Is starbucks an indicator for the coming of the ‘latte recession’?

The front cover of this week’s Economist and Business Week, as well as most of the main US daily broad-sheets like the Wall Street Journal and New York Times, are focussed on one major topic: the weaker US economy and the prospects of recession.

Indeed the matter has gone mainstream enough that it’s becoming a talking point at press events and dinner parties I’ve attended in recent weeks. The choice of topic is prompted by late summer’s unravelling of global credit markets, which has severely impacted the prospects of leveraged buyouts and other debt-funded deals. This is closely linked to the rapid slowdown in the US housing market over the last year, which has seen people at the lower end of the socio-economic ladder start to lose their homes at a more rapid rate. One of the reasons for the increasing home losses has been that many of these types of homeowners had been paying for their properties with subprime mortgages, some of which stretched most sensible definitions of credit worthiness.

Then there’s the fact that the US dollar is at record low levels and the impact of a close to $100-a-barrel oil is also starting to be felt at local gas stations. These are all good reasons why the topic of the economy has gone from the business pages to the front pages; and from corporate America’s boardrooms to middle America’s hair salons. All these factors have hampered consumer confidence. The official index has been on a downward trend since August.

Yet even as large banks write off mind-boggling billions of dollars in unpaid debts from their balance sheets and the stock markets remain in a highly volatile state, there are still debates predicting whether the US economy is heading for a full-blown or part-recession.

Perhaps one of the more interesting indicators that the good times might be over was a metric from Starbucks last week, which revealed in its fourth quarter results, despite a 35% rise in profits, its first ever drop in customer traffic to its US stores.

Long seen as one of the best growth stocks for investors in retail and consumer goods, the company’s share price took a big hit. Starbucks’ customer traffic hiccup and, paradoxically, its long-running success as a fast-growing business tell us plenty about the US economy and consumer confidence. Indeed this is why some media commentators are describing the impending US downturn as a “latte recession”.

So how did a small Seattle company that taught Americans, and then the rest of the world, to drink $4.50 coffee become an economic indicator and a marketing phenomenon? This and many other questions are addressed in Oregon-based writer Taylor Clark’s book Starbucked – A Double Tall Tale of Caffeine, Commerce, and Culture (Little Brown).

Bucked the trend
Starbucked… is an easy read if only because the Starbucks story is indeed fascinating and packed with plenty of fun and eye-popping facts and anecdotes. For instance, Starbucks has been opening new coffee houses at a rate of more than 2,000 every year – an average of six new stores a day. And plans to surpass 40,000 stores, which would make it the biggest retailer in the world. It’s worth noting that Starbucks management told Wall Street last week they’ll be easing back on some of that growth by around 100 stores.

Starbucks was started in 1971 by three Seattle friends and was a somewhat genteel, rarefied gourmet coffee shop which still had just six branches in 1984, a couple of years after Howard Schulz joined as a director of marketing. It was Schulz who came up with the idea of selling espressos in steamed milk after a business trip to Italy. In fact, the New Yorker left the original Starbucks in 1985 to start up espresso stores called Il Gionarle, which grew so quickly he came back to buy his former employer’s business in 1987 and renamed everything Starbucks.

Caffeine boost
It was in 1991 that Starbucks really started its growth spurt. Clark says this is when Schulz decided on the, then maverick, idea of having two Starbucks across the road from each other. He experimented in Vancouver and it was a huge success – rather than cannibalise it doubled sales. The company has never looked back, applying the strategy across North America. Indeed from where I write in my apartment on the east side of Manhattan I’m within a two-block stroll to any of four Starbucks outlets.

Starbucks’ omnipresence in big cities is not enough reason for its popularity and success. After all, as Clark puts it: “No one in the history of humanity has ever needed a latte – much less a double tall vanilla soy latte, no foam, extra hot.” But as he says, “The world’s thirst for them appears unquenchable.”

Starbucks’ growth was a result of sheer willpower and the strong belief that the company is not just about selling a cup of coffee but a lifestyle, as Clark and many previous marketing commentators have explained. The brand has benefited from being at the nexus of the “trading up” trend marketers and retailers have been observing in the past few years in Western countries. The increasingly richer middle classes demand affordable luxury items that give them emotional satisfaction rather than essential utility.

“For frazzled, affluent worker bees looking to feel spoiled and get a kick of energy, nothing could beat a warm, custom-made espresso drink,” writes Clark. “Indeed, the advent of a constantly exhausted, hyper-prosperous society in search of emotional soothing almost makes the rise of speciality coffee seem preordained.”

There is also the so-called “third place” philosophy of Starbucks, which the book points out was, in fact, not originated by the company. The idea is that your local Starbucks is the third place after your home and the office – a social hub where you can meet friends or have informal business meetings.

From a marketer’s perspective, brand consistency has been one of its greatest strengths. As well as managing to carefully design each store to look subtly different, Starbucks tries to get under the skin of its customers like the best marketing companies, such as Procter & Gamble do. But it’s even faster moving with Starbucks. For example, its research and development team tries to anticipate which colours will be in fashion a year ahead so future frappucino flavours will match the outfits of trendy customers.

“The secret behind Starbuck’s magnetic pull on consumers lies in the extraordinary amount of control it exercises over its image,” writes Clark. “In an age when homogeneous ad campaigns cover every surface that can be bought… [Starbucks] transformed into an ad for itself.”

That might have been the case through the majority of Starbucks super-growth story in the past 16 years but the company seemed prepared to acknowledge its own vulnerability last week. Schulz, now chairman, told Wall Street analysts that for the first time in its history Starbucks would advertise on television. Analysts may see this as a sign the brand is becoming even more self-confident as it moves beyond coffee to music, entertainment and other areas. Or it could mean that the latte recession is indeed upon us.

Yinka Adegoke is a New York-based business journalist. us.column@gmail.com