High-end coffee king retrenches

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The more of these stores that close the better.

Their products are overpriced, and the people who buy them are just wasting

their money.

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High-end coffee king retrenches

WENDY STUECK

Globe and Mail Update

April 15, 2009 at 9:16 PM EDT

VANCOUVER — Back in 1987, Vancouver was the beachhead for Starbucks' global

expansion, a rainy West Coast city where the Seattle-based coffee company opened

its first store outside the United States and where customers flocked to sip

then-novel cappuccinos.

Today, Vancouver is a beachhead of another kind: It's taking the first two

Canadian hits in Starbucks Corp.'s [sBUX-Q] global downsizing.

Known for having two Starbucks kitty-corner on a downtown street, the city is

seeing outlets start to go dark as the company expands in more promising

markets, such as Poland. Under company founder Schultz, who rejoined the

company as chief executive officer last year after an eight-year absence,

Starbucks is closing stores, laying off employees and scaling back store

openings in a bid to shave $500-million (U.S.) from expenses in the company's

fiscal year 2009.

At the Starbucks outlet tucked into a GM dealership on Marine Drive, a major

Vancouver thoroughfare, movers arrived one afternoon two weeks ago and began

moving fixtures and bags of coffee beans out the door.

" People were getting out their cars and walking into the showroom and getting

mad, because `Gee, you don't have coffee any more,' " said Dueck GM president

Moray , who'd struck a deal with Starbucks seven years ago that saw the

company run a coffee bar in one side of his dealership.

Mr. said a Starbucks representative left a dealership manager a message

saying that the site was one of 100 locations to be closed in Canada and that

the company would be in touch.

Starbucks declined to provide information on pending closings or to confirm the

number planned for Canada, saying it wanted to share information first with

those sites affected. A Starbucks at Aberdeen Centre, an Asian-themed mall in

Richmond, closed early this month.

As the company retrenches, it's not just fans of the Caramel Macchiato or the

Frappuccino who are grumbling. The retailer's stores dot upscale shopping strips

in pricey neighbourhoods, and its openings are viewed as heralding

gentrification and rising home prices. Landlords wooed Starbucks as their

first-choice coffee shop tenant in food courts and malls.

Now, rumblings about Starbucks outlets closing and the company's restructuring

plans have undermined its appeal, says Ted van Samang of Vancouver's

Franchiselink.

" We have been offered two or three locations [by landlords] that are no longer

available to Starbucks " because the landlord is jittery about taking on the

chain, he says.

Last July, the company announced it would close 600 U.S. stores and 61 in

Australia. This past January, Starbucks said it would close an additional 300

underperforming stores, with about 200 of those in the U.S. and the remainder in

" international markets. "

Starbucks kicked off a global coffee craze when it was founded in 1971 but has

seen its profits pinched – and cachet tarnished – by its own steamroller

expansion and by increased competition, including Mc's move into the

premium coffee market with its McCafé line. Throw in a global recession, and

Starbucks faces an increasingly tough challenge to keep customers.

" The marginal stores – the ones that were limping along when times were good –

are going to be the first to go over the falls, " said Meredith, a

marketing professor at Simon Fraser University.

Last week, it opened its first store in Poland, saying the country's coffeehouse

segment has posted an average annual growth rate of 40 per cent between 1997 and

2007.

And Starbucks continues to tweak its product lineup. Hot breakfast sandwiches

are out, but instant coffee is in: Last month, Starbucks launched Via, its own

brand of instant coffee, in a bid to get a piece of the $17-billion U.S. instant

coffee market.

" Over time, Starbucks has become more complicated to run, " says

Weinberg, professor at the University of British Columbia's Sauder School of

Business. In its early days, the company catered to a specialty-coffee crowd

that savoured coffee shop culture. That customer base has broadened to include

those who want a quick cup of premium-quality coffee – and who are being

aggressively wooed by competitors.

In international terms, that means Starbucks is better off in places such as

Shanghai than in Vienna, and will have to assess every North American outlet on

its merits, Mr. Weinberg said.

" What [starbucks] have been good at is taking a situation where there are

limited choices for high-quality coffee and providing that in a very welcoming,

warm environment, " he said.

" And that's worked really well when there hasn't been strong competition. "

Starbucks (SBUX) Close: $11.66, down 21¢