Economy in Recession: The Starbucks Effect

Remember Thomas Friedman's McDonald's theory of international relations? The thinking was that if two countries had evolved into prosperous, mass-consumer societies, with middle classes able to afford Big Macs, they would generally find peaceful means of adjudicating disputes. They'd sit down over a Happy Meal to resolve issues rather than use mortars. The recent unpleasantries between Israel and Lebanon, which both have McDonald's operations (here and here, respectively) put an end to that reasoning. But the Golden Arches theory of realpolitick was good while it lasted.

In the same spirit, I propose the Starbucks Theory of International Economics. The higher the concentration of expensive, nautical-themed faux-Italian branded frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.

It may sound doppio, but work with me. This recent crisis has its roots in the unhappy coupling of a frenzied nationwide real-estate market, centered in California, Las Vegas and Florida, and a nationwide credit mania, centered in New York. If you could pick one brand name that personified these twin bubbles, it was Starbucks. The Seattle-based coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pitstops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone. Starbucks's frothy treats provided the fuel for the boom, the caffeine that enabled deal jockeys to stay up all hours putting together offering papers for CDOs, and helped mortgage brokers work overtime processing dubious loan documents. Starbucks strategically located many of its outlets on the ground floors of big investment banks. (The one around the corner from the former Bear Stearns headquarters has already closed).

Like American financial capitalism, Starbucks, fueled by the capital markets, took a great idea too far (quality coffee for Starbucks, securitization for Wall Street) and diluted the experience unnecessarily (subprime food such as egg-and-sausage sandwiches for Starbucks, subprime loans for Wall Street). Like so many sadder-but-wiser Miami condo developers, Starbucks operated on a "build it and they will come" philosophy. Like many of the humiliated Wall Street firms, the coffee company let algorithms and number-crunching get the better of sound judgment: if the waiting time at one Starbucks was over a certain number of minutes, Starbucks 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. European and Asian governments, which until recently were rejoicing over America's financial downfall, have had to nationalize banks and expand depositors' insurance. Why? Many of their banks feasted on American subprime debt and took shoddy risk-management cues from their American cousins. Indeed, the countries whose financial sectors were most connected to the U.S.-dominated global financial system, the ones whose financial institutions plunged into CDOs, credit default swaps, and the whole catalog of horribles, 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 major financial cock-ups, from Australia (big blow ups in finance, hedge funds and asset-management companies; 23 stores) to the United Kingdom (nationalization of the nation's largest banks). In many ways, London in recent years has been a more concentrated version of New York—the wellspring of many toxic innovations, a hedge-fund haven. It sports 256 Starbucks. In Spain, which is now grappling with the bursting of a speculative coastal real-estate bubble (sound familiar?), the financial capital, Madrid, has 48 outlets. In crazy Dubai, 48 Starbucks outlets serve a population of 1.4 million. And so on: South Korea, which is bailing outs 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 have not financially integrated with banks in the Starbucks economies. In the entire continent of Africa, whose banks don't stray too far, I count just three (in Egypt). We haven't heard much about bailouts in Central America, where Starbucks has no presence. South America's banks may be buckling, but they haven't broken. Argentina, formerly a financial basketcase, and now a pocket of relative strength, has just one store. Brazil, with a population of nearly 200 million, has a mere 14. Italy hasn't suffered any major 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 (there are two in Denmark, three in the Netherlands, and none in the Scandinavian trio of Sweden, Finland, and Norway).

My tentative theory: having a significant Starbucks' presence is a pretty significant 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 (virtually all the countries in which Starbucks has established beachheads have their own venerable coffeehouse traditions) in favor of fast-moving American ones. The fact that the company or its local licensee felt there was room for dozens of outlets where consumers would pony up lots of euros, liras and rials for expensive drinks, is also a pretty good indicator that excessive financial optimism had entered the bloodstream.

This theory isn't foolproof. Some places that have 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. And 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 just returned from a week in Istanbul, a booming financial capital increasingly tied to the fortunes of Western Europe. It has a storied coffee culture, yet I gave up counting the number of Starbucks stores occupying prime real estate. It turns out there are 67 of them. Watch out, Turkey.