Starbucks Lacks Direction and Soul

I have been all over Starbucks (SBUX) for over 2 years now, someday the company will listen. After two years of scoffing, dismissing and mocking those who would suggest the notion of discounting, calling it "diluting the brand", Starbucks is chasing McDonalds (MCD) and Dunkin Donuts down the food chain (pun intended).

Monday's Memo from Howard Schultz.:

To: All Partners
Date: February 9, 2009
Subject: Value and Everyday Affordability – The Starbucks Way

Partners,

During these tough times, customers need to know they’re making a smart choice when they come to Starbucks. That they’re getting the world’s finest coffee, delicious food made with quality ingredients, and an experience they can’t get anywhere else. But they also need to know we’re listening to them, and that we’re helping them by making Starbucks an affordable, everyday value.

We have taken some time to understand how Starbucks can deliver more value in a way that is both consistent with who we are, and relevant to the day-to-day realities consumers are facing. It was time well spent. We have tested concepts, conducted research, and most important, listened to our customers. I am very pleased to report that we have arrived at a value strategy that will appeal to customers without compromising our commitment to quality.

On March 3, we will introduce a selection of new pairings at $3.95. They combine our most popular beverages with our most popular breakfast items – and we’ve added a few new ones as well. Our pairings lead with our hand-crafted beverages. They offer our customers more affordability at breakfast time – not a free extra they wouldn’t have ordered anyway. And they come with the Starbucks Experience each and every day.

This move is the right thing to do for our customers. And we can do it while maintaining our high standards in sourcing, buying and roasting the finest coffee in the world. Starbucks success over the years has been in delivering a level of taste, quality and authenticity based on the coffee beans we start with and the experience created by our partners. The majority of our customers are coffee lovers and we need to trust them to find value and quality at Starbucks over and above fast food purveyors and other coffee companies.

At the same time, we will do more to tell our story. I talked to a Partner recently who was frustrated by the persistent misperceptions about our value. He was urging the company to be more aggressive in responding to the mythical claims about the $4 latte. With your help, that is exactly what we are going to do.

Did you know, for example, that ounce for ounce; our brewed coffee is competitively priced vs. others in most markets, and in some cases, is lower priced? And did you know that the average price customers paid for beverages for all of 2008 was under $3? We will be providing you more facts like these over the coming weeks, so you have the ammunition to dispel the myth -- with customers and friends, online and in conversation. We’ll also be adding new offers over time that combine everyday affordability with an emphasis on why Starbucks is a smart choice for customers – in tough times and in good times.

I look forward to sharing more with you about the value we bring to customers, and I thank you in advance for playing a critical role in telling the story.

Onward,

Howard

Problem? Yeah, it is now an admission that everyone who has said Starbucks was too expensive was right. Had the company done this last summer it could have played it as a "helping out the consumer" motive. Now it just smacks of desperation as sales plummet and customers continue the two year exodus to the "competition" Schultz & Crew always denied existed.

How is the competition doing?

Yeah... good thing they aren't competition for Ole' Howard. Will the price drop help? NO. Why? Starbucks is in reactionary mode and has no direction and no soul. They no longer know who they are and what they stand for.

Until they figure it out, shareholders will suffer. What really needs to happen is for Schultz to go. Since the firing of Jim Donald last year, the return of Schultz has not led to any better leadership or decision making.

Schultz returned promising a return to what made the brand great and almost every decision he has made since then has been counter to what Starbucks once stood for. Because of that, the brand is in shambles... A fresh face is needed....or at least an original idea...

Disclosure: Long MCD

Comments

[Jake Berzon:]

I has direction and soul alright, but also some overpriced coffee - great fad during the boom cycle, not so good in a recession and terrible disaster during a depression, unless of course they can reposition themselves as a cheap luxury. It will be a minor miracle if they can do this with a product that competes head on with standard soup kitchen fare...

Feb 10 01:40 PM

[drone:]

I don't believe Starbucks should be going after MCD or Tim Hortons any more than Coach should be chasing Ross Stores or Winners. SBUX is a place to sit and relax, have a coffee, read a book, listen to good music. I wouldn't spend any more time than I had to at MCD or Dunkin, even if their products are inexpensive.

Feb 10 01:42 PM

[TomF75:]

Back when I used to have an Expense account, I was religous in my devotion to Starbucks (usually 3x's per week). Now with no expense account, and having to pay for my own coffee, MCD and Dunkin's coffee taste ALOT better than it used too.

Feb 10 01:42 PM

[Amanda Starlet:]

Maybe desperation is just what they need. I'm first in line for that $3.95 breakfast deal. woo hoo!

Feb 10 01:44 PM

[mikebrah:]

While some of your comments are on point, spare us the vitriol.

If anything, you should be praising them for their new direction. So SBUX doesn't have your gift of omniscience. MCD went through this very same transition and faced many hem-hawers like this along the way.

Revenues are not nearly as dire as many people imply. They took in $2.6B last quarter. As CAPEX gets reduced and stabilizes at a lower level SBUX will be a cash-flow cow.

Personally I started buying at 12 and got my last order at ~$7.70ish. It has held up very well since the November turbulence and is a long term winner. There is still vast untapped potential in overseas markets despite all the cries of "saturation" and "cannibalism."

It is a globally recognized brand trading at 0.75x revenues compared to almost 3x revenues for MCD.

At $30-40/share, your logic held water but at current levels I find it very leaky.

MM

Feb 10 01:45 PM

[Nick Waddell:]

One step closer to every Canadian's dream: Tim Horton's supplants Starbucks...

Feb 10 01:46 PM

[Jason Laurent:]

To mikebrah

I think we all agree that at $30-40 SBUX was by all means expensive. How about at the $10 level? Well if you believe SBUX is worth $43 for every dollar of earnings it generates per share, then........well no, actually there is nothing to say. It's all yours.

With Apple trading at a PE of 18 for example, I'll let you buy SBUX at a 43 PE who only has its brand to protect its $5 coffees and slightly disgusting food menu. Personally, I'll go for one of today's best innovator and marketer at an 18 PE!

Feb 10 02:28 PM

[user1938:]

I think that Starbucks has lost its soul. what Starbucks has been offering over these year is the experience, that it is all, $5.00 buy you luxury, pricing is one thing, they just was hot headed, opened too many stores while only few percentage really could afford those latte. How many store you have seen that Neiman Marcus has, you don't have the population that you would like to see in Wal-Mart, but you still want to be blind to open too many locations. How come you have one stop inside of Safeway while you open a full service store right next to it, that is crazy and senseless business behavior, bubble is always bubble, have you seen a bubble stay, the same to Starbucks. Starbucks has great logo, it has created a experience of sense of luxury by paying few bucks, but it is not messive operation. Starbucks will go no where before they realize they were lucky those years because housing market was good, few dollars did not mean much, therefore they had the share of market, now it is just the time to get real, BEST SOLUTION: DOWNSIZE.

Feb 10 02:59 PM

[drone:]

MCD has a way of drawing you in with cheap prices then screwing you in the end. For example their fries are undersize compared to competitors. Do they offer free refills on the fries? No, even though potatos are cheaper than coffee beans.

Feb 10 03:09 PM

[swagvalance:]

Starbucks invited the fast food chain competition years ago. Now it will eat them alive.

Feb 10 06:10 PM

[jenny:]

They may be late on the boat, but I feel consumers will appreciate the change despite how late it has come. It's not like they are lowering all their prices, they are literally introducing a measly value meal. The $4 latte still exists. Starbucks reputation will contiue to preced itself not matter how hard Howard tries to change it but at least in the meantime consumers can sorta catch a break. I honestly think SBUX is cheap at this point but you've got to be in it for the very very long run. Sentiment is pretty bearish right now (www.predictwallstreet....) so it might even be a better idea to hold out a little longer to get in.

Feb 10 06:35 PM

[Mr. Ed, Jr.:]

Shulz says employees can help "dispel the myth" about Starbucks high prices, and also "mythical claims about the $4 latte."

I don't think the $4 latte is mythical. I have seen that unicorn.

The author, I believe, expresses very well the attitude of a growing number (myself included) of regular SBUX customers who have become former SBUX customers.
McDonalds is forcing the breakfast issue. In this economy, McDonalds will likely win share, not SBUX. And the high-end coffee competition is gaining ground too, both in quality of product and status (which has always been with SBUX)
As SBUX closes stores, their same-store numbers will increase, but that will reflect a reduction in the cannibalism, not necessarily an increase in business.
The only question is whether, on the other side of this severe downturn, SBUX will have lost too much market share to ever rejuvenate their stock. As far as the American consumer, I expect that change in their spending habits will last for years, not months. That does not bode well for SBUX.

Feb 11 01:33 AM

[mikebrah:]

The $4 COFFEE is a myth. When I go to Starbucks I get a grande black coffee (16 oz I believe?) for $1.85. Yes lattes cost more than that, as they do most places. But comparing DD or MCD's coffee price to Starbucks' latte price is apples to oranges.

I am a happy new shareholder. Since I just drink coffee I rarely go there, but I do brew the SBUX brand at home.

And since everyone seems interested in using anecdotal stories to judge a $10B global enterprise, I will say that every Friday when I do stop in the place is packed.

MCD went through the same thing during the 70s. The stock price dropped about 70% peak-to-trough as all the analysts swore that fast food was done. No one would spend money to eat out when they could cook their own food right? Well, MCD in 1975 was one helluva investment opportunity.

Lost among all the chatter is the fact SBUX reported $2.6B in revenue last quarter and has a market cap of just $7.3B. Once capex gets controlled that will start filtering to the bottom line nicely.

Just my $.02
MM

Feb 11 02:18 AM

[Joseph Sherman:]

This value meal will kill the gourmet ties to the brand. It opens a space for independent coffee shops to crate value by meeting local customer tastes.

Feb 12 02:49 AM

[User 356010:]

Savoring the salt caramel hot chocolate is like a comfy cosy delicious dream fantasy.

The latte is not just a pick me up. Its a spiritual experience.

Feb 12 04:09 PM