* Eyeing European suburbs, more profitable drive-thrus
* Targeting EMEA operating margin of 15 pct over time
By Lisa Baertlein
SEATTLE, March 27 Starbucks Corp hopes
to brew up a European business renaissance after reviving its
operations at home.
The world's biggest coffee shop chain dominates in the
United States but has been just another player in Europe's famed
cafe culture. It wants to change that.
The United States accounts for most of Starbucks' revenue
and operating profit; the region that includes Europe, the
Middle East and Asia (EMEA) kicks in about 10 percent of revenue
and just 2 percent of operating profit.
And though EMEA brings in about twice as much revenue as
Asia, it lags that region in operating profit because rent,
labor and other costs are higher.
Starbucks recently said it had fallen short of its targets
in Europe, where austerity measures aimed at reducing government
debt are weighing on consumer demand in some countries. The
company said it had taken steps to improve results in that
market, which executives say has suffered from a lack of
Starbucks is stealing a page from its successful U.S.
"transformation agenda" as it works toward a long-term goal of
delivering EMEA operating margin of 15 percent, versus 6.5
percent in the latest quarter.
Leading the charge is Michelle Gass, a veteran Starbucks
executive who was a leader in the U.S. turnaround and is known
for championing the company's blockbuster Frappuccino drinks.
"Our business in Europe today is quite reminiscent of what
we went through in the U.S. back in 2008 -- a tough economy,
record unemployment, fierce competition and our own self-induced
mistakes," Gass, president of Starbucks Europe, Middle East and
Africa, said at the company's shareholder meeting last week.
When Gass arrived in London about six months ago, she got an
earful -- from everyone from cabbies to her dentist -- about
weak coffee and too-milky lattes.
"Europe is espresso territory. To compete, we must
absolutely deliver the best latte on the High Street," she said,
referring to the European equivalent of Main Street.
Starbucks has retrained its European employees and is
finding ways to squeeze out unnecessary costs like wasted milk,
as it did in the United States.
It is also making market-by-market adjustments aimed at
boosting results and paying for further improvements. A little
over a week ago it changed the recipe of its small lattes in the
UK to include two shots of espresso rather than one, which is
the norm at Starbucks cafes elsewhere. Gass told Reuters that
selling more lattes will more than offset the cost of adding the
extra espresso shot.
Starbucks also has introduced a second espresso roast in
France, another company first.
Food is a big part of the plan, and localized menu options
include "bacon buttie" sandwiches in the UK and foie gras
sandwiches in France.
"At Starbucks, when we take care of our own issues, the
external environment doesn't matter," Gass told Reuters. "We've
broken the cycle in the U.S. and I'm convinced we'll break the
cycle as well" in Europe.
FROM VALUE TO DRIVE-THRUS
In the quarter ended Jan. 1, Starbucks' EMEA region reported
a sales gain of 2 percent at coffee shops open at least 13
months -- respectable considering the fallout from Europe's debt
crisis, but tepid compared with Starbucks' U.S. gain of 9
Gass declined to give a country-by-country breakdown but
said sales at established shops in the UK -- Starbucks' largest
market in Europe with 700 cafes -- were up during the latest
Starbucks opened its first UK cafe in 1998. Its top
competitors there are Whitbread's Costa Coffee, Caffe
Nero, and a host of independent operators, according to market
research firm Mintel.
Consumers in Germany, Starbucks' second-biggest European
market, are sensitive to economic jitters, but countries like
Russia and Turkey are posting strong results, she said.
In the depths of the U.S. recession, Starbucks offered
discounted coffee-and-food combos for the first time in its
history. It also introduced Starbucks Rewards, a loyalty program
that gives customers a free drink with every 15 purchased.
It rolled out Starbucks Rewards in the UK in January and
plans to introduce the program in Germany this year.
The company, which is reporting record sales and earnings,
has temporarily cut the price of small lattes in Germany and has
permanently slashed the price of small cappuccinos in Greece by
1 euro to 2.5 euros.
The turnaround strategy worked in the United States and "it
can work (in the EMEA region) as well," said Lazard Capital
Markets analyst Matthew DiFrisco.
Starbucks closed nearly 1,000 cafes around the globe as part
of its restructuring. Gass said there are no plans for more
Instead, the company's Europe strategy involves renovations
and expanding beyond High Street and its expensive rents.
After giving its cafe at Berlin's Brandenburg Gate a
makeover, Starbucks plans to spruce up 100 stores in the UK --
70 of them high-profile cafes in London that will be ready in
time for the summer Olympics.
The company is also eyeing Europe's busy suburbs, where
rents are less pricey. Plans there include building
American-style drive-thrus, which boast healthy profits.
Over the next five years, Starbucks plans to add 200
drive-thrus to the dozen or so it now has in the UK.
About 40 percent of Starbucks' U.S. cafes are drive-thrus.