Friday, January 30, 2009

Starbucks Shrinks!

In three posts last year- here, here and here- I discussed the failure of Starbucks' CEO Howard Schultz' growth strategy.

Finally acknowledging a slump in high-end retail sales, Schultz is cutting 6,000 store employees and 700 headquarters staff, as well as closing 300 additional stores above the 600 closures announced last year.

As I have noted in prior posts, the firm exposed itself to this sort of risk when it sought growth from lower-income customers. Those store openings and employee additions, which caused breakneck growth only a few years ago, have now had to be reversed.

The nearby price chart for Starbucks and the S&P500Index shows how the coffee roaster's equity price has fallen by some 40% since late summer, when I wrote the first post noting the beginning of its pullback. The silver lining is that it hasn't lost appreciably more than the S&P.

Meanwhile, McDonalds, which added better coffees to their menu, is running smoothly and posting gains.

Good management shows, and Starbucks clearly still doesn't have it.


kerrjac said...

Yeah I think you're right on that Starbucks had a warped view of what growth meant, by placing more importance on the number of locations rather than the strength of their brand. For what it's worth though, I don't see competitors like McDonald's & Dunkin Donuts being very effective in the long-term against Starbucks. They're taking advantage of the fact that coffee can be done cheaply, but unlike Starbucks they don't specialize in coffee & their lives don't depend on it, which leaves them less incentive to innovate or to continue competing whenever the recession ends. Not to mention that they lack the atmosphere Starbucks was built off.

C Neul said...


Thanks for your comment.

I totally disagree with your view of McD's and DD's. They have already forced Starbucks to fight for price-sensitive customers, to some extent.

It's precisely because these two firms don't depend upon the premium coffees, and that premium coffee is not, for everyone, such a central, expensive purchase, that they will remain a serious thron in SBUX's side.

For example, SBUX makes almost all its money off coffee, which is going to be far more economically sensitive than DD's and MCD's other food products.

Innovation isn't required for premium coffee. Just offering it at DD's and MCD's was sufficient. That's now largely finished.

Sure, some will remain at SBUX for that atmosphere and high prices. But some, like my friend and I, don't care, and went to DD this morning, instead of SBUX. They're only a few blocks apart.

It's not necessary for DD or MCD to dominate the coffee business in order to succeed. It is important for SBUX to retain as much market share as it can.

I continue to believe that SBUX is simply on the reverse slope of their category's growth curve, and its own success.