Additional Thoughts On Starbucks
I’ll be attending Berkshire Hathaway’s annual meeting this weekend. I’ll do a book signing at the Omaha Dairy Queen from 8:30-10pm on Friday May 2nd (West Dodge Dairy Queen, 404 N. 114th St.). I am very excited about attending and speaking at the Value Investing Congress on Tuesday May 6-7 at Pasadena CA. If you happen to attend one of these events, stop by and say hi.
After I wrote a piece on Starbucks (SBUX) raising questions about its future success in international expansion and questioning the growth premium built into the stock, I got a lot of great emails that really made me think (the best kind!).
About the stock: I saw a lot of value managers that I respect loading up on it, even at $5 higher. As price keeps declining, the stock is definitely becoming more interesting, however, I have not done enough research to figure at what price it turns into a buy.
I still have many questions that need to be answered, but here is a little story that really tells you about the quality of SBUX’s brand: A couple of weeks ago I guest-co-hosted a radio show in Denver. I decided to bring a gift to my co-host. It was 9am on a sunny Saturday, and coffee seemed like the right choice (for a very modest gift), plus I had an excuse to get one for myself. I stopped by a Starbucks, one of three that I encountered on my two-mile journey to the radio station. The show went well and my co-host appreciated the gesture.
Here is the thing, though. According to consumer surveys, McDonald’s (MCD) has better coffee. But I would have looked silly if brought a McDonald’s coffee instead. Some may disagree about the taste, but Starbucks went into our dictionaries as quality coffee.
For example, it’s hard to go wrong giving a Starbucks gift card, but people may look at you funny if you give them a McDonald’s gift card.
I know the issues about Starbucks – the McDonald’s entrée, the copycats, recession sensitivity, too many locations, international expansion worries. I’d have to have a better grasp on them before I buy the stock, but one thing is definitely clear to me – SBUX has a unbelievably strong brand, at least in the U.S.
After looking over readers’ feedback, I came to the following conclusion about SBUX’s international expansion: so far SBUX has succeeded in places where coffee-drinking is not deeply ingrained into the culture. In fact, the less coffee is ingrained on country’s culture the, the higher the chances of SBUX’s success.
I was amazed how many SBUX stores I saw in London. The U.K. is not a traditional coffee drinking nation – tea is the national drink. Japan falls into the same category. However, SBUX will have to climb a steep mountain in a good part of Europe (including Austria, Italy, Turkey, etc.) where coffee drinking is deeply ingrained in the culture.
Ironically, it seems that SBUX’s international success will depend on converting non-drinkers into drinkers.