Coffee Wars: Starbucks Moves into Alcohol

Starbuck’s (NASDAQ:SBUX) is testing serving alcohol at a couple of locations, to try out the idea as a way for increasing the later daypart business. Curiously, they are changing the name of the first outlet to “15th Ave. Coffee & Tea, inspired by Starbucks.” I guess the question remains what has been posed before; how badly do you need to beat a brand to destroy it from the inside?

Are Instant Coffee and Alcohol Brand Builders?

While the expansion of business in a weaker time period is always a bonus, there seems to be less respect for the core brand within Starbuck’s than there is from the outside. First, the instant coffee brand -VIA™ rollout, and now trying to be a limited-option bar in the evening.

Not Addressing Menu Overhaul

Actually the alcohol idea isn’t a bad one, but it would make more sense to include it as an overall remaking of the Starbuck’s menu. They seem to be running from the challenge being put forth by the QSR’s, McDonalds (NYSE:MCD) and Dunkin Donuts (Private), in particular, but all the big chains are jumping on the coffee bandwagon.

The way to get solid revenue increases driving at Starbucks is to commit to providing a viable light meal option to complement the beverage business, and this is something they seem reluctant to do. If Starbucks can’t drive revenue by coming up with a way make going there about more than just a side pastry or cookie, they lose the revenue war to the QSR’s challenge in the long run.

Fast Food Chains Challenging on Coffee

While Starbucks doesn’t need a “Dollar Menu” or to put french fryers in, a feature deli-style sandwich that goes with either a cold coffee drink or the newly-introduced beer or wine would seem to be a smart positioning move, and give them a chance at increasing per-ticket rings and putting more revenue into the later dayparts they are trying to improve.

Starbuck’s is running from what made it a premier brand ands a ubiquitous presence in all but the smallest of markets.

When you have a big ship to steer, you can’t do it with a gentle push, you need to give it a good shove. The QSR’s have issued a challenge to Starbucks, if they don’t make a solid move in response to come up with a light meal alternative, they will lose the revenue war down the road.

Office Depot – NOT Takin’ Care of Business

Office Depot (NYSE:ODP) announced quarterly results yesterday, and losses exceeded estimates by a considerable amount. The other major players in the sector, Staples (NASDAQ:SPLS), and OfficeMax (NYSE:OMX), while being hurt by the current low consumer confidence and recessionary spending patterns, aren’t imploding like Office Depot. Stock prices are down, but the core businesses at the two major competitors seem more stable.

To paraphrase the slogan they used for so long, the management at Office Depot is definitely NOT “Takin’ Care of Business”, at least not theirs. It’s hard to remember when ODP was a savvy, best in the category retailer, because they used to be. They aren’t acting or getting the results like one now.

The latest management trick of getting a capital injection by selling 20% of the company to a UK based firm, after closing 9% of their stores as “underperformers”, show that this is a sad story heading down the same road as Circuit City. Surrendering markets by closing stores, and then having an accelerating sales decline, shows Office Depot is still heading for the same sad end result as Circuit City.

This isn’t an inevitable result, but they HAVE do what they need to do: get back to concentrating on retailing, taking care of the customer they service, and improving in-store experience so that same-store sales aren’t in double-digit declines. Home Depot’s (NYSE:HD) re-emphasis on the customer and store-level service delivery might be a good blueprint for Office Depot to look at. The Microsoft (NASDAQ:MSFT) Windows 7 launch may give them a bump when it occurs, but computers are about to enter a brutal discounting phase as Wal-Mart (NYSE:WMT) ramps up its laptop sales effort.

Retailing is all about customer perception and how they feel when they walk both into, and more importantly, out of your store. Pricing, selection, cleanliness and knowledge are the pillars to increasing sales, or on Office Depot’s case, stopping the declines. Unless management launches a store-level initiative to make the sales experience better, Office Depot will have a tough time surviving the balance of the economic downturn.

Fast Food is a Recession Beater for Families

Source Article: Fast Food Fading? (Forbes) Click Here For Article

Ramifications

1) Fast Feeders branching into less "Traditional QSR" Fare

2) Chains looking to upscale ticket

3) Can entertain a family inexpensively

Analysis:

Fast Food Restaurant Chains are moving through the recession in fine fashion. McDonalds (NYSE:MCD) is in fine shape regardless of what the stock price reacted against.

McDonalds has made a well-publicized foray into Gourmet coffees, stepping on Starbuck's (NASDAQ:SBUX) toes, and had added a $3.99 burger, a premium Angus Beef burger, to the menu. Wendy's (NYSE:WEN) has added "Chicken Bowls" and other chains are trying less traditional QSR items at a higher per unit price point.

The casual dining chains, Friday's and Applebee’s in particular, have aggressively promoted price competition to keep consumers coming through the door, but the QSR's are coming "Up" to meet them. It's going to be hard to break the consumer of the "2 for $20" (Applebee’s) or the $5 Dollar Entrees (Fridays) that were running in heavy rotation through the early summer.

The QSR's recognize that consumers are "Trading down" on entertainment dollars, which is why they are adding "Quality" items at a slightly higher price. They are reaching towards the casual dining houses in menu quality perception, and catering to the spenders in the family, Mom and Dad.

While the value menu is what McDonalds is famous for right now, the advertising is going to the McCafe line of coffees, and they are going beverage promotion with the $1 Fountain drink promo. It's a smart and two tiered approach, and whether the benefits show up right now or a bit later, the entire QSR segment has acquitted themselves well in the recessionary consumer environment.

As long as the economic future remains uncertain, the fast feeders will be the choice for families "Feeling the squeeze" but still wanting to go out,

Home Depot focuses on Retailing

Results Better Than Expected

Home Depot's better than expected results, given the fact that the economy really isn't growing, shows that the management focus on it's core retailing base is starting to pay off. The forays away from the core home retailing business are over.

The home improvement and "DIY" sectors of the economy have taken a big hot, along with the housing market and decrease in home values. People are fixing what needs repaired or replaced, but really aren't, in most markets, making the big home improvement purchases right now.
Lowes and other home improvement retailers and suppliers are all experiencing the downturn in the housing market firsthand.

There's too much uncertainty in the future course and timing of economic recovery for people to feel comfortable about big discretionary expenditures. So, going back to the basics of good service and knowledgeable associates to assist their customers will pay off in the long run. Working on improving the in store experience for their customers is a great strategy.

They have closed the Expo design centers, are serious about cost controls, and management is really concentrating on being the best home improvement retailer they can be. As long as they continue to look at efficiencies and increasing per square foot sales, the things HD’s management can control, it bodes well for future results.

As long as they stay focused on that very worthwhile goal, HD will come through the balance of the recession poised for renewed growth.

Crude Oil flirts with $70 a Barrel before falling back

Done for the Examiner.com Sunday June 7

Crude Oil broke through the $70 a barrel level for a while on Friday, before falling back to $68.44, down 37 cents for the day. Prices are steadily moving higher, and as the economic recovery seems to be taking shape, the market is betting on energy going higher as activity picks up.

Natural gas Futures are up; Heating Oil and Gasoline are heading higher, consumers see first hand when they fill up at the gas pump that the overall outlook for energy prices is bullish. Multiple studies are suggesting we will see $85 a barrel oil this year.

A strong dollar move Friday contributed to Crude prices falling back, but on the whole, it looks as though Crude has plenty of room to move higher. The big question is; what does this do to the potential for recovery, not just here in the US, but worldwide? Most of the “Big Engines” in the worldwide economy are net oil importers, so it’s bound to create a drag on growth.

US consumers were just getting used to lower prices for gasoline, heating oil and natural gas, will the price shock send them back to hiding from all but the most necessary spending? The US economy needs consumers to feel good moving forward to get spending rolling again, while sentiment is up right now, it won’t take many weeks of $3.00/Gal gasoline to end that feeling.

As the summer driving season rolls in, tourism interests have to be feeling a bit nervous. What will increased costs do to traditional “Summer Vacation” destinations like Orlando and Seaside resorts?

Well, Oil seems like it’s going to go higher. Had the worldwide economy not been in a serious recession, it’s wise to think it never would have gone down below where it is right now. As growth picks up, energy costs are bound to rise.

Gasoline up 47 cents a gallon since Easter

Published in the Examiner.com


The report released yesterday by the Energy Information Administration (EIA) shows gasoline, on average, has gone up 47 cents a gallon since Easter. Oil hit a 7 month high at close of trading yesterday. As economic uncertainty recedes, energy prices are heading back up.

While not close to the historic levels of last year, this price climb with the world economy not yet back to growth mode means energy costs to the consumers, and the fortunes of oil and natural gas companies, are going to continue up. OPEC is saying they would be comfortable with $70-$75 per barrel oil, and we are heading back there right now.

US domestic exploration and production had slowed down after the large price drop for Oil and Natural gas last year, but the firming market makes US domestic supply plays look like a good bet moving forward.

For the motorist, this means more expensive fill-ups are going to remain a fact of life. Had the US and worldwide economies not contracted over the last 9 months, the price respite we just received as drivers never would have happened. Heating Oil customers should be budgeting for higher prices over the winter.

The world is still a hydrocarbon based energy consuming system, and it will be for quite some time, so as demand ramps back up with the increase in economic activity, so will oil and Natural Gas prices. Can the fledgling economic growth trend sustain itself in the face of higher prices for Oil, Natural Gas, and Energy in general? How much of the economic slowdown of the last year was caused by higher energy prices?

This summer will an interesting test of those questions, as well as the resiliency of motorists in the face of climbing gasoline prices.

Starbucks asking for Rent Reductions Good First Move

Source Article: Starbucks Pushing Landlords for 25% Cut in Cafe Rents | www.bloomberg.com (view article)

Implications:
1) Cost reductions pay off every month over term of lease

2) Opportunistic move or readying for Market Share battle?

3) Cost Reduction good Defence, what about adjusting to competition.

Analyis:

As reported, numerous landlords have received letters from Starbucks asking for rent reductions of between 20 and 25%. This is a good tactic, and the resulting reduced costs are good for operating results every month.

My question is, is this an opportunistic way to reduce overhead, and admission that they were paying too much for sites when times were better, or are they getting ready to defend market share, as the QSR's lead by McDonald's and Dunkin Donuts, takes a bead on the market Starbucks has dominated for so long? Maybe a combination of the three.

The rent reduction initiative is a good defensive move, but is just another admission that the "Fat times" are over for Starbuck's unless this move is followed up with some "offense."

In other words, pushing back in a big way against the Fast feeders coffee push. Otherwise, at some point, Starbucks will hit the point where a reduced market share cannot be covered by cutting costs.

Innovative advertising, a new food product or two, sharper pricing and promotions, and a real competitive challenge to the upgraded competitors are the real key to long term survivability for Starbucks.