Starbucks on the way out

Since I’ve previously commented quite a few times about Starbucks, I thought I should note this news. It’s a pity for those who will lose their jobs in a softening labour market, but not really a surprise.

Update A letter in the Fin Review makes the point that Starbucks suffered in competition with Gloria Jeans (for non-Oz readers, a truly horrible food court coffee chain, closely associated with one of our less appealing churches), because GJ is a franchise operation, with most franchisees being small enough to avoid payroll tax, while Starbucks were company-owned and had to pay. If the coming tax review could get rid of payroll tax, it would be a huge boon.

74 thoughts on “Starbucks on the way out

  1. The more surprising thing is that they were able to hang on for so long in cities like Melbourne where there are innumerate cafes on every major street. Given this, I doubt the total number of people employed selling coffee is likely to change at all in the long term.

  2. The Starbucks business model is bizarre. Putting a Starbucks on every corner just cannibalises other Starbucks. (If you think there’s a lot of them here, go to the US and check them out there. They are everywhere.)

    But of course the real reason for their failure here is the quality (and price) of their coffee. In the US, Starbucks is the best coffee you can get, Here, it’s the worst or close to it.

  3. The problem with Starbucks was that their coffee was crap and if you live in the big cities where great coffee can be found on every corner why bother going somewhere for an inferior product? The sign at Starbucks “now brewing” showed they didn’t understand that serving filtered coffee that had been stewing on a hotplate for hours is not our idea of a good cup of coffee.
    News reports today said in part…”Starbucks president Howard Schultz ruled out closing other stores internationally and cited “challenges unique to the Australian market”.

    Retail analyst Barry Urquhart said Starbucks failed in Australia in part “because they didn’t understand and respect the unique and differing characteristics of the Australian coffee consumer”.

    “In America, Starbucks is a state of mind. In Australia, it was simply another player,” he said.
    Associate Professor Nick Wailes, a strategic management expert at the University of Sydney, said Starbucks had failed to understand the Australian market. “Starbucks’ original success had a lot to do with the fact that it introduced European coffee culture to a market that didn’t have this tradition. Australia has a fantastic and rich coffee culture and companies like Starbucks really struggle to compete with that.”

    The president of Starbucks Asia Pacific, John Culver, admitted: “I think what we’ve seen is that Australia has a very sophisticated coffee culture.”

    To which you have to ask don’t these companies do any research? Anyone who has tried to get a good cup of coffee in America knows they know nothing about good coffee even though they drink gallons of the stuff.
    Starbucks was a classic case of corporate arrogance and while sorry for all the workers who lost their jobs you can’t feel sorry for Starbucks. Of course Starbucks’ John Culver will keep his job and may even get a bonus for cutting costs so effectively.,
    How come the people who get the fire the bullets in corporations are the ones who should be heading out the door?

  4. We never got one in Perth (sniff).
    Good to see the market working BTW. Company spends money getting in, finds consumers do not like the product, makes losses, pulls out.
    What was another commenter here saying about consumer desires being manufactured by companies?

  5. Starbucks may just be fortuitously reacting to the coming demise of the cafe-latte/finacial intermediation/service economy as the large malinvestments caused by central bankers’ miscalculations over the past decade or so are unwound. No doubt Starbucks has some immediate problems with past expansion and the flight of credit now.
    I did hear yesterday some hospitality industry chap forecasting the demise of around 50% of the takeaway/coffee/cafe/restaurant market over the next few years as about that proportion are marginally profitable now according to him. Basically price rises in food, fuel and interest rates are about to hammer the discretionary economy. Notice how it starts in the US and then spreads here, albeit much more quickly nowadays in globalised economies.

  6. Alan got it right: dud coffee will eventually defeat hype and cultural cringe.
    The mines need 87,000 workers over the next few years, so I read. Perhaps the young people who were working at Starbucks will reduce the number of 457 visas offered.

  7. “What was another commenter here saying about consumer desires being manufactured by companies?”

    Yes, all that money spent on building brands is wasted.

  8. “The mines need 87,000 workers over the next few years,”
    Problem is 06, that’s based on past projections now. The question is how will world demand for resources hold up now as the developed debtor nations rapidly unwind. That alternative employment will evaporate rapidly I’d suggest. Essentially we’re about to take a large cut in real income one way or another and unfortunately our labour regulations mean only one way now. Either that or some more resort to the printing press coupled with Accord Mk2 to achieve more of the other. We’ll think about it all over another coffee eh?

  9. observa,
    Have a close look at China and India (add in Indonesia) and then tell us that demand from there is going to dry up soon. Include analysis of how dire their situation is and how little their people want to buy anything more than the amount they have.

  10. Trouble is Andrew they’ll have to buy them with US dollars and as one lone bloke is saying, something big is happening with those now-
    http://www.lewrockwell.com/paul/paul466.html
    I’ve been out of the stock market and into Perth Mint gold warrants and cash for some time now. You can get 7.05% and rising, at call, calculated daily, payable monthly at the click of a button now. The ASX index grew from 2500-6600 in 10 years and is now testing the 5000 support level domestically. I’m with Ron Paul on this now. Something really big is going down with the world’s fiat reserve currency and I know exactly what that means.

  11. nice try observa,

    but i think you’ll find andrew knows best,
    in fact, you could say if andrew aint sayin it then it aint happening,

    my predcition is that when andrew finally recognises that his beloved corrupt mythical world of capitalism is eating its children and itself,

    then, and only then will the markets meltdown

  12. “The more surprising thing is that they were able to hang on for so long in cities like Melbourne where there are innumerate cafes on every major street”

    So true. Why, just the other day on Collins I asked my barista whether, if a 109 tram left the Swanston St superstop at 9:23am, while a 112 travelling in the other direction turned off Spencer St at 9:17am….

  13. This all makes me wonder why their Australian business model didn’t include provisions for making decent coffee. Like, y’know, find out what your customers expect and attempt to make money by selling it to them. Seems obvious… anyone got a theory?

  14. FDB – there’s nothing like massive business success to build arrogance and a sense of infallibility.

    Like the McDonaalds execs who eat there several times a week, the Starbucks management were probably convinced they had a superior product.

  15. I always liked Starbucks coffee because most cafes make coffee much too strong for my taste. The store in Collins St Melbourne I always enjoy for its quiet ambience – its a pleasant place to sit and watch the passing parade.

    In business courses I have long used Starbucks as an example of achieving core competencies by doing lots of things ‘in house’ – for example by roasting their own beans & using their own internal real estate people in selecting sites.

    For decades it has enjoyed incredible success from its modest beginnings in Seattle.

    Whoops! Back to the drawing boards with that case study!

    I am intrigued to read the various reasons people are advancing today for its failure. Maybe I can recast as a rise and fall story.

  16. observa and Andrew place your bets, that is what investment is about. I would like to point out observa you can’t eat gold, drive it to the corner store or drink it in the morning. I strongly suspect that these are the sort of things people are going to continue to want to do.

  17. Returning to cofee….

    I just dont understand how the making of `good’ coffee cannot be mechanized. What do Barista’s do that cannot be mechanized? Froth Milk? Surely this can be done `right’ by machine…. Put coffee grounds into a cup and attach it to a machine? Again, easily mechanized. Set the temperature nozzles? Come on! Can someone elighten me… what is the `art’ part to making coffee.

    Note, I’m not disagreeing that coffee from a good coffee shop is better than from, say, McDonalds. I buy my coffee, also, from someone who makes their living making it. I just dont understand what part of the process cannot be mechanized….

  18. I did buy some tinned soup yesterday – but I ate (drank?) it today. I guess that is really putting my money where my mouth is. [groans]
    I am also about to buy some bank shares. NAB is yielding over 9% (this of course does not constitute investment advice and you should consider your own position before making any investment. Perhaps also speak to an investment adviser…).

  19. The error was an anomaly

    yeah, and the pope is a deeply spiritual man who devotes himself to compassion and love

    they probably should have tried perth, it generally has the worst coffee in australia,
    the best i’ve had was in melbourne at journal cafe in the ‘city library school thingy’

    andrew,
    i dont know all the answers, and i do have a lot of questions,
    but one thing i dont want is to be confused for a self assured know-all,
    how about you?

  20. Peter – if the growing, picking, drying, storage, roasting, re-storage and grinding could all be perfectly controlled, a machine could easily be designed to do it.

    A good barista can respond dynamically to slight variations in the consistency and chemical constitution of the coffee, judging by colour, texture, crema appearance, sound (once you know the machine) – all kinds of things.

    A chump, however, will do things like burn the milk, overextract the coffee, over- or under-tamp the coffee in the ‘group’ (thing what you screw in full of coffee above the cup), not clean the parts regularly.

    I’m sure a machine could easily be designed to sit at about the median level of quality though. I’m not sure why it is that horrid shit comes out of every automatic machine I’ve ever used.

  21. I just got an email today which had the following to say about the success of Starbucks, obviously in America :

    Starbucks is great at operations research. It wouldn’t have become the company it is today if it hadn’t created detailed manuals telling people how best to assemble the various chemicals that make up a modern adult milk shake. All of those independent coffee shops that have a nostalgic fixation on grinding the coffee beans right before using them, claiming this “ tastes better ” — these poor shops go out of business left and right, because they don’t have the right system. They make only a handful of drinks in the time it takes Starbucks to serve a hundred.

    I just thought the juxtaposition of these two things was funny, even if there’s nothing surprising about it.

    To me, it doesn’t matter how you make coffee : I’ve never had one I could finish.

  22. smiths,
    You seem very assured in the belief that we are all ruined, the system is collapsing and that it will be replaced. Very self-assured. All I have done is to ask you to justify that position, a justification you have consistently failed to supply.
    If asking you to justfy your position makes me the “…self assured know-all…” then I would have to do two things:
    1. Cry “guilty”; and
    2. Re-examine my understanding of the English language.
    .
    On the question of gold or silver coins, smiths, I remain to be convinced. The current system, while ugly, seems to be working and has the benefit of flexibility.
    Voters seem to now understand that debasement of the currency by resort to the printing press only hurts everyone, so, while voters have a strong say in it (and I both hope and believe this situation will continue) I think it works well enough to not justify the (rather high) costs of any change.

  23. “I would like to point out observa you can’t eat gold, drive it to the corner store or drink it in the morning.”
    Can’t do that with those irredeemable dollars in the bank at present either, but I’m happy to leave most of them there. A quarter of the readies is in gold warrants now and they don’t earn interest naturally. Just a bit of hedging against complete monetary disaster. Trouble is I can’t spend the IOUs coming in fast enough since I’m debt free, so where to put it other than that 7% call at present eh? I figure cash is king for the next 12 months or so and who wants term deposits with interest rates rising? Be interesting to see which medium buys more coffees in 12 months time of course.

    Actually Andrew, with Westpac paying 7.05% and their corresponding mortgage rate at 9.67%, I’d guess that’s the lowest spread the banks have had for many a year. Probably explains the decimation of the NBFI sector in the mortgage market currently, because investors like me won’t touch anything but Swanees 4 pillar pets now.

  24. the problem as i see it is this andrew,

    if you look at the world financial system currently,
    all the evidence suggests that it is not working,

    therefore your counterfactual arguement that it is, is surely the one that needs justifying,
    hopefully with copious amounts of analysis and some graphs just for kicks

  25. smiths,
    I have been working in and around that system for nearly two decades – starting with the prosecution of a failed “bank”, moving on to working in investment banks, switching to retail, then into consulting and now purely as a user of the services. I look at that system daily – often many times a day.
    I like to think I know it as well as almost anyone.
    Like any system it has its flaws and mistakes are made. I see no evidence that, taken as a whole it is “not working”.
    In any case – I am not asking for any evidence that it is, or is not, working. I am asking you to say where you want to get to. So far all I have got from you is criticism of the system and a few woolly worded statements about what you would like to see it replaced with.
    So far, you have provided no real idea of how you would replace the system you see as having failed. Until you can do that you will remain someone carping on the sidelines – but definately not relevant to the argument.

  26. “if you look at the world financial system currently,
    all the evidence suggests that it is not working,”

    What evidence would that be?

    How does the current “evidence” differ from every other recession or speculative panic of the past century?

  27. Starbucks (an incredibly successful franchise by anybody’s standards, also an incredibly successful branding of a product by anybody’s standards) was notable for a few things, including:

    Mediocre coffee.

    Financial failure of the retail business model (if indeed that is the problem) must be blamed on more than crap coffee.

    Despite all the circle jerking about how refined is the Ozzi “coffee culture”, this culture (cheifly faux bohemian/faux european decor) has developed without quality coffee being necessary.

    Indeed, with rare but notable exception, barista incompetence, and inconsistency of quality between cafes has been the watermark running through Ozzi coffee culture.

    “The MacDonalds of Coffee” is often said about Starbucks. This is a deserved epithet, though unfair to MacDonalds. MacDonalds, guilty of serving their product with junior staff, do NOT hand customers a number (without any explanation) and put the onus onto the customer to later find their way to the servery window & claim their purchase.

    MacDonalds DO smile, Do treat customers like they are a VIP, DO have staff who possess a thorough knowledge of the product, DO keep their premises spotless, DO explain in a concise polite friendly manner their customer service process, and they DO NOT offer hamburgers in 65 jellybean-ish flavours.

    Just saying.

  28. My Starbucks offered a $1.20 ($2.70 Saturdays) newspaper for 50 cents extra. Got me in but if hard copy newspapers are going out of fashion then I guess it wasn’t such a good sales gimmick.

  29. I was all for the Oz coffee culture explanation until I read this from the Christian Science Monitor: http://www.csmonitor.com/2008/0730/p09s02-coop.html

    Starbucks is in trouble in the US too! Apparently a starbucks coffee was once a status symbol, but no longer. Probably it boils down to an improvement in the US coffee culture. Or else it means only status conscious people worry about the quality of their coffee (as distinct from just the quantity of caffeine?).

  30. FDB said:


    A good barista can respond dynamically to slight variations in the consistency and chemical constitution of the coffee, judging by colour, texture, crema appearance, sound (once you know the machine) – all kinds of things.

    I find it hard to believe that a machine could not respond to the same changes, and do a better job than most people. I suspect that even if such a machine did exist, most people dislike the thought of a machine prepared coffee. I would like to see some blind taste test studies on human vs. machine prepared coffee, if only they could produce a machine that produced reasonable coffee — my experience, like yours, is that the stuff that comes out of those fully automatic machines is awful… watery, weak, and wholly unsatisfying.


    I’m sure a machine could easily be designed to sit at about the median level of quality though. I’m not sure why it is that horrid shit comes out of every automatic machine I’ve ever used.

    Completely agree. Still don’t understand why it has to be that way.

  31. “How does the current “evidenceâ€? differ from every other recession or speculative panic of the past century?”

    Firstly Ian booms and busts are inherently credit expansion followed by credit contraction so the nature of the boom and subsequent malinvestments to be liquidated, depends largely on the length and depth of the credit creation that preceded it. That’s what makes this bust of 1930s proportions I’d suggest. As developed countries revelled in the luxury of rising asset prices as income(something for nothing) and its trappings of the cafe-latte/financial intermediation/service economy, its real economy was being hollowed out by those who were ordered to do so. Here’s the evidence of that now-
    http://environment.newscientist.com/channel/earth/climate-change/dn14412-33-of-chinas-carbon-footprint-blamed-on-exports.html?feedId=climate-change_rss20
    not to mention the Starbucks and Dons Smallgoods writing on the wall too you’ll notice. How many tranches of 600+ jobs going and their downward multipliers will it take before that feeds back to Asian tigers and their consequent demand for resources we may well ask ourselves now. That’s exactly what the markets are very jittery about and they have every right to be. By any rational assessment, the developing nations should have been absorbing real savings and investment from the developed(and aging)world the last decade or so, but by a curious aligning of the planets that wasn’t the case. That very deep ponzi scheme sucking in Asian savers for so long is about to collapse, so make sure you are well seated now.

  32. Here’s the problem at sherriff headquarters in a nutshell from the Mogambo Guru-

    Gary North in his Reality Check newsletter at garynorth.com wrote, “Americans would regard the son’s inheritance of a father’s debt as tyrannical. But, with the help of Congress, Americans have adopted the same system, but on a far larger scale. We have passed our IOUs on to the children of our neighbors’ children.”

    “Today, the Treasury sells its IOUs to foreign investors, especially foreign central banks. Something in the range of 40% of the on-budget Federal debt of $9 trillion is held by foreigners.”

    Bill Bonner here at The Daily Reckoning writing, “Today, fully 21% of Russia’s monetary reserves are invested in the obligations of Fannie, Freddie and the Home Loan Banks. And the largest holder of Fannie and Freddie debt is another friendly foreigner, China”, which he says, “owns $376 billion worth of US agency bonds. Altogether, foreigners hold $1.3 trillion of them.”

    And as Mogambo points out-
    In fact, it is said that purchases of Fannie/Freddie debt by foreigners covered a third of the US current account deficit of $700 billion over the last year!

    Richard Fisher, the head of the Dallas Federal Reserve Bank, who said, “Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon.”
    “Traditional Medicare composes about 69%, the new drug benefit roughly 17% and Social Security the remaining 14%.”

    [Notice that drug benefit liability exceeds that of social security now and all of this when GDP of the US is around $13 trillion]

    Richard Fisher again-
    “We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid”,
    “Purging rampant inflation and a debased currency requires administering a harsh medicine. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the US economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.”

    To which we ask ourselves when? Sometime, somehow, an awful lot of coffees have to be forgone by somebody and perhaps Starbucks understands that imperative now.

  33. andrew, forget it

    i cant be bothered, please invest as much of your personal wealth in banking shares as you can manage,

    i hope it works out well for you

  34. The only people I see in Starbucks in Melbourne are international students. Fair enough, no surprise they don’t know any better. But not a great customer base for a high-cost business.

  35. Observa, I read your Ron Paul reference and was thinking, ‘yes indeed,’ until I got to “The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to “monetizeâ€? U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone – especially the U.S. Congress that doesn’t care, or just flat doesn’t understand.”
    Not too keen on conspiracy theories, though one is almost required to explain bad machine coffee. Qantas Club is particularly disappointing; Q could afford good coffee and a clean machine in the days before its planes started to fall to bits in midair. That’s all that should be needed for a good espresso; milk’s harder to automate.

  36. I find it hard to believe that a machine could not respond to the same changes, and do a better job than most people.

    Well they probably can make better coffee than ‘most people’ but really good coffee isn’t made by most people. It’s made, as FDB pointed out, by skilled individuals with well-developed taste and skills, who know how to respond to the subtle range of variables that presents themselves. It’s not heart surgery but its not widget making either.

    What an automated machine represents is a company that’s unwilling to train its workers to this level of expertise or hire people that already have the skills. It’s not a good place to start from.

    I’d really recommend heading off to a barista course – great way to understand what’s what with coffee. And if you’re lucky, there’ll be ‘cupping’

  37. Yeah 06, he probably drifts out there a bit with the central planning central bankers’ conspiracy bit but I’d cut him a bit of poetic licence there for the real message. In one sense he’s right that central bankers will have a tendency to cover their backsides generally and there’s no doubt some have been manipulating their currencies for some perceived end game. That would be Ron Paul’s objection generally, that they know not what they do in the long run and their long run is no doubt upon us all now.

  38. “If the coming tax review could get rid of payroll tax, it would be a huge boon.”

    OT, but wouldn’t it be better to remove the exemption for small employers rather than remove the tax (or, rather, replace it with some other tax which may or may not be a good one)?

  39. “…Dons Smallgoods…”

    Yes, a company buying the two largest smallgoods companies in Australia and then rationalising their work force is a clear sign of imminent global economic collapse.

  40. “Firstly Ian booms and busts are inherently credit expansion followed by credit contraction so the nature of the boom and subsequent malinvestments to be liquidated, depends largely on the length and depth of the credit creation that preceded it.”

    What percentage of world output does the current credit represent and how does that compare with prior credit expansions prior to recessions?

    “As developed countries revelled in the luxury of rising asset prices as income(something for nothing) and its trappings of the cafe-latte/financial intermediation/service economy, its real economy was being hollowed out by those who were ordered to do so.;

    Yes the vicious evil western Greens used their dictatorial power over the poor defenseless Chinese to force them to industrialise when really they LIKED eating once a day (if they were lucky).

    Incidentally how does the boom in Chinese exports to other developing countries fit into the latest iteration of your eschatological visions?

  41. “….the developing nations should have been absorbing real savings and investment from the developed(and aging)world the last decade or so, but by a curious aligning of the planets that wasn’t the case.”

    so there’s no connection between the hundreds of billions of western investment capital flowing into China (and Inbdia et al) over the past decade and that massive increase in their industrial output?

  42. Further to Anthony’s points (and ignoring for the moment that a very good non-automated machine is very expensive anyway):

    I’m sure you could build a machine to replace a very good barista, but it would cost a shitload to design, build and maintain.

    It would be a VERY sophisticated bit of kit – like you’d usually only find in research labs or large-scale value-adding industry.

    Which does lead me to question why there isn’t an iced coffee on the market made with even half-decent coffee. That might, on a big enough scale, be a worthwhile application for a barista-bot.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s