Starbucks's Bull's Rebuttal
by Bill Barker ([email protected])
Battlestar Galactica? Please. If we're going to introduce science fiction into this Duel, at least let it be intentionally humorous science fiction. I propose this excerpt from the fourth book of Douglas Adams's Hitchhiker's Guide to the Galaxy trilogy, which I think accurately sums up the weakness in the Bear argument:
As mentioned above, change is one of the problems (for there are many) lurking in the Bear's den. Another is that Rick would have you believe that "the operating trends are clearly in a state of deterioration." Clear to whom? I'm pretty sure that we're talking about a company that has had positive same-store sales figures in every single month of its public history (how many other retailers can say that?), with improving margins, and which continues to grow at a rapid but well-managed pace. Calling that "deterioration" is fiction, though in my opinion not scientific.
Rick accuses me of being "two-faced" for praising Starbucks' successful deal with Dreyer's Ice Cream, while I predicted doom for Planet Hollywood's joint venture with the same company. Let's be clear about the source of this dichotomy, though. In terms of food service, Planet Hollywood has a well-deserved reputation for being significantly shy of mediocre. Irrespective of Dreyer's involvement, I don't expect there to be a great demand from the public to try a product burdened by the Planet Hollywood name. Starbucks, though, has a well-deserved reputation for serving best- of-class products. It is no surprise that the top-selling premium coffee ice cream has the Starbucks name on the outside -- it's not the Dreyer's product on the inside of the carton that's driving the sales.
Finally, Rick would have you believe that predicting success as Starbucks expands internationally is tantamount to some sort of jingoism. I buy this argument about as much as I did when Rick made it in relation to Coke -- which is to say I don't buy it at all. To expect that Starbucks will succeed internationally does not presuppose slavish devotion abroad to all things American -- it just assumes that others will enjoy good service and good coffee to the same extent Americans do. Starbucks doesn't succeed on the East Coast because people are trying to emulate Seattleans -- it succeeds because it's better than the competition.
Maybe I should be more charitable. Maybe change in price isn't a problem.
Maybe Rick's argument still does make sense.
Maybe if I read it through again, I'll get it.
Maybe not.
Next: The Bear Responds
"The problem is, or rather one of the problems, for there are many, a sizable number of which are continually clogging up the civil, commercial, and criminal courts in all areas of the Galaxy, and especially, where possible, the more corrupt ones, this.
The last sentence makes sense. That is not the problem.
This is:
Change.
Read it through again and you'll get it."
Change. Yes. You see, when Rick and I first sat down to write our respective articles and Starbucks was at about $55 a share, there was a great argument that Starbucks' valuation was intergalactic. But then something changed, and it wasn't the company or its fundamentals. The price changed, shedding over 30%. Where before Starbucks was trading at an unarguably lofty P/E north of 70, the price is now all the way down to about $41, and a prospective investor is confronted with a great company that is trading at a forward P/E multiple on calendar '99 earnings of just over 30. For a company that has a five-year expected growth of over 30%, that's no "space shot" valuation.