Starbucks Hides Behind the Veil

This morning a loyal reader pointed out to me that the best thought leaders constantly make bold predictions - and only remind others of the times when they happen to be correct.  So I'm proud to say that my prediction in June 2006 that Starbucks was headed for a fall has come true. 

Way back in that hot summer of 2006, Starbucks was on a tear.  The company's stock was at a record high of nearly $40 per share, and the company was benefiting from growth both through new openings and same-store sales.  But in a series of posts titled "The Spoils of Success," I made the point that the company's success was leading to arrogance, and in turn to bad decisions.  I mainly focused on its growing focus on selling music and movies - rather than coffee.  Founder Howard Schultz, who gave up his CEO spot in 2000, had big entertainment aspirations for the company; to re-quote from BusinessWeek in 2004:

"We are much more than a retail store. Much more than a coffee store," Schultz says. "We are becoming alternative distribution."

But now Starbucks has come crashing down to earth like so many of its customers off a caffeine high.  Its stock has lost more than half its value and now trades at $19 per share.  Sales are down, stores are under-performing, and the company was one of the first to claim a Recession had hit.  As a result, Howard Schultz has re-taken the CEO throne and is closing stores and clearing out breakfast sandwiches.  Schultz promises to restore the "distinctive Starbucks experience".

Bad choices in the past and market struggles are challenges that are finally driving improvement at Starbucks.  But while many these moves to resurrect the brand and growth seem smart - there is at least one choice that brings a bitter taste to Challenge Dividend believers: Schultz has informed Wall Street that he will not be reporting same-store sales numbers while his turnaround is in progress.  This flies in the face of retail investors, as same-store sales results is the standard by which most chains' business is judged. 

Schultz claims that he needs relief from investors' focus on short-term results like same-store sales.  He reasons that this will be a long-term plan and such numbers are less important.  The problem is that same-store sales will continue to be an important number, and investors cannot compare how Starbucks is doing compared to, say, McDonalds or Panera Bread (both of which have rising stock, by the way).

Sharing financial performance information publicly is a type of challenge.  And by withholding same-store data, Starbucks is bucking the challenge dividend.  The results could be tough.  First, investors will automatically push prices down because the lack of information increases risk.  Second, company management will be under less pressure to solve its problems and fix broken stores and initiatives.  Third, investors will not be able to judge whether or not new choices are working. For example, the company is about to spend millions on its first-ever TV commercial campaign, and restaurant chains often judge TV success by same-store sales (just ask Saatchi/Wendy's).

I admire Howard Schultz for making tough decisions in a bid to return his company to glory.  But any decision that goes counter to the challenge dividend can only make the path more difficult.

Comments

[Tyler]

If you were building a multimillion dollar custom home, and you showed up at the framing stage wanting to see how things were going, and your general contractor stopped you at the street and said "no no no no, you can't see the place until it's finished", you would laugh in his face and head on in. I understand why Mr. Schultz wants to keep short-term financials under his hat. No one wants to show unfinished work because it's not representative of the final product. I think of art, web design, construction, etc. But in this case, investors really do need to watch the "baby steps to the elevator", and I think it would be entirely beneficial to allow them to watch.

[Bob G]

Nice analogy, Tyler!

[Timstigator]

High finance may well be different but as a professional creative, I've found that transparency and openness allows others to add value (not always) along the way and enrolls them in the building of the final product, and that contributes to the biggest thing of all, a sense of ownership. Few things in the corporate world are truly solo ventures.