Right Wing Nation

Thanks to Maggie’s Farm for yet further evidence that the management of Starbucks is passing round the bong (and by the way, this would make a really great case study for a class):

Starbucks, faced with a sharp drop-off in customers, reported on Wednesday that earnings declined 21 percent during the second quarter.

Starbucks reported that net income declined to $108.7 million, or 15 cents a share, from $150.8 million, or 19 cents a share, in the year-ago quarter. The company said revenue rose 12 percent, to $2.5 billion.

The report came just a week after Starbucks, the world’s largest coffee chain, warned of lower-than-expected earnings and cut its full-year forecast, citing a decline in quarterly sales and describing the economic environment as the weakest in the company’s history. Wall Street analysts had forecast 19 cents a share for the quarter.

[ . . . ]

Starbucks, which had 125 stores when it went public in 1992, now has 15,000 stores in 44 countries. But the company has struggled to maintain its differentiation in the face of growing competition. Most recently, Starbuck’s has suffered the effects of the crisis in the housing market, which has put a pinch on sales, particularly in California and Florida. Mr. Schultz said that customers were simply not visiting Starbucks stores at the rate they once did.

Mr. Schultz is expected to lay out a turnaround plan in a conference call with financial analysts late Wednesday. Among the many changes Mr. Schultz is expected to unveil in coming months, in addition to cutting costs, is the addition of a line of fruit smoothie drinks, the start of a broad effort to offer healthier drinks and expand beyond coffee beverages.

I don’t know if you’ve been following this, but here’s a quick run down.

Starbucks is started to cater to the chi-chi latte liberal crowd. Starbucks adds wi-fi.

Starbucks almost immediately has problems. The group they cater to also hates capitalists. Starbucks does everything they can to be ultra-green, socially conscious, and offers everything they can to make the latte liberals feel good about themselves if they buy Starbucks coffee.

Starbucks adds catered bakery items and sandwiches, and begins to compete with Dunkin’ Donuts, McDonald’s, Burger King, you name it — but only barely (keep reading).

In the meantime, every business on the block starts putting in wi-fi, removing that niche for Starbucks.

Starbucks adds drive-through windows, and revenues skyrocket (and are you surprised, given that with a drive-through, you don’t have to put up with all of the dolphins and rainbows and “fair-trade” nonsense?) Starbucks builds more and more stores, over-saturating the market.

With me so far? Geese and ganders and all that, so since Starbucks had decided to play with the big boys, they decided to play back, starting with Dunkin’ Donuts, when they started offering espresso-derived coffee drinks. Dunkin’ Donuts was boosted by several loudly touted consumer surveys, which found that people preferred Dunkin’ Donuts’ coffees to those at Starbucks. Dunkin’ Donuts then begins a very savvy ad campaign, which mocks Starbucks chi-chi-ness.

Starbucks, with an over-saturated market (there are blocks in Midtown that have three Starbucks), and (shudder!) competition from Dunkin’ Donuts begins to lose market share (read: customers). And revenue.

Then the really big boy on the block decided to start playing: McDonald’s.

This fall, a McDonald’s here added a position to its crew: barista.

McDonald’s is setting out to poach Starbucks customers with the biggest addition to its menu in 30 years. Starting this year, the company’s nearly 14,000 U.S. locations will install coffee bars with “baristas” serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks’ ice-blended Frappuccino.

Internal documents from 2007 say the program, which also will add smoothies and bottled beverages, will add $1 billion to McDonald’s annual sales of $21.6 billion.

The confrontation between Starbucks Corp. and McDonald’s Corp. once seemed improbable. Hailing from very different corners of the restaurant world, the two chains have gradually encroached on each other’s turf. McDonald’s upgraded its drip coffee and its interiors, while Starbucks added drive-through windows and hot breakfast sandwiches.

The growing overlap between the chains shows how convenience has become the dominant force shaping the food-service industry. Consumers who are unwilling to cross the street to get coffee or make a left turn to grab lunch have pushed all food purveyors to adapt the strategies of fast-food chains.

It also shows how the chains’ efforts to adapt to a changing market have had drastically different results on their bottom lines. McDonald’s is entering the sixth year of a successful turnaround, while Starbucks has begun struggling after years of strong earnings and stock growth.

And McDonald’s sales revenues for their espresso-line in test markets are through the roof. Of course, like Dunkin’ Donuts, you don’t get the squishy, gooey, organic, free-range, warm fuzzies you do from Starbucks, and they’re not catering to the real fussy idiots who have to have exactly this particular kind of fake milk and that particular esoteric flavoring flown in from Italy, but run the numbers (which I don’t have in front of me). Just in terms of customers, how many thousands more people go to McDonald’s as opposed to Starbucks?

Ads for the espresso drinks running in the Kansas City area, where the concept is already being tested, say you don’t get a “condescending look” for mispronouncing the size of the drink at McDonald’s — a jab at the “grande” and “venti” sizes at Starbucks. (At McDonald’s, you just ask for small, medium or large.)

As you do at Dunkin’ Donuts, which has already run ads about this very topic (they’re funny, too). But just to go off on a slight tangent for a minute, what is the fundamental difference — other than market — between MickeyD’s and Starbucks?

McDonald’s actually has a business model, and real excutives that, you know, pay attention to the market and analyze data:

McDonald’s grew from a single San Bernardino, Calif., hamburger outlet that opened in 1948 into the world’s largest restaurant chain by offering consistent hamburgers and french fries served quickly and at a low price. Its beverage lineup, anchored by Coca-Cola Co. sodas, was designed to complement its food.

McDonald’s executives watching the growth of Starbucks at the beginning of this decade realized that they were missing out on the fastest-growing parts of the beverage business. Data showed that soda sales had flattened while sales of specialty coffee and smoothies were growing at a double-digit rate outside McDonald’s. Customers were buying food at McDonald’s, then going to convenience stores to get bottled energy drinks, sports drinks and tea, as well as sodas by Coke competitors.

Starbucks execs, on the other hand, have their heads firmly planted way up inside their colons:

Early on, Starbucks didn’t see the Golden Arches as a competitor “because McDonald’s was selling hot, brown liquid masquerading as coffee,” says John Moore, who spent almost a decade in Starbucks’s marketing department before leaving in 2003.

Really? Who’s making money, and who’s losing money? But we also have this stupidity:

Laissez-faire. It’s a policy that made Starbucks vastly successful. But don’t try to put that phrase on a customized Starbucks Card.

The cards are supposed be personalized to reflect customers’ tastes and uniqueness. They are available in a range of colors, often given as gifts and used by regular customers who prefer to prepay for their java.

But when my friend Roger Ream, president of the Fund for American Studies, received a Starbucks gift card for Christmas, he found there was a limit to how personalized a card could be. His card required him to customize it on the company’s Web site. So he went to the site and requested that the phrase “Laissez Faire” be printed on his card. A few days later he was informed that the company couldn’t issue such a card because the wording violated company policy.

Starbucks’s company policy is this: “We review each Card before printing it to make sure it meets our personalization policy. We accept most personalization requests, but we can’t honor every one. Some requests may contain trademarks that we don’t have the right to use. Others may contain material that we consider inappropriate (such as threatening remarks, derogatory terms, or overtly political commentary) or wouldn’t want to see on Starbucks-branded products.”

Because, you see, Starbucks is all image and no substance — exactly like their original latte liberal customer base. But what’s most idiotic about this whole thing is the way the CEO wants to react. Check this out:

After more than a decade of sensational buzz, Starbucks is struggling nationwide as it faces slowing sales growth and increased competition.

The man who built the chain, Howard D. Schultz, has retaken the reins in an effort to revive it. He is scheduled to roll out a plan on Wednesday that will almost certainly involve shutting down more stores in the United States while accelerating expansion overseas.

Mr. Schultz has said he wants to refocus on the “customer experience,” recapturing some of the magic of the chain’s early years, when employees — who had heard the term barista before Starbucks came along? — made the drinks by hand and customers were excited by top-notch coffee.

Mr. Schultz faces a difficult task: He has to slow down the company to make stores feel more like hip neighborhood coffeehouses while also delivering the steady growth that investors have come to expect from Starbucks.

So he wants more image, and less business, and that will fix everything. And look at who he wants to cater to:

“It’s lost its mom-and-pop home-away-from-home feel,” said Aga Machauf, a 26-year-old event planner, while sipping a grandé caramel macchiato. “It feels more corporate now.”

Maybe because it is corporate, do you think that’s a possibility?

And of course, the NYT laments the new, “vulgar” Starbucks:

It was not too long ago that the arrival of a Starbucks was a major event, a recognition that a town or neighborhood was worthy of the chic Seattle-based chain. But in the last five years, every street corner, airport concourse and roadside rest stop in America seemed to attract a Starbucks.

And they can’t turn back the clock, unless they take out those drive-through windows that democratized the chain — and of course, made it vulgar. Ewww, that person in line ahead of me doesn’t have a CompLit PhD? I feel dirty! Ugh!

Mr. Schultz had already outlined many of the problems in a Feb. 14, 2007, memo that is now famous. Entitled “The Commoditization of the Starbucks Experience,” the memo acknowledged that rapid growth had diluted the Starbucks magic.

The image! The experience! The magic! All lost, because we let all of the riff-raff in and worse, we actually behaved like a business! Shades of Steve Jobs!

Marc Greenberg, an analyst at Deutsche Bank, questioned Starbucks initiatives that encouraged competition with fast-food chains, like drive-through windows and an expanding menu of food.

“Starbucks is all about fresh ground coffee,” he said. “As for the food, there’s no kitchen in the store. How fresh can it be?”

Even so, he said the primary problem for Starbucks was simple.

“It’s being overbuilt, classic over-saturation,” Mr. Greenberg said. “How many places do we need? Aren’t we there? Is it hard to find a Starbucks?”

Exactly. And here’s the thing: Starbucks can’t expand, except to build more stores. The stores don’t have room for kitchens, so they can’t expand food lines without risking yet more stale muffins. And expanding will only hurt, because over-saturation is the problem — well, one of the problems.

Here’s their fundamental problem. Look at what this jackass says:

Geoff Vuleta, chief executive of Fahrenheit 212, an innovation consultancy in New York, said Starbucks had lost focus on the experience that drew customers in the first place by neutering the baristas and by crowding the stores with merchandise, or as he put it, “replacing mystique with relentless commerce.”

“We all remember our initial encounters with Starbucks: the exoticism of new language, space, sounds and smells,” Mr. Vuleta said in an e-mail message. “Fast-forward a decade, and the first thing that jumps out is that the mystique that so thoroughly defined the initial experience is conspicuously absent — trampled in the stampede of proliferation.”

He suggests that Starbucks get back to basics, emphasizing the role of its baristas and focusing on the quality of its coffee, promoting “the theater of the craft and bold celebration of the provenance of the bean.”

Relentless commerce! Stampede of proliferation! Oh, to get back to the provenance of the bean!

Seriously, you can’t build a business on nothing more than a trend — or image or mystique or experience, if you prefer — and apparently, they forgot to ask the dot.coms that went out of business in the 90s about this. And more importantly, you can’t cater specifically to a group that hates businesses, because they’ll eventually turn on you. If they want more revenue, they have to expand to appeal to more people, but if they do that, they lose all that “magic.”

Understand, I don’t have any deep moral objections to Starbucks. I live on espresso. It’s the caffeine equivalent of Bacardi 151. I can’t abide the faux-culture, pinkie-up, superficial feel-good idiocy inside, so if I do go in to get something, I leave as soon as I’ve paid for it, and preferably, I use the drive-through (and when I do go inside, I have fun giving them obviously fake names and watching their reactions). But these idiots are so in love with their own little fantasy of what they are they’re missing the bottom line. And frankly, I’m not sad about it. But I’m glad I’m not Starbucks, because they’re in an impossible position.

There’s no going back. It’s much better that they deal with that and move on, but they won’t. Their heads are far too firmly planted up their anuses.