Starbucks: Serving a Venti Cup of Desperation

Why the coffee company's lack of focus should worry investors

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Dumb Starbucks Move #3: Verismo

All investors should know about the disaster of Green Mountain Coffee Roasters (NASDAQ:GMCR) now that its single-serve Keurig coffee maker is going off patent and the market has reached its saturation point. GMCR stock has flopped from $110 a share last fall to under $25 currently. That’s a nearly 80% decline.

But if this company melted down as its iconic Keurig lost momentum, why is that a sign that the market needs more coffee gadgets this late in the game? Somehow Starbucks thinks its own single-serve machine, with the silly name Verismo, will be a success anyway.

Maybe there is still decent business in the appliance market. But don’t forget Green Mountain made most of its cash on licensing the K-Cup pods for the Keurig, not on the machines it sold for meager margins.

And SBUX was already peddling its own branded coffees for the Keurig and other single serve machines, so it already had a hand in this market!

Bigger margins indeed come from cutting out the middle man. But that doesn’t mean it always makes sense. For instance, Starbucks doesn’t own its own ice cream facility and instead allows packaged foods giant Unilever (NYSE:UL) to produce its Java Chip Frappuccino flavor for a cut of the profits.

Though after the Bay Bread deal, I guess I shouldn’t give them any ideas …

The bottom line is that this is a low-growth move at best, and appliances are way outside the SBUX comfort zone.

Biggest Dumb Move of All: A Lack of Focus

Last November, Starbucks bought the Evolution Fresh juice brand to bolster its bottled drink offerings in-store, and then rolled out its first Starbucks-owned juice bar in March.

Now we’re talking! This is actually something that is very aligned with the core business of quality drinks served up with a smile at Starbucks cafés …

Except that with all this other crap going on, you have to wonder if this jaunt into the juice biz will go off the rails too. After all, this hardly all adds up to a comprehensive strategy.

The biggest irony of Starbucks right now is that its stunning resurgence since 2009 lows has was due to cutting out the clutter. SBUX stopped selling so much crap at the counters, gave up on its asinine record label, and reemphasized the great café experience that made it so successful.

And now that SBUX is back on top, company leaders are forgetting how they got there.

When Howard Schultz took over again as CEO in 2008 after an eight-year hiatus, he closed underperforming stores that had popped up due to over expansion, and vowed to return Starbucks’ attention to its customers and rejuvenating its dominant brand.

Now we get juice that doesn’t even bear the Starbucks logo?

Now we get baked goods as the “core business” of SBUX?

Now we get coffee kiosks where we have to serve ourselves? And if we buy we get the Seattle’s Best “off brand?”

I won’t argue with Starbucks performance since its reinvention under Schultz.  SBUX has posted year-over-year revenue growth and earnings growth in every period dating back to Q4 2009, making a streak of 10 consecutive quarters where profits and sales have both moved up.

But be wary of expecting that kind of momentum to continue forever.

Remember, SBUX stock crashed from a high of around $45 in 2006 to a low of around $8 during the depths of the economic meltdown in 2009. In case you’re bad at math, that’s a gut-wrenching 82% decline.

The reasons for the shock? A failure in corporate leadership and vision that coincided with an economic downturn that gutted consumer spending.

If you’re an Starbucks investor, take a look around. Things are very different in 2012, but in many ways the risks are the same as they were five years ago.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/starbucks-serving-a-venti-cup-of-desperation/.

©2014 InvestorPlace Media, LLC

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