Cof­fee crunch

There’s a cor­re­la­tion be­tween US melt­down and Star­bucks pro­lif­er­a­tion

Finweek English Edition - - Openers - BRUCE WHIT­FIELD

YOU’VE HEARD OF the Big Mac In­dex. It pro­vides in­sights into pur­chas­ing power par­ity of con­sumers in one econ­omy over an­other. The the­ory goes that the health of a na­tion’s con­sumer buy­ing power can be as­sessed by the price they pay – in US dol­lar terms – for a Big Mac. The cheaper a Big Mac in a coun­try, the greater buy­ing power its cit­i­zens have.

Here’s a new eco­nomic the­ory you might not have con­sid­ered: “The Star­bucks the­ory of in­ter­na­tional eco­nomics.” This tonguein-cheek the­ory – which is yet to with­stand any aca­demic rigour – goes that the more Star­bucks cof­fee out­lets a coun­try has, the more likely it is they’ve been caught up in the di­rect ef­fects of the global fi­nan­cial cri­sis.

Sound im­plau­si­ble? The the­ory comes from the mind of Daniel Gross, a colum­nist for the in­ter­na­tional mag­a­zine Newsweek, who con­cedes that while his the­ory may sound shaky at the out­set, it has merit.

Star­bucks has about 13 000 out­lets and a pres­ence in around 40 coun­tries. It can there­fore pro­vide a barom­e­ter for eco­nomic ac­tiv­ity and some in­ter­est­ing com­par­isons be­tween lo­ca­tions. Take it a step fur­ther and it could also be­come a sym­bol for ex­cesses in an econ­omy.

Star­bucks took a com­mod­ity that was avail­able cheaply, de­vel­oped it into a lux­ury prod­uct and man­aged over the sub­se­quent 16 years to con­vince con­sumers to pay a pre­mium price for it. Founder Howard Schulz did what no re­tailer pre­vi­ously had con­sid­ered. From the out­set, Star­bucks sought to densely pop­u­late its mar­kets with out­lets. Schulz learned about the flow of pedes­tri­ans when, frus­trated by the need to turn cus­tomers away from his cof­fee shop in Van­cou­ver, he opened a sec­ond store across the road. Both were equally well pa­tro­n­ised and sales rock­eted.

As the US econ­omy grew, prop­erty prices rose, con­sumers felt bet­ter off and their propen­sity for ex­cess swelled. The Star­bucks queues grew and rev­enues at their peak were US$7,8bn, thanks to 40m cus­tomers vis­it­ing its out­lets.

Is it likely Star­bucks, like the US fi­nan­cial sys­tem that be­came ob­sessed with the magic of se­cu­ri­ti­sa­tion, sim­ply took a great idea too far? It was coun­tries more closely aligned with the US fi­nan­cial sys­tem in terms of busi­ness and trade that saw the cof­fee chain open its out­lets in their coun­tries. When the US econ­omy got into trou­ble, the ef­fects were rapidly felt in coun­tries with the great­est num­ber of US deal­ings.

Like the US hous­ing mar­ket, says Gross, Star­bucks peaked in the spring of 2006 and has since fallen pre­cip­i­tously. Star­bucks last week re­ported weak quar­terly earn­ings, thanks to Amer­i­cans cut­ting back on their pre­mium cof­fee con­sump­tion. The com­pany’s share price is down 50% this year, re­flect­ing the pres­sure on its prof­its: fourth quar­ter 2008 will see it earn $71m, down from $158,5m in the same quar­ter last year. It’s see­ing lower con­sumer vol­umes – and those that are com­ing into its out­lets are spending less.

It’s now clos­ing out­lets – 600 world­wide in July alone. Looking at Star­bucks’ store lo­ca­tor on its web­site the cor­re­la­tion be­tween coun­tries that have a high den­sity of the group’s cof­fee shops and those caught up in the im­me­di­ate con­se­quences of the global credit crunch is un­canny.

Aus­tralia has 23 Star­bucks, Spain’s cap­i­tal Madrid has 48, as does Dubai, while South Korea has 253 and Bri­tain – which has seen its gov­ern­ment step in to bail out most of its big banks – has 256 in Lon­don alone. Those coun­tries are all feel­ing the af­ter­ef­fects of a sig­nif­i­cant prop­erty bub­ble and a debt-fu­elled con­sumer boom.

Though South Africa has pres­sures of its own, it has yet to feel the di­rect im­pact of the in­ter­na­tional credit crunch. It doesn’t have one Star­bucks, de­spite the com­pany’s in­sis­tence last year it was ea­ger to cap­i­talise on the rapidly grow­ing cof­fee cul­ture here. The Seat­tle-based com­pany told us in Au­gust last year that SA was on its radar and it was “ex­cited by the op­por­tu­ni­ties that SA presents…”

Just weeks later it be­came ap­par­ent the sub-prime mort­gage cri­sis that was just beginning to be felt in the US was in­fin­itely more se­ri­ous. Now the con­se­quences of the global credit crunch are be­ing felt and Star­bucks is con­tract­ing rather than ex­pand­ing. A bit like the global econ­omy is threat­en­ing to do.

Tied to the global econ­omy… Howard Schulz

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