On July 29, 2008, Starbucks Australia shut stores nationwide to hold urgent discussions regarding the future of operations in Australia.
By July 30, the future plans for Starbucks in Australia were made public and the speculation was right. It had been no secret that Starbucks in the US had taken drastic moves to close hundreds of stores and lay off thousands of staff in a bid to improve profitability, and exactly the same was to happen in Australia. Some had predicted a total cessation of operations in Australia, but at this point, a small number of stores will remain open.
Starbucks have a total of 84 stores in Australia and it has just been announced that 61 will close and over 700 jobs will be lost as a result.
Does this spell the end of an American icon in Australia?
Well, maybe and the honest truth is that they were always on shaky ground in this country. From the opening of their very first flagship store in Park Street in Sydney’s CBD in 2000, the chain was ridiculed at dinner parties, abused on internet forums and roundly criticized by rival coffee shop owners and coffee industry heavyweights in what was perhaps both a mix of the old Australian poppy-chopping syndrome and a knee-jerk reaction to competition.
But there is more to it than that. Even an Australian public company that tried to set up a home-grown version of Starbucks, faltered. Back in 2000 David and I purchased the Queensland operation of a fledgling chain called GOSH Coffee, set up by music and lingerie giant Brazin Ltd. Brazin was a public company headed up by one of Australia’s most successful entrepreneurs, Brett Blundy. They had spent a year or so operating about 14 outlets on the east coast of Australia and had aggressive plans to open 300 stores within a few years. When the share price of the company faltered, Blundy reacted by initiating a sell-off of the coffee-arm of the business which shareholders had lost faith in. Profits were just not high enough. And it wasn’t as if their stores were not set up properly with the right espresso machines, coffee and fit-outs or that their locations were not heavily-trafficked. They were. The problem was that they just didn’t make money, or enough money to warrant rapid expansion.
Our experience owning GOSH Coffee in Qld was a huge learning curve. We learnt the retail side of the business, refined our barista skills and learnt a lot about real estate and leases in the meantime. We turned around these stores from faceless chain shops into mini cafes that attempted to blend in with their local communities and in this way, were able to do fairly well when we sold them.
To be brutally honest though, Australians quite simply do not like chain coffee. Whether this is right or wrong, it is a notion that I have had troubles dealing with over the years. We have been outspoken proponents of Starbucks over the years. Maybe this has been because we spent many years overseas where this coffee was the only “decent” coffee available and maybe it is also because we have a respect for a company whose knock-on effect to build the coffee industry up into what it is today, has been significant.
As previous coffee roasters and wholesalers who lived through the pre-Starbucks era and who witnessed the introduction of Starbucks, we watched as consumers’ education about coffee grew (thanks to Gloria Jeans as well) and can appreciate the positives that Starbucks in Australia brought with it. Unfortunately for the chain, not many Aussies shared our views.
It is a shame that Australians do not like chain coffee. Our reluctance to enjoy chain coffee at the end of the day, most probably lies in the rich history of espresso that Australia has thanks to the Greek and Italian immigrants who introduced espresso machines and freshly roasted coffee in the late 1940’s and early 1950’s – a tradition which did not exist in many parts of the world, including Asia, where the Starbucks growth has been phenomenal.
It takes more than a national culture of chain coffee haters though to kill an icon though. There is something else going on here.
As past consultants to a large coffee roasting facility in Melbourne, we have seen many small coffee shop operators come and go. Sure, some have no idea about business and are both ill-advised and ill-equipped to deal with the constancy of owning a 5-7 day beast like a café, but more often than not they suffer because of huge rental payments paid to the likes of Westfield and AMP.
Rent on Starbucks cafes in shopping malls must have been enormous. It takes a lot of coffee to pay a 6-figure annual rent and often these outlets would not begin to make money until the 6th or 7th day of the week. Throw in a faltering economy, a lull in consumer spending, the odd day of bad weather here and there and the many public holidays that Australia endures and you have a recipe for financial ruin. If not ruin, then a low profit and declining growth and that simply does not sit well with the financial modelers bunkered in at home base in Seattle that have to justify a certain growth figure every year for their stores.
In time, we will probably see more Starbucks stores quietly close their doors as their leases expire. The chain will probably eventually pull out but rest assured, they will survive as a company and in Australia, their place will be filled by enthusiastic operators who think they can do it better.
Unless rent becomes more realistic for these operators, they have their backs up to the wall. The only way to fight out of that situation is to maximise their offering. A café cannot live on coffee alone. These days, it has to serve exceptional espresso, have top-end staff, sell good food and do more than just think about offering the other two drink-types that have traditionally sold well dating back to the 1600’s – tea and hot chocolate.
For all things coffee, please come back to www.baristabrothers.com
Copyright 2008. All rights reserved.
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