Starbucks losing customers – not special enough

Starbucks is struggling to maintain customer traffic due to the economic squeeze and competition undercutting. US customer visits to Starbucks’s cafes have declined for two straight quarters.

Competitors have been nibbling away at different segments of the $US25 billion-plus US specialty coffee market that Starbucks carved out. McDonald’s Corp has aggressively entered the drip coffee market and plans to roll out more expensive espresso drinks. In addition to McDonald’s, Dunkin’ Brands is undercutting Starbucks.

Starbucks CEO Mr Schultz in a memo last year that the chain had lost sight of the “romance and theatre” of coffee as it expanded. The brand has become such a part of mainstream life that some analysts say it is struggling to offer consumers something special.

Mr Schultz, 54, took Starbucks public in 1992 after buying a small Seattle chain named after the coffee-loving first mate in Herman Melville’s Moby-Dick. Mr Schultz’s first tenure as CEO ended in 2000 and he continued as chairman. On January 7 this year Mr Schultz returned as CEO to put in place a new turnaround plan which could offer solutions to “reaffirm our coffee authority” and make the chain feel less corporate. Schultz is promising to change what he had called the “commoditization” of the brand. Schultz also pledged to announce five new initiatives on March 19

Starbucks has said it will open 350 fewer stores than planned through September. Starbucks now has about 10,000 US stores and some 5,000 international locations. Schultz wants to increase traffic in the 15,000 stores of the world’s largest coffee chain. Earlier this year, Schultz said Starbucks would close 100 underperforming stores and cut its 2008 new store plan in the United States to 1,175 from 1,600, while increasing the number of international store openings by 75 outlets to 975.

The Seattle-based company is facing unprecedented economic pressures, from lower consumer spending to high coffee and milk costs, and Schultz did not see profit margins improving for the balance of the year.

Starbucks has long said its coffee is an “affordable luxury,” but that assumption is being challenged because consumers are spending less on everything, from dining out to buying clothing, as home prices fall and the cost of necessities such as gas and fuel continue to rise.

Starbucks aims to attract consumers, who are rethinking their spending amid a broad economic downturn, by rolling out a new coffee blend, delving into energy drinks and investing in espresso equipment and high-end French presses. It said it had bought ‘Clover’ French press maker Coffee Equipment Co.

Starbucks baristas will be able to see customers over new low machines to appear more friendly.They plan to stop selling warm breakfast sandwiches, partly because they overwhelmed the aroma of coffee. Starbucks wants to introduce a new premium range of coffee but are also trying out a budget cup of regular coffee with free refills in the Seattle area. A new coffee blend is scheduled for an April debut and a Web site, http://wonder-struck, will allow customers to submit ideas to the company and to vote on them.

For more information see:

SMH article

Business Spectator article

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