Something stinks at Starbucks
Posted
Feb 01 2008, 05:08 PM
by
Robert Walberg
Rating:
This weekend when you get up early, grab the newspaper and head over to Starbucks for some coffee and a breakfast sandwich, you better savor the flavor of the eggs and bacon, as management announced that it will be pulling its egg sandwiches from the menu. Apparently, management is under the impression that consumers aren't frequenting its stores as often as in the past because the odor from the eggs overpowers the aroma from the coffee, thereby destroying the whole Starbucks sensation.
Something stinks, but it's not the breakfast menu. Okay, so there is a faint smell of bacon and eggs from time to time, but so what. Are we really to believe that the average Starbucks consumers' sense of smell is so refined and/or delicate that they can't stand the odor wafting from the kitchen area while waiting a few minutes for their coffee? Seems to me people have been doing it for years at McDonalds, Dunkin Donuts, and the local diner. The two -- coffee and breakfast -- aren't incompatible. In fact, they seem to go together rather nicely.
Frankly, what I smell is a lot worse than eggs and bacon -- it's a management team trying to pull a fast one on investors. Traffic at Starbucks is down from the pace it enjoyed a couple of years ago, but that has less to do with the customer experience being scrambled by breakfast items and much more to do with ever higher coffee costs, a sluggish economy and increased competition. That's the three-headed monster depressing growth and until management starts to honestly address these problems, the stench coming out of Starbucks will be its quarterly financials.
To his credit Howard Schultz, who returned as CEO last month, is starting to make some more necessary changes. The company will be closing about 100 underperforming stores and will reduce the number of new stores it will open in 2008 by 425. These efforts will reduce overhead costs, which have been climbing rapidly in recent quarters, and cut down on cannibalization. Management also announced recently that it is testing a $1 cup of brewed coffee and free refills -- two initiatives designed to ward off competition and revitalize traffic.
These are the type of moves that got me excited when I heard that Schultz was back in charge. Even cutting lower-margin breakfast items from the menu isn't a bad idea. It's the way it was spun that left a bad odor. When times are tough investors demand more transparency from management not less. Yet we get a bogus explanation for slowing customer traffic and news that the company will stop providing financial forecasts. These moves raise a red flag and make investors -- myself included -- question management's veracity and the company's near-term growth prospects. Something smells rotten at Starbucks alright -- it's just not the eggs or coffee.
