Lessons from Starbucks

In the interests of disclosure, I admit that I have never been a fan of Starbucks. To me it has always been over-hyped, over-marketed, over-priced coffee and a lot of other high fat stuff helping to make people chubby. More importantly, I saw the prolific rise of Starbucks over the past few years as a mascot for a global consumption bubble that inevitably ushered in our present era of pain.
Through mindless access to ridiculous credit, over the past few years, regular working people became like masses of the nouveau riche. Intoxicated by “lifestyle” and the things they could buy, people bought their brains out. The question was no longer “should we?” We could, so we did. High-priced-lattes that no one could live without, were a daily reminder of the madness that overtook us.
In 1999 Starbucks had 2,000 stores. By 2007 it had close to 10,000 company-owned stores. In 1999 Starbucks opened 447 stores – 1.8 stores per working day; in 2007 that number more than tripled to 1,403 stores a year – 5.5 stores per working day. Suddenly maintaining this unsustainable rate of growth became their primary focus. In an all too familiar pattern of human behaviour, poor business decisions soared, as compromises of quality and location became the natural product of growth at all cost. Now over-levered and over-grown, Starbucks is suffering the thump of the consumer spending slow-down. They have recently announced their need to close hundreds of stores; and counting.
This story bears great insight into the present economic contraction in the world. As the world’s largest economies teeter into recession, export dependent nations are at greatest risk.
Today we learn that Japan’s economy shrank last quarter, leaving the country on the edge of its first recession in six years, as exports tumbled and shoppers spent less. China is now learning the hard lessons of Starbucks on an epic scale. See this excellent article: A Value Investor Looks at China, by Vitaliy Katsenelson.
This contraction bodes poorly for the commodity bulls over the coming weeks and possibly months. And as I have said many times over the past year, the present contraction in growth and asset prices was inevitable. Those who have been taken unaware and are losing precious capital have been blinded by greed and hope or were simply ignorant. We still live on planet earth. Gravity still does apply, and trees still cannot grow to the sky. Neither could Starbucks, neither can China.