Tag: sbux

Here, in a nutshell is Starbucks (SBUX) problem.

So, Starbucks has a policy that it knows is injuring customers, yet refuses to change the policy. I guess them recognizing $5 coffee in an economic malaise won’t sell isn’t going to happen anytime soon.

Arthur F Licata, an attorney in Boston has a case against Starbucks that make you questions the thought process in Seattle.

Starbuck has a policy that when you hand them your cup (the travel mugs) to be filled, they do not put the top back on the 185 degree coffee that sits inside. What is happening? People are getting burned. In Licata’s case, his client was burned when the cup the barrista placed on the counter began to tip. In an effort to catch it, the barrista ended up shoving the cup and its contents into the face of his client who’s eyes were burned to the point she no longer has any peripheral vision. What stuck Licata is that through his investigation, this is a common occurrence. Whether it be employees spilling on customers, customers spilling on themselves or customers spilling on other customers, it is happening daily, yet the policy remains.

I know some people are going to scream “McDonalds coffee lawsuit”. I will simply say those who mock that suit have no knowledge of the details of it or the injuries suffered by the old woman or McDonalds role in them. I will also say that McDonalds altered it policy, to date, Starbucks has not.

When I buy coffee at Starbucks and they make it for me, they place the top on.

What does this illustrate? Arrogance. Howard Schultz in a recent interview called the coffee at McDonald’s (MCD) and Dunkin’ Donuts, both of whom are serving more people every day, “swill”. I have never heard a CEO so insulting of another company’s product before, especially when their results are lapping his.

Despite store traffic declining for over a year, Starbucks only recently acknowledged its prices were affecting its business may made at least token efforts to make its products more affordable.

Both episodes go to a mindset. “We do what we do”. If you think we are too expensive or like the other coffee, you just aren’t cultured or are to cheap. We don’t put cap on your travel mug, if you get burned, too bad.

Call it hubris, stubbornness, arrogance or whatever you want, just don’t call it common sense.

UPDATE:
Here is an article about advertising companies walking away from a “very difficult client”. One agency’s head was actually a friend of Howard Schultz

Disclosure (“none” means no position):Long MCD, none
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While Starbucks (SBUX) reports quarter after quarter of decline or stagnant traffic and disappointing results, McDonalds (MCD) keeps turning in great results and traffic increases. Now word is that results at Dunkin Donuts are so strong, they plan to double the number of locations, adding over 9,000 in the next decade.

Reuters reported:

“They have a lot of appeal to the anti-Starbucks crowd. It’s not as chichi and it has a little more blue-collar appeal, which works to their advantage,” said restaurant consultant Bob Goldin of Chicago’s Technomic. Dunkin’ has been a Technomic client, but Goldin has not done work for the company.

Goldin said Dunkin’ made the right choice in expanding beyond breakfast, spiffing up units and pushing national advertising. Its biggest risk is making its menu too broad, he said.

Despite its name, 58-year-old Dunkin’ is more about drinks than doughnuts.

The chain gets around 65 percent of sales from beverages. Over the last few years, it has added espressos, lattes and cappuccinos that cost roughly $1 less than at Starbucks.

Now Starbucks and its leader Howard Schultz can claim all day that they are not losing people to “the competition” but, until the blatantly obvious facts stop saying otherwise, that and almost everything else that is said in Seattle will be looked at very skeptically.

Disclosure (“none” means no position):Long MCD, None
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Apparently people can’t wait to go to McDonald’s (MCD) to drink the coffee or “swill” as Starbucks (SBUX) Howard Schultz called it.

McDonald’s said Tuesday U.S. comparable sales rose 4.5% in August. Global comparable sales increased 8.5% in August, while systemwide sales for McDonald’s worldwide restaurants rose 14.1%.

What does McDonalds give the credit to? Value, Breakfast, Extended hours.

Value: A pinched consumer will NOT spend extra money on a indistinguishable commodity (for 95% of us) like coffee.

Breakfast: See Value

Extended Hours: While Schultz goes with gimmicks and closes stores in the middle of the day to train folks how to make coffee, McDonalds recognizes not everyone works 9-5. In response it has extended it hours making it even more convenient for customers to purchase goods from them. Novel idea.

What to look forward to? More of the same for both, that is good news for McDonalds shareholders and bad for Starbucks.

Disclosure (“none” means no position):long MCD, none
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They needed a poll for that?

Let’s think about it. Let’s assume the coffee is as good as or better than that had at Dunkin Donuts or McDonalds (MCD). Well, if people aren’t going to Starbucks (SBUX) anymore (or are in increasingly fewer numbers) and sales of coffee at the other two are exploding, then it has to be the price.

Here are the survey results:
“76% of American adults say they rarely or never visit one of the shops, and only 14% say they visit occasionally.

A new survey by Rasmussen Reports shows that 73% of Americans say Starbucks coffee is overpriced. Only 6% disagreed and 21% said they were unsure.”

It continued:
“Along with the perception of high prices, only 38 percent of the 1,000 adults polled gave the coffee behemoth a favorable rating, while 27 percent had an unfavorable view of the chain. About one-third of respondents had no opinion.

Younger adults have a more favorable view of Starbucks than older adults. Just under 50 percent of respondents 18 to 29 give the chain high marks, while only 28 percent of seniors shared that view. And those who make more than $100,000 a year view the chain more favorably than those who make less than $20,000 a year, the survey said.”

So, notice one word that was not there? Value. High prices are one thing if you feel like you are getting what you pay for. I do not expect the same service and food at Denny’s as I do at Morton’s. As long as I feel like the service and food were great when I leave Morton’s, I fell like I got my money’s worth. Starbucks problem is people by in large do not feel that way.

The service is non-existent (worse than McDonalds) and the overwhelming majority of folks, by the time they add milk or cream, flavoring and syrup to the coffee, have no ability to ascertain the quality of the bean they are drinking. I will take it a step further and say that unless you are drinking pure coffee or espresso, in 99% of the drinks could be made with the same beans McDonalds and DD uses and no one would be able to tell any difference. If Howard wants to take me up on it, we can arrange a taste testing here in Massachusetts.

Starbucks could then sell the drinks at reasonable prices and finally shut me up.

Now, Howard Schultz, Starbucks’ Chief Snob will look at the results and say “educated people who know better prefer us”. That, Howard may be true. But, you have 14,000 locations. There are not enough $100,000 plus a year folks out there to sustain the growth you need at all those locations. You’ll need to appeal to the “lesser folks” for lack of a better phrase to accomplish what you want. Either that, or you need to admit you need to close another 1,000 plus locations (minimum) to force feed current traffic to existing locations.

Howard has misjudged his market..

Something has to give, right now it is stockholders brokerage accounts…

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

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“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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