Reality Hits Starbucks' Growth Plans

Starbucks is in the news again this week!



In my last post on the coffee retailer, here, I noted that Howard Schultz's vaunted turnaround, for which he returned to the company as CEO, had cratered in a quarterly loss.



This week's Wall Street Journal piece reaffirms the coffee roaster's cutbacks on US store openings, fights with landlords as it closes locations, and even a slowdown in its overseas store openings. According to the Journal piece, same-store sales at Starbucks are down 8% among the conventional 'open at least a year' category.

The nearby 3-month price chart for Starbucks and the S&P500 Index shows the coffee giant falling by more than the market average. Significantly more. Starbucks has lost nearly half its value amidst the market turmoil which began in September.

Clearly, the chain reaction of financial losses to consumer spending has now hit the upscale coffee retailer.



Back in January, I wrote a post concerning the marketing battle brewing between Starbucks and McDonalds. In it, I observed,




"To me, having followed this building story for nearly a year, Schultz' and Starbucks' logic and expectations are wrong. They expanded into more price-sensitive, lower-income segments, and are now struggling to make that business more constant. But it will be precisely those customers who are vulnerable to McDonalds and Dunkin' Donuts. Further, the changes in its product strategies is causing confusion and morale problems among Starbucks' workforce."



This is now coming home to roost big time at Starbucks. As cost-conscious, lower- and middle-income consumers flee the pricey coffee seller's offerings, the other two, more middle-market brands are likely to increase share.

It's not fair to accuse Howard Schultz of not foreseeing this financial-market triggered economic downturn. But he is responsible, never the less. As CEO, he presided over the expansion of the Starbucks brand into ever-lower income customer segments. This was bound to affect sales and profits growth come an eventual economic softening, never mind a serious recession.

Now the full import of the coffee roaster's years of breakneck expansion are coming back to haunt shareholders.

Will Schultz finally admit defeat and just accept that Starbucks' rapid growth phase is over?