Thursday, January 31, 2008

Starbucks’ Grande Mistake

Yesterday Starbucks announced its first quarter results, a 2% gain over the same period a year ago.  This is a weak performance by Starbucks’ standards and was accompanied by a number of announcements regarding initiatives to turn Starbucks back into the Starbucks that people used to love.  What caught my eye, however, was the simultaneous announcement that Starbucks was now longer going to provide same-store sales numbers.  I think this is a grande mistake on the part of the company.


Now, for those of you who do not immediately see the impact of this, allow me to enlighten you.  I worked in the retail sector for 23 years at Walgreens and for 15 of those years I was responsible for their investor relations.  Walgreens released same-store sales on a monthly basis so that means that I went through about 180 monthly cycles of releasing sales numbers.  I can tell you that same-store sales are the most closely watched indicator in the retail arena.  The numbers help investors figure out if you are growing in your more mature stores and how successful your merchandising initiatives are.  And while everyone knows that one month’s sales do not necessarily set out a trend, a series of same-store sales numbers will certainly help people understand where the business is going.


So, just when things are going bad, Starbucks has decided to communicate less.  I don’t agree with what they are doing, so I took a careful look at the reasons they set forth for their actions, as reported in The New York Times and The Wall Street Journal.  (I find that I need to read both newspapers to get a balanced view of the world – one pulls you to the left and then the other pulls you to the right, so you wind up in the middle.)  What I found were two justifications for the decline in communications.  First, they said that a focus on increasing same-store sales is part of what led them away from their core strategy of creating a Starbucks experience, and second, same-store sales numbers would be “erratic” during the transformation.


Frankly, in financial terms, this is a lot of baloney.  The reason the Starbucks experience changed is that they stopped acting like a neighborhood coffee shop with a focus on coffee and started acting like a chain restaurant.  Everything became standardized, with a focus on cutting wait times and controlling the process.  This worked when the economy was robust and there was little competition, but things are tougher now. 


As to the second reason, Starbucks was happy to report same-store sales as long as they were robust, giving people the impression that they were going to grow to the moon.  Now, when same-store sales might be erratic, analysts can no longer be relied upon to draw the proper conclusions (read: conclusions that are favorable to Starbucks).  It doesn’t work that way.  You can’t close the curtains on the wizard.  If Starbucks thinks that they are going to enter a period of erratic same-store sales because of the transformation they are attempting, they should be prepared to explain to investors what they are doing, the impact it has on sales and how they believe it will improve sales in the long run.  That’s part of being a public company.  To put it into consultant speak, where performance plus perception equals stock price, Starbucks is cutting off an important component of the performance portion of the equation, which will throw into doubt investors’ perceptions of the company.


I think Starbucks is a terrific company, one of the great growth stories of the past 20 years.  I’ve been to one of their analyst days and I am convinced that they are one of the best marketing companies around.  They sure know how to sell the romance of a cup of coffee, creating a premium product out of what was once considered a commodity.  I just think they’re dead wrong on this issue.  I’ve seen the “No Same-Store Sales Numbers” movie before, Home Depot version, and it did not have a happy ending.

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