There’s a correlation between US meltdown and Starbucks proliferation
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