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Starbucks Sales Losing Steam

High Gas Prices Are Grounds for Concern

August 4, 2006

Starbucks • Starbucks to Close 600 U.S. Stores • Baristas Beware: Starbucks Puts Machines in 86 Stores • Starbucks Serves Up Free Wi-Fi • Starbucks Cuts Trans Fats • Starbucks Data Loss No Laughing Matter • Starbuck Raising Coffee Prices • Starbucks Sales Losing Steam • Starbucks Plans to Get into the Digital Download Business • Starbucks Pours on the Trans Fats • Starbucks Raising Prices • Starbucks Blends Brews and Blues --- • Consumer Complaints

The rising price of one liquid commodity -- gasoline -- may be affecting sales of another. Starbucks reports slowing sales, possibly due to consumers feeling pressured by rising gas prices.

Starbucks said stores open at least 13 months recorded only a 4% increase in sales in July, the smallest increase in nearly five years. The tepid showing following several months in which sales seemed to be losing steam.

Starbucks blamed -- what else? -- the weather.

Company executives said the hot weather created a robust demand for Frappuccinos, cold drinks that take longer to make than the glitzed-up coffee drinks for which the chain is famous. That created longer lines, which drove some customers to give up and drink the dismal drip served at work.

But Wall Street wasn't buying the explanation and the company's stock price fell 8%, closing at $30.64 on the Nasdaq yesterday.

Starbucks has been a darling of Wall Street for years because of its seeming invincibility. For a while it seemed that consumers would continue paying $3 and $4 for a cuppa Joe not all that different from what they could buy for 50 or 60 cents at the nearest McDonald's or corner deli.

But with gas prices hovering around $3 a gallon, some analysts thought that consumers were beginning to wake up and smell the coffee, perhaps realizing that spending $20 or more per week on coffee was a habit they could break.

Other restaurants felt the pinch earlier. Applebee's, KFC and other chains have experienced a major downturn which they've attributed to high gas prices.

Analysts noted Starbucks has expanded in many new markets, including smaller towns and inner cities where residents may be more careful with a dollar than their big-spending downtown counterparts.

But super-caffeinated Starbucks executives say their continuing expansion will increase sales not hamper them. How? Why, by having more stores, lines will be shorter, even as those time-consuming Frappuccinos get more popular.

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