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Originally published Sunday, May 17, 2009 at 12:00 AM

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On the Economy

What if Starbucks is an artifact of an economy that's not coming back?

At Starbucks, the days of easy growth are long past and this icon of Seattle is tarnished by brutal competition, a nose dive in profitability and no clear path to regaining its groove.

Special to The Seattle Times

Who knows what nightmares haunt the makers of a dream brand in trouble?

Maybe trouble is too strong a word to describe Starbucks' situation. But the days of easy growth are long past and this icon of Seattle is tarnished by brutal competition, a nose dive in profitability and no clear path to regaining its groove.

Maybe the worst nightmare is this: What if Starbucks is an artifact of an economy that's not coming back? A time of rising, if fleeting, American affluence as we moved from dot-coms and telecoms, to day trading and house flipping, all based on the biggest run-up of debt in the history of the world. For this venti, triple-shot America, it might have been the quintessential bubble drink.

The stakes are large for Seattle. This is a major corporate asset employing some 3,000 at its headquarters, drawing talent and capital here. It's also that most valuable prize for any city: An innovative small company that grew into a giant and remained independent and locally based.

Sometimes nightmares don't come true. Although Starbucks suffered a 77 percent drop in its fiscal second-quarter net income, it actually beat analyst's expectations slightly. Its shares have been generally rising since March and have outperformed the Standard & Poor's 500 Index. These are no small victories for a public company that is 63 percent owned by fickle institutional investors.

Still, same-store sales remain in negative territory, a critical measure for any retailer. For two years, it has underperformed the Dow Jones Restaurants and Bars Index (yes, there is one).

And for all his confident talk to analysts about new initiatives, Chief Executive Howard Schultz led off by emphasizing $500 million in cost reductions for this fiscal year and a commitment to more discipline. Those are the defensive measures of a company no longer young and sexy.

Indeed, Schultz may have inadvertently let the master-marketer mask slip when he spoke of the continued relevance of its brand. If you have to say it ...

The company's troubles before the recession are well-known, chiefly overexpansion and the need to make the transition from being a young growth stock. Yet it did not expand merely out of corporate hubris.

Wall Street demands high growth, and this was the way Starbucks could appear to deliver rising profit margins. (It went public in 1992, with about 165 stores.) And Wall Street might not be happy if Starbucks aged gracefully into a value stock.

The mythmaking surrounding such a successful company is also unavoidable. Starbucks was set on a careful course by Schultz, who then stepped aside as CEO, only to return as savior in 2008. It prompts comparisons with Apple's Steve Jobs. Schultz isn't the founder of Starbucks, but he was in essence the founder of Starbucks as most Americans know it.

Yet Jobs revived Apple with such innovations as iTunes and the iPhone. Schultz, who never really left and is said to have exercised considerable influence even as chairman, ran head-on into the worst recession since the Great Depression.

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It caught his company not even halfway into a turnaround. And for all his sniffing at the idea that McDonald's could be compared with his premium brand, the House of Ronald is indeed a clear and present danger. Go to the Seattle Center Mickey D's and the drive-through has a recorded message hyping espresso drinks. Right here in our house.

Starbucks remains powerful. It appears to have managed its debt well. It's not the General Motors of beans. Nobody appears to be stalking one of the region's last remaining major headquarters companies, although last year the Columbian National Coffee Growers Federation called for an alliance of producer nations to make a bid for Starbucks.

Seattleites can be especially jaded, enjoying so many local java nests. But in many cities, Starbucks virtually invented the third space, the popular creative-class haven between work and home. It manages to sell wildly in the humid South and the torrid Southwest.

But you have to wonder.

Schultz is a marketer, and he may have grown into a disciplined manager. In another environment, he might have had time to cut stores, tinker with the menu, find a way to fend off McDonald's and develop new avenues to grow profits. Unfortunately, that's not the one we're in now, with a historic cutback in consumer spending, massive unemployment and millions more worrying about their jobs.

In that environment, will people still be willing to spend for Starbucks? Will what Schultz calls the emotional connection and reservoir of trust built between the company and customers hold up?

Looking back, Starbucks' fall was a leading indicator of the trouble massing across the land. Now the question becomes whether the America that emerges from the financial shock of the Great Disruption will have the appetite, and the cash, to fund Starbucks' hopes.

And another one: How long will Wall Street just wait and see? However the recession has changed America, Wall Street is still in a pre-2007 mindset, and it may demand growth that Starbucks simply can't deliver anymore.

Jon Talton can be reached at jtalton@seattletimes.com

Copyright © 2009 The Seattle Times Company

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About On the Economy

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@yahoo.com

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