EDINBURGH'S HAYMARKET, a once-beery triangle of famous boozers such as Ryries and the Haymarket bar, is now one of the fiercest battlegrounds in Scotland's coffee wars. At the Haymarket station entrance is the shiny bronze AMT coffee stall (latte, £2), 15 steps away from a Starbucks coffee shop (tall caffe latte, £2.05). Less than 100 metres away is another Starbucks on the corner at Palmerston Place. Alongside is an array of sandwich shops and food outlets also selling coffee of varying degrees of quality. Opposite the busy rail station, in the faded grandeur of a former Clydesdale bank branch, is an outlet of Scotland's troubled music and coffee brand, Beanscene (little wicked latte, £2.10).

Stir in Costa Coffee and Caffe Nero, and this battle order is repeated at any key junction in Glasgow, Dundee and Aberdeen. But with global leader Starbucks announcing the closure of 600 stores in the US and 61 in Australia, the loss of 1000 jobs and restructuring costs that have pushed the coffee giant into deficit, there are huge question marks over the future of so many coffee stores.

Last week Beanscene, a uniquely Scottish coffee and music chain, became an early victim when it went into administration. What was startling was that the announcement came only four months after its founder Gordon Richardson was ousted from the company by new owner Tinderbox. Beanscene's future now hangs in the balance, while administrator KPMG is "confident" it can sell the business as a going concern.

The Beanscene story highlights the acute difficulties of building a strong Scottish business able to compete with the major players. How could it all go so wrong for an ambitious and visionary Scottish entrepreneur who tried to develop something that was more than just a place to buy and consume hot drinks?

From its foundation in 1999, Beanscene worked hard to be different: it offered live contemporary music and a place to munch pizza and olives, positioning itself as an "authentic" antidote to the brash American invader. Its open-mic music nights helped spawn the musical careers of singers KT Tunstall, Amy Macdonald and Tom Baxter. It was the modern way to hear good new music spurned by the struggling record labels. For Richardson, the music was the heart and soul of the business - but coffee was the way to get customers across the threshold in the first place.

But even after expanding to 14 outlets with an annual turnover of £4.2 million, Beanscene could not withstand the deluge from Starbucks and Costa Coffee, both with about 25% of the market, and more recently Caffe Nero, with less than 10%. To compete, Beanscene needed to be scaleable too. Over time, this led to a difference of opinion between Richardson and his team, who were keen to build a 100-outlet chain across the UK, and the funders, anxious about becoming embroiled in a fight with the big guns. Richardson's ambition has been truncated by the commercial realities of finding suitable places at affordable rentals - and the continuing squeeze by one of the world's most successful branded businesses.

On Wednesday afternoon, the Starbucks founder and visionary, Howard Schultz, spoke to investors about the perfect storm of the credit crunch, higher costs (including fuel), and a decline in sales, especially in the United States. He denies that the best days of Starbucks are behind it, and he is taking drastic action, soon to be felt on the UK streets.

Schultz, who returned to run the business in January 2008, admits the Starbucks leviathan had lost its way, and although its revenues for the second quarter of 2008 were a staggering $2.6 billion, it announced an operational loss of $21.6m because of the closures and business restructuring.

"Today's earning call is probably one of the most important in our 16-plus years as a public company. We've taken significant steps to restructure Starbucks for the long term," he said as he introduced the session.

He then talked about the recent rationalisation of the US store portfolio - where 600 Starbucks outlets are to close - and a more aggressive international growth strategy. And while Schultz was content about the early success of new products, he concentrated on "customers' pricing concerns".

Schultz talked about battling the "perfect storm", announcing the loss of 1000 support staff, along with the closure of 61 outlets in Australia with its concentrations on the cities of Sydney, Melbourne and Brisbane. He says a "razor-sharp focus on operations is a non-negotiable requirement".

But while Starbucks's US business may be down, its international business, including the UK, was delivering growth. Total net revenues increased by 24% from $536m (£270m) in the third quarter of 2007, from $432m. Revenues increased 23% to $450m, with Starbucks opening 319 new stores in the past 12 months and benefiting from favourable currency exchange.

There were slower sales in the UK, however, and operating expenses increased by about 9%, especially with the higher cost of dairy products in the UK.

The reality of Starbucks restructuring is that it needs to increase its turnover. It takes a lot of £2 lattes to cover the costs of the rental, the business rates and the upkeep. Starbucks says it has 86,000 drink combinations - all customised to individual needs - yet it is inventing even more. That puts pressure on the smaller player.

While the price of coffee has been relatively stable, with a pound of Colombian Mild Arabica coffee selling at $1.48 (having recently been as high as $1.60), the coffee shops face huge extra costs on other commodities such as milk, lighting and heating. Starbucks has immense buying power.

This isn't the only formidable foe the new owners of Beanscene were required to take on. Costa Coffee, started by Italian brothers Bruno and Sergio Costa in London's Vauxhall Bridge Road in the 1970s, is an integral part of the Whitbread restaurant and food group. Whitbread owns Premier Inns, Brewers Fayre and Beefeater, while Costa is the largest and fastest growing coffee shop brand in the UK. Costa has seen a strong sales performance, with total sales up by 28.4% year on year benefiting from its own rapid expansion programme, which has seen the number of units increase year on year by 289 to 1051, and sales growth of 6%.

Last week Starbucks also announced it was taking its fight to Costa Coffee and Caffe Nero by announcing free refills of complimentary filter coffee to all customers who purchase a hot drink. Free refills are commonplace in American coffee shops and could prove popular with cash-strapped consumers.

Perhaps the brand most similar to Beanscene has been Caffe Nero, established in 1997, which now has about 360 stores across Britain. Here the ethos and style has mirrored some of what Gordon Richardson was driving for. It provides the ubiquitous coffees along with paninis and pasta and has been an advocate for local music.

In 2005, according to Business Week, Caffe Nero was one of the fastest growing businesses in Europe, driven by the billionaire entrepreneur Gerry Ford. It had became a listed business in 2001 but in 2007 Ford took his business off the market in a management buyout for £225m. He said at the time that being private would help in the next stage of expansion.

Nearly 70% of Britons consume at least a cup of coffee each day - and the big coffee chains hope that you buy one on the way to work, one at lunch time with your sandwich and another on the way home.

Richardson never intended to go head-to-head with Starbucks or Costa Coffee. From day one, his strategy was to create a venue where people could listen to music. It remains at the heart of his thinking today, and he isn't ruling out taking back control of Beanscene if he can gain the backing. Nevertheless, Beanscene's rivals are the big players.

"We have created something very special with Beanscene. It's not like one of the large chains. Our customers stay longer and become part of the experience. With Beanscene we wanted our customers to be part of the discovery. It would be sheer folly to turn it into another coffee shop," he says.

"There is a fantastically talented team still working inside Beanscene. Amber McAllister-Hill, the operations manager, and Mo Templeton, as operations director, know how to run this business well," he told the Sunday Herald.

First it must survive. But expansion plans would mean gaining a drinks licence in every outlet to sell beer and wines for table consumption. Richardson says success means staying open to compete with the traditional pub.

But success in the UK's coffee war revolves around location, location, location. James Godfrey, a partner at Culverwell, the Scottish commercial property firm, has acted on behalf of commercial property owners leasing to many of the larger players.

"The rapid expansion of the coffee houses - and I also include the like of Pret a Manger and EAT, which will be expanding in Scotland shortly - have put up the rental costs of premium sites in Glasgow and Edinburgh.

"The coffee culture is now well ingrained in Scotland - the expansion out of London took some time but that has put pressure on many small local players. Increasingly, it is difficult for the single coffee shop to compete with the branded big boys."

He said that a typical pitch is between 1500 to 1750 square feet, which allows the store to let people sit about in chairs. But rentals, even in the teeth of the current downturn, are showing no signs of dropping. Godfrey reckons that typical rental values for a 1500 square foot store are £50,000 in Scotland's suburbs, while a city centre locale can be up to £100,000-£120,000 a year for a 10-year lease.

While wage levels are traditional low, this means that the stores need to sell a lot of coffee at £2 a shot, along with other produce.

Godfrey says that competition for stores also includes Greggs, Baguette Express, O'Briens and Subway and that Beanscene has suffered because it has not been able to get into the prime spots.

"I think Beanscene is an excellent company but I don't think they are in the strongest sites - perhaps that was what they could afford when faced with the bigger players. But having a good pitch is vital in the ongoing coffee house battles."

It's not just the habitués of its leather sofas who will be regretting that Beanscene appears to have come to the bitter end of its ability to stay in that fight, but anyone who approves of Richardson's original spirit of entrepreneurialism and ability to imagine a new kind of lifestyle-friendly business for Scots to savour.