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Starbucks on the comeback trail with Clover


“Wow,” I said.

“Yeah, wow,” said the guy behind the counter.

“That is so cool. Can I take a picture?”

“Well, it’s not allowed but go ahead – quick.”

And so I surreptitiously snapped the pic you see above. Looks like a weird, black contraption of unknown purpose, you say. Actually, it’s nothing less than the potential savior of that little $13 billon coffee chain from Seattle, Starbucks Corporation. It’s called the Clover 1s, it costs like $11,000 and it brews one of the tastiest cups of coffee this side of the moon. Starbucks bought Clover’s maker a few weeks ago and plans to put the machines in lots of stores soon. For now, it’s only in six, one of which happens to be in Harvard Square in Cambridge, Massachusetts, a few miles from my house.

As a primary observer of the coffee wars, I had to get to the front lines and check out the new artillery. As you’ll recall (and as we’ve been blogging about for the past two years), Starbucks is under assault from all manner of opponents, but most especially McDonalds and Dunkin Donuts. Both downscale chains have moved up in the coffee ecosystem with fancier blends and Starbucks-like menus of lattes and frozen frappacino concoctions.

And of course the current economic weakness is hurting the entire industry, making Starbucks all the more out of favor. After peaking close to $40 a share in early 2006, the stock has lost more than 50% and sits at $17.66 right now, about where it was three years ago. The stock drop has got the company refocused on the business of making coffee and that’s where Clover comes in. This fine and fancy brewer is piece of the successful turn-around strategy you’ll be reading about all over two years from now.

I learned of the nearness of Clover from the New York Times, wherein a reporter accompanied by a friendly neighborhood coffee guru tried almost every single blend of coffee beans in the store as brewed up by the Clover. You may or may not be surprised to discover the resulting review comes across as ridiculously pompous. I was interested in the appeal of Clover-made coffee to we the less high falutin’, coffee-swilling masses who make up the bulk of Starbucks customers.

But when I arrived at the Harvard Square Starbucks I knew of there was no Clover present. I inquired and the helpful barista explained that it was at another store, a few blocks away. Cannibalization, shmannibalization. “I’ll understand if you want to go over there,” she said. And so I did.

The hype was visible before I even breached the door – signs outside touted “New PRESSED Coffee,” explaining in smaller type: “Fine small-batch coffees, brewed by the cup.” And just inside, isolated as its own coffee shrine, stood the unassuming black box (it looks nicer in Clover’s official portrait, of course). I tried a cup of Kona blend, $2.25 instead of the usual buck sixty-five. The barista, who let me snap my pic and shall therefore remain nameless, ground me up a cup's worth of beans, poured them into an opening at the top of the machine and hit a button. Hot water poured down on the grinds – the process started out in the open. The smell was terrific. Then a vacuum something-or-other sucked down liquid and my coffee was ready.

Despite what the foodies at the Times say, the Clover-brewed Kona was tasty and complex, starting with a sweet, mellow flavor and leaving a nutty slightly spicy after-taste. And I’m not even that big a fan of Starbucks – I’m patronizing the local brewstand most mornings. After the event, Mister Barista grabbed a tiny squeegee and shoved the cake-like pile of grounds into a waste bin. No fuss, no muss. The Harvard Square branch also showed other signs of CEO Howard Schultz’s turnaround plan including a lower height main espresso machine and a bar to sit at and chat with the baristas.

The question for investors, however, is whether an extra 60 cents a cup from an $11,000 machine will help get the stock moving in the right direction. As we’ve noted before, Starbucks opened the door to competitors by diluting its own coffee house mystique. Clover and the various other moves in the works will certainly help fix the chain’s image. I’m already trying to figure out how to justify a return trip. Anyone need a Harvard sweatshirt from the university book store?

And there’s also the matter of basic investing discipline. Buy low and sell high means buy when everyone else is selling and sell when they’re all buying. With Starbucks trading at the lowest price-to-earnings ratio in years and suffering (in part) from the effects of high dairy prices and an economic slowdown that will inevitably end someday, this is one of those times to buy low. Sure, the stock could drop further if the recession deepens but long-term investors know to wait it out. Order up a few custom Clover brews while you wait and the time will pass quickly.

Minor update: The local chowhounds agree with me -- Clover makes a fine cup of coffee.


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