Saturday, April 12, 2008

Cutting Costs and Calories at Starbucks, or Trying To, Anyway



“We no longer put whipped-cream on our drinks. If you want whip, Just Ask!”

So says the colorfully-drawn sign behind the counter at this Starbucks.


And so, along with the much-promoted “Pike Place Roast” and the new paper coffee cup label colored a shade of brown that is suspiciously similar to Peet’s Coffee, Howard Schultz’s “Transformation Agenda” takes hold.

We won’t disclose the exact location in order to protect our sources on the latest doings at this struggling-to-turnaround purveyor of high-end coffee, but according to the barista behind the counter, Georgia is a test market for a “no-whip” policy the company is thinking about rolling out elsewhere.

And while it makes perfect sense, business-wise, to dispense with the automatic slathering of the stuff on otherwise perfectly fine coffee drinks, what with dairy prices having gone through the roof—along with everything else—in recent years, Georgia might not be the place to start:


“This isn’t the best market to do it,” our barista tells us. “People around here love whipped cream.”

She’s not kidding. Georgia’s adult obesity rate is 6th highest in the U.S.

Now, Starbucks isn't exactly shoving the test down its “Guests” throats. The sign is barely noticeable on the wall behind the counter, and the baristas have been prompting customers to make sure they know there’s no whip cream coming on whatever it was used to get it.

So, how’s the “no-whip” portion of the Agenda looking in Georgia?

About half the customers here still want their whipped cream.



Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

3 comments:

Mark said...

Okay, now this one intrigues me, so I took out my envelope and started writing on the back of it...

According to the nutritional info on Starbucks's web site, there are around 25 grams of whipped cream in each of its whipped cream drinks. This is slightly under an ounce, but seeing as the average "barista" (damn, that's an annoying word) probably lays it on a little thicker (after all, Starbucks would probably like to "officially" undercount its "real life" calories), let's say its one ounce of whipped cream per drink. So...

I popped over to the "Fresh Direct" web site and see that Reddi-Wip (which, incidentally, I just learned is made from real cream, while "Cool-Whip" isn't) currently sells for about .43/ounce in a seven-ounce cannister. So, let's WAG it (I am, after all, doing all this on an envelope) and say it costs Starbucks (which makes its own whipped cream) one-third of that; i.e., around .14/ounce...

Now, let's say Jeff's calculation that around half of the previous whipped cream recipients no longer get it, thus saving Starbucks an average of 7 cents per whipped cream-topped drink...

Okay, here's the tough part: How much money does this actually save the company? After Googling around a bit (i.e., wasting as much time as I was willing to waste on this) I found a stat on Wikipedia saying that Starbucks in the U.S. bought 1.5 billion cups in 2006. So, let's use that unimpeachable source as a base figure, and gross it up to 1.8 billion for 2008...

Now, here's the REALLY hard part: what percentage of those 1.8 billion cups get filled with a whipped cream drink? Seeing as I have absolutely no idea (I never go to Starbucks because I think its coffee tastes burnt, and I don't want all that high-calorie sweet stuff [like, for instance, whipped cream] that people add to "unburn it") and, additionally, seeing as I'm mathematically very lazy, I'm going to say one-third of those 1.8 billion cups had been getting whipped cream put in them, which gives us a nice, easy to calculate figure of 600 million whipped cream drinks per year served by Starbucks...

So, if Jeff's right about that figure now being cut in half and I'm right about a savings of 7 cents per drink, this "whipped cream is now optional" initiative would save Starbucks around $42 million a year plus, say, another $3 million in labor (after all, there's an extra step in there if you want the whipped cream), for a totally WAG annual savings of $45 million. (We are, of course, ignoring the potential international savings here.)...

According to its last Q, Starbucks has 725 million shares outstanding, which means (according to my WAG) that this initiative should increase annual pre-tax earnings by around .06/share, which would roughly translate into around .04/share on the bottom line. At a TTM PE of around 20, that's around .80/share in the stock price, which is actually pretty substantial for such a seemingly small initiative...

Now, imagine what they could do to the stock price if they "went optional" on the COFFEE!

jkc said...

The brown cup bears the original Starbucks logo, in the original brown. The green-and-black logo was designed when Starbucks went big and corporate, into markets other than Seattle where bare-breasted mermaids might not be received so openly.

Aaron said...

I am surprised no one is talking about how the pullback in consumer spending in states like CA and FL is affecting revenue growth for chains like SBUX. I guess cutting costs is not a great strategy for a high-end commodity seller to get back to profitability.