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In Ten Years: Starbucks

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Creating an aura of exclusivity - and charging handsomely for it.

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10 Companies in 10 Years Starbucks (SBUX) started as a niche player in a fading sector. It prospered by making its customers feel elite - and charging a premium for the privilege. The next 10 years will see the creation of new elites, along with a few twists on the company's familiar theme.

It was a great idea: Think Pottery Barn with an espresso machine. After spectacular growth, the café craze came to an end in 2008, when Starbucks was forced to close about 600 outlets. Part of the problem was acute overbuilding - in many upscale neighborhoods, competing Starbucks sprang up within a dead-cat's toss of each other.

The economic downturn didn't help, either. For the first time, many consumers questioned the wisdom of spending $5 or more on their morning java jolt. This put Starbucks in a tough spot, and the outlook for domestic growth was bleak.

Here's why: Compared with Europeans, Americans aren't big coffee drinkers, now consuming about 9.2 pounds per year compared with 25.1 pounds a year in Finland, 19.8 pounds in Norway and 14.5 pounds in Germany.

This means Starbucks will expand aggressively overseas when the global economy rebounds. In the US, Starbucks will plump profits by boosting prices and trying to get customers to linger longer and buy more than coffee.

Taking a cue from the airlines, Starbucks will set aside a corner of each store for frequent slurpers, maybe on a platform with plank flooring. A smiling barista will graciously lift the rope to allow the favored few to pass into the realm of lightning quick Internet connections, high-backed leather chairs and brass bank lamps with green shades set on polished oak tables. You can even rent a chessboard. And don't forget, Mozart fans, that Starbucks is a proud sponsor of the Fresno Symphony.

A frequent buyer card is the first step in admission to the new Starbucks elite. Available only after payment of a hefty annual fee, the card will be essential to the new aura of exclusivity. The company's "golden cup" customers will be its golden goose: The favored few who can never overstay their welcome - because they're such big spenders.

Starbucks found that even its more aggressively egalitarian customers enjoyed being treated like an elite. This will lead to differential pricing on coffee - not by size, but by ingredients.

No one behind the velvet rope will want to be seen drinking the proletarian swill. Color-coded cups will separate the elite from the hoi-polloi, creating a new category of aspirational striving: Cup-color envy. The cost of the extra ingredients will be minimal, but the markup will be huge, much like the difference between a Ford and a Mercury.

Starbucks will supplement its frou-frou coffee with a "good for you" menu that includes mineral water, fruit and vegetable juices as well as cucumber sandwiches on wholegrain bread. A lucky few will be able to afford alfalfa sprouts. The company's initial attempt at made-to-order sandwiches flopped, but the next crop will be crafted in the rainforest and wrapped in biodegradable plastic.

Between crunches of cucumber sandwiches, a few devoted customers will begin to wonder where the conversation went. Starbucks will astound Wall Street analysts by selling all-natural vowels, making conversation possible once again.
No positions in stocks mentioned.
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