How to Profit If Starbucks “Hates” In-Store Customers Like Me

Keith Fitz-Gerald Oct 09, 2019
4 

Like millions of Seattleites, I’ve cheered Starbucks Inc. (NasdaqGS:SBUX) on for years.

I’ve watched, cheered, and consumed my fair share of coffee as the company’s grown from the one-room grinding shop where it started in the Pike Place Market to the worldwide brand it is today. And, in return, I’ve always felt that the company valued my business.

No longer.

In fact, I think there’s a good case to be made that Starbucks “hates” in-store customers like me.

That’ll be bad for unsuspecting stockholders who get caught mid-latte, but great for savvy investors who line up big profits as the price of Starbucks’ shares falls.

Let’s talk about how to line up big profits now as Starbucks loses its buzz

Like many retailers, Starbucks has embraced the rise of the smartphone and remote ordering, in particular.

Customers using the Starbucks app can order ahead of time then breeze through the shop to satisfy their coffee craving without having the worry about the nuisance of paying or waiting in line.

Starbucks, of course, loves this because managing orders and payments becomes simpler, faster and more accurate. The app also makes each order more profitable per cup than having baristas take orders the old-fashioned way… by hand, one at a time.

Walk-in customers like me are unfortunately left out of the loop. And, if my recent experience is any indication of what’s to come, the repercussions could be significant.

Let me explain.

Two Friday’s ago I visited the Starbucks at 13120 Newcastle Commons Dr. just south of Bellevue, Washington and a stone’s throw from the company’s Seattle HQ. My intention was to meet up with an investing colleague and talk shop over coffee and pastries, exactly as I’ve done dozens of times.

I may never set foot in another Starbucks again.

I was treated like scum of the earth for having the nerve to order from a barista personally, rather than via the mobile app. The young lady who took my order was polite and obviously well trained; that wasn’t the issue.

“Would you like your scone warmed?” she asked, as I selected a tasty-looking blueberry version from the counter with my Americano.

“Yes, please,” I replied.

Little did I know what I was in for.

My scone was ready almost instantly but my Americano… hoeee… I might as well have ordered an exotic drink in South America and waited while the baristas took a flight south to harvest the beans in some remote Amazonian jungle location, cure ’em, grind ’em, and return to prep my drink.

Nearly 20 minutes later, I still didn’t have my coffee but 20 other mobile drinkers who shoved their way by me to the mobile pickup stand did.

What I had was a cold, hard as a rock scone, a gruff explanation that mobile orders took priority over in-store customers like myself, and an assortment of snotty looks from the counter staff for having the gall check on my order, evidently an inconvenience in barista-land.

What a shame!

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Businesses fail when employees begin to view the customers standing in front of them as a nuisance. They’re trained to follow procedure, regardless as to whether or not it’s the right thing to do. Many times, they’re incapable of seeing the bigger picture.

Musician Dave Carroll, for example, flew United Airlines Holdings Inc. (NasdaqGS:UAL) only to have his $3,000 guitar smashed to bits during his flight a few years back. United responded with complete indifference at which point Carroll had the last laugh when he penned a protest song, United Breaks Guitars, that debuted in 2009 and has 19.4 million views and 164,000 likes today.

It’s a catchy tune that resurfaces every time United screws up. The company’s stock went into freefall as the video went viral.

Other notable screwups include:

  • Toyota Motor Corp. (NYSE:TM) waiting more than a week to apologize for hiding a deadly unintentional acceleration defect that led to 34 people dying. The related recall cost the company $21 billion in market capitalization, and still more in goodwill.
  • Bank of America Corp. (NYSE:BAC) doubling Ann Minch’s interest rate and lowering it only after she called the bank a bunch of “evil, thieving bastards” during a viral YouTube expose which earned her a guest appearance on Fox and Friends
  • Verizon Communications Inc. (NYSE:VZ) charging Cynthia Lacy for her father’s cell phone bill… more than a year after he died.
  • Kylie Jenner singlehandedly cost SnapChat $1.3 billion with a Tweet.

My point is that profits are not just about numbers.

That’s why I do a lot of “boots on the ground” research when it comes to the recommendations I make and why I pay attention to situations like this. You see, treating customers badly is often symptomatic of bigger changes lurking behind the scenes… the cost of which is not apparent until the next earnings report.

I cannot understate how important this is.

A 2010 study by Consumer Reports found that 64% of people had walked out of a store because of bad service.

In 2017, American Express found that 33% of Americans will consider switching companies after just a single instance of poor service, while more than 50% cancel or scrap a planned purchase because of bad service.

Salesforce found in 2018 that 74% of people are likely to switch brands if the purchasing process is too difficult.

Which brings me back to Starbucks.

The problem with technology is that there are clearly cases where it empowers the wrong people as is the case here. The baristas were trying to do their best to fill orders, but the frustration they felt for being slammed by an order system that corporate foisted upon ’em shouldn’t have been directed at me.

Chances are you’ve had a similar experience. In fact, I’ll bet you’ve probably stood in a line somewhere sometime shaking your head in amazement and disbelief over the stupidity of what you’ve just been told.

Author Larry Winget frequently relates a similar story about how he was refused a cookie upon check in at Doubletree Hotel more than a decade ago. Like me, Winget questions the lack of common sense and wonders it was really worth it to the company to have him tell that story to hundreds of thousands of people in the years since because management prioritized procedure and policy over common sense.

You want to know the saddest thing, though?

I’ve been a loyal Starbucks customer for years, so I figured that the company would be most interested to learn about my experience (and reassure me that it was a “one-off” in the interest of keeping my business).

Evidently not.

The company’s switchboard operator told me that she was not allowed transfer my call to CEO Kevin Johnson’s office or even to one of his assistants under the circumstances. That boggles my mind because most CEOs have an assistant or teams of specially trained assistants to deal with special situations like this one.

Then, I spent more than 30 minutes on hold trying to reach a member of the “customer care” team to whom she could transfer me but which, evidently didn’t “care” enough to answer the phone – I hung up in frustration.

So, now what?

I’ve watched Starbucks closely for nearly 40 years and during that time seen it grow remarkably. But, this is the first time I’ve sensed a dangerous change in corporate culture.

The stock is trading at $85.92 share as I type, which represents a PE multiple of 25.62 according to Yahoo!Finance. That’s down from a 52-week high of $99.72, but still very rich. History shows the stock behaves best when the PE ratio is in the low-twenties.

Competition is coming on strong. China’s Luckin Coffee, in particular, poses a significant threat because it represents a different business model that could pressure margins significantly in one of the world’s largest markets at a time when the narrative has yet to be written.

Technically speaking, Starbuck’s stock has retreated from the top of a rising channel but now threatens to break lower, which is historically, a bearish play.

There are, naturally, a myriad of ways to play the situation.

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The simplest is to short the stock with a sharp eye on risk management. I suggest a trailing stop of $99.00 or hedging using the SBUX December 20, 2019 $90 Put (SBUX191220P00090000) option to limit losses.

Savvy investors may wish to consider purchasing the SBUX January 15, 2021 $80 Put (SBUX210115P00080000) option which gives you another 15 months to let the situation develop, while also limiting your investment to just $7.00. More sophisticated investors and traders could also consider a variety of bearish spreads or diagonals, too.

In closing, I really hope to hear from Starbucks.

I’ve been a loyal customer for years and it sucks to think that one of my local favorites may have grown too big for its britches. And, Mr. Johnson, if you’re reading this, I’d love to know that my experience was a “one-off” and that your employees are not being trained to regard walk-in customers as second-class citizens.

Second, I’d hate to see Starbucks lose its buzz.

Unless, of course, the profits I’ve outlined are “stirred in.”

Until next time,

Keith

4 Responses to How to Profit If Starbucks “Hates” In-Store Customers Like Me

  1. Michael says:

    I am still learning…..is SBUX191220P00090000 a buy-to-open ir sell-to-clos??
    Also d trailing stop of $99…..is that….$.99??
    Stoppp laughing….being new(learning) & poor just means I have a ‘ways to go’!!!
    MSpence
    Ps if anyone responds….make sure see d response
    Thanks in advance

    • Bob says:

      MSpence-
      The $90 put would be a sell-to-open, in conjunction with shorting SBUX stock.
      If you are just learning you might be better off with just buying a plain put like the $80 mentioned, although many others would work also. Good luck

  2. Allen says:

    I have a special list, called my “defecation roster” which holds those stores that have treated me poorly, cheated me, or just acted like idiots. This is headed my AT&T which is just to stupid to trust to my business.

  3. Bob B says:

    Why do we have to beat stores over the head to take our money! I’ve walked out. I’ve cancelled orders. Just one snarky “Customer Service Specialist” too many. Are some of them Quiet Assassins? Testing our loyalty or looking for an edge to sell more? Whatever happen to Order Fulfillment? Take the money and run, errr smile! Yah that’s what I meant! What the Hell did you mean? Sooo mean! Geesh!

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