Starbucks: Burnt Coffee Sucks
The Market Ticker ® - Commentary on The Capital Markets
Posted 2012-07-27 10:56
by Karl Denninger
in Company Specific
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Starbucks: Burnt Coffee Sucks
 

More implosions last night....

At U.S. cafes, sales growth began to slow in June from earlier this year, Chief Financial Officer Troy Alstead said yesterday in an interview.

“The overhang of challenged consumer sentiment and housing and unemployment, I think the consumer is feeling it,” he said.

The problem was that the company reaffirmed guidance and then missed.

Look, I said back in June (when I was out traveling) that I saw a marked deterioration among places that I am almost always during the summer months.  Call it the Tickerguy Vacation Indicator if you wish; we are creatures of habit like most people and simply put in June I saw a very-visible slowdown in consumer behavior in places that I frequent.  This has continued into July, including here locally.

As just one example traffic here locally is, comparatively, very light when looking at the 2006ish timeframe as your benchmark.  It's not as bad as the disaster that was 2009, but that's cold comfort if you're trying to be "all bulled up."

The miss essentially destroyed all of 2012's price gains in 30 seconds, leaving one to ask "what's next?" 

I'll admit to being severely-biased in the negative direction on this company, simply on the product.  I hate their coffee -- they "over-roast" their beans, and I believe it's done on purpose for inventory control reasons.  See, coffee, once roasted, has a shelf life of about 2 weeks (and really more like 10 days) before its best quality is lost.  That makes for mighty distribution headaches and mandates very precise control of how much you roast and how much you distribute to a given store, because if you actually honor what should be expiration dates you're throwing anything unused in that two-week period away.

The problem is that unlike most foods roasted coffee doesn't turn into something dangerous and thus unmarketable after it expires.

It just tastes like crap.

A properly-pulled espresso with fresh beans has about a 1/4-1/3" layer of crema on the top; a natural "foam" that is produced from the extraction of the coffee under ~120psi of water pressure.  To get a proper crema layer you need three things to be right:

  • The coffee has to be fresh; no more than 2 weeks post-roast, and the roast must be neither too dark or too light (for most coffees suitable for espresso this means you want to pull the roast just as it enters "second crack".)  Starbucks fails here -- their coffee is roasted too dark for optimum extraction.

  •  The temperature of the water in the brewing unit has to be almost-exactly right.  Proper extraction takes place around 198F.  The exact temperature varies somewhat with the blend of coffee being extracted, but once you have the proper temperature you need to maintain it with no more than ~2 degree variance for best results.   If the water is too cold the coffee is extremely acid in taste, if too hot it tastes burnt.

  • In addition, the pressure in the brewing basket must be around 8 bar, which means your coffee grind must be exactly right, since that's what provides the back-pressure on the system.  If the grind is too coarse the coffee will be "thin"; if too fine it will be extremely bitter.

I have never gotten a Starbucks espresso with a proper layer of crema on it.

If you roast your coffee too dark on purpose you degrade a lot of the flavors that are in the natural bean.  This, however, results in coffee that doesn't get much worse if the roasted coffee is older than they should be.  It just sucks to start with and continues to suck.

If you drink your coffee with all sorts of crap in it you probably don't notice this much; the "Carmel Macchiato Grande'" is almost all milk and caramel syrup, with a couple of shots of coffee in it.  I bet you could substitute battery acid for the coffee and you might not know the difference! 

But I drink my espresso as straight shots, and unfortunately every sin the cafe makes is blatant and exposed to the palate when you drink it that way.  And I'll not kid you -- I find Starbucks coffee nearly undrinkable, to the point that I will only buy shots there if I need the caffeine and am willing to simply not care if it tastes like brewed dog****.

Think of it as the McDonalds' model.  You'll never get an outstanding hamburger at McDonalds'.  But you will get the exact same hamburger at every McDonalds' anywhere in the nation.  I can pull into one here, one in Michigan, one in California and one in Colorado and when I order a Quarter Pounder with Cheese I know exactly what it's going to taste like.  McDonalds' goes to a lot of trouble to make sure that this happens, as it's basically what they are selling -- the same thing, everywhere, every time, even if it's uninspiring at best.

This is the Starbucks' business model.

Unfortunately for people like me, I want an exceptional espresso. I want to taste nuances of chocolate, nut and even fruit overtones in the cup, and I don't want to have drown it with sugar or crap like caramel sauce.

I'll never get that coffee at Starbucks.  Their entire system is designed around "make it fast, get it out, price it to wherever you can get away with."

That might work in an iPhoney world, which we seem to be in.

But as earnings showed, perhaps, on balance, people just expected too much from a company that at its core turned from being a coffee lover's paradise into the McDonalds' of coffee.

Now please excuse me while I drag my snobbish coffee-swilling face in front of my espresso machine and pull myself another shot.

Disclosure: Caffeine-addled and bouncy, but neither short or long SBUX.

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User Info Starbucks: Burnt Coffee Sucks in forum [Market-Ticker]
Poodlelover
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" I hate their coffee -- they "over-roast" their beans"

Haha, I f-ing hate starbucks coffee, tastes like run off from a pig pen, it's nasty stuff. I'll take Dunkin Donuts any day over it, though some connoisseurs certainly do seem to prefer to to the "watered down" kind I like.
Randy123
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My local coffee shop gets all my business and its much better than Starbucks. I don't know how people afford to buy that **** everyday.

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Mayorquimby
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NYC has a bunch of "third wave" places which roast daily. 17th Street Espresso and Blue Bottle are both exceptional. Pricey - but exceptional.

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Genesis
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Eh, I have quite a bit invested in my equipment, but the coffee itself, bought green, is about $8/lb. I roast once a week and do about 3/4 of a lb at a time. It's always fresh and always delicious.

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Madashel
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I am proud to say I have never once drank starbucks coffee. I have drank coffee since I was a child and indulge daily. Coffee made in my bunn coffee maker beats anything else I ever drank. No need to be overcharged for coffee made by someone else.

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Mayorquimby
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I think 99% of the people have never really had "good" coffee and would be shocked at the difference.

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Iou
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I couldn't agree more. Their coffee is bitter and I can't stand it. I can’t believe they’re able to sell that **** at any cost let alone the prices they’re charging. Unbelievable! When the leverage comes out this business model is a zero.

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Tinfoil
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Oxidation is greatly reduced by packing in nitrogen prior to shipment, thus extending shelf life of fresh roasted beans to 30 days or more without measurable or noticeable deterioration. As Walt would say, "respect the chemistry". I don't believe Starbucks is using the roast to control deterioration... I believe they do it because it sells, and the popularity stems from the fact that a darker roast stands up better mixed with crap, which they do a lot of.

Personally, I agree - it's crap coffee, but it's also a great business.

I prefer 185 degree water in a hand-press with a very fine paper filter. This requires more coffee, but tastes less bitter. You can get this perfection with the Aeropress, a $25 "coffee machine". :)
Mdm
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In college, I worked in a restaurant owned by coffee snobs. They called it Charbucks.
Rjazz117
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Having had good, bad, and exceptional coffee, I settle for "good" on a daily basis (I'm sure Karl would disagree) but cannot stand Starbuck's coffee at all. It is utterly horrendous...even when compared to the "good" coffee I drink (Maxwell House brewed through my KitchenAid).

I rarely get an exceptional cup, because I can't afford the beans on a regular basis, have no time to learn how to roast my own, nor can I afford to frequent the establishments in which one would find such a brew. I guess I'll have to make the trip to Niceville to find out what I'm really missing.

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Duc888
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I never had a Starbucks coffee. The prices just seems ridiculous to me.

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End_the_bubbles
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Can you believe this ****ing thing was $7 in Nov. 2008?

Sure, it's down around 10% today, but Jesus Christ it's had a big run. The amazing thing is that it's still higher than it's previous highs of $40 in 2006 after a 10 year rally. I remember trading SBUX back in 1998 when people were shorting it at a split-adjusted $5.

Yep, that thing has a lot of air in it yet! Anyone short (especially before today's drop) would be crazy to cover now........

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Jonesapple10
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Starbucks - such a fad, just like Fakebook. People flock to places they think cool people go to; it's never been about the coffee. Personally I'd like that coffee maker from Breaking Bad, now that's brewing coffee.

(disclosure, I drink about 5 cups a YEAR)
Mayorquimby
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Apple and Starbucks are not fads. They have had decades of success. Tele-tubbies and Ugh boots are fads.

I dislike Starbucks coffee but think one needs to isolate what one thinks of a company's products lest you short companies that make uber $$$$.

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Susanjbear
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Woe - I was never much of a coffee drinker. It always smelled far better than it tasted.

Now I may have learned why.


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Genesis wrote..
But I drink my espresso as straight shots

I doubt there's a single regular poster here who was surprised by that revelation....

smiley

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Mannfm11
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I have rarely been particular about coffee. Black, nothing in it and too much. Starbucks has never been a deal. We get our coffee at Costco and the store we use has the roaster. The bags are still hot sometimes. Priced comparably to what you buy in a can. It is usually a month or more old when we are finished. They sell green in cases, so if I was particular, I would get a roaster.

When coffee was around $1 a pound, green, STBX was around $10 a pound. The hot stuff at Costco was $7.99 or $8.99 for 2.5 pounds. Of course, the coffee cartel has moved to Wall Street. 10 years ago, there wasn't a place to warehouse the stuff and they were going to make Houston a new warehousing area for the exchange. Green coffee has a 10 year shelf life. Was there ever a time to buy stuff like coffee and cotton better than 2002? Record low CPI adjusted prices.

I have never understood the Starbucks model. Seems like a business that would go to hell in a handbasket in a recession. I meet someone at a store about twice a month. $5 for coffee, a cookie and a small tip. I would never go on my own. The gas station is good enough for a buck or so.

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Jonesapple10
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I agree fad was the wrong choice of words for Starbucks (I didn't mention Apple) - how about a yuppie ****hole that makes watered down waste?

Mayorquimby
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Not to defend the yuppy **** hole but it's been my experience that yuppies are a hell of lot happier than those who insult them.

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Lucky1
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People buy it for the status symbol of carrying the logo around so everyone can see it at the meeting while sitting around the conference room table.

Having a McDonald's cup sitting there in front of you would be gauche.

That is all.

That really is the entire business model.

It's the business model for every 'designer label' out there. Premium pricing for the status value. If they can premium price an additional $3.00 for a 10-cent squirt of caramel flavoring out of you, all the better.

It carries a high gross margin, so it will work until people value retaining wealth more than they value status.

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Mayorquimby
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I dunno Lucky - Dunkin coffee is even worse than Starbucks - there really isn't a good option for coffee on your way to work in a big city - it all sucks. What is a working schlub to do?

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Reluctantdebtor
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You guys are coffee snobs. Kroger's generic here, $4.99 a large can, made in a twenty-year-old Mr. Coffee, bleached every few years for cosmetic reasons and still going strong. Two scoops per cup so it's nasty dark. I'm lactose intolerant to the extreme, so each cup gets an ounce and a half of artificially-flavored creamer (a wonderfully toxic plastic stew) to bring the 16-oz cup to room temperature. It is shotgunned. Wide awake! Mission accomplished. 25˘ or less per cup.
Ihsmta
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Bingo! Lucky1 is the winner! Starbucks doesn't sell coffee, it sells its logo. Period. Can't stand the muck. Dunkin'? Really? I'm very unimpressed.

I support my local coffee shops that roast their own whenever possible.

Granted, you can't get a cup of espresso at McD's, but for a quick cup-o-joe-to-go they can't be beat.

Real swill is the black sewage you get at your average diner or convenience store.

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Bertdilbert
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Mental note: add coffee to the list of topics never to argue with Karl over.

Current abbreviated list.

Telecommunications
Anything internet
Thermodynamics
Thorium power
Coffee

Actually I have been expecting McDonald's to take a bite out of Starbucks for some time since they started featuring coffee drinks.

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