Starbucks: The Return Of The Wealthy Consumer

Starbucks (NASDAQ: SBUX) made one thing clear when it reported earnings. It will depend on affluent consumers to continue its success, which at this point is unquestionable. The slowing economy may not make the coffee company’s forecasts possible. Starbucks needs to have greater numbers of well-to-do customers who are willing to pay higher prices for products that use expensive commodities such as coffee and sugar.

For the period that ended on July 3, total net revenues increased 12% to $2.9 billion. EPS increased 33% to $0.36 in fiscal Q3 2011 compared to $0.27 in the same period last year. Starbucks forecast 10% revenue growth in fiscal 2012 and it plans to open 800 new stores.

The recession was considered a hamburger and beer consumption period. The proof of that may be the success of McDonald’s (NYSE: MCD) sales in 2007, 2008, and 2009. McDonald’s did well both in the U.S. and overseas. Analysts attributed that to the fast food company’s decision to keep prices low and the addition of a new line of coffee drinks to compete with Starbucks. McDonald’s was clever enough to price its coffee products below those Starbucks customers had to pay.

The McDonald’s plan, which was copied by Dunkin’ Donuts (NASDAQ: DNKN), was credited with taking market share from Starbucks. The twin problems of the recession and McDonald’s success caused Starbucks to fire 12,000 people and close hundreds of stores. The company’s new earnings report is a testament to the turnaround under founder Howard Schultz, who returned as CEO when Starbucks was in trouble.

The turnaround was caused as much by the economic recovery as by any clever product development or marketing plans crafted by Starbucks management. The company did not mention this when it released its numbers. As a matter of fact, Starbucks did not talk about the substantial risk the slowing global economy will pose to its plans. Starbucks neglected to warn about similar risks three years ago, just before its business collapsed. The affluent consumers have come back, but they appear, based on recent economic data, ready to leave again.

Douglas A. McIntyre