The reputation of global coffee chain leader Starbucks has taken a hit in recent months, with declining sales

leading to 600 store closures in America and a further 61 in Australia (more than two-thirds of their Australian outlets). The company is by no means in dire straits, quarterly revenue of US$2.57 billion highlights that point, but things certainly dont look as rosy as they did just a couple of years ago. Starbucks posted their first quarterly loss on Wednesday since going public in 1992, but are still going to post a profit this year and maintain guidance that 2009 will reap earnings per share of $0.90 to $1. The company has reported that the worsening economic conditions in the US and some poor real estate decisions have been behind the issues plaguing the company at the moment. Others have suggested that increased competition from the likes of McDonalds has contributed to the decline. But surely there is more to it than that. The success The company successfully brought caf culture to Americans for the first time and introduced people, who had never even liked or tried coffee, into the culture by providing a diverse range of options never before seen. The brand was widely accepted and became, to an extent, a symbol of status. It was as an upper class coffee chain that they first made their mark and was what defined the success of the company. Sure people were aware that the beverages at Starbucks were more expensive than at many cafs but they still frequented the outlets, as it was a place to see and be seen. Recent turbulence Starbucks were, however, intent on rapid expansion and kept a remarkable pace of opening at least one new store a day, on average, throughout the 90s and early 00s, leading to the company now operating about 15,000 stores worldwide. It is likely that this quick growth has led to the recent turbulence. Setting up a brand as a symbol of status has served many companies well but if the company becomes too commercial and widely used it will lose much of its initial appeal. Af ter all, if every second person appeared to be wearing Armani clothing, would anyone pay $400 for an Armani shirt? Once their growth really took hold they gradually gained a greater reliance on less-affluent consumers. Consequently, the reason for the decline at a time of disappointing economic growth highlights that their customer base is now predominantly the middle and lower wealth classes who have sought to save in times of trying conditions. Australian troubles They didnt cut over two-thirds of their American stores, so why is it that their struggles have been exacerbated here in Australia? Primarily it is due to the fact that a firmly entrenched caf culture was already present in Australia when they set up shop in Australia eight years ago.

Associate Professor Nick Wailes, expert in strategic management in the Faculty of Economics and Business at the University of Sydney, believes that organisations such as Starbucks, who lose sight of what initially made the business successful and fail to recognise the importance of local culture, will always fail in the Australian market. There are a number of important business lessons that can be learned from this situation, advised Wailes. Unfortunately, Starbucks failed to truly understand Australias cafe cu lture and has become an example of the big corporate machine it originally tried to differentiate itself from. Part of the problem is that Starbucks original business model just doesnt translate across markets. Starbucks original success had a lot to do with the fact that it introduced European coffee culture to a market that didnt have this tradition. Australia has a fantastic and rich coffee culture and companies like Starbucks really struggle to compete with that, Wailes concluded. Store closures Starbucks announced the locations of the 61 Australian store closures earlier today, with the eight stores across South Australia, the ACT and Tasmania to close leaving them with representation in only the three states of Victoria, Queensland and New South Wales. The remaining 23 stores are in and around the capital cities of these states following a decrease in store numbers of 28 in NSW, 8 in Queensland and 17 in Victoria (store closure details can be found at www.starbucks.com.au). Future The future for the company appears bleak in Australia for the time being considering they have closed over two-thirds of their 84 stores this week and CEO, President and Chairman of Starbucks, Howard Schultz outlined that the challenges presented in Australia are unique. However, a restructure or transformation of their international operations should see the company succeed in the future. Schultz appears particularly confident that their vision will return strong growth long-term and sees light at the end of the tunnel. when we look at the opportunities that we have, coupled with some of the mistakes that have been made and the headwind of the economy, we believe strongly, unequivocally in the model, in the brand, and have great confidence that we can return a much higher long-term value to the shareholders, Schultz told analysts. Some of the changes they have announced include the introduction of a new food platform as they seek to tap into the health and wellness trend, while the reduction of smell caused by sandwiches is to be addressed to ensure the coffee aroma in the stores can return and the popular Starbucks card will be enhanced.

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When the Starbucks (NASDAQ: SBUX) coffee chain announced last month that it would close 600 U.S. stores over the next several months, a move which will cost an estimated 12,000 Starbucks employees their jobs it only amounted to a closure of five percent of the companys U.S. locations. But job cuts wer e much deeper in Australia, where 61 of 85 Starbucks outlets closed last week. The only Starbucks remaining open Down Under are a few in Brisbane, Melbourne and Sydney. Starbucks has withdrawn completely from Australian Capital Territory, South Australia and Tasmania. At the same time, the company says its accelerating its international growth. So what went wrong in Australia? The answer is surprisingly simple: Starbucks didnt understand its audience. The coffee giant didnt understand local customs and its target market, instead trying to impose its cookie-cutter American business model on Aussies. When Starbucks made its Australian debut in 2000, a thriving urban cafe culture was already in place. In an Australian newspaper article, Chris Berg wrote of the pitfalls of globalization, saying: The secret of the companys success in the American market wasnt that it sold coffee. It sold coffee cultureThe other aspect of Starbucks appeal in the U.S. has been its establishment of the cafe as a social hubBut when Starbucks came to Australia to bring coffee and the cafe culture to the masses, it found that we already had it. Particularly in Melbourne, we have better coffee and more relaxing cafes than anything that Starbucks brought with it. Starbucks failed to grasp the simple concept that McDonalds (MCD) understands: When in Rome, do as the Romans do. While the coffee chain offers the same espressos, frappucinos and lattes worldwide, the McDonalds menu varies according to the dictates of local culture and tastes. In Japan, a consumer can buy an Ebi Filet-O (a shrimp burger), while McDonalds customers in Turkey can purchase kebabs, and the McCurry Pan is available in India. Starbucks has failed to understand local social mores in the past, most notably in Beijing, China, where a Starbucks location in the former Imperial Palace in the centuries-old Forbidden City closed in July 2007. The coffee shop had been a source of ongoing controversy since its opening in 2000; protesters felt that the presence of the American chain in this location was an affront to Chinese culture. Twenty-nine percent of Starbucks outlets are located outside of the United States, with new stores scheduled to open in Algeria, Belgium, Bulgaria, Colombia, Hungary, Poland and Portugal. According to the companys February 2008 fact sheet, Starbucks operated in 44 countries, with 4,588 international locations. In February, Starbucks rehired Arthur Rubinfeld, credited with helping Starbucks grow from 100 stores to 4,000 stores, as president of global development. Rubinfeld also authored Built for Growth Expanding Your Business Around the Corner or Across the Globe, a book detailing his views on branding, business model infrastructure and site selection. And a tip of the hat to Mark Herron of Sydney, Australia for the story idea. Gday, Mark! Read more Australian news.

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What conclusions can we draw about the brand's tactics after Starbucks announced the closure of the vast majority of its Australian outlets? Now that the collective cheer of all coffee-loving Australians has died down, it's worth exploring just why Starbucks has failed to make an impression in the Australian marketplace. Everyone has their own opinion, but from where I sit (on a needlessly funky chair inside an advertising agency) Starbucks was doomed from the start for two key reasons. Firstly, they didn't seem to pay much attention to product optimisation. In short, they just took what worked in the US, and tried it here. Unfortunately for Starbucks, what worked in the US was bitter, weak coffee augmented by huge quantities of milk and sweet flavoured syrups. Not so much coffee, as hot coffeebased smoothies. For the Australian consumer, raised on a diet of real espresso, this was always going to be a tough sell. But aside from their product woes, Starbucks made a single, crucial tactical error: they failed to deliver to the Australian consumer an organic experience. Let me explain. In the US, Starbucks started in Seattle as a single store. And in a nation bereft of genuine caf culture, that single store soon captured the imagination, and became a second store. Then a third. Before long, it had become a demand-driven phenomenon; everyone wanted a Starbucks in their local area. For those old enough to remember, McDonalds grew exactly the same way in Australia. They opened just one or two stores in each city - nowhere near enough to meet demand - thus creating an almost artificial scarcity, which built huge buzz around the brand experience. Krispy Kreme is doing exactly the same thing here too. But when Starbucks decided to put out their shingle down-under, what did they do? Why, they immediately tried to impose themselves, with multiple store openings in every city. And in one of the stupidest moves I've ever seen, they decided that one of their very first stores would be in Lygon Street, Carlton. Now, Lygon Street may have lost much of the lustre it once had, but it still holds a place in the collective consciousness of Melburnians. To a Melbourne coffee-drinker (which is pretty much every Melburnian with a mouth) coffee was born in Lygon Street, and this big Starbucks store with its big backlit corporate signage and its carefully arranged linger-all-morning sofas... well, it was an affront to the senses. A great big middle finger, raised imperiously in the general direction of your local caf. So while Starbucks grew organically in America, in Australia it tried to impose itself upon us. It took key sites. It hung huge signs. It even tried to get us to order coffee in sizes, just like you do with popcorn at the multiplex. And with weird names (Decaf Mocha Grande anyone?) Basically, Starbucks said to us: "That's not how you drink coffee. This is how you drink coffee." For us, the Starbucks experience wasn't organic. It was implanted. We didn't discover it: it was dumped on our doorstep. The only surprise was it took head office so long to realise that this approach wouldn't work.

This is not to say that Australians are somehow impervious to the chain-store caf phenomenon. For better or worse, home-grown chains such as Hudsons and Gloria Jeans are doing quite well for themselves. But it's instructive to note that they're succeeding because they're offering a brand experience that is comfortable to Australians (no weird drink names, just two lattes and a cappuccino thanks). Perhaps the final, and most important, lesson from the Starbucks experience is this: as consumers, we ultimately have the power to kill bad products and bad brands. Don't give them your money, and eventually they'll go away.