The coffee wars are starting to get interesting.
Lately, Starbucks (NASDAQ: SBUX) has felt a few sharp elbows from burger giant McDonald's (NYSE: MCD). Starbucks is a story "in transition," with any luck back to its growth and glory days. And with the return of Chairman and founder Howard Schultz to the CEO role, Starbucks is going back to the basics.
Effective immediately, Starbucks will be offering a regular cup of coffee aptly named Pike's Place Roast after the location of Starbucks' first store in Seattle. This blend of coffee will be offered every day for customers who don't want to try the flavors of the week and prefer on a standard, regular cup of coffee. Pike's Peak was blended after feedback from over 1,000 customers.
The return to basics means that freshly brewed coffee will now sit in holding pots for only 30 minutes as opposed to the old 1-2 hours. Breakfast sandwiches are being scrapped as customers felt the egg aromas conflicted with the sought-after coffee aromas. All workers at Starbucks have been re-trained to go back to the basics right down to asking the customer his or her name after taking the order.
Starbucks is closing unprofitable stores in the US and actually slowing down new US store openings. Its international growth agenda is still intact as margins will eventually accelerate from foreign outlets. Economies of scale are on the horizon in international markets and Starbucks will reap the benefits quickly.
Some will argue that McDonald's has made some inroads into the Starbucks customer base by offering various blends and fancy concoctions. These two are not natural competitors as McDonald's is still perceived as a food vendor primarily with coffee as an ancillary sale. McDonald's has aggressively marketed its coffee offerings but the poaching of some Starbucks customers remains largely anecdotal.
The good news for Starbucks shareholders is the downside potential for the stock is minimal at the $17-18 level. The March quarter I am sure will not be pretty and Howard Schultz has stopped providing earnings and revenue guidance to Wall Street. Nor will he provide monthly same store sales numbers, as he wants his management team to manage annual growth results as opposed to micro-managing for monthly comps.
For patient investors, Starbucks is a buy.
Georges Yared writes about great growth stories in Game On Investing.
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Reader Comments (Page 1 of 1)
4-08-2008 @ 3:56PM
Mike said...
Starbucks should have devloped this new flavor by seeking feedback from non-customers! The choir are already believers, but by seeking feedback from non-customers they would appeal to new customers.
4-08-2008 @ 4:00PM
William Dollar said...
The recent scare and sales drop off are good medicine for a company that has become a bit on the lazy side. Having the founder back in the saddle with new products is great, and given his talent, I'm sure Howard Schultz can turn things around. Grinding the coffee in the stores will breathe new life into a bit of a tired brand. But hey, Starbucks is still a good place to get a cup of coffee.
4-08-2008 @ 4:24PM
Laurie said...
Just to correct the author, the previous hold time for coffee was 1 hour, not 1-2 hours. Now the coffee is brewed every 30 minutes. In most stores it is probably brewed every 10 to 15 during peak coffee hours
5-01-2008 @ 4:57PM
trendo said...
"The trend is your friend." This statement is one of the most basic tenets of stock price action.
Even the most elementary, but trustworthy means of analyzing price action on a price chart, daily simple moving averages, (50SMA, 200SMA) are in a downtrend. Without assessing the merits of moving average crossovers, and an array of other signals from "technical analysis 101," it is indisputable that price remains in a confirmed downtrend.
To offer a Buy recommendation when it is counter to the prevailing trend borders on irresponsible. Value, and price that is paid for a stock should not be confused. "Patient investor" is too often a sad euphemism for an investor who bought a stock at a higher price than they wished they had paid, wondering why they allowed themselves to do so.
As much as Starbucks, the company, is righting itself in many right ways, and as much as the shareholders may continue to hold shares in hope that they decline no farther, the market for this stock has not signaled that the price decline is over. Until it has, the price of SBUX should be considered likely to reach lower lows.
4-08-2008 @ 10:20PM
Mark said...
One little thing.... it's "Pike Place", not "Pike's Place". Don't worry--most people outside of Seattle make the same mistake!