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Starbucks Is Not Crying Over Customer Drop

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By Michael S. Rosenwald
Washington Post Staff Writer
Saturday, November 17, 2007

Perhaps the best explanation for why Starbucks got blistered on Wall Street yesterday came from Howard Schultz, the man who turned a tiny specialty coffee brewer into a global caffeinated steamroller. He said, "We understand all too well that we have built a very attractive business for others to look at and try to take away."

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Dunkin' Donuts took the plunge. McDonald's did, too, even beating Starbucks in a Consumer Reports taste test. And so it was that Schultz presided over a conference call with analysts in which the company tried to explain its first-ever drop in customer traffic. It fell 1 percent in the fiscal fourth quarter from the fourth quarter last year. Shares fell 3.9 percent yesterday, to $23.17.

"Starbucks is not imagining the bad guys are coming to get them," a Deutsche Bank analyst report said. "They really are."

Schultz, the company's chairman, was swaggering in defending Starbucks. "Most people that are entering the space and creating lots of noise," he said, "are not coffee roasters."

For the first time in its history, Starbucks is using national television ads to trumpet its Java. Think about that: Starbucks is reminding consumers that it is the place for coffee. "We have not really had to tell that story for many, many years because we haven't been concerned about people trying to in any way create attrition for us," Schultz said.

There are other problems besides competition. Dairy costs are up, leading Starbucks to raise its already-not-low prices; customers are spending more on gas; and bad housing market news continues. That all adds up to fewer venti lattes.

Schultz said he has an answer: His coffee is better. He's betting that coffee drinkers will turn to Starbucks after trying out the competition. "They're going to trade up because they're not going to be satisfied with the commoditized experience or the flavor," he said.

For Schultz, the cup is half full, not half empty.


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