Coffee Wars IV - Schultz rallies Starbucks' baristas

Posted by: Aaron Pressman on February 23, 2007

The coffee wars continue unabated into 2007 and Starbucks (SBUX) still looks like target numero uno of every new and expanding player. Today, the web site Starbucksgossip.com (“Monitoring America’s favorite drug dealer”) got the scoop an internal memo from chairman CEO Howard Schultz and it sounds like all of that competition is grinding down the company’s market position. Some commentators are missing the real story, praising Schultz for not being complacent. That’s all well and good but a lot of damage has already been done. Starbucks shares are down 10% since July, when McDonalds disclosed its coffee successes versus the 16% gain in the S&P 500. This is hardly a proactive move by Starbucks.


Basically, Schultz is decrying decisions his company has made during its massive expansion that fueled efficiency or helped cut costs at the expense of diminishing the aura and environment of Starbucks as a coffee house. Brand dilution, perhaps. Near the end, he sums up:

“I take full responsibility myself, but we desperately need to look into the mirror and realize it’s time to get back to the core and make the changes necessary to evoke the heritage, the tradition, and the passion that we all have for the true Starbucks experience. While the current state of affairs for the most part is self induced, that has lead to competitors of all kinds, small and large coffee companies, fast food operators, and mom and pops, to position themselves in a way that creates awareness, trial and loyalty of people who previously have been Starbucks customers. This must be eradicated.”

With McDonalds’ (MCD) push into better coffee succeeding, expansion at Dunkin Donuts and Tim Hortons (THI) plus Coke (KO) and Pepsi (PEP) horning in on the ready-made sector, the pressure on Starbucks has hardly peaked. Good for Schultz for getting the troops focused but investors should also be listening closely. And don’t forget you’ll soon be able to buy the coffee commodity ETF in London more easily via E*Trade’s new international trading program.

One more thing: it’s interesting to note that shares of small-cap coffee companies are getting killed today on the Schultz memo. Peet’s Coffee & Tea (PEET) is down 4%, Caribou Coffee Co (CBOU) is down 2% and Green Mountain Coffee Roasters (GMCR) is off 3%. While these little guys seem at least equally vulnerable to the attack of McDonalds et al, it’s hard to see how Schultz’s call to action will hit their bottom lines any time soon. Shares of Starbucks itself are down half a percent.

Reader Comments

Jillian Alexander

February 25, 2007 11:09 AM

What far too many managers, and apparently some Executives, of Service businesses seem to not understand is that the "experience" of receiving the service IS the "differentiating factor."

Although the Starbuck's team has driven down costs through the improvements Schultz mentioned and some methods not mentioned (i.e., such as processing prematurely picked beans to ripen them rather than allowing them to mature and reach full taste) for years, it's only now that the reduced quality, lack of interaction with a quirky or bohemian or other fun-personality Barista, and cookie-cutter ambiance does nothing to attract a new customer or retain the existing customers. One can buy a similar cup of java at the nearby 7-Eleven, Krispy Kreme or Dunkin' Donuts.

Laurel

February 21, 2008 11:01 AM

I absolutely agree. I am a former Starbucks Barista and hardcore supporter. I've stopped going to the three Starbucks located within a 3 block radius of my office simply because the service was so bad. It's sad.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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