Starbucks: Is it Heading Back to 2008?
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starbucks (NASDAQ: SBUX) could be heading into another downward spiral as in 2008. Just one of the red flags is that it is tampering with a key part of its experience-economy formula: Being a 3rd place. Customers were willing to pay premium prices for a cup of coffee as a tradeoff to be able to hang around to think, work or give the appearance of that, conduct meetings, consult with an executive coach, and interview for jobs. Now, Starbucks is destroying that genteel tradition. FORBES writer Alice G. Walton reports that in her favorite Starbucks:
“ … teeny-weeny tables line up in formation against the longest wall. Behind them is a lengthy bench, too high to sit comfortably and too wide to rest your back.”
Sound familiar? It used to be claimed that fast food outlets made standard that same tactic to ensure folks would eat and run. Then they might have realized that people who linger usually get a 2nd wave of hunger or thirst. In addition, they develop good feelings about the brand. Along with this red flag, Starbucks also seems to be diluting the original coffeehouse brand identity by serving hot food, selling packaged coffee in grocery stores, and adding beer, wine and finger food at select locations. Its stock price hasn’t reflected any major hit, yet. It’s at 54.73, within a 52 week range of 33.72 to 62. But there is every reason for investors to question the business wisdom of these shifts.
For example, consider how that other classic 3rd place Barnes & Noble (NYSE: BKS) has been leveraging its café. In the North Haven, Connecticut store, it has placed its Nook display and dedicated sales agent right in front of it. That in itself creates a relaxed atmosphere for customers to take a peek at the Nook, without feeling anxiety about a digital device. Also, it’s impossible for those at the tables not to overhear customers and the salesperson discussing the Nook. After customers try it out, then there is frequently a squeal of surprise. You bet, more than a few of us wandered over to check out what digital wonders seemed to be taking place. The point is this: Starbucks could be missing out on a similar opportunity to showcase, in an indirect way, a new product or service. Mea culpa. I used to view this café as symbolic of the bookstore’s anachronistic business model. No more. Plenty of Nooks get sold.
In addition to missed opportunities, Starbucks sans 3rd place is vulnerable to emerging forms of competition which are grafting on or ramping up their own versions of that.
Take Panera (NASDAQ: PNRA). Unlike Starbucks, its pricing has never been premium. Yet it has always met Starbucks toe-to-toe in unique ways to bond with customers. For example, for its soups, which have a sort of cult status, it provides the recipes. That not only doesn’t seem to cut into store sales, but Anecdotal evidence also indicates it increases it. Sure, let's go to Panera and not have to cook the soup tonight. In the North Haven Panera, there is relatively comfortable seating, along with WiFi. The treat is a “front room” with a fireplace. Groups having meetings pull the tables together to stare at the fire. As time passes, and as Panera probably expects, one or more will make a food or beverage run to the main counter. Panera is a leader in the fast casual dining sector.
Most consumers know Whole Foods (NASDAQ: WFM) as an upscale supermarket. The company is trying to change that identity to more midlevel, with the fun of discounting. One of its tactics is The Whole Deal coupons. Those who use Union Square in Manhattan for commuting also know Whole Foods as their own 3rd place. Given the chain’s identity for zen balance, it’s where they can unwind or even do business in a calm manner. On the way in or out it’s likely they purchase some groceries. “Meet me at Whole Foods at Union Square to discuss that” is a priceless word of mouth promotion.
That neighborhood drugstore which transformed itself into health services and convenience market Walgreen (NYSE: WAG) could also wind up making 3rd place features standard. Right now hanging out is only possible in its new concept stores such as in Chicago and coming soon to Cambridge. There, along with the Norman Rockwell pharmacist eager to help are gourmet foods like sushi, wine, beer, manicures, and yes, a café with baristas.
The Walgreen stock, now stuck at 30.93, in a 52 week range of 30.34 to 45.34, could take off if this approach results in higher margins. After all, upscale merchandise and services are being hawked. Since its fundamentals are sound and the current problem is the disappointing growth in net income, Walgreen could be a buy.
As 3rd places become standard among companies known for being customer-centric, not having one could be a disadvantage. Consider Apple retail. It’s a place where both geeks and amateurs can hang out, play with the products, and have expertise at their beck and call. Contrasted with that is the distressed Best Buy. The store layout, overly bright lighting, and seemingly self-absorbed young staff make it not at all conducive for lingering and learning.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread, Starbucks, and Whole Foods Market. Motley Fool newsletter services recommend Panera Bread, Starbucks, and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.