Monday, March 5, 2007


From the "timing is everything" department:

1/17 - SBUX shares stand at the high price for 2007 at $36.29 a share
1/22 - ValuePlays first post hits claiming SBUX is overpriced - Why Price Matters. A Case Study
2/8 - Did SBUX CEO Donald Really Say That? Is posted questioning the direction the company is going. It is widely distributed inThe Wall St. Journal, The, Seeking Alpha, ValueInvesting News and others
2/8 - SBU
X shares close at $33.42 down 9.2% from their highs
2/14 - Founder and Chairman Howard Schultz pens memo to CEO Donald echoing sentiment in ValuePlays post of 2/8
2/23 - Memo becomes public and is reported on CNBC
2/26 - SBUX follow up piece Vindication Thy Name Is Howard Schultz runs in ValuePlays
2/26 - SBUX shares close at $30.75 down 15.2% from high level
2/27 - StarbucksGossip. com picks up 2/26 ValuePlays post
2/28 - Boston TV Show "Chronicle" does a segment comparing coffee chains called "BreakfastWars" featuring McDonald's improved coffee offerings
3/1 - Prudential analyst Howard Penney cuts his price target SBUX shares
3/2 - SB
UX shares close at $29.88 down 17.6% from their high

"Ok, so what is the point Todd"? The point is that SBUX shares are falling fast and now that the mainstream media is piggybacking on the ValuePlays sentiment, there is nothing happening on the immediate horizon to stop it. If anything, things are due to get worse, much worse. Why?

*McDonald's (MCD) announced it will serve specialty coffee beverages like vanilla lattes and caramel cappuccinos at outlets across the U.S. The drinks are already
available at McDonald's restaurants in Michigan, New York and New Jersey. McDonald's is pricing espresso-based drinks between $2 and $3, undercutting Starbucks, many of whose similar offerings are over $3. The high-end coffee drinks are consistent with an overall strategic shift away from its traditional burger-and-fries offerings and toward more "upscale" food, like chicken and salad. McDonald's specialty coffee drinks will be served from push-button machines, which are faster than Starbucks' labor-intensive hand-made approach.
*Starbucks announced plans to start selling hot breakfast sandwiches in its stores to compete with the Egg McMuffin.
*The past five years, Starbucks sent a gift card for $3.50, enough money to buy a latte. Previo
usly, it was a coupon for a free drink of their choice.This year, shareholders are opening the envelope to find a coupon good for two coffee-drip drinks. Starbucks says it wants people to bring a friend or family member along and then write about their experience at According to shareholders, "We expect better next year, Howard."

When your competition is encroaching on your main product and even those who invest in you are unhappy, you've got problems. In a nutshell here is the core of the issue... SBUX has no identity anymore.

Starbucks used to stand for superior quality in a relaxed atmosphere (almost lounge like). For that, people were willing to pay a premium for their product. What happened? Whether they will admit it or not not, management is trying to "out McDonald", McDonalds. Meaning? This whole new breakfast menu thing is a catastrophe in the making. Just give me my muffin and let me sit down or go on my way. When you begin to serve McDonald's breakfast items, the only way you can be considered successful at it is if you do it better than them and nobody, nobody executes better than McDonalds. Yeah, I know what you are saying "SBUX egg sandwiches have imported feta cheese, all organic no growth hormone eggs, hydroponic rain forest lettuce and hand milled flour buns". Right, so when I order I'll ask for the "egg and cheese"? "But what about McDonalds" you ask. Aren't they trying to "out Starbucks" , Starbucks with the improved coffee and premium offerings like latte's and cappucinos? Yes they are, and they are doing it. Here is the reason, for most people coffee is coffee and and egg and cheese is an egg and cheese. Of course there are the "coffee connoisseurs," they will never go to McDonald's and I am not talking about them, I am speaking of the great ambivalent masses in the middle. When all things are equal, price and convenience always win. McDonald's has both. What about the atmosphere you say? Check out the new McCafe' concept. What has happened is McDonald's has raising its image and Starbucks has come become more ordinary.

Starbucks needs to take what they did best and do it better. What they did was try to do what McDonald's does better and in the process lost what made them great. McDonald's on the other hand is taking their concept and improving it to meet the needs of their consumer, without, and here is the key, sacrificing what has made them great, convenience and price. You also cannot underestimate the goodwill McDonalds enjoys with consumers being associated with the Newman's Own brand coffee. When Starbucks started they created a niche, by then doing what McDonald's does they opened the door for McDonald's to be compared to them and are losing the battle. If they want to win, they must take the concept more upscale... not less. Here is a freebie, instead of making me stand in line for 15 minutes, could somebody come over and take my order and bring it to me? If I am going to pay premium prices, I ought to get premium service, no? Sounds simple but think about it. If I am ordering at McDonald's and they do not have my order ready, they ask me to go sit down and relax and they will bring it to me, even if it is only a .99 cent hamburger. Why can't I get my $12 latte' and muffin brought over?

Mr. Schultz, really, this is starting to get away from you guys... email me..


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