asset - the premium Starbucks brand.

Professor DAVID REIBSTEIN (University of Pennsylvania): They started to extend to corporate cafeterias.

KAUFMAN: And to coffee service on airplanes.

Professor REIBSTEIN: And actually, my local gas station put up a sign saying we serve Starbucks. That's a real loss of quality control.

KAUFMAN: Moreover, as the number of U.S. stores grew to 7,000, quality inside Starbucks stores faltered too. That explains the barista training that shut down thousands of U.S. Starbucks stores for three hours a few weeks ago.

The company is now closing some of the lowest performing stores, opening fewer ones in the U.S., and focusing on expansion abroad. But above all else, Schultz says, there is renewed attention to coffee, including new espresso machines and a new drip - a less costly alternative to espresso drinks.

Mr. JOHN MOORE (Former Marketing Manager): I think the activities the company is doing now are activities the company should've been doing five years ago.

KAUFMAN: Consultant John Moore, a former marketing manager at Starbucks, applauds the company's decision to reemphasize coffee. But he adds the company shouldn't be ashamed of being so convenient.

Mr. MOORE: McDonald's competes on convenient hamburgers, not on the highest quality hamburgers. There's nothing wrong with the company aspiring to become the next McDonald's.

KAUFMAN: Looking at the battered price of Starbucks shares, Howard Schultz might be delighted if his company's stock was doing as well as the hamburger chain.

Wendy Kaufman, NPR News, Seattle.

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