Change of tune at Starbucks as lattes lose their allure

Best we know there is no federal bail-out planned for Starbucks nor is one of its competitors, say Dunkin' Donuts, poised to buy it for a rock-bottom price. Things are not that fragile at the house of the double-shot soy-milk frozen macchiato. But, by its own admission, they are no longer especially buoyant either.

If the failure of one very large bank last weekend brought the woes of Wall Street into focus then the new-found struggles of America's most ubiquitous coffee purveyor may similarly be a symbol of the more general economic malaise infecting Main Street. The foam on its lattes is suddenly going sour.

It is a uncharacteristically contrite Starbucks that is now acknowledging that its model for retailing coffee beverages at not-so-modest prices is suddenly under assault and that salvation resides in reconnecting with its coffee-roasting roots and, hopefully, its customers.

The pain is being felt most acutely in the US market, where numbers lining up at its counters fell in the last quarter for the first time in its history, if only by 1 per cent. Once invulnerable, moreover, the company's share price has tumbled by roughly a half in 15 months.

At an annual shareholders' meeting at Starbucks' home base of Seattle, its chief executive and founder, Howard Schultz, pointed to what he called a gathering "tail-spin" in the economy which will crimp the willingness of the public to indulge in the "affordable luxury" of premium coffee drinks. Not helping, he added, were the rising wholesale prices of coffee beans and milk.

The company is also facing increasing pressure from competitors who only a few years ago thought coffee was served only one way – thin and brown. Edging in on the designer coffee act, for instance, are Dunkin' Donuts and even McDonald's.

But Starbucks is also blaming itself, implying that after years of unbridled expansion – the number of outlets has doubled in the past two years to 15,000 in 44 countries – it has become complacent. "We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy," said Mr Schultz. "We have somehow lost our edge".

Part of the problem may have to do with smell. Almost immediately after retaking the reins in January, Mr Schultz discontinued the sale of warmed-up breakfast sandwiches because their aroma overwhelmed that of the coffee. And it is coffee he wants Starbucks to be all about again. "By embracing our heritage, returning to our core – all things coffee – and our relentless commitment to innovation, we will reignite the emotional connection we have with our customers and transform the Starbucks experience," he declared.

To that end, the company is decreeing that filter coffee must not stand around for more than 30 minutes before being replaced with fresh supplies. Mr Schultz also announced that by 2010 most of its stores will be equipped with new espresso machines that grind beans for each cup and have a lower profile so that baristas and customers will have eye contact again.

Starbucks will soon introduce a new blend called Pike Place Roast, named after the market in Seattle where Mr Schultz opened the first Starbucks 37 years ago.

All this has so far done little to impress Wall Street – Mr Schultz's announcements were followed by a further drop in the company's share price. But maybe Main Street will be more kind.

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