Is Starbucks Slipping?

There's no question that Starbucks  (NASDAQ: SBUX  ) has a more outspoken, community-minded mission than its competitors. When CEO Howard Schultz politely told a shareholder to sell his shares after the shareholder suggested Starbucks' gay-marriage stance was hurting the company, it was just one more headline in a year of headline grabs.

But was the shareholder right? Is Starbucks a victim of its own passions? While beans may make the cup, the message makes the brand. And as Starbucks' message gets a little muddled in the face of growing competition, the competitors are using the mermaid to build their own brand.

Market slip?
A recent poll of hospitality's most social brands shows that McDonald's (NYSE: MCD  ) has slightly edged out Starbucks in its online love. It's a subtle shift, but one that reflects a larger trend. McDonald's has long been the haven of those on the go, while Starbucks has courted the entrepreneur/freelance-work-from-a-coffee-shop crowd (including yours truly). But Starbucks' new eco-friendly, small-space store with no room for power outlets, tables or lounging has some wondering if Starbucks doesn't want the all-day-sitting, free-refill-drinking coffee-loving laptop-toters, after all. On the other hand, McDonald's recent push to include customers in its social media campaigns came with prizes worthy of the Macbook-toting hipster crowd.

Dunkin' Donuts  (NASDAQ: DNKN  ) has slowly gained market share over the past year, while its "Friends Don't Let Friends Drink Starbucks" campaign is now as recognizable to many as the mermaid herself.  

A coffee klatch
Coffee lovers should keep an eye on the German investment firm Joh. A. Benckiser, which has been methodically buying up coffee companies for the past year. The Minneapolis coffee chain Caribou Coffee was recently purchased for $340 million. The group also bought Peet's Coffee & Tea last year for $974 million. Rumors abound that the company is now eyeing Dutch Master Blenders, the company spun off by Sara Lee last year. Dutch Master Blenders has struggled as an independent company. A large, consolidated brand of these three companies could be enough to challenge Starbucks overseas.

The proof is in the cup
In the face of the confrontational shareholder, Schultz acknowledged a poor quarter, while also pointing out the company's 38% return over the past year. He challenged the shareholder to find such returns elsewhere, with reason for his confidence. Canadian competitor Tim Hortons, which has been slowly making progress in the U.S. market, is nearly flat from this time last year after a range of peaks and valleys. Dunkin' Donuts and McDonald's may brew a good cup, but aren't coffeehouses. As long as Starbucks keeps the atmosphere it built itself on, and opens small-space stores sparingly, the gap will stay wide.

After all, while Dunkin' Donuts might post cheeky billboards claiming that $4 for a cup of coffee is ridiculous, $3.70 for a tall soy latte, power outlet, comfortable chair, and Wi-Fi for a day in an urban area is cheaper than office space and the best bargain in town.

To the naysayers, I say… nay
That McDonald's and Dunkin' Donuts have managed to put themselves on the same consciousness level as Starbucks when it comes to coffee is an enormous feat. That the burger-maker and doughnut-dipper make coffee is lovely, but at the end of the day, there's a very real difference between a slam of caffeine and enjoying a leisurely coffee and scone with friends.

Starbucks isn't going away. As for the public displays by its CEO, they might occasionally overshadow the company's business model, but it would be foolish to think that activisim and altruism aren't a major part of its message. It's the message that will keep customers coming back for the cup, and those customers that will ultimately keep shareholders (mostly) happy.

After making investors rich in 2011, McDonald’s has been one of the worst-performing blue chip stocks of 2012. Our top analyst on the company will tell you whether you should be worried by this trend, and he’ll shed light on whether McDonald’s is a buy at today's prices. Click here now to read our premium research report on the company.


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