• Jeff Matthews

Well, He’s Back at Starbucks. Now What?

Yes, he’s back at Starbucks.

No, I do not mean Howard Schultz.

I mean Mark. Mark was a hard working, conscientious kid, and he worked at the local Starbucks for years. Mark left for various reasons a year or so ago and I had not seen him since.

Then this morning Mark appeared behind the counter. He’s come back, for various reasons, and it was good to see him. But the most interesting thing about Mark’s return is that he can’t yet make espressos until he’s done his training.

This is a guy who, at the rate of ten lattes, cappuccinos and other, foofier, beverages per shift, probably made at least 10,000 espresso drinks over a period of five years at Starbucks. If that sounds ridiculously high, do the math yourself. In fact it’s probably low.

But Mark can’t make a single one until he’s finished his training again.

Now, no fall from grace—among the many that have occurred in Corporate America since the Housing Bubble burst—has been more visible and more welcome in more quarters than Howard Schultz’s Starbucks.

And I’m not sure exactly why—resentment at the fancy prices, resentment at the foofy names for cup sizes and what are essentially chocolate milk shakes, or resentment at the demise of local coffee shops at the hands of a Chain Store from Seattle.

Whatever the reason, now that Wall Street has mostly given up on it and McDonald’s is gloating over the boost to its business from an espresso roll-out of its own, Howard Schultz has returned to Starbucks and made a few changes.

Actually, he’s made a lot of changes—firing executives, firing employees, getting rid of the hot sandwiches that made the place smell like a Subway sandwich shop, and shutting all the stores for three hours for an all-hands training session all around the country.

I had my doubts about that much-hyped “training” session, but hearing Mark talk about his own experience coming back makes me wonder if Howard’s return won’t be a good thing—for the business, if not necessarily for the stock.

Sure, McDonald’s is now out there, along with Dunkin Donuts and Peet’s. And yes, traffic is down and the cost of milk is up and the price of coffee beans is through the roof.

But I recall a conversion I had long ago with John Bryan, who at the time ran Sara Lee, which, back then, was a well-run company.

Bryan had come out of the meat-packing business—an awful, commodity business—and he loved consumer brands. He still couldn’t quite get over the fact that consumers paid more for nothing but a label and the perceived quality behind that label.

And the consumer brand business that intrigued him above all was the tobacco business.

Now, this was in the days before Big Tobacco became a target of the government, and even before the toll of cigarette smoking on public health was as well known and widely accepted. Also, Bryan wasn’t actually looking to buy a tobacco company, what with the liabilities and public censure and all surrounding what was regarded in most quarters as a somewhat dirty business.

But as a business, he mused, it was the best model you could find: not only were cigarettes addictive, he noted, they were brand-addictive.

And coffee is like that, too. Except for the emphysema and lung cancer and all.

Starbucks drinkers drink Starbucks, for the most part. They’re not firing up Maxwell House at home, and they’re probably not altering their morning routine to go through the McDonald’s drive-thru instead of the Starbucks.

The same thing holds true with Dunkin Donuts regulars. And doubly-so with the snootier coffee drinkers who swear by Peet’s and wouldn’t be caught dead with a Starbucks cup in their hands.

So maybe there’s something to this turnaround at Starbucks. Perhaps, if and when the commodity inflation that’s hurting margins subsides, and the lending crisis that’s hurting store traffic is over, the business will come back.

After all, a non-lethal, brand-addictive product can’t be too bad a business, in the long run.

Jeff Matthews I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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