Starbucks faces an uphill battle following its first decline

Jonathan V. Last

America’s corporations often function as miniature histories of the country itself. This is particularly true of Starbucks.

One of the Onion’s funnier moments was a 2001 item ( that “reported” Starbucks had simultaneously closed down its thousands of retail locations in order to embark on “a Sinister Phase Two” of its corporate mission:

“Though the coffee chain’s specific plans are not known,” the Onion explained, “existing Starbucks franchises across the nation have been locked down with titanium shutters across all windows. In each coffee shop’s door hangs the familiar Starbucks logo, slightly altered to present the familiar mermaid figure as a cyclopean mermaid whose all-seeing eye forms the apex of a world-spanning pyramid. Those living near one of the closed Starbucks outlets have reported strange glowing mists, howling and/or cowering on the part of dogs that pass by …”

I remembered this spoof in February, when Starbucks simultaneously closed all of its U.S. stores for three hours. Lucky for us, it was just an occasion for employee training. But it was also a sign of trouble for the coffee giant.

Recent weeks have seen a host of problems for Starbucks. During the last 12 months, its stock dropped 50 percent, the first sustained fall in company history. In the first quarter of 2008, its sales declined, also a company first. It will close 100 underperforming stores and cut its domestic expansion plans by 30 percent. After hyping its entry into the hot-food market with (inedible) breakfast sandwiches, Starbucks recently announced that the little hockey pucks were coming off the menu. And the company just lost a lawsuit that will force them to pay employees more than $100 million in back tips.

Why should we care? A couple of reasons. First, it’s always good to be reminded how swiftly creative destruction manifests itself in the free market. Starbucks went from tiny start-up, to all-powerful, to on the rocks in just 20 years. Again: The fortunes of Starbucks and American corporations in general may be those of the country writ small.

Taylor Clark’s excellent 2007 book, “Starbucked,” is a fine bit of corporate biography, detailing the rise of Starbucks from a small coffee shop in the early 1980s to a 15,000-store mastodon that does $1 billion of business a year from frappuccinos alone. Clark details the emergence of America’s specialty-coffee craze, from 585 coffeehouses in 1989 to more than 24,000 of them in 2008. Starbucks was both a cause and effect of this new culture.

Like McDonald’s, Ford and the other great shapers of America, Starbucks began almost by accident. As Clark tells it, Howard Schultz was working for a Swedish housewares company in New York in 1981 when he noticed a small coffee shop in Seattle ordering more of his drip coffeemakers than Macy’s. The shop was called Starbucks. Curious, Schultz went to meet with the owners. Struck by a vision of chain coffeeshops, Schultz convinced them to hire him. A few years later, Schultz bought the company out from under his employers, added espresso drinks and began expanding.

You know the rough outlines of the rest: Starbucks grew into the second-largest food retailer in America. Gourmet coffee went from being a trendy accessory, to an affordable luxury, to a middle-class staple. And the coffee shop became, per sociologist Ray Oldenburg, a “third-place” – a cultural space replacing the Elks Lodges, social clubs and public houses of previous generations.

In the process, Starbucks became somewhat reviled. There are good reasons to dislike the company, foremost among them being that its coffee stinks. Also, there’s something creepy about a ubiquitous company that commodifies everything, even selling ad space on its receipts.

Yet there are very good reasons for us to root for Starbucks. Chief among them is a counter-intuitive effect observed by Clark: Starbucks stores do not compete with independent coffee shops; instead, Starbucks helps them.

Sounds strange, doesn’t it? Yet the data is incontrovertible. Fifty-seven percent of all American coffeehouses are independently owned small businesses, and the number of indie shops have been on an upward trajectory for 20 years – ever since Starbucks began expanding. And even in the face of Starbucks’ ubiquity, the failure rate for new indie coffeehouses is a shockingly low 10 percent.

In fact, getting a Starbucks next to your indie shop seems to be a boon for business, as the mom-and-pop stores capture runoff from the new customers Starbucks brings – and then steals customers who are ready to graduate up from Starbucks’ brew. Starbucks is so good for business that one small Seattle-based chain, Tully’s, has an explicit policy of opening new stores as close as possible to existing Starbucks shops.

Starbucks is the rare company that created and now sustains an industry, opening space for small businesses rather than squeezing them out.

That’s pretty interesting. And Starbucks may be even more interesting for another reason: Its difficulties may be predictive. It could be that the company was mismanaged into the current decline. It could be that we are witnessing a corrective to a coffee bubble. Or it could be that “affordable luxury” companies such as Starbucks are the canary in the economic coal mine and the harbinger of a downturn more serious than the mini-recessions of ’82 and ’91.

Which, come to think of it, is one more reason to root for Starbucks.

This guest column, written by Jonathan V. Last, first appeared in The Philadelphia Inquirer yesterday. It was made available by MCT Campus.