Can Starbucks Perk Back Up?

Surrounded by rivals and new coffee trends, the Seattle chain looks to stir faster growth

When Starbucks reports its fiscal fourth-quarter earnings Nov. 1, it will be the first full quarter without the involvement of founder Howard Schultz, who stepped down as chairman in June.PHOTO:GETTY IMAGES

StarbucksCorp.SBUX9.70%has been in a funk over the past 2 years,posting quarterly same-store sales growth well below its historic rate of 5%or greater in the U.S., where the brand once seemed unstoppable.

The problem? The coffee culture Starbucks helped create in America spawned all kinds of competitors on both the high and low end, leaving Starbucks in the middleand still charging premium prices.

A confluence of changes in consumer behavior has contributed to the coffee giant's slowed growth. People are increasingly consuming on the go; a trend Starbucks was way ahead on with its 2009 development of a mobile app. But now almost every coffee chain has an app.

Starbucks's app became so popular that it created another problem: people milling around the area where drinks are handed off. This scared off customers who saw the crowds from outside. Starbucks sought to fix that by adding staff, using the shops' extra espresso machines and upgrading its app to notify customers when orders are ready.

While Starbucks was busy fixing its app's popularity problem, it was also dealing with another one: a shift away from hot coffee. Starbucks was quick to respond in its shops with cold drinks, which now represent more than 50% of U.S. cafe sales. But the growing preference for cold coffee spurred a new category of canned and bottled cold brew that's widely available at retailersand another option for on-the-go consumption that's detracting from coffee shop visits.

The availability of so much coffee has taken a toll on Starbucks, particularly in the afternoon, when consumers aren't as loyal to their coffee brand as they are in the morning. Afternoon visitors tend to be those who visit Starbucks five or fewer times each month.

The company says it is trying to entice customers to return more often with new food, drink deals and the option to use its mobile app, which previously had been available only to members of the chain's loyalty program.

There's also been a gradual shift to eating more at home. Starbucks says Americans get their coffee in retail stores only 20% of the time. The company is hoping to sell more of its packaged coffee for at-home consumption through a new deal withNestleSA.

The company's recent woeshave attracted activist investor William Ackman, who recently disclosed a 1.1% stake. He said he thinks Starbucks's stock price could more than double in price over the next three years.

For now, Mr. Ackman doesn't appear to be taking an activist stance and says he thinks the changes the company is making, such asslowing store growthand expanding in China, are the right ones.

The company reports earnings for its fiscal fourth quarter on Nov. 1. It will be the first full quarter without the involvement of Howard Schultz, whostepped down as company chairman at the end of June. Some analysts expect Starbucks, which has reduced its long-term growth targets already, to do so again when it reports earnings this coming weekor at an investor meeting in Decemberas it adjusts to a new reality of being a mature brand in the hypercompetitive market it helped create.

1.Consider a market with low barriers to entry. What is the effect of above-normal economic profit by the firms in the market on entry into the market?

2.Consider a market in which innovation is readily imitated by competitors. What is the effect of a profitable innovation on imitation by competitors?

3. Interpret the meaning of the statement, "a mature brand in a hypercompetitive market."

4. Why has Starbucks reduced its long-term growth target?