Thursday, February 28, 2008

More Thoughts on Starbuck’s (and Other High Growth Companies’) Investor Relations

Last week the Houston NIRI (National Investor Relations Institute) chapter hosted a speech by Karen Blumenthal, author of “Grande Expectations, A year in the Life of Starbuck’s Stock”.  It was one of the best luncheon speeches I’ve heard in a long time.  Karen obviously knows her topic and, more importantly, knows how to tell a good story. 

During the course of the speech, Karen told the story about Starbuck’s annual shareholder meeting that I found illustrative. Starbucks annual meetings are something of an extravaganza, with thousands of small shareholders in attendance consuming large quantities of caffeinated beverages, while working themselves into a frenzy of adoration for the stock that they have done so well by.  It seems that during the meeting, when Karen began to talk to investors, Starbucks reacted negatively.  She was approached by a person with a headset on (think security type) who asked her if she was a member of the media.  When she acknowledged that she was, she was immediately requested to cease talking to people, and to leave the building.  The phrase “Media Alert!” was even heard to be spoken over the headset. 

The story struck a chord with me, as I have heard large institutional investors complain that Starbucks, for as great a company they may be, are extremely controlling about the information flow about the company.  One manager at a large Boston hedge fund went so far as to tell me, “You ask them a question and they tell you they’ll get back to you in a week or so.”  This is not exactly optimal investor relations.  This is “if I can control all aspects of what you know, then you’ll favor my stock” relations.  For some reason, many high growth, high P/E companies adopt this approach.  The thinking seems to be, “we’ve obviously invented a better mousetrap which is highly deserving of its rich valuation and we don’t have to go out of our way to answer all your pesky questions.”

What this ignores, of course, is that trees don’t grow to the sky.  Put another way, high growth rates sooner or later come to an end.  When the growth slows down, if the company has not built up its reservoir of good will and credibility with the investing community, the valuation decline will be faster, farther and last longer than if the company had established a strong voluntary disclosure program and stuck to it through thick and thin.

It’s not as if Starbuck’s doesn’t understand publicity.  Witness the recent media coverage of their three-hour shutdown to retrain their baristas in the Starbucks way of making coffee.  They had coverage in every major media outlet that I read or watch, from The New York Times to the Today Show (actually, my wife watches the Today Show, I just happen to eat breakfast in the same room.)  Yet they somehow seem to have a blind spot when it comes to dealing with investors.  Whereas more is more when it comes to stories that they can control or put in a favorable light, less is more when it comes to quantifiable data that will help investors make informed decisions.  Starbucks (and many high growth companies) needs to loosen up, give out more information and understand that not everyone will put the same spin on the information they share. To quote that great philosopher Yoda, “Train yourself to let go of everything you fear to lose.” After all, it takes both buyers and sellers to make a market.

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