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Starbucks steels against economic 'tailspin'

Starbucks chief executive Howard Schultz says the chain will offer discounts and new drinks to lure back customers. Starbucks chief executive Howard Schultz says the chain will offer discounts and new drinks to lure back customers. (Ted S. Warren/Associated Press)
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Bloomberg News / March 20, 2008

NEW YORK - Starbucks Corp. chief executive Howard Schultz said the US economy is in a "tailspin" and the coffee-shop chain will offer discounts and new drinks to lure back customers.

Starbucks, the world's largest chain of coffee shops, also said yesterday it would acquire Coffee Equipment Co., the maker of $11,000 Clover machines that brew one cup of coffee at a time. Financial terms weren't disclosed.

"You have an economy that really is in a tailspin, and many would say the consumer is in a recession," Schultz told more than 6,000 shareholders at the annual meeting in Seattle. "We are dealing with things that we haven't seen before in terms of how people are responding to how tough it is."

Schultz, who built the Seattle-based coffee chain into a corporation with almost 16,000 cafes worldwide, is counting on new styles of coffee and a slowdown in store openings to halt two quarters of customer declines. First-quarter revenue rose 17 percent, the smallest gain in two years, as consumers cut spending and McDonald's Corp. promoted lattes and cappuccinos.

Starbucks will introduce a coffee blend and will add an automated espresso machine, which uses freshly ground beans, at most locations in the next few years.

The chain will also introduce a rewards program in mid-April, Schultz said. Customers will be able to get syrup or milk alternatives at no extra charge for their drinks, or free refills on brewed coffee, if they use their Starbucks card.

"Register your card and we will customize your beverage basically for free," Schultz said.

Starbucks fell 74 cents, or 4.1 percent, to $17.50 in Nasdaq Stock Market composite trading. The stock is trading near its lowest level in more than four years and is worth half what it was at the beginning of 2007.

Starbucks reported its first quarterly drop in US customer visits last year amid tightened spending, rising gasoline prices, and the deepest housing slump in a quarter century.

"We began to see a slowdown in traffic that we believed was economy-driven," Schultz said yesterday. "As we look at the balance of calendar '08, I don't see any reason to believe that we're going to see a change."

After taking over as CEO for the second time on Jan. 7, Schultz, 54, said Starbucks' problems were "self-induced" and vowed to introduce more innovative products and clean up aging stores.

Starbucks opened its first store in 1971 in Seattle's Pike Place Market as a place to sell beans and coffee-making equipment.

The company was named for the coffee-drinking first mate in the novel "Moby Dick."

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