“Swill” is how Howard Schultz described the coffee at both McDonalds (MCD) and Dunkin Donuts in a recent interview. Swill?
Now, I know most CEO’s think their product is better, but swill Howard? Perhaps the “snobby attitude” found in Starbucks (SBUX) by many people who do not frequent it starts at the top down? I was shocked when I first read it and then as I let is sink in, it did make things over the last year or so make more sense. Perhaps shareholders at McDonalds are snickering? After all, their swill selling company’s stock sits at an all-time high while Howard’s sits at 2003 prices and is now reporting quarterly losses. More on that later.
Schultz still thinks of Starbucks as a niche coffee house catering to coffee aficionados. Problem, it is not. 14,000 locations officially make is a chain that needs to appeal to the Average Joe if it is going to continue to grow.
Also from the article:
“Only last year, Schultz told talk-show host Charlie Rose that Starbucks was “fairly recession-proof.” The economy had dipped before, but Starbucks had always managed to be what Schultz likes to call an affordable luxury.”
Contrast this to what Schultz said on the latest earnings call:
“But clearly we are facing a headwind in terms of the economy that’s very, very difficult to kind of crack through…..But until the economy significantly improves, we’re just trying to do what we can to get through this storm and be much stronger when it improves.”
Schultz blamed the economy at least a dozen times during both the prepared remarks and the Q&A. So, Schultz was very, very wrong last year in his assumption of the necessity Starbucks coffee held with consumers and he is very,very wrong today when he says in response to the following question:
John Ivankoe – J.P. Morgan: “Okay, fair enough. And secondly, and a little bit of a follow-up on Jeff’s question; he asked a question on pricing for 2009 and what I would like Howard to address, if possible, is the comments on value promotions in the fiscal first quarter, a focus on value and exactly what that may entail. I mean, whether it would be actually advertising price points or discounting or combos — if you could just give us a sense of where the brand may be heading over the next couple of months.”
Howard Schultz: “We have no intention of doing things that would dilute the integrity of the premium position that Starbucks occupies, and what I mean by that specifically is we are not going to go down the fast food lane and do things that are what I believe not in the interest of, long-term interest of the value of the brand and the experience.”
Schultz is confusing price and quality. A cheaper cup of coffee or more promotion at Starbucks does not mean “worse”. Only “more affordable”. I have been pounding this point for 17 months now. Coffee, for the majority of people is a commodity. When you have as many locations as Starbucks, the tastes and preference of the majority are what matter. Price and value rule in commodity businesses.
Schultz then does something that seems a bit either hypocritical or desperate. Starbucks announced they will offer any iced coffee for $2 after 2pm. Even this though was done the wrong way. It is only available to people who bought coffee that morning and who have a receipt. Just do it without all the hassle guys.
So, are we not doing promotions or are we? Perhaps things are still deteriorating and folks in Seattle are grasping at anything to get folks to walk trough the door?
Far from “cheapening the brand” Schultz has done worse, he will really anger customers who have lost their receipt. Conditional discounts like this only ever create headaches.
Contrast this to previously mentioned McDonald’s (MCD) shareholders whose stock sits at an all-time high today after quarter after quarter of growth. McDonalds cannot credit enough their “breakfast” offerings. The translation for that is “coffee”. People are making the switch and now that they will soon be able to get a cappuccino and espresso through the drive-through, expect further defection to the Golden Arches from the Green Mermaid.
Now, of course the “coffee aficionados” will not defect. But, there are not enough of them to keep 14,000 locations growing and the guy or gal in the middle will go for the more affordable and to them, equally as good offering.
Schultz refuses to see what his company has become, a coffee chain. Until he does and enables it to behave like one, shareholder will continue to suffer.
Far from needing Schultz to bring Starbucks back to its glory, what it needs is a total outsider willing to shake things up and who does not have such an emotional stubbornness to a singular direction despite all evidence as to its continued success.
Here is the interview on Conde’ Nast Portfolio
Disclosure (“none” means no position):None
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