Tag: sbux

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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