Tag: mcd

Just in case you thought management at Starbucks (SBUX) just did not seem to get it when they went into the music biz, they made sure today. Starbucks announced today that they will add prepared salad’s to their menus. It will add a tomato mozzarella salad and a “fiesta salad” with grilled chicken, roasted corn and black beans, to its lunch menus nationwide. Regional additions will include white chicken curry with couscous, albacore tuna penne, “champagne pasta salad,” bowtie pasta with goat cheese, and Asian sesame noodle salad.

The price tag for one of these gems? $5.50. So now I can get my $5.75 Carmel Macchiato which is about as healthy as a Big Mac at Mcdonalds (MCD) and even it out with a $5.50 salad? Why won’t I go get a quality coffee and salad at McDonald’s for half that and not have the 17 grams of fat the Macchiato delivers?

If anything, Starbucks need to find a way to not be “the more expensive and less convenient” option to McDonald’s which is what they are today. I can only imagine how slow the lines are going to be now as folks ponder what salad choice they are going to make. Plus, a salad needs to eaten sitting down. How many folks actually sit in a Starbucks vs. get a coffee and walk out? If their muffin sales which are very mobile are not getting it done, (again, high price and they are a heart attack inducer) this idea will flop on it’s head also.

this is ironic in the wake of Howard Schultz’s memo in which he feared the company has gotten away from what made it great. Every action they have taken since then has moved the company even farther away from it’s roots. Peculiar.

I haven’t seen a company push this hard in the wrong direction in a long time.

This is just a bad idea….

I do not really know where to go with this. I had to read it a couple of times because I thought I was missing something

Goldman Sachs (GS) today reiterated it’s “buy” rating on shares of Starbucks (SBUX) but removed it from it’s “conviction buy” list. They replaced it on the list with McDonald’s (MCD). Now is Starbucks CEO Jim Donald finally “considering the competition”? I am not sure if this means shares of Starbucks are definitely a buy or not. It sounds like they are saying “we are pretty sure you should buy this, but not really sure.”

This is on the heals of Deutsche Bank’s call last Friday essentially saying the same thing. At least DB has Starbucks rated a “hold” and is not telling people to go buy shares.

Here is where the Goldman call gets odd (as if it is not already). In their note, they say that that they maintain a price target of $43 (almost 60% higher than they are now) based on a multiple of 36 times 2008 earnings (year end October). 36 times 2008 earnings? Even if Starbucks hits it’s goal of 18% earnings growth this year, which is looking less likely everyday, and would be the third consecutive year of earnings growth decline, what make then think investors will pay such a high multiple? That multiple also assumes Starbucks grows earnings 25% next year, a number they have not hit since 2005. What impetus is there for this turnaround?

When you consider coffee prices are increasing, milk prices are at all time highs (and the real reason for the switch to 2% milk) and it is clear to everyone except folks in Seattle McDonald’s is taking customers from them left and right, how could any reasonable person think they are going to report anything but “challenging conditions” in August when they release earnings and give future guidance? If they do manage to meet the earnings estimates, will it be be due to another $500 million share buyback like the one they did in Q1? Again, I will reiterate, I love share buybacks, but Starbucks just cannot afford that much each quarter.

I guess the question we need to ask is not why doesn’t Starbucks deserve a multiple of 36 times earnings, but what justification can anyone give for claiming they do?

McDonald’s (MCD)Chief Executive Officer Jim Skinner remarked, “May marks another month of strong sustained sales and shows how well we are providing solutions for today’s busy lifestyles, with the convenience and value that customers expect from McDonald’s. The chief reason given for the US business growth? Breakfast, or as I spell it c-o-f-f-e-e. Is Starbucks (SBUX) CEO Jim Donald paying attention now?

After their last earnings announcement, in an interview on CNBC, Donald said “we do not really consider or discuss our competition.” He’d better start. They are stealing his business. Attracting only 1% more people per quarter will not fuel the long-term growth rate of 21.9% that analysts expect.

When you compare Starbucks recent quarter with today’s statement by McDonald’s Skinner who said, “We’ve re-energized our worldwide business with new food choices, redesigned restaurants and relevant marketing. Around the world, demand for McDonald’s continues to grow as we now serve 6 million more customers every day than we did in 2002. We are working to attract more customers, more often, through innovation, added convenience and greater menu choices.”

This upcoming quarterly announcement by Starbucks will be very interesting. They are officially entering the “reduced comps” phase. This means that when they are comparing quarterly sales growth, the comparisons they are going up against now become easier as this quarter marks the beginning of the recent slide. It also coincides with the improved coffee offering at McDonald’s, but do not expect to hear that on the call.

While McDonalds is consistently blowing away improving numbers, Starbucks investors are hoping to beat diminishing ones. Not good. I am expecting bad news for investors this quarters and look forward to whatever excuse management comes up with. Last quarters anemic numbers were excused away as being “up against a tough comparison”. Now that the comparisons are getting dramatically easier, we need to take that one off the table.

Should be interesting..

Early this month I posted about Starbucks and how milk costs were going to effect the bottom line.

Starbucks (SBUX) said Thursday it plans to switch its dairy standard to reduced fat, or 2%, milk from whole milk for all espresso-based drinks in its stores in the United States and Canada. The change will be complete by the end of 2007. The Seattle-based coffee chain also said it is assessing options for a conversion to a lower fat dairy standard in the 39 markets it operates in outside of North America.

Said Denny Post, senior vice president of global food and beverage in a statement, “The move to reduced fat milk as our core dairy offering comes directly from our customers’ requests, and while they will still have the option to customize their drinks, our standard beverages will now come with fewer calories and less fat”. Do not believe him. Why?

This is all about price and Starbucks doing anything it can to reduce rising costs in the face of stagnant store traffic. According the USDA, 2% milk averages 8 cents a gallon less than whole milk and when you buy almost 300 million gallons a year, 8 cents a gallon adds up real quick. Starbucks can try to gloss over this by saying they are “listening to our customers” but the cold hard reality is they have been making drinks this way for almost two decades now and no one has complained. If they really were listening, they would have eliminated all milk with growth hormones from the stores, but that would be expensive and negatively effect profits. The tell tale sign here is that they are cutting costs, not raising prices like they have in the past. This is perhaps the most public recognition that even they feel they are at the top of the price range and going higher here will cause even more defections to Mcdonalds (MCD) than they have already suffered.

I am not against a company saving investors money, but let’s not play games and call it what it is when you do it. Of course for Starbucks to say that now, it would scare folks into thinking there was an earnings miss coming and with your stock at an almost 2 year low, that is the last thing they need.

After reading my post about Brazilian coffee bean producers turning part of their crop into bio-diesel in Forbes, I received the following request. Ethiopia is looking for any way to profit from its coffee crop and is looking for interested parties to look to Africa as a source of Bio-Diesel production.

“Ethiopia is the largest coffee producer in Africa. As a large (population about 75 million) but extremely poor (per capita GNP is the $100/year range) country, there might be interest in biofuels from an available resource. I would be interested in knowing more about this possibility, particularly some idea of capital requirements, required support infrastructure (e.g. reliability of the technology, need for highly skilled personnel, etc.), minimum size/capacity of a viable operation and expected output (gallons/liters of biodiesel).”

“Any of your readers with an interest in the Horn of Africa are welcome to add their email addresses to the list. The focus of the list is political/economic/developmental, with only very occasional items about coffee or biofuels.”

“Shlomo Bachrach”

Any interested parties can email me information and I will forward them to the necessary parties.

After the work I have done on Starbucks (SBUX), I ended up in correspondence with people intimate with the recent Ethiopian negotiations (on the Ethiopian side). In response to a question I asked I got the following response….

“At this moment, SBUX and Ethiopia are working out the terms of a licensing agreement acknowledging Ethiopia’s ownership of three coffee marks. An Ethiopian official told me today that he hopes an agreement will be concluded in the coming week or two. SBUX was offered exactly this deal 18 months ago or so, but it rejected the offer dismissively and without seeking to discuss it. This led to the Oxfam campaign that has tarnished the SBUX image. SBUX’s arrogant rigidity is a mystery. Prices were not mentioned in that agreement, and are not mentioned in the present — probably very similar — version, as far as I know.”

In any matter, it is now clear that Starbucks will be paying more for it coffee from Ethiopia. Do not be surprised to see other coffee producing nations look to do the same thing in an effort to enhance profits.

“Coffee prices are rising as demand for premium coffees has been rising (in part because of SBUX’s own growth) faster than supply, though supply of ordinary coffee is plentiful. The two executives within SBUX who are held most responsible internally for their mishandling of this are Dub Hay and Sandra Taylor. Both could be gone some months from now, but it is likely that Schultz will wait long enough to weaken the cause-effect link to the Ethiopia embarrassment since SBUX hasn’t openly acknowledged how badly they handled it. It has been a PR disaster for SBUX but has given Ethiopia invaluable publicity for its coffees. Millions who were ignorant of the facts now know that Ethiopia is a coffee producer, that it is the original home of coffee, and that its coffees are among the world’s finest.”

The Ethiopian fiasco has badly tarnished the “Good Citizen” image Starbucks once had. In a Wal-Mart (WMT)inspired move Starbucks seems to have put profits ahead of the lives of Ethiopian coffee farmers in order to protect the bottom line. This uncharacteristic move to me is extremely telling. It is a sign that management recognizes costs are rising at a rate faster than they can offset them with revenue increases either by passing them off to customers or selling those customers more non coffee products. Their 1% transaction traffic growth the last quarter illustrates they will not be able to do it selling more people more items. This realization is causing them to do almost anything to control any cost they feel they may be able to, hence the initial hard line in Ethiopia. It smacks of a bit of desperation from a company who is seemingly in denial about it’s future.

After all the negative publicity from this and doubt about future profits recently due to competition from the likes of McDonalds (MCD) and Dunkin Donuts, a profit warning would put shares into a free fall.

Perhaps Schultz and company are hoping for cost relief to bail them out or have a “Hail Mary” planned. Either way, the rest of 2007 could very unkind to shareholders.

I have another article at Forbes Online today. Actually, I think it was posted on Friday. You can read it here…If you want to wait..

I will post it here some time next week.

As I watched Curt Schilling’s opening day debacle for my beloved Boston Red Sox against the hapless Kansas City Royals, I immediately began thinking once again about Starbucks (SBUX) because the comparisons between the two are striking (baseball pun intended). Really they are, read on and I will explain. A note: I have penned (typed?) several pieces on Starbucks in the past and will not regurgitate them again. For those interested, you can read them here, here and here.

First a bit about Mr. Schilling.
He came to Boston in 2004 with a singular goal in mind: To win the World Series and by the time the 2004 season ended, he was a hero. Anybody who saw the blood filled sock (now in the Baseball Hall of Fame) and his gusty performance in the playoffs as he lead the Sox to their first World Series title in 86 years can understand why he was then elevated to royalty in Boston.

This spring Curt who, after an poor 2006 season, apparently took the off season so seriously that he showed up to spring training almost 30 pounds overweight. Now, at 20 that weight can be worked off in spring training. At 40? Not so much. To compound this he:

• Asked for a contract extension for two more years
• When denied, he then spent the spring talking about “not talking” about his contract
• When “not talking” about his contract, he spent time talking about his online game company which, in a snit had a name change from “Green Monster Group” (in reference the Fenway Park’s famed left field wall) to 38 Studios which….
• Mirrors the name of his website “baseball” blog that spend very little time talking about baseball
• Seemed to be distracted with all the attention new arrival and pitcher Mr. Matzusake is getting in Boston with his vast array of pitches. In response he….
• Decided he was going to expand his and start working on a change-up.

Now, Starbucks
The Starbucks concept as we know it today began with Howard Schultz in 1987. The singular premise was to mirror the Italian coffee houses he visited during a trip to Italy in 1984 and for the better part of two decades they did exactly that. They single handedly invented the coffee experience we enjoy today. Their growth exploded in the 90’s and made investors gobs of money all the while staying true to what made them great, their singular focus on great coffee in an intimate, relaxed setting. This growth lead to them needing to squeeze more sales from each location to finance new ones. The formerly intimate setting became cluttered with items for sale that covered the spectrum of coffee makers, coffee mugs to CD’s and almost everything in between. The rapidly expanding drink menu became complicated to both order and execute and led to longer, much longer, wait times at the counter. The peak of this came in the summer of 2006 when execution difficulties with a new frozen drink led to people choosing other options for coffee rather than waiting in line an obscene amount of time in the hot sun for one. In response to rising customer complaints and negative media reports Starbucks:

• Decided to give away 10,000 custom made t-shirts from a designer no one has heard of
• Introduced more drinks to further complicate an already burdensome process
• Seemingly distracted by the incredible success McDonald’s (MCD ) was having with their Newman’s Own Premium coffee and the new and very popular McCafe‘ concept, decided to copy them with a breakfast menu. It should be noted that the same production problems that hamper the coffee experience are being exacerbated and compounded by this new wrinkle. It just is not worth the time or the $4 for an egg and cheese sandwich guys.
• Jumped at the opportunity to finance Paul McCartney’s upcoming divorce by creating a record company and signing him to a deal. I wonder if the brass at corporate realized that Mr. McCartney’s last #1 hit was with Wing’s in the 70’s. When you sign a new act to your label and the first reaction of your core customer is “He is still alive?”, it is not a good sign
• Decided that despite centuries of drinking tea, the Chinese ought to switch to coffee
• Are considering a Starbucks themed clothing line
• These action now have them financing their growth with debt which has exploded from $4 million to over $700 million in just two years

Greatness requires a singular focus on the intended outcome that is desired. In Schilling’s case it was being a great pitcher, a leader, and winning a World Series. In the case of Starbucks, it was the coffee, period. By focusing on those items and only those items, both accomplished those goals and received the accolades that accompany that success. Sadly, both have strayed far away from what have made them great in the past. It appears Red Sox fans will feel this pain this year again as Schilling seems to have picked up where he left off the second half of last year, focusing on everything but baseball. It also seems that Starbucks shareholders and customers will also feel the pain of distraction as Starbucks makes them wait longer in more and more crowded locations (not with people) for coffee while they try to sell them sandwiches, records and clothes.

Here is hoping Schilling at least gets his act together first….

PS. A note to Mr. Schilling: We Red Sox fans have no patience or sympathy to someone making $15 million a year who complains about not making more and then gets his head handed to him by the worst team in baseball. You have not pitched well in almost a year now. Do you want to feel our wrath? Keep it up because it is brewing out there. Just keep your mouth shut and win, you do that and we will do your talking for you.

On Feb. 8th ValuePlays subscribers read the following at the end of the post Did SBUX’s CEO Donald Really Say That?: ” The hard core Starbuck’s customer who garners much of their self worth from carrying that cup with the barely exposed green logo around will never abandon them, no matter how much they are forced to pay for their “vente soy non fat half caff white chocolate mocha latte with an extra pump”. However, the casual customer will and appears to be. I look at my wife and I (it is always a good idea when investing to look at yourself. No matter how unique you think you are, there are lots of people who think and act very similar to you). She was once a daily visitor for Mr.Donald and SBUX. Now, she runs a very successful law practice, has 3 children at home under 4 and a very tight schedule. She no longer has the 15 – 20 minutes it takes to park, go inside and get a cup of coffee at Starbuck’s. Instead, she has discovered that the cappuccino from the Christmas present her thrifty husband bought her is just as good. She can take it with her in her travel mug and avoid walking through the Massachusetts winter weather to get one (that cappuccino machine paid for itself in only 6 weeks). As for me, if I am driving around this winter and want a cup of coffee, rather than lug 2 four year olds out of their car seats and wait in line for one, now that I can get a really good one from inside my car at McDonald’s (MCD) while listening to them sing Brooks & Dunn’s “Hillbilly Deluxe”, why would I choose anything else? We can’t be the only two people out there like this and judging from McDonald’s (MCD) coffee sales growth, we aren’t.

Mr. Donald… Are you paying attention?”

Apparently he wasn’t but former CEO and Chairman Howard Schultz was as only six days later he penned….

From StarbucksGossip.com

Starbucks (SBUX) Founder and Chairman Howard Schultz wrote this to CEO Jim Donald earlier this month (a portion follows). The memo’s authenticity has been confirmed by Starbucks.

From: Howard Schultz
Sent: Wednesday, February 14, 2007 10:39 AM Pacific Standard Time
To: Jim Donald

“...While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers….“

Nothing I have posted to date has received the visceral reaction of the initial SBUX post. From complimentary mentions in industry titans like The Wall St. Journal Online , TheStreet.com and Seeking Alpha to websites like TheStockMasters, Value Investing News and others who I would like to apologize to now for not citing, to the hysterical email and post comments it got, I seemed to hit a nerve. I was surprised to be honest at the intensity of the reaction by those who still frequent SBUX daily. Reading them, I got the impression that they would have preferred I insulted their mother or father rather than take their beloved Green Logo’d Cup to task. I could just picture them all hopped up on a “triple vente two pump half calf half soy non fat caramel macchiato with extra drizzle” raging at their computer screens with bloodshot eyes trying to spew venom at me via their keyboard while hopelessly trying to fight off the near seizure inducing effects of enough central nervous system attacking caffeine to cause a meth-amphetamine addict to look at them and vapidly exclaim, “That dude must be crazy!”. The really odd part of it all was that as I sat back and looked at those comments, (yes I read them) most of the negative comments just completely missed the point of the post. They were indignant that I would even presume anyone would rather go anyplace else for coffee. This, despite the fact that SBUX management commented on anemic customer growth while McDonald’s was practically giddy over theirs during conference calls. The assumption must be McDonald’s is growing customers? To those folks I would quote Judd Nelson in the movie “Breakfast Club”, “I am trying to help ****, I would expect you you know the difference”. Only by pointing out problems can they be addressed and fixed.

My point was not “Starbucks sucks” which is what quite a few of you inexplicably took away from it or that McDonald’s was “going to put Starbucks out of business”. Quite the contrary. If you read a previous post on Starbucks, you’ll see I call it “a great company”. The post was not an indictment of the company itself but of Mr. Donald’s seemingly arrogant dismissal of impressive competition. The point was, if I can get a good, inexpensive cup of coffee in other places, why go to Starbuck’s and deal with the inconvenience that often accompanies the experience? As a consumer, there was nothing “special” to me about Starbucks anymore.

Back to Howard Schultz’s memo:

“…we have had to make a series of decisions that, in retrospect, have lead to the watering down of the Starbucks experience, and, what some might call the commoditization of our brand.”

It would seem at least Mr. Schultz got the point of my post.

Econ 101. In a commodity business price and availability win. When you buy gas for your car you most likely go for the closest, cheapest station because you do not perceive any difference in the product. This is what has happened to Starbucks. Ten years ago if you wanted a good cup of coffee, Starbuck’s was really your only option. Today there are small coffee houses and fast food giant’s that have closed the quality gap while providing more convenience. This has enabled them to peel off Starbucks customers. Despite what you ValuePlays doubters may think, Mr. Schultz at least recognizes this.

Now for Mr. Donald (did you think I forgot about him?). His flaccid idea of giving away 10,000 t-shirts needs to be critically looked at. These shirts were customized with the bearers favorite drink on them designed by Mychael Knight, a finalist from the Bravo TV show “Project Runway.” I do not know who this is and this is another problem. It does not mean I am “out of touch” because I can tell you that Carrie Underwood, whom my 4 year old sons stare longingly at whenever she is on TV, won “American Idol” last year. This does mean that Mr. Donald concocted an bizarre promotion with somebody most people have never heard of. I am going to go out on a limb here and say that the type of person who would wear their favorite drink on a t-shirt is the same person who if Mr. Donald stood in the entrance of a Starbucks and slapped in the face as they walked in would say “thank you sir, may I have another!”, wait to be flogged again and then continue in to order their drink. I on the other hand, after witnessing this event would turn to my kids and say “who wants a happy meal!” It is not necessary to give t-shirts to these people, they are coming tomorrow anyway, maybe twice. Mr. Donald is sadly just preaching to the choir which is easy and feels good but, doesn’t accomplish anything. If he wants to do something useful he ought to be trying to figure out a way to lure people like my wife an I back. He has failed to realize is that his initial customer base is aging. We have gone from 20 somethings to 30 (almost 40) somethings with children and careers and all the time consuming activities those responsibilities entail. When you have 1,000 stores we can easily be replace by new 20 somethings, but when you grow to 13,000 stores and have the desire for more, we cannot be replaced, you need us to keep coming in. “How?” you ask. I have ideas and no, they do not include free coffee, muffins or pretentious t-shirts.

As so often happens with a dynamic company when its charismatic founder leaves the CEO post, it flounders. Think Microsoft (MSFT) since Bill Gates left, Dell (DELL) after Micheal Dell left (he has since returned to the CEO post), Apple (APPL) after Steve Jobs left (before his successful return) and a host of others. There is that same listless feeling to Starbucks now. If you are a stockholder I am sure you recognize this as shares are only up 12% since Jan. 2005 despite the S&P’s roughly 23% advance. EPS growth is declining also so clearly something must be done. The first thing we need to do is:

1- Mr. Schultz, sorry but it is time to come back to day to day operations. You are brilliant and SBUX needs your help (yes I think he is brilliant, you cannot create what he did unless you are).
2- Mr. Donald, please click here

Next we need to take control and define your brand. Currently it being defined by the very people who would wear those ridiculous t-shirts and are lucky not to get backhanded when they look mockingly at others as they stumble through an order. The Starbucks brand is something you need to nurture and direct, not allow to drift aimlessly like it is now. All the “corporate good citizen” stuff is warm, fuzzy and sweet but it is only relevant to what I think of those of you at HQ in the state of Washington and has nothing to do with the coffee I drink in Massachusetts. You need to make me feel something about your cup other than “great coffee but a hassle”. I mean, the fact that the brown sleeve that stops me from scalding my palm on the cup is made from recycled paper, saves the rain forest and has halted the near extinction of the three legged flying pygmy toad is nice and makes for a great press release, but it does not influence a buying decision.

I have said it quite a few times here before that timing in life is everything. I do not know if Mr. Schultz saw my previous post but it’s wide circulation and the timing of his memo to the very target of it has me wondering….

Mr. Schultz, I am neither a fanatic nor a hater of Starbucks. You have a great product and too be honest I would love to frequent your establishments more. Give me a reason to. I have ideas, lots of them, and I think they are good. Get in touch and we can chat…