Monday, July 14, 2008

Skepticism About Starbucks

This one is hard to fathom: Starbucks falls into a trap with Wall Street that I thought was usually the province of the inexperienced and unannointed.

What did it do? Something we always counsel client companies not to do: make promises to Wall Street, setting unrealistic expectations, and then not having the courage to say, “We blew it” early on. Pressure builds and suddenly Wall Street is “running a company’s business.”

A Makovsky + Company investor relations principle and one that I believe is shared by all investor relations counselors: always advise clients to run their businesses in the best interests of the shareholders -- or better yet stakeholders -- rather than by creating long shot promises which would make Wall Street happy, unless both coincide. By doing such, everybody wins. Why put a company in a vise?

According to The New York Times business section article, July 4th, commercial real estate brokers nationwide, on the heels of Starbuck’s announcement that it would close 600 U.S. stores, said that “the company was so determined to meet its growth promises to Wall Street that it relaxed its standards for selecting new store locations.” To meet the obviously impossible goal meant putting stores or leased operations within yards of one another.

The story noted that in 2004 Starbucks said it would double its pace of expansion with a goal of reaching 15,000 stores in the U.S., when it now has only 7000.

Since this was a company known by Wall Street for its rigor in selecting locations, the decision to close 600 stores, while partially related to the economy, is a blight on Starbuck’s reputation beyond Wall Street. By “living a lie” – in one fell swoop – the firm negatively affected its economic fortunes, its standing with Wall Street, and even potentially impacted the consumers who support it.

Now, of course, Wall Street should applaud the reality of its decision. Reality-based management, of course, in both the long and short-run is the best for the shareholders, Wall Street, and overall reputation.

Starbucks’ analysts will now approach the company with a level of skepticism, which did not exist before.

Technorati Tags: Starbucks, Wall Street, investor relations, reality-based management, The New York Times, analysts, business, communications, public relations


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