July 30, 2008
Is Starbucks In Its Death Spiral?
It looks more and more like the Starbucks we grew up with has irretrievably lost its way. Every day brings news of layoffs and losses, maps of store closures, tanking stock price, deckchair shuffling in the executive suite, and the frantic introduction of new products (banana smoothies, indeed).
In the beginning, down at Pike Place, a regular customer would know every company employee by name. Now there are over 150,000 people on the Starbucks payroll, even after the layoffs. And what a bunch of gossips they are!
CEO Howard Schultz makes a big point of citing Starbucks as the world's most trusted brand, with over 40 millions of customers a week. Loyal they are, too, mounting (apparently spontaneous) protests to keep their forlorn neighborhood store open. But everyone's missing the point.
Starbucks was never about coffee; it was a cup to be seen with. To hold the Green Mermaid meant you'd navigated the shoals of barista-speak ("Fritalian"), and that you had the ready cash to spend on high-end snacks. Those days are over, and fiddling with the product mix ("leveraging new platforms") is pointless. Blame Howard's hubris, blame the economy, blame gas prices, blame stupid real estate choices if you will, but today's Starbucks is just another candy store.
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True dat. All of it.
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Starbucks obviously xpanded way too fast and too far, and now its paying for it.
But that's not unusual in the business world. So then they have to dump their non-profitable stores (or divisions, or whatever), reduce staff and move on. I think calling it a death spiral is way overblown.
Go to any big city (and their suburbs) and you'll see scores of Starbucks stores doing a booming business. If management learns from this I expect the company will do just fine.
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Definitely no death-spiral involved here, sorry to say. Starbucks's greatest achievement has been penetrating espresso into mainstream American culture. Even ten years ago, their was still a "snootiness" associated with espresso. I remember working as a sheet metal worker during the summer before my freshman year of college, and the under-35 workers would come in with espresso and the over-35s would mock them. Now, as the McDonald's espresso ads make clear, it's the place, not the coffee, that's pretentious. So one way or another, Starbucks will successfully re-brand itself as a chain store provider of a mediocre good, a new Dunkin' Donuts or the like. That's not a death spiral, that's a metamorphosis, like a butterfly emerging from a cocoon, except the beginning wasn't really all that cute, and what's coming out isn't exactly pretty either.
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Ditto Jeremy. As I've said before, things may look bad for big Green, but this is just a phase. They may not be the best place in Seattle to get coffee, but in many places, they are and that's saying something.
Long term, these guys are a hold for sure.
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It's official. Schultz can no longer blame gas prices or the economy. Last night competitor (and, some might say, original mentor) Peet's Coffee & Tea posted a 69-percent rise in profits in the second quarter:
http://www.forbes.com/feeds/ap/2008/08/01/ap5280510.html
Time to start swallowing some bitter medicine and stop blaming others and external forces.
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They expanded so quickly to raise stock prices. During a recession, expansion doesn't affect stocks, as investors are more cautious and do what they should have always done - research.