I recently returned from Italy. I spent my time there wandering the streets, taking photos and sitting in one café after another, sipping coffee and eating awesome food.
I returned to the U.S. to find that Starbucks (SBUX) is apparently in negotiations with The Percassi Group to bring the brand to Italy.
Barring some major change in how Starbucks operates its stores, I think this will be a total failure, although it won’t materially affect Starbucks stock.
Here are the three reasons why.
1. Italian Culture Runs Counter to the Reason for Starbucks’ Success
Howard Schultz himself should know better. He said the idea for the company came to him while he was sipping espresso in Italy. That is, Americans did not have any place to meet between home and work.
Starbucks’ primary success factor is not its coffee, but that it provides that neutral meeting ground. The coffee was secondary, but still important, since people needed something to do at these locations and could only get coffee at diners and coffee shops.
Italy has a zillion cafés on every street. That isn’t a joke.
Well, not a zillion, but one after another after another. People already have places to meet. The single biggest reason for Starbucks’ existence is eliminated right there.
That’s also true in most other European countries.
2. Starbucks Coffee Is Inferior to Italy’s
I don’t know what kind of coffee they used over there, although I suspect it was usually the Illycaffé brand. Regardless, the worst espresso I had was better than most of the finest roasts I’ve found here in the U.S. (shout-out to the superior Handsome Coffee Company in L.A.!).
This is not an exaggeration. The worst espresso I had there was still smooth and delicious … in the Belgrade airport!
Italians are not going to put up with the bitter motor oil that is Starbucks espresso, and Starbucks stock will suffer some PR woes as a result.
We can argue all day as to what constitutes good coffee, but I’m betting if you put it in front of a pro, or even the casual Italian consumer, here’s the reaction the you’ll get.
3. Starbucks’ Traditional Price Point Is Too High
In Italy, you walk into an espresso bar or a café, order your espresso, and it is served in a little porcelain cup on a little porcelain dish. It’s classy. You drop in your sugar, if desired, and knock it back. Some people sip it. Most just stand at the counter, drink up and pay.
One Euro.
That’s about a buck.
At Starbucks, a single espresso, served in a paper cup costs $1.95 in most locations. It’s higher in others, like New York City.
Cafés in Europe don’t have to worry about being publicly traded. If they fail, it’s no big deal. But with Starbucks stock being publicly traded, they will always be scrutinized
Worth A Try?
Although I think this plan will fail, I do believe running a pilot program makes sense. SBUX is not going to roll out a thousand stores all at once — it will give it a try here and there. The idea is that it doesn’t want to commit fully because that could create a huge downside for Starbuck stock, if it fails.
SBUX does not need to take big risks. It can, however, take small risks and see if the potential for big reward is there.
I think a few extra pennies on the Starbucks stock earnings report would be welcome, but I doubt it’s going to happen.
As of this writing, Lawrence Meyers owned shares of SBUX.
