Starbucks was the perfect second derivative play for the consecutive bubbles that powered the U.S. economy in the recent past. The company's marketing and strategy was brilliant. Take a perfectly good product that is already fairly high margin. Surround it in a fuzzy, feel-good aura. Raise prices of product astronomically while holding ingredient costs fairly level. Build a first-class merchandising operation around said product. Print money and laugh all the way to the bank.
In an era of endlessly rising expectations, when any itinerant laborer could buy a $500,000 house with no down and no real income, the Starbucks parable was perfect. After all, we worked hard. We deserved a break (Whoops, that's a Mickey-D's line). And an affordable luxury like Starbucks, particularly an addictive one, was not even a luxury anymore -- it was a divine right. Starbucks responded quite well, recognizing the trend, expanding rapidly, and fueling the aura with a barrage of relatively expensive corporate practices that fed the feel-good perception, from health insurance for all employees (even part-timers) to Fair Trade coffee practices. All of these efforts were, on the whole, quite laudable and not a sign of weakness. On the contrary, they marked a market maestro at the top of their game.
How quickly the foam came of this latte. First every supermarket and convenience store started offering higher grade coffee at prices below Starbucks. Then, when McDonald's entered with its McCafe concept, it was clear that Starbucks was in for some really rough competition. As same-store sales slowed and declined, Starbucks responded by shuttering locations and laying off workers. Not so warm and fuzzy any more, eh? While investors howled for the company to revert to its earlier formula, the reality is, such a formula would not work as well in an economy where far fewer people feel comfortable coughing up $15 per day to fulfill a bad beverage jones.
Then comes this, the big backpage ad pleading with the business community that Starbucks is different. Trying to redefine a market perception and turn back the clock through a newspaper ad is one of those things that makes it obvious the glory days of Starbucks are long gone Yes, the company will be able to improve its operations and regain some luster from its past. No, Starbucks remains a viable company. Yes, Starbucks will grow (in fact, SBUX posted decent Q2 numbers). But it will grow a lot more slowly than perhaps people realize and it will be fighting an uphill battle. If you have to tell everyone how hot you are in a lifestyle segment, then clearly you just aren't anymore. Make mine a no steam el cheapo tall Cafe Americano, please.
Alex Salkever is the Director of Research at Piqqem.com, a stock prediction community powered by the wisdom of crowds.
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Reader Comments (Page 1 of 1)
5-04-2009 @ 5:40PM
Todd said...
Wow- so premium is dead. We should just flip the switch to communism.
But before we do, try and have a business meeting at a McDonalds, then do the same at Starbucks.
The difference in the total experience is why we pay more for Starbucks coffee.
And a $3 latte is not the same as an over-leveraged $500K home you can't afford and shouldn't have bought in the first place. (I don't know anyone who ever spent $15 / day on coffee?)
Maybe you should have a hot cup of reality before you advise us on which stocks we should spend our money on.
5-04-2009 @ 6:02PM
okydoky_20 said...
Wow Alex, calm down! After reading your diatribe, I surmise that you REALLY need a coffee break!
5-04-2009 @ 6:16PM
ToddB said...
Wow! I could not have said that any better. I tried to enjoy the McCafe experience, but with signs in every direction telling my that my stay in the McDonald's store could only last 30 minutes. I found it highly unlikely I would be able to relax. Besides I go to Mikey Ds for a burger and fries, not coffee!
5-04-2009 @ 6:28PM
Sheldon L said...
You start off with a strong position and by the end of the blog you have recanted 3/4's of it.
???
5-04-2009 @ 6:36PM
alex said...
You are the kinds of customers Starbucks actually dislikes. They sell most of their coffee before 10 am and if they lose that business to McDonald's they are toast. While their feel-good aura allowed people to use Starbucks for meetings and the like and it is a nicer space, the reality is, it doesn't take much erosion of market share to really hammer them. As for Megan, I can tell you, I know at least 10 people who were spending $15 per day on expensive Starbucks drinks. Not sure what planet you live on. :)
5-04-2009 @ 8:52PM
Andy said...
You know 15 people that spend 15 bucks a day on coffee ? Of the thirty or so people I know that drink Starbucks most have one, some have two and just a couple have three. Nobody claims to have four or five. Forget the caffiene...assuming half don't drink the lite version you're talking thousands of calories a day...Are all your friends over 300 pounds ?
5-04-2009 @ 8:59PM
Josef said...
Ok Alex, I can read between the lines, you missed the 50% + share price increase in 2009 and now you are trashing Starbucks. Go get yourself a cup of Joe at McDonald and hopefully you fit in the kiddies seats and try to relax a bit.
Josef
5-05-2009 @ 9:56AM
Rick said...
There is a huge difference between Starbucks and McDonalds, like night and day. If you want to hang out around screaming toddlers tearing into their happy meals (how ironic) while sipping your latte, then go to McD's. If you want to hang out around hipster doofuses, go to Starbucks and feel superior to the people who are going to McDonald's. If you just want a good cup of joe at a good price, go to 7-Eleven (which actually does have pretty good coffee) and drink it in your car listening to whatever music you actually like, or in complete silence if you prefer.