Starbucks Corp. Chief Executive Officer Howard Schultz said the U.S. economy is in a ``tailspin'' and the coffee-shop chain will offer discounts and new drinks to lure back customers.

Starbucks, the world's largest chain of coffee shops, also said today it would acquire Coffee Equipment Co., the maker of the $11,000 Clover machines that brew one cup of coffee at a time. Financial terms weren't disclosed.

``You have an economy that really is in a tailspin, and many would say the consumer is in a recession,'' Schultz told more than 6,000 shareholders at the company's annual meeting in Seattle. ``We are dealing with things that we haven't seen before in terms of how people are responding to how tough it is.''

Schultz, who built the Seattle-based coffee chain into a corporation with almost 16,000 cafes, is counting on new styles of coffee and a slowdown in store openings to halt two quarters of customer declines. First-quarter revenue rose 17 percent, the smallest gain in two years, as consumers cut spending and McDonald's Corp. promoted lattes and cappuccinos.

Starbucks will introduce a new coffee blend and will add an automated espresso machine, which uses freshly ground beans, at most locations in the next few years.

The coffee-shop chain will also introduce a rewards program in mid-April, Schultz said. Customers will be able to get free syrup or milk alternatives for their drinks, or free refills on brewed coffee, if they use their Starbucks card.

``I thought giving away a vanilla shot, which costs 30 or 40 cents, to a loyal customer who's coming in and getting a latte quite frequently is a small price to pay to keep that customer,'' said Sharon Zackfia, an analyst at William Blair & Co.

Stock Performance

Starbucks fell 74 cents, or 4.1 percent, to $17.50 at 4 p.m. New York time in Nasdaq Stock Market composite trading. The stock is trading near its lowest level in more than four years and is worth half what it was at the beginning of 2007.

``The initiatives we heard about today strategically build a moat around the business from a competitive point of view,'' said Zackfia, who recommends investors buy the shares. ``They're giving no one any room to say their coffee is better than Starbucks.''

Starbucks reported its first quarterly drop in U.S. customer visits last year. U.S. consumers have tightened spending amid rising gasoline prices and the deepest housing slump in a quarter century.

Traffic Slowdown

``We began to see a slowdown in traffic that we believed was economy-driven,'' Schultz said today. ``As we look at the balance of calendar '08, I don't see any reason to believe that we're going to see a change.''

After taking over as CEO for the second time on Jan. 7, Schultz, 54, said Starbucks' problems were ``self-induced'' and vowed to introduce more innovative products and clean up aging stores.

To communicate better with employees and customers, Starbucks said it will also start an online community.

Former CEO James Donald left Starbucks less than three years after taking the job. Schultz, who took over the chain in 1987 and was chief executive through 2000, took the company public in 1992 and expanded it overseas.

Former Executives

Since returning to the helm, Schultz has brought back a number of former executives. He named Arthur Rubinfeld, executive vice president for store development from 1992 to 2001, as head of global development last month. This month, he appointed Cliff Burrows to run Starbucks' U.S. stores.

Last month, the chain closed 7,000 company-run U.S. locations for more than three hours to train its baristas on espresso making and re-emphasize the company's focus on the customer.

Starbucks has already begun using its loyalty card to offer deals to customers, saying last month that it will give out two hours of free AT&T Inc. wireless Internet access a day to Starbucks Card holders.

Sales globally at Starbucks stores open at least 13 months rose 1 percent in the first quarter, the lowest gain ever. Customer visits in the U.S. dropped 3 percent, the second decline ever after a 1 percent decrease the previous quarter.

Schultz said in January that Starbucks won't give same- store sales numbers for the remainder of 2008. The chain expects to open 2,150 stores in the year through September, 350 fewer than previously planned. It will also close 100 locations.

Coffee Test

Starbucks began testing last month an 8-ounce, $1 cup of regular coffee with free refills in the Seattle area. That test was unsuccessful, the company said.

``In terms of deciding if our customers are really interested in this, and are we getting a good response, we didn't and we quickly moved on,'' said Michelle Gass, vice president of global strategy.

Starbucks opened its first store in 1971 in Seattle's Pike Place Market as a place to sell beans and coffee-making equipment. The company was named for the coffee-drinking first mate in the novel ``Moby Dick.''

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