Coffee, Starbucks and a bit of history

Tim Worstall raised an issue about the profitability (or lack thereof) of Starbucks in the UK. I remembered that Starbucks closed a lot of stores in Australia some years back, so I did a bit of googling. Fascinating results.

Before I give you the professional opinions, here's mine. I did a bit of a road trip across parts of the US in the mid 1990s. On the whole, the standard of coffee from coast to coast was worse than abysmal - it was totally fucking atrocious. It was OK in central New York and large parts of Seattle - but in between those two locations lay a huge wasteland of drip filtered muck. We tried every style of road side diner you can imagine, searching for a drinkable coffee......and we failed. Totally failed.

In the end, we turned to Starbucks. Yes, the coffee cups were too big, they tried to sell ridiculous combinations of stuff and the staff were mainly hipster tossers (back before hipsters existed) - but if you ordered a small, plain latte, you got something that was actually quite drinkable. Not great, but good enough. Certainly better than the crap we'd been served up until that point.

Starbucks grew to dominate the US market (in my opinion) because there was no competition for them to deal with (outside Seattle). It was like shooting fish in a barrel. Different story in Australia by the time they arrived on our shores - the coffee revolution was well under way, and they entered a market that was more Seattle than say Bumfuck, Idaho.

As an aside, I sent some Compuserve emails from what was probably the first internet cafe anywhere when we were in Seattle. I had to use a green-screen terminal to do it. Hang on - how could it be an internet cafe when the internet had not been invented at that point? Once more, I confuse myself.

To the professionals:

What conclusions can we draw about the brand's tactics after Starbucks announced the closure of the vast majority of its Australian outlets? 

Now that the collective cheer of all coffee-loving Australians has died down, it's worth exploring just why Starbucks has failed to make an impression in the Australian marketplace. 

Everyone has their own opinion, but from where I sit (on a needlessly funky chair inside an advertising agency) Starbucks was doomed from the start for two key reasons.
Firstly, they didn't seem to pay much attention to product optimisation. In short, they just took what worked in the US, and tried it here. Unfortunately for Starbucks, what worked in the US was bitter, weak coffee augmented by huge quantities of milk and sweet flavoured syrups. Not so much coffee, as hot coffee-based smoothies. 

For the Australian consumer, raised on a diet of real espresso, this was always going to be a tough sell. 

But aside from their product woes, Starbucks made a single, crucial tactical error: they failed to deliver to the Australian consumer an organic experience. 

Let me explain. In the US, Starbucks started in Seattle as a single store. And in a nation bereft of genuine café culture, that single store soon captured the imagination, and became a second store. Then a third. Before long, it had become a demand-driven phenomenon; everyone wanted a Starbucks in their local area. 

For those old enough to remember, McDonalds grew exactly the same way in Australia. They opened just one or two stores in each city - nowhere near enough to meet demand - thus creating an almost artificial scarcity, which built huge buzz around the brand experience. Krispy Kreme is doing exactly the same thing here too. 

But when Starbucks decided to put out their shingle down-under, what did they do? Why, they immediately tried to impose themselves, with multiple store openings in every city. And in one of the stupidest moves I've ever seen, they decided that one of their very first stores would be in Lygon Street, Carlton. 

Now, Lygon Street may have lost much of the lustre it once had, but it still holds a place in the collective consciousness of Melburnians. To a Melbourne coffee-drinker (which is pretty much every Melburnian with a mouth) coffee was born in Lygon Street, and this big Starbucks store with its big backlit corporate signage and its carefully arranged linger-all-morning sofas... well, it was an affront to the senses. A great big middle finger, raised imperiously in the general direction of your local café. 

So while Starbucks grew organically in America, in Australia it tried to impose itself upon us. It took key sites. It hung huge signs. It even tried to get us to order coffee in sizes, just like you do with popcorn at the multiplex. And with weird names (Decaf Mocha Grande anyone?) Basically, Starbucks said to us: "That's not how you drink coffee. This is how you drink coffee." 

For us, the Starbucks experience wasn't organic. It was implanted. We didn't discover it: it was dumped on our doorstep. The only surprise was it took head office so long to realise that this approach wouldn't work. 

This is not to say that Australians are somehow impervious to the chain-store café phenomenon. For better or worse, home-grown chains such as Hudsons and Gloria Jeans are doing quite well for themselves. But it's instructive to note that they're succeeding because they're offering a brand experience that is comfortable to Australians (no weird drink names, just two lattes and a cappuccino thanks). 

Perhaps the final, and most important, lesson from the Starbucks experience is this: as consumers, we ultimately have the power to kill bad products and bad brands. Don't give them your money, and eventually they'll go away.

and another opinion:


THERE's the financial argument -- that Starbucks simply expanded too fast, and took on too much debt, in its eight-year attempt to colonise Australia.

Then there's the elitist, gastronomically xenophobic argument -- that Australians are sophisticated drinkers who want a quality brew and are not prepared to stomach paying $3-plus for a weak "American" coffee.

The truth behind this week's decision by Starbucks to retreat to the east coast capital cities by closing 61 stores in Australia, for the loss of 685 jobs, is probably somewhere in the middle.

Starbucks Australia blames underperforming outlets for the move but its accounts reveal an overstretched company living on the goodwill of its Seattle-based parent, Starbucks Corporation.

Unlike other retail chains, such as rival Gloria Jean's, Starbucks doesn't use a franchise model, preferring to lease and fit-out its own outlets. This means more cash being spent upfront and, in Starbucks' case, more debt.

Financial statements filed with the Australian Securities and Investments Commission reveal the pace of its growth -- and a corresponding rise in losses and debt -- since its first store opened in Sydney's CBD in 2000.

In 2000-01 it opened 16 more stores. The following year came another 15. In 2002-03, it opened just seven more stores but these included its first "regional" outlets outside the capital cities and Queensland coastal strip -- in Newcastle and Erina in NSW.

By the end of the 2006-07 September year, Starbucks had 87 stores around the country, but it also had accumulated losses of $143 million, including a record $36 million loss that financial year. Loans from Starbucks in the US had hit $72.3 million and, by the company's own admission, it was able to consider itself a "going concern" only because of the parent's support.

The company's management this week pointed the finger at the economic slowdown but the group's performance in North America -- 600 stores have just closed in the US and Canada -- has been in decline for close to 12 months. In any event, some industry insiders say the coffee industry should be able to weather economic downturns, with the beverage seen by consumers as an affordable luxury.

Instead, they say the company simply underestimated how "coffee savvy" consumers were. That rival chains Bean Bar and Hudsons Coffee are eyeing soon-to-be-vacant Starbucks sites suggests others in the industry see a stronger future.

In a report issued this week, Swiss investment bank UBS said Starbucks might need a franchise model to get its business back on an even footing. "With a well-managed re-franchising program, Starbucks can give top-quality managers a chance to own a store -- and to keep the same employees in one place," it said.

Gloria Jean's has successfully localised an offshore brand, expanding to 440 outlets in Australia, something Starbucks failed to get right. And another home-grown chain, Brisbane's Coffee Club, is also having success with a franchise model.

Bean Bar master franchiser Ron Basset yesterday said Starbucks failed because Australians did not take to American-style coffee. "Their coffee is more like a milkshake, we probably have three times the coffee in ours than they do," Mr Basset said. "We don't offer vanilla shots or caramel shots because we believe our coffee is good as it is."

Australasian Specialty Coffee Association representative Brian Raslan, who is one of only two accredited world barista judges in Australia, said Starbucks excelled in making "gimmicky drinks", but failed to make "proper" coffee. "I think here in Australia we have quite a mature coffee culture and a lot of discerning taste and people understand here what coffee is about," Mr Raslan said. "Our coffee culture has been Europeanised for a number of years and in America some of the success is because they had all of the lounges and you could lounge around."

At Starbucks' closing Rundle Mall store in Adelaide -- a favourite with tourists -- Scottish student Emily Finnie drank a final vanilla latte. "I like the flavour of the coffee mostly, there's nothing quite like it," Ms Finnie said. "It's milky, quite sweet and not bitter."

Her friends Sara Husi and Giacinta Clark said they were happy to meet people at Starbucks but Ms Clark preferred supporting local companies, rather than multinationals.

Claudio Ferraro, part-owner of the Cibo chain, said there was still room for growth within the Australian coffee market. "I think people just appreciate good coffee and people (who) have that drive to find good coffee are still looking for it," Mr Ferraro said. "Is it saturated? Probably not."