Starbucks' customer drop-off is a warning to other chains to anticipate bad news

Nation's Restaurant News, Dec 10, 2007 by Gregg Cebrzynski

A decline in customer traffic is unfortunate for any restaurant chain. When it happens to Starbucks, however, it's a signal that all chains should re-examine their positions in the market and whether they're taking steps to secure their existing customer base and attract new consumers.

Starbucks lost customers for the first time during its fourth quarter, which ended in September. Year-over-year traffic dropped 1 percent, although same-store sales were up 4 percent. Bear in mind that the same-store sales figures were affected by two price increases during the company's fiscal year, the latest a 9-cent increase in July.

Did Starbucks grow too quickly and forget that it started out as a neighborhood coffee-house, as founder Howard Schultz speculated could happen earlier this year? Company officials don't believe growth is an issue, but they will reduce the number of planned openings this fiscal year. The decrease in customer traffic, however, indicates that consumers don't have the same emotional bond with Starbucks that they once did.

To remedy that, the company plans to improve its service, said Jim Donald, Starbucks' president and chief executive. Field managers will spend more time in the stores to make sure service really does get better, and new baristas will receive additional training.

Starbucks, which since its founding has relied on word-of-mouth as its primary marketing tool, launched its first national TV campaign to defend its ownership of the coffee segment from encroachment by McDonald's, Dunkin' Donuts and other chains.

Promises to improve service, reduce growth and expand marketing efforts are the typical responses to a decline in customer traffic. Most chains take these steps. It's the economic context in which Starbucks was forced to act that deserves close attention.

"It is apparent," Donald said, "that our customers are feeling the impact of this economic slowdown."

That's why Starbucks' customer decline has greater significance for the restaurant industry than it appears at first glance. If a brand as strong as Starbucks, which was once invulnerable to bad economic news, can lose customers, restaurant chains that don't share the same cachet are just as vulnerable, if they're not in an even weaker position.

Many signs are pointing to dark days ahead for the restaurant industry, which is not to say that the current days ate notably brighter.

Consumers are wary of rising gas prices, declining home values, foreclosures, the weak dollar, tighter credit and expected increases in energy bills this winter. The scenario is what David M. Jones Sr., president and chief executive at Denver-based DMJ Advisors, described to the Associated Press as "a perfect storm of negative factors affecting the consumer tight now."

He's right on the mark with that observation. Consumer confidence in November reached its lowest level in two years, according to the Consumer Attitudes and Spending by Household Index, a monthly national survey conducted by the Toronto-based RBC Capital Markets securities firm.

The result is that consumers are giving deep and hard consideration to how they spend their money, and restaurants are slowly creeping out of their thoughts.

Fifty-nine percent of consumers plan to eat out less during the next three months, according to RBC, and only 20 percent plan to order appetizers, desserts or higher-priced entrees. That can kick check averages down the stairs.

Those figures show that more consumers plan to cut back on eating since an RBC survey in August. when 54 percent said they'd eat out less. Forty-three percent of consumers said they already are eating out less than they did six months ago. That's up from the 39 percent of respondents to the August survey who said they already scale back on restaurant dining.

Restaurant chains ought to pay attention to these worrisome statistics and, especially now, pay even more attention to the desires of their customers. That's one of the lessons to be learned from Starbucks' situation. The chain seems to have let its attention wander, otherwise it would not now be taking steps to improve operations to regain the customer traffic it lost.

Sad to say, Starbucks should have anticipated the shifting competitive landscape in the coffee segment. During the past several years a growing number of chains have improved their coffee products and promoted them as premium products at a cheaper price. Starbucks certainly watched the competition grow, but as developments have shown, the chain fell into the unenviable position of having to react to a downturn in customer traffic instead of acting beforehand to prevent it.

That's another lesson restaurant chains can learn. In light of consumer reluctance to eat out, restaurants that do an even better job of anticipating the dessert, beverage, appetizer or entree that consumers will crave next will have a stronger foundation on which to build sales, or at the very least maintain the sales they have.

Equally as important, restaurants should not lose sight of their brand heritage, which is the key to building customer relationships for the future. Customers flee when a brand forsakes the values it has always championed. Competition in every segment of foodservice is as tough as it's ever been. but the pressure on consumers to cut back on spending and to choose carefully where to spend their money is greater than it has been in years.