A Tale of Two Companies

McDonald’s kicked ass last year and all indicators are pointing to another solid performance this year. The analysis that people just want cheap food is wrong though, people want value, which is a lot more complex than just having a low price tag, and McDonald’s delivers it in spades. The Mini Meals menu items that they are running right now are about as good as it gets for a full meal in a reduced portion size for $3.

US fast-food giant McDonald’s said Monday its 2008 net profit soared 80 percent from a year, lifted by growing demand from consumers seeking low-cost meals in a deepening global recession.

[From McDonald’s posts sizzling 80% profit rise in 2008]

The team at McDonald’s read the cards correctly and put in place several initiatives that are paying returns, the value menu being just one of them. They embarked on an ambitious program to renovate retail stores, which feature comfortable sitting areas, televisions, and a new color palette that is pleasing and warm. New menu items like salads and chicken sandwiches satisfy a broad range of tastes and desires.

On the coffee front they, like Dunkin Donuts, doubled down on plain old drip coffee while adding espresso drinks, which put them squarely in competition with Starbucks, although with a far better array of assets to compete with then Starbucks could muster. In retrospect I think it’s fair to say that drip coffee is a bigger sales driver than many observers would suggest and it is most certainly the case that the quality of the coffee is far more important than other attributes… my purchase decision is not based on whether it’s fair trade or not, but how it tastes and Starbucks drip coffee just doesn’t taste that good.

Starbucks announced that they are making another 1,000 job cuts. This is a classic example of a company that lost it’s way by forgetting that the core competency they had to deliver on was good coffee and not just a lifestyle brand. Starbucks rather spectacularly miscalculated that people went to Starbucks for the atmosphere and the lifestyle brand could be leveraged for (bad) food, music, hardware and appliances, and even extended to the grocery store shelves. As it turned out, Starbucks is one of those disposable brands that you can do without.

On top of the dilution that occurred as they expanded into (bad) food and mediocre baked goods, the retail stores started to look dated and tired. As I wrote above, Starbucks lost their way and with so many things going wrong for them at the moment it is difficult to imagine a scenario where they emerge intact.

Their stock has lost $21b of market cap in a few short years, which puts massive pressure on employee morale, among other things, and their balance sheet is not particularly strong. What is most troubling is their cash flow, which is negative and largely driven by necessary capital expenditures. It’s hard to speculate on whether or not they would be an acquisition target; while the vast majority of the stock is held by institutional investors it really comes down to who would acquire them in this environment with the problems they are confronting.

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Starbucks Still Looking for a Soul

Back in 2007 Howard Schultz penned a memo that would have been called the “peanut butter manifesto” if Brad Garlinghouse were not destined to write it a year later. In it, Schultz warns that the company had lost their unique soul in the process of becoming the success that they were at that time; with cookie cutter stores, products not related to coffee, and automatic espresso machines that any monkey could work.

Fast forward to today and Starbucks announces a 97% drop in earnings while under Schultz’s watch and what do they highlight? Fewer cookie cutter stores but still cookie cutter in nature, expanded non-coffee products like smoothies and pastry products, and replacement of old automatic espresso machines with new automatic espresso machines. Someone needs to send Schultz the memo he wrote… the crowd at StarbucksGossip.com is overwhelmingly negative.

Besides closing the stores, Starbucks has cut more than 1,000 positions — many of which were unfilled — and introduced a slew of new products, including Vivanno smoothie drinks and breakfast pastries.

The company also replaced aging espresso makers and launched new single-cup Clover brewing machines in some markets.

[From Starbucks 4Q profit drops 97 pct on closure costs: Financial News – Yahoo! Finance]

When Customers Vote

This is actually very clever… it looks and feels like it’s built on Salesforce.com Ideas.

A new coffee blend is scheduled for an April debut, and a Web site, www.mystarbucksidea.com, will allow customers to submit ideas to the company and to vote on them.

[From Starbucks CEO sees economic tailspin | Reuters]

Sprint was running their new advertising in heavy rotation on Jericho last night featuring CEO Dan Hesse saying stuff like how a simple flat rate billing plan was awesome and if you have ideas for how to improve the mobile company then email them to dan@sprint.com. The problem is that this is a cheap advertising stunt, the company acknowledged that it’s not his real email address and more to the point, they don’t make public what people want anyways so maybe this is just some autoresponder that pings every schmuck who takes the time to write in about all the things Sprint could be doing better. As I was watching the commercial I was thinking of all the things I could write in about, but what’s the point? It really doesn’t matter because for Sprint it’s just lip service.

Thumbs up to Starbucks and back into the penalty box for Sprint.

In the end I wish more companies would just do this:

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Starbucks Closes for “Retraining”

At least they didn’t call it “re-education,” which sounds kinda creepy. I would give Schultz credit for attacking the problem but I can’t help but think that from a PR standpoint this is not the kind of attention that they need because it focuses attention on the fact that their retail customer service has, broadly speaking, gone to shit. I haven’t been into a Starbucks in at least 5 months because of the service and the quality of the coffee.

The next thing Schultz should do is rip out those automatic espresso machines and go back to the old style manual machines. I don’t want espresso that is the same thing as what I can make at home, I want espresso porn.

CEO Howard Schultz announced the 3-hour closure starting at 5:30 p.m. local time Tuesday to energize 135,000 employees.

[From Coffee break: Starbucks closing for 3 hours today – USATODAY.com]