Is Starbucks a Fad?

All right, I can take the heat. I'm here to ask your opinion: Do you think Starbucks (Nasdaq: SBUX  ) is a fad?

Contemplating which products are fads can be a hot-button topic for investors. Last year, before Crocs' (Nasdaq: CROX  ) shares' precipitous fall, I commented on the "faddishness" of the shoe. Boy, did I field a lot of angry hate mail at the time. (And no, I'm not, and never was, beholden to any "short sellers' consortium.") So I'm hereby volunteering to take a dose of my own medicine by soliciting feedback in the comment box on the bottom of this page on a stock I own a few shares of, Starbucks.

I still think Starbucks has a bright future, despite the stock's sad performance over the past year or two. I don't believe its brand is tarnished, and I trust it can pull off a turnaround much easier than many other beaten-up retailers can. And if consumers are backing off a bit now, there is the reality that what was an "affordable luxury" a year or two ago may look a tad less affordable as people grow accustomed to $4-plus gas and the high price of food. But is Starbucks done forever? I highly doubt it.

However, given Starbucks' sad two-star rating in our community-intelligence database, Motley Fool CAPS, it looks as though plenty of people disagree.

So let's hear it. Do you think McDonald's (NYSE: MCD  ) , Caribou (Nasdaq: CBOU  ) , Peet's (Nasdaq: PEET  ) , Dunkin Donuts, and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) are going to eat Starbucks' lunch? Do you think Howard Schultz's return to the helm is highly overrated in terms of getting back on track? Do you think the only thing lamer than hanging out at Starbucks is hanging out at Starbucks in a pair of Crocs and crooning to a pet rock? Use that comment box below, and share your take on the coffee giant whose stock has fallen and can't get up.

And of course, if you'd like to defend Starbucks as an incredibly undervalued stock at these levels, please feel free to do that, too. Don't be intimidated, since, believe it or not, there are still plenty of people who like Starbucks as an investment -- it's been recommended by both Motley Fool Stock Advisor and Motley Fool Inside Value, for example.

I'm looking forward to seeing some thoughtful feedback on this big question. Until then, enjoy your Friday coffee break!

Pour yourself some related Foolishness:

Starbucks has been recommended by Motley Fool Stock Advisor and Motley Fool Inside Value. The Fool owns shares of Starbucks. Crocs is a Motley Fool Hidden Gems Pay Dirt recommendation.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2008, at 3:40 PM, starsucks wrote:

    4 bucks a gallon of gas= $40 for a gallon of coffee, Yep, that's a fad!

  • Report this Comment On June 13, 2008, at 5:16 PM, DudeAbides wrote:

    It's hard to say that a company that has been "mainstream" for well over ten years is just a fad. It may be that drinking milkshakes in the guise of coffee is a little faddish (a.k.a. frappacinos). But the idea of going to a local coffeehouse (rather than a bar) to hang out with friends or to sit and read a book will stick around for years and years to come.

    Starbuck's has made this experience amazingly pleasant over the years with friendly staff (because they are well-paid), nice decor, non-distracting music, and at least fairly comfortable chairs.

    Quick aside, I went to the Croc's sponsored AVP (Beach Volleyball) tournament in Hermosa Beach last weekend and Crocs in LA are alive and well with their flip-flops and various new shoe stylings. McDonald's also had a booth serving their vanilla cold coffee drinks. They were pretty watered down and not very tasty... I'll stick with Starbucks.

  • Report this Comment On June 13, 2008, at 5:22 PM, barry1954 wrote:

    $4 coffee is extremely discretionary when gas is costing the working poor who commute any distance 1 or 2 days' take-home pay. Starbucks will lose their lower and lower middle class clientele quickly unless the oil bubble bursts very soon. I consider myself middle class, but I only go to Starbucks now when someone has given me a giftcard. I just can't justify paying those prices for what is a $1.25 expense tops when I brew it on my machine at home, and I can reproduce pretty much anything on their coffee menu at home now.

  • Report this Comment On June 13, 2008, at 11:04 PM, pink3 wrote:

    When I was living off unemployment and the severance money, I continued my "affordable luxury". When I got the new job, of course, I continued. But when the new baby came, it was brown bag lunches and free coffee from the company's kitchen. As much as I may love Starbucks, it's just NOT a necessity. When money is tight, it can be the first thing to go, since it can easily be substituted (quality of the replacement aside). Here in Los Angeles, a friend spotted supreme gas at $5.09. Yep, five dollar gas. My cheap Exxon regular is $4.62. There's going to be a whole lot of belt tightening going on, and I think Starbucks will be a casualty. You can only open so many more Starbucks, so profits from that growth has to slow eventually. So who will be the winners? Target and Costco. Who will be the losers? Everyone else who does retailing of discretionary items, or non-discretionary items that can be delayed or downgraded.

  • Report this Comment On June 14, 2008, at 2:35 AM, mungovan48 wrote:

    Starbucks is no more a fad than McDonalds (lots of outfits will fry up a burger for you) or Coca-Cola (premium pricing for colored, flavored, fizzy water). It's a highly favored brand, an enjoyable experience, and less of a premium-priced experience than many detractors suggest. And it's solid, as demonstrated by its 5-star investment rating from S&P. It might be over-priced, and if you think so, then hold but don't buy. My wife has held SBUX for 16 years and done very well by it.

  • Report this Comment On June 14, 2008, at 8:35 AM, mikan0761 wrote:

    The Mac Attack will hurt Starbucks more than any other factor. Now McDonalds has sugar-free-vanilla ice coffee that actually tastes good at $1.70. Each week they add more coffee options and they are serving up adequate taste for the price. Temporarily cost conscious coffee drinkers may stick with the Mac after the bad times pass. Everyone like value. The only hope is that Starbucks' new coffee machines will restore a large enough gap to cause coffee drinkers to see the sense in paying that much more for its coffee.

  • Report this Comment On June 14, 2008, at 7:38 PM, excio wrote:

    fad (fd)

    n.

    A fashion that is taken up with great enthusiasm for a brief period of time; a craze.

    Fad?... No, facing more competition and tougher economy... yes

  • Report this Comment On June 14, 2008, at 9:28 PM, bprov1533 wrote:

    I think starbucks is a good buy right now. The stock is at 5 year low and may even dip back down into the $15 per share range. However, in 2 years this stock will be in the $30's again thanks mainly in part to the focus of expansion in Europe and the fact that nobody likes to hang out a McDonalds with your friends and a great cup of coffee. Starbucks simply has the best coffee in the world. GRMC is got so good stuff going on, but not a direct competitor to Starbucks. Starbucks is a must buy in my book.

  • Report this Comment On June 15, 2008, at 3:17 AM, Whirlingdurvish wrote:

    Starbucks is a great investment right now. They are just starting their expansion into Europe, South America, Middle East, and Asia. They are being very smart about it too. They are offering many of the local favorites, not what was popular in America. They have corporate offices dedicated to the Region in which they are operating, not run out of Seattle, Washington. And through this they have seen success. They are slowing the growth in the US (Which they should do) and will help during the recession. They are offering the new card benefit program that will turn that $4 coffee into a $3.30 coffee. So they are taking the right steps to deal with the recession while still expanding their market share across the globe.

    Starbucks (being the leader of the pack in Coffee) has taken the brunt of ridicule from the press and public for price of Coffee. While they are quite literally the symbol for coffee in the US, their prices are not as high as most people think. For a Grande coffee you will pay $1.75 at Starbucks, while at Mcdonalds you will pay $1.65, and the same $1.75 at DD. A Grande Latte will run you $3.20 at Starbucks, and Dutch Bros will charge $3.15.

    Starbucks prices are not insane compared to other companies in the same market, so if starbucks is a fad, then so is every other Coffee Company out there. The only difference now is that instead of Starbucks having almost all of the market share for Coffee like in 1990, they now are sharing it with 30 other companies. Starbucks will never be the prodigy they once were, but they sure are here to stay.

  • Report this Comment On June 15, 2008, at 1:54 PM, ChrisBern wrote:

    Based on the comments here, some people are doubting the Starbucks brand and stock because of the cost of a cup of coffee, and because it may seem like a luxury in a somewhat depressed economy. But, the economy won't be depressed forever, and I've still yet to walk into a Starbucks where there wasn't at least one or two people in line ahead of me. If you accept the thesis that coffee can be as addicting of a drink as cola, then to me, Starbucks has the potential to be a long-term successful international brand like Coca Cola. I'm not saying Starbucks will ever be as big market-cap wise as Coke, and they do have different distribution models (Starbucks sells primarily through its own stores vs. Coke selling anywhere and everywhere). But I think Starbucks could be the de facto quality brand of coffee for dozens and dozens of years to come, and that could add up to long term shareholder value for those who buy at today's respectable stock prices.

  • Report this Comment On June 17, 2008, at 10:48 AM, condorica wrote:

    No, I don't think Starbucks is a fad although the business model of a coffee shop has major flaws. You can't do 70% of your business before 9:00 in the morning and expect to have revenue meet expenses the rest of the day. Starbucks makes it because they were the first one to the party and have the best deal on real estate leases. Anyone entering the market now can't sell enough cups of coffee to pay the overhead. They need to add a significant revenue stream that compliments their business. I sure wish they would check out Tank Goodness and we could help them solve this problem.

  • Report this Comment On June 17, 2008, at 2:46 PM, forwardxprogress wrote:

    70% of the business before 9am???

    Where are you getting these figures from? Obvoiusly you haven't seen the 24-hour Starbucks' in Chicago, New York, LA, Michigan and several other locations. Starbucks is the late night hangout for high-teens to low 20's who can't get into bars yet and those college kids pulling all nighters cramming for finals.

    Starbucks is not going anywhere. Customers are not trading in their premium beverages for McLattes, they're simply going to Starbucks less. That will all change when the economy comes out of this rut.

    New beverage options are on the horizon, including tapping into the bottomless energy drink market and giving Jamba Juice a run for its money with fresh fruit smoothies.

    The company is becoming extremely lean when it comes to payroll, laying off hundreds of unnecessary, non-operations related positions. This also streamlines communication and laser-focuses the company's managers to creating a great experience and a great product.

    Fad or no fad, the Frappuccinos bring amazing gross margins and need to be embraced by investors.

    As for breakfast, don't get used to them not having a breakfast option. Something else will be available soon. Howard Schultz doesn't install $8,000 ovens in every store just to warm muffins. There will be a "brand-appropriate" food option within the next 1-2 years. Mark my words.

    Let us also not forget Starbucks purchasing the revolutionary "clover" coffee machine. The company has plenty in its pipeline to stay ahead of the game for many years to come. A poor economy won't derail this train.

  • Report this Comment On June 17, 2008, at 11:03 PM, condorica wrote:

    Sounds like the previous poster is long on Starbucks. I live in Minneapolis and you could hold volleyball tournaments in the empty parking lot of every Starbucks and Caribou by noon each day. Don't count McDonalds out! They're going to claim a huge chunk of the premium coffee market. They have good coffee and use the same lame push button espresso machine as Starbucks. I had lunch at a McDonalds today and the employees wowed me with their friendly smiles and hospitality. It's the one on Lone Oak just off Hwy 55. I've been in the hospitality industry a long time and was quite impressed. Sorry to get off topic but Starbucks has to re-capture the "experience" they supposedly once had. The public is craving tasty food made with real ingredients and they will flock to whoever does it best. Chipotle is doing it well.

  • Report this Comment On June 18, 2008, at 11:31 AM, TMFLomax wrote:

    Thanks for all these great comments, everyone! I really enjoyed reading each and every one of them -- so much good food for thought!

    Alyce

  • Report this Comment On June 19, 2008, at 9:03 PM, Northville wrote:

    I looked at this company closely recently and did some due dilligence etc. I passed on purchasing shares. The reason, any company that has stores on the NY State Thruway (a trip I take regularly) will always be just another coffee house in my mind. So no, it's probably not a fad, but it certainly isn't the high end experience it is trying to convince us it is.

    Northville

  • Report this Comment On July 10, 2008, at 8:42 PM, jaredb018 wrote:

    Starbucks is not a fad. Crocs, just like any item of apparel, are bound to be hot at times and cold at other times.

    barry1954 and anyone else who says "$4 coffee" about Starbucks is obviously a moron. Starbucks coffee is closer to $2 than $4. Lattes cost $3-4+ anywhere you go, especially your ma and pa places (which are often pricier than Starbucks)

    I don't know where some of you people live but the ones I've visited in downtown and suburbs of Chicago, and suburbs of Boston, are all busy. Like the other poster said, the 24 hour ones tend to be packed. You won't get that at McDonald's or Dunkin Donuts.

    Lastly, Starbucks owns at least 23% of the entire coffee market.. so even if the other companies do well Starbucks is still profiting.

    I feel confident in saying that if any companies are to close (Peets and Caribou are pretty much a given) I'd say Dunkin Donuts would close long before Starbucks will.

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