Maybe It's Just You, Starbucks

So, is this how it's going to be, Starbucks (Nasdaq: SBUX  ) ? Instead of poking, prodding, and fixing your problems, you're going to blame the consumer?

Reading Alyce Lomax's brutally honest account of last week's shareholder meeting -- at which the company had the gall to blame its fade on a supposedly incorrect notion that the chain's brews are costly -- blew my mind.

Starbucks somehow feels that its recent woes are related to the "myth" of $4 coffees -- a myth that, unlike Bigfoot, Chupacabra, and the Loch Ness Monster is oh-so-very real. In other words, Starbucks says it isn't wrong -- Larry Latte and Veronica Venti are the idiots.

Come on back, java sippers. Starbucks is cheaper than you think!

What a load of Frappuccino
If the bean baron is struggling only because luxury items such as premium brews are kryptonite to the masses, and Starbucks claims that it's offering up a fair value, it would be a breeze to crank out a new marketing slogan.

Try a few of these on for size:

  • Tight on cash? Bean there.
  • You can't spell Starbucks without a buck.
  • Our coffee is hot, but our prices are even hotter.
  • Starbucks: Just pay us what you can.

Unfortunately, there are several flaws to the company's attempts to claim it's been mistaken for a Bentley or a Kate Spade handbag.

The obvious knock on the theory is that the company's waning popularity has been going on for some time now. Stateside comps began to turn lower during the company's fiscal first quarter of 2008, which is essentially the 2007 holiday season. That's when the company's pricing flexibility came to a screeching halt, as a 1% decline in the number of same-store transactions couldn't be lifted by a 2% increase in the average value of those transactions -- spurred mostly by price increases in July of 2007).

Was luxury spending a cultural no-no two holiday seasons ago? Not exactly.

  • Whole Foods Market (Nasdaq: WFMI  ) delivered a 9.3% increase in comps during the quarter.
  • High-end yoga-mom haunt lululemon athletica (Nasdaq: LULU  ) posted a whopping 24% spike in same-store sales on a constant-dollar basis during the quarter that ended at the beginning of February 2008.
  • Apple (Nasdaq: AAPL  ) had no problem moving its premium-priced laptops, with market share barreling toward a multiyear high.

It has to tell you something that when Larry and Veronica decided to cut back on premium experiences, they chose to rub out Starbucks before they gave up on pricier pleasures such as organic groceries, yoga pants, and MacBooks.

Standing still in a rotating world
If going to the past is too painful, let's stay in the here-and-now. The economy is in a funk. What began as a small crack at Starbucks towards the end of 2007 now looks like the plumber working under the kitchen sink.

Surely every premium provider has to be smarting if Starbucks saw its stateside comps decline by a brutal 10%. Right? No. Not quite right at all.

  • Sirius XM Radio (Nasdaq: SIRI  ) closed out the quarter with 82,945 more subscribers than it started with, and the satellite-radio operator competes against free content.
  • Chipotle Mexican Grill (NYSE: CMG  ) posted a 3.5% uptick in comps, and you can pay a fifth of Chipotle's ransom to get a value-menu burrito at Taco Bell.
  • And, once again, Apple had no problem growing its top line, and this was during a period that saw iPhone clones hit the market and dirt-cheap netbooks sell briskly. 

So why is Starbucks dancing to the wrong beat? Why doesn't it realize that its model is broken? Blaming the economy or perceived experience value are arguments that sound great for shareholders. But I don't buy the argument that consumers will flock back to Starbucks in droves when they have a little more pocket change. Consumer habits do change, of course, and they may very well be shifting during this recessionary lull.

Green Mountain Coffee Roasters (Nasdaq: GMCR  ) sold 711,000 of its Keurig single-cup brewers this past quarter, 121% more than it did a year ago. How many appliances with up to triple-digit prices saw their sales double during this moribund holiday season? Not many, I'm sure.

For the equivalent of roughly $0.40 for a K-Cup refill, consumers have access to more than 200 premium coffee flavors from several leading coffee-blend marketers. Can it be that the java-sipping experience itself has been altered, transported to the convenience of home brewing at a fraction of the price?

Starbucks was never the closed ecosystem of the Apple iTunes Music Store or the only game in town for satellite radio, the way Sirius XM now is. It educated the market on the European nuances of premium coffee, but perhaps it taught its fans too well.

The problem at Starbucks isn't that Larry Latte and Veronica Venti are dumb. No, it's far worse than that. The chain's problem is that Larry and Veronica are too smart.

How do you feel about Starbucks as a long-term investment?

Chipotle Class B is a Motley Fool Hidden Gems pick. Starbucks is a Motley Fool Inside Value recommendation. Chipotle Mexican Grill and Green Mountain Coffee Roasters are Motley Fool Rule Breakers picks. Apple, Starbucks, and Whole Foods Market are Motley Fool Stock Advisor recommendations. The Fool owns shares of Chipotle Class B and Starbucks. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz can walk to three Starbucks stores from his home, but he's still not much of a coffee sipper. He owns no shares in any of the companies in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (13)

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 March 23, 2009, at 12:57 PM, DollTV wrote:

    The problem with Starbucks? It's just not cool anymore and hasn't been for two or three years. The joint is packed with high school kids and wannabe's who think a cup in the hand determines status. The fat and uneducated are lining up in droves. And the coffee isn't as good as it used to be either. Perhaps I've just gotten used to it, but Starbucks has not introduced anything notable in two years.

    A Mormon friend of mine said, "Invest in Starbucks. Caffeine is a drug people can't shake." I say, "Love is the drug. Big love."

    Cheaper, easier: Taster's Choice 12 oz freeze dried from Costco. And a three pack of whipped cream.

    That's livin'.

  • Report this Comment On March 23, 2009, at 1:29 PM, funkycool wrote:

    In a separate but related story Starbucks also announed at it's annual meeting that it was on track to generate $500M in free cash flow by October......$500M! Looks like somebody's still buying. On another note come on DollTV Taster's Choice, really? really? are you serious?! At least bump up to Yuban or Maxwell House- you must be really old or be a big time smoker who's taste buds are shot.

  • Report this Comment On March 23, 2009, at 1:39 PM, TexasLonghorns wrote:

    Another "Million Dollar Portfolio" DUD!!!

  • Report this Comment On March 23, 2009, at 2:58 PM, juliehowe wrote:

    The only thing I disagree with is the rather smirking tone of your article. However, I do agree with the points that you've made here. Especially:

    "Consumer habits do change, of course, and they may very well be shifting during this recessionary lull."

    This is what Starbucks and other purveyors of luxury are missing. I am your consumer, and I have changed. My values have changed. There is no longer meaning or worth in a $5 cup of sugar, water, coffee and whipped cream. Actually, nothing will lure me back, and it's not really anything that Starbucks did (or didn't do.)

    I was a five-to-seven day a week consumer in the boom years, and a few years ago I cut back to 1 or 2 venti Frappuccinos a week. I've already vented on these forums about why Starbucks lost me completely as a customer.

    For my $5, I expected to be able to sit down in a comfortable environment and suck down my overpriced beverage in a leisurely manner. The fifteen to twenty minutes that I spent in this way twice a week made me happy. Then Starbucks rolls out the free wi-fi.

    After that, there was never a place to sit down because of the brew coffee drinkers (with free refills) with their laptops, sucking down the free wi-fi all day and night, hogging up the comfortable chairs and making a nuisance of themselves with their laptop power cords stretched out across the floor.

    This was the point that Starbucks lost me forever as a consumer, when their chains became a loafer and freeloader's paradise, and I could no longer sit down and enjoy my $5 overpriced beverage.

    I've already posted in another Motley Fool forum about how the last time I walked into a Starbucks with a gift card, and I held my formerly beloved $5 Venti Frappuccino in my hand, there was no meaning to it. It was a $5 cup of sugar, water, coffee and whipped cream, and I felt as if I'd just wasted $5, even though the drink was free. It was one of those DOH life moments where you smack yourself on the forehead.

    This has little to do with Starbucks as a corporation, an institution, a way of life, and everything to do with my own personal value changes. I'm sure that I'm not alone. I don't hate Starbucks. It's just that I've changed, and there's nothing they can do to bring me back as a customer.

  • Report this Comment On March 23, 2009, at 3:17 PM, Skysclear wrote:

    Good report. Agree!! ( Of course you realize the only good report is when we agree...) but i have not enjoyed Starbuck's coffee for two years now. I bought their whole bean and they were always stale. It changed with in a month, and never seemed really fresh again. So why pay their prices at the store? Just buy Brothers whole bean.. and you get a better flavor. 'French Roast', of course, and a lot cheaper.

  • Report this Comment On March 23, 2009, at 3:58 PM, hookem11 wrote:

    Before issuing an article like this, you should check your facts. First, SBUX is not "blaming" the consumer. If you listened to this meeting and other earnings calls/analyst meetings, you'd find that there are several reasons cited for the downturn in the business - none of which blames the consumer. To the contrary, the blame actually rests with hack journalists, such as this guy, who perpetuate the notion that SBUX is more expensive than the competition. Then, competitors also jump on and create bogus advertisements to enhance the message. All SBUX said is that they will now fight that message with a message of their own that is based on facts (something you should try Rick). And it's true, when you compare their prices to someone like Dunkin Donuts, who claims to be cheaper, SBUX is often in line or actually cheaper themselves. Again, do your homework - they are just trying to debunk the myth of the $4 cup of coffee. Seems appropriate considering you can actually go in and get a drip coffee for less than $2.

  • Report this Comment On March 23, 2009, at 4:14 PM, Emeralddome wrote:

    Here's a contrarian view. I still enjoy my trip to Starbucks. I still get my latte even though I have cut back in frequency. But there is no question that as things get economically better I'll be back to my daily dose. BTW, nice post hookem11.

  • Report this Comment On March 23, 2009, at 7:14 PM, matthewmatthew wrote:

    I am amazed at how people with little knowledge of the company post comments. Be that as it may, as someone who has worked for the company on and off for a number of years, I have actual knowledge of what goes on inside Starbucks.

    I am only writing here today to make one point which is that you almost never ready how well the company treats its employees and that one reason Starbucks costs more than many of their competitors is that they actually provide excellent benefits for even part-time employees. People rarely consider this issue when they make a purchasing decision which is most unfortunate. Walmart can afford to sell products for very little money because they don't pay well and don't offer much in the way of insurance especially for part-timers.

    I would be the first to admit Starbucks is not as perfect company and they have made some mistakes. However, they don't deserve all the criticism they receive. In general, they provide a good value to the consumer.

  • Report this Comment On March 23, 2009, at 7:43 PM, TMFBreakerRick wrote:

    hookem11, but you said it right there. It's the hack journalists who "perpetuate" the myth, hence the consumers start to believe it. So Starbucks is saying that the consumers are idiots for believing it.

    More to the grander point of my story is that if you have to market yourself as "cheaper than you think" then you've lost any pricing premium that you may have once had.

    If you think that Starbucks will be more relevant -- or even AS relevant -- as it was before the recession when the economy bounces back, we will have to agree to disagree.

    I appreciate the feedback and the criticism. Obviously we don't agree, but thanks all the same.

    Good luck!

  • Report this Comment On March 23, 2009, at 7:46 PM, CoughE wrote:

    My question is what is Starbucks going to do when the most popular drinks, ie the 1/4 that DO cost $4, are sold by McDonalds and Dunkin Donuts for $2?

    I read somewhere there is a rumor Thermoplan, the company that makes the "Gold Standard" Starbucks Mastrena is going to put the machines currently on the front page of www.thermoplan.ch in McDonald and Dunkin Donuts sometime in the next year or two. What happens next?

  • Report this Comment On March 23, 2009, at 9:12 PM, oklahimau wrote:

    I won't do business with a firm that supports the liberal dim-wit-o-crats. I suppose the founder now thinks his buddies in the White House should send him bail out money because people are tired of his rip off, pseudo cool product(s), and the fact that he is a big time contributor to the DNC.

    I prefer Republican coffee! It gives me an honest bang for my buck (or less).

  • Report this Comment On March 23, 2009, at 10:39 PM, swizlstx wrote:

    it's all about what one's definition of a cup of coffee is. I dare the author to go into starbucks, 7-11, tim horton, dunkin, and all the rest and buy one 12oz cup and make a price comparison. not much difference and not even close to $4. The quality of starbucks is far superior to the others is worth the minute price difference(10cents, if even).

    the point they are making is that there is a misnomer among the poplace that a cup of coffee is really $4. people dont realize that the $4 drink is the fluffy esresso drink with milk and other nonsense.

    I ve even met people who dont know starbucks even served regular coffee. They thought it was all about fraps and lattes.

    starbucks is just trying to dispell the myths held dearly by the obviously ignorant masses.

    Rick Aristotle Munarriz is a hack. he's a commentator, not a journalist.

  • Report this Comment On March 25, 2009, at 1:39 PM, k2snowboarder07 wrote:

    As an employee of Starbucks, I sharply disagree with this article.

    Great job matthewmatthew for your comment. I couldn't agree more.

    Rick, you are truly ignorant of what's going on at Starbucks. Starbucks is still a popular brand. Who the heck goes to McDonalds to order "gourmet" coffee? There's no such thing there! The fast food chain has attempted to undermine Starbucks as a snooty place to go. I would love to see someone who eats healthy (not fast food) and says to their friend "hey, meet me at McDonalds for a coffee!" WTF? Lets talk about customer service for a moment too. Have you had an decent and/or enlightening conversation with a "barista" (if they deserve to be called that) at McDonalds or Dunken Donuts? ...... Don't think so. The environment are way different. Employees at other places are paid at best, minimum wage... At starbucks? We get pay increases every six months!

    Also, even if our costs were higher than our competitors. Have you even taken a look at Starbucks' social responsibility and the great benefits we give to almost all employees? Those do cost money you know! Doesn't it feel nice to be supporting an ethical company?

    Maybe you should rewake up and smell what Starbucks is doing to make this world a better for the communities in the coffee belt. Want to know why I don't shop at Wal-Mart? They treat their employees like trash! Next time your buying groceries there, ask the associates (hopefully they have at least a fake smile on) if they love their job.

    You seem like one of those people that look for cheap priced goods, just remember that lovely theory of price vs quality relationship.

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