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Starbucks, the former darling of Wall Street, earned $50M in operating income this fourth quarter, down from $150M a year earlier. However despite closing 600 stores, the revenue increased by $100, from $2.4B to $2.5B.

They have laid the problem at the feet of an economic slowdown and belt tightening has probably contributed to this drop. However what would be interesting is the impact of dramatically improving competition has on the US market.

Starbucks has always struggled in markets that already had a strong coffee presence. In New Zealand and Australia there was a strong cafe society already, so Starbucks continues to struggle to compete. In Canada they have Second Cup, a worthy competititor, in Madrid the local coffee is amazing, and in Italy they don’t even try to enter the market.

In the USA, Macdonalds and Dunkin Donuts used to have coffee that tasted like warmed over dirt. Recently they have come up with products that are half way decent, askewing the cheapest Fodgers they can find for more full flavored (read more expensive) beans. Although MacCafe has been around for 10 years in other countries, they are now popping up around the US, competing with Starbucks for that quick cup of coffee.

The $5 coffee is quickly becoming a treat rather than a staple. It would be intersting to see how the mix of drinks are changing and how much of their revenue has moved from $5 coffee to $2 coffee. This number, average revenue per customer or transaction size is probably more important than the overall revenue number because it indicates the longer term health of the company along with foot traffic.

If these numbers continue to decline then Starbucks neds to look for something else to keep the punters coming back.

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