Starbucks (SBUX)

The U.S. consumer is facing many headwinds including rising food and energy prices, a weakening labor market and the weakest housing market in decades. Starbucks is the prototypical consumer luxury and is likely to be one of the first victims in a cutback in consumer spending. In April the company said it expects a midsingle-digit percentage decline in U.S. comparable-store sales, a surprising reversal for the company which has seen rising same store sales for over two decades.

Let's think about it. Let's assume the coffee is as good as or better than that had at Dunkin Donuts or McDonalds (MCD). Well, if people aren't going to Starbucks (SBUX) anymore (or are in increasingly fewer numbers) and sales of coffee at the other two are exploding, then it has to be the price.

Here are the survey results: "76% of American adults say they rarely or never visit one of the shops, and only 14% say they visit occasionally.

A new survey by Rasmussen Reports shows that 73% of Americans say Starbucks coffee is overpriced. Only 6% disagreed and 21% said they were unsure."

It continued: "Along with the perception of high prices, only 38 percent of the 1,000 adults polled gave the coffee behemoth a favorable rating, while 27 percent had an unfavorable view of the chain. About one-third of respondents had no opinion.

Younger adults have a more favorable view of Starbucks than older adults. Just under 50 percent of respondents 18 to 29 give the chain high marks, while only 28 percent of seniors shared that view. And those who make more than $100,000 a year view the chain more favorably than those who make less than $20,000 a year, the survey said."

So, notice one word that was not there? Value. High prices are one thing if you feel like you are getting what you pay for. I do not expect the same service and food at Denny's as I do at Morton's. As long as I feel like the service and food were great when I leave Morton's, I fell like I got my money's worth. Starbucks problem is people by in large do not feel that way.

The service is non-existent (worse than McDonalds) and the overwhelming majority of folks, by the time they add milk or cream, flavoring and syrup to the coffee, have no ability to ascertain the quality of the bean they are drinking. I will take it a step further and say that unless you are drinking pure coffee or espresso, in 99% of the drinks could be made with the same beans McDonalds and DD uses and no one would be able to tell any difference. If Howard wants to take me up on it, we can arrange a taste testing here in Massachusetts.

Starbucks could then sell the drinks at reasonable prices and finally shut me up.

Starbucks has grown complacent about its customer experience. These days, snobbish cafe culture and prices that even the company itself must recognize as somewhat extortionist are starting to overshadow the idea of Starbucks as the friendly, adoration-worthy, eco-friendly chain. Despite Chairman Schultz's indictment of the "watering down" of the Starbucks experience, little has been done to reverse this trend.

And as anti-corporate crusaders are now discovering, instead of advocating for legal prohibitions on chain stores or attempting to zone the offending businesses off of Main Street USA, mom-and-pop shops can successfully combat the coffee behemoth by using old-fashioned market competition., and they are doing so now.

July 1 Starbucks Corp., the world's largest chain of coffee shops, plans to close 600 ``underperforming stores in the U.S.

Pretax costs associated with the closures, including severance, may reach $348 million, Starbucks said today in a statement distributed by Business Wire.

McDonalds is competition, and Starbucks is blind to the fact.

Exhibit A: premium coffee for around one dollar that can be served drive-through and which, according to an authoritative recent survey, tastes better than all other offerings. Exhibit B: premium coffee for about 4 dollars, served after a five-to-ten minute wait by baristas who raise judgmental eyebrows at you if your order lacks a long and precisely ordered string of specifications. Which would you choose?

For a lot of people--the price-conscious, the busy, the thin-skinned, the taste connoisseurs--the answer is A, McDonalds. (And never mind Starbucks' "promising overseas expansion opportunities" (read: China). McDonald's has China on lock--it's massively popular, plus the Chinese Golden Arches carries none of the cheap, white-trash stigma its American cousins must face down.)

The remainder who choose B, Starbucks do so for Starbucks brand loyalty, a sense of sophistication, eco-friendliness, and a "fight The Man" mentality. But of these four reasons to choose Starbucks, the latter three go just as well with a vote for C, the local privately owned coffee shop. Indeed these littler community offerings are often trendier, more environmentally/trade conscious, and definitely more personal/less corporate than the Starbucks every-cafe. It doesn't matter that these little guys have no market capitalization worth speaking of--the lost sales add up for Starbucks. Who consistently chooses Starbucks in the end? The Starbucks brand-loyal. Whoopee. What a haul to look forward to.

Starbucks risks saturation in its core North American market, putting it at significant risk of cannibalization.Starbucks cut its previous forecast for 2008 new stores from 1,600 to 1,175 (US), plus mentioned closing 100 or so underperforming locations. The company is forecasting ’09 US store additions of less than 1000. Slower/less growth in Starbuck’s store count translates into less revenue in future periods. Starbuck’s may have rough time in the near-term.

Starbucks pays no dividend, and is 122x more expensive than its earnings. Uhhh stay away!

From the memo:

• All U.S. vice presidents and above, including Howard Schultz and the senior leadership team, will receive no salary increases this year.

• Based on Starbucks year-to-date performance, we are not currently on track to reach the requisite financial targets for the General Management Incentive Plan (GMIP). When we announce FY08 results in November, GMIP participants will learn more about the status of bonus payouts.

What status? If you are not on track to meet the targets, there ought to be nothing, correct? Or, are we going to play the Circuit City (CC) game of lowering the target and give them a bonus in lieu or a "raise next year"? Or, are we going to lower targets and increase incentives for next year so it all comes out in the wash? That statement was just way too ambiguous for me.

I am going to watch this. Think about it. How far has the brand fallen when corporate actions can be looked at in the same vein as those at Circuit City?

As home values decline, consumers are less likely to indulge in luxuries like Starbucks coffee. In April the company pointed to soft sales in California and Florida, where consumers have been hurt by soft home prices and the subprime-mortgage crisis. Those states account for 32% of Starbucks's U.S. retail revenue and 31% of its U.S. company-operated retail stores.