Starbucks gets a shot from the improving UK economy

Group says that first quarter sales growth is best for two years

Two years ago Starbucks had lost its way, but after the return of the group's founder, Howard Schultz, to the chief executive's chair, and a round of heavy cost-cutting measures and store closures, the ubiquitous coffee chain is back on its feet.

A blend of an overly ambitious expansion plan, too much attention paid to merchandise and the "brutal" economic crisis had put the company in trouble. But eight quarters of disappointing results later, Starbucks yesterday reported its first rise in global like-for-like sales for two years.

In the UK, Starbucks said a strong Christmas on the high street helped like-for-like sales jump by 3.9 per cent in the three months to the end of December. In the final six weeks of the period, sales were up by 6 per cent.

Mr Schultz yesterday hailed an improving economic situation and a "leaner and stronger" Starbucks. Speaking to journalists, and without touching any of his own coffee, preferring instead to stick to mineral water, he said: "We have now come through what was a cataclysmic and brutal economic crisis to deliver a record quarter. From our point of view, continued innovation, the successful enhancement of the consumer experience and a transformed, more-efficient cost structure have brought Starbucks to a significant milestone – a return to profitable growth."

The recovery of the UK economy was stronger than he had imagined, Mr Schultz admitted. Last February he drew the ire of the Business Secretary Lord Mandelson after telling US television that he was worried about consumer confidence in Britain. "The concern for us is western Europe and specifically the UK. The UK is in a spiral," he said, prompting Lord Mandelson to ask: "Why should I have that guy running down the country? Who the fuck is he?"

The fact that he seemingly overestimated the problems in the UK economy does not worry Mr Schultz – he now reckons that 2010 will be stronger than last year, saying that consumers are more optimistic than they have been for some time. In Britain, that is true despite VAT returning to 17.5 per cent, the spectre of rising taxes and the likely end of the Bank of England's £200bn stimulus package.

But it is not just better economic fortunes in Britain and elsewhere that has helped the company.

Starbucks has closed branches in areas Mr Schultz describes as not being in a "demographic sweet spot," by which he means poorer locations. In the UK, the company has also started sourcing all its espresso coffee, which it uses in its lattes and cappuccinos, from Fairtrade. It is also launching new store formats, which it says is in response to customer feedback.

Starbucks' UK managing director Darcy Willson-Rymer adds that 30 new shops will open this year, including more in other stores. This is despite the group being forced to close a number of outlets when the book chain Borders collapsed at the end of last year.

The clothing chain New Look has agreed to take on five of Borders' old shops and Starbucks cafés will continue to refresh its customers, Mr Willson-Rymer confirmed yesterday.

Mr Shultz argues that that there is still plenty left to do. Easyjet recently began selling Starbucks' coffee to its passengers, a move that he describes as an opportunity to tap new channels of distribution. Similarly the introduction of range of instant coffee sachets and a cheaper coffee designed to lure customers back are also on their way to a café near you this year.

All froth: Starbucks backtracks on quality claim

Starbucks was yesterday forced to withdraw a claim that it has been barred from describing a new product as "instant coffee" on the insistence of the Food Standards Agency (FSA), because, the company said, it was of superior quality to alternatives in the market.

In fact, it was revealed that no discussion took place at all between the company and the FSA regarding the launch of Starbucks' Via coffee sachets, which are expected to go on sale in the UK later this year after impressive sales in the US. During a press conference, at which the chairman and chief executive, Howard Schultz, was present, Starbucks had openly claimed that it had been expressly told not to describe its new product as instant coffee because the quality of the coffee was better than other products, including brands such as Kenco and Nescafé. The claim was repeated by the company later in the day.

The FSA said that the company was free to call the product instant coffee if it wished to. "We have not spoken to Starbucks at all about this product," it said.

A press officer for Starbucks later admitted that the claim was false. "There is actually no issue with the FSA regarding Via, or its quality," he said. "Lawyers for Starbucks had advised that because Via contains both real and instant coffee, describing the product as instant coffee could be considered to be misleading."

3.9%

Starbucks' UK first quarter sales growth.