Starbucks Falls Apart II

But what Starbucks didn't realize after their disastrous exploration of Chantico was that a backlash of incredible proportions was developing. As I argued in this essay, Starbucks actually began being used as a "bad example" by middle-class parents--as they taught their children how to live frugally.

Starbucks Responds

So, Starbucks stock began to tumble in about March 2006. At first everyone probably thought that it was a little hiccup, a kind of "correction" that was needed after a dizzying ride up a steep slope of earnings growth. Indeed, that happened. It fell to around 30 dollars per share in July 2006, but then quickly rebounded, testing the $40 per share just in time for Christmas 2006. It dropped, expectedly, early in 2007. But something different happened this time. Rather than only falling to 35, regrouping and then surging ahead to unexplored heights, Starbucks stock began to tumble in an uncontrolled fashion. It explore $30 per share in February 2007, ticked up a bit, and then continued its relentless decline. Even as I am writing this essay, it dropped another $2 in after-hours trading, to fall to under $16 per share. It continues in free fall.

So, what has Starbucks done to try to counteract this leaden fall, a fall quicker than Satan's fall from Heaven after his battle with God before the creation of the world? It has basically ignored everything that it should have learned from the fiasco with Chantico and has launched a line of chocolates that are so outrageously overpriced that the only thing you can do is shake your head and say, "How can a corporation be so dumb?"

How Dumb Can You Get?

Let me illustrate what I mean by taking you to a local store with me and doing some comparative pricing of chocolates. Of course you have the traditional bars that cost under a dollar, but then, as everyone knows, you have gourmet chocolates which are for the chocolate-lover in each one of us. I did some checking on the following five brands: Dove Dark Chocolates, Hershey Organic Chocolates, Ghirardelli, and two European brands, Toblerone and Ritter Sport. The store I went to was my local Fred Meyer (owned by Kroger). It isn't a high brow store. Here is what I found.

1. Dove sells a 5.8 oz. "Dark Chocolate Mint" and other dark bars for $3.49. This is about $.60 per ounce. Cheap but heavenly.

2. Hersey's Organic chocolate bar, is 3.5 oz. and costs $2.99. This amounts to a little over $.80 an ounce. Well, you have to pay more for something "organic," so I can understand this.

3. Ghirardelli Dark Chocolate, with 60% cacao is $3.99 for 5.25 oz. Even though Ghirardelli has probably one of the best names in chocolate, with a distinctive and wonderful taste, it only costs about $.75 per ounce.

4. The famous Toblerone bar is 3.8 oz. for $1.99, which comes down to just about $.55 an ounce.

5. My all-time favorite chocolate bars are "Ritter Sport," which still isn't very well known in this country but were very well-known to me in Europe in the early 1980s when I was writing my dissertation in Tuebingen, West Germany. Each day I would take my "Ritter Sport" break, and buy one of these 16-square bars, which came in about 20 flavors in that day. The flavor I loved the most, the "Mocha-Sahne," is no longer made. But now American stores are carrying Ritter more and more. A 3.5 oz bar costs $2.29, or about $.63 per ounce.

Tabulating the Numbers/Comparing to Starbucks

So, from my informal survey we have the following:

$.55 per oz.--Toblerone
$.60 per oz.--Dove.
$.63 per oz.--Ritter Sport.
$.75 per oz.--Ghiraredelli.
$.80 per oz.--Hersey's Organic.

So, Starbucks decided to break into this "high end" chocolate market in 2007. How would it position itself? Maybe it might, you think, try to be competitive on the low end, because it needed to try to convince people that its chocolates were actually worth something. When going up against the power of traditional brands, which already have loyal followings, you need to be circumspect how you do it. Undersell the competition, challenge them, build a loyal constituency and then you can perhaps raise the price a bit.

Well,I looked at Starbucks chocolate. It didn't matter if you looked at the Espresso Truffles or any other kind of dark chocolate. The prices were all the same. What does Starbucks charge? $4.99 for 4.2 oz. or about $1.17 per oz. What, you say? Starbucks is charging more than double the price that you pay for Toblerone, and almost 50% more than you would pay for any other brand on the shelves of my store. How on earth can you get away with that? Well, maybe there are farmers eagerly making cacao in Borneo or other portions of the world, farmers with whom you have contracts to brings up their children and educate them in American schools, but I think not. Starbucks' pricing is unconscionably high. They obviously have learned nothing from their experience a few years ago and believe that just because they have a "name," they can enter into the market with impunity and charge whatever they want because they are, in fact, the 900-pound gorilla that can "sit" wherever it wants.

Conclusion

But Starbuks has vastly overrated its own importance once again. It is counting on its "name" to make consumers ignore their pocketbooks. In fact, I suppose that is really the "lesson" of all of this. Starbucks is counting on people to be so addled in mind that they will forget their pocketbooks whenever they see a Starbucks label. They will, like a person newly in love, just throw all reason to the side and pony up any amount of money demanded by Starbucks just to have the priviledge of tasting something with the green logo on it.

But for the last two years consumers have been telling Starbucks that this is precisely how they don't want to be treated. They are conscious of their pocketbooks. But Starbucks created the monster, the monster that could choose anything they wanted in whatever flavor or size. Now, that same kind of demanding consumer is demanding cheaper drinks. But what is Starbucks giving it? If the chocolate is any indication, they are saying, "I will continue to charge you an arm an a leg." They might have been able to get away with this for a few years, even a decade. But now the door has been closed on Starbucks. They have made too many mistakes. They continue to make those same mistakes. Arrogance clouds judgment, and has not simply clouded it for Starbucks; it has occluded it. The blind company from Seattle now is shifting for itself in the darkened corridors of American corporate life. They have gone past the point of no return. Expect the stock to settle in at a range of $15 -$16 for a few more years. Nothing, at this point, can redeem it. And, I don't think I am sad about that....

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