Monday, July 14, 2008

Clouds in the Coffee

By John Gaffney, Senior Editor

A highly caffeinated look at the recent developments at Starbucks:
Cup One: Grande Finance: This layoff-store-closing and store opening cancellation had nothing to do with the economy. Now I know there have been some industry pundits and Wall Street analysts that have said the opposite. Starbucks has managed to build a very profitable business by getting people like me and you to spend $4 a day, $20 a week and $80 a month on coffee. And that might be a light month for most people. The per store revenue growth for Q2 was around five percent, according to Starbucks financials, not enough to merit closing 600 stores.

Cup Two: Double Espresso What did it have to do with? Overcaffeinated expansion plans. That’s the biggest lesson to learn from Starbucks, no more; no less. You simply cannot overpopulate any market the way Starbucks has. On Market Street in San Francisco there is literally a Starbucks across the street from a Starbucks. Didn’t that tip anybody off? I think you’ll see the drug store retail business suffer from overpopulation in a similar fashion before the end of next year. CVS has 6,300 retail locations. Walgreens has 6,252. On July 7, Moody's Investors Service floated a plan to cut credit ratings on Walgreen citing “slowing same-store sales growth, modest margin pressures and unfavorable domestic economic conditions.”

Cup Three: Underaccino: Those overcaffeniated plans were fueled by some of the very people who now criticize Starbucks as an underperforming company. Those are Wall Street analysts and I would argue that Howard Schultz needs to spend a bit less time obsessing with them. Schultz is a great retailer in my opinion. He is not an investor relations executive. I think he should have realized earlier on that there is a limit to store growth, both same store growth and in new openings. Retailing, and that’s what we’re talking about here, is not an unlimited growth game.

Cup Four: CEO Roast: Big lesson here. Nothing, not a celebrity CEO, not exclusive CDs, not Venti Half-caf-fraps-with-a double shot and whipped cream on top, will give you the kind of growth that Wall Street wants. It is a zero-sum game. Nothing will keep you from the boom-bust-return to sanity cycle that Starbucks played in.
Cup Five: Serious Mood Swings: Let’s not forget that this is a retailer that provides health care, obsesses about retail training, pays more than a passing nod to customer experience, and continually looks to innovate. Applause.

Cup Six: Post-caffeine anxiety. Outside of the Wall Street play, there’s one thing Starbucks completely missed, and I don’t know how, and that’s an online presence. I thought they could have been a great morning news, opinion and culture portal back in the day, but that day’s over. Starbucks is looking at the limits of its company and it will be a lesson for us all to watch.