Starbucks — Aspirational Brand Turned Boring
It is Saturday. Thinking that I haven’t written anything for this blog in a while, I hop in my car and drive to a local coffee shop to jot down some ideas. So here I am, sitting in a comfortable chair, trying to come up with a topic to write about. Halfway through my cappuccino, it strikes me that Starbucks that I passed on the way there could be a great research target. This is a company that I was fascinated by at some point and bought and sold some of its shares a few years back. Even though I made a solid profit, ever since the last time I sold it, I see Starbucks as another unexciting member of the S&P index. And since a few of my friends still like the stock, I have to prove my case.
Starbucks was founded in 1971 in Seattle, Washington. For the first 15 years, the company was selling roasted coffee and brewing coffee samples at their stores. In 1986, Starbucks started offering espresso at all of their six locations. Next year, the company was sold to Starbucks’ previous Director of Marketing, Howard Shultz. He saw a larger potential in the company than just a few stores in Seattle. After a rapid expansion of the number of stores across the United States, the company did an Initial Public Offering in 1992. Since then, there have been a lot of ups and downs in the history of Starbucks, but it’s impossible to deny that they have created a strong worldwide brand awareness. Currently, it’s the third largest fast food restaurant chain in the world, only behind Subway and McDonald’s.
Besides a steady growth in the U.S. stores, these past few years have been mostly defined by a rapid overseas expansion, increased variety of consumer-packaged goods, and development of the brand portfolio (Seattle’s Best Coffee, Teavana, Tazo, and others). However, along with a steady growth in revenue, the company saw a lower profit margin, while aggressively accruing a great deal of debt. Such changes on the balance sheet are justified by the expansion initiative but make the Debt/Equity ratio too high for the industry. Another thing on the Q3 results that grabbed my attention was their growing division of packaged products. With a worldwide store expansion, they will most certainly try to penetrate local retail markets and extend their brand awareness even further.
The supporters of Starbucks stock like to bring up brand awareness as a growth potential. But I would argue that the number of people familiar with the logo of the brand is not the most important criterion for such a large company. Instead, a company of Starbucks’ size needs a strong brand image to remain successful. The distinction between these two definitions is the fact that the latter deals with the actual perception of the brand in the eyes of the public, rather than the acknowledgment of its existence. I’m more likely to buy a product of an aspirational brand that represents values I resonate with, instead of a brand that is simply known to be popular.
Ten years ago I was one of those teenagers fascinated by Starbucks’ logo and the atmosphere of the stores they represented. Pictures of white cups with a green goddess used to frequently pop up on social media, reaffirming the Seattle-based company’s ‘hip’ ethos. But the times have changed. It seems like that the predictability of Starbucks’ store design and offerings works as a disadvantage, rather than an advantage with Millenials. The barriers to entry in the restaurant industry are low, which explains a growing number of new coffee shops all over the world. Furthermore, due to non-existing switching costs (going to another restaurant instead), they are going to keep losing customers to coffee shops that provide inspiration the way Starbucks did some 10–15 years ago. Oh, yeah, and the quality of the product is not helping them — it took me a few years and an expensive espresso machine to realize how bad their coffee generally is.
To sum up, I think Starbucks has morphed into a stable company with a rather exemplary management that will keep the price afloat for some time. Their low P/E ratio can get a lot of investors to argue that the stock is undervalued. Given the fact that they keep increasing dividends, it could be a substitute for one of the blue-chip stocks in your portfolio. However, it is most likely to get even more boring from here — overly saturated market in the United States might worsen the brand image in the future, leaving the company hoping for the success overseas. But knowing the power of Western influence, winning back the US consumer will certainly be a part of the equation to establish a worldwide dominance. And at this point, it seems like they are running out of ideas.
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Do you agree or disagree with the points presented in the article? Would love to see your feedback in the comments!
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