Monday, September 10, 2007

What Was Schultz Thinking?

Just when I think Starbucks (SBUX) could not be any further off the mark than they are now, they prove me wrong.. sorry shareholders (again).

In Mexico, CEO Howard Schultz said “At the very top of the market where Starbucks plays, I do not believe that others will have access to the quality of coffee that we are buying because we have secured those sources,” Schultz said.

What Schultz did not say was that Starbucks’ size of 13,000 thousand plus locations prevent them from sourcing their beans from smaller, artisan growers capable of growing the highest quality coffee beans. Instead, they require a "best of the biggest" approach, where they deal solely with growers who can supply coffee beans in large enough quantities to meet their huge distribution needs.

Let's put that obvious one aside. Let's deal with the "super premium" comment. Has anyone ever seen an ad where McDonald's (MCD) or Dunkin Donuts claimed "super premium"? Me either. What they do offer is "very good coffee and very good prices". They call it "gourmet" but that could just mean "doesn't suck" and based on the money pouring into both companies from coffee sales, any alleged shortage is not affecting them. Let's assume they are buying the same beans (I will play along Howard). If you are a coffee grower and are approached by Starbucks and McDonalds, which dwarfs Starbucks in size, and both want to buy your beans, are you going to put all your eggs in just one basket? If you are, would it be the smaller guy?

Schultz, it seems, has fired a shot over the bow of, well, Starbucks since only they seem to think they require all the "super premium" beans. There may be a slew of small European cafe's affected by this alleged shortage, but McDonald's and Dunkin Donuts will not be. Also, whether Schultz or anyone else at Starbucks wants to admit it and clearly they do not, this IS their competition and it IS where their former customers are getting their coffee now.

"Starbucks is not an advertiser. If other companies are going to advertise and promote specialty coffee, Starbucks is going to benefit in the long term," Schultz continued. Well, maybe he ought to be because they clearly are not in the short term. He needs his company's products to be defined by something other than their high price which his "competition" has managed to do to them. Starbucks allowed their brand to become equatable to Mcdonalds (MCD) and Dunkin Donuts, now they need to spend money to change that or the comparisons will not end and they cannot compete on value with either of them. Just when I think things may begin to change.... nope

I can't wait for the next one.


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