Starbucks (SBUX)

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.

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.

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.

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.

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 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.