A look at how Starbucks changed the coffee business in surprising ways. While it tried to become the 800 lb. gorilla of the industry, it actually ended up helping the independent stores that were so afraid of it. Conversely, its closing of 600 stores may signal the end of the good times for mom and pop coffee shops.

Is This The End of the Three Dollar Latte?

We’re in an economic downturn and jobs are getting cut everywhere as businesses tighten their belts and get ready for rough weather ahead. Newspapers are laying off staff, car makers are slowing down SUV and pickup truck production. It’s the same wherever you look. But it still seems different somehow when it happens to Starbucks. The company announced that it’s going to close 600 company-owned outlets across the United States. (This will eliminate about 12,000 jobs by the way. If you’re one of those, you already know what this means to you.)

The news seems to have shocked a nation accustomed to layoffs and soaring food prices and $4.00 gas. The company’s explosive growth has become a running joke in America. The Onion ran an article about Starbucks setting up outlets inside other Starbucks. In the dog-show mockumentary Best In Show, a couple relates how they met when she was in one Starbucks and noticed him in the Starbucks across the street. Whether you laughed or gnashed your teeth over it, the expansion of Starbucks into every available open space seemed a given.

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Now that the company is seeing sales fall, no doubt some people will applaud the comeuppance of a corporate giant that has ground community coffee shops and culture between its massive corporate gears. These people should keep in mind that the company has more than 15,000 stores worldwide. You’re still going to be within line of sight of a Starbucks from pretty much every point on earth.

But people who applaud the decline of Starbucks should consider that Starbucks is no Wal-Mart. Its growth wasn’t nearly as destructive to the local small business coffee shop market as people think. In fact, it appears to have been the best thing that ever happened to that market. Last year, Slate ran a piece that examined what effect Starbucks had on mom and pop shops and found that their business actually increased when a Starbucks moved in across the street. Dramatically.

It wasn’t that Starbucks wasn’t trying to be the 800 lb. corporate gorilla. In the Slate piece the owner of a Los Angeles chain of coffee shops reported that Starbucks showed up one day, tried to buy him out cheap, and said if he didn’t take their deal, they’d just come in anyway, put stores right next to all of his, and squash him like a bug.

That’ll put the fear of God into pretty much anyone, so the owner called a friend, who happened to run the Seattle’s Best Coffee chain. The friend reassured him this was going to be the best thing that ever happened to him, and indeed it was. Sales increased so much that he started following Starbucks around and putting in new stores next to theirs.

Why did this happen? Apparently because Starbucks increases the size of the market for premium coffee. And those new coffee drinkers sooner or later move beyond Starbucks to see what other shops might have to offer.

The key thing to keep in mind about Starbucks is that coffee used to cost a nickel. It came in a chipped white cup served in a diner somewhere by an old lady in a weird pink dress, and she’d keep refilling that cup for you forever. Coffee used to be a loss leader. It was largely Starbucks that took specialty coffees like lattes and espresso out of little ethnic cafes and introduced them to mainstream America. It was Starbucks that created the idea that a cup of coffee came with a bunch of other stuff in it, and was worth three bucks or more.

Once that idea was ingrained, it wasn’t just Starbucks that profited from it. The rising tide Starbucks created raised all boats. The restaurant business has always been absurdly risky. Well over half of new restaurants fail in the first three years. The failure rate for coffee shops? Ten percent.

That’s because, especially at Starbucks-style pricing, the markup on coffee is so high. It’s a simple business to run and it’s hard to fail. A lot of people who were squeezed out of the more traditional job market over the last couple decades and went “self-employed” did it by opening up coffee shops.

So if this is the end of the golden age of coffee, we’ve got a lot more to worry about than Starbucks. If hard times are making Americans rethink the Iced Frappucino, if they’re going to go back to a cheap cup of joe to save money, then a lot of small businesses are going to suffer. Next time you’re walking through your nearest commercial district, try counting the coffee shops. Then imagine them all closing. It should be pretty sobering, even if you don’t like coffee.