May 24, 2022

Starbucks – Doing It Right

SBUX On The Right Road

There is an old saying that if you don’t know where you are going, any road will get you there. Starbucks seems to know where it wants to be and is also taking the right steps to get there. When the bottom starting falling out of the economy in 2008, Starbucks developed a plan for the continued success of its valuable franchise.

In February of this year Howard Schultz, chief executive of Starbucks, explained his long term plan for future growth and profitability. The essence of the Starbucks turnaround was to cut costs and convince customers that Starbucks coffee was value priced.   Mr. Schultz shrewdly based his plans on a forecast that the economy would be weak for a protracted period of time.

“I strongly believe we are going to be in this environment for years… it is a reset of both economic and social behavior.” – Howard Schultz

Strategy Starting To Pay Off

The latest quarterly results announced by Starbucks (77% profit decline) would seem disastrous at first glance.  Looking beyond the quarterly results, it matters more where Starbucks is going rather than where they have been. The company’s focus remains on cost cutting, selective price cutting  and portraying  Starbucks coffee as a high quality value priced product. The quarterly profit decline was due largely to the costs associated with store closings.  The important metric of customer sales shows  improvement from the previous quarter.

The key positive for Starbucks is that the decline in sales had minimal correlation to product quality.  Besides introducing some new coffee products such as  the Pike’s Place blend, the basic Starbucks menu was not changed.  Starbucks continues to deliver a high quality product and is adjusting their business strategy to reflect the reality of weak consumer spending.   The company is strong financially with a modest amount of net long term debt.

Profit From Short Term Weakness

Starbucks is one of the great American success stories.  None of Starbucks’ basic success ingredients have changed – superior management and a great product sold in a pleasant environment by friendly and well trained employees.  The company is taking the right steps to reposition itself for future growth.  The bad news has probably been discounted, making the stock  a great long term buy.  The flight to safety play is becoming yesterday’s strategy.  What would you rather own today – a five year treasury paying sub 2% or an ownership interest in a great American franchise?

SBUX Courtesy: stockcharts.com

Disclosures: Long SBUX

Saks “Gets It” – Starbucks Not Quite There

Brutal Days For Retailers

Retailing has suddenly become a lot more complicated than simply planning how many more stores to open next year and projecting sales increases.   Today, the toughest job is surviving. Job losses, pay cuts and lack of credit have turned the once profligate American consumer into a modern day Scrooge.   Many consumers have cut back on all but the essentials – frugality has become a necessary virtue.   Retailers that over expanded with borrowed capital  will not last as they discover that cash flow does not cover debt service.

The great American retailers that will survive have already adapted to the new age of frugality.  Consider Saks Fifth Avenue and Starbucks, both of whom market their goods at the higher price points.

Saks Upends Luxury Market With Strategy To Slash Prices

When Saks Fifth Avenue slashed prices by 70% on designer clothes before the holiday season even began, shoppers stampeded. “It was like the running of the bulls,” says Kathryn Finney, who says she was knocked to the floor in New York’s flagship store by someone lunging for a pair of $535 Manolo Blahnik shoes going for $160.

Saks’s deep, mid-November markdowns were the first tug on a thread that’s now unraveling long-established rules of the luxury-goods industry. The changes are bankrupting some firms, toppling longstanding agreements on pricing and distribution, and destroying the very air of exclusivity that designers are trying to sell.

Sak’s risky price-cut strategy was to be one of the first to discount deeply, rather than one of the last.  Sak’s chief executive says his actions were done to “make sure that the company survives”.  Last Thursday, Saks said January sales fell nearly 24%.

Saks will survive but its strategy is putting many of its smaller competitors out of business since they cannot compete with the massive discounts Saks is offering.  Saks also recognizes the risk of discounting to their future sales.  How many customers will pay $3,000 for a “designer luxury good” in the future, when they can now buy such an item for $900?   Discounts of 70% make one feel foolish to have overpaid so much even when times were good.

Starbucks Plays Common Joe

Starbucks Corp., which built a coffee empire on its premium image, wants to convince customers that its drinks aren’t that expensive.

The company said Monday that it’s selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It’s the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.

The move shows how premium brands are trying to reposition themselves for a prolonged economic downturn.

“I strongly believe we are going to be in this environment for years,” Howard Schultz, chief executive of Starbucks, said in an interview. “It is a reset of both economic and social behavior.”

Asked whether Starbucks is considering simply reducing drink prices, Ms. Gass said: “Today, no. But never say never.”

Mr Schultz is correct.  This is a new world for retailers and you adapt or you go under.  Starbucks has cut costs in its operations over the past year but has not cut product prices.   If sales continue to decline Starbucks will be forced to discount, just as Saks is doing.   Expect to see price cuts coming soon on your favorite Starbucks beverage.