Starbucks aims for a bigger hit

COFFEE BREAK: Craig Neal, Starbucks NZ general manager, enjoying a brew
COFFEE BREAK: Craig Neal, Starbucks NZ general manager, enjoying a brew

Starbucks is on a coffee-fuelled mission to change customer perceptions of the cafe chain, and while it is starting to make progress, the New Zealand branch of the multinational is not out of the woods yet.

Starbucks was launched in New Zealand in 1998 by listed company Restaurant Brands, which owns the national master franchise rights for Starbucks, KFC, Pizza Hut and Carl's Jr.

Craig Neal, Starbucks New Zealand general manager, said when the brand launched it was "quite cool" to have a takeaway coffee cup in hand but the New Zealand market then changed. Many New Zealanders moved away from large, milky coffees served by chains to preferring lattes in a glass and flat whites from independent cafes that roasted their own beans. The trend was similar in Australia.

However, New Zealanders are still drinking about the same amount of hot drinks as they did five years ago. According to Roy Morgan consumer research, 57 per cent of New Zealanders said they had visited a cafe for a coffee or tea in a three-month period. Neal wouldn't say what market share Starbucks had.

People's perceptions that Starbucks did not make good coffee hit the company in the pocket. For the financial year ending February 27, 2012, Starbucks' total sales were down 9.8 per cent.

In order to claw its way back, the coffee chain knew radical change was required and it started on that in mid-2012, altering its food and beverage offering, closing poor-performing stores and realigning menu prices with the rest of the market's.

"Starbucks was regarded as being expensive, and it certainly was," Neal said. "It isn't now."

The chain dropped its food and beverage prices by an average 10 per cent, and by as much as 15 per cent on some drinks, he said. That meant all small-sized hot drinks cost less than $4 and small cold drinks less than $5.

Neal claims an increase in transactions per customer has more than compensated for the initial margin drop of five per cent when it increased espresso shots in some coffees and dropped prices.

The chain's financial results show it has been a slow turnaround and there is a way to go before it can claim success.

In the financial year to February 28, 2013, Starbucks reported a 5.1 per cent slump in sales to $25.1 million and its same-store sales fell 1.7 per cent. Then, earlier this month, Starbucks reported full-year sales to February 24, 2014, of $25m, a decrease of 0.3 per cent. However, same-store sales for the year were up 5.7 per cent, and there was further growth in the fourth quarter to February 24, with same-store sales up an encouraging 7.6 per cent.

Neal said while results were improving, the brand still needed to gain more traction.

"We need to take the work of last year in particular and embed the changes."

Starbucks has long been viewed as the weakest link in the Restaurant Brands portfolio. Investors were uncertain about the business's future and Restaurant Brands is still keen on a potential sale at the right price. In the last financial year, while Starbucks worked on its turnaround, KFC increased sales 0.3 per cent to $237m, with same-store sales up 1 per cent and Pizza Hut lifted sales to $47.9m with same-store sales up 21.2 per cent.

Starbucks closed six stores during the 2013 financial year, due to a range of factors including poor performance, the Christchurch earthquakes and wrong location. Some 27 stores remain nationwide, and Neal said he wanted to focus on cementing changes before considering opening new ones in the three main centres.

What has worked under the brand transformation has been improved food sales, up three to four per cent since it started offering smaller portions to complement the coffee rather than full meals.

"We will focus on Starbuck's strengths and not try to be everything to everyone."

It has also introduced smaller coffee options, adding a shot to lattes and flat whites to suit local tastes, while retaining the classic sizes and flavours that appeal to the tourist market.

Neal said it was a hard job convincing consumers that Starbucks served good coffee, particularly in Wellington, which he described as the "heart of coffee snobbery".

But Starbucks had three Wellington stores and its Lambton Quay outlet had one of the company's highest volumes, with the best customer feedback.

Wellington's Midnight Espresso cafe owner Hamish McIntyre said Kiwis preferred independent or one-off cafes because they were used to them, although overseas a lot of these establishments had been bought out by bigger chains. Local competition was good, he said, because it brought more people to an area, and he believes the overall pie is growing, with more Kiwis drinking coffee.

Part of Starbucks' problem has been breaking down Kiwis' negative perceptions about it being part of a multinational chain. The publicly listed Starbucks was founded with one shop in 1971 in Seattle's historic Pike Place Market and now has around 19,000 stores in 60 countries.

Sunday Star Times