Wednesday, July 9, 2008

In Defence of Starbucks

I don't fully understand why all the vitriol aimed at Starbucks these days?

Starbucks would be the bad guy if they arrived on your local corner selling coffee for 39 cents. The mom'n'pop shops would cry that the big bad soulless corporate behemoth was undercutting them out of business. But, Starbucks doesn't do that; quite on the contrary, when they show up and overprice their coffee, they drive business to the mom'n'pops (studies are in - local coffee shops overwhelming do better when Starbucks is nearby) - that's not so bad, is it?

(yes, I've heard horror stories about overly-aggressive promotional tactics, but vitriol in these situations is better levied against individual store management than to the national brand itself).

Starbucks doesn't sell anything we need. It is selling something we want. Which means, we have choice. It's not like the oil companies (I'll come back to this in a sec...). In other words, Starbucks isn't forcing anyone to buy their coffee. So, why is Starbucks to be blamed if someone chooses to buy a $4 cup of coffee?

Which is my next point. Starbucks isnt selling coffee. They're selling image. Like "$100 sneakers" (remember when?), or jeans that cost over $200 (still just cotton to me)... This is part of why Starbucks locations I know don't have a take out window or drive-thru - part of the product is being there, being seen there. For whatever that's worth (and, given their growth, it was worth a lot, not too long ago), that's what it is.

If there is blame to lay at Starbucks doorstep, it's that they have not done right by their shareholders in creating alternative revenue streams to offset lagging sales derived from the luxury of selling image. The market came to Starbucks, pushed their growth almost in spite of themselves (coffee across the board was selling), and they got fooled into thinking people really would keep buying, economy notwithstanding. But, as discretionary income has dwindled, and people are forced to choose what's really necessary, luxury things like a $4 cup fo coffee are quicker taken off the list than, say, buying gas to get to work.

Which brings me to my issue with allowing the stock price to be the primary determinant of value. Yes, the price of the stock is a reflection of the company's ability to sell in this economy, and as such does indicate management may have been shortsighted. That's no good, if you're a shareholder. But for all of us who are not, what's the problem? By comparison, consider the stock performance of your garden variety oil company - shall we conclude based on stock performance that these are "good companies", companies that people appreciate and are happy with?

Some might suggest the oil companies are extorting their money because we don't have a choice - we must get to work, to school, to whereever we are going, and have to make difficult choices when there's not enough money left after filling up the tank.

I can think of several companies whose stock these days are doing well, but do we embrace them? Canadian banks, internet and wireless service providers are doing well on the market, but are continually bouncing from one PR nightmare to another.

Valuing a company solely on stock price is illusory and shallow. How many companies can we think of that were shooting stars on the market for a time, and we allowed the soaring stock price to blind us to fundamental problems - Bre-X, Nortel, Enron....

Maybe Starbucks should be named among them, just another shooting star crashing back to earth. To-date, however, Starbucks hasn't actually been accused of any malfeasance. So, that's not the problem.

Recently there was public outcry over Rogers iPhone pricing, and they've been forced to respond. Is Rogers allowed to hide behind the defence I'm offering Starbucks? After all, both are being accused of charging too much for their service. I think the difference is one of the markets of these respective businesses - there is plenty of choice in the coffee market if you don't want to give your money to Starbucks. But, if you want a GSM cellphone, the infrastructure that the rest of the world uses, there's nowhere to go in the dominion of Canada but Rogers. As such, we may be able to accuse Rogers of taking advantage of a monopoly situation, but we can't levy that same charge at Starbucks, there's just too much choice in the coffee space. 

Same goes for the oil companies. Even though they may argue there's "choice," there really isn't, for two reasons:
  • first, if there are eight oil companies selling a litre of gasoline for approximately a dollar, a high-low price range of  3% amounts to 3 cents per litre, and people will cross the street, so oil companies don't tend to vary their prices a whole lot. Choice in the seller from whom you buy from is only part of the equation. Choice in how much you pay is also a necessary component of the concept of choice;
  • with coffee, there's choice, not only in brand, but also in price. If I can buy a cup of coffee for 99 cents (or 25% of a Starbucks cup) the equivalent in gasoline would be finding a station charging 35 cents per litre across the street from the station still charging $1 (of course, you'd probably spend all day lined up to buy). When it comes to coffee, we have choice.
Any way you pour it, Starbucks is not as much of a corporate bad guy as other companies whose stocks are still performing well. The herd mentality has got people piling on Starbucks, but there's really no need, because Starbucks has done one more thing better than those other companies - they have remained accoutable to the general public. Whereas internet and wireless providers and oil companies can balk at being called to task by government inquiries and go right on exploiting their positions, we don't need to write a letter to our ward alderman or start an online petition to break The Beer Store monopoly when it comes to Starbucks, because Starbucks has remained accountable to the marketplace - the stock is down.

Edit - (Dec 13, 2008)

Recently I bought a medium beverage from a Second Cup shop, it was $4. And it dawned on me that I was right about this Starbucks defence.

Is anyone complaining about Second Cup charging $4 for a medium cup of a hot beverage? Nope.

The issue, thus, isn't about whether Starbucks or any other place is overcharging for cup of coffee. It's about other things.

Edit - (Jan 27, 2010)

Here's a recent (January 2010) headline "Starbucks profit surges"

Management has apparently weathered the external storm, and righted the internal ship. As Gilligan was wont to say, "from here on in it looks like smoooooth sailing."