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STARBUCKS - A TRANSITION FROM BLUE OCEAN TO RED OCEAN - OR TO AN OCEAN OF PROFIT?
STARBUCKS - A TRANSITION FROM BLUE OCEAN TO RED OCEAN - OR TO AN OCEAN OF PROFIT?
Drowning in a Red Ocean?
Christopher Columbus, arguably the best explorer and the "Great Admiral of the Ocean" sailed four times from Europe, wandered around voyaging uncharted water across the oceans, and finally made it to the west thinking he made it to the East.
By mistake, but a new world was revealed.
Starbucks, once the Rolex of coffee business, the Columbus of the blue ocean, seemed to have been steering at all possible directions lately. Or is it the corporate compass named "top management" that is malfunctioning? To that point, I think that the company has downshifted to Red Ocean by trying to position itself among every other coffee store through so-called product differentiation and pricing. It wants to sell coffee to everyone on the planet that drinks coffee. Well, so does every other coffee shop. How is Starbucks different then?
Kim and Mauborgne tossed a fitting term "drowning in the red ocean" but it is evidently a MOJO problem, to me. Starbucks has lost its mojo –meaning the company has a simpler problem than one might think – the problem is identity crisis. The result is loss of strategic direction. Generally, this happens when a company is steered by greedy management that is purely driven by profit and nothing else but profit. A unique position, a charisma is sacrificed for the lure of profit thru misjudged over expansion and unnecessary dilution of an otherwise unique product line. A unique appeal is lost; an exclusive position is surrendered giving birth to stiff competition, a bloody battlefield where everyone is battling for market share.
A contradicting perspective: ocean of profit?
I wish I had bought Starbucks stocks a year ago or even few months ago.
The only ocean the company seems to be swimming on currently is the ocean of profit. That is the ultimate ocean a for profit company wants to stay afloat in even if it takes transition from blue to red or somewhere in the middle.
Strategies are predominantly driven by management preferences; let's not forget that for a second.
Starbucks stock has returned a staggering 35% (excluding dividend) in last one year, with TTM revenues of 10.2 billion and 39% YOY earnings growth (1). It maintained strong Q to Q sales momentum heading in to the end of the year. From an investor's perspective, one would have to be iniquitous to say the company is drowning or even struggling in red, blue or any ocean. It has continued to put money toward advertising and innovation during the economic downturn and kept growing.
During the months of Aug and September 2010, Howard Schultz, the CEO, sold 3.2 millions of stock options at an average price of $27. After excluding the average exercise price of $10 and transaction fees, the guy pocketed before tax $51 million in 2 months from stock based compensation (2). The stock closed at 27.54 today and it's pushing the 52 wk high resistance everyday. It got an analyst upgrade this week with price target of low-mid mid-30s based on 7% projected revenue growth next year.(3)
Schultz and his management are paid to grow the company and to make money. It's a business, not a charitable organization. He is doing his job almost as good as it gets. Our preconceived notion and our inclination to a particular stakeholder perspective can very likely influence our judgement and opinion about a company while applying a concept like "blue ocean strategy"; however, based on numbers, the company is doing excellent. I understand that numbers are not the only factors to consider but numbers are what matters at the end.
Starbucks - a Great company with great coffee and great business success story.
Learning point: Be aware of your standpoint while applying a corporate theory on a company.
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Email: earafat@easirarafat.com
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