Drink up (or down?)

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Published: July 14,2008

After emerging during the economic boom of the 1990s and the early part of this decade, the coffee industry has ground to a halt.

In two separate announcements this month, Starbucks, the market leader, has unveiled plans to close a total of 600 of its 11,000 locations in the U.S. by the first few months of 2009.

“In January, we committed to transforming the company through a series of critical and strategic initiatives to improve the current state of our U.S. business and build the business for the long term,” said Howard Schultz, chairman, president and CEO, in a news release announcing the first round of closings. Most of the stores scheduled were opened during fiscal year 2006 and were located in every major market in the country, the release said. In a message posted on the company’s website July 8, Schultz said a complete list of stores affected would be posted in mid-July. Schultz blames poor real estate decisions and a struggling economy as the reason behind the move.

Starbucks stores sprang up everywhere the past 15 years, before soaring fuel costs made the majority of consumers re-evaluate their spending habits. In some cities the coffee houses were as prevalent as McDonald’s restaurants. In 2006, pop-culture comedian Lewis Black did an entire routine on two Starbucks in Houston, Texas, that were literally across the street from one another.

So with all the difficulty the national coffee economy is experiencing, it would follow that Jackson’s most popular coffee brewer, Cups, is in the same boat.

“Actually, it’s not that bad,” said Cups owner Dennis Cameron, who oversees seven locations, six of which are in the Jackson metro area. The other is in Magee. Three additional locations in Flowood, Forest and Ridgeland are scheduled for opening, and Cameron says more are on the horizon.

“Our actual customer count is up and we’re slightly ahead of where we were this time last year.”

The reason for that, Cameron says, is Starbucks has a million-dollar mandate each of its stores must meet. “Where in the South are you going to find a coffee store that will perform like that?” Cameron asks. “Probably nowhere.”

Cameron concedes that his stores are short of projections made this time last year. Cups has had to raise prices of some of its popular specialty drinks, but the price of coffee beans, which have gone up at the wholesale level, remain the same at Cups locations.

“All the costs are going up and we’re struggling to maintain service without our prices going up,” Cameron said. “If things continue they way they are, we may have to raise the price on beans. But we’re going to hold on as long as we can. Overall, we can’t complain.”

Because Starbucks set such a high bar for its stores, it set a lot of them up for failure. And when the company saturated markets, inevitably there would be a cannibalistic effect, with some Starbucks raking away from profits from its sister locations.

“But we’re geared to a lower volume than they are,” Cameron said. “We’ve learned how to adjust. (Starbucks) came in during the coffee heyday.”

And setting attainable financial goals is important for the overall health of a coffee house, Cameron reiterates. Even though the profit margin of a cup of coffee is high, “you have to sell an awful lot of them to do well,” Cameron said.

With Starbucks closing so many locations, it could very well benefit some of its competitors. The demand for coffee is not going away, but some of the supply is.

“I don’t think it’s going to hurt the small guys,” Cameron says. “In fact, it might help some. Starbucks has established a certain clientele and even when they’re gone, those people are still going to want coffee.”

Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .

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