Stock of the Day by Jeannette Di Louie, Investment U Research
Last week, Starbucks Corporation (Nasdaq: SBUX) debuted "Via Ready Brew" – its new instant coffee.
It's a product that CEO Howard Schultz calls "perhaps the biggest opportunity" in the company's history.
Hmm… perhaps Mr. Schultz is being slightly over-the-top.
Aside from a ConsumerReports.org report, which labels the coffee, "good, not great," that rather so-so review is beside the point. You see, Starbucks' success has less to do with delicious products (although its Tazo Iced Green Tea is quite tasty), and more to do with ambiance.
Here's what I mean…
A Cool Vibe… But it's the Bottom Line That Counts
Despite the company's significant downsizing efforts, you can still find multiple Starbucks stores in towns and cities across America ( about five per town now exist in California).
No doubt it's because the company knows it delivers a hip image and mellow environment that middle-class Americans love to soak up.
Unfortunately, though, middle-class America is still struggling, as evidenced by their recent switch to saving over spending, plus grinch-like predictions on the upcoming 2009 holiday season.
Sure, Starbucks still serves its ambiance with every steaming double-shot latte and people like it just as much as they used to. But times are tough, so instead of hitting Starbucks, they're more apt to opt for a McDonald's Corporation (NYSE: MCD) McCafe instead.
McDonalds has both the right taste and right price to appeal to today's cash-strapped consumers, which explains why its gross profit rose from $1.8 billion in the first quarter of 2009 to $2.1 billion in the second.
Starbucks only managed a jump from $1.2 billion to $1.3 billion over the same period.
And while McDonald's is seen as more of a fast-food chain than just a coffee shop like Starbucks, keep in mind that the latter has revamped its menu to include more food choices.
A profit is still a profit, of course. But with unemployment nudging closer to 10%, higher-end Starbucks may continue to struggle for traction until employment rises and consumers have more disposable income again.
Over the long-term, Schultz may succeed in turning Starbucks around and restoring it to its former glory – after all, he's got a successful track record – but the short-term remains murky. As we approach the holiday season, consumers aren't likely to be spending much of their spare cash at Starbucks – especially not on those overpriced Cinnamon Dolce Frappuccinos.
Good investing,
Jeannette Di Louie
