McDonalds - Starbucks Round Two

I'm rethinking what I said on Wednesday regarding Starbucks' ease at redefining the game.

As a reminder, this is what I said:

[I]n my view, Starbucks can redefine the game very easily, and in a way that is guaranteed to keep McDonalds, Dunkin Donuts, 7 Eleven, and the rest at bay.

Starbucks should stop pretending that it sells coffee.

While my views on Starbucks' positioning are definitely valid - you're not going to have a relaxing time sipping a coffee in a McDonalds PlayPlace - I forgot a major truism of American business today.

As far as the investment community is concerned, if you're not growing, you're shrinking.

Even if Starbucks were to increase its revenues by 25% in calendar year 2008, a followup 2009 revenue increase of 24% would be considered a failure.

And Starbucks' last quarterly report (February 8, 2008) was, in the eyes of the investment community, "mixed":

Fiscal 2008 - First Quarter in Review

Operating income increased 4% to $333.1 million in the first fiscal quarter of 2008, from $319.7 million in the prior year quarter.

Operating margin contracted 160 basis points to 12.0% from 13.6% in the prior year, driven by weakness in the U.S. segment.

U.S. segment operating margin declined 290 basis points to 14.6% from 17.5% in the prior year, due to higher cost of sales and occupancy costs, and an increase in store operating expenses, as a percent of revenues.

Weakness in U.S. segment was offset in part by improvement in the International and CPG segments, as well as leverage on Corporate general and administrative expenses.

So this explains why Starbucks would expand outside of their current market and try to go for the "I'm lovin' it" crowd. And why Flickr added video. And why Nokia expanded beyond the paper mill. And why Oracle expanded beyond customers with acronymic names.

Personally, I think it's kind of sad, but today's mantra is grow or die, and being good at what you do isn't good enough.

[mrontemp business] | [mrontemp politics] | [mrontemp technology] | [mrontemp del.icio.us tags]

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