Market Overview

The Coolest Things Starbucks Said on its Earnings Call

Starbucks (NASDAQ: SBUX) views itself at the “third place environment”, whatever that means:

This is corporate lingo for “we want you to visit us before, during, or after work”, which comes before heading home to the family or letting them know you arrived safely to the office in the AM.

Think about this logically for a second. If you go to Starbucks in the morning, even for the cheapest cup of java offered on the menu, and do this every day, the chain has created something in your brain that a visit to the store is more necessary than arriving to work 10 minutes early.

On the flip side, that walk to Starbucks while on break for a discounted refill has also become a habit not so easily broken, and Starbucks again has squeezed itself into the precious 30 minutes you have to chill. So how does Starbucks bring that “third place environment” to life and profit? Here is how:

• At the root, Starbucks is selling an illegal drug (caffeine). The consumer becomes hooked on the notion that superhuman performance in the morning can’t happen without that cup of coffee. Those trips in the late afternoon are intact because the person surmises he/she needs the next round of caffeine to power through an all-nighter at the office or have just enough pep to chase the kids around at home.

• Once inside the store, Starbucks greets you with an ever expansive array of food options that have to be tried if for no other reason than they look good every time the store if visited. The food options also have become part of your daily rituals, and Starbucks has bolstered what it calls its “average transaction value.” This transaction value also stands to increase in the future as Starbucks rolls out a new single serve coffee brewing machine in its stores this fall (called “Verismo”) and natural energy drinks named “Starbucks Refreshers.”

Oh those Starbucks loyalty cards: There are more than 4.7 million active members in the U.S. Starbucks loyalty program that will load some $2.5 billion onto their cards this year. Why should investors care?

This card is perhaps the sweetest thing Starbucks has ever done. To give a card to a Starbucks faithful and resident coffee addict that will lead to a future free coffee is marketing genius. Moreover, there is ease of use to the cards that consumers love; load the money, avoid debit card transaction fees, and work your way to a free cup of coffee by purchasing coffee.

Let me go a step further. Once you do score that free cup of Starbucks coffee, chances are high that the $4.00 in your pocket reserved for the coffee will be spent on a breakfast sandwich or a Kind granola bar. So, truthfully, is that cup of coffee free? Keep in mind that Starbucks makes a killing in terms of profit margins from that cup of coffee you buy daily, so giving a little of that back in the form of a free coffee goes a long way to building brand loyalty without hurting the bottom line.

Mobile is the man: Starbucks generated 45 million mobile payment transactions in its most recent quarter. Wow, that is a serious amount of people rocking the Starbucks mobile payment app. Figure it this way, who wants to clumsily reach into their wallets at 7am for cash or a debit card when the mobile phone being used to text is already in hand? Nobody! Starbucks developed this app to get where the consumer spends a large part of his/her time; every time you scroll on the iPhone that app appears, and gets you pondering a Starbucks purchase that day or another day not too far off.

BTW, I suggested to clients to not buy Starbucks pre-earnings, was not feeling the risk reward. Now? I think hanging out on the sidelines remains the name of the game, but if the stock begins to run past $58.00 on convincing volume nibbling would be reasonable. The market essentially would be saying it’s more encouraged on the future and its lower coffee costs and the high probability of a European segment turnaround than the negatives recently reported.

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