Kiwi snobs won't stop Starbucks' domination

In 2007-2008 the stock price dropped from US$39 to less than US$10 ($51 to $13). Photo / Filephoto

Back in 2006, Starbucks was well on track in its plot for world domination. Sales were booming, the stock price was making fresh highs on a weekly basis, and the company had just announced plans to triple its 12,000 stores worldwide.

Shareholders were grinning. The rest of us were deeply afraid.

But the company's grand plans came off the rails. Starbucks expanded too quickly, saturating the market with its pale wood furniture and caramel frappuccinos. When the 2007-08 recession came along, Starbucks was forced to close hundreds of underperforming stores.

Shareholder grins froze as the stock price dropped from US$39 to less than US$10 ($51 to $13).

A lot of people were quite smug about Starbucks' fall from grace. Despite its ubiquitous presence, Starbucks has always been sneered at by certain sections of the public, even more so than other multinational chains like McDonald's or KFC.

Anti-Starbucks sentiment is especially prevalent in New Zealand, where the brand has never really taken off. In certain parts of Wellington, walking around with a Starbucks cup will attract dirtier looks than if you were wearing a baby seal overcoat.

Restaurant Brands, owner of the Starbucks New Zealand franchise since 1998, has understandably had enough. The company has made no secret of its desire to offload its 38 Starbucks stores.

A reason New Zealand has never embraced Starbucks is that we are a nation of shameless coffee snobs. Twenty years ago, we considered it the height of sophistication to add a dollop of clotted cream to a mug of drip coffee.

An upmarket brew was Greggs Red Ribbon Roast. But now, in cosmopolitan 2011, we turn our noses up at anything less than espresso.

We're hardly true aficionados like the Italians or the French. In fact, given the popularity of flat whites and lattes in New Zealand, it's not clear whether we've developed a genuine taste for espresso, or we've simply found a socially acceptable way to drink lots of warm, frothy milk. Dairy is in our DNA, after all.

But regardless of the underlying motives, Kiwis are now very particular about their caffeinated milkshakes.

This should have played into Starbucks hands. The company was serving up espresso long before Kiwis even knew what the word meant.

Its menu leans toward the Anglo-Saxon preference for coffee drowned in milk. And despite reports to the contrary, the quality of the beans is actually pretty good. But it's probably not the coffee that Kiwis find objectionable. It's the whole Starbucks image. The corporate vibe. It's just not cool. We like our trim flat whites to be served by tattooed hipsters and surly short-film actresses, ideally from windswept coffee carts. It makes us feel edgy; less predictably suburban.

By contrast, Starbucks stores are laid back and comfortable. Dido is usually playing in the background. The customers look as if they're dressed for golf. And the baristas could just as easily be working for a bank.

In other words, Starbucks stores are a little too close to our humdrum, middle class lives.

But here's a newsflash: the Seattle-based Starbucks doesn't give a white chocolate mocha about New Zealand's coffeehouse snobbery. It wants the big markets: the Americas, Western Europe, and the mother of all growth opportunities, Asia.

So far, the sales numbers in India and China are encouraging. Other nationalities, it seems, do not have the same hang-ups about Starbucks that Kiwis do. The market has taken note.

Starbucks' share price recently recovered to US$33 on the back of a turnaround in US sales and signs that its emerging markets strategy is reaching an inflection point. Based on its current sales momentum, Starbucks should deliver 20 per cent earnings growth this year (even with sharply higher coffee prices). Bullish analysts believe this level of growth can be sustained well into the future.

To signal the next phase of its master plan, Starbucks has unveiled a new logo - dropping the corporate name and enlarging the wavy-haired siren with the Mona Lisa smile. It's a bold move, giving Starbucks the freedom and flexibility to think beyond just coffee. Their words, not mine. Maybe we should all be afraid again.

Nathan Field is a senior equity analyst at Gareth Morgan Investments.