Starbucks Turns to Tv to Perk Up Sales

Starbucks will today launch its first ever national advertising campaign on American television as the country's caffeine addicts desert a chain which in some American cities seems to have an outlet on every corner.

The Seattle-based company last night dropped its earnings forecasts as it revealed that the number of coffees and pastries sold in its home market over the last three months fell for the first time since it started giving out sales data three years ago.

Starbucks portrayed the advertising campaign as marking its elevation into a nationwide business, but detractors will see it as evidence that one of Main Street's fastest expanding companies is losing some of its froth.

Wall Street analysts have been voicing reservations about the company's rapid expansion, suggesting that the market has become saturated and Starbucks has overreached itself as it aims for 40,000 stores worldwide. The company denies that America has enough coffee shops to be going on with, but admitted yesterday that it will open a hundred fewer stores next year than it had originally projected.

In the three months to the end of September - Starbuck's fourth fiscal quarter - the company's US shops saw a 1% decrease in the number of transactions.

Starbucks has been hit by a combination of rising raw material costs, which has forced it to raise prices and a drop in consumer confidence as a result of the sub-prime mortgage crisis, which has made its expensive coffee a little less alluring. The company increased prices over the summer but pricing pressures are continuing - milk prices, for instance, have increased more than 60% since the start of the year.

Starbucks also faces increasing competition from fast food companies such as McDonald's who are moving into the hot beverages market as their core burgers 'n' fries offerings come under increasing attack from pressure groups who accuse them of being unhealthy.

In a conference call with analysts on Tuesday, McDonald's US president Don Thompson said the company plans to improve its drinks lineup.

"Beverages promise to bring a whole new set of customers to McDonald's," he said. But because of the investment needed, the company does not expect coffee and fruit smoothies to be a big contributor to its profits until 2009.

In its results yesterday Starbucks met analyst expectations with a 35% increase in fourth quarter earnings to $158.5m (£77.5m) or 21 cents a share. Total revenue increased 22% to $2.44bn.

But the company added that it expects annual earnings of $1.02 to $1.05 a share in 2008. Analysts had been looking for at least $1.05 a share.

It added that it expects same-store sales to rise in 2008 between 3% and 5%. In the past the company's long term projection has always been growth goal of 3% to 7%.