Starbucks: Recession-Proof or Not?
As you have probably heard, Starbucks is going through its first ever round of large-scale layoffs, letting about 12,000 people go and shuttering 600 stores. Not surprisingly this is being blamed on $4+/gallon gas, the housing crisis, the credit crisis, and the general recessionary feel going around the economy. So sad news for those getting laid off, though schadenfreude for those who disparage the mass ubiquity of the brand.
$4 a gallon gas has forced many Americans to drive less, but the high price of gas is also causing many to change their spending habits all together. A new survey reveals that many Americans are cutting out small luxury in order to keep their car’s tank topped off.
A new study conducted by Kelly Blue Book finds that one in four people has cut out Starbucks completely from their morning routine, with another 21 percent greatly reducing their patronage of the coffee house.
But wait a minute, wasn’t Starbucks supposed to be recession-proof? If anything, it was supposed to do better during hard economic times because people would cut out on bigger luxuries like eating out, but they would increase purchases of mini luxuries like Venti Frappacinos because these made them feel good and cost relatively little. As one article has put it:
Wasn’t Starbucks supposed to be immune to economic ups and downs? That was always the investor argument made in favour of owning the company’s shares, and it was borne out during the U.S. recession that followed the dot-com collapse and 9/11. While most restaurants and retailers felt the squeeze as consumers scaled back, Starbucks’ latte-sipping well-to-dos kept coming back for more. That’s because, typically, luxury brands attract premium customers who are less sensitive to economic swings. They’ve got better job security and more disposable income to ride out the lows. When Starbucks continued to rack up impressive gains through 2002 and 2003, analysts went so far as to label the company “recession-proof.”
So which is it? Starbucks can’t have it both ways, either it’s recession-proof or it’s not.
But what the company offers has changed, or rather the way it offers it has changed. Service got worse, quality got worse, expansion happened too quickly and in an un-controlled way. I wrote a couple of years ago that Starbucks should be worried about how poor experiences happening at its periphery were affecting perceptions of its core stores:
Starbucks’ problem is that they are letting their experience get away from them at the peripheries: airports, corporate installations that “Proudly Brew Starbucks”, airlines, and so on. They are getting sloppy: the milk is too hot, the coffee brewed too weak or is burnt, espresso shots don’t have the punch, the counters are filthy and messy, the supplies aren’t stocked, the staff are impolite or poorly trained….
Perhaps [executives’] infatuation with new opportunities like selling CD’s at the stores and being in the movie business are distracting them from their core. Or perhaps their executives are not spending enough time really living the experiences they are selling, in all its variations. This happens a lot. I remember working with a wireless company a few years back where the executives used Blackberries instead of the phones the company was selling to customers at the time. They had no idea what actual customer experience they provided.
Starbucks stopped “eating its own dogfood” as the saying goes, or got so caught up in its own hype and self image that it lost track of the value that its customers actually put on what it was selling. And their rapid expansion actually lowered the perceived value by making it too commoditized and not special enough, as well as lowering the actual value because the quality got worse. Starbucks have now run smack into that limit.
Starbucks Should be Worried