The business stories that matter, by Fortune's Colin Barr
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April 23, 2008, 4:16 pm

Consumer slowdown scalds Starbucks

The Starbucks (SBUX) turnaround is going to take some time. The Seattle-based coffee company warned Wednesday afternoon that it expects second-quarter earnings to fall short of Wall Street’s expectations due to “the sharp weakening in the U.S. consumer environment.” Shares of Starbucks, which have dropped 45% over the past year, dropped an additional 10% in late trading after a brief halt for the release of the bad news.

Starbucks said it expects to make 15 cents a share for the quarter ended March 30, down from 19 cents a year ago and shy of the 21-cent Wall Street analyst estimate. The latest quarter includes a 3-cent-a-share charge tied to the company’s plan to close underperforming stores, unveiled earlier this year. The company said it expects revenue to rise 12% from a year ago, compared with the 16% expected rise forecast by estimates. Starbucks said same-store sales fell from a year ago, as customer traffic softened, especially in markets hit hard by the housing bust, such as California and Florida. Starbucks declined to offer full-year earnings guidance, but said it expects its earnings to be ”somewhat lower” than the 87-cent profit it turned in last year. Analysts were expecting a dime a share more.

“The current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers,” said CEO Howard Schultz, who returned earlier this year to lead the company’s turnaround efforts after a spell of weak results under the departed Jim Donald. However, he still believes in what he calls the Starbucks Experience. “Underscoring my optimism is our customer research, which shows that while our customers are reducing the frequency of their visits to our stores - due to the economic pressures they are feeling - they are not substituting their Starbucks Experience with coffee products from others.”

I have to agree, “Pikes Place” blend is tasteless and not worthy of entering the store sorry to say. May as well have a cup of 7-11 or fast-food blends. They need to offer a version of their other blends to keep the “regulars” happy and stop trying to pander to those who have no real taste in coffee to begin with.

Posted By Tom Stevenson Washington DC : April 27, 2008 3:19 am

The lower earnings are no suprise. They deserved a hit after their last price increase. Even loyal customers (like myself) are finally fed up with the ridiculous prices. I’m using up a gift card, then I’m done with Starbucks.

Posted By Jane Parkinson, Phoenix AZ : April 24, 2008 2:07 am

I HAVE to agree with you. They open SIX new Starbucks every business day. They have COMPLETELY lost control of quality. I can still choke down an occasional latte there, BUT if there is a line, I find that I don’t need it that badly, just walk on. I think this slope will continue downwards, just like their quality….btw I am an AVID coffee drinker.

Posted By Doug from Dallas, Tx : April 24, 2008 12:04 am

All of the talk of a weakening economy impacting Starbuck’s sales is a huge distraction from a larger problem I have seen brewing for some time….Quality! I have all but given up on my local Starbuck’s because the every changing chorus of barista’s can not make a drink properly! Wrong milk, not putting shots of espresso in drinks, or handing me the wrong coffee altogether. I thought it was just bad luck for me living near a bad store but on a recent family visit to the Bay Area, I ran into the same problems! It took one person three attempts to make my drink properly! I know what everyone must be thinking right now! Oh this is one of those guys who orders complicated drinks with fifteen different adds or no-adds with extra-hot this or that! And then complains when they miss number 13 on the list-I would like the record to show that I am not one of those people-all I order is an Iced Vanilla Latte with non-fat milk. If Starbucks wants to turn around its business they should start focusing on making a quality beverage that they built the business on in the first place, especially if I am paying $3.75-and hire some barista’s who know what they are doing. Maybe I should just start going to Pete’s Coffee or the Coffee Bean and Tea Leaf?

Posted By Paul, Los Angeles, CA : April 24, 2008 12:00 am

Cant lower the price or you will “cheapen” the experience, no pun intended. It is like Versace having a sale, cept its gourmet mud and not $10000 fashion.

Posted By David, Prior Lake MN : April 23, 2008 11:45 pm

I also switched to McD’s coffee which I think is better and even a bit cheaper than S’s new drip blend, a strange mix for people who claim to know coffee. However,under the arches I never find free newspapers to read.It’s that awful Pike’s Peak Blend,Starbucks!

Posted By HR Dallas,Tx : April 23, 2008 11:08 pm

Pike’s Place is disgusting. I even have the free coupon that I can use every Wednesday until May 28th. I put it in the trash.

Posted By Perry, Anywhere, CA : April 23, 2008 10:22 pm

My local Starbucks are mostly inefficiently organized so the line waiting time is horrendous, they get the order wrong 50% of the time, and it’s expensive. The guys in the metal carts out on the street (I live in NYC) are perfect every time. My brand loyalty is dwindling. I suppose they can blame it on the economy if they want, but it’s only an indirect relationship - the state of the economy is forcing me to not cut them any slack any more.

Posted By JonT, new york city, NY : April 23, 2008 10:05 pm

Starbucks should be called Overpriced Starsux. The best coffee comes from Juan Valdez in Colombia.

Posted By CoffeeCat, Kitty Litter City, Catlafornia : April 23, 2008 9:28 pm

Wow-I hope the previous commentator-Michael is wrong about Pike Place-but he’s probably correct. I’m a Starbuck’s shareholder but I’ve always thought that the concept of the “Starbuck’s experience” was a crock.I’ve found that their coffee was way too strong and overrated. Those near anorexic soccer moms in their sweats, with their baseball caps and ponytails permeate towns like Lake Forest, IL. Breathlessly they leave Starbucks with their liquid status symbols in hand as they sprint towards their gas guzzling SUVs. What a vapid existence.

Posted By Tom,Waukegan , IL : April 23, 2008 8:35 pm

If their new Pike Place brewed coffee is any indication of their future, it doesn’t look good. I literally just picked a ‘tall’ cup up and after a minute of waiting for it to be brewed I had a taste of this new “experience”. Me and the customer before me, who ordered it too, took one sip and paused… Wow, absolutely no taste. Folger’s tastes better. For the same size cup and price, McDonald’s tastes way better.

So I’m not sure about this new experience. Starbucks might have a problem here. They just need to bite the bullet and lower their prices on their offerings and face the music that this is a different environment and their prices were never justified other than the fact that the new wealthy could afford it.

Posted By Michael, Orange, CA : April 23, 2008 7:04 pm
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Colin Barr covers business and finance for Fortune.com. Previously he was an editor at TheStreet.com and author of the weekly Five Dumbest Things on Wall Street column, and an editor at Dow Jones Newswires.
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