Posted on Thursday, 28th February 2008 by LMN
Maybe the most significant signal of a change in the US business cycle is Howard Schultz’s return to the role of chief executive of Starbucks after 13 years as chairman. He is expected to carry out an impassioned mission to reinvigorate the “romance and theatre” of coffee-making. Recently, Starbucks stock has declined over fears that they may have run out of room for further significant growth despite that the company posted revenues of $9.4bn in 2007, had double-digit earnings growth and opened more than 2,500 new stores. Clearly, the company is positioning for what lies ahead, and by keeping our eyes trained on this bell weather it is possible that we can learn a lot more than we might expect.
Recently, we have been hearing more recession-talk in the media from financial pundits. The Doom and Gloom Group would have us believe that we are on the verge of a financial collapse. On the other hand, the Pollyanna Purveyors are reassuring us that our economy is the strongest on earth and that real recessions are a thing of the past. As is usually the case in life, the truth lies somewhere between the two extremes.
But really, what exactly is a recession anyway? We read about recession and pundits speak of it as if everyone knows precisely what it is. Anecdotally (and paraphrased from newspaper columnist Sidney J. Harris), we know that a recession is when the neighbor loses his job and a depression is when we lose ours. However, the American National Bureau of Economic Research defines a recession more ambiguously as “a significant decline in economic activity spread across the economy, lasting more than a few months.” They add that a recession may involve simultaneous declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. HUH?
Not to worry, I have an indicator that has proven to be more useful than any scientific approach I have come across. I call it the Starbucks Recession Indicator.
I developed the Starbucks Recession Indicator as I witnessed the Starbuck’s phenomenon spread throughout Europe and
- The Diehard - a person who drinks the Starbucks marketing “coffee” in one big gulp and who walks 2 - 4 blocks in downtown Chicago during a blustery winter day just to wrap their shivering hands around their 185 °F venti nonfat latte
- The Connoisseur - for the Connoisseur it’s all about the beans. The Connoisseur often brings his or her own premium brew percolated from very expensive Kona or
- The Hype - the coffee patron equivalent of Flavor Flav, hype-man for Public Enemy. The Hype drinks Starbucks because it is the “thing” to do, and if he could wear the cup around his neck on a chain, he would. He is the one who generally goes out and brings back lattes for the whole team, at significant personal risk I might add. That coffee is brewed at temperatures between 185-203 °F, hot enough to cause 3rd degree burns in two to seven seconds! Of course, the Hype is willing to risk making this goodwill run because he knows that the other Hypes in the office will love him for bringing them a cup
I observed that Starbucks patron’s behavior changed predictably as the economy moved through its expansion and contraction cycle. During the early part of the Expansion phase (see the Recession Indicator graphic), the Diehard visits her local Starbucks 1-2 times a day and orders the standard coffee drinks. Nothing extraordinary here.
However, as the expansion continues and the economy enters the Overheating phase, the Hype increases the frequency of his goodwill runs and brings back more elaborate and larger dessert type beverages, and the Connoisseur buys non-coffee treats such as moon pies or short bread. But, it is the Diehard that signals things are over heating phase. She does something extreme like starting a collection of Starbucks cup holder sleeves or he shows up wearing a pair of Starbucks cowboy boots.
When the Hype stops purchasing dessert beverages and the size of the cups begin to decrease it is apparent that the economic peak has passed and the Denial phase is upon us. No one admits that times are getting tougher, but cup sizes continue to decline anyway.
Finally, we recognize that we are in the middle of the Contraction phase when the Connoisseur switches to Peet’s coffe and justifies her actions by retelling the story of how Starbucks as a startup first contracted with Peet’s for their beans. According to the Connoisseur in the Contraction phase, “It has always been about the beans”, she was making the trip with the Diehard just to keep him company. However, its the Hype that sends the clearest signal that a Contraction phase is upon us. During the contraction, the Hype buys his Starbucks coffee at the beginning of the week and refills the cup throughout the week with coffee from the break room. When asked why he does this the Hype responds with, “Even break room coffee tastes better from this cup.”
I guess it’s really all about the brand!
So, how can you or I, the average consumer, business executive or entrepreneur benefit from this knowledge? Here’s how:
Keep your eye on your extreme consumers. Your Diehards and the Hypes will signal cyclical changes.
Read the signs, a recession is approaching if your neighbors are buying fewer and smaller non fat lattes. A recession is here if you are buying fewer and smaller lattes.
3.Recognize that cycles exist (and none of us can change that) so prepare for the Trough during the Peaks by asking yourself, “What’s the worst that can happen?”, and then preparing for it when times are good.
Put away some cash and buy your personal automatic espresso machine during a trough (when it’s cheap).
Invest in more durable assets, and instead of refilling a new cup each week buy a Starbuck’s mug or stainless steel travel cup and fill it with coffee from your espresso machine
4.Wait out the Trough and prepare to profit from the next expansion by buying stock in the company that supplies cups to Starbucks
It wouldn’t surprise me at all if the real reason for Howard Schultz’s return has something to do with the company’s preparation for a business cycle shift and a slower growth environment. Hmmm! Maybe it is time to wake up and smell the coffee.
Tell us what you think?
Is a recession approaching or are we already in one? What are you doing to prepare? Let us know. We look forward to hearing from you.
Growth is Good!
Leamon Crooms
The Guru of Growth®
Posted in Weekly eNewsletter | Comments (0)
