As any caffeine addict knows, morning coffee is simply not negotiable. If you ever are unlucky enough to catch me early in the morning in Alderman without a cup in hand, I suggest running the other direction. And, despite seeing at least 10 Oprah specials on saving money by making coffee at home, I still remain fairly true to my Starbucks reliance. From the line there this morning, it seems safe to assume that other college students feel similarly.
With rising concerns about future American consumption habits, Starbucks executives would be pleased to see our own Corner location full of customers. The University of Virginia demographic is exactly what Starbucks executives are anxiously trying to predict. When the economy is crashing, which Americans will still need their venti caffè mochas?
Since 2006, Starbucks stock has seen a steady decline. In 2006, at the peak of the housing market’s rise, the stock went for around $40. Today, it lingers around $10 . The peaks and troughs of the Dow on a whole seem to be anticipated well by Starbucks’ stock. During the last four years, Starbucks’ stock price has followed the market trend almost exclusively. Economists call this the “latte index,” and it tends to be a good measure of the health of our economy.
As a product, Starbucks is well designated to be a market indicator. Starbucks sales are inexorably tied to the expendable income of the middle class, and thus a large chunk of American purchasing power. Even Starbucks CEO Howard Schultz would tell you that Starbucks is not completely about the coffee. You could easily get a cup from the local convenience store or McDonalds. Instead, Starbucks sells luxury, and a specific brand of social status. It sells an experience to the consumer who spends time in its stores. This experience is known in the Starbucks business model as a “third place.” Its customers want a community meeting place, separate from work and home, which appeals to specialized sensibilities. The logic of the latte index is clear: If customers can afford $4 mochas, then the economy must be doing well.
It is hard, however, to ignore the consistent bad news of Wall Street, and the latte index has continued to be an accurate indicator. Just as the rest of the economy has suffered extreme hits in the past months, Starbucks too has experienced problems. The company already has begun making changes to its corporate strategy that served it well in better times. With less money to spend on luxury goods such as venti mochas, McDonalds and other providers of cheap caffeine are seeing a boom in their revenues. In hopes of capturing a demographic with less expendable income, Starbucks has started providing a line of instant coffee. The stores also introduced a new breakfast deal, despite Schultz’s previous fears that it would suggest a fast food chain. Starbucks claims that these business decisions were already planned well before the economic downturn, and that they are part of a larger shift toward making the coffee affordable to all.
So what does the latte index say about the economic future of 2009? It is not a promising story. Starbucks has noticed significant declines in revenue during the past few months, including around nine percent last quarter. For many, the days of frivolous spending on luxury coffee have disappeared. A January study about coffee consumption found that 60 percent of Americans have cut back on their Starbucks trips. Starbucks already has limited the amount of new stores it will open in an effort to mitigate the effects of lost revenue. It also has cut down on corporate spending, forbidding salary raises in 2009 and selling its new $45 million jet. It may be that these reactions, however, are not enough for the coffee giant. Analysts see Starbucks facing an even more significant cultural shift, which will force the company to adapt its product and philosophy as a whole.
The future of Starbucks may depend on how well the company is able to address those shifts. For Starbucks to keep the demand for luxury coffee strong, it will have to keep convincing Americans that they cannot live without their mochas, or develop a new source of attraction. But as a strong believer in the economic strength of Starbucks, I can only be excited to see what they come up with next.
Lauren’s column runs biweekly Thursdays. She can be reached at l.palmer@cavalierdaily.com.
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