Grande Expectations: a Year in the Life of Starbucks' Stock

Citation

Cole, G. (2008), "Grande Expectations: a Year in the Life of Starbucks' Stock", Management Decision, Vol. 46 No. 4, pp. 673-675. https://doi.org/10.1108/00251740810865120

Like Martin Luther King, Howard Schultz had a dream. The dream was to open a chain of coffee bars serving espressos, cappuccinos and other beverages prepared with coffee beans supplied by the small‐Seattle based organization where he directed marketing operations. That organization was Starbucks Coffee Company, which grew from such humble origins and the rest, as they say, is history. Just two decades later, Starbucks had become a leading global brand boasting over 11,000 outlets in 37 countries and 40 million customers every week.

In part, Grande Expectations is a fascinating account of this meteoric rise. Of particular interest is the spotlight on the strategies that have enabled Starbucks to maintain growth at levels many other companies can only fantasize about. But the biography of the organization is only one aspect of what's on offer in this book. Author Karen Blumenthal also aims to explain the workings of the stock market by following the Starbucks stock for one year in order to provide a fly‐on‐the‐wall report of key players and events that influence how the stock performs.

Each chapter in the book represents a different month in the journey that eventually lasts just over a year. The February focus is on Starbucks' hosting of its annual shareholders' meeting and the book comes full circle when finishing with the 2006 version of the same occurrence. The uniqueness of Starbucks is perfectly illustrated by the meeting itself, which is deemed a “celebration” and thus a far cry from the dull fare usually associated with such events. Instead, the company turns on the style to provide a level of razzamatazz more in keeping with showbiz than commerce. Each year there are new additions to the program so those present can enjoy entertainment that ranges from stories to circus acts. Throw in features like the recently introduced little theater and celebrity endorsement live and by video and you soon appreciate the magnitude and splendor of the occasion.

That the event is so long is planning soon quashes any notion that Starbucks is more show than substance. And a quick foray into the chapter entitled “Growth” provides further indication that thoroughness runs through organizational veins. In this chapter, Blumenthal discusses new store openings and reveals the company's logic for situating so many stores in close proximity to each other. She spends time with Doug Satzman, Starbucks' larger‐than‐life director of new store development, who describes how using the “Main & Main” strategy enables Starbucks to make a “splash” in new areas. Like so many of the company's other strategies, it's the simplicity that will catch the reader's eye and make most impression on practitioners.

But this simplicity doesn't disguise the meticulous research that precedes many new store openings. Satzman and his team operate in the San Francisco area and are responsible for identifying opportunities for growth within the next five years. Location is everything and the team carries out a series of extensive surveys as no stone is left unturned in the quest to find the prime spots in new areas. A review of competitors and other Starbucks' nearby completes the task and historical trends in the area are used as a basis for predicting sales over the next decade. Because decisions to open new stores are partially based on sales‐to‐investment ratio, this research is obviously crucial.

Why does the company persist in a policy that can sometimes mean a Starbucks outlet almost on every corner of the block? And how come this apparently flawed rationale is so successful? A tour of San Francisco with Satzman enables Blumenthal to share some enlightenment with the reader about what she terms “one of the most baffling aspects of the Starbucks phenomenon”. Human beings are creatures of habit and many follow the same routine and travel the same direction every working day. When it comes to buying a coffee, some won't even cross the street but will instead carry on until they find an outlet en route. If this happens to be a competitor, then Starbucks loses the sale. Therefore, careful placement of different stores near to each other allows Starbucks to capture trade coming from most if not all directions.

But that's not the only reason. At least half of sales are made before noon and this can lead to long queues when there is only one store in a vicinity. Opening other outlets nearby eases the pressure and while this often has an impact on sales at the original store, aggregate earnings more than justify a move first introduced in Vancouver during the 1990s. The book also mentions the many operational tweaks that likewise serve to keep queues short and service moving.

In 2004, a corporate citizenship survey discovered that 86 percent of consumers would switch to a brand supporting worthy causes. A total of 70 percent of investors similarly indicated that corporate social responsibility influenced their decision about which stocks to buy. One investment manager comments that Starbucks is “more of a ritual and less of a product” while Blumenthal herself notes that the company has “continually nurtured its reputation”. Coincidence? Or another prime example of the company's shrewdness and scrupulous attention to detail? The chapter of the book entitled “Coffee Moat” should leave the reader in no doubt as to which is the case.

In this chapter, we learn about Starbucks' decision to launch the aptly‐named Ethos brand of bottled water and the pledge to donate around $10 million from product sales over a five year period to help provide the world's poorer countries with clean water. As an article in Fortune commented, such moves can only serve to boost brand performance in a sector dominated by Pepsi‐Co, Coca‐Cola and Nestlé. Being the world's largest buyer of green coffee helps too when it comes to promoting itself as a principled organization And those who feel that charity begins at home will be equality impressed with Starbucks' efforts to carve out a reputation as an employer that cares about its workforce. Schultz recognizes that front line workers are crucial to the objective of giving the customer such a warm experience that they come back again and spread the gospel to others too.

That so many do come back and display a willingness to pay top dollar into the bargain is a constant source of surprise to many analysts. Throughout Grande Expectations, however, it emerges that Starbucks knows a thing or two about offering the right products to its customers. The company maintains a strong core range while also building demand for seasonally available drinks that are eagerly anticipated every year. Add to this an ongoing expansion into food, sandwiches and entertainment products and you soon get a picture of an organization not prepared to stand still.

Development plans usually come at a price but the book cites different examples of Starbucks' penchant for expanding without increasing costs significantly. For instance, one common practice within new foreign markets is to reduce start‐up costs by initially setting up franchises or joint enterprises and then buying out the venture once it becomes established. The policy also allows Starbucks to engage local expertise that often proves invaluable. Expansion overseas remains a key part of Starbuck's strategy and the company is particularly excited about the untapped potential in China.

Schultz points out company belief that “key to building shareholder value is continued rapid growth coupled with solid financial results”. Starbucks more than meets these measures on both counts. Of course, there's much more to stock market investment than that and a key thrust of Grande Expectations is to explore the machinations of this hurly‐burly environment.

In stock market exchanges, small players rub shoulders with their expert counterparts and in chapter six, the author provides an interesting who's‐who in the investment stakes. We learn about the methods at their disposal and the different strategies adopted in relation to decisions to buy, sell or hold shares. While many professionals largely reach such decisions after analyzing a wealth of information from a range of sources, it soon becomes apparent that gut‐feeling can play as large a part here as with those who regard investment as a hobby. The book benefits from injections of subtle humor and this is evident in Blumenthal's portrayal of the murky world of an unnamed short seller whose fundamental aim is to make short term killings when stocks fall.

But with many investors, it's the words and deeds of the company that matter most and attention reaches fever pitch when quarterly projections or actual earnings are announced. Some investors might rely on market analysts but it's the company that ultimately knows best when it comes to making predictions about earnings, as Starbucks' chief financial officer Michael Casey points out. The effect on market activity and stock price at this time can be significant. The implications of a company buying back its own stock is examined thoroughly in chapter six and it is noted that such actions can generate a feel‐good factor even at times when net earnings decrease. The reason? Repurchasing shares sends out a strong indication of management confidence in the organization while also suggesting that the stock is trading lower than its real value and thus has growth potential. The irony of this doesn't escape the author who reports that a poll of money managers had rated Starbucks as “one of the market's most overvalued stocks”.

Despite spending almost a quarter of a century as a financial journalist, Blumenthal admits to still being baffled by the quirks of what she terms “Stockland”. In this respect, Grande Expectations becomes a learning experience for both author and reader alike. And while Blumenthal succeeds to a considerable extent in demystifying many stock market intricacies, this aspect of the book will essentially appeal most to a niche audience.