A Tea Party at Starbucks

The coffee king is taking a page from the Tea Party focusing on grass roots and local tastes. The strategy is working.

By Jamie Dlugosch Feb 8, 2010 6:37PM

Coffee beansThe upstart, grassroots based Tea Party hosted its first convention this past weekend. Its most notable speaker, Sarah Palin, urged the movement to stay true to its core by remaining leaderless.

 

Without a key figurehead, the movement can remain nimble and local.

 

Interestingly, certain business lessons can be learned by following the lead of the Tea Party. Specifically, Starbucks (SBUX) and its founder Howard Schultz are invoking the same advice in efforts to revive the global leader in retail coffee.

 

“We lost our way,” Schultz says in describing the difficulties of the company. In order to get back on track the company is returning to its days of entrepreneurial spirit.

 

That spirit allows Starbucks to react quickly to changing local tastes and needs. (As a result Starbucks recently beat earnings estimates. Here are 10 stocks likely to do the same)

 

In essence Starbucks is doing economically what the Tea Party is doing politically, and it seems to be working.

 

Faced with intense competition from McDonald's, Starbucks' future looked bleak. With saturated growth providing little in the hope of new earnings momentum, the company slashed overhead and reduced the number of stores.

 

Those moves are typical of any company that grows too large and essentially becomes stale. Where Starbucks is finding its mojo is transitioning the company back to the days of being an independent coffee shop.

 

Last summer I criticized Starbucks for not staying true to its core, wrongly interpreting efforts to sell food in response to the McDonald's threat. What I missed was that, in reality, Starbucks was indeed returning to its roots.

 

By opening itself to review and accepting customer feedback, Starbucks learned that it had become too corporate. That lesson resulted in the development of concept store 15th Avenue Coffee and Tea that strives to be fiercely independent and therefore cool.

 

In addition, the company reorganized along geographic lines hoping to infuse stores with local flavors.

 

So far the results are encouraging. For the first quarter Starbucks reported same store sales had increased by 4%. That growth helped propel the company to earnings of 32 cents per share.

 

Analysts had expected 28 cents a share. The company increased guidance  for the rest of the year to $1.05 to 1.08.

 

Even though shares trade for more than 20 times that number, investors should be impressed with the performance. The company can translate nimble entrepreneurial efforts into big profits.

 

It is likely that the company will exceed expectations this year. If so, its stock should continue to move higher. Thirty dollars per share is not out of the question. Here are 5 reasons to buy Starbucks.

 

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