Can Starbucks Survive?
Hard times for famed coffee house.
Starbucks (SBUX), the master of pricey lattes and other frou-frou drinks has discovered that, like mere mortals, it must scramble for customers in a downbeat economy. It once raised prices with little resistance from customers, but now slugs it out with blue-collar Dunkin' Donuts in the $50 billion market.
Don't look for across-the-board price cuts at Starbucks just yet, but keep an eye out for future spot price reductions, coupons and even a discount card.
Starbucks has closed about 600 stores as customers cut back on expensive coffee. This caused grief coast-to-coast as some loyal customers lost their favorite outlet. Some may have been forced to trek several blocks to find another Starbucks.
The cutbacks have hammered earnings. In July, Starbucks reported a third quarter loss of $6.7 million, or one cent per share, compared with net income of $158.3 million, or 21 cents, for the same period a year ago. It was the first quarterly loss in 16 years as a public company.
Starbucks said restructuring charges reduced third quarter earnings by about 17 cents a share. The company expects revenue to grow about 11% in fiscal 2008, but the cost of restructuring will extend into the first half of 2009. Translation: no immediate miracles.
"During the (third) quarter, we continued to make solid progress in transforming the business for long-term, profitable growth," Howard Schultz, the company's chief executive officer, said in a prepared statement. "We are taking decisive actions to strengthen our global store portfolio and gain efficiencies in our overall cost structure."
The company's stock recently fetched $15.74 a share. The 52-week range is $13.33 to $28.19.
Starbucks says it has no plans to raise prices in the fiscal year ending September 2009. Espresso and other fancy beverages can cost $3 to $5 each.
The company also has no plans to cut prices. However, the cost of holding the line will be paid in aesthetics – look for more discounts and promotions to clutter stores filled with coffee drinkers earnestly tapping away at their computers.
For those looking for decent coffee at a good price, a recent Consumer Reports test might surprise you. The organization hired tasters to sample a medium cup of black coffee from McDonald's (MCD), Burger King (BKC), Dunkin' Donuts and Starbucks.
McDonald's "beat the rest," Consumer Reports said. Coffee from the Golden Arches was "decent and moderately strong."
In the face of this and other challenges, Starbucks must maintain its margins while preserving the brand name, not to mention the artsy atmosphere it has fostered at stores coast-to-coast.
Starbucks launched Vivanno smoothies in July and marked the occasion by handing out free product coupons. The current promotion, "Treat Receipt," offers $2 cold drinks in the afternoon to customers who present the receipt from the purchase of their morning coffee.
While no one foresees "Blue Light Specials," a "Gold Card" test program underway in Denver and Vancouver, British Columbia includes a discount for family and friends as well as free drinks on birthdays or one other special day selected by card holders.
Starbucks is also testing a program that gives cardholders a free drink after they've bought ten with their Gold Card.
Some coffee aficionados say the spirit of Starbucks lives on in Peet's Coffee & Tea (PEET), a chain of about 165 stores concentrated in California. Peet's also sells its coffee through national grocery chains, including Safeway (SWY) and Whole Foods (WFMI).
Reshuffling the coffee market gives consumers more choices at a better price, but who wants to contemplate capitalism's "creative destruction" while sipping a cup of joe?
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