Stop Sticking Up for Starbucks

What is with all of the hero worship for Starbucks (Nasdaq: SBUX  ) ?

I figured that my latte-slurping fellow Fools -- whom I love dearly -- would stop giving the java chain a free pass after it announced store closures and layoffs last week.

I was wrong.

"There is plenty of bearishness out there on Starbucks, but I'm still willing to wait this one out -- and I believe the long term's still bright," writes Alyce Lomax.

"When we finally get out of this recession that I think we're in, even if it takes a couple of years, Starbucks is going to come back much stronger than most other companies out there," says Seth Jayson, suggesting that the company's domestic retreat is "good news for investors."

I don't buy it. This is lousy news for Starbucks. I spit out the Kool-Aid flavored Frappuccino.

Here is the problem. Starbucks has never positioned itself as simply a coffee company. As one of the noblest CEOs you will ever meet, Howard Schultz considers Starbucks to be a people company, first.

"I was just trying to create a company with a conscience," he explained on The Motley Fool radio show four years ago. "I grew up on the other side of the tracks; my dad never made more than $20,000 a year, and I saw firsthand the fracturing of the American dream when there wasn't a lot of money to go around and never believed I would be in the position that I am today. I think the vision for the company of trying to create a company that is based on a set of values and a culture in which people are respected in the workplaces is really based on where I came from. Trying to build a company that has a soul."

Color me this, then: What happens to morale when you announce that you will be closing 600 stores over the next year and slashing 7% of your workforce? What becomes of the bubbly barista, even if she is fortunate enough to be in a store that sticks? They say the first cut is the deepest, but what assurances do Starbucks hires have that it will be the last?

Like a shower of blazing hot espresso, this is a wake-up call at Starbucks.

Battle of the barista
True story. I have a friend who is a Starbucks barista. Fresh out of college, she spent a few years at a public relations firm before the entrepreneurial bug bit. She set her sights on opening an upscale coffee shop. She decided to spend a few months at Starbucks, to learn the ropes, before striking out on her own.

Several years later, she is still there. The corporate culture and working environment at Starbucks have proven too aromatic for her to pass up. The chunky benefits have dissuaded her from taking the small-business plunge. A reckless driver once even barreled into her store, coming within a few feet of her, and she shook off the shards of glass and kept living the barista life.

I don't know how she's taking last week's concept retreat. I imagine that most baristas won't care until the actual closures and dismissals drive the mortality home. But how can this be good for Starbucks?  

Time changes everything
As a shareholder, Alyce is willing to ride out the storm. Seth feels that the company will come back strong, even if it takes a few years. What if the future gets worse? I'm not suggesting that Starbucks will be a broken brand. I am merely suggesting that the competition will close the gap.

During the same 2004 radio interview that I spoke of earlier, Schultz was asked to rank McDonald's (NYSE: MCD  ) , Krispy Kreme (NYSE: KKD  ) , and Dunkin Donuts as competitive threats.

"When I look at McDonald's and Krispy Kreme and Dunkin Donuts, those three companies do an excellent job, but they are in a different business than we are," he replied. "They are in the transaction business, fast-food business. That is the antithesis of Starbucks."

How times have changed. All three of those companies have improved their coffee brews. Starbucks may have successfully fended off the Caribou Coffee (Nasdaq: CBOU  ) and Peet's Coffee (Nasdaq: PEET  ) chains, but now it is facing the reality that premium coffee is a commodity. New Starbucks units didn't cannibalize existing stores. It's a tag-team of doughnut shops, fast-food joints, and quick-service diners that is crowding the siren-decked pioneer.

Bulls will argue that I'm wrong. They will counter that the stock has already fallen sharply, discounting a lot of its recent shortcomings. However, what if its most recent dud of a quarter -- one that saw comps and earnings dip -- isn't just a temporary blip.

What if Starbucks today is really Gap (NYSE: GPS  ) circa 2001? That specialty retail chain thought it had a lock selling apparel basics, until everyone else began stocking jeans and khakis. Everyone loved Gap when it first stumbled. They saw the dips as attractive buying opportunities, and deeper dips as golden chances to dollar-cost average.

Starbucks is too iconic to fall as hard as Gap. It sells an experience, even though book superstore chains once thought the same thing. The longer it takes for Starbucks to turn itself around, the more time it gives conventional -- and unconventional -- rivals a chance to carve up the premium bean brew market. How many more people will simply be brewing their own Green Mountain Coffee (Nasdaq: GMCR  ) Arabica K-Cups then? Starbucks will innovate, but how quickly will the market copy what works then?

I hope I'm wrong. I would never short Starbucks; the profit would be hollow if Schultz fails, given all that he has done to raise the bar when it comes to corporate responsibility. However, I'm not compelled to be charitable and buy into the Starbucks story just because of a company's past. Reality pours a mean cup. It will be a survivor, but it won't be the sole -- or soul -- survivor. 

Starbucks and Gap are Motley Fool Inside Value and Motley Fool Stock Advisor picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz can actually walk to three Starbucks from his home, but he's still not much of a coffee-sipper. He does not own shares in any of the companies in this story. He is part of the Motley Fool Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

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 July 07, 2008, at 1:34 PM, weiwentg wrote:

    Even good companies have to close locations if they were opened in error.

    Saint John Health just closed a hospital in inner city Detroit. Being part of Ascension Health, a Catholic health system, caring for the poor is where it is for them. But they had no choice, because they were losing money hand over fist.

    Starbucks opened too many darn stores. When there's a Starbucks on every block, you have to figure eventually they'll start cannibalizing each other's sales. This is a publicly traded business. If they are closing stores because they aren't profitable, that's not a knock on their soul.

    And I was under the impression that the stores being closed were in fact in close proximity to other stores. Now, I agree that competition has heated up, with folks like McDonalds, Panera and Caribou serving good or excellent coffee.

    But Starbucks still has the national and international scale that domestic competitors lack. There are far more Starbucks locations than Caribou or Panera. Internationally, they still provide a higher end experience than McDonalds.

    I agree with you that they're experiencing difficulties on the domestic side. However, I think you aren't counting their international prospects. And I think the domestic problems are fixable.

  • Report this Comment On July 07, 2008, at 2:21 PM, jrlaw15 wrote:

    The hubris of Starbucks brought it down. I experienced it from the inside. I traded being a Washington DC area attorney for the Starbucks experience. I recognized the excessive self importance and believing of their own press a year into my experience. It was built upon corporate office comments and the actions of an inept district manager and regional manager. I was saddened to decide to leave last fall but mostly sad for the coming demise.

  • Report this Comment On July 07, 2008, at 3:50 PM, SCdujour wrote:

    The argument that closing stores and laying off staff might be inconsistent with the 'people-oriented' theme of the company gives me an uncomfortable tingle of liberal propaganda. If a company is struggling financially, it has to make adjustments to survive. Would it be better to keep all stores open but severely cut benefits? Should the store make no cuts and go ahead with business as usual until it files bankruptcy? If anything, Schultz is showing that having a conscience does not mean being a lousy businessman. With regard to the second half of the article, it seems opportunistic to me to point fingers at competition from fast-food places, as it is mainly the bad economy that would lead a seeker of good coffee to choose a donut store over a Starbucks. Regulars may leave Starbuck's because the ambiance has deteriorated, but this would send them to another coffee shop of similar caliber and not to a McDonald's, and the ambiance can be restored if Shultz continues to make the right changes. Sure, I'm bullish on SBUX but I'm happy to be convinced to be bearish. The set of bear arguments in this article increases my comfort level with my bull position.

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