Global coffee giant runs out of steam

Starbucks' lifestyle brand is in need of new energy and direction. Photo / Reuters

Coffee, it is sometimes said, is one of America's premier cultural obsessions. Over the past two decades no company has done better at satisfying and exaggerating that obsession than the US$12 billion Starbucks Corp.

But after years of solid growth, the Seattle-based chain is at a crossroads. It is no longer a coffee house offering a "coffee experience" with its novel culture and distinct language but a cumbersome global corporation selling a lifestyle brand in need of new energy and direction.

Ongoing problems were underscored last week when its top executive in charge of food and beverages, Denny Marie Post, abruptly resigned in the midst of a company makeover under the direction of Howard Schultz, the 54-year-old executive who grew the firm from just four outlets in 1987 to nearly 15,000 worldwide today.

With its share price at US$17, roughly half what it was one year ago, the firm has been hit by both the downturn in consumer spending and rising cost of basic commodities such as milk and coffee.

But while Schultz has told shareholders that the current economic environment is "the weakest in our company's history" he recently said that the problems appeared to be more deeply rooted - and even that the era of expensive, complicated coffees might be over.

"We somehow evolved from a culture of entrepreneurship, creativity and innovation to a culture of, in a way, mediocrity and bureaucracy," he conceded recently. "We have somehow lost our edge."

A decade ago, the company had just over 1000 outlets. As it expanded, it became synonymous with the technology boom of the late 1990s and the image of a geek with a laptop and iPod spending hours in a branch tapping on a keyboard while sipping a soy latte.

There seemed to be no limit to its growth. Less than two years ago Schultz told analysts and investors that Starbucks would one day have 40,000 locations - more even than McDonald's.

In truth, business was slipping. Schultz's original idea - to transform coffee into a social experience and create a "third place" between home and work - had become cluttered.

Schultz, who had stepped down as CEO in 2000 to direct his energy into the Starbucks music label, Hear This, and the Seattle Supersonics basketball team, noticed that the innovation that once gave the company its edge was being suffocated by corporate thinking.

In a memo to employees, he lamented how automatic coffee machines had improved efficiency but given customers a more "antiseptic experience". He noticed how the smell of the company's breakfast sandwiches overpowered the aroma of coffee and new flavours had replaced genuine inspiration.