Tuesday, January 29, 2008

Not Recession Proof After All - Back to the $1 Menu Drawing Board

Wall Street is not very forgiving! MCD's found this out on Monday. The conversation might have gone something like this: 'Oh, so you had ONE bad month...no biggie! It's ok...you've had, let's see...FIFTY-SIX CONSECUTIVE MONTHS of higher year-over-year U.S. comprable same store sales. We'll let this one slide."

NOT! Mr. Wall Street pushed McDonald's down to a 4 1/2 month low. Said another way, MCD's went from a nice $54.36 stock price on Friday down to a relatively hard hit $50.80 by close of bell Tuesday. That's not very nice...but it was the worst quarter in 5 years. A flat December is not pretty. And worse yet, it's not a good sign.

What did McD's have to say for itself? Excuses, excuses. Mr. Wall St. hates 'em. Especially if their not believable. MCD's did it's best though, blaming it on the weather - "It was COOOOOLLLLDDDD outside.." If that were to be believed, things would be OK in Oak Brook, but things are a little shakey because people believe otherwise: It's the economy, stupid!

Higher food costs, higher energy costs, an overall weak economy tied to the housing "downturn"...these are more likely culprits. And if McDonald's is feeling it, that is NOT a good sign. A canary in the coal mine!

What shocks me is that, considering McDonald's "not lucrative" price point, they are suffering at all. Do people REALLY not go spend...$5, $6, maybe $8 at McDonald's and apparently make their lunch and save...a $1? Apparently they do.

What will McDonald's do? What will be their "corporate mission" in such an environment?

They'll go even CHEAPER. "You want cheap...we've GOT cheap" is what their gearing up to do. How so? They'll look at their trusty balance sheets and recognize a couple things: 1. their value meals account for 14% of their TOTAL REVENUE. That's a lot of cash. They will start going to their strengths and cashing in on that little tid bit of information in the form of...more Happy Meals! And two...$1 Menu. Yup...it's what got 'em out of their first jam, and they'll bet it will carry them through this pickle, too.

Look for slight changes to their menu in '08 emphasizing their creme' de la' creme: cheap!!!!

Interesting Update:

Burger King is seeing NO slowdown in it's same store, Q1 sales...hmmm...it's actually experiencing an "uptick".


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Monday, January 28, 2008

Starbucks: $1 coffee? Who Knows?

I entered the Starbucks on 8th Ave. & 102nd the other day asking if they knew anything about a $1 cup of coffee, with free refills. I was greeted with "Where did you hear that?" The friendly barista / partner continued: "I was watching the local news today and I didn't see anything regarding a $1 cup of coffee!" I went on about Reuters, CNN, The Associated Press, blah blah blah - and it occured to me: the problems at Starbucks goes beyond store growth and economic downturns - there's a basic operations situation going on here, a major operations and communcations crack.

This was my main concern. Forget about what it does to the brand. This company is apparently so rife with bureaucracy that their own local, Seattle area store managers and "partners" are not even aware of major product initiatives & campaigns that have been highlighted in the national media for over 36 hours. They served me the advertised 8oz short cup of drip coffee for $1.66. I got one $0.55 refill.

On the same day - Thursday January 24th 2008 - I went to the Starbucks Music Store on Bellevue Way in downtown Bellevue. Again, confusion! A partner explained to me that it was an initiative that Starbucks was experimenting with in a "...few counties in Maine.." What? Maine? That's not what I was reading, but perhaps the national press got it wrong. They decided to honor it anyway, which was obviously a little uncomfortable.

It's a fascinating conversation: what will the reverberations of this "experiment" be? Did it work? Will they move forward with a reduced cup of "joe" at Starbucks to compete with McDonald's and Dunkin' Donuts? How will this effect the sterling brand that is Starbucks? Will this dilute the brand or does this usher in long needed change and adaption to a growing market place for high quality coffee? Does it really create "segmentation" and beneficial and new "entry points"? Those are great conversations, of which I have clear and strong opinions on (*Yes, they need to institute free refills and no longer implement price increases for "drip" coffee in order to subsidize raising dairy costs - AND they need FREE WI-FI) but that's for another post.

My point here: There is a significant problem in Seattle w/ Starbucks that goes beyond national product experiments, brand prestige and positioning, competition with McDonald's, Dunkin' Donuts and strong 'independents', falling stock prices, the economy, store growth, etc. etc. These are all interesting and serious topics to be addressed, but Starbucks needs to get back to 'brass tacks' and concentrate on the basics like corporate to store communication, communication amongst Regional Managers, District Managers and Store Managers and overall execution on operations. Without these basic fundamentals in place, and it's obvious that this has been in decline for awhile, all those other high minded initiatives won't be as important. It's a coffee shop. They need to execute on the fundamentals first. And because of all these other moving parts and increased competition, which shows no signs of subsiding, the time to act is now!

Warch for Howard - he will be making some major improvements in short order!

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