The economy writ Short, Tall, Grande
To forecast the U.S. economy, look to the rises and falls of Starbucks. Why? If you think about what the coffee chain sells, it starts to make sense.
In the middle of 2006, Starbucks' stock price peaked at $39.63 a share. Everywhere you looked, a new Starbucks was opening, an average of six new stores a day. The company had 12,241 shops in the United States, with plans to expand to 40,000 locations worldwide. Citing increased demand from less-affluent customers, chief executive officer Howard Schultz told investors: "We don't believe that we are even 50 percent through to the unique opportunity we have."
Things have changed.
At the end of January, Starbucks Corp. announced its second round of store closings, bringing the number of U.S. stores it will shutter to 800. The company's revenue has shrunk. Its net income for 2008 declined 54 percent. Its first-quarter profit from 2009 is down 69 percent. Today, Starbucks' stock price hovers around $9.50.
Why should you care? Because Starbucks is a leading indicator for our broader economy.
It's not a coincidence that Starbucks reached its peak at the precise height of the housing boom - the inflation-adjusted price of housing in the United States topped out in 2006, Starbucks' last year of living high on the bean.
Plot Starbucks' stock price against the Dow Jones industrial average and you see that over the last four years, Starbucks has anticipated the market at nearly every turn. Starbucks' stock started heading north in 2005, five months before the rest of the market started climbing. Starbucks began its decline in late 2006, just as the outlines of the recession were emerging on the horizon. And Starbucks' stock dropped through the floor nine months before the Lehman Bros. Holdings Inc. crash sent the rest the market tumbling.
If you think about what Starbucks sells, it makes sense. By its own admission, Starbucks isn't really in the coffee business - it sells affordable luxury, lifestyle, and a "third place" where people can gather that isn't the home or office. When consumers get spooked, this is the first kind of spending to go. People still need caffeine in a recession; they don't need a "third place."
To prove this point, Advertising Age commissioned a study on coffee consumption last month. The results: 60 percent of Americans say they've cut back on luxury coffee buying in the last six months. One respondent summed up the situation succinctly, saying: "I don't drink as much Starbucks as I did before."
Starbucks is the 800-pound gorilla of the luxury-coffee kingdom, but other retailers in the space are getting crunched, too. Caribou Coffee Co. Inc. is the nation's second-largest high-end chain, and even though it followed a more judicious expansion program than Starbucks, it has received the same beating as consumers turn away from the "third-place" coffee model. In fact, if you track Caribou and Starbucks' stock prices together, they follow each other almost day-for-day.
At the same time, low-end coffee retailers - who sell java, not lifestyle - have flourished. McDonald's Corp., which has jumped into the coffee and espresso market in a big way, actually beat its earnings projection for the last quarter and is showing sales growth even in the face of recession. It says that its coffee offerings are hitting or beating its internal targets. Green Mountain Coffee Roasters Inc., a company that specializes in office coffee, is doing great business - its stock is up 30 percent since October.
Meanwhile, Starbucks is a synecdoche for the rest of corporate America: scared, overexposed, and desperate to cut costs. Like other companies that tried to whistle past the graveyard at the beginning of the recession, Starbucks initially tried to double-down. In March 2008, it bought the company that makes the futuristic "Clover" brewing system. Clover coffee is ultrapremium - the machines cost $11,000 each, and a cup of Clover coffee goes for upward of $3. To date, the Clover system has been rolled out in only 51 stores, and the company doesn't seem to be rushing to install more of them.
Starbucks led the curve on downsizing, too. Starbucks was once seen as indomitable, but it announced the first store closures in July 2008. At the time, it was inconceivable that a company that had never shown negative growth and had never closed a store would shut down 5 percent of its locations. Again, it was a herald of ill tidings: A few months later other giant institutions - banks, retailers, newspapers - began winking out of existence at a rate few people ever imagined.
Prefiguring the PR troubles the auto heads and Citibank would later have, Starbucks management took heat last December after revelations that it had ordered a brand new $45 million jet to replace its seven-year-old plane. Chastened by the reaction, the company is now trying to sell the new jet. Even more strikingly, management agreed not to take any salary raises for 2009.
Today, Starbucks is laying off workers, both at the retail level and at headquarters. It has tried to find savings in unlikely places - such as changing the recipe for its banana bread. It recently made headlines by announcing that it would no longer brew drip decaf coffee in the afternoons unless a customer requested one. Expect to see the same types of gonzo attempts at savings in other industries soon.
It's fun to root against Starbucks in the same way we root against Microsoft Corp. or the Yankees. But if Starbucks is a harbinger for the rest of our economy, we better hope that Americans go back to buying their overpriced, over-roasted coffee - soon.