Starbucks (NASDAQ:SBUX) today announced that they will beat industry analyst projections for Q309, but almost entirely as the result of cost cutting initiatives and store closings, followed by decreased (ceased) short term borrowing and increased grocery store distribution. Though a positive result for the short term, the company saw an 5% decrease in US same store sales and projects further decreases in future years, though at a slowing pace. After making the “easy” cuts, what is the plan to turnaround sales?
Starbucks management has successfully reduced costs, but where is the plan to increase same store sales and reverse the commoditization of its brand that has led to vulnerability from competition? Despite past public assurances by Schultz that the company is returning to its roots, management actions have demonstrated anything but.
An article from the Associated Press today summarizes:
Starbucks has introduced instant coffee, changed its food recipes and begun a multimillion dollar ad campaign to keep customers from defecting to lower priced competitors like McDonald’s Corp (NYSE:MCD)., which is rolling out espresso drinks to its 14,000 U.S. restaurants.
Offering more and different products can increase overall sales in the short term, but ultimately drives the most brand loyal consumers -those customers or roots on which the company was founded- in search of alternative options. While Starbucks has faltered in recent quarters, small specialty independent chains and other coffee businesses have thrived, in part as the result of Starbucks’ missteps, which send alienated customers in search of other options.
On the upper end of the specialty coffee market, small chains and independents continue to grow at a blistering pace as consumers -even those adversely affected by the economy- continue to reward or console themselves with coffee’s affordable luxury. On the bottom, c-stores have made substantial investments into coffee service programs that capitalize on the blue collar market demand for caffeine in beverage form — and in the middle, QSRs like McDonald’s and Dunkin’ have taken deep cuts into Starbucks’ former territory. Being pressed at all sides, the decision to offer a wider array of products appears as if the company is searching for any additional opportunity to increase revenue rather than projecting a clear message of what it does best.
Schultz did not introduce any initiatives on the call but said Starbucks will update its packaging for the coffee it sells in grocery stores to include a coupon for free brewed coffee in its retail stores.
The suggestion that couponing and packaging offer the best hope of reducing the slide of same store sales is a troubling one. As with ice cream and instant coffee, these too are short term solutions to a long term identity crisis in an increasingly sophisticated market.