KEY POINTS:
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.
The merchandising that once seemed innovative, including a record label that last year put out an album by Paul McCartney, was judged to be cluttered and confusing.
After dipping its toe in film merchandising and distribution - Arctic Tale - the company has cut back on both music and film, leaving it to new entrants in the field of corporate-backed, cut-price record labels - such as Wal-Mart.
In some international regions, Starbucks has become synonymous with US corporate over-reach, an almost imperialistic template of business that seems intent on erasing individuality or surprise.
Last year, an outlet inside China's Forbidden City, the 587-year-old imperial palace, was forced to close after a news anchor at the public state broadcaster, China Central Television, began a campaign to have it removed, calling it "a symbol of low-end US food culture" and "an insult to Chinese civilisation".
This year, a California judge ordered Starbucks to pay its baristas in the state more than US$100 million after finding that managers and supervisors had illegally shared in employee tips.
In the Bible-belt, it found itself facing an evangelical-led campaign against a new Starbucks logo - a bare-chested woman with a mermaid-style tail taken from a 16th-century Norse woodcut.
"The Starbucks logo has a naked woman on it with her legs spread like a prostitute," complained a spokesman for The Resistance, a Christian activist group.
"The company might as well call themselves Slutbucks."
A report this year from a UK consumer group complained that Starbucks coffee was poor and expensive compared with Costa Coffee and Caffe Nero - and that some of its coffees were too calorific. By expanding so far beyond its roots as a coffee house, Schultz warned that Starbucks was "losing its soul". "They were built on the coffee experience," said brand consultant Harvey Hartman.
"By moving so far beyond that, they are jeopardising everything else."
The quandary Starbucks faces is one that confronts any rapidly expanding business.
The original idea is lost. While investors reward growth, especially in in-store sales, it must ultimately slow and the stock slide.
Schultz, who returned as CEO this year, must now negotiate the narrow path between restoring the brand and fostering growth.
He has proposed grinding the coffee by hand again (to restore the aroma), phase out the over-powering breakfast sandwiches (replacing them with more healthy fare), introduce a new, smaller espresso machine so baristas can see over the top and better connect with customers.
The true innovation, analysts say, is for the company that convinced consumers to spend a hefty multiple on a latte when they could have spent far less on coffee with milk, to offer a quicker, less accessorised or complex "coffee experience".
Its management is undoubtedly watching two companies that have found success with a back-to-basics approach to coffee, McDonald's and Dunkin' Donuts, the latter tipped to be the next Starbucks. With more than 5000 US locations and a reputation for inexpensive, strong coffee, it was recently found to have higher customer loyalty than Starbucks.
Famous for its distinctive pink and orange logo, Dunkin' Donuts was the brainchild of the late marketing genius William Rosenberg.
Founded in 1950, it now claims to sell more coffee-by-the-cup - at one billion a year - than Starbucks.
Owned by a consortium of private equity firms, including the Carlyle Group and Thomas H Bain, it is aiming to triple the number of US outlets to 15,000 by 2010.
But with its emphasis on coffee and 52 different types of doughnut - a favourite of cops everywhere - Dunkin' Donuts is valued for honest can-do American simplicity.
As Starbucks declines in terms of cultural symbolism, Dunkin' Donuts is on the rise - and not without controversy. Last month, the firm was forced to pull an advert featuring bouncy young celebrity chef Rachael Ray.
Conservative bloggers noticed he was wearing a fashionable checkered black-and-white fringed scarf in the ad promoting Dunkin's iced coffee and accused the company of casually promoting the symbol of Palestinian terrorism and the intifada, the keffiyeh, via Rachael Ray.
One blogger accused Dunkin' and Ray of promoting "jihadi chic". The company, which withdrew the ad, said Ray's scarf was selected by a stylist and "absolutely no symbolism was intended". The incident, however, created publicity, and any publicity that makes the brand appear relevant almost by definition comes at the expense of Starbucks.
But Schultz vows to return Starbucks to success. An aggressive expansion abroad will be matched by a focus on customers. "We have incredible, dedicated partners, but were not organised properly over the past few years," Schultz told Fortune magazine.
"We need to put ourselves in the shoes of our customers. That's my new battle cry. Live and breathe Starbucks - the way our customers do."
NZ CHAIN STRONG
* In New Zealand, Starbucks is operated by listed fast-food firm Restaurant Brands. The coffee chain has been a strong performer for the company, whose other brands are KFC and Pizza Hut.
* Starbucks' same-store sales for the year to January 29 were up 4 per cent to $33 million.
* Same-store sales grew 6.7 per cent in the first quarter of this year. Total sales for the quarter were $7.7 million, up from $7.6 million the previous year. There were 44 stores in New Zealand, down two from the previous year.
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