STARBUCKS ON THE STREET

Wall Street, this is.  Starbucks (SBX) logged the largest gain in more than a year during its recent quarter.  And, so, the Street is pleased with them, right?  Well, not exactly.  Even though stocks rose 9% based on the report that in-store U.S. sales rose 4% versus the 2-3% that had been anticipated, the gain was primarily due to SBX raising their prices.

That kind of gain is seen as transitory – that is, unable to be counted on as consistent and ongoing gain in the long run.  SBX has twisted themselves into a pretzel in recent months in their attempts to please everyone, including closing its U.S. stores for racial-bias training and designing seasonal cups with just enough of a Christmas theme to avert charges of “removing Christmas.”  There appears to be a need to concentrate on the growing competition.  Dunkin’ Donuts has taken it on as their personal mission to challenge Starbucks – and win – by offering “up scale” coffee concoctions at less than Starbucks charges for the same product.  McDonalds and others are also strong contenders in the competition arena – a number of friends and clients report that they’d rather have a latte from McDonalds than Starbucks.  And definitely at a cheaper price.  Thus, with Starbucks relying on raising their prices for recent gains, it seems as if they might be painting themselves into a corner.  They have nearly 30,000 outlets world-wide, so that appears to be near-market saturation – and new store openings are slowing as a result.  Thus, the gains that normally come from opening stores in new markets appear to offer modest opportunities for growth.  SBX has begun closing underperforming stores in crowded markets in urban areas where rents are high, and they’re slowing the growth of stores in airports  –  and supermarkets (never a productive enterprise, as I’ve viewed them) – while at the same time expanding into new cities in the Midwest and South.  They’re also reducing the time that employees spend on administrative tasks, so that they can concentrate on customers.  And they’re focusing effort on knowing the preferences of more visitors so that they can better target them with offers that appeal to their ordering behavior – a recent loyalties/rewards program brought in 4 million more digitally registered customers.  It will definitely be interesting to see how new CEO Kevin Johnson proceeds – it’s always a challenge to take an established company and remake it into a newly-performing entrepreneurial one.

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