Market Overview

Is Starbucks the McDonald's of Coffee?


Starbucks (NASDAQ: SBUX) is losing the gains it had for the day on Thursday in after-hours trading as investors react to the company's disappointing earnings, as Q1 2012 served earnings per share of 50 cents to investors, giving the market jitters.

Despite the fall in the coffeemaker's share price, they still overperformed expectations. Analysts had expected EPS for the quarter of 49 cents and revenues of $3.29 billion. Crowdsourcing site Estimize gave an EPS estimate in the opposite direction of the company's results, at 51 cents per share. Weighing experts and Estimize's users equally, Starbucks performed right in line with expectations.

Higher revenues and earnings mean the quarter sets new records, with record revenue of $3.49 billion exceeding analyst estimates, but the growth pales in comparison to previous quarters. For example, from Q4 2010 to Q1 2011, Starbucks earnings jumped from 37 cents to 45 cents per share, and the company has steadily capitalized on a variety of strategies that would help it maintain its dominance in the cafe and coffeemaking sector.

Starbucks was one of the first chain restaurants to offer free wi-fi at all of its locations in summer of 2010, although it followed McDonald's (NYSE: MCD) lead on that front. While some critics questioned whether giving patrons a reason to linger for hours was a good business move, a steady rise in the company's revenue, not to mention its stock price, at the end of 2010 confirmed the strategy's wisdom. Now, customers can rely on Starbucks if they are on the go and in need of internet, and that is only helping to make it a convenient choice for customers.

The emphasis on convenience in the company's marketing and operations strategy has gone unnoticed. While the company began its success by marketing itself as a trendy and friendly stop for hip urbanites, a noticable shift towards reliability and ease has helped Starbucks to transform itself from a cool café to a useful place to get caffeine and internet access. While this may make Starbucks less sexy, some would say that ship sailed a long time ago as indie and locally-owned cafés became more popular despite the sometimes higher prices.

Recent forays into technology, such as the Starbucks app that makes it possible to buy coffee from a cell phone, have made the chain convenient in other ways. Starbucks has also begun reaching more aggressively into the homes of customers. The company combined convenience and the push for brand loyalty with its instant coffee line in 2009, which is available both from its website and in supermarkets.

The company has sold coffee at its cafés since its inception, but the move into supermarkets in 1998 thanks to a partnership with Kraft Foods (NYSE: KFT) helped the company retain and maintain brand loyalty--as did the move to install Starbucks cafés in supermarkets and Target locations nationwide beginning in 2002.

The company never gave up being cool, however, and the recent move to sell beer, wine, and premium foods at some of its retail locations is an attempt to capitalize on the foodie trend while maintaining some level of yuppy cred. This, combined with the company's attempt to have some cultural clout with its entertainment offersings, is a transparent attempt to avoid being to caffeine what McDonald's is to beef patties and fried potatoes.

Yet Starbucks has had to appeal to the convenience-seeking patron to regain lost market share to McDonald's own McCafe offerings, which has been a real challenge to the Seattle-based roaster for years, not to mention Dunkin' Donuts (NASDAQ: DNKN), whose coffee has grown substantially in popularity.

Its foray into artisanal beers and wines has been met with righteous criticism from investors, who see the move as either too little, too late or just plain bizarre.

The move is an attempt to recapture the Starbucks magic that vanished years ago. Another recent attempt was the Starbucks Veranda, a new lighter roast that was supposed to appeal to coffee aficianods more than the Starbucks roast, which is a deeper roast than Italian or Spanish blends. The new blend was supposed to be closer to a city roast, and would appeal to coffee lovers who do not take milk or sugar. Critics, however, are unimpressed.

Critics could point the finger at other changes in Starbucks that have made it a less appealing destination amongst discerning patrons, such as its move to auomated espresso machines. Such moves made many feel that Starbucks had lost its soul--and Starbucks founder and chariman Howard Schultz would probably agree. Presumably, serving alcohol is the company's attempt to regain its soul, instead of the costlier option of brewing coffee more slowly and to a better standard.

The company justifies the move, which it has experimented with in stores in Seattle and Portland for over a year, as an attempt to regain customers in the afternoon and evening hours and as a place for groups to meet. Investors may want to wait a while to see how successful the move is, as it is a sign that Starbucks is dissatisfied with being the McDonald's of coffee.

Posted-In: Earnings News Retail Sales Best of Benzinga


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