Sweet prospects for Starbucks

Last July, Starbucks (SBUX) announced that it had signed a deal with Hershey Co. (HSY) to create a new line of premium chocolate products. This weekend I finally saw on TV the commercial launching the announced Starbucks Chocolate line.

I was pleased with what I saw. The TV ad was very appealing, and highlighted the unique marriage between two indulgent darlings, coffee and chocolate, that only the expertise of Starbucks could achieve. There was an organic, slightly distressed feel to the commercial that connoted craftsmanship and heritage, but with a modern feel. Well done!

This initiative begs the question, though: is this right for the troubled coffee company? Is this in line with Starbucks’ CEO Howard Schultz’ pledge to go back to basics and refocusing on the core business to turnaround the ailing chain?

I attribute Starbucks woes to three factors:

a) The “commoditization” of good coffee. Starbucks not only taught Americans how to drink coffee; it also taught competitors how to prepare it. Now the chain is facing competition from a myriad of different sources, from McDonalds to Dunkin Donuts and convenience stores. All good, tasty alternatives at a far better price. Not only that: those competitors are also talking the talk, proudly touting their own array of exotic variants, from the Costa Rican Tarrazu blend to the 100% Indonesian Arabica decaf brew.

b) The grinding economic situation, that puts consumers in the position to choose between a cup of Starbucks’ double-shot Latte and a gallon of gas.

c) The clear erosion in Starbucks quality, against which Schultz warned and that he is trying to address with his back-to-basics mantra.

In order for Starbucks to return to a path of profitable growth, it will have to address all these factors. I would not worry about the economic situation. Yes, it will be a hindrance for a number of quarters, but sooner or later, things will get better. Actually, rightly leveraged, it could even help, as will be discussed later. It is the other two factors that are fundamental problems that Starbucks will have to address.

Starbucks will have to not only improve its quality: they must also re-build the conviction among consumers that their quality is superior to any other coffee expert wanna-be out there, and therefore, worth the effort and price for a superior experience. Starbucks must re-assert its position as the absolute expert in coffee. A level of expertise and connoisseurship that guarantees that, when looking for the well-deserved, ultimate coffee indulgence, consumers consider Starbucks as the only possible purveyor.

Here is where the chocolate line comes into play and why it makes so much business sense for Starbucks at this juncture. In a tight economic situation, consumers are forced to cut back in superfluous expenditures. Splurging in big-tickets pleasures is out of the question. However, people still want to enjoy and reward themselves. Small indulgences become more important, as consumer cling to the remnants of their standard of life. You might not be able to go to the beach during this Memorial Day weekend, but surely you can afford to go to Starbucks and enjoy the sunny afternoon enjoying a well-deserved Caramel Macchiato, can’t you? I mean, it’s only five bucks versus the hundreds you just saved by staying home, right? You’ve earned it! Or for that matter, you could afford to indulge in some fine chocolates while watching that DVD, couldn’t you?

Ah, the fine things in life. Chocolate is one of them. As with any other product, consumers are nowadays expecting more from it than just the sensorial pleasure (for more on these motivations, see my post “Consumer values to look for”). The assurance that craftsmanship and sophistication bring to the experience is as important as the taste and the texture. Chocolate has joined the pantheon of products in which consumers are looking for, and demanding, a higher level of connoisseurship and artisan mastery. Just ask Godiva.

Starbucks’ introduction into the chocolate category has a double benefit for the company:

a) Starbucks expertise in the coffee business gives it instant credibility to participate in the premium chocolate category with a coffee-based offering. Not only are chocolate and coffee complementary products from the sensorial perspective: they have close affinity as product categories, in terms of their indulgent role in the consumers’ lifestyle. Chocolates is a fitting complement and a natural extension to Starbucks’ core coffee business.

b) By extending its coffee expertise into another category where mastery and premium character matters, Starbucks is just reclaiming those attributes for itself in the eyes of the consumers, which in turn should revalidate the uniqueness of the Starbucks experience and help support their core business.

This is certainly a step in the right direction, and strategically, it surely beats serving breakfast!

Disclosure: I own shares of Starbucks

Winning the online brokers’ war

One of the most competitive spaces right now must be the online brokerage business. It is to be expected: it is an industry with relatively low barriers for entry and a huge potential market. As the stock market is democratized by the power of the Internet and its abundance of quality information, the need for full-service brokers is dwindling. This is not new, and the process has been going on for years now. Yet, full-service brokers still have significant number of customers who the online brokers are constantly vying for. Likewise, new generations of would-be investors join the mass of potential customers each year as thousands of young professionals –with an independent, entrepreneurial mindset- enter the job market and need to decide how to invest their newly acquired disposable income.

Online brokers invest intensely in advertising and promotions trying to gain these available new customers, and of course, steal a few from the competition. This massive investment and ferocious competition keep their margins razor-thin. In this situation, is it wise to invest in an online broker? If so, which one –if any- is poised to win the online broker’s war?

The three frontrunners in this race are Charles Schwab (SCHW), TD Ameritrade (AMTD) and E*Trade (ETFC). Their trading platforms, fees and quality service can be considered quite similar in principle. What will determine then which would a potential customer choose? Here is where building an emotional connection with target customers becomes crucial. In a market where the tangible products or services being offered are quite homogeneous between competitors, creating a sense of rapport and shared values becomes the angle that can make the difference for a consumer.

Each of the three key brokers is trying to achieve this affinity of values in different ways. TD Ameritrade is sticking to Sam Waterston as its spokesperson and trying to leverage the independent spirit of America as their guiding value. This approach, in my view, has limited appeal among young, truly independent investors. It positions investing as a fairly stern, mature and conventional endeavor. That does not resonate well with the right-brained nature of the current generation of customers (for a great book on this, I suggest Daniel Pink's A Whole New Mind: Why Right-Brainers Will Rule the Future).

Charles Schwab hit a home-run with the launch of its “Talk to Chuck” campaign. What a dramatic repositioning for the company! The pioneer of the industry had been losing ground to other online brokers after the retirement of its name-sake founder. The new management at that point lost its sense of direction and tried to take the company to play with the big boys… exactly the opposite of what had made the company successful in the first place! When Charles Schwab returned at the helm, he realized that the company had lost touch with its customers and had created a stodgy and outdated image for itself. “Talk to Chuck” was a vibrant and energetic way of re-humanize Charles Schwab. From the emotional perspective, I think Schwab is in the best position in its history. “Talk to Chuck” is a warm, fun and irreverent campaign that makes the company approachable and dynamic. However, Schwab might be missing an opportunity: their recent commercials are still talking to sophisticated investors. Their strategy is still about switching consumers from the full-service brokers. In its commercials, Schwab’s “customers” invariably explain how the service they got from their previous broker didn’t match their own sophistication and knowledge. This communication may be irrelevant for investors that don’t feel to be as experienced and –dare I say it-… wealthy as the ones portrayed in the ads.

Finally, there is E*Trade. This company was roaring in all its cylinders until it got badly hit by the sub-prime meltdown. Its competitors didn’t wait to take advantage of E*Trade woes, and in just a matter of weeks, they stole thousands of consumers and billions of dollars from the company. Even in the midst of the crisis, E*Trade did not lose sight of the importance of communicating with its customers and the reassuring power of advertising. Despite its hemorrhage of liquidity and its internal shakeout, the company upheld its plans to advertise in the Super Bowl. E*Trade famous “Trading Baby” TV ad was enough to assuage the consumers’ jitters and is credited with stopping the bleeding. In terms of understanding consumer values and position itself as the right complement to their lifestyle, E*Trade does the best job of all three. Their approach is plain, simple and straight-forward. They focus on the simplicity, power and excitement of trading, and are able to let the consumer know that they understand the emotions they are going through in navigating the stock market world: from the father making his first online trade surrounded by his family, to the dude that trades while fragging his friend in "Gears Of War” (very insightful!). These are real people, and E*Trade is there with them. Not above, not ahead, but at their side.

Online brokerage will continue to be an intensely competitive industry in the foreseeable future, and the fierce fight to gain customers will continue demanding huge investments that will keep its profitability in check. Nevertheless, I think E*Trade presents a very compelling risk-reward proposition right now. The stock price is still depressed after the credit crunch scare, even though it showed some strength last week, closing at $4.31. While I think their financial situation is still fragile, management is doing the right things to refocus the business and gain new customers. All reports indicate they keep opening new accounts at a vigorous pace. I am not surprised. I think E*Trade has a strong brand equity and they know how to leverage it among the segment of consumers that represent the highest potential for gains. I think the bottom for E*Trade is in the past, and for the patient investor, this could be a rewarding investment. Something to consider for your portfolio; who knows, soon you may even get to rent your own clown.

Disclosure: I own shares of E*Trade Financial Corp.

Green works… just ask Clorox

In my last post “When does Green shine as an investment opportunity?”, I discussed the requirements a product or brand that wants to leverage the current Green trend needs to meet in order to have a significant opportunity to succeed.

One company that is doing it right is The Clorox Co. (CLX). A few months ago, Clorox launched a full line of natural cleaning products named GreenWorks. The positioning and messaging around GreenWorks is spot on. Let’s evaluate it based on the model discussed in my last post.

Integrity: The sound design of this product line starts with the smart selection of its name. It precisely describes the line’s main promise: products that are ecologically friendly, and most importantly, that are effective. The name for itself directly disarms one of the main prejudices in the mind of potential users: natural products are unlikely to be effective enough. It addresses that preconception head on: green does work –or more specifically, this line was able to make it work!-. In their website, they reinforce that point indicating: "You wanted a natural cleaner that worked. And we listened". In its communications messaging and tone, Clorox makes a point of explaining, in detail, how these products work. They provide abundant, factual information about how the GreenWorks line was designed from the ground up with 99% natural ingredients that minimize its impact to the environment. They disclose its ingredients, and how they interact to achieve the level of cleaning power consumers expect. Finally, the tone of the communication is soothing, reassuring, clean and confident. There is not hype at all. They acknowledge the consumers’ concern with their health and the environment and explain how their products meet that interest.

Performance: Clorox makes sure that the issue of effectiveness is directly addressed in all its communications around GreenWorks. The promise is clear: GreenWorks are as effective as conventional cleaners. Based on my own experience, they deliver. In trying both the general and the glass cleaners, we found that they worked up to standard.

Affordability: GreenWorks are sold at a small premium to conventional cleaners, according to their website. In my experience, the price gap was not significant and therefore, not a deterrent for adoption.

GreenWorks meet all the criteria to become a relevant green product with potential to achieve widespread adoption. And that, in my view, is a great promise of profits to come. The final ingredient to qualify this initiative as a potential blockbuster is support. Clorox is very conscious of the opportunity at hand, and has launched GreenWorks with a vigorous advertising campaign that includes TV, web and, most importantly, a very robust distribution and adequate shelf space and visibility at retail.

Clorox share price closed this week at $55.70, close to its 52-week low. This might represent a great entry point to start building a position. I think the GreenWorks line will show to be a significant success for Clorox, and naturally, the greenbacks should follow.

When does Green shine as an investment opportunity?

In my previous post “Can we invest in Green?”, I discussed the drivers behind the acceleration of the Green movement, and its value as an investment opportunity. However, I warned that we have to be cautious, really understanding the underlying value of what any particular company is doing to leverage this trend. Paraphrasing the old adage, I indicated that not everything that is Green shines.

Everyone is jumping into the Green trend. Not everyone is doing it right though. Adopting ecologically friendly initiatives cannot be just a marketing plot. This is what is called “green-washing” and consumers see right through it. A company needs to be sincere in its approach. It is a fundamental component of the authenticity consumers are looking for in their dealings with a company (please see my article “Consumer values to look for” for a more detailed analysis on the topic of “authenticity”).

For a Green initiative to be successful -and therefore interesting as an investment opportunity-, we need to look for three key components: a) integrity; b) performance; and c) affordability. Let’s discuss these requirements:

Integrity: There are different levels of features a company can incorporate in a product in order to make it more eco-friendly. Some measures can be limited and represent just a small step in the right direction: for example, a change in packaging, using a little less plastic or incorporating recycled cardboard. Others can represent a radical and thorough re-design of a product or type of products, ensuring that everything in it significantly reduces its impact to the environment. All these steps are good: they all represent progress in the right direction. What is not right, though, is making just a small change and then try to hype it as major breakthrough in ecological responsibility. As indicated, consumers see right through these hypes and judge them as insincere attempts to prey on their genuine concerns. If as a company all you are doing is including 30% recycled post-consumer content in your cardboard boxes, just say it that way, and devote a little corner in you packaging to let consumers know; they will notice it and appreciate it. But don’t suddenly launch a full campaign touting that small change as the new “eco-friendly pack” for your product and thump your chest about how concerned you are about the environment and how seriously you are taking your ecological responsibility. Nah… that does not cut it. It's not authentic. On the other side of the spectrum, the more comprehensive is the change or the innovation, the more evidence consumers can see of a thought-through, purposefully designed product that comprehensively addresses their environmental concerns, then the stronger will be the manufacturer’s grounds to genuinely support the innovation in force and the higher the potential for consumers to pay attention and ultimately adopt the product. This thoroughness in the offer is what we need to look for in considering a potential investment opportunity.

Performance: There is one absolute truth with respect to Green. Consumers are willing to adopt products that are ecologically sound as long as those products perform as well or even better than conventional products. Period. As much as consumers want to do the right thing, they are not willing to wear soiled clothes, or eat tasteless food, or sacrifice aesthetics for the sake of the environment. The brands and products that promise to be environmentally friendly must also provide convincing arguments to make consumers believe they will perform well, and finally, they have to deliver on that promise.

Affordability: Consumers are willing to pay a little more for a more responsible product. But not a whole lot more. The closer the price of the eco-friendly product is to what the consumers are used to pay for that type of product, the higher it is the likelihood that consumers will switch to it. This is no surprise, though. Ultimately, we are playing with the good old value equation. Consumers are willing to pay more for products that have a greater value for them, that is, the ones that solve for a wider range of needs. What is the value of feeling good for fulfilling your responsibility with the planet? Hard to tell, but not that high in the big scheme of things. Yet, at a competitive price, it is a very relevant differentiator, and may tip the market share balance dramatically in favor of the eco-friendly contender. Therefore, look for competitive pricing when gauging a potential investment. The real volume and profit potential will be there.

Good! Now we know what to look for. I have some ideas of my own that I will be sharing in future posts. Do you have some ideas that can enrich this discussion? Your comments are always welcome. Invest well and prosper!