Starbucks Sees Profits Drop 28% in Second Quarter

Retailer, Amid Back-to-Roots Plan, to Roll Out Array of Non-Coffee Beverages

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CHICAGO (AdAge.com) -- Amid disappointing earnings yesterday, Starbucks CEO Howard Schultz sought to quell fears about the company's future by offering guidance on earnings and store openings through 2011. He also announced an array of new beverage platforms, which some experts say are at odds with Starbucks recent back-to-roots theme.

"While we are not going to use the economy as an excuse, it is important to keep in mind that our second-quarter results do reflect the sharp weakening U.S. consumer environment," Mr. Schultz said. "Like most other retailers and restaurants, we are experiencing a downturn in customer traffic demonstrated in reduced frequency of customer visits that we believe tie to a real reduction in consumers' discretionary spending habits."

Emphasis on economy
Second-quarter net income plummeted 28% compared the year-ago quarter, and same-store sales suffered what the company described as a "mid-single digit" decline. Starbucks warned of lower-than-expected earnings last week. Mr. Schultz repeatedly emphasized that there were "no immediate signs" of an economic recovery.

Not everyone agrees with his economic thesis on the company's woes.

David Palmer, an analyst with UBS, wrote, "We believe that Starbucks is the worst under-earning company in our coverage. Mismanagement & macroeconomics have led to declining [same store sales]. The questions now are: will the company be able to drive meaningful innovation, and create cost savings?"

Starbucks is hoping that a raft of new offerings will help drive traffic. Starbucks DoubleShot is an energy-drink platform that will be offered in stores as well as bottled and sold through the company's partnership with Pepsi.

"Entering this category offers us a significant opportunity for us to complement our customers lifestyles and engage in important and relatively untapped demographic for Starbucks," Mr. Schultz said, citing other energy drinks that have included caffeine.

Fruit smoothies
Starbucks will also begin making fruit smoothies at its locations nationwide this summer. Mr. Schultz called the "protein and fruit-blended beverage" Starbucks' first meaningful step into the health-and-wellness category. At launch, the beverages will come in two flavors, have no artificial sweeteners, contain 15 grams of protein and no more than 270 calories. He added that Starbucks has been discreetly testing the drinks in certain stores, and received responses that surpassed expectations.

"In our research, more than 60% of customers surveyed said they would come to Starbucks to buy healthy, nutritious beverages, and we are confident we have found the perfect answer to their needs," he said.

Finally, Starbucks will introduce an Italian beverage platform that Mr. Schultz heralded as his company's next Frappuccino. "We searched the world over and over and have found something finally that took us back to our heritage."

The new, low-calorie beverage, which will launch in parts of California this summer but won't be available nationwide until 2009, will have a "smooth, frozen texture," and offer a range of options including fruit, dairy and yogurt.

John Moore, a former Starbucks marketer who blogs at BrandAutopsy.com, said the slate of launches reads like a TV network with a show in the pipeline that they're being forced to air.

In the pipeline for months
"Keep in mind these beverages have been in the pipeline for months," he said, indicating that R&D likely preceded Mr. Schultz' return as CEO. "And it wasn't until the end of January is when we became knowledgeable the about the company was getting back to its roots."

As part of the "transformational agenda" Mr. Schultz laid out in March, Starbucks has sought to return to the company's core areas of strength, including espresso and brewed coffee. As part of this push, the company recently pared back its entertainment business.

Mr. Moore added that if the beverages are successful, they could present an operational problem, because preparation will take baristas away from their core coffee and espresso competencies.

Starbucks again cut the number of stores it expects to open in 2008, now to 1,020. In the three subsequent years, or through 2011, Starbucks plans to open less than 400 stores annually in the U.S. The lion's share of the company's growth will be international.
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