In a surprise announcement after the closing bell on Thursday, January 8th, Starbucks’ (NASD : SBUX) chief operating officer Troy Alstead, a 23-year veteran of the coffee giant, is taking an “extended unpaid leave,” leaving many investors displeased with the circumstance and in the strange manner in which the information was made public. Further complicating matters, an email sent to Starbucks employees by CEO Howard Schultz articulated that the leave of absence was not based on health-concerns nor the poor fiscal performance of the last reported quarterly earnings. While that has answered some questions regarding the unexpected declaration, it also leads to disconcerting speculation. If legitimate casual factors were not behind the leave of absence, what is actually occurring behind the scenes to justify such a radical maneuver? Especially in light of the very public brand image of Starbucks, any action taken by its executives will surely be scrutinized with a fine comb. Understanding this context, investors are concerned and rightfully so.
From a marketing perspective, Starbucks faces a growth conundrum. Despite their tremendous success in penetrating domestic and international market share and the resultant financial rewards from such domination, the amount of money that will be expended moving forward will be less “productive” from a return on investment analysis. In other words, the coffee giant has already grabbed all of the low hanging fruit that the global market has to offer. Any other forays into consumer growth will be far more expensive, requiring either direct conflict with key competitors or moving into foreign and most likely, less profitable markets. A third option is to consider changing or adding to the primary product line-up.
The Sign Of The Times
The strategy implemented by the company to distribute its Tazo-brand tea exclusively to retail partners, such as grocery chains and big-box retailers, and replace Tazo products with Teavana, is confirmation that the third option is being heavily pursued. It allows Starbucks to infiltrate the tea-drinking market through traditional retail channels with its popular Tazo-brand while allowing its recently acquired Teavana products to grow organically in Starbucks stores. The change represents the sign of the times. “At its annual investor conference in December, Starbucks said that tea as a percentage of Starbucks U.S. retail sales had grown from less than 8 percent in fiscal 2009 to 10 percent in recent quarters” (Baertlein, Lisa. “Starbucks moves Tazo tea out of its shops“. Reuters. Web.).
While this may be considered a shrewd maneuver to capitalize on consumer trends, it also reflects the reality that the coffee market is heavily saturated, with little room for substantive growth. Since coffee remains the bread and butter of Starbucks’ revenue machine, the saturation is unfortunately aligned with the inability of their shares to move confidently to higher plateaus. Taking a daily chart of the fourth-quarter performances since 1992, shares are trading in a bearish “broadening wedge” pattern, indicative of future entropy or chaos. This makes sense considering that there’s truly not much room for equity shares to grow, and executive management, with the sudden absence of its COO, appears perplexed as to its vision for the future. The equally sudden emphasis by Starbucks on its tea-based offerings, despite it only account for ten-percent of U.S. sales, suggests a running out of ideas.
Regrettably for the once ground-breaking company, ideas may not be the only thing hitting the doors this year.