Thursday, April 24, 2008

Coping with the growing cost of coffee

A street-level look at how Southern Californians are stretching their dollars in a sputtering economy.

Howard Schultz
Partly as a response to competition from McDonald's and 7-Eleven, Starbucks CEO Howard Schultz introduced Pike Place Roast, a drip coffee.

By Alana Semuels
Los Angeles Times Staff Writer

April 24, 2008

Economic woes are percolating down to Americans' morning brews.

Java junkies looking to pinch pennies are sipping less expensive coffee drinks, brewing at home or going cold turkey altogether. The shift is hurting both small-time coffee shops and giants of joe such as Starbucks, which said Wednesday that it expected lower second-quarter profit and full-year earnings than it originally projected because in-store sales and traffic had declined. It blamed the economy, not its prices, for the slowdown.

"These days, I'm not about to buy a $5 coffee," said Carlos Medina, a house painter from Covina who has persuaded his girlfriend to get her daily fix at McDonald's, which introduced a premium drip coffee in 2006, rather than Starbucks.

Starbucks has faced cut-rate competition in recent months from companies such as McDonald's Corp., which is rolling out a line of premium coffee drinks, and 7-Eleven Inc., which in February unveiled a multimillion-dollar advertising campaign to talk about its freshly brewed coffee. Partly as a response, Starbucks this month introduced Pike Place Roast, a drip coffee, and has distributed coupons allowing consumers to get the blend free on Wednesdays.

"The current economic climate is the weakest in our company's history," said Howard Schultz, Starbucks Corp.'s chief executive. The company said it was being hit especially hard in California and Florida, which make up nearly one-third of its U.S. retail revenue.

In a caffeine-addicted nation, there will of course always be people like Justin Rabalais, a West Hollywood bartender who still goes to Starbucks every day despite being a little low on cash these days. "I need it to wake up," he said. "They must put something in it, because nothing else works as well."

But many are like Kat Ward, a head-shot photographer in Hollywood who has restricted her Starbucks intake to twice a week, down from four or five times. Now, she buys beans at the grocery store and brews coffee at home. With her photography business slow because of a potential actors strike, she said, "It's cutback season."

Sarafina Rodriguez, assistant manager at the Groundwork coffee shop on 2nd Street downtown, said more customers are becoming their own baristas.

A pound of coffee costs $9.50 to $17.50 at her shop and yields about 40 cups. That would run you $56 at Groundwork.

Those who haven't given up the coffee-shop routine are buying less expensive drinks: drip coffee rather than a caramel macchiato, or an iced coffee instead of a frappuccino.

"Fancy coffee has had its run," said Dean Trucco, owner of Stir Crazy, a boutique coffee shop on Melrose Avenue.

Other folks are starting to buy their coffee in convenience stores, said David Portalatin, director of industry analysis at NPD Group. In the first quarter of this year, 19.2% of consumers going into convenience stores purchased coffee, up from 18.6% in the same period last year.

"As consumers are getting squeezed economically, the overall share of their wallet going into the gas tank increases, so they have to make choices about spending," Portalatin said. Consumers spent $38 billion more on gasoline in 2007 than they did the previous year, he noted.

"I'm not too picky; I buy it in gas stations now," said Garrett Wayne, a freelance artist who feels pinched because of the cost of filling his Chevy Tahoe. He was holding a tray of Starbucks drinks to take back to work but said "the only time I buy coffee like this is when work pays."

If the idea of chugging gas-station coffee instead of your usual nonfat grande honey latte with extra foam sounds like a nightmare, pity Robert Menna, who said he was going to try to cut out coffee entirely.

"It's such a bad habit," Menna said outside a Coffee Bean in Larchmont Village. "It's one of those hidden expenses you don't want to admit."