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Sat, Aug 05, 2006 - Page 10 News List

Starbucks overwhelmed by demand for cold beverages


The world's biggest coffee chain, Starbucks, is struggling to cope with long lines of impatient customers seeking iced frappuccinos to provide relief from record heat on both sides of the Atlantic.

In a rare financial setback for the rapidly growing company, Starbucks announced that its like-for-like sales rose only 4 percent last month -- lower than in the preceding nine months and below its trend of a 6 percent increase over the year.

The shortfall sent Starbucks shares down by 11 percent on NASDAQ on Thursday. Investors are accustomed to rapid expansion in profits from the company which has 11,784 stores worldwide.

Starbucks chief executive Jim Donald said the company's iced, blended drinks take longer to make than its traditional espresso- based coffees, causing frustration and prompting some caffeine-seekers to go elsewhere.

"Customers are embracing these cold blended beverages as a morning staple to a degree that we had not anticipated," Donald said.

"We have recognized the opportunity to refine and improve our cold beverage station to make drink preparation more efficient and improve service over time but, in retrospect, we did not move aggressively enough," he said.

Donald said the company was working to solve the problem by having more baristas work the morning peak hours, among other possible changes, including reducing the time it takes to blend cold drinks.

He conceded that customers were not proving to be very patient.

"We believe we are losing some espresso business due to longer than normal wait times in both cafes and drive-thrus during peak morning hours," he said.

In spite of the problem, Starbucks revenue leapt 25 percent to US$2 billion for the three months to last month as new stores pushed up sales. Profits grew by 16 percent to US$145 million.

The company has disclosed an even more aggressive openings policy with 2,000 new outlets planned this year, rather than the previous 1,800. India and Russia are likely to see their first Starbucks next year.

Analysts suggested there could be more to the shortfall than booming frappuccino sales.

"Is this a strictly one or two-month problem because of the cold blended beverages or is it something, which is a macroeconomic pressure ... has consumer spending slowed and that's hurting them as well?" Don Gher of Coldstream Capital Management asked.

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