A coffee war is brewing
Today's Financial News - Posted January 26, 2009
The economy is slowing and few folks have money to burn, especially on expensive coffee. That means Starbucks (NASDAQ:SBUX) is hurting and its low-price competitors, like McDonalds (NYSE:MCD), are gaining valuable market share.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): After years of celebrating the value of its premium brand image, Starbucks (NASDAQ:SBUX) may be forced to rethink its marketing scheme. In an economy where tomorrow’s income is far from certain, fewer and fewer folks are willing to dig deep in their pocket for a cup of coffee and the opportunity to feel like a successful yuppie.
Starbucks is in trouble. It already fired a slew of workers in recent months and is closing 600 stores. But now, just a few days prior to its next earnings report, the company announces it will gather boxes for another 1,000 employees in its Seattle headquarters. That is not the news investors want leaking from the company leading up to a crucial quarterly report.
Since the recession began in 2007, Starbucks has had trouble finding the right mix of products, quality and service. The company is known for its premium beverages and above-average service, but in an economy that calls for extreme cost-saving measures, the right balance is becoming increasingly difficult to find.
For investors still hanging onto shares of this company, this news should be the proof you need to realize the glory days of high-flying growth are in Starbucks’ past. By the time the company emerges from this recession, the value of its brand will have eroded dramatically – right along with share price.
When yuppies go broke
Remember, in a deep recession, it is critical to look for brands associated with dependability and value. Nothing evokes those qualities more than the Golden Arches. While Starbucks is trying all it can to increase its consumer base, one of its top competitors, McDonalds (NYSE:MCD) is grabbing more and more market share. It is doing it by offering similar products at much lower prices.
Earlier today, McDonalds released its fourth-quarter figures. Even when consumers are reeling in pain, the burger maker found a way to keep from getting pulled under. The company announced Q4 earnings of $985 million, down from last year’s figure of $1.27 billion.
While quarterly earnings are down, the company beat Wall Street expectations, plus it posted a 3% revenue gain for the year. But most importantly, McDonalds plans to spend $2.1 billion over the next year to open more than 1,000 new stores and upgrade existing operations.
In other words, McDonalds is expanding while its competitors and the economy contracts. That is the kind of business you should want to be part owner of, not some trendy coffee shop past its prime.
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