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Peter Atwater: Starbucks Is Serving Up Full Foam in a Frothy Market

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Behaviors exhibited by Starbucks' CEO offer clear evidence of peaking confidence.

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I am often asked if the principles of socionomics and confidence-driven decision making I used to analyze markets apply to single companies and organizations.

I think they do. Companies, like markets, are social networks, albeit smaller in size. As such, they have the same ability to herd, and therefore to demonstrate the full spectrum of collective underconfident to overconfident behavior.

To offer an example of this, I'd like to focus on Starbucks (SBUX).

While the markets are in full froth, Starbucks, I suppose, could be described as in full foam.

I have been worried for a while about Starbucks. 

Last fall, CEO Howard Schultz came out with a book, For Love of Country: What Our Veterans Can Teach Us About Citizenship, Heroism, and Sacrifice, co-authored by Rajiv Chandrasekaran.

While I have a huge amount of respect for Mr. Schultz and many of his initiatives, as a socionomist and researcher on confidence-driven decision making, I am not a fan of CEO books.

Best-sellers by popular corporate leaders like Michael Dell and Jack Welch helped marked the peak in 2000.

I have also been watching Whole Foods (WFM) very closely ever since John Mackey's book came out.



Then there was this Time cover featuring Howard Schultz from February:


                                 
As Paul Montgomery first showed, magazine cover stories, particularly those froM Time, are a notoriously good contrarian indicator.

And in the specific case of Starbucks, I was struck by this line from Rana Foroohar's story:

"Schultz says he is deeply invested in these ideas not only because making the company a preferred employer helps keep turnover costs lower and service quality higher than the industry average but also because he believes corporations have a duty to help people realize the American Dream."

When corporate CEO's expand their ambitions - and more importantly the ambitions of their organizations, I am always sensitive to what that says about confidence levels. 

Bold and audacious goals, particularly far outside of the critical path, go hand in hand with extremes in confidence.


Click to enlarge

With Starbucks stock up ten-fold from its 2009 lows, and up more than 30% in the past six months, confidence in the executive suite at Starbucks is a perfect fit with the Time cover.

As you may know, a month ago Mr. Schultz took yet another bold step when Starbucks and USA Today co-initiated an effort "to stimulate conversation, compassion and action around race in America. The program, called "Race Together", enlisted  Starbucks baristas to raise the topic of race relations with customers. It was entended to be "an opportunity to begin to re-examine how we can create a more empathetic and inclusive society -- one conversation at a time."
            
As the Huffington Post reported, "The initiative was developed in response to racially-charged events unfolding across the country and direct feedback from their employee "partners" across race and class over the past three months, with more than 2,000 Starbucks team members discussing racial issues at open forums in Oakland, Los Angeles, St. Louis, New York and Chicago."

While the "Race Together" initiative received very mixed reviews, its existence in the first place is what interested me. 

As Aaron Chatterji and Michael Toffel shared recently in the Harvard Business Review, "[CEO] activism is a different animal. CEOs are intentionally courting controversy by weighing in on contentious issues without any obvious pretense of raising profits."

That Mr. Schultz deliberately took on the issue of race relations AND committed the employees and reputation of Starbucks to follow through on it reflects extraordinary confidence.

Coming on the heels of his book and his Time cover, the Race Together initiative suggests that Mr. Schultz -- and by association, Starbucks -- is at peak confidence.

While others may see these events as indications of strength and opportunity ahead, my research and the work of other socionomists suggests just the opposite. 

Extreme confidence accompanies tops, not bottoms. Mr. Schultz's recent actions are a perfect fit with the sentiment reflected in stock chart above.

What is ahead, though, will challenge Mr. Schultz and Starbucks far more than investors think.

But I doubt Mr. Schultz will be alone in his struggle. 

CEO activists of all kinds are likely to be challenged by falling confidence. Goldman Sachs' (GS) Lloyd Blankfein, Duke Energy's (DUK) Jim Rogers, and Google's (GOOGL) Eric Schmidt, Facebook's (FB) Sheryl Sandberg -- all mentioned by name by HBR -- along with Whole Foods' John Mackey, will face headwinds. 

Needless to say, if these CEOs face struggles, so too will their companies and their companies' shareholders.

Just like investors have embraced passive investing, falling mood will have corporations looking for less active leadership, too.

To be clear I wish none of the leaders above, nor their associates ill. But as a researcher on how changes in our level of confidence impact our preferences, decisions and actions, the behaviors that I see from Mr. Schultz offer clear evidence of peaking confidence.
I will be watching closely to see what happens from here.

Peter Atwater's groundbreaking book "Moods and Markets" is now available on Amazon and Barnes & Noble.
 
"Peter Atwater brilliantly provides a framework for understanding both the socioeconomic hubris that led to the great credit bubble of the past decade and the dark social-psychological hangover that has resulted from its collapse. In so doing, he offers an invaluable guide to what promises to be a very difficult and turbulent period ahead as we experience what he calls the 'me, here, and now' behavioral tendencies of the post-crash world."  -Sherle R. Schwenninger, Director, Economic Growth Program, New America Foundation


Twitter: @Peter_Atwater
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No positions in stocks mentioned.
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