In industry conferences and festivals of many sorts, there is a saying: "when the economy is down, people buy ___." Fill in the blank depending on your audience; books, liquor, chocolate, coffee. Small, inexpensive pleasures, the idea goes, are a refuge in a depressing time.While that truth does hold with coffee, it doesn't hold for every retailer. Starbucks Corp. (NASDAQ: SBUX) is one of the victims of the opposing "not so much" theory. That is, yes we need our pleasures, but we're not going to pay that much for them. Yesterday Starbucks announced its rather terrible fiscal fourth quarter 2008 profit, for the period ending September 30, 2008; a penny a share after charges, 11 cents a share excluding charges; a depressing 10 cents lower than the year-earlier quarter.
McDonald's (NYSE: MCD) and Dunkin' Donuts, on the other hand, are smugly celebrating their success with "premium" coffee at a low price (well, lower than Starbucks, the price benchmark in today's economy); at the same time wondering if their low prices are too low. McDonald's is considering upping the price of some dollar menu items to $1.19; the company has high hopes for its own premium coffee offerings, including espresso bars and blended coffee drinks, although analysts wonder if the company's customers even like coffee.
Well, whatever McDonald's is doing, it seems to be working. Same-store sales are up at a much greater percentage for the fast food giant than for Starbucks. The company's stock seems to have avoided Starbucks' low, low, lows -- McDonald's is quite near its all-time high, and is up 116.5% (to $56.29 at today's market close) over the past five years. Compare with Starbucks, whose return-on-investment chart is filled with red for every period of time from one day to five years.
Will Starbucks suffer forever?
Industry analysts don't seem to think so; Harry Balzer offers this rather quiet optimism: people are still buying coffee drinks rather than brewing at home, though "everything with a premium price is going to be under pressure for a while."
The question for Starbucks: how long is "a while"? And will the end of that "while" show a renewed interest in the minorly expensive pleasures of Starbucks, or the return to coffee brewed at home and enjoyed, with a newspaper, at the kitchen table? I believe that, no matter what happens in the economy, consumers will continue to look for places to meet for good caffeine and good conversation. I believe that big changes need to occur in the company's basic business model (for instance, stop relying on a raft of expensive-to-market and focus-destroying merchandise lines), but many of the changes I'd make are already underway. I think the current price is a reasonable one and accurately reflects the company's growth potential in a climate of economic uncertainty.
No matter what the legend, I believe that Americans are hooked on caffeine and the low-investment community found at Starbucks and other like-minded coffeeshops. Huge revenue growth may not be in the cards for 2009, but long-term mindshare growth probably is.
The question for Starbucks: how long is "a while"? And will the end of that "while" show a renewed interest in the minorly expensive pleasures of Starbucks, or the return to coffee brewed at home and enjoyed, with a newspaper, at the kitchen table? I believe that, no matter what happens in the economy, consumers will continue to look for places to meet for good caffeine and good conversation. I believe that big changes need to occur in the company's basic business model (for instance, stop relying on a raft of expensive-to-market and focus-destroying merchandise lines), but many of the changes I'd make are already underway. I think the current price is a reasonable one and accurately reflects the company's growth potential in a climate of economic uncertainty.
No matter what the legend, I believe that Americans are hooked on caffeine and the low-investment community found at Starbucks and other like-minded coffeeshops. Huge revenue growth may not be in the cards for 2009, but long-term mindshare growth probably is.
Reader Comments (Page 1 of 1)
11-11-2008 @ 6:52PM
jeff said...
People are cutting back on $8 cups of coffee......what a shock.
11-12-2008 @ 9:52AM
Mike O said...
Yeah, couldn't agree more with you, Jeff.
I used to get one every week... now it's one every couple months.
I buy the pre-packaged Dunkin Donuts ground coffee and brew it myself. Sure, it's not as good as my Grande White Mocha, but it's the best plain-jane cup 'o joe you can get for such a low price.