An article in the WSJ last week suggested that the smoothie beverage launch at McDonald’s (MCD – $69.67) had the potential to lift the boats of all smoothie participants, including Starbucks (SBUX – $25.15), Panera Bread (PNRA – $73.56), and Jamba Juice (JMBA – $1.98).
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Here’s what we find interesting. Last year, when MCD entered the premium coffee category, the conventional wisdom was that the burger giant’s entry into the premium coffee category lifted all boats. Was there any data to support this conventional wisdom? None that we can find.
So, where did analysts and investors obtain this particular thesis? On the Q1 2009 conference call (see transcript here) in January 2010, SBUX CEO Howard Schultz suggested that MCD’s then recent premium coffee launch was lifting all boats. Was the proclamation true? We doubt it.
Here’s why. On the Q2 2009 conference call in April 2010 (see transcript here), Mr. Schultz suggested that traffic in its U.S. Division increased for the first time in 13 fiscal quarters. He also suggested the following traffic drivers:
- My Starbucks Rewards launch in late-December 2009;
- Warm Panini and healthy snack program launches;
- Customer own tumbler discounts.
Mr. Schultz can’t have it both ways. Which is it? SBUX top-line initiatives or MCD’s premium coffee entry?
He can’t suggest that his +3% traffic increase in the U.S. Division was driven by MCD’s recent foray into the premium coffee category AND by the various programs that were launched to drive traffic versus a 13-quarter decline (i.e. traffic may have simply bottomed and any of the company’s top-line initiatives may have been a material traffic driver).
So, why did Mr. Schultz provide this “MCD lifting all boats” proclamation? We can only speculate. But, if investors were to believe MCD was negatively impacting SBUX’s top-line at such an early stage of their premium coffee initiative, SBUX’s premium valuation relative to its restaurant group peers would come under severe pressure.
That said, this particular subject highlights how, many times, traditional Wall Street analysts simply regurgitate the talking points of management teams without simply asking the follow-up question… where’s the data to support your claim?
So, let’s get back to smoothies. Will the entry of MCD into the smoothie market lift the boats of the existing players? JMBA CEO James White believes so. He’s suggesting many of the same things that SBUX CEO Howard Schultz suggested 6 months ago. Great spin. We’re much less certain.
Disclosure: No positions