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Time for Starbucks (NASDAQ:SBUX) to change its brand
Today's Financial News - Posted December 4, 2008
The American economy is changing. That means it is time for some of the nation’s brand-reliant giants to change their imagine. Starbucks (NASDAQ:SBUX) is a great example investors can learn from.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): If you want a good gauge of the nation’s economy, just head down to your local college or university and count the number of students dashing across campus sipping on a steaming cup of coffee from Starbucks (NASDAQ:SBUX).
If you seen no more than four grande mochas per dozens students, we are in a recession. See more than one cup carrying the McDonalds (NYSE:MCD) brand and we are in a full-on depression.
College students may satiate their late-night munchies at the Golden Arches, but they do not buy their coffee from a clown. They get it from an art-school dropout with the title of a barista. It makes them feel sophisticated.
Not changin’ nothin
With the economy crashing from its multi-year caffeine buzz, it is no surprise Starbucks and its CEO, Howard Schultz, are telling investors the company may miss its fiscal first-quarter earnings estimates.
Right now, in the middle of the quarter, same-stores are down by roughly 9% over last year’s same period. Last quarter, they were down by 8%. It looks as though things are getting worse for the coffee giant.
Slowing coffee sales in the face of increased competition from the clown-touting fast-food restaurant mentioned above and a drastically wounded economy are no surprise. Frankly, I am dumbfounded there are any college students left that are willing to shell out $4 for a cup of joe. Don’t they know they can get nearly 40 packs of Ramen noodles for that price.
What’s surprising is Shultz’s firm stance that he will not allow the company to alter its brand in order to boost quarterly profits. He tells investors this is merely a short-term recession and the company’s traditional customers will return with credit cards in hand.
By diminishing the power of the Starbuck’s brand by offering cheaper coffee and lower-priced items, the CEO contends he will destroy the company’s long-term profit potential.
At first, Shultz’s theory sounded plausible. Eventually the economy will recover and American’s will resume their lavish a garish spending. But will they do it at Starbucks? I doubt it.
For proof, all we have to do is look at the fundamentals of business, specifically the product life cycle. Throughout history we have seen fashionable products come and go. Just look at bell bottoms, pet rocks and Beanie Babies. Coffee may not be a come-and-go fad, but expensive and trendy coffee is.
Nothing but castles in the sand
To illustrate how the product life cycle works, imagine that hectic section of the earth where the ocean meets the land.
What happens if you build a sandcastle right on the section of beach where waves are breaking and surging towards shore? Unless you care for it and move it as the tide rises, it will eventually erode to a point where one tiny wave can erase the entire thing.
Starbucks has reached that point. Today, the company’s top executive tells us he will not reposition his sandcastle. As wave after wave (or quarter after quarter) of competition and a declining economy erode the company’s earnings power, all it will take is one small surge for the company’s once-powerful brand to be totally erased.
The section of beach where a beautiful castle once rose from the sand will perfectly blend in with its surroundings. As an investor, that is not where I would want to see a company heading.
Schultz must realize to modify the Starbucks brand to better reposition it for a changing economy does not necessarily mean he will have to degrade the company’s image.
Sure, if the company is not careful that is the likely outcome. It will take hard work. But a company so brand-savvy as Starbucks certainly has the marketing capacity to modernize its already fading persona into something that will be able to stand up against the next onslaught of dangerous waves. After all, that is what Shultz gets paid over a million bucks a year to do.
Until Starbucks realizes the status quo will not carry it deep into the future, I cannot reasonably believe its share price will ever reach the peak we saw in 2006.
With a share price decline of 60% so far this year, Starbucks investors have faired worst than the overall market. Unless the company changes its branding views, that phenomenon will evolve into a long-term trend.
This is an important investing lesson to learn. Many of the nation’s top companies are not great because of proprietary technology or products. They are great only because of their brand strengths. Take a way their brand and you take away their value.
Next Article: Unemployment horror: When bad is good
2 Responses to “Time for Starbucks (NASDAQ:SBUX) to change its brand”
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December 5th, 2008 at 6:57 am
[...] Time for Starbucks (NASDAQ:SBUX) to change its brand The American economy is changing. That means it is time for some of the nation
December 4th, 2008 at 11:10 pm
Those who have followed the coffee business longer than 5 years (see Pendergrast's history, “Uncommon Grounds”) know that the chase for cheaper product is what put coffee consumption into a death spiral by the 1970's. Yes, quality does matter. People don't drink “brands.” They drink coffee, and when it doesn't taste good any more, they start drinking other things, like soft drinks. When accountants and branding experts take over a coffee company from the coffee people, as with Diedrich's Coffee, they first destroy the product, and then they destroy the company.
Yes, Starbucks and other specialty coffee retailers will suffer in this recession, but only the ones that keep an eye on quality will survive to prosper when it is over.