Starbucks closes 61 stores in Australia

Commenting on Starbucks’ radical decision to close 61 Australian stores (note the terminology: stores not cafes) the Australian Newsagency Blog’s Mark Fletcher says while he doesn’t enjoy the company’s coffee he admires its business model and goes on to ask “If Starbucks can reach this decision with key factors – range, margin and buying power – working for them, what is the situation newsagents face?”

Starbucks’ coffee is distinctly average by Australian and New Zealand standards. Its cafes are so-so and its prices are sky-high. So with hundreds of small, local cafes providing better coffee, service and all-round experiences at lower prices why would anyone patronise Starbucks?

Well the chain grew fast in America because by US standards it was high quality, albeit at a premium price in a market where fragmented competition performed poorly.

Australia and New Zealand already had a coffee culture, so Starbucks simply doesn’t offer the same value proposition in this part of the world. Some time ago an US business magazine ran a story about small, boutique neighbourhood coffee shops going head-to-head with Starbucks in America and winning. In effect, that’s exactly what happened in Australia.

My local Starbucks in Australia was the branch inside the Borders Bookstore at Hornsby. Sitting down with a bucket of overpriced, weak milky coffee somehow seems more acceptable when you’ve a pile of books to check out and you’re deciding which ones to buy.

There’s an obvious link here with newsagencies — Borders competes for at least some of the business. It may make sense for large magazine specialist newsagents in prime retailing positions to offer a Borders plus Starbucks-like coffee and magazine experience.

But that’s not the answer to Mark’s question. Are newsagents in a similar situation to Starbucks?

I’d say probably not.

First, Starbucks is large. It can standardise, it has buying power and marketing clout that small firms like newsagencies can never achieve on their own (if they acted together things might be different). But what it simply can’t do is deliver a quality customer experience at the local level. Nor can it respond to individual needs or rapidly changing tastes. Newsagencies can do both.

Despite the company’s best efforts, its coffee tends to be dished up by bored teenagers who, beyond uttering ‘have a nice day’ mantras, don’t care about customer service. That’s never going to be as good as coffee served up by cafe owners, their families and the people work with them. Newsagents have the power to ensure the customer experience is first rate.

Second, Starbucks is a corporation. It has to pay all its costs and salaries then deliver a substantial return on capital to shareholders — they probably expect something like 20 percent, anything less would have made them vulnerable to private equity firms before the US financial markets turned nasty. Newsagents need to make a capital return, but something like a 10 percent return on money invested would satisfy most owners. Maybe it shouldn’t. Maybe that’s the lesson here.