Hubble Bubble

The year is 1720 and we are in a coffee shop off Exchange Alley.

"Can I interest you in in a joint stock offering in a discount voucher scheme?" says the nice jobber sipping a latte.

"What's a discount voucher scheme?" we ask.

"It's an enterprise so secret and mystifying yet exciting that I cannot tell you but if you miss out on this IPO you will look stupid," says the jobber.

"Count me in then, although it sounds awfully familiar," we say.

It sounds really stupid but in 1720 a few people caught a bath in what came to be known as The South Sea Bubble. Even intelligent people like Sir Isaac Newton who knew a thing or two about making money as he ran the Mint lost money. The organisers of the company, by some spooky coincidence all sold at the top and made literally millions.

As Alexander Pope put it at the time:

A bubble is blown up in air,
On which fine prospects do appear;
The bubble breaks, the prospect's lost,
Yet some bubble pay the cost.
Hubble Bubble all is smoke,
Hubble Bubble, all is broke,
Farewell your houses, lands and flocks,
For all you have is now in stocks.

This resonates to the modern day. Not that we learn any as we went through Web 1.0 and we even have been through the worst financial crisis since the Depression (by the way, we are by no means clear of that after papering over the cracks, Greece might yet pull us all back in), now we are web x.0 and we are talking up the valuations yet again.

The odd thing is this about things like Facebook. It's run by a loathable person about who there is more than a modicum of doubt about his provenance on the idea, in order to get at the 'riches' trapped within they will probably have to break data privacy laws, and the whole fad is getting passé as new and better networks emerge. But Facebook hangs on hoping for yet bigger valuations before going public. In their wake comes Groupon with a $20 billion tag that only has 481 competitors, two of which are Amazon and Google, and with a business model that you and I could copy tomorrow. And there's plenty more on the way.

The bubble is being inflated. Alexander Pope would be as wise today as he was all those years ago. People will make and lose fortunes, but when the dust has settled we will all marvel over the really trivial ideas all of these things were.

Just like the fever pitch in Exchange Alley in 1720.

Hold The Latte!

I have blogged before about the collapse of the Coffee Shop culture around the time of the South Sea Bubble and how last quarter we saw history begin to repeat itself with the Starbucks results. Well, I make no apology for resurrecting the story as Starbucks have just announced their latest figures and the froth is certainly missing let alone the chocolate sprinkle.

Sour Coffee

I have never seen the attraction of the Starbucks brand of coffee. The little shops are nice with their comfy couches but often there is no room to sit down as that sort of seating is limited but it's the coffee I didn't like. It was either overly sour or had silly little seasonal flavours which made me gag. We once bought a pack of their filtered coffee beans and I would never do so again, always preferring a Coffee Direct as being at least equal in quality and a far cheaper product.

But it has become a way of life for lots of people and has sprung a new Starbucks-speak language to describe what people drink - 'Tall, skinny latte to go, please' is just a simple statement, they can be far more complicated.

I had a VP of Sales once who would periodically drop in from the US and he was quirky to say the least but he was the branding executive's dream. He would not go to any restaurant or hotel that was not a recognisable US chain, so he stayed at an expensive London Marriott, ate at McDonalds and drank Starbucks coffee. Our trip to Sophia Antipolis was a nightmare and culminated with me threatening to stop the taxi and make him walk when he complained about the superb French coffee we had drank at a curbside cafe because it did not serve vanilla essence to mix in.

But that was the Starbucks magic. It hooked a lot of people into buying £3-5 buckets of sour coffee with all imaginable options of their choice - everyday.

Changing Times

This time round, things got considerably worse for Starbucks. They announced a 69% dive in profits and that they will cut about 6,700 jobs and 300 stores, making only $64m profit in the quarter to 31 December 2008 down from $208m a year ago.

Around two thirds of the stores to close will be on home turf USA which is a double blow on top of the 660 stores shut there in 2008. Hailing from Seattle, this is a body blow to the West Coast city as two of its other flagship businesses, Boeing and Microsoft, also announced lay offs in the week .

Starbucks revenue fell 6% to %2.6bn.

History Repeating Itself?

The coffee shop culture died roughly around the time of The South Sea Bubble where all the gossip and stock broking activity thrived in the small streets of London. It's a little different this time around but it very much falls into pattern of the boom years we have enjoyed. The coffee shop was not just associated with the market players like stockbrokers or starving writers and artists communing to meet like-minded people - it was the 'to go' culture of popping in and grabbing a $5 cup of coffee. And everyone did it, not just Hi Tech executives or super-rich bankers - it was a defining sign of the times.

In the years of leveraging equity in our homes, such little luxuries became a way of life and a trivial yet essential daily routine. Many new companies sprang up to satisfy the 'fixes' required and we have good alternatives here in the UK in Costa, Cafe Nero and AIM. But in the US there was a strong reposte from the likes of Dunkin' Donuts and McDonalds who had the edge of leading with food and they added in equally good coffee to Starbucks at a fraction of the price - and this has hit hard as everyone starts to look at the cash in their pockets rather than in their equity.

It is very much a sign of the new austere times that small but expensive luxuries are the first things to go - perhaps along with membership to swanky Health Clubs as the next obvious area of concern then maybe regular eating out at middle to high end restaurants and, of course, up market holidays.

Or have we just woken up and realised that we could make a very decent cup of coffee at home, stick it in a thermos and go to work for a fraction of the price. I also think part of Starbucks' vulnerability is that it never had anything more than expensive coffee to sell - it was a model as flawed as the boom itself, just like the South Sea Bubble all those years ago. Personally, I have always preferred a decent cup of tea and you just can't get one outside of the UK.

Perhaps Starbucks has missed a trick all along.