Tag: sbux

So McDonalds (MCD) is introducing its first new burger in a long time, called “Angus Third Pounders” .

Will it work? Based on early tests in NY and other test markets, yes it will. The cost of the product will be $4 which is not unreasonable at all for a burger. McDonalds is also going the right direction. Going up the price ladder is easier than coming down.

Look at Starbucks (SBUX), they cannot shake the “expensive” label, no matter how hard they try because for so long, they were and were proud of it because to them it signaled “quality”. Now the consumer has turned as is looking for value and McDonalds is printing profits as they come in the door.

The burger. I think people are really underestimating the potential here. Think about it. Most people like a good burger and $4 is still dramatically cheaper than the $7 -$9 you pay in most chain restaurants for one. Because of that, I am of the opinion that a large swath of current customers are going to give it a spin. Mom and dad can enjoy one while the little kids enjoy the Happy Meal they always want.

From a consumer perspective, this is the perfect thing for them to be doing now. They have expanded the coffee customer base, expanded the healthy offerings, and now they are expanding the base of people who want a burger but also want more than the current cheeseburger fare. Unlike other past unsuccessful roll-outs like when they ventured into pizza, this is perfectly in keeping with what people go to McDonalds for in the first place.

This is going to be big folks…..

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

Here is the latest. Talking Starbucks (SBUX)/Mcdonalds (MCD), Iran/Israel, Oil, GDP

View more investing video at Wall St. Media

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

This is a joke……. Not too long from now business school students will be doing case studies on the “destruction of the Starbucks (SBUX) brand”.

Remember this memo?

Over the past ten years, in order to achieve the growth, development, and scale necessary to go from less than 1,000 stores to 13,000 stores and beyond, we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.

Many of these decisions were probably right at the time, and on their own merit would not have created the dilution of the experience; but in this case, the sum is much greater and, unfortunately, much more damaging than the individual pieces. For example, when we went to automatic espresso machines, we solved a major problem in terms of speed of service and efficiency. At the same time, we overlooked the fact that we would remove much of the romance and theatre that was in play with the use of the La Marzocca machines. This specific decision became even more damaging when the height of the machines, which are now in thousands of stores, blocked the visual sight line the customer previously had to watch the drink being made, and for the intimate experience with the barista. This, coupled with the need for fresh roasted coffee in every North America city and every international market, moved us toward the decision and the need for flavor locked packaging. Again, the right decision at the right time, and once again I believe we overlooked the cause and the affect of flavor lock in our stores. We achieved fresh roasted bagged coffee, but at what cost? The loss of aroma — perhaps the most powerful non-verbal signal we had in our stores; the loss of our people scooping fresh coffee from the bins and grinding it fresh in front of the customer, and once again stripping the store of tradition and our heritage? Then we moved to store design. Clearly we have had to streamline store design to gain efficiencies of scale and to make sure we had the ROI on sales to investment ratios that would satisfy the financial side of our business. However, one of the results has been stores that no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store. Some people even call our stores sterile, cookie cutter, no longer reflecting the passion our partners feel about our coffee. In fact, I am not sure people today even know we are roasting coffee. You certainly can’t get the message from being in our stores. The merchandise, more art than science, is far removed from being the merchant that I believe we can be and certainly at a minimum should support the foundation of our coffee heritage. Some stores don’t have coffee grinders, French presses from Bodum, or even coffee filters.

Now that I have provided you with a list of some of the underlying issues that I believe we need to solve, let me say at the outset that we have all been part of these decisions. I take full responsibility myself, but we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.

So, this was the “new” direction Howard Schultz was taking the company in March 2007.

Fast forward….

From the NY Times:

Starbucks is moving into the instant coffee market as it works to shake off its reputation as a seller of expensive coffee drinks.

The company, based in Seattle, plans to unveil Via instant coffee on Tuesday and make it available next month.

Starbucks says Via was in development for 20 years and replicates the taste of its coffee. Three single-serve Via packets will cost $2.95, and 12 packets will be $9.95.

The move pits the company, which already sells its coffee beans in grocery stores and in its own shops, against giant food sellers with established instant coffee brands, including Nestle, the maker of Nescafe, and Kraft Foods, the maker of Sanka.

Instant coffee, which Starbucks says has a $17 billion global market, was more popular decades ago in the United States and remains a staple in parts of Europe and Asia.

“Starbucks is trying to go where the customer is,” Tom Forte of the Telsey Advisory Group said.

Starbucks is “giving a customer an opportunity to experience the brand at a lower price point,” Mr. Forte said. “The company is being aggressive in trying to generate sales in an increasingly weak economic environment.”

Simple analysis is that Starbucks once again has no idea about its market. “20 somethings” do not “trade down” to instant because a Starbucks label is slapped on the package. Nor will your 80 year grandmother switch from her Folgers to pay 3 times as much for Starbucks instant. Mystifying…

This does not move the needle on people’s thought process from “expensive” to “value”. It moves it from “quality” to “crap”. Somewhere McDonalds (MCD) exects are laughing their asses off on this one

Nice job Howard….

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

Visit the ValuePlays Bookstore for Great Investing Books

I have been all over Starbucks (SBUX) for over 2 years now, someday they’ll listen. After two years of scoffing, dismissing and mocking those who would suggest the notion of discounting, calling it “diluting the brand”, Starbucks is chasing McDonalds (MCD) and Dunkin Donuts down the food chain (pun intended).

Today’s Memo from Howard Schultz.

To: All Partners
Date: February 9, 2009
Subject: Value and Everyday Affordability – The Starbucks Way

Partners,

During these tough times, customers need to know they’re making a smart choice when they come to Starbucks. That they’re getting the world’s finest coffee, delicious food made with quality ingredients, and an experience they can’t get anywhere else. But they also need to know we’re listening to them, and that we’re helping them by making Starbucks an affordable, everyday value. We have taken some time to understand how Starbucks can deliver more value in a way that is both consistent with who we are, and relevant to the day-to-day realities consumers are facing. It was time well spent. We have tested concepts, conducted research, and most important, listened to our customers. I am very pleased to report that we have arrived at a value strategy that will appeal to customers without compromising our commitment to quality.

On March 3, we will introduce a selection of new pairings at $3.95. They combine our most popular beverages with our most popular breakfast items – and we’ve added a few new ones as well. Our pairings lead with our hand-crafted beverages. They offer our customers more affordability at breakfast time – not a free extra they wouldn’t have ordered anyway. And they come with the Starbucks Experience each and every day.

This move is the right thing to do for our customers. And we can do it while maintaining our high standards in sourcing, buying and roasting the finest coffee in the world. Starbucks success over the years has been in delivering a level of taste, quality and authenticity based on the coffee beans we start with and the experience created by our partners. The majority of our customers are coffee lovers and we need to trust them to find value and quality at Starbucks over and above fast food purveyors and other coffee companies.

At the same time, we will do more to tell our story. I talked to a Partner recently who was frustrated by the persistent misperceptions about our value. He was urging the company to be more aggressive in responding to the mythical claims about the $4 latte. With your help, that is exactly what we are going to do.

Did you know, for example, that ounce for ounce; our brewed coffee is competitively priced vs. others in most markets, and in some cases, is lower priced? And did you know that the average price customers paid for beverages for all of 2008 was under $3? We will be providing you more facts like these over the coming weeks, so you have the ammunition to dispel the myth — with customers and friends, online and in conversation. We’ll also be adding new offers over time that combine everyday affordability with an emphasis on why Starbucks is a smart choice for customers – in tough times and in good times.

I look forward to sharing more with you about the value we bring to customers, and I thank you in advance for playing a critical role in telling the story.

Onward,

Howard

Problem? Yeah, it is now an admission that everyone who has said they were too expensive were right. Had they done this last summer they could have played it as a “helping out the consumer” motive. Now it just smacks of desperation as sales plummet and customers continue the two year exodus to the “competition” Schultz & Crew always denied existed.

How is the competition doing?

Yeah….good thing they aren’t competition for Ole’ Howard. Will the price drop help? NO. Why? Starbucks is in reactionary mode and has no direction and no soul. They no longer know who they are and what they stand for.

Until they figure it out, shareholders will suffer. What really needs to happen is for Schultz to go. Since the firing of Jim Donald last year, the return of Schultz has not lead to any better leadership or decision making.

Schultz returned promising a return to what made the brand great and almost every decision he has made since then has been counter to what Starbucks once stood for. Because of that, the brand is in shambles…

A fresh face is needed….or at least an original idea…

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

Visit the ValuePlays Bookstore for Great Investing Books

When folks are flush, they will spend for status, but when things get tight and quality low cost competitors enter the market, buying habit change…fast. This also has nothing to do with Steve Jobs’ shareholder deception, what is happening now at Apple started last summer.

So, the Apple (AAPL) nuts will send me more hate mail and call me names. Oh well…

Remember when WholeFoods (WFMI) was the only place in town to get organic food and Starbucks (SBUX) was the only place the get anything other than a standard cup of coffee? Remember? It seems like and eternity ago especially when I can get organic food at the 7-11, Wal-Mart (WMT), Costco (COST), BJ’s (BJ) and every local supermarket and a cappuccino can be had at any one of a dozen local coffee houses, McDonalds (MCD) and Dunkin Donuts.

If WholeFood’s $5 a pound organic potato the best? Is Starbucks $6 cappuccino appreciably better than an offering from anyone else at a fraction of the price? No.

Is the iPhone ($199) that much better than Research in Motion’s (RIMM) Blackberry Bold or Storm that can be had for 1/2 the prices ($99 through discounts)? No

Is a Mac computer really worth 2x the amount I can get a similarly functional product from Dell (DELL) or Lenova? No.

Now for all the above, for the coffee devotee, the person searching for the “one of a kind” generic item and the computer lover who wants a top of the line item or a devoted Apple user, all of the above will continue to generates sales and profits from these folks.

But, for the “unwashed masses” (yours truly is one of them) that is not married to a brand, a cup, need a computer for basic functionality and does not need organic-hand-picked-free-trade-union-only beets, we will alway drift to the lower cost comparable item. The problem with the above three is that they lack an item for us.

The Blackberry Bold and the iPhone are both comparable items. Both have pro and cons vs each other and both have loyal followers that will tell you either is better. But for 1/2 the price, the Bold has the most important advantage over the iPhone.

I am reading Howard Lindzon’s upcoming book “The Wallstrip Edge “. For the record I am not a trader but the book is very good as it does force you to look at things a different way and it challenges “common knowledge”. Lindzon has been in the game for decades now and anytime you can get insight from someone as brutally honest as Howard, that has tremendous value. Enough about the book, I’ll have more when I publish the review next week.

As I read it I realize the trend in Apple is over like the others. Shareholders are not going to see a $180 stock price in the future and like the other two, a stable or declining price is more likely. The iPod was revolutionary and had such a lead on the others there was no answer (the real advantage was iTunes, not the player). The iPhone is a great product but was immediately matched by competitors that offer some things it doesn’t at a far lower price point. Unlike the iPod, there is no iTunes for the phone that makes using a competitor’s product impossible. Cell networks are as interchangeable as toilet paper thus the advantage the iPod has is not found on the iPhone. Now price rules.

With US sales down 24% in Q4, Apple is left with only more price cuts to stimulate sales. That will cut into margins and profits.

Are any of the above three going away? No. Are they in danger of losing money? Apple no, the others, for a while, yes. It does mean the glory days for the stock are over, unless they can tap back into the mass market that has left them. But that will require dramatic pricing alterations and all three up until this point have been painfully reluctant to do so. Starbucks and WholeFoods really have not significantly altered it and Apple only did so on the iPhone (from $599 to $399 to $199) after sales of the product ground to a pedestrian level and even at its current level, the phone is overpriced vs the market.

What’s worse is all three now have the reputation of “expensive”. That will be the hardest thing to overcome, convincing a newly thrifty bargain hunting consumer you are not what they say you are…

Disclosure (“none” means no position):Long MCD, none
Visit the ValuePlays Bookstore for Great Investing Books

Of course they slipped in an SEC filing and did not actually say it out loud. There have been few companies that I have covered that have been either as clueless as to their business environment or dishonest about it with shareholders than Starbucks (SBUX) had over the past almost two years now.

Back in Feb. 2007 the CEO Jim Donald claimed that McDonalds (MCD) then new entry into premium coffee would be a benefit to Starbucks as McDonalds’ customers would then trade up to him. At the time I detailed to folly of this statement and said “I advise any potential new shareholders to avoid shares…”. Shares at $34

Less than a month later then retire founder and former CEO Howard Schultz penned a memo saying, without naming, that “competition has created awareness” of themselves, the company had “got away from its roots” and that it was affecting results.

In May 2007 with milk prices soaring and flimsy earnings out I detailed how dairy price would hurt them despite the fact management denied it would affect earnings and CEO Donald said “we do not consider the competition” when asked about McDonalds. Um….can’t really even add to that…Shares sit at $28

Only weeks later Starbucks switched from whole milk to 2% in all drinks for “customer service” reasons and at the time I said it was all about milk prices, then at decade highs..(2% is cheaper than whole)

Fast forward a month, Starbucks issues a profit warning and says “rising dairy costs are a challenge”…..duh..

Then came the announcement of the near $6 salad. At the time I commented that for a company that Schultz had lamented had “got way from its roots” in his famous memo, nothing they had done since then was a return to them.

Then just in case you weren’t convinced the ship wasn’t drifting listlessly, in late July facing declining stores traffic and an increasingly cash strapped consumer Starbucks did what???? Raised prices…

Less than a week later Starbucks admits increased prices leads to less store visits by customers….yet they maintain price levels…

Finally in September Starbucks admits “dairy prices will be a negative into 2008″…Shares now priced at $27

In Jan 2008 Schultz finally did what I begged him to do for almost a year a fired Donald

In Feb. 2008 they admitted what I hope anyone who has read the blog already knew, the coming year would be a poor one. Shares priced at $18

In March things got weird. Starbucks decided that they were going to start a social site so folks who loves the place can go online and talk about it…..more of Schultz “going back to the roots” of the company?

In May we find out the fired CEO Jim Donald cannot work “for the competition”….McDonalds..but, we thought they weren’t??

In July Starbucks started playing games with the earnings release to hide how bad results really were. Shares priced at $14

In August Schultz gave an interview in which he called the coffee at McDonalds and Dunkin Donuts “swill”, said he won’t “dilute the brand” by “going down the fast food road” and then does just that only days later with the “$2 after 2” promotion. Shares priced at $14

Current day. I have stopped following Starbucks as close as before because with the stock at $9 vs the $34 it was at when I told folks to run from it, I hope the story is clear for all to see. But, I could not let this one go by.

From the WSJ:

The filing to the Securities and Exchange Commission sheds light on how much of a threat new competition is to Starbucks, as McDonald’s Corp. and other restaurants add espresso drinks and more elaborate beverages. In the filing, Starbucks says that, in the U.S., “the continued focus by one or more large competitors in the quick-service restaurant sector on selling high-quality specialty coffee beverages at a low cost has attracted Starbucks customers and could, if the numbers become large enough, adversely affect the company’s sales and results of operations.”

Not bad…..it took 22 months for them to either recognize or admit it……

Just terrible…

Disclosure (“none” means no position):Long MCD, none
Visit the ValuePlays Bookstore for Great Investing Books