Fool Blog: Can Starbucks Be Saved?

It's not always easy being a legend. Just ask Starbucks (Nasdaq: SBUX  ) . Transforming a once-cheap commodity into a luxury beverage helped the company join the ranks of Nike (NYSE: NKE  ) , Coca-Cola (NYSE: KO  ) , and General Electric (NYSE: GE  ) as a world-renowned brand. Two decades of heady expansion made for a fairy-tale growth story on Wall Street, as Starbucks locations began popping up on every corner and the company cultivated a cultlike customer base.

Then, it seemed, the company suddenly switched to decaf. Starbucks' performance began to lose its jolt in 2006, and it's now fallen more than 60% from its peak. Some claim its faddish days are numbered; others claim that overexpansion led the company to cannibalize its own sales. Still others simply blame the economy. As two shareholders of the company, we'd like to offer our own sides of the story.

Kristin: I'm feeling jittery about Starbucks, and it's not from the grande Pike Place Roast I drank this morning. While the coffee may taste smooth and bold, the company's operations are anything but. Don't get me wrong -- I'm a fanatical customer. I probably lose more capital in one month from my daily coffee fix than I've lost in total as a Starbucks shareholder. But as an investor, my craving for caffeinated growth hasn't been satisfied.

Earlier this year, Howard Schultz returned to take the reins of his coffee empire, determined to return Starbucks to its "core." He introduced a fresh new basic coffee, and purchased the almighty Clover machine to dominate the luxury coffee market. Schultz was all about the coffee and the experience. Nothing more.

Alyce: I still believe Starbucks can be saved. I don't think it's the kind of downtrodden retailer that faces an incredibly hard turnaround, like Sears Holdings (Nasdaq: SHLD  ) . Still, the recent roller-coaster moves connected to the company's whole "back to coffee romance" schtick indicate there may be a fair amount of seemingly counterintuitive strategizing to come.

For one thing, I found the fruit-flavored Vivanno jarring. How does it refocus the company on coffee, exactly? And hey, Starbucks is supposed to be the higher-end alternative to McDonald's (NYSE: MCD  ) and Dunkin' Donuts. So why did the company kick off a monthlong promotion with "treat receipts" for $2 grande frozen drinks for daily two-timers? And why did it test $1 coffees and free refills in its Seattle stores? Is it trying to become McStarbucks?

Schultz also announced the end of breakfast sandwiches, due to their coffee-scent-obliterating aroma, only to subsequently change his mind. "Schultz's apparent indecision regarding the lowly breakfast sandwich makes me hope business decisions are being made with more prudence than romance," I wrote at the time. That was my polite way of expressing my hope that Schultz isn't a little too passionate -- as in, prone to apoplectic fits of passion -- about decisions regarding his corporate baby.

Kristin: I won't lie -- I thoroughly enjoy the additional offerings. I'm still chowing down on my favorite turkey-bacon-and-egg breakfast sandwich, and I've exchanged my mid-afternoon java break for a Vivanno. I even filled up one morning on a hearty bowl of oatmeal.

Kudos to Starbucks for convincing consumers like me to shell out more for one small cup of oatmeal than they'd spend on an entire canister of Quaker Oats. But my enthusiasm stops right there. How exactly does displaying a bakery case full of new hearty-grained snacks, and blending iced fruit smoothies, add up to getting back to the coffee core?

It doesn't. That's what's so worrisome about Starbucks. The company established a goal to get back on track and ended up wandering in the opposite direction. That doesn't bode well for Schultz's reputation, and it certainly doesn't make me optimistic about the company's ability to revive itself.

Alyce: In the July issue of Portfolio, David Margolick's cover story on Howard Schultz talked about how Schultz may need a strong No. 2 executive around to check his impulsive nature. Even visionary company leaders have run afoul in the past because they couldn't keep their emotions in check -- or check their egos at the door.

I'm not selling my Starbucks shares, and I still believe its turnaround is far from impossible. Still, the company could face a rocky road to recovery.

Kristin: I'm still a shareholder, because the business is fundamentally sound and possesses the financial strength to muscle through its problems. I'm simply wondering whether Starbucks can find itself.

Just what is Starbucks, and what does it stand for? Schultz may have asked that question, but he clearly hasn't answered it yet. Even a healthy balance sheet won't save a company that flounders around trying to figure out what it is. As a consumer, I like the extra twists Starbucks has thrown into its menu. But as shareholder, I'm not content seeing the CEO say one thing, only to turn around and do another.

Figure out who you are, Starbucks, and stay true to yourself. Only then can you save yourself.

Bottom line
Starbucks' questionable future always stirs up a good conversation. So what do you think? Can Starbucks be saved? Sound off your voice in the comments box below.

Sip on more Foolishness:

Starbucks is a Stock Advisor and Inside Value selection, and the Fool owns shares of it. Coca-Cola and Sears have also been recommended by Inside Value.

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


Read/Post Comments (14) | Recommend This Article (9)

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 September 24, 2008, at 12:32 PM, treesbags wrote:

    You find every fault with the company and yet you tout the stock. This company can't get out of its own way. Poor management, lousy help, employees that ring up x number of sales for Starbucks and one for themselves. There is so much theft at the register it is hard to believe. They are too rigid in their systems. If there is a line in many of their locations they let customers walk rather than opening another register. The list can go on and on.

  • Report this Comment On September 24, 2008, at 12:34 PM, foolwelldone wrote:

    Starbucks can make a come back, but only if they go back to the basics with regards to coffee and reduce the store/territory ratio.

    It would help considerably if they actually knew how to roast coffee. If you were to compare their roasting methodology with an order for a steak, your coffee would be burnt black no matter how you desired it to be cooked. I have tried on several occasions at different Starbucks to find a "light roast" or even a "medium roast" varietal coffee. "Expresso roast" or burnt black is all I could find. Whatever true flavor that could be found in a particular bean is superceded by the bitter carbon taste that they manage to apply to every bean they stock and brew.

  • Report this Comment On September 24, 2008, at 12:41 PM, rbnlaw1 wrote:

    I like the discussion, but it makes me a little skittish about holding my sbux. Maybe I need to convince my friends to buy more lattes.

    As for the coffee; I like the whole concept behind the Pike Place roast. Not as strong or "burnt" as the bold roasts, yet very flavorful. Customer service? Better than it was 6 months ago, but that also depends on the kind of customers patronizing that store, IMHO.

  • Report this Comment On September 24, 2008, at 1:32 PM, meggie1019 wrote:

    As an employee of Starbucks, I just want to put my two cents in. In reference to the new healthy line of Starbucks merchandise, that is a result from polling our customers. Our customers reported that they would like to see a healthier line of food and drinks. So, like any business, we listened to our customers and now we have the Vivanno, the vanilla latte plus protein and all of our skinny beverages. In reference to companies such as McDonalds coming out with drinks, yes you could get a drink at McDonald's in the morning along with your 3000 calorie sandwich, but you are not going to get the service or friendliness associated with Starbucks. To the employees at Starbucks, you are more then a beverage. We try our very best to connect with each and every customer so that if and when you become a regular, we know your name, beverage, and little bit about your life. This allows you as a customer to feel that your business is important to us and it allows us as a business to grow and to attract more clientele. Please stay true to Starbucks as we are a business that thrives on customers! We love each and every person who comes in and buys their Cinnamon Dolce Latte and their cup of oatmeal in the morning or their Caramel Latte at night. I hope that this clears up some confusion.

  • Report this Comment On September 24, 2008, at 2:06 PM, TMFBomb wrote:

    I don't know, Kristin...coffee focus or not, they seem to be doing a good job of upselling you...oatmeal, vivanno, breakfast sandwich...maybe "Do you want fries with that coffee?" could work! :)

  • Report this Comment On September 24, 2008, at 2:32 PM, brodave66 wrote:

    Starbucks market over saturation is just one of several corporate management mistakes. Other recent blunders include introducing a new in store wifi plan as “free” when it is in fact not free, introducing an inferior coffee (Pike Place Roast) at the same price as their premium dark roasts and then trying to force it upon their customer base by only offering Pike Place between noon and 5 PM, introducing a multitude of complex, time consuming hot and cold drinks without providing an express line for their core, coffee only, customers, refusing to replace their paper dribble cups with functional cups, etc.

    The combination of these marketing and management blunders have resulted in lower US same store sales which has in turn negatively impacted overall corporate financial performance. At least they have begun to correct the over saturation problem.

    Visit the “My Starbucks Idea” site (http://mystarbucksidea.force.com/apex/ideaHome ) to gain a more in-depth understanding of the problems. Register and read the comments to the “Bring Back Bold” and “Free WiFi Internet - I mean REALLY free” idea threads.

  • Report this Comment On September 24, 2008, at 3:12 PM, TMFLomax wrote:

    I just want to chime in on what meggie 1019 says... I have heard people complain about Starbucks customer service (a few in this thread are), but the ones at the one I go to every morning are seriously super nice, super helpful and do open the extra register when needed. When it comes to all the Starbucks I've frequented, certainly some are better than others, but I've never felt like it was totally "lousy" service at any of them, quite frankly. Not that I've been to every Starbucks in the world or anything. ;) But just wanted to give my two cents on that.

  • Report this Comment On September 24, 2008, at 3:53 PM, dhenise wrote:

    dump the stock ......... MCD will stomp them. Why pay a buck or two more for the same drink? Because it's cool or trendy? Sorry ....... not likely in these financial times.

  • Report this Comment On September 24, 2008, at 4:45 PM, GyasiM wrote:

    Starbucks is a luxury item. Times are hard right now. Gas is $4.30 a gallon. I can't spend $4.30 for 8 oz of coffee.

    Have happy hour prices from 4-7pm.

    Get back to coffee and get out of the music business and everything else. Focus on coffee & real estate.

    Yes, Sbux is trendy, and guess what, everyone wants to be trendy deep down inside(except for Hippies and Goths.) Cut prices and people will come back.

  • Report this Comment On September 25, 2008, at 2:02 PM, seanoneill01 wrote:

    Their coffee is worlds above any chain competition (including even my beloved Wawa). But how come I still can't get free wireless at my Starbucks but now can at the local Burger King. They've fallen behind in their internet cafe appeal.

  • Report this Comment On September 26, 2008, at 1:38 AM, heiwous wrote:

    Over & over you hear that Sbux coffee sucks. If you disagree, you probably are not a good judge of coffee. Example, order 10 "for here" double short cappuccinos at 10 Sbux. It's a safe bet you'll get at least 5 different kinds of drinks. 2 will be a tall latte, and 2 will be served in paper cups (not "for here"). All 10 will be weak coffee. Not one will have coffee mixed into the foam, which every decent place does. Do I sound snobbish? For $3.30 I deserve to be, esp. when I can get a perfect cappuccino every time for 50 cents less at the competition. The other place roasts their beans on site, and everyone I've taken there gets addicted.

  • Report this Comment On October 17, 2008, at 7:01 AM, contactmaxray wrote:

    Millions of us wake up every morning to a good strong cup of coffee. And, as it happens, coffee figures in the story of the wake-up call one man received after hitting a low point reminiscent of George Bailey's in the film "It's a Wonderful Life." the only reason i do not despise Starbucks coffee is because the extra purchase cost goes to supplying part time and full time employees with full health insurance (http://www.ampminsure.org/health-insurance.html) -- something the owner of starbucks' father never had and swore to provide to his [future] employees. Kudos to you, sir.

  • Report this Comment On October 28, 2008, at 5:19 PM, LLCoolJosh wrote:

    Speaking from personal experience, Starbucks was one of the first discretionary expenses I cut once gas prices got above 3.00. I think with gas prices coming down, Starbucks could a major benefactor.

    Another thing to think about. Those who are not in the market have to be feeling pretty good right now. Gas has come down almost 50% (here in TX) from 4 to 2.15. A married couple I know... not rich... not in the market... just a young couple getting by and paying rent just took a vacation, and bought their SECOND iPhone. They're not feeling the market turmoil. They've got some extra cash in their pockets. I think discretionary consumer spending could see a turnaround beginning with these people.

  • Report this Comment On February 05, 2009, at 1:06 PM, wren10 wrote:

    I truely believe Starbucks can be saved, especially with all of their new promotional ideas and advertisements within their store.

    I received several "Tazo Tea" coupons with all of their new tea lines that just came out.

    I also think the red, white and blue sleeves with Presidential quotes were genious when Obama was elected President.

    Today I went to get a Chai Tea, and the new sleeves feature shamrocks for St. Patty's Day.

    It's all very catchy and they are broadening out to changing up their cups from just the normal holiday line.

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