Starbucks admits growth starting to drip

March 24, 2010

Starbucks finally admitted growth has slowed to a drip. The coffee company announced its first dividend, almost two decades after going public in a sign it’s finding fewer places to spend. Returning cash is a welcome sign of maturity. Yet Starbucks hasn’t entirely shaken its sprawl addiction.

It looks as though Starbucks learned from the crisis. Demand for upscale coffee has been hit hard over the past two years. Same-store sales fell. The company shut several hundred shops and slowed the opening of new ones in the United States in favor of international expansion. It cut nearly $600 million of annual costs.

The ubiquitous brew-house has perked up again. Sales at locations open at least 13 months turned positive in the first quarter for the first time in two years. Payouts to shareholders signal another sign of confidence.

Yet Starbucks’ willingness to serve up cash to shareholders may be more tepid than it looks. The company has promised about $700 million in the form of dividends along with a new buyback program. That’s nice, but Starbucks has more than $1.3 billion of cash on its balance sheet and should generate about $1.6 billion of cash from operations this year. Although it’s not a perfect comparison because McDonald’s  uses more franchises, the hamburger chain pays out about twice as much of its cash flow.

More stores are planned overseas, where profitability has been slim. And Starbucks is pushing into new areas. Instant coffee has been rolled out and it’s selling a sub-brand, Seattle’s Best Coffee, in fast-food outlets.

These investments could well pan out — Chief Executive Howard Schultz has a good track record. But pursuing so many disparate initiatives seems more apt to result in diluted returns. Giving more cash to shareholders would force Starbucks to sip some decaf and stop bouncing from one idea to another. The result might be a stronger and tastier brew for shareholders.

Comments

Schultz has too many irons in the fire and I don’t like relying on selling a $4 cup of coffee to a consumer just off the death bed

Posted by Story_Burn | Report as abusive
 

I am so bored of Starbucks and its over-priced burnt coffee.

Posted by iflydaplanes | Report as abusive
 

Starbucks, is that the place where they sell 50 cents worth of coffee in a $3. cup?

How many consumers actually know what they are drinking in reference to the type of coffee being served?

A clever racket indeed, or consumers are out of touch with the value of their money.

Posted by rror | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/