Tag: mcd

Starbucks (SBUX) Chairman and now CEO did an interview with Business Week and a read of it shows a stunning lack of grasp of reality.

The “A” are Schultz answers
Q: So people have been spending less on $4 lattes?

A:No question about it. Our research suggests they’re not going anywhere else; they’re just coming to us less frequently. So we have to do everything we can to demonstrate to our customers that Starbucks is an affordable luxury.

OK. So, if they are not going anywhere else and just not coming to you Howard, how can we explain the increasing traffic counts at McDonalds for breakfast and coffee each quarter? Is McDonalds cloning existing customers? I can give you the names of a few dozen who have made the switch.

Are former Starbucks customers just not drinking coffee anymore?

Q:Earlier you said to me, the media has made such a huge deal about all of Starbucks’ competition. So tell us straight out what the story is here. Have you been hurt by the premium coffee sold at McDonald’s (MCD) or by Dunkin’ Donuts getting more aggressive?

A:First off, I don’t think there’s premium coffee being sold at those fast-food places. Second, this is not about the competition. Our customers are not buying a hamburger and fries and then going to get espresso. That’s not the case. What is the case is that there’s a downturn in the economy. As a result, people are coming in less often than they did a year ago. But we control our own destiny. And what we strongly believe is if we take care of our customers, produce the kind of product that is distinctive, and exceed their expectations, we’re going to be in great shape. But we’re going to couple that with relentless innovation that you’ll begin to see in the marketplace in the months ahead.

Wow…. “It’s not about the competition”…….That is stunningly reminiscent to a quote from former CEO Jim Donald just over a year ago when the stock was trading near all-time highs.

Sorry Howard but despite what you think, you do not exist in a consumer category of one.
While your customers are not “getting burgers and fries” with their coffee as you so condescendingly pontificate, they are going there for COFFEE. Based on results for the past year, they are doing so in droves.

When you started Starbucks you were a pioneer in the industry. Now, it is crowded with competition. It just cannot be denied.

I am sure there is a small segment of the population that can tell the difference between coffee roasts just like there is one that can do so with wine. If we admit that we also have to admit the overwhelming majority of the population cannot. This is ok if you have 1,000 restaurants nationally that cater to an elite crowd but when you have 14,000, it is the tastes and preferences of the majority that control your destiny. Schultz has not realized this or refuses to admit it.

Let’s be honest here. If I buy a vente caramel macchiado or a hazelnut latte, by the time the milk, syrup and caramel are poured over the espresso, if there really anyone who can tell if it is “super premium”, “premium” or just “really good” espresso beans? I doubt it and would really question anyone who said they could. Again, there may be a select few who can, but they will not support a 14,000 store chain.

That being true, then we now have a generic aspect to the product. If the product becomes generic, then price rules.

Schultz’s refusal to admit he has competition is very bad news for shareholders. It means that there won’t be any moves from the company to address to the apparent non-existing competition anytime soon. Too bad….

Here is the whole interview.
Disclosure (“none” means no position):Long MCD, none

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Some initial thoughts on early reports on Starbucks’ (SBUX) “initiatives”.

In an interview before the meeting, Starbucks executives said they want to bring back some of the romance and theater that’s been missing from stores since the company switched to using sealed grounds years ago. Starbucks will quit using flavor-locked bags of pre-ground coffee next month and get back to grinding beans in most of its U.S. stores.

Starbucks’ senior vice president of global strategy, Michelle Gass says she expects the change will improve sales that have gone to rivals McDonalds (MCD) and Dunkin’ Donuts.

One quote struck me, “”We have an economy in a tailspin . . . and a company whose performance has not met your expectations or mine,” Howard Schultz. Earth to Howard, we have not even had one quarter of negative GDP, this not only does not qualify as a tailspin, it barely qualifies as a hiccup. This is alarming as Schultz is seeming to push the chains poor results, which have been deteriorating for longer than the economy on outside factors.

Has he seen McDonald’s results?

Rather than a return to what they do best, Starbucks seems intent, at least after initial reports to be running around in more directions. After begging them to get rid of the clutter in the stores, a report is out that they sell approximately 2 Cd’s per day per location. What is the point for forging ahead with this? The resource expenditure in terms of money, human time and stores space is tremendous for essentially zero return.

Here are the initiatives:
* A proprietary and revolutionary in-store Clover® brewing system that delivers the best cup of brewed coffee available anywhere;
* A complete reinvention of brewed coffee in-store, that will be brought to life by baristas across the U.S., who will scoop and grind a new unique coffee blend, connecting customers to the early days of Starbucks;
* The introduction of a new state-of-the-art espresso system that provides the perfect shot every time and helps facilitate the critical connection between barista and customer;
* The first phase of a Starbucks Card Rewards program, rewarding registered cardholders and providing unique new benefits when using their cards in Starbucks stores;
* The launch of MyStarbucksIdea.com, Starbucks first online community, that takes the Starbucks Experience outside the store and enables customers to play a role in shaping the company’s future; and,
* An expanded relationship with Conservation International

A social networking site? Why? An expanded relationship with Conservation International? Nice, but, who really cares? Stocking your shelves with 100% organic products would have made a much larger difference with countless more folks. It seems as though Schultz is driving the company to be almost a social experiment and is ignoring his business’s realities. When he started, he had almost no competition. Now the competition is fierce. A social networking site will be meaningless long term.

The initiatives set to “transform” the company simply fall flat and will perpetuate the current slide. As a casual Starbucks user, only one of the six actually will have any affect on me and any purchasing decision and even it is negligible. A new espresso machine and coffee brewer? So what. Are you telling me what is in there now is no good? The one that will actually matter? A rewards card, not a bad idea.

Schultz & Co. still have not addressed the chief complaints people have, Convenience, Price and Service. Until they do, do not expect any dramatic improvement.

Disclosure (“none” means no position):None

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In a press release, Starbucks (SBUX) announced it will disclose “transformational initiatives” at it annual meeting next Wednesday. Here is my two cents.

My first though when I read this was: Is it necessary? Hadn’t they done just fine up until this point? Didn’t they get themselves in to trouble in all actuality when they tried to “transform” away from what they did best?

What should they announce then? Here are some directional ideas.

1- If you are going to claim to be “upscale” or “premium”, then you have to act like it. The only thing upscale about the Starbucks experience in many locations is the price. Get rid of all the junk for sale that makes me feel claustrophobic when I try to maneuver myself to the counter. Expand locations to give us more seating. If I have to wait to get my drink made, please ask me to go sit down and then bring it to me. Also, I should not have to clean off the table when I sit down at it.

These are not real big things, they are basics and McDonalds (MCD) currently does them. Yet location after location ignores these. You are not doing me a favor letting me drink coffee there.

2- Shrink the menu. Do fewer things very well rather than a bunch just ok. There is a big variation in the same drink from location to location. That may have changed after the recent “training” but with new baristas being hired everyday, the unwieldy menu can only lead to mistakes and more unhappy customers.

3- Organic: Everything sold at the stores should be organic. The population is drifting that way in its food choices and Starbucks ought to be a leader here. This also goes with the “acting upscale” theme.

4- Be Nice: If I order a “large” do not correct me and say “it is called a vente”. Just smile and give me a large.

5- Kids. Your stores could not be more kid unfriendly if you tried. Everything for sale is waist height which means any kid under 6 will look at it, touch it and possible break or try to eat it. I am not saying put a jungle gym in, what I am saying is that less people will avoid the locations who have children if they do not fear what they will get into taking the kids in.

6- Price: You are at the top.

None of these are a magic bullet but when taken together and enacted, they will begin to change some of the negative sentiment that has built up out there towards the chain. Many of these things were all done years ago but Starbucks drifted away from them in an effort to maximize dollar per square foot. In all reality, by drifting from their core, they alienated many people.

Disclosure (“none” means no position):Long MCD. none

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Remember the movie “Groundhog Day”? Bill Murray keeps waking up and it is the same day over and over? This has become what reading McDonalds’ (MCD) monthly sales figure has become.

For February:
* Same-store sales in the U.S. rose 8.3% during the month, led by breakfast and coffee offerings.
* European same-store sales grew by an impressive 15.4% on strong results in the U.K., France, Germany and Russia.
* Asia Pacific region, Middle East and Africa rose 10.9% for the month, mostly on strength in Australia, China and Japan.
* Systemwide sales, which include restaurants owned by franchisees and affiliates operating under joint-venture agreements rose 13.2% in February.

It is all about the two C’s. Coffee and convenience. I have been saying the same thing since Feb. of last year and nothing that has happened since then could lead anyone to think that things are due to change anytime soon. Id McDonald’s going to become less convenient anytime soon? No. What are they going to do? Expand the coffee offerings. That can only lead to more interested people choosing to get their fix from Ronald & Crew at convenient locations at value prices.

Compare this to Starbucks (SBUX) that has maintained the coffee, increased prices and diminished the convenience factor with the addition of sandwiches and micro locations that force you to wait in line outside. Any wonder the stock has cratered in the past year, down well over 50% since my first post on the subject?

Disclosure (“none” means no position):Long MCD, none

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McDonald’s (MCD) said Friday its same-store sales rose 5.7 percent in January, driven by strong international growth. Yawn… haven’t we heard the same thing every month for a few years now? Aren’t shareholders thrilled that because of this you have not had a down year in the last 5?

For the month ended Jan. 31, U.S. same-store sales rose 1.9%, boosted by sales of breakfast (COFFEE!!) and dollar-menu items. Europe same-store sales jumped 8.2% on strong sales in France, Germany and the U.K.

Now, much of the current though process out there is that McDonald’s is over-reaching with the new coffee offerings slated to be completed in 2009. McDonalds on the other hand sees and additional $1 billion in sales. Who to believe? McDonalds of course.

Why? Those who think that McDonalds is over reaching keep saying that they will never “over-take Starbucks (SBUX)”. Here is the thing though. McDonalds has no plan to do this. What they do plan to do, and have been doing exceptionally well, is tap into a vast market gap.

Millions of people want very good coffee at very good prices. That is what McDonalds is providing. They have no intention of being an upscale coffee house. What they do intend on being and based on all empirical evidence to date they are succeeding at, is the nations most convenient place to get a cup of good coffee.

With 14,000 locations virtually all with speedy drive -thru’s, McDonalds has given the nation another reason not to stop and get out of their car to get their daily fix.

Starbucks’ Howard Schultz keeps pounding home the specter of the size of the US market for quality coffee. He is right that the market is huge. But, he is wrong if he thinks they will all pay $8 for a couple cups of it. The far larger market is those folks who want the quality but will not pay the price. This is not an “coffee specific” event. This trend in the same whether we are talking about cars, computers, or cell phones. We Americans want value.

Years ago the gap between the quality of McDonalds’ coffee and Starbucks’ was vast. It has close considerably and for your basic “cup of Joe”, there is none. McDonalds has expended its potential market for its offering while at the same time, shrunk that of Starbucks. This move into lattes and cappuccinos will further shrink any remaining gap.

Starbucks could alter this easily but they won’t until shareholder dissatisfaction becomes so great that even Schultz’s head is called for. Starbucks is no longer a growth company and it appears management is the last to recognize this. That does not mean they cannot reward shareholders, they just can’t if their reality escapes them.

Until they stop the exodus of customers, they will not right their ship. What to do? Give customers more value.

Want proof? Just sit back and watch McDonalds the next couple years.

Disclosure (“none” means no position): Long McDonald’s, None

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“What we have to do is simple: Differentiate our experience, so that when a customer walks into a Starbucks store, they get something that they can only get from us..” Starbucks (SBUX) CEO CEO Howard Schultz

Notes from the earnings call:

The financials:
** Revenues for the quarter were up 17% to $2.8 billion, from $2.4 billion a year ago.
** Earnings per share increased to $0.28 cents in Q1 of this fiscal year, compared to $0.26 cents per share in Q1 of ‘07.
** Dairy costs resulted in a negative $0.02 impact to EPS in the quarter.(ValuePlays readers first got this in May of 2007)
** Operating margins contracted 160 basis points to 12% from last year’s Q1 margin of 13.6%. (Dairy cost)
** Higher interest expense driven by an increased level of debt when compared to the first quarter of 2007. The debt was used to repurchase shares, resulting in a net neutral impact on earnings per share in the quarter. (Again, see May of 2007)
** A new share repurchase authorization by our Board of Directors for up to an additional 5 million shares
** For 2008 “we are looking to deliver low double-digit earnings growth — lower than expected”

The stores:
** plan to open a total of approximately 1,175 net new stores in 2008, down 34% from fiscal 2007 openings.
** Closing approximately 100 underperforming stores.
** For 2009, plan to open fewer than 1,000 new stores in the U.S.
** Will open approximately an additional 75 net new stores in international markets
** In fiscal 2009, that number will rise to over 1,000 new stores internationally,

Products:
** will discontinue warmed breakfast sandwiches in our North American stores

Plans:
** “At our Annual Meeting of our shareholders on March 19th, we will lay out five specific, bold consumer-facing initiatives that will be a major catalyst for change and transformation.” Schultz

The sentence that really mattered? “Comparable store sales declined 1% in the quarter, driven by a 3% decrease in transactions.” That is the whole ball of wax.

So Schultz and company have a plan? Here are some more helpful hints:

1- 100 US store closing just are not even the beginning of what is necessary
2- Differentiation? If I am going to pay premium prices for ANY product, I want a service level that equates. Most people feel the same way. I do not expect the service at McDonalds (MCD) to be the same as a Mortons (MRT). That being said, if I go to McDonalds and have to wait for my order to be completed, they politely ask me to go sit down and relax and they bring it to me. If I am in Starbucks, I stand in the “cattle line” and wait, and wait, and wait. Why?
3- Too many small locations. Now, I am sure the little locations are money makers but their proliferation has had a negative effect. Why? If it is a nice day, I do not mind stopping and dragging the kids inside to get some coffee, but, if it is raining, snowing and very cold, I won’t go in because there will be no place for us to sit and it is just too much effort to walk and and then turn around and go. The proliferation of the “counter stop” locations with no real sitting area causes a mental picture of Starbucks. I now (and so do others) pass them by when I see them because there now is an assumption of their lack of adequate seating. They have changed the perception of the company from a place to hang out and drink coffee to one of inconvenience.
4- Get rid of all the crap. There is just too much junk for sale and the stores feel claustrophobic. Has anyone ever purchases one of the cappuccino machines there for sale? I keep waiting to see lawn mowers for sale out front..

Starbucks shares are getting hit on Thursday and even with all the pain in 2007, they trade around 26 times this years earnings. They are by no means cheap. With growth expected to slow even more, there isn’t anything to warrant shares going higher anytime soon.

Disclosure (“none” means no position): None

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McDonalds has just enjoyed its 58th consecutive quarter of same store sales growth.

With Starbucks (SBUX) set to report dismal results this week, perhaps execs at the troubled coffee chain can finally admit they missed this one? By the way, going to an 8oz. $1 coffee is not the answer. If you claim to be upscale and want people to think of you that way, going low-scale in price is not the answer. Better service and larger less merchandise crowded locations are.

Back to Mickey-Dees:
— Global comparable sales increased 6.7%, on top of a 6.3% increase in
2006
— Growth in consolidated Company-operated and franchised restaurant
margins for the eighth consecutive quarter
— Consolidated operating income increased 22% (15% in constant
currencies)
— Earnings per share were $1.06, including $0.33 per share of income tax
benefits. Currency translation benefited earnings by $0.04 per share
— The Company repurchased over $1.3 billion of its stock

Full year 2007 highlights included:
— Revenues reached a record high of $22.8 billion on global comparable
sales of 6.8%
— Company-operated and franchised margins rose by 110 basis points and 80
basis points, respectively
— The Company returned $5.7 billion to shareholders through shares
repurchased and dividends paid

CEO Jim Skinner announced a change to the dividend structure. “Separately, given the substantial increase to the Company’s dividend over the last several years, McDonald’s Board of Directors has decided that beginning in 2008, dividends declared will be paid on a quarterly basis. On January 24, 2008, McDonald’s Board of Directors declared a dividend for the first quarter of 2008 of $0.375 per share payable on March 17, 2008 to shareholders of record on March 3, 2008. The Board of Directors will continue to review the Company’s dividend rate annually each fall.”

McDonalds also plans to return $17 billion to shareholders from 2007 to 2009 through both dividends and share repurchases.

Disclosure (“none” means no position): Long McDonalds, None

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“We are going to bring back the Starbucks experience”, Starbucks CEO, Howard Schultz. Really?

I thought they were going to emphasize the “superior ingredients” that go into their brew? I thought they were going for the “premium market” for coffee? I thought the mantra was that people would be willing to pay higher prices for all of the above?

Why, then is Starbucks removing organic milks from its stores? According to the Wall St. Journal, “Drinks with organic milk account for less than 1% of Starbucks’ beverage sales, said Michelle Gass, the company’s senior vice president of global strategy. “Far and away, the No. 1 reason people are purchasing organic milk is because [it lacks] the growth hormone,” she said.

In 2006, sales of organic dairy products in the U.S. grew 25% to $2.67 billion, making it the second fastest-growing organic food category behind meat, according to the Organic Trade Association.”

Here is why this move is just wrong. If they really only sell 1% of their drinks that way, the move is not going to save much cash. It will, however, really piss off those folks who will only drink the stuff.

Starbucks claims the move is in part to “simplify” the menu of drinks. With about 1,000 options, there had to be a far less potentially confrontational way to do it. With every retailer in the food spectrum rushing into the “organic” field, to pull out of it and gain very little financially just seems misguided.

Schultz could have used this consumer option to differentiate Starbucks from McDonald’s (MCD), now it simply appears he is desperately cutting costs to try to compete with them.

Disclosure: Long McDonalds

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Fast Company did a piece on McDonald’s (MCD) Wednesday that essentially said “How McDonald’s Will Kill Itself Killing Starbucks”. That is not my conclusion but the title of the article.

First read the article here:

Where to start? The premise of the piece is so flawed that we might as well start there. I was unaware that McDonalds was trying to destroy Starbucks (SBUX), was anyone else? What they have said repeatedly is that they were responding to changing customer tastes and preferences. Let’s remember where this all began.

McDonalds faced sluggish to falling breakfast traffic and survey after survey said the same thing, the coffee was awful. They responded in the Northeast by replacing their admittedly “brown liquid in a cup” with the “Newman’s Own” brand gourmet coffee. Guess what? Sales of coffee and ancillary breakfast items exploded.

Mcdonalds then responded to this profound success by rolling out gourmet coffee in its 14,000 restaurants nationally. Guess what? Another stunning success as foot traffic is up and earnings release after earnings release credits “breakfast and coffee” as the driver for this success.

What is the next logical step now that Dunkin Donuts’ has gotten into Latte’ market? Right, get into the latte’ market.

Back to the article. The author tries to make three points:

McPizza: McDonalds has regularly tried foot menu items that have failed. That being said, coffee is beyond a runaway success for the chain. The author then goes into the smell and aroma of the stores and this somehow being a negative for coffee sales. Back to the earnings releases. “Breafast” has been the driver. I have never smelled a Big Mac at 6am in McDonalds, replacing the smell of grease from home fries the smell of good coffee is actually a plus and more likely to get people in there.

Drive -Thru.
The author claims that the drive thru convenience will be destroyed buying the drinks there. What he fails to realize is that unlike the hundreds (thousands?) of options customers have at Starbucks, Mcdonalds, like Dunkin Donuts will only offer a few. The reason? Simple really, the speed and convenience of production will not be compromised for any item. The stores where the drinks are being tested in Kansas City have reported no diminished drive thru times and have reported increased store traffic which is perfect as that leads to increased sales.

Dunkin Factor
This is the most egregious point. The “Dunkin Factor” is the very reason McDonalds is moving into lattes. Currently they are the only significant competition to McDonalds for coffee at the drive thru. As their menu goes upscale, so must McDonalds and vice versa. Offering gourmet coffee while your competitor in the space offers that and more and NOT getting into that market would be a poor business decision.

What the author fails to realize is that is EXACTLY what happened to Starbucks. As both Dunkin and McDonalds improved their coffee selection and kept prices reasonable, Starbucks sat pat and had nothing to respond with as the market around them changed and customers fled in droves…

In short, if one wants black and white proof the piece is way off base, just look at the two companies results. While McDonalds has increased its dividend 50%, is consistently increasing earnings guidance and trades at an all time high, Starbucks is dialing theirs back, fired the CEO and saw its stock drop 40% last year…

Disclosure: Long McDonald’s, None in any other

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Rocket,CNN, Crain’s NY Business, RI Legislature

– Will he pull a Palmero or a McGwire?

– Another thank you is in store for this mention.

– Another thank you to Aaron Elstein at Crain’s NY for both this interview and mention.

– Now the infighting begins on money they will not even ever see..

Disclosure:

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