Wake Up And Smell The Coffee

For those of us who have never really seen the attraction of sour tasting coffee, it comes as no great surprise that the recession caught up with Starbucks as their fourth quarter profits 'Hit The Wall'. It's profits in the quarter to 28 September were just $5.4m worldwide down $158.5m from the same period last year on a 3% quarterly rise in revenue to $2.5bn while revenue dropped 8% in same stores from a year earlier.

Is The Coffee Shop Culture Over?

It could be argued that in recessionary times it's those little luxuries that go first, like the coffee on the way to work or at elevenses. If that's the case then this news cannot be good for the High Streets bristling with similar offerings like Costa and Nero for example. Starbucks point out that a good deal of the profit collapse was $105m spent in closing down unprofitable stores - 600 of them in the USA and 61 of them in Australia shedding over 1,000 jobs.

For us in the UK, it's a key indicator that people are watching the pennies. In the same breath, it was announced by the Royal Society for Chartered Surveyors that house sales had slumped to a 30 year low and a report from the British Retail Consortium stated UK retail sales have fallen over a 12-month-period for the first time in more than three years; total sales in October were 0.1% lower than the same month last year.

Gloom & Doom

As we collectively tighten our belts and head toward the worst retail Christmas sales for years, the outcome will be that the lower paid service jobs associated with 'luxury spending' on bespoke coffee and gifts will be lost first. While that seems a minor cut as many of these jobs may get paid the minimum wage but they attract the same state benefits for those who join the unemployment queue. Again, a side concern will be how many of those workers came from abroad and have not long been part of the tax system yet may well now pose a burden?

As tax revenues drop when unemployment rises and consequently there is a heavier burden of tax on those in jobs to pay for it, a vicious spiral begins. Pundits have predicted that in this recession unemployment could rise swiftly to 3m, that's just less than double where we are today - add that to the long term claiming benefits unable to work due to disability and we are well over 4m out of work.

Inflation has risen to 5.2% although with producer prices falling rapidly and oil prices falling, it is assumed that prices will drop particularly as interest rates are so low at 3%. But that's cold comfort for all of us who have seen weekly food bills rise sharply and the price of energy still at high levels, so it will take a while to filter through.

Manufacturing shrank in October for the sixth month in a row as pressure builds in the economy. It is little wonder that interest rates were slashed so dramatically - it was the Bank of England's equivalent of defibrillation on the economy.

But how many jolts will it take? And how long to recover afterwards? And can we afford the 'electricity' to do it?

It's a small parallel, but when the South Sea Bubble popped, coffee houses were at their peak in British cities. It took them an awful long time to be so popular again. Perhaps history is repeating itself.