The Death Of Starbucks Growth

September 12, 2007 by Douglas A. McIntyre

According to Bloomberg rising sales of McDonald’s (MCD) coffee prompted Marc Greenberg, a Deutsche Bank Securities Inc. analyst in New York, in June to reduce his Starbucks stock-target price by 14 percent to $32. “The golden arches are doing coffee better,” Greenberg wrote in an investors’ note. He rates Starbucks (SBUX) as “hold.”  That pretty much says it. No need to add anything.

McDonald’s claims that sales of its specialty coffees rose 34% this year. Consumer Reports rated MCD coffee as better than Starbucks.

But all of that is not the worst of it. Starbucks share price has been based on a combination of same-store sales increases and it ability to open more and more stores on its way to a 40,000 location target. The coffee company is even considering dropping its policy against marketing to children presumably to pump up sales.

McDonald’s has effectively launched products across its larger number of stores that effectively prevent Starbucks from reaching its goals.

Starbucks is heading into the wilderness of former growth companies which still have good businesses but can never recapture the glory of their youth. Its shares are down from $40 to $27 over the last year, and they are unlikely to top $30 at any time in the foreseeable future.