Starbucks Hopes Growth Abroad Will Save Its Bottom Line

LONDON, July 31, 2008 -- On the same day that Starbucks posted its first quarterly loss since it went public 16 years ago, its shops in Britain began offering free refills of regular coffee.

It's just one way the company is trying to hold onto European customers while fewer Americans are choosing to shell out more than $3 for gourmet coffee concoctions.

Starbuck's third-quarter earnings, which were reported Wednesday, weren't good news for the Seattle-based coffee company. It reported a net loss from April to June of $6.7 million, compared with a gain of $158 million for the same period a year ago.

Management blamed continued slow traffic and declining sales on a weak economy and poor real estate decisions. Starbucks has also been hurt by competition from chains like McDonalds and Dunkin' Donuts, which are breaking into the coffee connoisseur business.

In an attempt to cut costs and return to profit, the company is closing stores, shaking up its management team and launching a new line of nutritious smoothies.

And although Starbucks plans on closing more than 600 stores in the U.S. and more than 75 percent of its locations in Australia, business is brewing in other parts of the world.

There are plans under way to open more than 900 new shops in Europe and Asia this year.

Even though the company has been criticized for building too many stores too quickly in the United States, it still hopes that expanding abroad, where there's room to grow, may revive its sluggish performance.

In Europe there are more than 1,400 Starbucks stores – that's two-and-a-half times as many as there were just five years ago.

In one section of western London there are four Starbucks stores in a three-block radius. The newest location just opened two weeks ago.

Even the most devout java junkies are scratching their heads at the plethora of beaneries.

Lucy Benson, who sits outside her local Starbucks with her drink of choice – a grande soy mocha – said she's noticed the trend.

"They are popular, but it does seem strange that there are so many popping up," said Benson.

Bridget Bailey, a spokesperson for Starbucks based in Seattle, told ABC News.com that "international growth is a growth engine for the company."

But on Wednesday's conference call, CEO Howard Schultz told investors that the company wants "to be as cautious as possible and not over-expand at a time when the consumer may be under significant pressure."

So has the message been lost in translation?

Operating margins for overseas stores in the second quarter fell to 3.6 percent, from 5 percent the year before. And although U.S. growth is declining, the American stores still account for approximately 80 percent of Starbucks' overall revenue.

And in yesterday's conference call, Starbucks said traffic during the latest quarter softened in the United Kingdom, which is coping with its own economic downturn.

But that won't stop this caffeine-fueled behemoth. After earnings were reported yesterday, investors sent shares up 4 percent to $15.30 from their NASDAQ close the day before.