Region perks up Starbucks as West burnt by crisis

ABU DHABI // For the budget-conscious, Dh18 can go a long way. It can buy you an entire meal - drink included - from McDonald's, or a sack of rice or a fresh chicken at the supermarket. At Starbucks, it just about covers a cup of coffee. Perhaps it is no surprise, then, that consumers are more likely to opt for a McDonald's Happy Meal than a Starbucks latte when feeling the pinch of the credit crunch gripping much of the world. Starbucks Corp announced yesterday its plans to cut new international coffee shops after posting a steeper-than-expected decline for its fourth-quarter profit.

Shares fell by nearly 3 per cent after the company revealed that it might hit the low end of, or completely miss, its earnings forecast. Net profit for the fourth quarter ending on Sept 28 dropped 97 per cent to US$5.4 million (Dh19.8m) after taking account of charges of $105.1m arising from restructuring and turnaround efforts. Some customers say the news comes as little surprise. "Their coffee is expensive and people are trying to save money these days," said Evgeny Gruzdev, a native of Russia who lives in Abu Dhabi. "Maybe if they drop some of their prices, they will not do so badly."

This is quite contrary to the positive results released yesterday by McDonald's, the world's largest restaurant company, which is said by analysts to offer some relief to consumers burdened by soaring food prices and higher unemployment levels. Global sales at restaurants that have been open for at least 13 months climbed 8.2 per cent, led by Europe's gain of 9.8 per cent compared with a year earlier. On that basis US sales increased 5.3 per cent.

Despite its disappointing performance in the West, Starbucks is part of the success story that is the Middle East retail sector. Many western retailers are setting their sights on the more prosperous emerging markets of the Middle East and Asia to make up for losses at home. The Kuwait-based retailer Alshaya Group, the holding company for Starbucks in the region, plans to increase its network of stores from 1,400 to more than 3,000 by 2011. That network includes the Starbucks chain, its continued success in the region contrasting with shortcomings elsewhere; the coffee giant has already announced the closure of 600 outlets in the United States, and most of its cafes in Australia.

"If you look at the life cycle of any brand, you have birth, growth, maturity and decline, so the big question is how do you stop decline or increase the time span for maturity," said Naeem Ghafoor, chief executive of Skyline Retail Services consultancy. "You must be innovative, come up with new product lines, go to new markets - so expand here as Starbucks is doing, expand in Russia, focus in those markets since stores in the US and UK are suffering."

If the boisterous retail industry is indicative of anything, it is that consumers in the Gulf continue to shrug off news of the financial crisis afflicting many western economies. Many believe that for the time being, Starbucks - and the rest of life's little luxuries - are here to stay. Another Abu Dhabi resident, Janette Bruce, said as she sipped her cappuccino: "I don't even think it is that overpriced."