(By Karl Denninger)More implosions last night....
At U.S. cafes, sales growth began to slow in June from earlier this year, Chief Financial Officer Troy Alstead said yesterday in an interview.
"The overhang of challenged consumer sentiment and housing and unemployment, I think the consumer is feeling it," he said.
The problem was that the company reaffirmed guidance and then missed.
Look, I said back in June (when I was out traveling) that I saw a marked deterioration among places that I am almost always during the summer months. Call it the Tickerguy Vacation Indicator if you wish; we are creatures of habit like most people and simply put in June I saw a very-visible slowdown in consumer behavior in places that I frequent. This has continued into July, including here locally.
As just one example traffic here locally is, comparatively, very light when looking at the 2006ish timeframe as your benchmark. It's not as bad as the disaster that was 2009, but that's cold comfort if you're trying to be "all bulled up."
The miss essentially destroyed all of 2012's price gains in 30 seconds, leaving one to ask "what's next?"
I'll admit to being severely-biased in the negative direction on this company, simply on the product. I hate their coffee -- they "over-roast" their beans, and I believe it's done on purpose for inventory control reasons. See, coffee, once roasted, has a shelf life of about 2 weeks (and really more like 10 days) before its best quality is lost. That makes for mighty distribution headaches and mandates very precise control of how much you roast and how much you distribute to a given store, because if you actually honor what should be expiration dates you're throwing anything unused in that two-week period away.
The problem is that unlike most foods roasted coffee doesn't turn into something dangerous and thus unmarketable after it expires.
It just tastes like crap.
A properly-pulled espresso with fresh beans has about a 1/4-1/3" layer of crema on the top; a natural "foam" that is produced from the extraction of the coffee under ~120psi of water pressure. To get a proper crema layer you need three things to be right:
- The coffee has to be fresh; no more than 2 weeks post-roast, and the roast must be neither too dark or too light (for most coffees suitable for espresso this means you want to pull the roast just as it enters "second crack".) Starbucks fails here -- their coffee is roasted too dark for optimum extraction.
- The temperature of the water in the brewing unit has to be almost-exactly right. Proper extraction takes place around 198F. The exact temperature varies somewhat with the blend of coffee being extracted, but once you have the proper temperature you need to maintain it with no more than ~2 degree variance for best results. If the water is too cold the coffee is extremely acid in taste, if too hot it tastes burnt.
- In addition, the pressure in the brewing basket must be around 8 bar, which means your coffee grind must be exactly right, since that's what provides the back-pressure on the system. If the grind is too coarse the coffee will be "thin"; if too fine it will be extremely bitter.
I have never gotten a Starbucks espresso with a proper layer of crema on it.
If you roast your coffee too dark on purpose you degrade a lot of the flavors that are in the natural bean. This, however, results in coffee that doesn't get much worse if the roasted coffee is older than they should be. It just sucks to start with and continues to suck.
If you drink your coffee with all sorts of crap in it you probably don't notice this much; the "Carmel Macchiato Grande'" is almost all milk and caramel syrup, with a couple of shots of coffee in it. I bet you could substitute battery acid for the coffee and you might not know the difference!
But I drink my espresso as straight shots, and unfortunately every sin the cafe makes is blatant and exposed to the palate when you drink it that way. And I'll not kid you -- I find Starbucks coffee nearly undrinkable, to the point that I will only buy shots there if I need the caffeine and am willing to simply not care if it tastes like brewed dogshit.
Think of it as the McDonalds' model. You'll never get an outstanding hamburger at McDonalds'. But you will get the exact same hamburger at every McDonalds' anywhere in the nation. I can pull into one here, one in Michigan, one in California and one in Colorado and when I order a Quarter Pounder with Cheese I know exactly what it's going to taste like. McDonalds' goes to a lot of trouble to make sure that this happens, as it's basically what they are selling -- the same thing, everywhere, every time, even if it's uninspiring at best.
This is the Starbucks' business model.
Unfortunately for people like me, I want an exceptional espresso. I want to taste nuances of chocolate, nut and even fruit overtones in the cup, and I don't want to have drown it with sugar or crap like caramel sauce.
I'll never get that coffee at Starbucks. Their entire system is designed around "make it fast, get it out, price it to wherever you can get away with."
That might work in an iPhoney world, which we seem to be in.
But as earnings showed, perhaps, on balance, people just expected too much from a company that at its core turned from being a coffee lover's paradise into the McDonalds' of coffee.
Now please excuse me while I drag my snobbish coffee-swilling face in front of my espresso machine and pull myself another shot.
Disclosure: Caffeine-addled and bouncy, but neither short or long SBUX.