Monday, January 7, 2008

Now Will Starbucks CEO Donald "Consider the Competition"?

Back in February of 2007 during a conference call Starbucks (SBUX) CEO Jim Donald replied to a question regarding the company's competition: "I don't know the details" and then in June he said, "We don't really consider it (the competition)". I am guessing shareholders are wishing he did...

This year, McDonald's (MCD) nearly 14,000 U.S. locations will install coffee bars with "baristas" serving cappuccinos, lattes, mochas and the Frappe, similar to Starbucks' ice-blended Frappuccino reported the WSJ. Documents from 2007 say the program, which also will add smoothies and bottled beverages, will add $1 billion to McDonald's annual sales of $21.6 billion.

In a clear shot across the bow of Starbucks "grande" and "venti" size lingo, ads for the espresso drinks running in the Kansas City area, where the concept is already in place, say you don't get a "condescending look" for mispronouncing the size of the drink at McDonald's. At McDonald's, you just ask for small, medium or large. Novel idea...

The best part? The new drinks are priced from $1.99 to $3.29 and come in vanilla, caramel and mocha flavors. At those prices, they undersell Starbucks by almost a dollar a cup, and that is very significant.

It will be interesting to see what Starbucks does in response. Their previous action, a nearly $5 egg sandwich was a colossal flop both with customers and employees. Maybe $6 pancakes?

If you believe we are in for an economic slowdown, you cannot deduce anything other than Starbucks is in for a world of hurt.

What do they now do?
-Fire CEO Donald
-Grind US expansion to a near halt.
-Invest in the stores big time. So many of them are just dirty and so crowded with everything from coffee machines to lawn mowers for sale.
-Every location that could possibly have a drive-thru should be equipped with one
-Give investors a dividend
-Prices, they have to come down, not up.

That is just a starter list....


Todd Sullivan's- ValuePlays

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