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Starbucks: Bad Coffee, Bad Business

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An empire built on faux exclusivity and inflated prices.

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Editors Note: Welcome to Love It or Hate It, a regular dual-column feature that will capture the love-hate relationship America has with some of its biggest, most controversial companies. For past columns, click here. For the opposing view on Starbucks, see Starbucks: The Free Market at Its Best.

If you yearn for overpriced, sticky-sweet goo passed off as coffee, you'll love Starbucks (SBUX).

There's a lot to dislike about Starbucks. But even if you hate the company right down to the canned art on the wall, you've got to admit those businessmen in Seattle sure know how to build an empire on faux exclusivity and inflated prices.

When profits plunged 97% in the fourth quarter of 2008, optimists interpreted it as a sudden outbreak of good taste. No such luck. In the third quarter of 2009, the company earned $0.20 a share compared with a penny for the same period a year earlier.

What happened? Analysts will prattle endlessly about Starbucks closing 600 weak stores to get costs in line, improving customer experience and -- get this -- continued innovation intended to differentiate its 7,087 company-operated and 4,081 licensed stores in the US from the competition.

Don't believe it.

There's evidence that Starbucks's mass-produced ambience and its newest store "innovation" have been ripped off from independent coffee houses in the Pacific Northwest.

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Sebastian Simsch, co-owner of Seattle Coffee Works near Pike Place Market, said Starbucks employees elbowed their way into his 300-square-foot store last year to nose around.

"I thought it was funny," he told the Seattle Times. "We're this little store and I thought Starbucks didn't need to learn from me."

Starbucks's drones reportedly got so thick that Simsch called corporate headquarters to complain. The spies didn't return, even when he moved into a bigger space next door.

It seems Starbucks finally figured out that one size doesn't fit all, especially if you're catering to the froufrou set who pride themselves on their up-to-the-minute, cutting-edge look and attitudes. The chic new stores will be rebranded with individual names to create the illusion that they're locally owned. Who says you can't buy authenticity?

Of course, Starbucks has to do something to maintain its place in the coffee game. Many coffee lovers swear by Peet's Coffee & Tea (PEET), a tiny company with about 190 shops in California and half a dozen other states that traces its roots to Berkeley's gourmet ghetto. Aficionados say Peet's stuff is fresher and far superior to anything coming out of Seattle.

Starbucks also faces increased competition from unlikely blue-collar sources -- McDonald's (MCD) and Dunkin' Donuts, a company that aggressively drops its g's and adopts the semi-literate spelling of "doughnuts."

But thanks to that competition, coffee drinkers may have even more reason to hate Starbucks.
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No positions in stocks mentioned.
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