Richard Young recommended McDonald’s (symbol: MCD) in his Intelligence Report when the stock (and the stock market) was struggling. Today, I suspect Mr. Young is looking long and hard at Starbucks (symbol: SBUX) as a possible related speculation.
The similarities are striking. They are both former growth stories that hit bumps in the road losing focus, customers, sales and ultimately market value. The difference is that MCD recovered after a long and painful process of redefining itself and its image. Will SBUX do the same?
Ironically, one huge success for MCD recently has been coffee. MCD’s roll out of a high quality Joe that is sold at a discounted price has been a boon for business.
The success has been so great that MCD quite possibly could add blended coffees to the menu making further inroads against the coffee king, SBUX.
The experience is a great lesson in focus and branding. Who would have thought MCD could even compete in this space? Not me. I’m a coffee snob and I would have never considered going to MCD for my daily fix. And yet with a weak economy and a high quality product, I’m intrigued. So much so that when the mood strikes and a MCD is nearby, I would not hesitate to stop. That is a powerful statement and obviously many other consumers are doing the same. SBUX would be wise to follow the same game plan.
Bringing back entrepreneur extraordinaire and founder Howard Schulz is a great first step in the process. If anyone can bring back the mojo, it’s Howard Schulz.
The troubles he’s facing are steep. SBUX has lost focus, quality has suffered and competition is fierce. The brand is now mature and prior growth has resulted in store locations that very well may be cannibalizing other stores. Adding to the trouble are high commodity and labor costs and a weakening consumer. It’s easy to see why the stock is down some 40% over the last year. Righting the ship will take time. MCD tumbled at the turn of the millennium and it took nearly 3 years to bottom out. I suspect the turnaround at SBUX will take much less time.
In short order he has already scaled back new store openings and closed underperforming stores. Last week, Schulz ordered all stores closed for a few hours of barista retraining in an effort to refocus on quality and consistency. The sell-off in SBUX has resulted in much more appealing fundamentals. Shares now trade for just over 15 times forward earnings and 1.37 times sales. That’s a far cry from the heady multiples of a fast growing momentum stock.
If Schulz is successful in his efforts, like MCD was with theirs, then SBUX represents an opportunity today. Check out Richard Young’s Intelligence Report to see if he agrees with me.
Jamie Dlugosch
Executive Editor, InvestorPlace
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