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.
THE ORACLE OF OMAHA GETS HIS JUST DESSERTS Warren Buffett stops by his favorite local Dairy Queen(R) to enjoy the debut of the Dairy Queen Girl Scouts Thin Mint Cookie Blizzard(R) with Omaha Girl Scout Molly Maloy, 10. The Girl Scouts Thin Mint Cookie Blizzard(R) is available nationwide at Dairy Queens throughout July. This is the first time that Dairy Queen has merged its iconic Blizzard Flavor Treat with the best-selling Girl Scouts cookie ever, Thin Mint. (Photo: Business Wire)
