Coffee companies get the java jitters as sector slumps

Starbucks Corp. Chairman and Chief Executive Howard Schultz stands near the coffee shop's original store at the Pike Place Market in Seattle. The company introduced an 'everyday' brew hoping to revive slumping U.S. sales. (Elaine Thompson/Associated Press)

When Starbucks reported its first-ever quarterly loss in July, red flags popped up for the entire coffee sector.

After all, Starbucks, named after the first mate on the ship in the novel Moby Dick, resembled the great white whale in its overall effect on the industry. Metaphorically speaking, when the Seattle-based java giant sneezes, the rest of the sector catches a cold.

And, based upon the past month's news, Starbucks certainly has a bad case of the sniffles.

Starbucks has lost money and is closing 600 shops.(Ben Margot/Associated Press)

In late July, Starbucks said it posted a $6.7 million US loss for the third-quarter of 2008. The loss, driven by slower sales and a large restructuring charge, was the first time since becoming a publicly traded company in 1992 that Starbucks lost money over a three-month period.

Also last month, the company announced that it will close 600 cafes by mid-2009 and will trim its workforce by 1,000 employees.

This spate of bad news likely explains why Starbucks, which once proclaimed a goal of 20,000 coffee outlets worldwide, has lost 45 per cent of its per-share value in the past year.

The question faced by coffee companies and drinkers alike, however, is whether Starbucks's woes are its own doing or a sign that Canadians and Americans have actually kicked the coffee habit.

Interestingly, evidence can be marshaled to support both points of view.

A couple of years ago, Starbucks launched very ambitious expansion plans roughly at the same time the U.S. economy started slumping. Thus, latte guzzlers began viewing a $6 cup of coffee as a luxury that could be jettisoned in tighter economic times.

Thus, Starbucks was caught in a classic financial misplay: hiking its costs just as its revenue began to flatten.

For the first two quarters of 2008, Starbucks increased its sales by 12 per cent and 22 per cent, respectively.

Many companies would characterize those jumps as "soaring" and "robust." At Starbucks, however, these sales figures represented a fall of 45 per cent compared to the first quarter of 2007 and a drop of 15 per cent from last year's second quarter.

At least one former Starbucks executive now believes the aggressive U.S. expansion probably was not the best strategy.

"My worst decision was not investing earlier in international," former Starbucks chief executive Jim Donald said in a recent interview. "The international markets don't have as quick returns as the U.S. But if I'd known the U.S. economy was going to crash, I would have invested earlier."

Not surprisingly, current Starbucks CEO Howard Schultz said his company would weather these economic hardships.

"We can hear those drumbeats once again from people who think that our best days are behind us," he said in an open letter to the company's store franchisees. "But I strongly believe that, together, we will create an even stronger company for the future."

Americans curbing coffee consumption

Some signs, however, indicate sector-wide woes.

Annual U.S. Coffee Consumption1990 2000 2005Gallons per person 26.826.3 24.2 Source: U.S. Census Bureau

Americans have been cutting back on coffee drinking for a number of years.

The average American in 2005 drank about 10 per cent less coffee than 15 years earlier.

Still, the total amount of coffee being drunk in the United States has risen 10.5 per cent between 2002 and 2007.

But, with a new coffee outlet seemingly on every corner by mid-decade, the rise in consumer demand appeared to be not enough to back up industry expansion.

Americans have cut down their per capita coffee consumption.(CBC)

Other coffee companies besides Starbucks are struggling, especially within their café business.

Minneapolis, Minn.-based Caribou Coffee Inc. said its first-quarter 2008 coffeehouse sales were down 2.5 per cent compared to the same period one year earlier.

Diedrich Coffee Inc., a specialty roaster based in Irvine, Calf., dumped its café business entirely, selling 47 locations to Starbucks in 2006 as a part of a company-wide restructuring.

Canadian coffee floggers said this country is still in love with its java fix.

"We don't see what is happening in the U.S. as having any impact on what is happening in Canada," said one coffee executive who did not want to be named in this story.

Canadians are drinking marginally more coffee per person in the past few years.

Canadian Coffee Consumption20052006 2007Litres per person101.9100.9 103.6 Source: Statistics Canada

As well, Canadian coffee imports in 2007 grew to 4.2 million bags (a 60-lb measurement commonly used within the trade), a 27 per cent hike from 2003.

Still, Canadian coffee executives said the struggle for every customer is fierce.

"We are facing challenging conditions in terms of the economy and rising energy costs," said Ryan Brown, vice-president of marketing at Second Cup Ltd., a large Canadian coffeehouse chain.

That fight has led companies to expand their offerings beyond coffee to attract customers.

Second Cup, for example, has introduced zero per cent fat fruit drinks to give coffee-weary imbibers an alternative choice, Brown said.

And that is not all.

Wifi hot spots for computer users, chain-only CDs and discount club cards are standard fare for coffee outlets these days.

All these additions, however, might not be enough to turn the fortunes of the café part of the coffee sector.

Gerard Geoffrion, chief executive officer of Montreal's Van Houtte Group Inc., said Canadians are cutting back on the trips to the local coffee shop and, instead, want to grab a better-tasting brew at home.

"Coffee demand has been flat for a few years," he said. "What we are seeing is a shift. Some people will cut back on the $5 latte at Starbucks. Now, they will be … [drinking] one more coffee at the office or at home."

Van Houtte gets much of its business selling coffee to grocery stores.

Approximately two-thirds of coffee in Canada is consumed at home, with another 20 per cent at the office and the final portion at stand-alone cafés, according to Geoffrion.

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