Why Starbucks Ran Out of Steam

"Starbucks status has been drained out of its cup of coffee," Dr. Bryan Simon told a packed audience of Nichols College students on September 15^th.  Over the last three years, Simon has visited more than 400 Starbucks in eight countries and spent at least 20 hours a week observing both consumers and employees.

His most recent book, EVERYTHING BUT THE COFFEE, explores how Starbucks became a status icon in American life. Thus, its original store in Seattle's Pike Place Market is now a very popular stop for busloads of tourists.

From the outset, Howard Schultz, a visionary businessman, masterminded Starbucks success using an up-market image. From 1995 to 2005, a new Starbucks store opened every six hours.

The Starbucks experience goes beyond taste and convenience. Simon compared a Starbucks cup of coffee to an IPod. "It's functional, convenient, and the purchase makes you feel good. In addition, owning an IPod says something about who you are." But the real marvel of Starbucks success is that technology innovation was not an element in capturing the market. Rather, Starbucks did it with an age-old commodity -- coffee.

Professor Simon stated that in America's "post-needs" society, much of what we buy, we don't need. "Part of what we buy is broadly functional," said Simon, "but we pay more for those things that emotionally make us feel better, give us comfort, and help manage our moods." Most significant is the fact that Americans buy things that make status distinctions.

"In many ways, Starbucks is a bargain," said Simon. "For four dollars, you get a lot of bang," referring to the fact that a 16 ounce cup of coffee from Starbucks has twice as much caffeine as a same-sized cup from Dunkin Donuts.

While past generations defined themselves by their communities or organizations, such as the Rotary and PTA, Starbucks offers solutions to Americans who have retreated from a larger public life. For example, many self-employed entrepreneurs, rather than lease office space, ask clients to meet them at the nearest Starbucks.

"Starbucks success is also a product of our changing political culture," said Simon. "It used to be that global relations and environment were the responsibility of the government. Starbucks sells water at a 35% premium, but you can feel good that five cents of the total price is going to an undeveloped country for clean-water projects."

Eventually, Starbucks coffee became too hot. By opening more than 15,000 stores worldwide, the company violated the basic economic principle of "cultural scarcity."  In January 2008, Starbucks sacked its chief executive, Jim Donald, and restored Howard Schultz to his former job. It later announced that some 500 stores across America would be shut, with the loss of 12,000 full- and part-time jobs.

To make matters worse, McDonalds started serving specialty coffee beverages like vanilla lattes and caramel cappuccinos across the United States and undercutting Starbucks' prices. McCafe's new focus on high-end coffee demonstrates a shift to more upscale food and its specialty coffee drinks are served from push-button machines which are faster than Starbucks labor-intensive, hand-made approach.

Professor Simon is not counting Starbucks out. Rather, the company has shown a readiness to face up to its difficulties, but the growth of the past will never return. "Status seekers will come back only when Starbucks is a little scarcer and thus, a little cooler," he says.

Dr. Simon is a professor of history and director of American studies at Temple University.