Sunday, 26 October 2008

The more Starbucks a country has, the worse its economic crisis


 

Sunk in the sloppy mess of the Frappuccino recession

The more Starbucks a country has, the worse its economic crisis. Where lies the link between coffee and greed?

Remember the once-fashionable McDonald's theory of international relations? The thinking was that if two countries had evolved into mass-consumer societies, with the middle classes able to afford Big Macs, they'd generally be able to find a peaceful way of adjudicating disputes. In other words, they'd sit down over a Happy Meal to resolve their issues rather than use mortars.
The recent unpleasantries between Israel and Lebanon, which both have McDonald's franchises, put paid to that reasoning. Still, the Golden Arches theory of realpolitik was good while it lasted.
In the same spirit, I want to propose the Starbucks theory of international economics: the higher the concentration of expensive, faux-Italian Frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.
Think about it. The economic crisis has its roots in sub-prime mortgages and a credit crisis. If you could pick one brand name that personifies these twin bubbles, it has to be Starbucks. The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pitstops for estate agents and their clients. It also carpet-bombed the business districts of large cities, especially the financial centres, with nearly 200 in Manhattan alone.
And frothy Starbucks treats provided the fuel for the boom – the caffeine that enabled the Wall Street and City boys to stay up all hours putting together deals, and helped mortgage brokers work overtime as they processed dubious loans for people who couldn't really afford them. It's no accident that Starbucks based many of its outlets on the ground floors of big investment banks. (The one around the corner from the former Bear Stearns HQ has already closed.)
Like American financial capitalism, Starbucks took a great idea too far (quality coffee for Starbucks, securitisation for Wall Street) and diluted the experience unnecessarily (sub-prime food such as egg-and-sau-sage sandwiches for Starbucks, sub-prime loans for Wall Street). Like so many sadder-but-wiser building developers, Starbucks operated on a philosophy of "build it and they will come". Like many of the humiliated Wall Street and City firms, the coffee company let number-crunching get the better of sound judgment: if the waiting time at one Starbucks was more than a certain number of minutes, the company reasoned that an opposite corner could sustain a new outlet. Like the housing market, Starbucks peaked in the spring of 2006 and has since fallen precipitously.
America's financial crisis has gone global in the past month, spreading across Europe and Asia. Why? Because many of the banks feasted on American sub-prime debt and took shoddy risk-management cues from their US cousins. Indeed, the countries whose financial sectors were most connected to the US-dominated global financial system have suffered the most.
What does this have to do with the price of coffee? Well, when you start poking around Starbucks's international store locator, some interesting patterns emerge. At first blush, there's a pretty close correlation between a country having a significant Starbucks presence, especially in its financial capital, and huge financial cockups. Take the UK, which has had to nationalise the odd bank (698 Starbucks). Or take just London, which in recent years has been the wellspring of many toxic innovations and a hedge-fund haven (256 Starbucks).
In Spain – now grappling with the bursting of a speculative coastal real-estate bubble – the financial capital, Madrid, has 48 outlets. In Dubai, 48 Starbucks outlets serve a population of 1.4m. And so on: South Korea, which is bailing out its banks big time, has 253; Paris, the locus of several embarrassing debacles, has 35.
But there are many spots on the globe where it's tough to find a Starbucks. And these are precisely the places where banks are surviving, in large part because they haven't financially integrated with banks in the Starbucks economies.
In the entire continent of Africa, I count just three Starbucks (in Egypt). We haven't heard much about bailouts in Central America, where Starbucks has no presence. Argentina, a pocket of relative strength, has just one store. Brazil, with a population of nearly 200m, has a mere 14. Italy hasn't suffered any significant bank failures, in part because its banking sector isn't very active on the international scene. The number of Starbucks there? Zero. And the small countries of northern Europe, whose banking systems have been largely spared, are largely Starbucks-free (two in Denmark, three in the Netherlands, none in Sweden, Finland or Norway).
So, having a significant Starbucks presence is a pretty important indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It's also a sign of a culture's willingness to abandon traditional norms and ways of doing business in favour of fast-moving American ones. The fact that Starbucks or its local licensee felt there was room for dozens of outlets where consumers would pay for expensive drinks is also a pretty good indicator that excessive financial optimism had entered the bloodstream.
This theory isn't foolproof. Some places with relatively high concentrations of Starbucks – such as Santiago, Chile (27) – have been safe havens. Russia, which has just six, has blown up. But it's close enough.
So if you're looking for potential trouble spots, forget about the Financial Times or the Bloomberg terminal. Just look at the user-friendly Starbucks store locator.
The next potential trouble spot? I've just returned from a week in Istanbul, Turkey, a booming financial capital increasingly tied to the fortunes of western Europe. There are so many Starbucks that I gave up counting (in fact, 67 of them). I have no plans to move my money there.
Daniel Gross is the Moneybox columnist for Slate.com and business columnist for Newsweek


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