“We only have 10% of the US coffee market” says Starbucks (SBUX) Chairman Howard Schultz. So, by that logic ought we expect 18% growth from Mercedes because they only have 3% of the US auto market? Me either and thus the problem with Starbucks
I would be willing to bet they have 95% of the US coffee market that would be willing to pay $5 for a latte. That being said, we now have Starbucks’s central issue. The market they are selling to is only a fraction of what they think it is and they have virtually tapped out that smaller market. Schultz & Co. cannot continue to promise 18% to 20% growth when the number of people in the US they are serving has been stagnant for the current year. Consider the following chart from the WSJ.
Some folks have made the case that Starbucks grew too quick and saturated their market. Quite the contrary. They still have the same number of locations in the US as McDonalds (MCD) but the different is the coffee is more than twice as expensive. How could Mercedes increase their market share? Lower the price of the cars. How can Starbucks? Lower the price of its coffee.
Starbucks is caught here though between market share, maximizing ever penny per cup and growth. They have promised to expand to 40,000 stores and to back off that would scare investors. This is the problem will such bold predictions much like Home Depot(HD) is seeing with the shares repurchase plan, if you can’t deliver, people are less than pleased with you. This causes management to fight reality. Always under promise and over deliver.
When you have two products that are similar, price and convenience always win. Now, does McDonalds have the “super premium” blends and the variety of drink offering Starbucks has? No. But what they do have is a very good product at very reasonable prices. What they have done is take a huge segment of Starbucks current and potential customers who are looking for value.
If you look at the chart above one thing has to stick out, Starbucks “no growth” periods in the US coincides 100% to McDonalds coffee improvement.
What to look for today? Transactions. Did they grow over last year and IF they hit their EPS number, was it due to the addition of debt to buy back abnormally large blocks of shares like they did at the beginning of the year.
My guess? Flat to negative transactions and an earnings estimate miss. The good news? They start coming up against much easier comps in the next quarter so the illusion of growth can at least be there for those investors still holding on.
6 replies on “Starbucks Still In Denial”
I think that you should keep in mind that MCD did very well in integrating its products into foreign markets. Most of which were 2007 additions. For example, I know when I went to Australia they catered to the culture differences by offering selections that would in theory be more appealing to Aussies. Don’t believe me, check out their some of their menus from around the world. Here
In contrast, Starbucks is offering music downloads. Why would I go to starbucks to download a song when I can do that from home?
Alas you’ve stayed to long with your rants about Brazilian ethanol production causing coffee price spikes etc…
Starbucks is likey to report $0.21 (in-line) or $0.22 this afternoon. EBIT margins, which have declined for five quarters should be up 80+ BPS. They are likely to have positive things to say about FY 2008 margins. Comps should be low to mid single digits. Traffic modestly postive.
All of which is reassuring to me particularly when most restaurants are running negative comps given gas prices, housing woes… A high margin addictive product is nice place to rotate toward in a recession.
The company’s fast growing international business could surprise given FX benefits. The street consensus about SBUX’s international effort could do a 180 pretty quickly. International is the only thing interesting about many other retaurant names such as YUM.
The chart you popped from the WSJ starts in 2004 and the WSJ author suggested that negative traffic this quarter would be a first. Not true. If she went further back she would see that transaction growth has been flat and even slightly negative in the past–December 1995, November and December 1996, December 1997, December 1998, May through November 2001. It’s been awhile true but it has happened before and Starbucks bounced back.
No McDonald’s isn’t a competitor. I doubt that very many of their employees can pronounce cappuccino. What you wan’ eh Kaa-pooo-Seeno? Que?
hampster,
you McDonalds comment is the same as Schultz’s yet the companies performance and results in the coffee category, along with their stock price performance suggest both of you are wrong
you said:
“high margin addictive product is nice place to rotate toward in a recession.”
uh… think tobacco not coffee…
we’ll see today… if you have shares i hope i am wrong as i have no skin in this game…
not likely though
And if you are wrong, though “not likely” as you say, you will do what?
You said you were willing to bet.
Boy you really nailed this one. Good work.
Only the SBUX shorts can afford to drink the coffee.
anon,
thank you