Starbucks' Silver Lining

By Alyce Lomax
July 22, 2008 | Comments (4)

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Facing tough economic headwinds, Starbucks (Nasdaq: SBUX) recently announced that it would shut some U.S. stores and cut jobs. Some distraught citizens are petitioning the coffee giant to reconsider -- a reaction that says something very good about the company's brand, and offers a glimmer of hope that many other struggling retail stocks lack.

The Wall Street Journal reported on a grassroots campaigns springing up to save numerous stores slated for closure, many of which are located in small towns. Both customers and local officials are driving the phenomenon, which the WSJ dubbed the Save Our Starbucks campaign.

Starbucks shareholders like me know that the company is smart to shutter underperforming locations and focus on highly profitable growth. But distraught customers' perception that their local Starbucks' closure is a blow to themselves and their communities suggests that the java giant's brand remains as strong as ever, unlike the tarnished brands most retail turnarounds suffer. Rising food and gas prices may reduce the amount of coffee most people currently buy, but I doubt that's because those people think any less of Starbucks.

My Foolish colleague Rick Munarriz recently recapped a survey indicating that Starbucks' customer traffic has fallen off. All the same, outcry over Starbucks closures gives me one more reason to believe that the company's a far more compelling value stock right now than retail turnaround stocks past and present, such as Circuit City (NYSE: CC), Gap (NYSE: GPS), or Sears Holdings (Nasdaq: SHLD). It also says to me that Starbucks still has a lot of power to compete with rivals like Dunkin' Donuts, McDonald's (NYSE: MCD), Peet's (Nasdaq: PEET), and Caribou (Nasdaq: CBOU).

Starbucks has attracted a loyal following for its quality coffee and sterling customer service, successful elements that the company's built into its brand. I know I always enjoy seeing the baristas at my local Starbucks. Store closures aren't good news, but I think shareholders would have better reason for concern if their local Starbucks shut down -- and no one cared.

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Alyce Lomax owns shares of Starbucks. The Fool has a half-caf venti mocha disclosure policy.

Comments from our Foolish Readers

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  • Report this Comment On July 22, 2008, at 5:13 PM, lindersm wrote:

    If Starbucks could improve the quality of food product offerred, this could be another source of revenue for them. Many times I go in for coffee, but since I don't care for their limited and not very good food offerings, I normally pick up something to eat elsewhere. Last night at Borders, I stopped for my latte and noticed that they have many appetizing choices, but Starbucks continues with the same dreary tasteless stuff. Too bad their food offerrings are no where near the quality of their coffee. I really believe that they're missing the boat here.

  • Report this Comment On July 22, 2008, at 8:28 PM, mberan wrote:

    Food is a drag on their profit margins. They can't produce it in house, it further slows down their production time. That plus any additional equipment costs are prohibitive.

    Interesting as all I've seen are full page add coupons for $2 coffee in my local newspapers. They must really be getting desperate.

  • Report this Comment On July 23, 2008, at 4:55 PM, rmiers wrote:

    I never did appreciate a cup of coffee that costs almost as a glass of wine. Nor did I liked looking at a server with green hair and creative tatoos,,,,but their Cafe Americano had twice the kick and two bucks wasn't going to kill me....my daughter likes those four dollar things, but the dagger into our relationship was the morning my laptop wood not work. I was informed that I had to pay or join some T-Mobile/starbucks sidescam to check my stocks. It was too much. The tiny cost of Wi-Fi was just another revenue source for these greedy Ba#@%^Ts and I was the chief chump. The store was brand new with a fresh lease (in Rockport Texas) on the gulf with lots of visitors and fishermen.

    Guess What? It is one of those being closed. The morons didn't even research their competition....the Dairy Queen has free WI FI

    When you lose a customer, you lose his friends.

    I am thinking of writing a book, It will be titiled "How to go broke, one customer at a time"

    When I first meet a server, I ask him/her "how are you today" and give them a genuine smile. If they do not smile back, I leave...life is too short

  • Report this Comment On July 24, 2008, at 8:51 PM, mberan wrote:

    Oh yeah....and don't forget to tip them in the tip cup too! For grinding some beans and pressing a button. Sorry, it's a tired story and they forgot their customers come first.

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